It is only the second time ever that Indonesians are electing their president through popular vote rather than an electoral college. While the young promoters are pushing fliers for former president Megawati Sukarnoputri and her running mate, just about every other shopper is whispering the name of the man who has in recent weeks enthralled audiences across the Indonesian archipelago at the hustings: Susilo Bambang Yudhoyono.

President Yudhoyono, or SBY to most Indonesians, is likely to win the presidential election, beating off a challenge from his former vice-president, Yusof Kalla (who now has former military commander Wiranto as his running mate), and his former boss, Megawati (with former special forces commander Prabowo Subianto on her ticket), by clinching majority votes in the first round of balloting.

Although the polls have tightened in recent weeks and there is an outside chance that Yudhoyono might not be able to cross the finishing line on July 8, analysts say, even if he fails to clinch victory in the first round, Yudhoyono is likely to beat his opponent in the final face-off. “The election is for Yudhoyono to lose,” says Fauzi Ichsan, an economist for Standard Chartered in Jakarta. Ichsan says the markets have “already priced in his victory” in the first round and will be hugely disappointed if he doesn’t win it outright.

The odds are stacked in the president’s favour, should he win a new mandate. For starters, Yudhoyono’s Democratic Party, which will have 27% of the seats in the new parliament as opposed to just 11% in the previous one, will need to do a lot less horse trading to lead a stable coalition. Moreover, the president has picked a technocrat, former central bank governor Boediono, who once served as Coordinating Minister for Economy, as his vice-presidential running mate. Finance Minister Sri Mulyani is being tapped to head the central bank and the Yudhoyono-Boediono team is lining up a strong group of pro-reform technocrats to guide Indonesia’s new economic agenda. Together, the duo presents a new face of Indonesia: pragmatic, pro-business, with a strong commitment to cut red tape and expedite development.

Sleeping giant awakes
Indonesia, the world’s fourth most populous country after China, India and the US and long regarded as the region’s sleeping giant, is finally on the move. Rich in natural resources — oil, gas, copper, gold, coal, nickel as well as timber, tin, rubber and palm oil — it has plugged into the global grid by becoming a key supplier of raw materials to China, India, the Middle East and other emerging markets.

After dictator Suharto was ousted in mid-1998, following weeks of street protests, Asia’s fifth-largest economy struggled through a vacuum of three weak administrations led by B J Habibie, Abdul Rahman Wahid and Megawati Sukarnoputri. With successive leaders unable to provide a strong platform for growth, Indonesia was written off by many as an ungovernable basket case in Asia.

But all that changed when Yudhoyono became president in late 2004. He won praise for his efforts to curb rampant corruption and indicted senior officials — governors, mayors, bankers and even judges who had been caught red-handed. His policy of decentralisation has dramatically reduced graft in the country. “Before he took office, provincial politicians would often take bribes, claiming they had no choice but to do so as they were being told by Jakarta to do so,” recalls Mark Matthews, Asia strategist for Fox-Pitt, Kelton in Hong Kong. “Now everyone knows the money stays in the provinces, because the top person in Jakarta is not corrupt.”

Even with rest of the region mired in a recession, Indonesia is relatively sheltered from the global recession, owing to low export exposure and will still rack up strong 3.8% to 4% growth this year — the third highest in Asia behind only China and India.

Indeed, the Indonesian economy has been growing so fast that US investment bank Morgan Stanley believes it should join the ranks of emerging giants like Brazil, Russia, India and China in an expanded “BRIIC” acronym. “In a broader sense, the case for Indonesia is better than even Brazil or Russia over the longer term,” Morgan Stanley’s economist Chetan Ahya tells The Edge Singapore in a recent interview. “Indonesia is where India was five years ago, or where China was 10 years ago.”

He says Indonesia’s excellent demographics, abundant natural resources, strong reformist policies and a structural decline in cost of capital have catapulted it to the forefront of emerging economies. The advantage from the demographic dividend and natural resources is not new, he adds. “What is new, however, is the coming together of all these growth-conducive factors,” Ahya says, adding that Jakarta needs to build infrastructure to create jobs and boost growth, strengthen its education system, particularly at tertiary level, and help nurture a vibrant private sector. That will help build a strong platform and take the country to the next level of development.

