The Asian financial crisis triggered a downgrade in the country’s sovereign rating from an investment-grade level of BBB- by both Fitch and Standard & Poor’s in early 1997, to B and CCC, respectively, in early 2001. This was followed by a capital flight, depreciation of the rupiah by over 70% and turbulent shifts in the post-Suharto regime’s leadership. After over 10 years of economic and political reform, Indonesia has regained investment-grade ratings: BBB- from Fitch in December 2011, and Baa3 from Moody’s in January 2012.
At Ancora Capital, as an active private equity investor focused on middle-market growth equity investments, we have seen first-hand the positive impact of the credit upgrade on foreign direct investment (FDI) and the capital markets. Our portfolio companies have seen a step-function surge in interest from foreign multinationals, and investors looking for opportunities to partner with and invest in professionally managed companies in Indonesia. In addition, the investment-grade rating for Indonesia has opened doors for institutional investors. Since the upgrade, participation in the Jakarta Stock Exchange by foreigners has grown from 32% of average daily trading value in fourth-quarter 2011 to 43% in second-quarter 2012. At Ancora this increased market liquidity has resulted in greater options for our portfolio firms to raise capital or achieve liquidity through the public markets, while interest in professionally managed funds has reached all-time highs. This virtuous cycle of increasing FDI and broader and deeper capital markets will have a positive multiplier effect on the country’s economy, particularly in the middle market consumer industries, which have historically lagged behind the natural resource sectors.
The country has now returned to the spotlight. The economy, backed by real sectors, strong domestic consumption and a highly productive population of 245m, has proven resilient against the sharp drop in external demand caused by the global financial crisis. GDP growth in 2009 declined only 1% below its five-year average, and rapidly rebounded to growth rates above 6%. Notable progress has also been made in monetary and fiscal policies. The budget deficit has remained below 2% of GDP since 2002, partly due to a gradual reduction in fuel subsidies. This has allowed the government to slowly reduce public debt from above 90% of GDP in 2000 to less than 30% in 2011.
At the same time, strong fiscal health has provided the central bank with greater monetary control. Inflation has been curbed, providing greater flexibility for it to carry out expansionary policies if needed and maintain affordable credit, a key ingredient to achieving higher financial participation. Despite the sharp rise in credit growth in recent years, Indonesia’s credit-to-GDP ratio of 30% remains below similar rates in the Philippines and China, suggesting room for further growth. Simultaneously, Bank Indonesia has been doing a good job in preventing any potential overheating by raising the minimum down payments for consumption loans. This attractive credit environment has allowed our portfolio companies to raise significant debt financing on highly attractive terms to help fuel their growth.
Recent pressure on the rupiah is partly due to consecutive quarters with negative current accounts, from fourth-quarter 2011 to second-quarter 2012. This was caused by softer commodity prices – in particular for coal and palm oil, which account for a large share of exports – coupled with an increasing share of capital goods in imports, from 17% in first-half 2011 to 20% in first-half 2012. Longer term, this will contribute to the expansion and modernisation of industry and infrastructure, which is vital to the development of value-added industries. Along the way, we expect investment opportunities in these value-added industries – including health care, financial services and consumer retail – to broaden and deepen. A stronger economy, coupled with foreign reserves of over $110bn, will help stabilise the rupiah in the mid-to-long term. The investment-grade rating signifies international recognition of our vibrant transformation, and paves the way for investment opportunities across all economic sectors.
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