OBG talks to Eko Yuliantoro, President Director, Bahana Securities

Interview: Eko Yuliantoro

What impact do you expect the elections in 2013 and 2014 to have on the capital markets?

EKO YULIANTORO: The 2013-14 elections should be reminiscent of 2003-04 political transition, where Indonesia experienced uptrends in GDP growth, banks’ loan growth and M2 money supply. With this being President Susilo Bambang Yudhoyono’s final term, Indonesia will elect a new head of government, and we hope this will bring exciting changes to the nation in the form of second-generation legal and economic reforms.

Thus, we think this will be good news for the capital markets, particularly as we expect whoever becomes president will remain pro-democracy and implement market-friendly policies going forward. While protests and unrests remain as key risks leading up to any election period, we hope that cooler heads will prevail, allowing for a smooth political transfer to occur.

In terms of market risk, what government policies do you expect to have an effect on capital inflows?

YULIANTORO: As in any other country, it is normal to see populist policies from the government in the lead up to elections, and Indonesia is no different. Perhaps the most widely talked about policy change has been the 2013 minimum wage increases, which have averaged a rise of 23% year-on-year to an average minimum wage of Rp1.4m ($140) per month, as reported by 29 of Indonesia’s 33 provinces.

APINDO, the Indonesian Employers’ Association, stated that several companies had closed factories while others had laid off workers following strikes in various industrial areas. If the government cannot tackle this issue, the investment climate in many sectors could be adversely affected, particularly exporters.

However, at this stage, we believe that those investing in Indonesia are here to tap the rapidly growing domestic market. Higher minimum wages translate to greater consumer purchasing power, leading to a virtuous cycle of consumption and economic growth for the country. This is why, in spite of labour-related issues on the ground, we still believe direct investments into Indonesia will continue to remain high, reaching an estimated $38bn in 2013.

Which economic sectors are you promoting for investment in 2013 and why?

YULIANTORO: For our investors, Bahana continues to recommend local exposure as a shield against external volatilities, particularly given protracted global economic uncertainties. In 2013, we are positive on sectors that will benefit from the government’s pump-priming efforts to accelerate economic growth leading up to the elections, especially in the construction and infrastructure, cement and property sectors.

On property, we now prefer counters with more balanced earnings coming from the commercial/ hospital side due to already substantially higher landed-housing prices. Other election beneficiaries we like are telecommunications stocks and their derivatives. Ahead of the 2013-14 campaigns, and coupled with substantial minimum wage increases, we expect rising phone usage to benefit mobile operators, tower companies, phone resellers and voucher distributors.

What areas of the global economy are you maintaining a bearish outlook for over the coming year?

YULIANTORO: On the back of continued weak global economic outlook, we remain mostly bearish on commodity-related counters. We believe the European debt issues will linger due to the deleveraging process in their banking sector and lower competitiveness as a result of the aging population base.

We are currently anticipating that global economic recovery will not occur until the second half of 2014. As a result, we predict downside risks to oil prices due to slowing energy demand and rising US energy independence caused by new petroleum finds, alternative energy sources (e.g. shale gas) and new technology. As other commodities such as coal tend to track oil prices, we expect overall sentiment to remain weak.