A Question of Investment

At a roundtable discussion in Jakarta hosted by FinanceAsia and sponsored by HSBC, leading corporate executives of Indonesia''s largest companies gathered to discuss the issues they face running their businesses.

In a wide-ranging discussion, these executives analyzed the effect the elections have been having on their businesses as well as the need for more investment from both outside and within Indonesia.


  • Cesar De La Cruz - CFO, Indofood
  • Rudjito - President Director, Bank Rakyat Indonesia (BRI)
  • Desmond Dempsey - CFO, Unilever Indonesia
  • Budi Setiadharma - President Director, Astra International
  • Sugiharto - CFO, Medco Energi
  • Hm Wityasmoro - CFO, Indosat
  • Dedi Sumanagara - President Director, Antam
  • Pramukti Surjaudaja - President and CEO, Bank NISP
  • K. Keat Lee - CFO Bank Mandiri
  • Wmp Simandjuntak - President and CEO, PGN
  • Mandeep Singh - Head of Investment Banking, HSBC Indonesia
  • Djaja Tambunan - SVP corporate banking, HSBC Indonesia
  • Moderator: Nick Lord

Can I start by asking what effect the extended election process has had on your businesses?

De La Cruz: In the short term, the election uncertainty has affected us negatively because the rupiah has started to weaken and that negatively affected us in terms of the cost of raw materials. But in the long term there are good positive results from the elections. Confidence is coming back and if the momentum can be maintained into the second half it will be good for business. We have seen some impetus in terms of consumer spending in the first half. Consumption has increased but that has caused more competition to come in and take market share.

Dempsey: Cesar must have stolen some of our market share as we did not see the same growth in consumption he saw. The first half was a bit of a struggle compared to the same period last year. We did not see lots of new money coming into the system and then coming into our products. We have seen a drive towards value for money from low-income consumers. So we need to concentrate on promotions and maintaining our brands. I suspect this will continue for some time.

We also had to stockpile for contingency planning due to the uncertainties of the election. This meant getting one week's extra stock into the trade just in case the supply chain got disrupted. Of course everything has gone quite smoothly now and so we have to sell that extra week. So there will be some sort of correction there because everything has gone well.

Rudjito: BRI is more focused on the rural areas and we have the experience of crises in these areas. The election is important for us and we want things to go smoothly. For banking as a whole, after three years of consolidation, we are all starting to lend money again. A lot of the banks are now focusing on the consumer side of the business not the corporate side. For BRI, we are not just looking at the microfinance and SME side of the business but are also looking at the larger borrowers too. So even if the election results are not good and produce some instability, banking remains flexible. We can move with the changing economy.

There is a parallel here between the growth in consumption and the development of democracy in Indonesia. Has this growth in consumption been good for business and investment?

Lee: In this election period, investors are standing to the side and waiting to see how events unfold. Business loan growth has been quite stagnant. As the election comes to a conclusion in Q3 and Q4, we expect activities to pick up quite quickly.

The informal sector continues to be one of the most resilient parts of the economy. You can see it in the growth of motorcycle sales. Investors should be watching that. So far, macro stability has produced some growth for Indonesia , but it has come about without a pick up in investment. With the election concluding and the new administration in place, we can expect a bit more clarity in terms of investment direction and more confidence for business. Accordingly, we should expect the next round of growth for Indonesia to come from investment.

Antam has recently been investing and raising money for investment in the country. How has your experience been?

Sumanagara: We are lucky that we sold international bonds in October last year and have also secured a loan from the local banks, and these are very important for our investment. We started a new project last year, and everything is going right for us. There has been no significant impact on our investments or on our business from the election process, apart from the slight weakening of the rupiah.

The banking sector has been a huge success in the last year as share prices and recent results have shown. How is the environment for the banking sector at the moment and will it get better?

Surjaudaja: Over the past two years, the banking market has improved significantly. In 1999, many of the banks were still losing money. Now banks are doing well with improving returns on equity and declining NPL rates. In the future, I don't think things will be as good as they are now. Competition is picking up. Three years ago only about 10 to 15 banks were seriously extending loans. Now more than 25 are doing so and more banks are coming into the market.

Rudjito: The Indonesian Bank Architecture Plan as outlined recently by Bank Indonesia, will help banks run an efficient banking business in the future. But this is just for banking. It won't have an impact on the real sector. The new government must put a new vision and strategy on the industrial sector as they have done with the banking sector. We can see how successful it has been.

