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The weakness of IDR is, in simple terms, a matter of too much IDR flowing out of the country.
There are many reasons for that, but most of it is related to long-running issues of corruption and political instability. The present situation is better than before, but local business owners have not shed their fear and distrust of the regional and federal authorities.
There is a reason why houses in certain enclaves of Jakarta are characterised by high walls with barbed wire, huge metal gates, and even security posts. And it is the same reason why they bank and seek medical treatment in Singapore.
If more of their monies are retained in the country's banking system, and spent/invested locally, there will probably be more development and lower currency depreciation.
But long-running business families don't stay rich without constantly looking over their shoulders. If you have reservations about investing in a company with poor management record, the business elites of Indonesia probably feel the same way about their country's political elites.
So there's still a lot of work for Indonesian administrators.
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But its challenging to get everyone behind a common goal because the power bases are so divided among different interest groups. The formation of the Indonesian state is itself an unnatural construct of bringing together the islands of Sumatra, Java, a large part of Kalimantan, Sulawesi, and Papua, after the second world war. The civil wars in Timor Leste and Aceh, and the subsequent granting of their independence and autonomous status, respectively, is what happens when you put people of different loyalties under a single and unfamiliar banner.
Politically, there are the conservative muslims, the less conservative muslims, different factions of the military, and different factions of the old-time noble/aristocrats/politicians. Everyone wants the country made in their own image, and a piece of the action. So what you get instead, in the formation of a parliament of varied interests, is a whole lot of compromises and (horse) trading.
Democracies may not always be good for the country. And dictatorships may not always be bad.
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Given the general long-term bearishness of the IDR, it will be expensive to hedge its depreciation against USD; if you don't want it, and others don't want it, who is going to want it? Long-term currency hedges are usually not practical for businesses, unless the rates are stable or cheap.
The best policy for companies like Delfi is probably to buy USD whenever their IDR working capital needs are satisfied.
Yet, if all foreign-owned companies are doing this, that's going to cause a lot of pressure on IDR.
This self-feeding vicious cycle can only be broken by convincing the currency market of IDR's long-term stability, which again rests on the market's perception/assessment of government action and policies.
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@jfc18 That's a very nice description. The quantitative parameters of Delfi's business and financial strength are well noted. And what you have written is probably what attracted a number of funds to bid its share price to more than 20x p/e valuations, in the past. Valuations are certainly cheaper now, even though nothing fundamentally -- apart from the coivd situation -- has changed.
@ksir The cost of lowering price to compete is not much for the giants, given their resources. Any gain from competition may be small relative to their size, but their goal isn't always profit maximisation. In fact, Mars has been the most successful globally in terms of sales, because of their penchant and discipline for keeping both returns and margins very low; not by allowing inefficiency, but by ensuring that selling price is extremely competitive. Being privately and family held, it has no pressure to raise profits/dividends.
I acknowledge that such discussions of competition could seem abstract or tenuous. But if the investor's intended time horizon is long, the only way an investor can feel safe from the vicissitudes of the markets through the duration is by ascertaining that the company/business will be safe from most forms of danger.
For those interested in the history, rivalry, cross of paths, and the eventual different trajectory of Mars and Hershey:
https://www.goodreads.com/book/show/7161...EJx&rank=1
There are many reasons for that, but most of it is related to long-running issues of corruption and political instability. The present situation is better than before, but local business owners have not shed their fear and distrust of the regional and federal authorities.
There is a reason why houses in certain enclaves of Jakarta are characterised by high walls with barbed wire, huge metal gates, and even security posts. And it is the same reason why they bank and seek medical treatment in Singapore.
If more of their monies are retained in the country's banking system, and spent/invested locally, there will probably be more development and lower currency depreciation.
But long-running business families don't stay rich without constantly looking over their shoulders. If you have reservations about investing in a company with poor management record, the business elites of Indonesia probably feel the same way about their country's political elites.
So there's still a lot of work for Indonesian administrators.
===
But its challenging to get everyone behind a common goal because the power bases are so divided among different interest groups. The formation of the Indonesian state is itself an unnatural construct of bringing together the islands of Sumatra, Java, a large part of Kalimantan, Sulawesi, and Papua, after the second world war. The civil wars in Timor Leste and Aceh, and the subsequent granting of their independence and autonomous status, respectively, is what happens when you put people of different loyalties under a single and unfamiliar banner.
Politically, there are the conservative muslims, the less conservative muslims, different factions of the military, and different factions of the old-time noble/aristocrats/politicians. Everyone wants the country made in their own image, and a piece of the action. So what you get instead, in the formation of a parliament of varied interests, is a whole lot of compromises and (horse) trading.
Democracies may not always be good for the country. And dictatorships may not always be bad.
===
Given the general long-term bearishness of the IDR, it will be expensive to hedge its depreciation against USD; if you don't want it, and others don't want it, who is going to want it? Long-term currency hedges are usually not practical for businesses, unless the rates are stable or cheap.
The best policy for companies like Delfi is probably to buy USD whenever their IDR working capital needs are satisfied.
Yet, if all foreign-owned companies are doing this, that's going to cause a lot of pressure on IDR.
This self-feeding vicious cycle can only be broken by convincing the currency market of IDR's long-term stability, which again rests on the market's perception/assessment of government action and policies.
===
@jfc18 That's a very nice description. The quantitative parameters of Delfi's business and financial strength are well noted. And what you have written is probably what attracted a number of funds to bid its share price to more than 20x p/e valuations, in the past. Valuations are certainly cheaper now, even though nothing fundamentally -- apart from the coivd situation -- has changed.
@ksir The cost of lowering price to compete is not much for the giants, given their resources. Any gain from competition may be small relative to their size, but their goal isn't always profit maximisation. In fact, Mars has been the most successful globally in terms of sales, because of their penchant and discipline for keeping both returns and margins very low; not by allowing inefficiency, but by ensuring that selling price is extremely competitive. Being privately and family held, it has no pressure to raise profits/dividends.
I acknowledge that such discussions of competition could seem abstract or tenuous. But if the investor's intended time horizon is long, the only way an investor can feel safe from the vicissitudes of the markets through the duration is by ascertaining that the company/business will be safe from most forms of danger.
For those interested in the history, rivalry, cross of paths, and the eventual different trajectory of Mars and Hershey:
https://www.goodreads.com/book/show/7161...EJx&rank=1