Helman Sitohang: Indonesia deserves IG rating

Indonesia’s sovereign credit rating does not reflect the country's progress since the Asian Financial Crisis, says Credit Suisse’s Asia Pacific CEO.
Helman Sitohang
Helman Sitohang

Indonesia’s sovereign credit rating does not reflect the country’s inherent strengths and the progress it has made since the Asian Financial Crisis says Credit Suisse’s Asia Pacific CEO, Helman Sitohang.

He is better placed than most to comment given his long experience based in the region, first in Singapore with Bankers Trust in the mid 1990s and then in Jakarta as country head for Credit Suisse from 1999.

Sitohang, who is half Czech and half Indonesian, has been Asian CEO for Credit Suisse since 2014 and believes the region’s infrastructure needs will propel growth over the next two decades.

As part of its 20th anniversary celebrations, FinanceAsia has been interviewing a series of figures that have helped shape Asian financial markets. Here, Sitohang also reflects on China’s transformation from capital importer to exporter.

As Indonesian country head for Credit Suisse you were right at the heart of the Asian Financial Crisis. What lessons did you draw from that time?

I’ve been fortunate to be in the region longer than any other international bank CEO and have seen a number of boom and busts. Sometimes it’s been extremely easy for Asian companies to raise money and other times it’s been very hard.

That’s one of the key lessons I learnt from the crisis.  Some of my clients’ funding just disappeared overnight. 

But a number of these companies had been doing perfectly well before the crisis. Even the world’s best companies would have got into trouble had they faced the same set of circumstances.

The big issue was the structure of Asia’s capital markets at that time. The average debt maturity was only about one-and-a-half years and much of it was denominated in US dollars so company after company hit the wall when the liquidity suddenly disappeared.

In the mid 1990s the Indonesian rupiah was close to 2,000 against the dollar.  It then lost about 80% of its value, touching an all time low of Rp16,500 in 1998. The Malaysian ringgit melted down, so did the baht. These were extreme times.

It’s also interesting how little focus there was on China back then. 

Pre-crisis it was all about raising funds for Southeast Asia. I was involved in some of the first dollar-denominated loans by Indonesian corporates. 

The buyers were mainly Korean and Taiwanese banks. Korean banks, in particular, were one of the largest investors in Asia’s debt markets. Now of course it’s the Chinese.

As Indonesia recovered during the mid-noughties, Credit Suisse led many of the landmark equity and bond deals. Which ones stick in your mind marking the transition back to some form of normalcy again?

Bank Mandiri’s IPO in July 2003 was a real turning point for the country and capital markets access. The bank was formed from  a number of banks including BBD, BDNI, Bank Expor Impor and Bapindo.

We raised $328 million. It doesn’t seem that much in the context of today’s money. But at the time it equaled one week’s trading volume on the Jakarta Stock Exchange.

It was a hard sell with investors. It took a while to convince them the economy was in good shape and the banking system had been cleaned up.

We got to the point where they said yes we will invest but need a cheaper valuation of a book value of 0.6 to 0.7 times.

Today, Bank Mandiri is trading on a 2016 price to book value of 1.7 times. That’s  the highest in Asia, and among the highest among banks  globally too.

What’s your view on the sovereign credit rating for Indonesia? When FinanceAsia first published in 1996 it stood at Baa3/BBB. Now it’s Baa3/BB+, while the Philippines has improved markedly from Ba2/BB to Baa2/BBB over the same period.

Indonesia still hasn’t regained its investment grade rating from Standard & Poor’s. I don’t think the current sovereign credit rating reflects the country’s inherent strengths and the progress it’s made since the crisis.

Indonesia has maintained excellent fiscal discipline and has a low debt-to-GDP ratio. 

There are also some very big long-term positives underlying the government’s conservative fiscal stance such as Indonesia’s demographic opportunity, its geographical position and resource riches.

The country has a young population and literacy levels are good. Growth has also been very consistent since 2002.

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What other challenges does the Indonesian government face?

There’s still work to be done broadening participation in the domestic capital markets.  Retail participation is very low compared to the rest of Asia although many citizens are investing directly through their insurance and pension funds.

It’s also good to see that pension plans are growing at double-digit rates in the country now. This will really help the domestic markets to flourish over the longer-term.

Looking at Asia as a whole over the next 20 years, do you think it can maintain its current growth rates?

The region has very large infrastructure funding needs, which will propel growth. Many of the region’s countries such as  India, Indonesia and the Philippines to name just three have huge populations.

The UN is projecting that India will overtake China in a few years with a population of 1.5 billion by 2030, while the Philippines will have a population of 124 million, up from 108 million, in 2020 and Indonesia nearly 300 million up from 272 million in 2020.

These figures will sustain regional growth. But these countries are also not going to be able to fund themselves. That’s the beauty of the capital markets. Those countries with a surplus of capital can fund those in deficit.

China being the prime example of a capital provider?

Indeed, it’s fascinating how far the country has come over the past 20 years. As I said earlier very few people were talking about China in the 1990s.

That all changed. Credit Suisse was the lead for CNOOC’s IPO in 2001 and China Life in 2003 to name just two landmark deals.

If you look at China today, it’s a major provider and user of dollar capital. Chinese dollar-denominated property bonds are the single largest segment of the emerging market bond universe.

Over the past year, many Chinese property companies have turned to the domestic market to raise funds. Is this a problem for banks like Credit Suisse? Will you ever make headway in the domestic league tables?

I think it’s important to remember that practically in every country, domestic banks have a very strong presence in their respective capital markets. That’s doesn’t mean there isn’t a role for others to play as China opens up.

Foreign banks will be able to increase their market share and sometimes even take a lead, especially when it comes to cross border financing and advisory transactions.

Look at China National Chemical Corp’s prospective $46.5 billion take-over of Syngenta. That features a mix of foreign and local banks.

Where do you think China will be in 20 years time?

It’s hard to predict that far into the future. But I think most people believe China will continue to grow at a slower pace, which is only natural given how strong it has been over the past 20 years.

The government will steadily open up the market in a measured way. There will be far more foreign players onshore.

And China’s currency will rank alongside the dollar, yen and euro.

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