On the back of a pick-up in Indonesian debt activity, Tigor M Siahaan, Citi's Indonesia banking head, tells FinanceAsia that all the signs point to a sustained recovery for the country's real economy and its financial markets
What is your outlook for Indonesia's economy?
Expectations are pretty high following the re-election of President Susilo Bambang Yudhoyono in July, with a big public spending agenda that will provide a further boost to domestic demand, which makes up the bulk of Indonesia's GDP. In some ways, the country is fortunate that its exports are still a relatively small part of the economy, certainly compared with some its regional neighbours which are suffering during this worldwide economic downturn. Confidence in Indonesia, both among local and international investors is reflected in the strength of the rupiah, now trading below 10,000 against the US dollar, and a sustained rally in the stock market. The relative health of the real economy suggests that those financial indicators aren't illusory, as consumer demand has recovered during the last few months reflected by stronger than expected auto and motorcycle sales, for instance.
Despite this, Indonesia's companies must be struggling to access funding?
What is very encouraging is a pick-up in the type of business that is Citi's bread-and-butter, and the sort that is really essential for the smooth running of commerce: that is, cash management, corporate treasury and trade financing. Indeed, we continue to help our clients access the capital markets and have continued to facilitate funding for our domestic corporate and multinational customers throughout the difficult times. In the past couple of weeks this was underlined by the transactions for Pertamina and Matahari.
And has confidence returned to the country's capital markets?
Capital markets activity has already shown strong indications of renewed confidence, most clearly in bond issuance with the $3 billion sovereign issues at the beginning of the year, and then the state-owned electricity company PLN raising $750 million last week. What is also encouraging is that last week Indonesia led the way in issuing the first high-yield offering in Asia since the Lehman fallout. This was Matahari [which was part of a bond exchange for a distressed debt restructuring, and was joint-bookrun by Citi]. Another notable sign of confidence was the $400 million term loan to Pertamina.
The government has also sold Islamic sukuks [Islamic bond-type structures] for the first time, which promises to be a market with plenty of upside and potential, and we have played a role on the retail sukuk bonds. While companies are gearing up for their rupiah-denominated bonds, Citi has been particularly busy arranging and syndicating loans, despite the global credit squeeze, and that type of short-term capital raising is usually the harbinger of longer-term bond and equity deals. The equity market is already about to open, with a heavy new issue schedule likely during the next 6 to 12 months. Construction companies, plantations and coal miners are all preparing to raise capital, plus the government's privatisation programme should finally be getting underway, for example PP (Perusahan Pembangunan) and BTN, a state bank concentrating on mortgages.
Which sectors are likely to attract M&A activity?
Interest in mergers and acquisitions, and other kinds of investment looks exciting. Any industry closely tied to personal consumption should be busy, so expect some action among retail businesses, and also in the energy and resources sector, as coal miners continue with moves towards vertical integration, controlling the process from digging the coal out of the ground to selling it to the final consumer. The new mining law is still causing uncertainty, but the government plans to clarify it by October and grandfather, or protect any contract-of-work arrangements that incumbent mining firms had previously entered into. That should reassure the existing players, including multinational miners. The new system of district or provincial authorities granting permits on a licence basis is part of a more general trend towards decentralisation and devolving powers to local government.
What about telecoms?
In telecoms, despite the ambitions of new entrants during the last couple of years, the top-three, Telkom, Indosat and Excelcomindo still dominate. The next phase of activity will be telecom-tower consolidation, as the big companies agree to share their towers, probably by spinning them off into an independent entity, which will be at arm's length from the operators. Not only would this make the mobile phone system much more efficient and convenient for users, but it would free-up capacity and debt-raising ability for the operators.
What types of foreign investors are looking at Indonesia?
Asset managers, including hedge funds and private equity firms are back, attracted by Indonesia's healthy macroeconomic fundamentals, and many are even looking at the opportunities for participating in bond private placements with equity kickers -- as they were a couple of years ago -- and in any debt restructuring deals such as Matahari [the retailer] and Gajah Tunggal [the tire maker] last month. As mentioned before, Matahari, in particular, has galvanised the market, attracting tremendous interest among international funds for other opportunities.
And they're not deterred by the country's poor reputation for corruption and governance?
Yudhoyono's popularity is not least due to his anti-corruption drive during his first term, and his emphasis on cleaning up corporate governance in the administration, all areas of public service and in the private, corporate sector. His success has also been recognised by international monitors, such as Transparency International. The composition of Yudhoyono's new cabinet, expected to be filled with professionals and technocrats and which will be formally appointed on October 20, bodes well for the future.