Asia/Pacific

Return to Article

Some Adventurous Investors Remain Undaunted Despite Indonesia's Woes

Heather Bourbeau

Indonesia may appear to be going to hell in a fiery handbasket, but that's not deterring some adventurous, long-term investors from scooping up what may prove to be some of the best deals of the coming century.

On the surface, Indonesia is an investor's nightmare. A United Nations peacekeeping force is trying to corral the armed militias that are roving through East Timor, a province whose independence vote some in Jakarta don't appear ready to recognize. The capital itself is reeling from the latest developments in the Bank Bali debacle, a case of suspected fraud that has involved a veritable who's who of Indonesian politics, including President B.J. Habibie and two senior ministers.

Last week, as the bad news continued to mount, Indonesia's easily battered rupiah slid more than 8.4% after both the International Monetary Fund and World Bank temporarily suspended loans to the country because of the scandal.

While that sort of volatility would normally drive investors to the security of the U.S. Treasury market, Indonesia's ADRs held their turf as some fund managers looked to an eventual grand-scale payoff. What's tempting them to stay? The prospects of picking up equities and bonds that will rise if the country can get its feet underneath it.

That may take some time.

In addition to the violence in East Timor and concerns over the administration's corruption, investors lament the country's lack of market basics. Corporate governance isn't transparent. Bankruptcy laws are ill-defined. And while these problems plague other emerging markets, too, Indonesian leaders have a history of ignoring advice and running the country as a personal fiefdom, rather than the world's fourth-largest nation.

Many foreign investors pulled out of Indonesia last year after then-President Suharto refused to abide by IMF loan conditions. That sent the country and the rupiah on a downward spiral, ending in riots and a currency depreciated by 85%. The current political and reform troubles serve as obvious caveats for any bargain hunter.

"If you want to get returns in Indonesia," says Scott MacDonald, a regional analyst at consultancy KWR International, "you're going to have to have a great deal of patience." This past Tuesday, MacDonald said he purchased 1,000 shares of Tri Polyta (TPI Quote - Cramer on TPI - Stock Picks), a chemical, plastics and rubber company, for his own account. At roughly a buck a pop, MacDonald felt it was worth the gamble.

Investors might also want to look at Asia Pulp & Paper (PAP Quote - Cramer on PAP - Stock Picks), an Indonesian company headquartered in Singapore, and Indonesian Satellite Corp. (IIT Quote - Cramer on IIT - Stock Picks), the country's primary provider of international telecommunications services.

Perhaps the most attractive Indonesian ADR is Telekomunikasi Indonesia (TLK Quote - Cramer on TLK - Stock Picks), the country's main phone company. Investors, however, will have to be comfortable sharing ownership with a government that has garnered international rebuke for its handling of the crisis in East Timor. Shares in the company, which is 75%-owned by the government, nearly tripled from the 52-week low of 2 9/16 despite the country's problems.

Investors might also find bargains in Indonesia's relatively tiny float of publicly traded debt. Indonesia has only $500 million in traded sovereign bonds and finances most of its development through loans from international organizations and multilateral organizations. Indonesian seven-year bonds have traded at a yield near 12.5%, comparable to Brazil and Argentina, and much less than Russian yields of more than 30%. That indicates that investors are more comfortable with Jakarta than they are with Moscow despite the uncertainties.

"There are a lot of things in the country that need to be worked out, but in the end, we expect things to improve," said Albert Van Ness, vice president of emerging markets at Citibank Global Asset Management, which holds some Indonesian sovereigns.

Given the country's tarnished fundamentals, including a public debt burden that some estimate could top two-thirds of GDP, the performance of the bonds might seem extraordinary. But Moody's Investors Service sovereign analyst Steven Hesse believes that the government will be able to meet its servicing obligations because of the small amount of debt. Moody's still gives Indonesian sovereign debt a B3 rating, but that's higher than the C-level ratings most of the country's companies get.

Assuming that the worst has been exposed, long-term international investors may help lay the foundation for future foreign investment -- and profit nicely from it at the same time.