Samir Mehta: Protectionist Indonesia is looking attractive in 2023

Investors should take a new look at Indonesia, where export restrictions are driving new domestic industries. Pendal’s SAMIR MEHTA explains the opportunity

• Indonesia’s export bans drive local industries
• Potential for long-term compounding benefits
• Find out about Samir Mehta’s Pendal Asian Share Fund

THE protectionist policies of Indonesian president Joko Widodo are driving transformation in a country once dubbed the “sick man of Asia“, says Pendal’s Samir Mehta.

Widodo’s (pictured above) moves mean Australian investors should take a closer look at Indonesia this year, says Mehta, who manages Pendal Asian Share Fund.

The policies are aimed at controlling exports of Indonesia’s natural resources and driving the creation of manufacturing and processing industries to lift the value of exports.

A ban on nickel exports has encouraged the creation of a domestic stainless steel industry that is now among the world’s biggest exporters.

A ban on exporting the bauxite used to make aluminium will come into force this year. Capturing the supply chain for electric vehicle batteries is also on Indonesia’s agenda.

An Indonesian transformation

The early successes of the policy have the potential to transform Indonesia’s attractiveness for investors, says Mehta.

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Its trade balance could be in a sustained surplus while foreign direct investment rises.

Lower interest rates, reduced currency volatility and higher growth could compound benefits for investors over the next decade.

“That could mean Indonesia will become and remain a very attractive market,” says Mehta.

Importantly for investors, Widodo’s policies are carefully calibrated to drive economic prosperity rather than simply protect local industries, says Mehta.

Foreign investment rules have been relaxed and industrial estates created with manufacturing and environmental permits in place and ready access to roads and ports for exporting.

“It shows that protectionism by itself is not bad,” says Mehta.

“Indonesia has laid down the principles — you can set up your business and you can earn the benefits.”

Rush of investment

The ban on nickel exports triggered a rush of investment in building domestic smelters, largely from the Chinese companies that once processed Indonesia’s nickel.

The results have been dramatic.

Stainless steel and iron exports are on track for $US30 billion from almost nothing less than a decade ago, making Indonesia the world’s third biggest steel exporter.

“The most remarkable statistic I observed was that Indonesia might run a current account surplus with China in the next few years,” says Mehta.

EV battery supply

The electric vehicle battery supply chain is the next target.

Indonesia has significant reserves of many of the metals needed for EV batteries, including nickel, cobalt, manganese and copper.

The key ingredient missing is lithium.

But by progressively banning the export of unprocessed minerals and exempting key imports from import duty, the government is encouraging the creation of a local ecosystem for producing EV batteries.

“They are in talks with Australian lithium miners to build refineries in Indonesia. They are getting Chinese companies to build production facilities — they are building the whole chain for EV battery manufacturing.”

Echoes of China

Mehta says the creation of industrial estates echoes China’s establishment of special economic zones on a smaller scale.

“Instead of assessing project by project, approvals are given to a whole area that can house multiple companies and projects.

“By doing that, they are hoping it will take away the risk of one individual project being singled out and then being caught up in politics.”

Still, politics remains a key risk for investors in Indonesia. Elections are due next February and change in government could be a concern for investors.

“But rationally and logically it seems like no future president of Indonesia should go back on this because clearly there’s big benefits for society.

“Jobs are being created, income levels are better, there is value creation that is taking place.

“These policies have laid the groundwork for a genuine transformation for the country over the next decade or two.”

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About Samir Mehta and Pendal Asian Share Fund

Samir manages Pendal Asian Share Fund, an actively managed portfolio of Asian shares excluding Japan and Australia. Samir is a senior fund manager at UK-based J O Hambro, which is part of Pendal Group.

Pendal Asian Share Fund aims to provide a return (before fees, costs and taxes) that exceeds the MSCI AC Asia ex Japan (Standard) Index (Net Dividends) in AUD over the medium-to-long term.

Pendal is a global investment management business focused on delivering superior investment returns for our clients through active management. 

Contact a Pendal key account manager here