ACFS Boardroom Briefing: Indonesia Giant in the Making

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This event was sponsored by AFM Investment Partners

Speakers from Mandiri Investasi suggested that Indonesia is one of the most misunderstood countries in the world. For instance, Indonesia has experienced continuous growth since 2001. There has been no lingering crisis rather just growth and democratisation.

Indonesia’s stock market is roughly the market capitalisation of the ASX. There is much scope for growth in financial services with the debt to GDP ratio at only 27%. This for instance represents a credit penetration rate little more than half that of China and Brazil. This low leverage is also seen as one of the reasons for Indonesia’s strong growth throughout the global financial crisis.

However, Indonesia’s future may be to become one of the largest Islamic Financial Services market in the world. Presently Islamic Syariah bonds account for only 5.3% of issuance in the AUD77bn Indonesian Government Bond Market. Two reasons were cited for the slow take off Sharia-compliant financial services. Firstly, the market is difficult to standardise given differing interpretations from Middle Eastern and Malaysian jurisdictions. And secondly, liquidity is low in such products because a prevalent view that trading may not be sharia-compliant.

Like any emerging market Indonesia has to address corporate governance and corruption issues. The establishment of a new Corruption Watchdog and a successful counter-terrorism campaign in recent years have allayed fears.

With continued high population growth and greater foreign investment inflow, Indonesia is expected to return to its pre-1998 trend of above 6%pa economic growth rates. It is expected to continue growing after China has slowed due to a younger more fertile population.

Inflation is significantly a function of food and oil prices which are capped by government subsidies, although government involvement in these two sectors is likely to be wound back over the next decade.

Major growth sectors are expected to be those that cater to growing population, higher intra-country trade and higher income levels. Being a massive archipelago, much infrastructure spending will go to building new ports.

Mr. Priyo Santoso, Chief Investment Officer of Mandiri Investasi suggested that for investors seeking a defensive source of alpha, Indonesia should be considered. With larger US pension funds now looking at funds devoted to China and India, Santoso foresaw a future trend for dedicated Indonesian-specialist funds.

About ACFS Boardroom Briefings
To promote excellence in financial services and boost Australia’s global credentials, ACFS draws on its international network of experts to present relevant and unique speakers to the Australian finance sector. Boardroom Briefings are invitation-only events run for selected stakeholders such as sponsors, partners and supporters, where they have the opportunity to interact more intimately with the speaker to conduct a more targeted discussion.

Contact details:
Australian Centre for Financial Studies
T: +61 3 9666 1050