Indonesia: Playing the long game

BLOOMBERG has recently reported major international banks like Citigroup Inc, HSBC Holdings Plc and Standard Chartered Plc have sharply increased their profit repatriation from Indonesia due to growing concerns over its state-led policies.

The newswire notes that since 2024, these three banks have remitted about US$640mil in total to their parent companies, and the figure is more than what they had earned.

The currency volatility and pressure on banks to support government initiatives was identified as further reasons.

Indonesia’s policy measures like the canalisation of major commodity exports, such as coal, nickel and palm oil under a central agency, have in some ways dented investor confidence.

This has resulted in the rupiah falling to historic lows against the US dollar while issues like managed trades of shares on the equity market have led to capital outflows.

Jakarta has also confiscated some five million ha of oil palm acreages and industrial forest concessions since last year and in the process created the largest oil palm company in the world in state-owned PT Agrinas Palma Nusantara.

These developments suggest it might be prudent for Malaysian businesses with operations in Indonesia to manage their risks more actively and maybe do the same as what some of the three banks have done.

CIMB Group Holdings Bhd and Malayan Banking Bhd (Maybank) have substantial banking operations In Indonesia while local plantation companies like SD Guthrie Bhd, United Plantations Bhd, Kuala Lumpur Kepong Bhd, IOI Corp Bhd and Genting Plantations Bhd, among others, have played a role in making Indonesia into the largest producer of palm oil in the world and a heavyweight in the global edible oil market.

The weak rupiah-ringgit exchange rate could be a negative but a small price to pay to protect capital and the interest of their shareholders.

The move would also help allay calls by institutional shareholders here in local companies to improve returns to shareholders and support what the MY Value Up programme wants to achieve.

Despite the negative headlines around Asean’s largest economy at present, Malaysian investors should consider having a long-term investment view of Indonesia.

Its Islamic banking financing is projected to grow by about 10% in 2026 by Fitch and keep its share of the system total at around 8%.

The growth of the sector is likely to be supported by government-led consolidation, financial inclusion initiatives, and new services such as bullion banking, capitalising on the large under-banked Muslim population.

So there are opportunities for CIMB and Maybank to grow in the country, as Indonesia is projected to become the world’s fourth-largest economy by 2045.

It’s already the only trillion-dollar economy in Asean with a population of 280 million people. Indonesia is a heavyweight in the commodities sector, having the largest nickel reserves in the world as well as being the largest exporter of coal and palm oil.

The country’s industrial policy is taking shape based on adding value to its natural resources.

Investments are going into digital infrastructure, artificial intelligence, advanced manufacturing and Fintech, among others. These will create jobs and improve income levels.

Jakarta is also seeking to address development issues through its sovereign wealth fund Danatara that has some US$900bil in assets. The measures taken via the fund aims to address its low tax to gross domestic product ratio and fund its infrastructure investments.

As it stands, international credit ratings agency Standard & Poor’s (S&P) has just recently affirmed Indonesia’s BBB/A-2 sovereign credit rating, noting its recent fiscal strains should be temporary and could be off-set by stronger commodities prices and spending cuts.

S&P expects government revenue will continue to recover this year and export receipts will rebound with higher commodity prices.

International investors also appear to still have confidence in Indonesia despite the negative news headlines the country has encountered this year.

Danatara recently raised US$1.5bil in June through its inaugural international bond issue. The bond issue was more than three times oversubscribed, leading to the upsizing of the issue size and a lower yield rate. The bond investors will be paid back with dividends earned by Danantara from its assets.

Indonesia is a long-term investment thesis and not dependent on a single administration. It has a robust democratic system, although with flaws like many other countries. General elections are held every five years. A government that fails to perform it can be replaced and policies changed.