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By Martin Hutchinson
At times, you can tell a country by the company it keeps.
Indonesia just announced it plans to leave the Organization of the Petroleum Exporting Countries (OPEC), the infamous cartel that tries to push our oil prices through the roof.
That decision may not seem very significant, but consider it this way: If you were Indonesia, which countries would you rather have as your buddies? A bunch of sleazy, corrupt, idle "lottery winners" such as Nigeria, Venezuela and Angola? Or would you prefer a set of hard-working and diligent neighbors such as Singapore, Malaysia and Thailand? Not to mention two of the largest growth economies in the world: India and China?
Believe me, when Indonesia left OPEC it wasn't to save the paltry $3 million annual dues. Like Groucho Marx, Indonesia decided it didn't want to be a member of a club that had such low standards for membership. Instead, it would rather join the good guys.
For emerging market investors, that choice is a significant one.
To be fair, Indonesia's decision wasn't just based on a snobbish desire to mingle with a classier set of countries. For one thing, while Indonesia still produces and even exports quite a lot of oil, it's a big country and is no longer self-sufficient from a petroleum standpoint: While its needs are about 1.1 million barrels per day, its production is now only 860,000.
What's more, Indonesia doesn't share OPEC's ambition, which currently appears to be to squeeze the rest of the world until oil costs $1 million a drop. Indonesia subsidizes oil for its domestic consumers (237 million of them, most of who are pretty poor) and so the last thing it wanted was yet higher oil prices – the subsidies were killing its budget.
President Susilo Bambang Yudhoyono took a huge amount of heat when he increased domestic oil prices by 125% in 2005; there were more riots after he found it necessary to raise them another 30%. However, if he hadn't done so, oil subsidies alone would have been more than 20% of government spending – and that's before taking into account food subsidies for the poor, also necessary in a year when rice prices have trebled.
The bottom line is that Indonesia wants lower – not higher – oil prices. More so, in the last decade, it has abandoned the sillier features of an OPEC-member country's economic-management playbook. While the oil company Perusahaan Pertambangan Minyak Dan Gas Bumi Negara – commonly referred to as Pertamina – is still state-owned, it is allowed to do joint ventures with foreign companies. And, unlike Russia or most OPEC countries, Indonesia's government has the sense not to steal the proceeds of those joint ventures that prove themselves successful. As a result, more than half of Indonesia's oil-import deficit will disappear when the Cepu Block offshore oil fields, jointly developed by Pertamina and Exxon Mobil Corp. (XOM), opens up to full production in 2010.
Since Indonesia doesn't agree with OPEC's prime objective, and doesn't approve of OPEC's typical state-owned kleptocracy as a way of conducting business, it's not surprising it decided to leave.
That's not to say that Indonesia has reached free-market perfection. For one thing, it remains astonishingly corrupt – ranked 143rd on Transparency International's 2007 Corruption Perceptions Index. That places the country far below China and India and close to the level that makes Nigeria and Myanmar such charming places in which to do business. The corruption dates back to the 32-year rule (1966 to 1998) of Indonesian strongman Suharto, who modernized the economy but used his position to grab billions of dollars for himself and his family and was forced out of office in an economic collapse. He died early this year.
Nevertheless, in the last decade, instead of wasting energies on rooting out every vestige of Suhartoism, Indonesia has moved a long way towards being a functioning democracy. Under Yudhoyono, the economy has grown at around 5% per capita, while privatizations have taken place – the steel company Krakatau is due to be privatized later this year, for example. Public spending has been kept under control and, most importantly, Indonesia has used these years of easy money and high commodity prices to pay down debt. Its international debt is now only 35% of its gross domestic product (GDP), a level it should easily be able to live with without major crises.
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In summary, Indonesia has moved from a commodity exporter to a true emerging market, and deserves the attention of investors accordingly.
There are only two Indonesian companies with full American Depositary Receipt (ADR) listings, both of them in the telecom sector. Thus, the easiest way for a U.S. individual investor to invest in Indonesia is through the closed-end Indonesia Fund (IF) The fund is run by Credit Suisse Group AG (ADR: CS), is rather small at only $93 million in assets, but has the advantage of selling at a 9% discount to net asset value (NAV), with an expense ratio of 1.55%. It has returned 38% per annum over the last five years, as Indonesia has demonstrated its recovery from the 1998 "Asian contagion" financial crisis, but there would appear to be more to go for.
Indonesia's satellite telephone company PT Indosat Tbk (ADR: IIT) operates cell-phone and long-distance services, and is currently trading at a Price/Earnings ratio of 15 on trailing earnings. It has a dividend yield of 4%.
Indonesia's fixed-line telephone company, PT Telekomunikasi Indonesia (ADR: TLK), is trading at a trailing P/E of 14, and features a dividend yield of 3.6%. It offers fixed-line and cell-phone services, and is the country's traditional telephone provider, founded in 1884.
With the two ratings so close, I would tend to go for the satellite service PT Indosat Tbk, since Indonesia is a large and enormously complex archipelago, with shaky infrastructure.
News and Related Story Links:
- Money Morning:
Indonesia to Withdraw from OPEC Due to High Oil Prices
President Susilo Bambang Yudhoyono
- Money Morning:
When Corruption is Low, Your Profits are High