As we know, King Salman
of Saudi Arabia is currently visiting Indonesia for nine days (March 1 – 9,
2017). And if we look at the fact that it was the first visit of Saudi Arabian
King in Indonesia in the last 47 years, then it must be a special visit, and
even the King will stay here for no less than nine days straight. The question,
what’s so special about the visit?
If we look again at King
Salman's destinations in his Asian Tour, we will find interesting facts: The
four countries, namely Malaysia, Indonesia, Brunei Darussalam, and the
Maldives, all of them are countries with predominantly Muslim populations (thus
indirectly having a close relationship with the King, as fellow Muslim), and,
economically, developing countries. While the other two countries, namely Japan
and China, both are not Muslim countries, but are developed countries. From the
King’s visit in Malaysia, the visit produced several economic deals, one of
which is cooperation between Petronas and Aramco to build a US$ 7 billion oil
refinery in Malaysia. While in Indonesia, King Salman will also put investment
here, especially for infrastructure projects. How much? Well, up to US$ 25 billion.. including cooperation
between Pertamina and Aramco to build a US$ 6 billion oil refinery in Cilacap,
Central Java. A very big money, of course.
While for Brunei and
Maldives, perhaps King Salman will also invest there, but there are no further
details. As for China and Japan, the goal is the opposite: The King will invite
the two countries to invest in Saudi Arabia. So a few months before King Salman
began the tour, the news has surfaced that Saudi Aramco, the world’s largest
oil company owned by the Saudi Arabian Government, will do an IPO in 2018, and
the IPO will be the largest in the world, because Aramco will release its 5%
stake to the public for US$ 100 billion (which means that Aramco is worth US$ 2
trillion). By the Saudi Arabian Government as Aramco's controlling shareholder,
the proceeds will be reinvested into non-oil and gas sectors both at home and
abroad, to reduce the country's dependence on oil. But of course, it is not easy
to attract investors to put so much money on Aramco (US$ 100 billion is four
times bigger than the current world’s largest IPO, Alibaba, worth US$ 25
billion). Maybe that's why King Salman himself comes to Japan and China, and
possibly several other developed countries, to invite them to invest in Saudi
Arabia, including buying Aramco shares.
So unlike other
'Petrodollar' countries like Qatar or United Arab Emirates, who only use their
own money (the proceeds from oil and gas sales) to invest at home and abroad
(Qatar Investment Authority is the owner of soccer club Paris Saint Germain,
holders of 17% stake in Volkswagen, 8.2% stake in Glencore, etc. While Emirates
Investment Authority is the owner of Manchester City, Etisalat, etc.), Saudi
Arabia is more liberal that they also welcoming investments from abroad, including
bringing Aramco to the trading floor. Indeed, some said that under the new
Government (King Salman has just ascended the throne in January 2015, replacing
King Abdullah), Saudi Arabia is now more ambitious to develop themselves to be
a truly developed country. Because even though they have so much oil, and also
the custodian of the Grand Mosque in Mecca that became the destination of
Muslim pilgrims from all over the world, but they have no other economic
resources. In terms of GDP, Saudi Arabia has GDP of only US$ 646 billion, or
still behind Indonesia of US$ 862 billion (but the Arab population is only 29 million,
or far below Indonesia’s which reaches 271 million, so their GDP per capita are
much higher), so it can not be called a developed country.
And that ambition was
revealed shortly after King Salman ascended the throne. Still in January 2015,
the Arab Government launched the campaign of ‘Vision 2030’ which contains
economic development targets in various fields for the Kingdom until 2030,
including the launching of a US$ 2 trillion sovereign wealth fund, including
proceeds from IPO Aramco. The Government of Saudi Arabia also established the
Council for Economic and Development Affairs as the authority and executing
body of the vision, and King Salman appointed his heir, Prince Mohammad, as
chairman.
So what are the
relations between the Vision of Saudi Arabia bla bla bla, with Indonesia?
There are several
things. First, what Saudi Arabia does above in order to develop themselves to
be a developed country, including by inviting other countries to invest there, it
is similar to what Indonesia does today. In the past, foreign investment in
Indonesia was only dominated by three countries, namely Japan, Singapore, and
the United States, but Indonesia is now also a major investment destination for
China, and now Saudi Arabia. With more sources of money, the nation will no
longer be too dependent on one particular investor. Yup, currently Indonesia is
just like Singapore who receives
investment from all over the world. But fortunately, unlike Singapore,
Indonesia has a vast territory and also many business sectors in natural
resources etc, so we do not need to invest abroad because there are many areas
and sectors in the country that can be developed. Especially from Saudi Arabia,
if the Government succeeded in raising funds for their wealth fund, including succeeded
in bringing Aramco to the stock market, then they will likely put tons of
investments in Indonesia. Because if we look at King Salman’ tour of Asia, it seems the Arab Government is only willing
to invest in a country with the status as ‘our muslim brothers’.
Secondly, in order to successfully
bring Aramco to the stock market, they have to make sure of one thing: A stable
oil price. Because investors will not join the IPO if oil prices drop. So, back
in January 2016 when oil prices fell below US$ 30 per barrel, I wrote that,
considering the history of oil price since 1860, then buy counting the
inflation, oil prices are more often at
the level of US$ 15 – 30 per barrel, and will only rise above that range if
there is a specific cause. In 2000s,
oil prices soar to US$ 100 because of growing demand from China. But along with
the economic slowdown in China, the demand for oil declined, and consequently
the oil price returned to its normal level, which is US$ 15 – 30 per barrel (so
it did not ‘falling’). You can read again the analysis
here.
