Winter 2013

INDONESIA: In the middle of a storm

TreeIndonesia was the worst-hit country during the Asian financial crisis and summer stirred up bad memories. Stefanie Eschenbacher finds asset managers in Jakarta are focusing on the long-term potential. Bad memories of the Asian financial crisis were whipped up last summer, when the Indonesian rupiah went into free fall, the stock market started to tumble and the current account deficit widened further. The similarities with the months before the Asian financial crisis in 1997 are striking. US monetary policy is once again a concern as the Federal Reserve contemplates tapering its massive bond-buying programme amid a global slowdown and a delay in much-needed domestic reforms. Indonesia was the worst-hit country during the Asian financial crisis, which ended the 32-year dictatorship of Suharto, and had far-reaching political and social implications. Asset managers in Jakarta, though, are focused on the long-term prospects of their country. Riki Frindos, chief executive officer of Eastspring Investments, says Indonesia boasts a lot of potential for asset managers, given that less than 0.1% of the population – Southeast Asia’s largest – invests in mutual funds. Indonesia’s GDP per head is more than twice that of India, where mutual fund penetration is 10%. The equivalent number for Indonesia is 2%. Just under $16 billion of assets are invested in mutual funds, data from Lipper shows. To put this in context, the Vanguard Total Stock Market Index, the world’s largest mutual fund, with $251.1 billion of assets under management has more than ten times the amount. Wealthy Indonesians also tend to hold their money offshore, mostly in Singapore. “Singapore is one of the important wealth management hubs, not only for Indonesians,” says Frindos. “It is natural for some Indonesians to put their money into Singapore, but our objective is to get a share of it.” Financial literacy is the largest challenge, he says, adding that many Indonesians are either unaware of the possibility to invest in mutual funds or are too conservative. Legowo Kusumonegoro, president director at Manulife Aset Manajemen Indonesia, shares this line. NOT JUST FOR THE WEALTHY
Local mutual funds were introduced in 1996, but there are less than 300,000 investors in a population of 246 million. “There is a perception that investments are only for wealthy people, but we offer funds where people can make investments with as little as $10,” says Kusumonegoro, who presents daily and weekly financial literacy programmes on TV aimed at educating Indonesians. Bank deposits remain popular because they promise double-digit returns, but with inflation hovering around 8.32% year-on-year, and a 20% tax on interest, he says savers are actually losing money. Rudiyanto, who, like many Indonesians has only one name, is head of operation and business development at Panin Asset Management. While Indonesians put their money into Singapore for privacy or tax reasons, Rudiyanto says stability is a more important factor. “If our country rating stays the same, money will stay outside the country,” he says. Standard & Poor’s credit rating for Indonesia stands at BB+, Moody’s rating for Indonesia’s sovereign debt is Baa3, and Fitch’s credit rating is BBB-. This puts Indonesia in the same bracket as Iceland and Spain. “There is also political instability,” he says, referring to the election next year. “If the new government does well, our rating could go up.” The stock market rallied during the past two elections in 2004 and 2009, but not so this time. Josua Pardede, economist, global markets and economic research at Bank International Indonesia, Maybank, is more upbeat. “Whoever wins the election, there will be no significant structural change. Indonesia has a blueprint for developing its economy.” Changes for the asset management industry are already under way, though. The Otoritas Jasa Keuangan recently took over responsibility for regulating capital markets and non-bank financial activities. It is modelled around the Financial Services Authority in the UK, which was recently restructured.   Kusumonegoro says the new regulator is engaging with asset managers, more than its predecessor, the Badan Pengawas Pasar Modal dan Lembaga Keuangan, ever did. The need to reform is made even more urgent because Indonesia aims to join the fund passport scheme Singapore, Malaysia and Thailand signed in October. If Indonesia joins in 2015, asset managers will be able to sell their funds into other countries. It would, however, greatly increase the competition in the local market. One of the challenges asset managers in Indonesia face is the fact that overseas investments are capped at 15%, although in recent months the regulator has signaled that this may be lifted. ECONOMIES OF SCALE
There is demand for offshore investments, Kusumonegoro says, but not many asset managers have made use of the possibility. The cap is problematic because the exposure needs to be hedged back into Indonesian rupiah and investors pay a 20% tax on capital gains, no matter if they are realised. Michael T. Tjoajadi, chief executive officer of Schroder Investment Management Indonesia, says none of his funds invests outside Indonesia. “We used to have an allocation overseas, but have closed it,” He adds it was impossible to reach economies of scale. Custody business had to be in Indonesia while the currency exposure presented a whole different set of challenges. With 85% of a fund’s assets Indonesian rupiah-denominated, the rest had to be hedged because funds were not allowed to give investors currency exposure. “In reality, it is not do-able to invest 15% offshore,” says Frindos. “We