Foreign direct investment: Indonesia set to change course on FDI

By:
Kanika Saigal
Published on:

Loss for DBS and Danamon; Politics underlines acquisition failure

Although Singapore’s bank DBS’s bid for a majority stake in Bank Danamon, Indonesia’s sixth-largest bank by assets, fell through at the beginning of August, a deepening current account deficit and pressures on the currency will force Indonesia to become much more receptive to foreign direct investment.

On July 15, the Indonesian rupiah breached the Rp10,000 to the dollar rate for the first time since September 2009. It has continued on a downward path since, adding to inflationary pressures. Over the course of August, the currency depreciated 10% against the dollar and reached a low of Rp11,424 on September 4. In addition, Indonesia reported a trade deficit of $2.3 billion in July as exports suffered on the back of a slowdown in China.

“In the current climate, foreign direct investment will be much more welcome in Indonesia,” says Wai Ho Leong, senior regional economist at Barclays in Singapore. “Indonesia will be looking for stickier forms of investments like FDI. But the view on equities in Indonesia remains bearish, and, as a result, foreign investors will remain wary during this volatile period. They will want to wait for underlying credit fundamentals to stabilize rather than rush in too soon.”

In an effort to expand its business outside Singapore and Hong Kong – which accounted for 83% of the bank’s total profit in 2012 – DBS sought a controlling stake of 67.4% in Bank Danamon, currently owned by Temasek, the Singaporean state investment agency. But new rules brought in by Bank Indonesia, a month after the offer was made, cap individual investors to only 40% ownership in the initial stages.

“For a lot of banks this just doesn’t work, especially from a Basle III perspective,” says Tigor M Siahaan, Citi country officer Indonesia. “A minority stake would mean that the Singaporean lender would have to deduct the value of minority investments from tier 1 capital under Basle III requirements. Shareholders wouldn’t have been happy.”

Agreement for the deal under the conditional share purchase agreement (CSPA) expired on August 1. The priority for the bank now is to grow its Indonesian business organically, says a spokesperson at DBS, adding to the 40 branches it already has in the country.

According to Henry Ho, president director of Danamon: “We will continue to conduct our business activities and focus on our business-growth plan as well as strengthen our lending franchise in the mass market, wholesale, SME and retail segments. Danamon does not expect that there will be any impact on its business and operations arising from the lapse of the CSPA.”

But Leong points out that both banks have lost out: “This would have been a really good opportunity for DBS to diversify its business outside of Hong Kong and Singapore where the market is saturated.”

Bloomberg data indicate that the average net interest margins for banks in Singapore are 1.82% and in Hong Kong the rate is lower at 1.66%. Comparatively, Indonesian lenders are some of the most profitable. Banks with a market value of at least $5 billion have an average net interest margin of 6.6%, according to Bloomberg. “And although DBS can grow organically in Indonesia it will be a lot more expensive to do so.”

Another regional economist based in Singapore says: “At the same time, Bank Danamon has lost out on additional expertise and a much-needed capital injection from DBS. They might start looking for investment elsewhere.”

Budi Gunadi Sadikin, president director at Bank Mandiri
Budi Gunadi Sadikin, president director at Bank Mandiri 
The reason for the collapsed merger, however, is most likely political rather than practical.

“Indonesia is the most open market in the world,” says Budi Gunadi Sadikin, president director at Bank Mandiri. “We are the only country that imposes almost no limitations on foreign banks entering in terms of investment banking, corporate lending, retail banking and wealth management. Maybe only Latin America can compete with us in terms of openness.”

Siahaan says: “Technically, a foreign bank can still own up to 99% of a local bank, but this can be done only after 18 months of holding a smaller proportion. The central bank here wants to make sure that whoever buys the banks are credible investors with the ability to provide solid corporate governance. That’s why you need to wait a year and a half to up the stake.”

Sadikin adds: “So while Singaporean banks already have huge operations in Indonesia, there is no agreement for Singapore to do the same. Restrictions on Indonesian banks in Singapore are vast.”

He continues: “The problem is not with Indonesians – we are open already – but it lies with the Singaporeans. DBS actually announced the deal without letting the central bank of Indonesia know – authorities in Indonesia found out about the deal through the press. That was a huge mistake and really severed ties. I’d say it’s too late for Singapore now, unless they start being a bit more humble.”

There has also been some tension between the two over the renegotiation of an extradition treaty. The treaty, signed in 2001, has not been ratified by Indonesia, which deems it unfair. As it stands, Indonesian authorities are limited in their power to repatriate and convict individuals that have illegally stashed assets in Singapore.