Setiadharma: For Astra, we have some businesses that are enjoying things at the moment such as our plantations business, which is benefiting from a high CPO price. For our automotive business, the main boost has been declining interest rates. So that has triggered more people to buy motorcycles and cars as well. The market has shifted from higher end to cheaper cars. The election has not had that much effect on our economics except that people feel a little insecure. The PR from the government is not very good. The perception of Indonesia is bad.

However large companies such as Honda and Toyota have been investing. They are not waiting. One year ago, Honda invested in its local engine company. It is now the third largest engine subsidiary they have in the world after Japan and the US.

Lee: That is an incredible story, which no one reads about. I was not aware of that.

Setiadharma: Yes it a company that produces automotive engines in Indonesia that are 100% for export. Also 30%-40% of our Kijang models are exported.

Singh: I agree that that there has been more domestic investment and some inward investment. But if you look at the total FDI numbers, there is a real cause for concern. Domestic consumption is driving Indonesia. If you take that out of the picture and look at what are the real flows coming into the country in terms of investment in plants and equipment, it is not looking very good. There is no easy solution to this for that. Indonesia has to make some fundamental reforms such as the legal system. It has to do with legal reforms and creating a better operating environment for foreign companies, before the FDI really starts to come in.

It is interesting that Medco Energi has decided to invest overseas with your acquisition of Australian oil company Novus Petroleum, at a time when oil prices are high and there are many assets in Indonesia that are cheap. Why did you decide that you could get a better return investing overseas than in your domestic market?

Sugiharto: We bought that company to get hold of their Indonesian assets! We understood that Indonesian assets were not popular in Australia and that Novus' stock had been going down because of these assets. We knew they wanted to sell those assets to concentrate on the US. We had lost some bids for other Indonesian companies because we are very disciplined when it comes to investing in a high cost of capital environment. Acquiring Novus Petroleum, is a strategic move. Our strategy is to acquire assets and boost our production profile in Indonesia, where we have our core competence. We will be unwinding and selling those parts of Novus that are not in Indonesia.

It also makes sense for us to acquire Indonesian assets overseas, as we are a dollar generating company. That is why we have access to the global bond market. But the sovereign rating of Indonesia is one of the lowest in the region, and that costs us when we raise money.

Energy companies are not really susceptible to the actual elections, but access to capital is more of an issue for us. Over the last three years, the government has wisely managed the macro economy. But once we have more political stability after the election, then our country rating should improve. This will help Indonesian energy companies to better compete with our regional peers.

Sumanagara: The mining sector is also in a wait and see situation. Mining is a slow journey with long-term investments and we are still unconfident with the existing regulations. Forestry and environment issues are also problems for us. Frankly speaking, natural resources still have huge potential in Indonesia. Companies such as Antam, in upstream processes and value added areas such as in the production of ferronickel, are attracting investors. They are investing now and will invest more soon. Big companies are quite prudent about Indonesia now but if they find a good channel for their investments they are ready to invest now.

The gas sector also has huge potential here. How do you find the investment scenario here?

Simandjuntak: The election process has not impacted our business very much, although reserve prices are still going down. Our company is mostly in the real sector, distributing natural gas, which is much cheaper than oil. The main problem we face is the lack of infrastructure for taking gas from its remote sources to its main market in Java and Sumatra. The investment scenario is to lay transmission and distribution pipelines close to the market areas in the cities. But this needs huge capital to realize this. Our company has successfully raised money from both the debt and equity markets in the last year. And what we have realized is that investors are interested in investing in the Indonesian energy sector.

Once we are able to lay the pipelines from South Sumatra to Java in 2006, and then from East Kalimantan to Java, then the real sector can become more competitive both for domestic and export markets. This is the main objective of our investments, trying to bring the gas to the end consumers.

Tambunan: I recently had the opportunity to meet the Minister of Mines and Energy. He advised that the Indonesian government understands the two main areas of concern include the development of energy and infrastructure. Since the economic crisis in 1997, there has been no significant investment in power projects, roads, ports and the like. Regardless of who wins the next election, the priority will be to focus in these main areas. I do not believe that Indonesia can afford a further breakdown in infrastructure particularly if there are increasing numbers of blackouts and brown outs.

Sugiharto: I think that is proving a stumbling block for any economic growth. On the one hand we have reserves of 260 billion cubic feet of gas, which is enough to feed our current level of LNG exports for a hundred years. But we only use gas to feed 20% of our power. Gas is the more environmentally friendly and can be more cost effective for power producers. There needs to be a systemic public policy to migrate from coal, which is an exportable commodity, to gas. The country needs oil for cars and for export revenues. But gas could be enormous for us. However, the investment climate for oil and gas has been diminished. The majors look at Indonesia and see the non-investment grade rating and don't put their investable funds here.

