In April, Standard & Poor’s cited failure to tackle the subsidies as one reason it hasn’t followed the example of Moody’s Investors Service and Fitch Ratings, which in the space of five weeks in December 2011 and January 2012 lifted Indonesia’s credit rating to an investment-grade level.
Investor Mark Mobius says he’s treading carefully in Indonesia, even though the Jakarta Composite Index surged 6.79 percent this year through June 11.
He’s enthusiastic enough about the consumer story to stake almost 6 percent of his $18.45 billion Templeton Asian Growth Fund on shares of PT Astra International, the country’s biggest automotive retailer, which sells Toyota cars and Honda motorbikes. Still, he says that many Indonesian consumer stocks are no longer cheap and that others aren’t transparent enough.
“It’s not easy pickings,” Mobius says. “And you have corporate governance and corruption problems.”
Indonesia has long been plagued by graft. Suharto, the dictator who was overthrown in 1998 after 31 years in power and died in 2008, may have embezzled as much as $35 billion, according to Berlin-based Transparency International.
Four officials in Yudhoyono’s Democrat Party have resigned in the past two years after being linked to bribery allegations; two were convicted and sent to prison, while the other two, who deny wrongdoing, have been named as suspects.
Indonesia ranked 118th out of 176 countries in Transparency International’s 2012 Corruption Perceptions Index, a fall of 18 places from the year before.
Another Mobius concern, the opaqueness surrounding many Indonesian companies, has been highlighted by the battle in London for control of Bumi, a company set up by British investor Nat Rothschild in partnership with the Indonesian Bakrie family headed by billionaire politician Aburizal Bakrie.
The Bakries injected stakes in two listed Indonesian companies into Bumi before the partnership collapsed amid Rothschild’s allegations of accounting irregularities at the Indonesian firms.
Now, investors are confronting another obstacle: nationalism. Some foreign mining companies such as Freeport-McMoRan Copper & Gold are being ordered by the government to pay higher royalties and sell bigger stakes in their companies to local partners. And starting next year, many companies will be barred from exporting raw metals, forcing them to build expensive refineries onshore or send their ore to be processed by local smelters.
Yum Brands, owner of the KFC and Pizza Hut chains, has more than 700 outlets in Indonesia. It learned in February that the government plans to limit most restaurant franchise holders to 250 branches to protect small businesses.
“There’s been a narrowing of space for foreign investment,” says James Castle, founder of CastleAsia, a Jakarta-based consulting firm.