Market Views: What drives Indonesia’s rising IPO activity?
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Indonesia has emerged as a formidable player in the world of initial public offerings (IPOs) in 2023.
This archipelagic nation, known for its vast reserves of battery metals, has surpassed all expectations, leaving Asian economic powerhouses like Hong Kong, India, South Korea, and Japan in its wake.
According to recent data from Dealogic, Indonesia currently ranks as the world's fourth-largest market for newly listed companies, based on the amount of capital raised.
At the end of May, investors have already put over $2.1 billion into Indonesian IPOs, just shy of $2.2 billion that the country’s firms raised over the whole of 2022 according to Dealogic.
This remarkable achievement places Indonesia just behind the reigning leaders in IPO activity - China, the United States, and the United Arab Emirates.
The surge in Indonesia's IPO market has caught the attention of global investors, who are increasingly drawn to the country's promising green energy sector.
With its abundance of metals crucial for manufacturing electric vehicle batteries, Indonesia has become a magnet for those seeking to capitalise on the rising demand for sustainable energy solutions.
Does the country's newfound IPO success represent a significant shift in the global investment landscape and signal a positive change in investors’ perception of this emerging Asian economy?
Against this backdrop, AsianInvestor asked industry experts what they see as the main drivers for Indonesia’s phenomenal IPO growth and what it means for the country.
The following responses have been edited for clarity and brevity.
Alexander Treves, head of emerging markets and Asia Pacific equities investment specialists
JP Morgan Asset Management
While there are outdated views on Indonesia in some corners of the investment community, for several years we have viewed it as being one of the more exciting markets in the Asia Pacific region.
First, Indonesia enjoys favourable demographics, with a large and growing working age population and an expanding cohort of consumers. Coupled with the intelligent use of technology, this offers long growth runways in areas such as banking – where financial inclusion remains low, and there are some exceptionally well-run businesses – and e-commerce.
This is underpinned by Indonesia’s abundance of natural resources. It is well placed to benefit from carbon transition. For example, Indonesia is the world’s largest producer of nickel, which is an essential ingredient in electric vehicle batteries.
Further, we believe that President Jokowi has enacted some meaningful reforms, driving a substantial uplift in the quality of Indonesia’s infrastructure. The country now runs consistent current account surpluses.
We welcome further development of capital markets as IPO activity widens the investable opportunity set for equity investors. For sure it is important to be selective when picking stocks, but for investors who conduct thorough analysis there is much to be positive about in Indonesia.
Jerry Goh, investment manager of Asian equities
abrdn
Indonesia has been highlighting its commodities downstreaming strategy across various supply chains, emphasising the most on nickel.
As part of its strategy, the government has implemented an export tax on nickel ore to attract foreign direct investments into the country. This will enable the development and building of commodity processing refineries onshore to produce value added products like ferronickel or nickel matte.
These products are worth a lot more, and therefore allow Indonesia to retain and capture value from the supply chain. Notably, the government is also implementing such a strategy for other commodities such as copper and tin.
As part of the nation’s push to capture value from downstreaming initiatives, some of the nickel mining companies have kickstarted an IPO process to raise funds from foreign investors to develop or build out smelters to process nickel ore onshore.
The high IPO activity suggests that investors are eager to be part of Indonesia’s commitment towards the global electrification supply chain. Global battery manufacturers such as CATL and electric vehicle automakers have also partnered with Indonesian mining groups to secure a part of the battery supply chain.
In short, Indonesia is undergoing a transformation, and if proven to be successful, this would mean that its economy will move towards more sustainable and higher quality GDP growth.
Swati Chopra, executive director, emerging markets equity
Franklin Templeton
There are six big IPOs in Indonesia this year, with three already completed in 1H2023 (PGEO, NCKL, MBMA), and three more are expected in the second half of 2023 from the consumer and commodity sectors.
Indonesia has benefited from listings of state-owned enterprises in a bid to reduce their reliance on the federal budget.
Indonesia’s plans to integrate itself into the global electric vehicle supply chain is also prompting firms to take advantage of high investor interest in the sector.
There is also increased participation among retail investors as well as an increased foreign flows and higher country weighting for Indonesia within emerging markets.
Indonesia sits on vast deposits of the metals needed to make batteries for electric vehicles. That has made the country an important engine of the global green transition — and a magnet for investors. Also, the rise in gross savings from metal exports would suggest that the investment share in GDP can rise – with positive spillovers to growth – even if the current account deficit limit of 3% of GDP is observed.
Alternatively, a rise in net savings – albeit at the expense of growth – would reduce Indonesia’s reliance on external funding. Such an outcome would suggest a lower sensitivity of monetary policy to external conditions.
How the economy and policy respond to the anticipated metals windfall remains to be seen and will depend in part on changes in the investment climate, among others.
Ernest Chew, portfolio manager
BNP Paribas Asset Management
As global economy is still experiencing a slowdown, Indonesia economy growth has been resilient, well supported by its government policy, supply chain upgrade, demographic dividend and growing middle class population. Domestic consumption accounts for 80% of GDP and makes Indonesia economy more resilient to external impacts.
The government has rolled out various policies to create a better business environment. The introduction of Omnibus Law eased the cost of doing business to attract more foreign investments into the country.
As for supply chain upgrade, the government has been prioritising localisation of manufacturing in Indonesia so that more value-added products will be produced locally. Strengthening downstream industries to enhance export growth could lead to a structural change in its current account and supporting its currency stability.
Young demographics is another reason making Indonesia attractive. 57% of the population in Indonesia are less than 35 years old, offering a large labour force in coming years. Meanwhile, growing middle class creates massive opportunities in consumer upgrade. The rising of e-commerce industry in Indonesia is clearly a beneficiary of it, while the Covid-19 pandemic was the catalyst in driving the change of behavior to online purchase.
As a result, foreign direct investment (FDI) stood at a record high in 2022 with 44% year-on-year growth and the rupiah was more resilient with less volatility than previously. In the near and mid-term, the next presidential election will be key to monitor.
Amit Singh, partner and head of South and Southeast Asia capital markets
Linklaters
Indonesia’s IPO boom is a perfect storm of timing and circumstance and has been driven largely by the mining sector. The pandemic placed a spotlight on the need for reinforced supply chains, and Indonesia is rich in key raw materials needed in the global economy.
Looking at the Merdeka Battery Materials IPO, for example, nickel is a key component for the electric vehicle and battery industries, and nickel mining companies are beneficiaries of the long-term global decarbonization plans.
But more generally, as the race to secure supply grows, raw material producers in Indonesia will be well placed for years, if not decades, for growth and strong sales, making them an ideal IPO target in the near-term.
Additionally, there is a clear global trend of an increasing number of local listings, including in jurisdictions that have not benefited from previous IPO cycles, as issuers are more comfortable with a securities regulator who understands the markets in which they operate and who speaks their language, both literally and figuratively.
Finally, global institutional investors are demonstrating an increasing willingness to buy shares locally, a reflection of their appreciation of the maturity of the markets like Indonesia.