As an emerging market debt analyst, it is always valuable to get out on the road and visit the countries that make up our investment universe. That’s why I recently travelled to Jakarta on a Barclays corporate and SOE investor trip, during which we had the opportunity to meet with various USD-bond issuers, local banks, syndicates as well as think tanks based in Indonesia.

My key takeaways from the trip are below, which hopefully provides an insight not only into Indonesian macro, but also the kind of thinking we apply to emerging market debt analysis.
Takeaway #1: Politics will remain stable, despite upcoming presidential election in February 2024
  • President Jokowi is widely considered to have done a decent job over the last 10 years and is broadly popular with the public. Staying in power for another term is forbidden by the constitution, so it is reasonable to conclude that people will favour a candidate who can continue Jokowi’s policy agenda
  • Among the three candidates running in the election, Minister of Defence Pprabowo – who has twice run for president before – is supported by the governing coalition parties that hold 45% of the seats in the parliament, followed by former Jakarta Governor Anies (29%) and former Central Java Governor Ganjar (26%). Jokowi reportedly supports Pprabowo for now, however Ganjar has also been endorsed by Jokowi at several party events. Meanwhile, Anies’ lacklustre performance in governing Jakarta might be problematic for his title race. Polls suggest there is no clear front runner and, given Indonesia follows a majority vote method, there will possibly be a run-off. However, regardless of who gets elected, policy continuity will be a top priority for the new government, which for investors gives a reasonable expectation of political stability.
Takeaway #2: The economic outlook is positive…
  • Indonesia’s young and vibrant population is impressive, and I was struck by similarities with China in the early 2000s.
  • Supply of money is abundant, which looks set to provide a multi-year tailwind.
    • The government has money and a willingness to spend it, with fiscal surplus and low debt ratio (a potential sovereign credit rating upgrade is also on the cards).
    • Large corporates, especially those in commodity-related sectors, have accumulated good profits during the commodity boom and have healthier balance sheet. It’s notable that a few years ago an investor trip to Indonesia would have been dominated by meeting high yield issuers – these days it is largely an investment grade event.
    • Banking liquidity is robust, and indeed banks are keen to push loan growth given their low loan-to-deposit ratios (~80%).
    • Indonesia has become one of the world’s two most popular destinations for private equity, alongside India, with its nickel supply chain especially attractive. Meanwhile, property developers report Japanese investment interest in local shopping malls.
Takeaway #3: … although demand growth is more of an issue
  • In general, SOEs aren’t inclined to borrow at the moment – their balance sheets are strong, government support is intact, and they are sensitive to borrowing costs with domestic rates elevated at 6%-7%. Even the state electricity company PLN, which was hit hard by the coal price surge, is prepaying loans while keeping committed facility unutilised.
  • Corporates are also cautious: this is export-related in particular as they worry that Indonesia’s two largest trade partners, China and the US, are either slowing down or entering recession. Meanwhile, business credit growth has been slowing since late 2022 and this downtrend may have further to go considering the elevated rates. In fact, SMEs are reporting that 2023 has been more challenging than 2020.
  • Low-income groups have been hit hard by inflation and rates, as wage growth simply hasn’t kept up with price hikes. That is despite the fact that inflation, which recently peaked at 6%, is not especially high in a global context. For example, Indofood, the largest noodle producer in Indonesia, mentioned their cheapest instant noodle products are the best-selling, because families can switch from rice at $0.30 (per person, per meal) to noodles at $0.20.

Taking the above into account, I see Indonesia as continuing to grow resiliently at its current pace of ~5%; although due to the lack of demand it’s not yet a double-digit growth story like Japan, Korea or China were in their heyday.
Takeaway #4: The ESG transformation story is clear and aggressive
  • Indonesia is notable for some natural endowments that have significant environmental implications. On the negative side, it is the second-largest thermal coal exporter in the world. As a result, Indonesia corporates rank poorly for pollution within the emerging market corporate universe. On the positive side, however, Indonesia is the largest producer of nickel – that’s important because nickel is crucial for EV production, and 70% of global nickel supply is forecast to come from Indonesia by 2030. Therefore, reducing reliance on thermal coal while increasing its presence in the EV supply chain is a clear roadmap for Indonesia’s ESG transformation.
  • There is a concerted effort between government and corporates to improve Indonesia’s environmental credentials. SOEs are required to help deliver upon an aggressive environment agenda as a key building block for Indonesia’s ambition to achieve net zero by 2060. This includes large corporates that can leverage on the reserves accumulated during commodity booms to venture into the EV supply chain – for example, I visited a store of electric motorbikes produced by Indika, a large thermal coal producer.
The implications for credit investors
The combination of stable politics and a broadly positive economic picture means, in my view, that investors should be able to source opportunities in Indonesia. This might include large blue-chip SOEs and corporations as the most immediate way to find attractive exposure, while a longer term view might also take into account event-driven opportunities such as the ESG transformation, as a future reappraisal of ESG characteristics could materially widen the pool of potential investors, while distressed or near-distressed corporates may have better access to external funding than the market currently fears given how motivated banks are to lend. These factors and more will be a focus of our continued analysis and due diligence efforts.

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