But today, after only a
year later, the price of oil has risen to US$ 40 – 50 per barrel, whereas oil
demand from China (or from any other countries) wan’t growing. But with the
emergence of the story of Aramco IPO since a few months ago, then the rise in
oil prices can be explained, is not it? If you look at oil prices in 2007,
which once skyrocketed to as high as US$ 144 per barrel without any fundamental
factors that could explain the rise, it might be easy for anyone with enough
resources and accesses, to ‘set’ oil prices at certain levels. If the current price
of oil still below US$ 30, the IPO for Aramco becomes impossible, especially
with its gigantic target of proceeds.
Thirdly, as we know,
the price of coal has also
skyrocketed since mid-2016. I myself was surprised when the price of coal rose
from US$ 54 to as high as US$ 100 per ton in just a matter of weeks, although
later fall to US$ 80s. There is no fundamental factors that cause such rise,
but later I remember a classic formula: If oil prices rise, the price of coal
will usually rise as well. And indeed, the increase in coal prices from US$ 54
to US$ 80s, is approximately equal (in percentage) to the increase in oil
prices from US$ 27 to US$ 53 per barrel.
And if oil prices could
rise once again, or at least stable in its current position, then what do you
think about the price of coal?
The combination of
investment inflow from Saudi Arabia (and possibly other countries), stable oil
prices, and rising coal prices, will eventually encourage the Indonesian economy
to have a better growth in a few years, starting in 2017. Compared with 2011,
when Indonesia experienced the peak of economic growth of almost 7% in the year,
I can say that the condition is now much better. Because, look: In 2011, the
prices of coal and CPO, which are the backbones of the national economy, were
very high (coal price was at US$ 120 per ton, CPO was RM4,000 per ton). But in
the same tima, the price of oil is also high at the level of US$ 100 per
barrel, which forced the Government to allocate large budget for fuel subsidies
(although Indonesia also have oil, but the level of oil consumption is far
higher than production, so the country must import oil), so there is almost no
more money left for development. On the other hand, the Government at the time
had almost never received any new investments from abroad (except from existing
international investors like from Japan, and the US). Before King Salman's
visit, there was never a story that Saudi Arabia would invest here.
And if the price of
coal is stable at least US$ 80 per ton, then although the price is not as high
as in 2011, but on the other side the cash cost for coal production has also
fallen by about US$ 10 – 20 for every ton of coal unearthed, mainly because of
the fall in the price of diesel oil for heavy equipments. This means that even
though the price of coal is now still below US$ 100 per ton, but coal companies
can generate earnings that are almost as big as in 2011 ago! While for the
Government, although now the price of oil is starting to rise again, but as
long as the price does not reach US$ 100 per barrel, they do not need to
subsidize the fuel like in the past, so the money can still be used for infrastructure
development. And because there will be additional money from Arab, plus
additional royalties and taxes from coal and other mining companies, it means
the developments could be more intense. The combination between the rebound of
commodity prices, the higher rate of development, will eventually encourage a
better economic growth. In a few years from now, I believe that the economic
growth of Indonesia will be as high as 7 – 8% per annum.
And of course, if all
the above hypotheses become reality, the domestic capital market will be
affected. In 2017, the Jakarta Composite Index (JCI) will likely to break a new high once again, after the last time it
happened at the beginning of 2015. And if Aramco successfully go public in 2018
(Aramco will be listing on the Saudi Arabian Tadawul Stock Exchange, but
because of its large size, it is very likely that it will also be listing (dual
listing) in New York, Toronto, London, or even Singapore), the capital markets
around the world will experience euphoria, especially in the petroleum sector,
at least for a moment, especially if Aramco’s shares rise. And as global fund
managers are eager to spend on oil companies around the world (not only Aramco),
they will also come into Indonesia to buy stocks of oil and gas, coal, and
other commodities. As a result the JCI, which may have risen quite high
throughout 2017, in 2018 will rise even higher!
By the way, Teguh, are
you really optimistic about the market? Yes, I am! After several years in the Indonesian
stock market, only at this time I feel this enthusiastic. To be honest, we have
been ‘fasting’ long enough for like four
years, where the JCI had only been able to moving sideways since 2013 (when
the JCI rose 15% in 2016, it only compensates the decline of 12% in 2015). And
for the last four years, I myself had not seen any signs that the JCI will rise
high like the 2000s.
But for today, well..
The signs are clear :) If all goes well, then in the next five years there will
be a lot of new millionaires coming from the Indonesia capital market, and
hopefully we are all included in it. Amen!
But also, experience has
teached that as an investor, we should never in euphoria, but we have to be
realistic and cautious. When I say that the JCI will break new high in this
year, then it could happen, but it also could not, depending on what economic events
that will happen in some future time. Thus, if there is fundamental changes
related to the market, then the above analysis will be updated. Just stay tune!
Original article was written and published (In
Indonesian language) in March 6, 2017. Any inquiries, contact the author (Teguh
Hidayat) by email teguh.idx@gmail.com.
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