Asiamoney.com: Opinion, September 22

A busy week for equity capital markets bankers in Jakarta – but then, they’ve all been busy weeks lately. As two IPOs raised almost a billion dollars in comfortably subscribed, internationally popular deals, banks were pitching for roles on a new jumbo secondary issue for Bank Mandiri.

Just what’s gone so right in Indonesia? Issuance volumes in southeast Asia are transformed. Whereas last year Indonesia, with $2.58 billion of equity issues, raised barely a fifth of what Singapore did, this year, with US$5.8 billion already, it’s on track to double volumes in the Lion City. The numbers look good already but they’re going to get a lot better before the end of the year.

This week Indofood CBP, which handles consumer branded products businesses such as noodles for the Indofood Sukses Makmur conglomerate, gave a clear demonstration of the foreign investor appetite for the Indonesian story. It raised US$700 million in a deal that pulled in nearly 400 institutional investors, with 90% of the stock going overseas in a deal that priced near the top of its range. The same day, coal producer Harum raised US$290 million, again mainly from overseas. Both followed a US$400 million placement of Indo Tambangraya Megah stock earlier in the month.

And this is just the start. Krakatau Steel and Garuda Indonesia, true trophies within the Indonesian privatization process, are still expected to list in the fourth quarter, according to the Ministry for State-Owned Enterprises. That Mandiri secondary – for which Bank of America Merrill Lynch, BNP Paribas, Citi, CLSA, Deutsche and Morgan Stanley sent their senior presentation teams in on Sunday – will raise up to Rp14 trillion (US$1.6 billion), while another big bank block trade, for Bank Negara Indonesia, could well hit US$800 million. Indonesia’s state energy behemoth Pertamina is due to spin off two businesses, Pertamina Hula Energy and Pertamina Geothermal Energy, with the first one – which could raise US$1 billion – a strong candidate to list before the year-end. Sooner or later, Pertamina itself will follow.

The Jakarta Composite Index is at an all-time high: 3,370 points at the time of writing, having started the year at 2,534. Foreign investors bought a net US$1.4 billion of Indonesian shares in the first seven months of this year, compared to US$1.5 billion in all of 2009, and put almost US$8 billion into government bonds over the same period. On both the debt and equity side, the proportion of Indonesian securities in foreign hands is growing by the month. There is reasonable talk of an upgrade to investment grade territory. The rupiah is up 5% this year. Economists are talking about it as another BRIC. And a new study of the decoupling theory released this week by HSBC showed Indonesia is one of the markets most able to withstand swings in western economies, whether US or European.

It’s all good, predicated on stable government and an irresistible consumption story. But is it all a bit too good? Those who have watched Indonesia for many years have seen exuberance followed by crushing disappointment time and again. And even those who weren’t around during the Asian financial crisis won’t have forgotten that the index dived 51% during 2008, among the worst in the world. “Things are improving, there’s no question about that,” says one banker in Jakarta. “But there are times I worry that we are getting a bit too much praise.”

It’s a question foreign investors in Indonesian issues are starting to ask themselves, though apparently not for very long. One investor told Asiamoney that it was “almost inconceivable” not to have been in the Indofood CBP deal because of the need to gain exposure to Indonesian consumer spending growth. They know that they’re buying stock at an all time high, and that doing so has proven historically unwise. But the risk of missing out is too great to step back.

On the debt side, the picture is slightly different. Indonesia is two notches below investment grade with a positive outlook at both Standard & Poor’s and Moody’s, while at Fitch it’s just one notch below. If Indonesia does get upgraded to investment grade territory, then strong performance and broader international ownership almost become self-perpetuating because of the weight of money that not only can then invest in Indonesian debt, but will be obliged to do so because of index weightings.

Those on the ground believe that there are important differences to previous periods when collapse has followed enthusiasm. Apart from the political stability, there is fiscal discipline: Indonesian public debt to GDP, which was around 100% a few years ago, now stands at 29%, well below many peers. Well, maybe. For the moment it’s time to enjoy a rare moment in the sunlight for a country that has too often been associated with miserable investment experience. But equity investors in particular should be looking very, very closely for danger signs of a reversal.

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