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The year of living dangerously

rock climbing

While all eyes are on China and turmoil in the mainland equity markets, our columnist turns his gaze to Indonesia where once again the government is attempting to privatise state-owned companies.

In December, I reviewed the disappointing volumes last year for primary equity issuance in Southeast Asia, and wondered whether 2016 could be the year when ECM bankers who cover the region become busy again. With the Chinese bourses now in free fall, the authorities there repeatedly depreciating the renminbi in a bid to prop up the economy, and an extension of the ban on equity sales by large investors in Shanghai and Shenzhen, market participants could indeed well turn their attention down South again.

While BoC Aviation (which is based in Singapore) is said to have chosen Hong Kong for its $3bn IPO (through BoC and Goldman Sachs), there are already talks that Canada’s Manulife could revive the launch of its proposed S-Reit, which was aborted last year due to adverse market conditions. Whether this will succeed in a rising interest rate environment remains to be seen.

However, an interesting piece of news from the Jakarta Post on January 4 caught my attention, as Indonesia’s SOE minister Rini Soemarno revelaed that plans were afloat to list a number of state-owned enterprises on Jakarta’s IDX. Among other potential candidates, the authorities specifically mentioned the possible IPO of aluminium producer Indonesia Asahan Aluminium (also known as Inalum), previously owned by a consortium of Japanese shareholders.

Besides IPOs of new buisnesses, the government also plans to encourage listed SOEs to carry out rights issues, rather than rely on capital injections by the State for their funding and development. In 2015, funding for 24 SOEs amounting to more than $4bn was frozen by parliament, which will have put a strain on these firms’ finances, hence the need to seek funding from third party investors.

Fewer than 17% of Indonesia’s SOEs are currently listed, although these twenty or so firms currently account for almost a quarter of the IDX’s market capitalisation.

Same again

Of course, attempts at privatisation by Indonesia are nothing new.

In the pre-Jokowi Widodo era, an ambitious privatisation programme involving financial institutions, engineering, and resources companies abruptly came to a halt. In a Royal Mail moment, the sale of 20% of Krakatau Steel in a $192m IPO in November 2010 saw the shares of the company soar 49% on their debut, prompting an investigation, amid claims that valuation had been widely underpriced.

The $500m privatisation of national carrier Garuda Indonesia followed in March 2011. But it also faced its own issues, as a portion of the IPO (said to have accounted for as much as 50%) remained unsold when the books closed, prompting the government to request that the underwriters honour hard underwriting obligations. Garuda’s shares next plumeted 31%, with Bank Mandiri, Bahana Securities and Danareksa said to have nursed losses of almost $300m, and the latter two even to have sought emergency funding. The market view at the time was that the timing and, above all, pricing of the deal – perhaps in reaction to the Karakatau Steel transaction – had been imposed on the lead banks, even though the book was in no shape for it to go ahead on that basis.

Such a legacy could therefore weigh on Indonesia’s renewed enthusiasm to trim its public sector.

The trauma of the Garuda experience could make some investment bankers weak at the knees. Time to market could also be an issue: it reportedly took Garuda four years to go public, as the Indonesian bureaucracy requires approval from no fewer than 25 agencies to secure a stock exchange listing, according to a recent interview of the (rather aptly named) IDX president director Tito Sulistio.

2015 has also been a weak year for the Rupiah, which fell almost 9% against the US dollar. And, as in neighbouring Malaysia, falling commodities prices could also diminish the prospects of some privatisation candidates.

The main difficulty, however, could come from Indonesia’s own lawmakers. The chairman of the House Commission VI, which oversees SOEs, recently affirmed that the commission opposed any plans to sell shares of profitable and high potential companies to the public. Now, that’s democracy in action!

Philippe Espinasse was a capital markets banker for almost 20 years and is now an independent consultant in Hong Kong. He is the author of “IPO: A Global Guide”, “IPO Banks: Pitch, Selection and Mandate”, and of the Hong Kong crime thriller “Hard Underwriting”. 

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