The Rise of Southeast Asia 2.0

By David Ruff, Portfolio Manager

Indonesia recently held presidential elections and early results suggest Prabowo Subianto, frequently referred to by his first name, Prabowo (pruh-bo-wo), to be the winner.  Although official results won’t be announced until March 20th, the initial tally suggests he won nearly 60% of the vote, easily more than enough to claim victory after just one round of voting.  Given the history of this controversial former general, the impressive margin of victory seems surprising.  Many lament that a Prabowo Presidency may herald the return to former dictator Suharto’s oppressive regime, creating challenges for democracy and free capitalism, but we believe Indonesia and our Indonesian investments will prosper under the new leader. 

To be sure, critics can point to a dark past for Prabowo. His military service, in particular, may be the most damaging to his reputation.  To review, Suharto, the authoritarian leader who ruled Indonesia with an iron fist from 1967 to 1998, and also a former military leader, helped Prabowo advance in his military career. Prabowo, an already decorated captain of the Indonesian Army, went on to marry one of Suharto’s daughters, known as Titiek; and unsurprisingly, became Suharto’s military protégé, while quickly rising through the ranks to become Indonesia’s youngest general at the age of 47.  Known as Suharto’s enforcer, Prabowo suffered an ignominious discharge from the military in 1998 for his alleged role in the kidnapping and disappearance of 22 activists critical of Suharto’s regime, 13 of which, are still missing. The discharge occurred a few months after Suharto’s reign ended, brought on by widespread student protests amidst the Asian Financial Crisis.  Although never brought to trial, such allegations of human rights abuses as Prabowo’s would end the political aspirations of anyone in much of the democratic world, but not in Indonesia, a country exhibiting a very unique democratic environment. 

Several factors contributed to Prabowo’s election success.  First, demographics played a key role.  With approximately 52% of voters under 40 years of age, they’re simply too young to know or understand the weight of these abuse allegations.  No wonder the former general fashioned his current campaign to appeal to younger voters, revamping his image to appear as a wise grandfather figure. In a departure from past campaigns, Prabowo responded to criticism not with sharp retorts, but with the understanding that Indonesians generally disfavor confrontational candidates—an idea alien to those accustomed to the dynamics of U.S. democracy. Second, although Prabowo represents the first ex-military leader elected since Suharto, Indonesians generally regard military backgrounds favorably, believing that these individuals provide strong leadership.  Finally, the country’s incumbent President, Jokowi, a highly respected and even revered President by the populace, who would have easily won reelection if not for term limits, effectively endorsed Prabowo.  Defeating Prabowo in the last two elections, Jokowi’s support for Prabowo seems enigmatic, especially given the vicious attacks on Jokowi by Prabowo in the 2014 election and contesting without reasonable grounds the 2019 results.  Despite this, Jokowi appointed Prabowo as his defense minister, reflecting how alliances can rapidly shift in Indonesia.  There also appears to be a quid pro quo, with Prabowo selecting Jokowi’s eldest son to be his running mate.

Leveraging Jokowi’s 80% approval rating, Prabowo voiced support for Jokowi’s existing policies, including his social support programs and efforts to elevate the Indonesian economy on the global stage.  Although, we have no illusions about Prabowo becoming another Jokowi and believe that he may introduce an element of unpredictability, we note the country’s relatively strong institutions provide crucial checks and balances against efforts to move rule to a more authoritarian style. The parliament, in particular, reflects meaningful representation by political rivals, with Prabowo’s own Great Indonesia Movement Party only controlling 13% of the legislature.  Less ideological than most democracies, coalitions form based on more practical goals here.  We expect Prabowo will follow Jokowi’s example and lead by accommodating the needs of others.  Importantly, the Bank of Indonesia maintains independence, an essential element for financial system stability to support sustainable economic growth.

As we’ve indicated in a previous commentary, The Rise of Southeast Asia – July 31, 2023, we believe ASEAN enjoys a special position in the global economy.  No longer dominated by colonial Europe, the region shows greater connectivity, increasingly trading with itself, compared to trade with Europe and North America, resulting in greater contribution to its own members’ growth.  Positioned to gain as companies shift production and supply chains from high-wage economies, such as Japan, South Korea, Taiwan, and now, increasingly China; ASEAN will increasingly take the baton from China and assume the mantle “factory of the world”.  Indonesia, in particular, will be a prime beneficiary, with the implementation of the regional trade liberalization pacts, such as TPP and RCEP.  Thus, the country’s impressive growth should continue.

A recent investment in our ADR portfolios should benefit from Indonesia’s bright economic outlook.  We regard Bank of Central Asia as the best bank in the country and, more broadly, one of the best in the world.  Few banks reflect the profitability and financial strength of BBCA.  Capital ratios and return on assets, for instance, run approximately double the level of the average US bank.  With more than 30 million customers and leading digital infrastructure providing BBCA with a highly profitable payment processing business, while offering the bank a deep understanding of Indonesian credit risk.  This latter element should enhance the bank’s profitable lending franchise as the bank’s loan-to-deposit ratio measures only 74%.  Thus, we look for accelerated loan growth over the next several years.  Notably, whereas most banks remain highly dependent on the business cycle for growth, we believe BBCA is unique in its ability to register profit gains in less favorable economic climates.  Importantly, the Indonesian banking system reflects segmentation with other major banks focusing on the lower-end segments and sub-scale banks increasingly becoming consolidated.  This should also work to BBCA’s advantage, propelling net interest margin higher.  We applaud the bank’s growing commitment to the cash dividend and expect accelerated dividend growth due to double-digit earnings growth combined with a rising payout ratio, making the Indonesian investment especially compelling.

In summary, Prabowo, at least initially, should be a continuity President, pursuing Jokowi’s economic agenda, but with a muscular statesman’s demeanor.  He would not want to dismantle the democracy he’s been voted to lead.   This should provide a positive investment climate.

The foregoing content reflects the opinions of Advisors Capital Management, LLC and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. Past performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns. Securities investing involves risk, including the potential for loss of principal. There is no assurance that any investment plan or strategy will be successful.