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Surging foreign investment and banking perfomance reflect increasing confidence

Article - November 28, 2011
According to Indonesia’s Investment Coordinating Board (BKPM), foreign direct investment (FDI) rose by 21 per cent in the second quarter of 2011 year on year.
The 43.1 trillion rupiah (£3.15 billion) increase between April and June followed a £2.82 billion increase in the first quarter of the year, putting the country on course to achieving its target of a record FDI level of 156 trillion rupiah (£11.4 billion) this year.

Bank Indonesia, the nation’s central bank, more conservatively predicts that FDI will surge by 42 per cent this year, passing the £8.6 billion mark. Portfolio investment, which remains dominant, is expected to fall, but the rise in FDI indicates a clear shift towards long-term investment. The international credit rating agency Fitch Ratings said recently that Indonesia has a “more than 50 per cent chance” of achieving an investment-grade credit rating before the end of next year, which would put it in the same league as India and Brazil. Fitch, which currently rates Indonesia BB+, one step below investment grade, raised the outlook on the rating from stable to positive in February.

Recently-appointed Minister of Trade Gita Wirjawan is a former Chairman of BKPM, who feels Indonesia, with its political and macroeconomic stability, deserves better recognition from international agencies. “We are talking about a country with proven fiscal sustainability. This is a country with a 26 per cent debt-to-GDP ratio (on decline) and an ability to manage inflationary pressures in an effective and efficient way.”

A recent investment report from the United Nations Conference on Trade and Development (UNCTAD) depicts Indonesia as the ninth best destination for investment, and the country has risen from 54th to 44th in the Global Competitiveness Index (GCI).

Ronald Tauviek A. Kasim, president director of Indonesia’s leading credit ratings agency PT Pemeringkat Efek Indonesia (Pefindo), an affiliate of Standard and Poor’s, identifies certain criteria as being among the main challenges that Indonesia faces in attracting more FDI. “Having transparency, good corporate governance and good accounting standards is not an option,” he says. “We learned a lot of hard lessons from the 1997/98 Asian financial crisis; we can safely say that we are prepared for the next crisis. Furthermore, during the 2008/09 global financial crisis, we realised that there is a positive side to having modest exports. Our strong local consumption has helped the country weather the downturn.”

Singapore is Indonesia’s largest investor, with the UK in second place. While recent investment in the mining sector can be attributed to strong commodity prices, a recent report from DBS Group Research says that the increase in FDI in Indonesia since the global recovery took hold in 2009 has been broad based, spread across industries ranging from mining and manufacturing to services sectors such as wholesale and retail trade, transport and communication.

External “push” factors favouring increased FDI in Indonesia include the expansion in the global business cycle and China’s waning competitiveness owing to higher wage costs. Meanwhile internal “pull” factors include Indonesia’s strong growth, low labour costs and improving economic stability. The size and youthfulness of its population also gives the country a solid competitive edge, providing investors with a huge domestic consumer market and an abundant supply of affordable labour; wages in Indonesia are among the lowest in Asia, averaging around one-third of those in China.

‘Indonesian banking methods are still very traditional. Most banks in the Western world play with derivative products with high risks and high yields; we don’t have those practices here’

‘Our banking industry is full of potential and there are immense opportunities still untapped. Penetration is about 26 per cent...
This speaks volumes about the abundance of opportunities here’
Parikesit Soeprapto, Deputy Minister of State-Owned Enterprises for Services, has praised the involvement of state banks in the development of the Indonesian economy. Guided by Government policies, they provide loans at favourable interest rates to spur development and change. The Deputy Minister is highly confident about the future for Indonesia’s publicly owned banking and financial institutions. “We have bigger assets than those of private banks and in general we have better ratios,” says Mr Parikesit, who also points out that the numerous burdensome regulations state-run banks have to comply with are currently being addressed to help their growth.

Confidence in the Indonesian economy and finance sector is far from the sole domain of the Government. A recent World Bank and IMF assessment of Indonesia’s financial system concluded that it is generally healthy. In the private sector, aspirations for the country’s banking industry are high. “I am very optimistic about Indonesia’s economic future,” says Gatot Suwondo, president director of Bank Negara Indonesia (BNI).

BNI was established in 1946 and was the first bank formed and owned by the Indonesian Government. Its legal status was upgraded in 1992 to that of a state-owned limited corporation under the name of PT Bank Negara Indonesia (Persero) and it now employs more than 19,000 people. “Even though the financial and banking industry was mildly shaken during 2007 and 2008, as you can see today Indonesia’s banks are solid and highly liquid,” says Mr Suwondo. “Indonesia’s banking industry is strong mainly because we have been able to overcome and learn the lessons from the Asian crisis of 1998.

“Also, Indonesian banking methods are still very traditional. Most banks in the Western world play with derivative products with high risks and high yields; we don’t have those types of practices here in Indonesia.”

The nation’s fourth-largest bank by assets, BNI’s capital adequacy ratio (CAR) – the standard measure of the core or permanent capital a bank holds as a percentage of its risk-weighted assets – stood at 17.2 per cent at the end of June this year, higher than the required minimum 8 per cent ratio set by the central bank.

BNI’s profits surged 41 per cent in the first half of 2011. Net income at the bank rose to Rp 2.73 trillion (£200 million) from January to June, up from Rp 1.93 trillion (£141 million) over the same period last year. Total outstanding loans at BNI also increased to Rp 152.9 trillion (£11.2 billion) for the first six months of 2011, up 21 per cent on last year’s first-half figure of Rp 126.2 trillion (£9.2 billion) in the same period last year.

 “When I became CEO (in 2008) I focused on strengthening the foundations of the bank. Then in 2010, once the bank was back on track, we returned to our original mission (as the circulation and central bank),” says Mr Suwondo. “For instance, one of Indonesia’s main priorities is to fix the infrastructure – transportation, telecommunication and energy being the main focus. BNI has committed about $43 billion (£26.2 billion) for infrastructure projects.”

Indonesian banks are constantly looking for ways to increase the number of bank users. “In terms of market share, I prefer to grow steadily and moderately,” says Mr Suwondo. “I consider myself a moderate CEO, neither aggressive nor conservative. On the other hand, we are very focused to grow in the segments we want to serve. I believe that this kind of strategy will give BNI sustainable and long-term growth.”

Consumer loans are giving an extra boost to the bank’s performance this year. BNI is targeting the mortgage market, particularly first-time buyers as rising numbers of Indonesia’s young population look to set up home. BNI sees a lot of potential in the sector, especially with continued improvements in incomes and standards of living. Home borrowing, at Rp 14.79 trillion (£1.08 billion), accounted for 54 per cent of total consumer loans in the first six months of 2011. Mortgage loan growth for the second half of this year is expected to be at the same pace as in the first half, at 49 per cent.  

“Our banking industry is full of potential and there are immense opportunities still untapped,” Mr Suwondo adds. “Indonesia’s penetration is about 26 per cent while in Singapore it almost constitutes 100 per cent. This speaks volumes about the abundance of opportunities you can find in Indonesia.”