Boon for Singapore
Indonesia’s emergence as the next growth story in Asia is a boon for Singapore, whose hinterland of budding tiger economies has lagged, with political turmoil and recession in Thailand and a prolonged downturn in Malaysia. Indonesia’s new growth momentum is one of the few bright spots for Singapore. High-net-worth Indonesians form the biggest group of clients for Singapore’s private banks. Affluent Indonesians are also the biggest buyers of private property in the city-state, accounting for nearly a quarter of all sales. Indonesian patients are also the biggest source of medical tourism to Singapore and the main revenue generator for private-hospital groups like Parkway. Singapore is also banking on Indonesian tourists, who account for 20% of all tourist arrivals, to fill the spanking-new malls on Orchard Road as well as the two new casino resorts in Marina Bay and Sentosa, which open early next year.

“The success and stability of Indonesia will likely have economic benefits for Singapore, given the strong economic ties between both countries,” notes Nomura analyst Lim Jit Soon, in a recent report. Singapore’s total trade with Indonesia grew to S$75 billion (RM182 billion) last year, while the cumulative direct investment into Indonesia rose to S$17 billion in 2008, from S$7.7 billion in 2002. Singapore is the biggest foreign investor in Indonesia.

Detractors say they have heard about Indonesia’s promising growth story before. Indeed, President Yudhoyono’s efforts to lure investment in his first term were stymied by regulations, which in turn hindered economic growth. His reliance on a loose coalition that included the former ruling party Golkar led to the watering down of policies and the stalling of key parliamentary bills. Yet, with a stronger parliamentary mandate and fewer coalition partners, Yudhoyono is now ready to prove naysayers wrong. To attract foreign private investment, the government will set up a IDR1 trillion (RM344.5 million) fund to protect investors against changes in government policies that weren’t included in the original contract and might affect profitability. Jakarta is also teaming up with the World Bank and the Asian Development Bank to establish an additional IDR3.8 trillion infrastructure fund for key projects like roads and ports.

In recent months, Indonesia has unveiled plans to spend nearly S$140 billion on new infrastructure over the next five years — more than doubling its expenditure on new roads, power plants and ports during the period. Jakarta’s aggressive rebuilding programme is part of a bigger drive by Yudhoyono to reverse more than a decade of under-investment since the 1997 Asian financial crisis. The administration is putting its money where its mouth is, doling out an array of incentives to lure investors in new toll roads, power plants as well as ports. The government will fund about 29% of the infrastructure projects from its own budget and is seeking investors or lenders for the rest. Yudhoyono has vowed to facilitate additional rebuilding efforts, including setting up a fund to guarantee against political risk to attract investors.

What does Indonesia have going for it that others don’t? “With two-thirds of its GDP coming from domestic consumption, Indonesia does not have China’s overcapacity nor is it overly reliant on exports,” says Fox-Pitt, Kelton’s Matthews. Moreover, Indonesia doesn’t have India’s deficits or even its political squabbles, he says. What it does have that makes it so appealing is political reform as well as a strong, popular and reformist leader in Yudhoyono.

Although Indonesia has been chugging along the right track for a few years, only now with the president poised to win a second and final five-year term are investors suddenly focusing on its real potential, says Ray Jovanovich, who heads Credit Agricole Asset Management (Asia) in Hong Kong. “There is a sudden realisation that we are witnessing a dramatic transformation” — the emergence of the next big growth story in Asia, he says.

Most affected by the 1997/98 Asian financial crisis, Indonesia was the least able to rely on exports to kick-start its growth when the region’s economies began to recover with a surge in tech-related exports in 1999, as the froth of the global tech bubble develop­ed. Forced to take the International Monetary Fund’s tough medicine and badly strapped for cash, Indonesia sold much of its banking, telecommunications and parts of its resources sector to foreign players, which brought in much-needed capital, expertise, improved corporate governance as well as technology.

That has placed the country in a far stronger position to ride out the current crisis. Morgan Stanley estimates Indonesia’s GDP will grow 3.8% this year and 5% next year, from 6.1% last year. “If they can build on what they have done so far, we think Indonesia can easily grow at 6% to 7% a year, possibly 8% beyond 2011,” says Morgan Stanley’s Ahya, adding that its size and 7% to 8% growth will clearly put it alongside other BRIC economies sooner rather than later.

“Consumption, especially rural spending, will be key to [short-term] recovery in Indonesia,” notes Rajeev Malik, an economist for Macquarie Securities. The central bank, which dramatically raised rates last year to fight inflation, has since slashed prime lending rates from more than 10% to 6.75%. Inflation in June fell to just 3.65% against a forecast 3.8%. The annualised inflation figure was the lowest recorded since June 2000. Investors are now betting there is room for more cuts as inflation eases to under 3% by year-end. The consensus view among economists who cover Indonesia is that rates could be cut to 5.5% within months, fuelling a consumption boom. Indonesia’s rupiah has been appreciating against the US dollar since March and is more likely to strengthen rather than weaken over the next 12 months.

