Good Morning, Indonesia

Why is Singapore Inc. investing big time in its neighbor?

June 12, 2003

By Eric Ellis


Indonesia has issues: separatism, terrorism, governance, corruption. No wonder foreign investment has been fleeing the country in recent years.

But Singapore is rushing in where others fear to tread. Its government-controlled companies have sunk $2 billion into Indonesia in the last year. Why? "Security," says Andrew Tan, Asian defense analyst with the Institute of Defence and Strategic Studies at Singapore's Nanyang Technological University. "Singapore seems to believe that big investment in Indonesia is a good way to help secure political stability in its backyard."

Singapore Telecommunications has been the biggest player. Last year it paid more than $1 billion for a 35% stake in Indonesia's leading mobile-phone operator, Telekomunikasi Selular (Telkomsel). SingTel also has a 40% interest in Bukaka SingTel International, which has the fixed-line monopoly in less populated eastern Indonesia.

ST Telemedia, an offshoot of government-owned Singapore Technologies, has emerged as a SingTel competitor in Indonesia. Last December it bought 42% of the country's No. 2 mobile carrier, Indosat, for $650 million. And last month Temasek Holdings, Singapore's state investment arm, agreed to pay almost $400 million for a 51% stake in Indonesia's fourth-largest bank, Danamon. Singapore's Cycle & Carriage group got the ball rolling in 2001 by buying 35% of Astra International, Indonesia's car giant.

It's easy to see why Singapore is so sensitive to what is happening next door. The city-state's four million people live in a rich and stable place, while most of Indonesia's 230 million are struggling, both economically and with the backwash of Islamic extremism. But Indonesia is also a huge market. "Our decision to invest in Indosat is purely based on commercial merits," says Melinda Tan, communications director at ST Telemedia. Temasek spokeswoman Eva Ho echoes that view. "Our bid for Bank Danamon," she says, "is strictly commercially driven." Adds SingTel spokesman Chia Boon Chong: "Indonesia presents an enormous growth opportunity."

Still, it's hard not to suspect that politics plays at least some role. Temasek is a wholly owned arm of Singapore's Finance Ministry, which is headed by deputy prime minister Lee Hsien Loong. His wife, Ho Ching, is Temasek's CEO. Lee is also the elder son of Lee Kuan Yew, Singapore's economic architect, whose younger son, Lee Hsien Yang, is CEO of Singapore Telecom. (Temasek owns 67% of SingTel and 100% of Singapore Technologies, which Ho used to run.)

Such connections worry many Indonesians, who say strategic assets are falling cheaply into powerful foreign hands. ST's Indosat deal faces union opposition and a class-action lawsuit from 57 politicians and religious leaders, led by former President Abdurrahman Wahid, who want it annulled. But President Megawati Sukarnoputri is in favor of the deal, and the suit doesn't seem likely to go anywhere.

Hugh Young, senior fund manager with Aberdeen Asset Management, notes that Singapore firms invested heavily in Indonesia during the Suharto dictatorship, which was toppled in 1998, but the returns were modest. This time could be different. Despite Indonesia's political problems, its economy is improving. Jakarta stocks are up about 20% this year, and the rupiah has strengthened against the dollar.

SingTel and ST have been criticized for overpaying for their noncontrolling stakes, but right now their investments are looking smart. Telkomsel had a great first quarter, posting 51% higher net profits of $156 million. And Indosat had first-quarter operating profits of $71 million, 20% higher than last year.

Singapore might be trying to send a political message with its Indonesian buying spree, says Young, "but that's not to say these are not good investments."