Wednesday, December 15, 2010

Bullish on Indonesia for the next 5 years-----By Shan Saeed

Asia financial crisis in 1997-98 badly hit the Indonesian economy that its currency Rupiah depreciated its value by 81% against the US Dollar. President Suharto and its son Tommy were sent out of the government office in May-1998. Corruption, cronyism, farce real estate and capitalistic confined attitude were the order of the day. But, now after 12 years, the country is reaping benefits of its natural resources, massive direct foreign investment, productive labor and stable political system. China is making huge investment in this country of 17,000 islands. Mining is one area.

Indonesia's mining sector has year to date attracted over $7bn in bank financing, already significantly more than the figure for the last year, and the trend is set to continue further. 2010 has been the boon year for the Indonesian economy with highest population in the Muslim world of 230 million people in the South East Asian region. Bankers are flooding into this market with huge potential of financing in this country of exploiting natural resources. China has already secured Strait of Malacca that is between Indonesia and Malaysia for its 83% Oil supplies route.

Indonesia's mining sector has attracted 62 trillion rupiah, or $7 billion in bank financing up to this year, surpassing 43 trillion rupiah for all of 2009, and is set to grow further in coming years due to strong demand and escalating prices of minerals.

The figure far exceeds the 17 trillion rupiah that banks loaned to the mining industry in 2006, figures from Bank Indonesia show, despite current uncertainties over the country's new mining law.

The growing industry has persuaded banks to extend loans to develop
mines and for support activities such as transportation. Indonesia's mining industry has been growing fast in the last five years because of demand from markets like China and India.


Financing has been one of the main concerns in launching projects in
Indonesia, particularly in the absence of longer-term mining deals --
contracts under the 1967 mining law that has been abolished under a
new mining law issued in 2009 and replaced with shorter-term mining

But with prices of mining resources such as coal hitting more than
$100 a tonne, along with strong economic growth in Indonesia and Asia,
less focus will be given to risks surrounding the new regulations,

Indonesia is Indonesia. A Country of 17,000 islands and rich in coal, oil, natural gas, timber and sandy beaches. It is still considered a high-risk area. There is strong interest, as, from a banking perspective, I don't see any new issues coming out from the new mining law.Financing for mining will be mostly on coal projects, which are easier to extract compared with base metals such as copper and nickel.

Some regional governments and private companies have launched railway
projects in in the main coal-producing regions of Kalimantan and
Sumatra. PT Bumi is the biggest coal producer in the country. There will be more interest for financing mining infrastructure.Banks view it as more safe and less-risky because there is government back-up for projects in railway, ports or logistic. Indonesia has forecast coal output to increase by 19 percent next year, while tin output is expected to rise to 95,097 tonnes from 54,646 tonnes this year.


Indonesia has struggled to attract foreign investments into mining in
recent years due to widespread corruption and uncertainties
surrounding the mining regulations.

But Southeast Asia's largest economy is expected to grow more than 6.2% this year, which together with increased political stability, are attracting strong foreign capital inflows to its bonds and stock markets as well as the mining sector, as investors and banks hope for further reforms. According to World Bank and IMF report, "Indonesia has a stable economic outlook and is fundamentally sound. If this continues until 2014, it will boost interest among investors globally. GDP growth in 2009 touched over 5%, currency appreciated 17% against US dollar, FDI reached $10 billion. Investors are coming in with new capital as local investors are bullish on the economy.

While the regulations contain many unresolved issues which could delay
projects and the award of tenders and permits that they offer investors some direction on the government's mining policy. Some banks are still very cautious about giving loans because the government has not yet rolled out the rest of the regulations. But it will change when all the regulations are well in-place.

One key regulation still in the pipeline is the process of tendering mining areas that will be crucial for investors to obtain mining permits in the future.

Disclaimer: This is just a research piece and not an investment advice. Investors are encouraged to execute their own Due Diligence and investment strategy as per their risk appetite and time-frame of their investment

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