Little wonder, then, that Indonesia is the best-performing market in Asia this year and over the past 12 months. In US-dollar terms, the benchmark Jakarta Composite Index is up more than 70% from the bottom in March and more than 65% year to date. At just 15 times this year’s earnings, 1.6 times price-to-book and a dividend yield of 3.3%, however, Indonesia is no longer Asia’s cheapest market, despite a recent correction following its sharp run-up. “Yet, its valuations are still cheaper than India or China, and what it shares with them, that other markets in Asia do not, is growth,” says Matthews.

“Indonesia will continue to outperform rising markets in Asia, owing to its attractive valuations,” says Credit Suisse’s strategist Arief Wana, whose year-end target for the composite index is 2,276 — up 20% from current levels.

In better shape
Some analysts and fund managers have been concerned that large foreign investors have been taking some money off the table. German building-materials behemoth Heidelberg Cement recently pared down its stake in Jakarta’s giant Indocement from 65% to 51%, raising US$321 million (RM1.13 billion) cash. California’s private-equity group Farallon Capital, which bought 49% of Bank Central Asia, Jakarta’s sixth-largest lender, eight years ago, last week sold its remaining stake in the bank, now controlled by the Djarom group. Others say such transactions have increased free float in large listed firms, which will only help boost portfolio flows to Indonesia.

The biggest surprise is how well the Indonesian banks have held up through recent crises. Unlike the Asian crisis, when the country’s corporate sector was battered, Indonesian companies are now in much better shape, with low debt levels and low foreign-exchange exposure, notes Credit Suisse’s Arief. While non-performing loans are rising, they are still way below critical and historical levels, he says. Indonesia is now one of the least leveraged in Asia — with one of lowest loans-to-deposit and loans-to-GDP ratios. Jakarta’s lenders are extremely well capitalised, with a tier-1 ratio of 13.5% — among the highest in Asia. They also have some of the region’s heftiest interest margins.

It is no surprise, then, that MNCs are rushing to Indonesia to take advantage of the burgeoning consumer market, which could be the third-biggest in Asia after China and India. British American Tobacco last month paid US$494 million for an 85% stake in a small local cigarette firm PT Bentoel Internasional Investama. That follows Philip Morris International’s US$5 billion purchase of No 2 cigarette maker, Sampoerna, 3½ years ago. German auto giant Volkswagen AG, which was spurned by Malaysia just two years ago after it made overtures to acquire part of national automaker Proton Holdings Bhd, is spending US$140 million over the next two years to build its first assembly plant in Indonesia, which will initially churn out 50,000 Touran multi-purpose vehicles a year. Volkswagen hopes to eventually use Indonesia as a beachhead to export MPVs across the region.

While it may not be anywhere close to the 10-million-cars-a-year market that China has become, Indonesia is already Southeast Asia’s biggest auto market, with 607,805 cars sold last year. With falling interest rates and a stronger currency, cars are increasingly becoming more affordable in Indonesia. Auto-industry insiders say the country is close to an inflection point, where car sales could dramatically spike over the next three years as personal incomes continue to rise.

That will help companies like Singapore’s Jardine Cycle & Carriage, which owns Astra International, the largest distributor of cars and motorcycles. Astra also jointly owns Bank Permata with Standard Chartered Bank and Astra Agro Lestari, a plantation firm, among other assets. Indonesia, now the world’s biggest producer of palm oil, the cooking oil of choice for consumers in China and India, is benefiting from a recent 50% rebound in palm oil prices, says Nirgunan Tiruchelvam, an analyst for RBS in Singapore. It is also benefiting from a bounce back in thermal-coal prices. Last year, Indonesia emerged as the world’s biggest exporter of seaborne coal, most of which is headed for power plants in India and China.

As ballots are counted up after July 8 and President Yudhoyono waits in the sprawling Istana Merdeka in central Jakarta to hear the results come in from the country’s far-flung islands, he will be aware that he has to carefully manage expectations. Indonesia may have won itself the right to be counted as part of an expanded BRIIC acronym, but it still has a long way to go. If Yudhoyono can marshal his resources to deliver the goods in his second and final term, BRIIC may be more than an acronym to all Indonesians.

This article appeared in Corporate page of The Edge Malaysia, Issue 762, July 6-July 12, 2009