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Indonesia Posts Growth Led by Consumers & Exports

By Carl Delfeld of Chartwell ETF and ETFfolio

Indonesia’s economy grew a higher-than-expected 6.4% year-on-year in the second quarter of this year, thanks to high commodity prices, strong consumer spending and robust exports. Oddly, Consumer confidence fell to its lowest level in three years, on the back of a 30% fuel price increase in May and rising inflation.

This is good news for the Indonesian Fund (IF)This solid growth will give a boost to President Susilo Bambang Yudhoyono as he released the government’s 2009 budget calling for a 55% increase in funds for poverty fighting and a significant expansion of the education budget.

Economic growth in Indonesia which is south-east Asia’s largest economy and the world’s fourth most populous country, reached 6.3% last year.

Nick Cashmore, of CLSA brokerage in Jakarta, believes that Indonesia had been “exceptionally lucky” because of high prices for coal and other commodities. “If this rising investment cycle picks up, [Indonesia] has the potential for insular growth that will set it apart from its neighbours,” he said. Exports accounted for 30% of growth in the second quarter, far lower than in neighboring countries, while consumer spending represented 60.3%.

Sri Mulyani Indrawati, Indonesia’s chief economics minister, was upbeat. “The growth momentum is very strong and the upward trend on employment and poverty reduction is healthy,” she told the Financial Times. “The main worry is inflation. It will be a couple of months before the central bank and we get it down to single digits again.”

This would be a great story except that market valuations are still high with the stock market trading at 3.5 times book value, 12.2 times cash flow and eighteen times annualized earnings based on S&P data.

Indonesia has been urged by the OECD to overhaul its rigid labor laws, remove foreign investment and ownership restrictions and cut its fuel price subsidies. Despite a 30% increase in fuel prices in May, the Indonesian government is expected to spend one-fifth of its government budget on fuel subsidies this

Indonesian (IF) Pullback Based on Valuations Not Growth

By Carl Delfeld of Chartwell ETF and Chartwell Partners Asset Management

Indonesia’s (IF) economy grew a higher-than-expected 6.4% year-on-year in the second quarter of this year, thanks to high commodity prices, strong consumer spending and robust exports. This is slightly higher than Indonesia’s 2007 GDP growth of 6.3%.

The figures will give a boost to President Susilo Bambang Yudhoyono as he unveils the government’s 2009 budget today. Ministers say this will include a 55% cent increase in funds for poverty alleviation programs and a significant expansion of the education budget that is mandated to be 20% of the total budget.

John Aglionby of the Financial Times reports that exports accounted for 30% of growth in the second quarter, far lower than in neighboring countries, while consumer spending represented 60.3 per cent. Sri Mulyani Indrawati, Indonesia’s chief economics minister, was upbeat. “The growth momentum is very strong and the upward trend on employment and poverty reduction is healthy,” she told the Financial Times. “The main worry is inflation. It will be a couple of months before the central bank and we get it down to single digits again.”

This would be a great story except that market valuations are high with the stock market trading at 3.5 timesbook, 12.2 times cash flow and eighteen times annualized earnings based on S&P data.
Indonesia has been urged by the OECD to overhaul its rigid labor laws, remove foreign investment and ownership restrictions and cut its fuel price subsidies.

Despite a 30% increase in fuel prices in May, the Indonesian government is expected to spend one-fifth of its government budget on fuel subsidies this year. The country’s central bank was also advised to act “resolutely” and “preemptively” to raise rates and combat inflation, which hit a 21-month high of more than 11% in June.

The close-ended Indonesian Fund (IF) has been beaten down a bit but still is trading at the high end of the 30 countries tracked by Chartwell ETF. However, while a year ago it traded at a 13% premium, it is now at a 13% discount to net asset value. The fund's largest holding is Indonesian Telecom at 17% of total assets.

Indonesia is on our watch list for the Country ETF Rotation ETFfolio.

Earthquake Rocks Hot Indonesian Market and ETF

A powerful earthquake centered near the Indonesian island of Sumatra rocked the Indonesian Fund (IF) which has been one of the best country ETF performers. The earthquake set off a tsunami alert for the Indian Ocean. At least seven people were killed and more than 100 injured.

The National Weather Service’s Pacific Tsunami Warning Center said sea level readings showed that the earthquake, which had a magnitude of 8.2, did indeed generate a tsunami that caused destruction along the coast.

In December 2004, a series of giant waves pummled Banda Aceh, Indonesia, killing 130,000 people. Scientists who have studied the area have warned that Padang, Indonesia, was particularly at risk for powerful earthquakes and tsunamis as the geological rupture that caused the 2004 destruction travels south.

But despite Indonesia's devastating loss from the 2004 tsunami, its economy recovered at an impressive rate, and its closed-end fund (CEF) reflects this. Indonesia's economy grew 5.5% last year and is expected to grow 6.2% this year and 6.5% next year. In addition, corporate earnings are projected to grow 23% this year and more than 20% next year, which would be the best performance in Asia.

Indonesia has taken the brave step of opening its financial services sector to majority investment by international investors; let’s also open up other areas such as infrastructure and power. The most important reform to make Indonesia more attractive to international capital is to set up a transparent and clear approval process to cut out red tape and corruption. Then reinvigorate a previously announced plan to privatize some of Indonesia’s 145 largest state-owned companies to increase their profitability and raise more government revenue.

It may be too thinly capitalized for an ETF right now but as a country with the fourth largest population in the world, the largest Muslim population and an archipelago spanning more turf than America, Indonesia deserves to be on your global watch list.

By Carl Delfeld of the Chartwell ETF Advisor

Why Not an Indonesian ETF?