We can all see that the local banks here are feeding consumer spending, but not investment spending. But Indonesia will have to attract domestic funds to feed these infrastructure projects. I accept that many creditor banks are unwilling to accept PLN's credit, even though it is more in transmission and distribution than generation. However, I think the real sector will be at risk because of the resistance to economic growth caused by the problems of the energy sector.

Singh: I was quite surprised when I recently heard that Indonesia's OPEC output quota is 1.3 million barrels of oil a day. But the country is only pumping out around 1.1 million barrels a day. Other countries are probably busting their ceilings because oil prices are so high. It would be good for Indonesia to increase its production to its quota level and to take advantage of high oil prices. But regrettably because of the lack of investment, it cannot produce enough even to meet its quotas.

Simandjuntak: It would be great to develop our gas infrastructure. Then, the government and the companies in the real sector could develop it for our domestic use. World energy prices are going up. But once we have boosted our gas production for LNG exports, then we will be losing our ability to sustain the security of our energy supplies. Seeking new LNG markets is okay for a short-term measure, but I don't think LNG exports will be very good for the country. Why should we import more expensive sources energy at a high price such as crude from the Middle East while we are exporting cheaper gas? It needs to be looked at by the next government.

Lee: So you are saying that in the energy sector you cannot be totally left to market forces You need appropriate energy policies to support the rest of the industrialization of the economy.

Simandjuntak: Compare us to South Korea. They don't have any natural resources at all but they are still able to produce cheaper steel than us and many other countries in the world. All they have is intelligent, hard working people.

Lee: This is a related issue for the banks as well. Clarity in public policy is critical for banks that are looking to manage their risks. If policy is lacking in clarity and this affects the security of cash flow for a project, then you cannot expect banks to lend. The idea that banks must support infrastructure development is quite valid but we cannot do so without understanding where the security of the cash flow that underpins the lending comes from.

Simandjuntak: But Indonesian banks have too much liquidity at the moment.

Lee: I know a lot of commentators are saying that because banks have low loan to deposit ratios (LDR), they are not lending enough. But be careful with that thought. As a result of the crisis a lot of loans got stripped out of the system and then came back to the banking system at a heavily discounted price which is why you see such a low LDR. Banks' capacity to lend is more defined by capital adequacy ratio and liquidity. Banks have started lending again, but in an environment where the lending is based on the quality of the credit, not on directed lending. Accordingly, the speed of lending growth is more measured.

How long will it be before the market comes up with a solution to the blackouts? Is it not time for some public policy?

Lee: The market cannot do so without a public policy that secures the cash flow.

Simandjuntak: Do you think Bank Indonesia regulations are too tough? Do you think you need some relaxation on where you can lend the money?

Lee: The central bank has learned lessons from the crisis and is very cautions with the speed of loan growth. On the other side of the coin, we are all struggling with how to speed up investments. There needs to be a balance, especially in view of where we are in the investment cycle. At the end of the day if banks lend more there will be more growth which in turn will generate more bankable businesses. This is the virtous cycle we are looking forward to. Naturally these should be done in the context of prudent risk management processes.

It sounds as if the companies around this table are starved of finance. Do you have sufficient access to capital?

Wityasmoro: It is no problem at all for the telecommunication industry here. Last year we issued a $300 million bond that was subscribed up to $1 billion. Investors see Indonesia as an emerging market and the telecoms sector as high growth. Especially when we look at retail and mobile telecoms, there is lots of growth here. Last year we grew our subscriber numbers by over 60%. This year we will grow at the same rate or above. In the fixed line sector it is growing at about 15% but we hope that growth will improve with more regional markets developing. All in all it is very good and not very sensitive to the political situation. But we will always need new finance: this year we have invested $600 million and telecoms constantly needs new money. In the future we will need to invest for 3G. So we still need a lot of funds from the market.

De La Cruz: Looking around this table, I don't think the companies here are short of funds. I think the real economy is up and down the supply chain for all the companies here. The suppliers and customers of Indofood, Astra or Unilever are the ones who need credit, yet they are the ones who are not getting credit.

Coming back to gas, it would be good for a manufacturer like us to use gas. We would be happy at Indofood to put in gas. But the question is who puts in the infrastructure. There is a need for policy as it is a long-term project. And unless the banks know that the government is behind it, they won't lend. It is a chicken and egg situation and someone needs to break the cycle.

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