Shoeb K Zainuddin & Thomas Halusa
Corporate Indonesia has continued to grow despite growing global economic uncertainty. Most of the country’s large business groups have posted strong first quarter earnings and forecast increased turnover in 2012. As with last year, the star performers have been those groups that have focused on the domestic sector.
In 2002, when Indonesia was just recovering from the Asian financial crisis, the Djarum Group paid our $500 million for a 51% controlling stake in Bank Central Asia (BCA). Previously owned by the Salim Group, BCA had been handed over to the Indonesian Bank Restructuring Agency (IBRA) as repayment for loans from the central bank.
Over the past 10 years, the Hartono family that owns Djarum has increased its stake in BCA, which is today estimated to be worth in the region of $10 billion. Founded in 1951, the Djarum Group has grown into one of the most formidable business empires in Indonesia, with BCA now the jewel in its crown.
Having a bank gives Djarum a major advantage over many of its competitors as it has access to funds that others do not have, although it is sure to stay well within legal lending limits. From its humble beginnings as a cigarette maker, Djarum has grown into a fully diversified group with interests in banking, property and plantations.
“Now is the era of corporate expansion funded by internal cash flow,” says Fauzi Ichsan, Indonesia economist at Standard Chartered Bank. “Access to cash has become critical for any group which wants to grow.”
A large number of Indonesian groups are in fact cash rich as corporate earnings have risen by 20% over the past five years while return on equity has also been over 20% over the same period. This has allowed many of the groups to accumulate cash, which they are now investing in new plants and projects.
Djarum is not the largest conglomerate on the GlobeAsia 2012 100 Top Groups list, coming in at number six with a turnover of $6.7 billion. Top honors belong to Astra International, which has held the top position for three years running now and this year has a forecast turnover of $15.8 billion, an increase of $5 billion from three years ago.
A robust economy and a rising consumption have been a boom for most of corporate Indonesia over the past three years. Indonesian corporations are therefore in much better financial health when compared with corporations in the US, Europe and even India where inflation is eating away at corporate earnings.
“Corporate expansion has been built on rising domestic spending,” Fauzi adds. “With 240 million people of whom 10% are middle class, the domestic market has huge potential.”
Statistics support his statement. Indonesian household debt is only 13% of GDP, which means Indonesian consumers have a lot of room to borrow. With interest rates at an historic low, they can afford to, which is why domestic consumption has been so strong.
On the other side of the coin, bank credit is only 30% of GDP, compared to over 60% prior to the 1998 financial crisis. Banks therefore also have the capacity to push loans and will need to do so in order to push up their earnings.
“If the banking sector and finance companies can remain active for the next 10 years, that will continue to fund private consumption,” notes Fauzi. “As interest rates are unlikely to rise sharply in the near future, consumers will also continue to borrow.”
This is good news for corporations such as Astra, Indofood, Unilever, Lippo, CT Corporation, Wings Group and others who are focused on servicing the domestic economy. Essential to their future is the continued rise of the middle class, which is set to increase to 70% by 2015. The true value of the middle class lies in its increased spending power and appetite for higher standards of living. With a median age of 28, most of Indonesia is only now reaching its full earnings potential.
With the crisis in Europe showing no signs of abating and with the US economy still hamstrung, the one dark cloud hovering over corporate Indonesia is the uncertain global economic environment. Global GDP growth is expected to slow to 2.5% this year from 3.5% in 2011, dragging down commodity prices with it.
Over two months, global oil prices have declined by about 12% while corn, copper, lead, cocoa and coffee have all dropped by around 5%. Prices of some metals such as aluminum, silver and copper have fallen by more than 20%.
More importantly for Indonesia, prices of coal and crude palm oil – two major commodity exports – have declined sharply over the past 12 months. This has impacted commodity producers and exporters who have seen their profits reduced.
“What is affecting commodity producers and exporters is the sharp slowdown in global economic growth,” says David Chang from UOB Securities. Exports fell by nearly 9% in May, higher than April’s 3.46% drop.
The slowdown in commodity prices has affected groups such as Adaro, Sinar Mas, Royal Golden Eagle and others who are heavily dependent on commodity exports. But although prices have fallen, output has continued to rise which has boosted turnover though not necessarily profits.
Overall, however, corporate Indonesia remains in good shape and poised for further growth in the coming years. Domestically, the biggest challenge remains improving the country’s infrastructure. Without modern toll roads, airports and seaports, investments in new factories and plants are not likely to accelerate.
The government has identified a number of major projects under the Master Plan for the Acceleration and Expansion of Indonesia’s Economic Development (MP3EI) but progress has been slow.
“Seeing is believing and at the moment there is little movement on the ground,” notes Fauzi. “Without modern infrastructure, companies are unlikely to invest in new manufacturing plants.”
Secondly there are also growing fears that as the country moves closer towards the 2014 presidential elections, economic nationalism will rise. This will lead to policy uncertainty and flip-flops, which will hurt the business community and cast a shadow over the investment climate. GA
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