In the beginning of the year, all eyes were on Japan but the Nikkei 225 has been a major disappointment down 6% so far this year. Meanwhile China has done well and Indonesia is the Asia-Pacific region?s stock best market this year up 27% this year. This is despite another punishing tsunami and concerns about bird flu.
Americans, in particular, seem to miss the story of this 3,200 mile archipelago and third largest democracy in the world
Indonesia?s President Yudhoyono, a combination of General, intellectual and bureaucrat, has made real progress in fostering market reforms. Many would categorize Indonesia as a relatively poor country but I beg to differ. I have toured Indonesia from tip to tip and it is a country with many assets and great promise. Rich in natural resources, a talented and young population, strategically positioned to benefit from Asian growth, a size three times the that of Texas and the world?s fourth largest population. As a relatively young democracy and developing economy it lacks an important ingredient for economic growth: capital and a financial system to allocate it efficiently.
Lower interest rates and strong consumer spending has led to a real economic growth rate of 6%. The realization that Indonesia is taking steps to better mange its natural resources has also caught the eyes of global investors. Indonesia has 10 billion barrels of proven and potential oil reserves and 180 trillion cubic feet of proven and potential reserves. After five years of tough negotiations, Exxon Mobil and Pertamina finally inked an agreement earlier this year. This should help Indonesia, a member of OPEC, to ramp up production and move towards being a net exporter of energy.
Exxon Mobil has operated in Indonesia for a century and invested $17 billion in the country, agreed to explore the dormant Cepu area years ago and by using advanced technology, found proven oil reserves of 600 million barrels and 1.7 trillion cubic feet of gas. At peak production, Cepu would provide the GOI about $2 million per day in revenues, add 180,000 barrels a day in daily production and eliminate gas shortages in East Java.
Investors have to also keep a close eye on Indonesian politics and the election cycle. While fuel subsidies were cut back sharply reducing pressure on the country?s budget and currency, other reforms have been pulled back. The reason is that President Yudhoyono party has only a 10% of parliamentary seats and needs to have the cooperation of other coalition partners to maintain power even though the next presidential election is scheduled for 2009. Indonesia has taken the brave step of opening its financial services sector to majority investment by international investors but it also needs to open up other areas such as infrastructure and power. The most important reform to make Indonesia more attractive to international capital is to set up a transparent and clear approval process to cut out red tape and corruption. Then reinvigorate a previously announced plan to privatize some of Indonesia?s 145 largest state-owned companies to increase their profitability and raise more government revenue. Finally, why not follow ten other countries by putting in place a flat tax to rein in bureaucracy, stymie corruption and stimulate growth and productivity.
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