Economic growth and outlook

The Indonesian economy has consistently grown by 5%-6% per year over the past 20 years, earning them the spot of the 15th largest economy in the world and the largest in southeast Asia. Indonesia is forecast to become the world’s 4th largest economy by 2030, with their GDP expected to maintain this growth rate throughout the rest of the decade. 

As the 28th largest exporter of goods in the world, the main drivers of growth are commodity exports that include gold, palm oil, coal and petroleum. Abundant reserves of thermal coal have pushed it to be the world’s largest producer, and domestically – fossil fuels supply 60% of their power.

With a large manufacturing sector that is ripe for consolidation, the country is getting ahead of the net zero transition with a US$132 billion green manufacturing hub powered by massive solar and hydro power projects. It’s an ambitious plan that is set to revolutionize the Indonesian economy into the low-emissions manufacturing heart of Asia – and it’s being funded by China.

While the country’s notorious nickel ore export ban certainly caused a rout, it wouldn’t be a bad thing if critical mineral refining was forced to take place under phenomenally sustainable conditions. Indonesia is strategically positioned between two continents and is at the intersection of many critical trade routes meaning it could form a crucial part of the battery supply chain. After Indonesian President Joko Widodo visited Elon Musk at the Tesla headquarters in Texas – the electric vehicle giant signed US$5 billion worth of deals to buy nickel from Indonesian companies.

Foreign investment environment

The Indonesian stock market has proven to be a robust investment that has capitalised on the country’s rapid growth over the past decade, with the Jakarta Stock Exchange Composite Index delivering over 430% of capital gains since the bottom of the GFC 14 years ago.

Global equity markets had a record year for IPO’s in 2021, including in Indonesia – which racked up 54 bourse debuts that raised US$4.7 billion. The country held up impressively well in 2022, a year when American IPO activity fell to levels not seen since the great recession, with the most amount of listings in all of South-East Asia (60) and the second largest amount of capital for new floats at US$2.2 billion. Some of the industry believe the fast-growing nation will again see up to 60 IPO’s in 2023, with a much larger amount of capital raised as some of the larger deals that were delayed last year look for an opportune time to list if macroeconomic conditions permit.

Australian institutional investors are showing a keen interest to take advantage of the opportunities in the region. Senior Portfolio Manager at Pendal, James Syme, singled out Indonesian equities in October last year as an asset that could outperform over the next 18 months. 

Pendal’s emerging markets fund operates a top down, country-driven allocation strategy that focuses on factors such as economic growth, monetary policy, market liquidity, currency, governance, politics and equity market valuation. He cited Indonesia’s abundant commodity resources, supportive monetary policy and a rapidly urbanising middle class as reasons to invest in the country.

The ASX is home to one of Indonesia’s biggest foreign investment success stories, Nickel Industries (ASX: NIC). The $3.1 billion capped producer, led by Justin Werner who is also a non-executive director of Far East Gold (ASX: FEG), stunned equity markets with a large $673 million capital raise to fund the acquisition of more nickel assets in Indonesia. It’s come a long way from its $200 million IPO raise in 2018 that valued the company at $485 million, and has given investors who watched from the sidelines a glimpse of what is possible in a new Indonesia that is encouraging foreign investment.

There’s also been lucrative transactions in the private markets in Indonesia. The Martabe mine, Sumatra’s largest resource, has been operational since 2012. The mine has changed hands numerous times over the years, including once being owned by Oz Minerals. EMR Capital purchased the mine for US$775 million in 2015, and then sold 95% of it for US$1.21 billion in 2018 after gold and silver prices rose 14% and 10% respectively. They also boosted production from 300koz/yr to 355koz/yr during the same period. The mine has operated at an impressively low AISC fluctuating between US$350/oz and US$450/oz.

Political progress

The Indonesian government has shown an increasing level of engagement with key international bodies around the world, especially with policy development.

There was significant collaboration in 2021 between the World Bank and the Indonesian government, civil society and private sector that resulted in a renewed Country Partnership Framework (CPF) for 2021-2025. The CPF is aligned with the country’s Medium Term National Development Plan of maintaining sustained inclusive growth, building a solid middle class and joining the ranks of high-income countries – goals that the World Bank believes are possible.

As the world’s third largest democracy, Indonesia is one of Australia’s most important bilateral partners. There are a wealth of opportunities for collaboration between the two countries, which were discussed at length when Prime Minister Anthony Albanese visited the nation and met with the Indonesian President – the culmination of which included a $200 million commitment from Australia to a climate change and infrastructure partnership.

In line with the Indonesian government’s aim of increased discovery of their abundant resources, they are providing swifter regulatory approval, process transparency and a greater willingness to work with foreign entities. A perfect example is Far East Gold’s flagship Woyla project, which received UKL-UPL (environmental authority) and IPPKH (borrow-use licence) – the first time in history this level of exploration (drilling) has been permitted on this highly prospective project. The Woyla project was previously explored by both Barrick Gold and Newcrest Mining, and FEG is the first company to achieve this level of success on this project. An impressive intercept that came from the drilling campaign was 30m @ 3.43g/t AuEq from 98m, including 8.1m @ 8.9g/t AuEq from 102.4m and 2m @ 27g/t AuEq from 108m.

Bullion bank for physical gold

At the annual Financial Services Meeting on February 6 2023 in Jakarta, Joko Widodo once again promoted the importance of extracting the country’s valuable commodities – especially gold.

As the 9th largest gold producer in 2021 and an estimated 2,600 tonnes of the precious metal in unmined reserves, it makes sense for the government to investigate not only what addition to the economy this can make through export, but also to financial services.

The Indonesian President floated the idea of bullion banking – which is denominated by precious metal instead of fiat currency. It’s still typically based on a fractional reserve system, where banks are able to lend out a much larger multiple of what they actually have in reserve. The difference being, book money is generated by the issuance of non-allocated gold certificates and account balances are shown in precious metals – as are the provision of loans.

It’s a practice that is widely used investment banking – especially by Swiss banks such as UBS and Credit Suisse.

Establishing a bullion bank may have several benefits, including increasing Indonesia’s foreign exchange earnings, promoting financial inclusion and stimulating economic growth. While there are challenges around the significant capital outlay which would be required, as well as ensuring a supportive regulatory environment – political leaders have revisited this idea over recent years, and Mr Widodo appears focused on establishing a gold bank in the medium term. 

Far East Gold is a junior exploration company with six gold and copper assets and is well-positioned to take advantage of Indonesian opportunities. To stay up to date with FEG news, Far East Gold investor centre.

Reach Corporate provides Corporate Advisory Services, including managing investor communications on behalf of Far East Gold Ltd and may receive fees for its services.

Past performance is not a reliable indicator of future performance.

Originally published via Pendal, who have given permission to Reach Markets to share the content.