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Indonesia's time to shine; rise of right wing complicates vicious cycle of income inequality

The Edge Singapore
The Edge Singapore12/27/2019 07:00 AM GMT+08  • 8 min read
Indonesia's time to shine; rise of right wing complicates vicious cycle of income inequality
SINGAPORE (Dec 27): Kelvin Tay, regional chief investment officer of UBS Wealth Management, is bullish that this coming decade will be one in which Indonesia will shine. “It might not seem very apparent right now, but Indonesia is primed to grow very st
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SINGAPORE (Dec 27): Kelvin Tay, regional chief investment officer of UBS Wealth Management, is bullish that this coming decade will be one in which Indonesia will shine. “It might not seem very apparent right now, but Indonesia is primed to grow very strongly, and it will have political and economic repercussions for the entire region simply because, for the first time, they have their act together,” says Tay, in an interview with The Edge Singapore.

For one, public sector corruption is no longer as widespread. President Joko Widodo has helped rein in corruption since he came into power and will continue to do so with his re-election. “We’ve seen better governance all around, we’ve seen reconciliation in politics, we’ve seen the government willing to step in and moderate the influence of fundamentalists and, now, the government is actively spending on infrastructure,” says Tay.

He acknowledges that infrastructure projects, by their very nature, will take time to gestate and see returns. Given Indonesia’s fragmented geography, the fact that things can be done is already an achievement.

The last few years have seen the construction of infrastructure, including a new airport in Bali and a new terminal at Jakarta’s overcrowded airport. The MRT system has also started running in Jakarta, which will help alleviate the city’s infamous traffic congestion. A bridge linking the islands of Bintan and Batam is being built and will be very positive for foreign investments in the area, says Tay.

The high-speed rail cutting across Java — Indonesia’s most densely populated region — faced delays for years, but is now on track. When completed, the travelling time from Jakarta to Bandung will be cut from three hours to 40 minutes; it will take just five hours instead of 10 to travel from Jakarta to Surabaya. Ports are also being upgraded all around the archipelago. “All that will start to bear fruit in the next five, 10 years,” says Tay.

He adds, however, that while Indonesia is actively pushing through the infrastructure projects, it needs to pay more attention to operational details. For example, the design of passenger flow at the new Jakarta airport terminal could be improved to prepare for bottlenecks.

Nevertheless, Tay is upbeat. “By the end of the decade, if stability in government is preserved, Indonesia will be far, far, stronger than what it is right now, and that is actually very positive for us,” he says.


Tay is also betting that Vietnam will continue to grow and emerge as a regional economic power in its own right. Vietnam is a key beneficiary of the US-China trade war as manufacturers relocate there. Yet, there are inherent factors driving the country forward.

For one, the population is relatively young, highly literate and very organised.

Like China, Vietnam is in a closed system, but with open minds; it is quick and willing to adapt to systems when necessary.

Also, because of the country’s communist system, nationwide economic policies can be implemented easily. “Infrastructure can grow, as they have a land acquisition power in place. Any country without a strong land acquisition act will be [left] behind,” says Tay.

He warns investors, however, to be wary of the local currency, the dong, which has proved to be volatile in the past couple of decades as the country’s economy opened up. Still, Vietnam already has a very vibrant stock market, since the government has pushed for more state-owned enterprises to go public. In 2018, for example, when developer Vinhomes was listed, its US$1.35 billion issue was the largest ever in Vietnam and also the second-largest in the Asean region that year.

The Vietnamese stock exchange’s market capitalisation is already very close to the Philippines’ and will overtake it in the next two years. In fact, daily liquidity is already higher than the Philippines’, notes Tay.


By contrast, the universe of Singapore stocks is unlikely to offer the best returns in the coming years. Investors will need to take a serious look at new asset classes such as renewable energy. “In 10 years’ time, carbon trading, trading in solar energy, can become very, very common. These are things that the Singapore Exchange has to focus a lot more on, other than just the listing of traditional corporates,” says Tay.

He agrees with a common observation that SGX used to be the hub for Asean companies — such as Thai Beverage — to list on. As other Asean stock markets mature, however, they become more liquid and generally more attractive; as such, listings tend to stay at home.

The relative pessimism towards Singapore stocks does not mean its economy cannot charge ahead into new areas. There are many new growth areas such as artificial intelligence, robotics and next-generation mobile-related services and applications that can be captured.

Tay is especially bullish on the data centre-related growth opportunities. This past year, two of the better-performing real estate investment trusts were Keppel DC REIT and Mapletree Industrial Trust. Both REITs made significant acquisitions of data centre assets.

The demand for data centres is rising because of the growing popularity of cloud computing. Companies are finding it more efficient to outsource computing and data storage capacity to service providers such as Google and Microsoft Corp or many of the other specialist data centre operators available. On the other hand, other big digital companies such as Facebook run their own data centres.

In Singapore, both land and energy do not come cheap. Citing his industry contacts, Tay says the local cost of operating data centres is among the world’s most expensive. Yet, data centre operators are willing to pay a premium because of the stable political environment and sound legal framework, coupled with a secure physical location. “We don’t want to put in in countries where, overnight, regulations change.

Then you are screwed,” says Tay.


The political stability of Singapore stands in contrast to the big changes happening in the developed West, where the two extremes, left and right, are leaving a huge vacuum in the moderate centre. In many European countries, the right has become far more powerful and have taken power in Holland, Italy and France, to name a few. “They are reasserting their eminence,” says Tay.

The extremes can grow strongly because the income gap has been widening since the global financial crisis. “That’s something we have to deal with a lot more in the next decade,” he warns.

In this light, US President Donald Trump, riding to power on the back of populist sentiment that exploits the gap between the haves and have-nots, might just succeed in his 2020 re-election bid, given the fragmented field of Democrat challengers. “They don’t have any credible alternative; that’s why he is still where he is,” says Tay.

Furthermore, Trump has been generally good news for the stock market. The continuous bull run of the US markets to record highs can be attributed partly to his corporate tax cuts from 35% to 22%.

“If you have a [Elizabeth] Warren or [Bernie] Sanders coming in, they are going to be very socialist. Taxes will go up; healthcare, pharmaceutical stocks will get hammered pretty badly because of the universal healthcare model they are pushing for, and that in turn could be pretty negative for the equity markets,” says Tay.

Hard landing?

Meanwhile, there is a vicious circle at work, a potential cause for problems far and wide. “You can’t delink politics and markets. As equity markets continue to hit record highs, people who are invested will continue to be better off, and those who invested are basically the better-off people; whereas the average man-on-the-street is not invested. Therefore, this gap keeps growing,” says Tay.

The rich, having made money from the equities market, would then buy properties, causing prices to stay at levels many people struggle to afford.

“The average guys in many countries, from South Korea to Malaysia and Thailand, are finding it difficult to afford a home. The ability of governments to provide affordable housing will also be a big challenge in the next 10 years as long as they remain where they are, and that’s a role that governments increasingly need to play,” he says.

In the same vein, investors need to pay close attention to China’s housing market too. “If the property market in China crashes, the whole world is going to crash, as we are so reliant on the Chinese these days,” he says.

He believes that, in the coming years, the Chinese government will tighten control on the country’s property sector, doing as much as possible to avoid a hard landing. “We should see property taxes in China coming through. If you have five empty apartments, then they will charge you; if you have rental income from five apartments, they will also charge you. If you sell and make money, they will charge you too,” says Tay.

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