Tom Lydon of ETF Trends poses the question of why not an Indonesian exchange-traded fund? Although Indonesia has yet to get its own exchange traded fund (ETF), one of way to invest in this rapidly growing economy is through its closed-end fund (CEF), which is the Indonesian Fund (IF). It was perhaps the best performing country fund in 2006 and is up 17.3% year-to-date and is up 2% so far today but investors should note that it is trading at an 18% premium to its net asset value. It also has a large concentration in one stock with almost 25% of its assets in Indonesian Telecom.

Despite Indonesia's devastating loss from the tsunami, it's economy is rebuilding at an impressive rate, and its closed-end fund (CEF) reflects this. Indonesia's economy grew 5.5% last year and is expected to grow 6.2% this year and 6.5% next year, according to Assif Shameen of Barron's. In addition, corporate earnings are projected to grow 23% this year and more than 20% next year, which would be the best performance in Asia.

It may be too thinly capitalized for an ETF right now but as a country with the fourth largest population in the world, the largest Muslim population and an archipelago spanning more turf than America, Indonesia deserves to be on your global watch list.

By Carl Delfeld of the Chartwell ETF Advisor

Snapshot from Indonesia

Many ETF investors have only a vague understanding of Indonesia but it is a very important country with a population exceeding the US, represents the largest Muslim country in the world and lies at a geographically strategic position next critical gaeways of trade and commerce. It has also been one of the best performing markets in the world over the past 18 months and I use the closed-ended Indonesian Fund (IF) as a proxy for its stock market in our World Country ETF Rotation Strategy.

Mark Headly, CEO of Matthews Funds wrote the following update after a recent visit.

"A few days visiting Indonesian companies in the sprawling capital city of Jakarta was enough to remind one of the complexities of this vast archipelago nation. With over 13,000 islands and more than 100 language groups, Indonesia is one of the most diverse nations on the planet. Both government and company management alike face many challenges in such an environment. Indonesia has gone through intense trials since the Asian Crisis ripped its economy and political system apart. On a visit in 2002, a tank was parked in front of my hotel. General Suharto's thirty year dictatorship left a vacuum that was very hard for a young democracy to fill. The hostility towards the small domestic Chinese population that dominated much of Indonesia's business community was particularly intense.

Today, one finds a relatively serene environment, but security at hotels and office buildings is tight, with all vehicles carefully inspected before they are allowed through security posts. The damage to Indonesia's reputation by the bombing in Bali and a prominent Jakarta hotel lingers on. Otherwise, this society seems to be moving forward with significant activity on the streets and in shops. Jakarta has progressed immensely from my first visit in 1991, but much remains to be done. Major infrastructure projects have been stalled for years. Urban unemployment remains high as foreign direct investors continue to shun a country known for aggressive labor unions, high levels of corruption and unreliable infrastructure.

A whole new social contract is being hammered out between the dominant island of Java and the many outlying population centers. In recent years, Indonesia has made money by selling it resources, agricultural goods and exported labor with much of this activity occurring on the outer islands of Sumatra and Kalimantan. For Indonesia to fully regain the confidence of international and domestic investors, the development of the major cities must proceed with government efforts that meet the needs of their populations and the business community. While this will not be easy, the odds seem in favor of Indonesia's millions of young and enthusiastic citizens."

Posted by Carl Delfeld of the Chartwell ETF Advisor

Indonesian President Tough Stance on Graft Should Hearten ETF Investors

While the Indonesian Fund (IF), a closed-ended fund was up 84% last year and is off to another great start this year, many investors are put off by high levels of corruption in the country. So it is encouraging that John Aglionby reports that President Susilo Bambang Yudhoyono fired five members of Indonesia's cabinet yesterday in a bid to reinvigorate his flagging war on corruption, a key part of the president's reform programme. The attorney-general and justice minister were among those dismissed.

Many would categorize Indonesia as a relatively poor country but I beg to differ. I have toured Indonesia from tip to tip and it is a country with many assets and great promise. Rich in natural resources, a talented and young population, strategically positioned to benefit from Asian growth, a size three times the that of Texas and the world’s fourth largest population. As a relatively young democracy and developing economy it lacks an important ingredient for economic growth: capital and a fiscal system to allocate it wisely.

Indonesia has taken the brave step of opening its financial services sector to majority investment by international investors; let’s also open up other areas such as infrastructure and power. The most important reform to make Indonesia more attractive to international capital is to set up a transparent and clear approval process to cut out red tape and corruption. Then reinvigorate a previously announced plan to privatize some of Indonesia’s 145 largest state-owned companies to increase their profitability and raise more government revenue. Finally, why not follow ten other countries by putting in place a flat tax to rein in bureaucracy, stymie corruption and stimulate growth and productivity.

By Carl Delfeld of the Chartwell ETF Advisor

Indonesian ETF Follows Stronger Balance Sheet

The Induesian Jakarta Stock Exchange and the Indonesian ETF (IF) has been unusually strong over the past year due in part to cleaning up its balance sheet. An Economist article points out that the World Bank thinks that 2007 could be a year of great opportunity for Indonesia if it only takes advantage of its improved finances and get moving on economy-boosting public works. It takes a similar view of the Philippines, South-East Asia’s other giant democracy.

Indonesia’s public debt has fallen below 40% of GDP, cutting interest obligations. The country recently declared “independence” from the International Monetary Fund, having paid off the last of its loans. The Jakarta stockmarket and the rupiah have been strong, reflecting foreign investors’ renewed interest. This week, as the government was preparing to issue up to $2 billion in bonds, it got a boost from Moody’s, a credit-rating agency, which said it was considering an upgrade. President Susilo Bambang Yudhoyono is fond enough of drawing up grand plans for public works. But politics keeps them on the drawing board.