would have to consult the regulator before making any investments, but by the time we get approval the opportunity might no longer be there… markets move very fast.” Frindos, who says he has been in discussions with the regulator over the past couple of months, adds: “The regulator seems more open towards relaxing these rules and will eventually give more flexibility. The key point is offering investors diversification in terms of currency exposure, asset classes and geography.” He says a pan-Asian strategy would be a suitable addition to the funds Eastspring Investments Indonesia already offers, a type of strategy Kusumonegoro also considers. “Investors are familiar with equities and they know some Asian markets. We used to sell Asian funds in Indonesia via private banks and received a strong response, but the government restricted it after the financial crisis.” Vivian Secakusuma, chief executive officer of BNP Paribas Investment Partners Indonesia, says the maximum 15% access to offshore investments has been utilised in only one fund. “If the limit is increased, we will consider to invest more and explore other product opportunities, which are allowed by relevant regulations,” she says, adding that this would also depend on market conditions and investor demand. “We understand that our regulator is working towards widening the number of investable assets for mutual funds. With globalisation, there will be demand for assets other than Indonesian equities, plus investors also need other options in order to diversify.” While Secakusuma says the mutual fund vehicle will still be preferable, she concedes that a greater variety of investment product is needed in Indonesia to provide diversification and alternatives for investors. Rudiyanto says Panin Asset Management would consider only one fund that invests outside Indonesia, in addition to the 10 products it already offers. “Indonesia is a lucrative market for asset managers and many international players want to come to Indonesia. Why would we invest elsewhere?” Instead of increasing the number of funds, he says the focus is on improving the system of payments. “We have to send a proof of transaction to our investors, which means we send 1,000 faxes every day.” With minimum investments as low as $10, asset managers struggle to make business more efficient. This has led to a situation where they focus on high-net-worth individuals, more so than in other countries. The average holding period for funds is one year, which suggests investors are still short-termist, and only banks and insurance companies are allowed to offer defined contribution pension funds. STRUCTURAL CHANGES
Kusumonegoro says asset managers might not make money in the short-term, but international players are making a long-term commitment to the market. “There is a huge opportunity in Indonesia, but we have to undergo the tough part first. Education is key.” Meanwhile, Tjoajadi says the regulator should allow funds of funds. PG Asset Management is looking to a whole different area of product development, the first gold exchange-traded fund in Indonesia. Chief executive officer Sanverandy H Kusuma says it is still not possible to invest in physical gold in Indonesia. With a stock market capitalisation of 4.6 quadrillion Indonesian rupiah, Kusuma says only eight stocks listed on the Bursa Efek Indonesia are considered large-caps. In addition, there are 50 small- and mid-cap stocks. “Other stocks are too small, too volatile or the businesses are family-controlled and not transparent. We all own the same stocks; some asset managers offer three or four equity funds that are not differentiated at all.” While PG Asset Management is expanding into the sharia market, only the planned gold ETF is a true innovation. “Gold is a hedge against inflation and instability, but we see it as another asset class,” he says. PG Asset Management has had to create a different company, PG, that launches the ETF because commodity-related investments are regulated by the Kementerian Perdagangan, the ministry of trade. “There is a mismatch in how economic activities in Indonesia are funded because a lot of funding comes from banks,” Frindos says. “The government should encourage companies to list shares and issue bonds.” There are also uncertainties when it comes to taxation. Investors in bond funds get a tax advantage, but this privilege will expire at the end of this year, with no indication from the regulator whether it will be renewed. He says the government has agreed to extend this benefit, but the official documents have not been issued yet. Then there is an over-reliance on banks when it comes to distribution, and asset managers are pressing the regulator to broaden distribution channels.   Pardede says the government has policies to deepen the financial inclusion and sector. “We never expected the stock exchange would fall so much.” He adds this was mainly caused by the monetary policy of the US Federal Reserve, and he concedes “Indonesia faces structural change”. However, he brushes off concerns over a second Asian financial crisis. “Compared to the Asian crisis in 1997 and 1998, or fundamental economy is much better now and our international reserves are five times as high, at $95.7 billion,” he says. The government has already introduced policies to address the widening current account deficit, boost investments and control inflation. Having been the worst-performing Asian currency, with the Indian rupee, the Indonesian rupiah shows few signs of recovery. Foreign ownership of Indonesian government bonds has fallen markedly. Bad memories linger. ©2013 funds global asia  

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