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Tuesday, November 08, 2005

Would You Rather Own Google or Indonesia?: William Pesek Jr.

Oct. 11 (Bloomberg) -- Faced with poverty, surging oil prices and terrorist threats, many of Indonesia's 235 million people probably never noticed the milestone. Ditto for global investors, who care more about such things.

In April, Google Inc. surpassed Indonesia's entire stock market in value.

Think about it. A seven-year-old company that produces no physical products is now more valuable than the equity of Southeast Asia's biggest economy. Indonesia is an archipelago of some 18,000 islands holding natural resources --including oil -- that make the world's richest nations salivate. Google is, well, an Internet search tool.

It raises an intriguing question, and one Mark Matthews, a Singapore-based director at Merrill Lynch & Co., posed this week in a sales note to clients: Which would you rather own: 100 percent of the Indonesian equities market or Google?

A bit existential perhaps, but a question that focuses the mind and gets at a bigger point. Matthews' take on it? Indonesia is the clear winner.

``Indonesia is a hairy asset to be sure,'' he wrote. ``It has African levels of corruption, thousands of islands spread out over three time zones, Islamic extremists. But judging by the market's ability to withstand the most recent mini-crisis and Bali bombs, this is in the price. So there is upside if they can eventually get it right. And it is something real.''

Today's Cotton Gin?

Matthews can't help but wonder if Google will go the way of inventor Eli Whitney. ``The cotton gin changed America,'' Matthews wrote. ``It revitalized the South and boosted the British textile industry, and had a thousand other effects. And this earned the inventor, Eli Whitney, almost nothing.''

What's all this got to do with Google? ``That's sort of where Google is today,'' Matthews wrote. ``Google has a small lead over a pack of competitors, all eager to fight for one of the few remaining high-margin zones left in tech-land. Does Google management know that the supply of advertising space on the Internet is unlimited?

Google's market cap is $92 billion and last year it had $3.2 billion in sales. Indonesia's stock market is valued at $72 billion and its gross domestic product is $258 billion. PT Telekomunikasi Indonesia, the nation's biggest telephone operator, alone had sales of 33.9 trillion rupiah ($3.3 billion) in 2004. In other words, one company that's just 14 percent of the Jakarta Composite Index had more sales than Google.

Indonesia's Pros and Cons

Matthews' basic conclusion is this: Folks who buy Indonesia at current prices may do better than those who buy Google.

In 1998, for example, Microsoft Corp.'s market cap was bigger than South Korea's. Now Microsoft's is $272 billion and Korea's is $530 billion. ``If I could take a 7-year view on them, I would long Indonesia and short Google,'' Matthews says.

Aficionados of the information age may fear Matthews is spending too much time in the tropical sun. The stock of the most- used Web search engine rose 62 percent this year alone. Clearly, people are making some serious money off Google. And how many companies have seen their name become a verb?

Google comparisons aside, Matthews raises some interesting points about the state of the world's fourth most-populous nation.

The aftermath of the deadly Oct. 1 bombings in Bali hasn't been what their perpetrators might have expected. If the hope of the suicide bombers who killed themselves and 19 other people was to shake confidence in Indonesia's economy, they failed miserably.

Bonds Tell the Story

That Indonesia's stocks are still up nearly 10 percent this year is one sign. A more important one is that Indonesia drew excess demand last week for its biggest overseas debt sale, and that it plans to sell more 30-year bonds in 2006.

If investors viewed Indonesia as a basket case -- which many did following the 2002 Bali bombings and the 2003 attack on the JW Marriott Hotel in Jakarta -- would they really have placed $4.25 billion of orders for the $1.5 billion of 10- and 30-year debt it sold? That demand prompted the government to increase the sale by 20 percent.

While the yields Jakarta is paying are higher than those offered in April, they were at the bottom of the range marketed to fund managers. The demand reflects confidence President Susilo Bambang Yudhoyono is making progress toward reducing Indonesia's budget deficit, protecting currency reserves and attacking corruption.

Subsidy Gamble

Risks indeed abound in Indonesia, an economy whose only real consistency is its ability to confound investors. The place has crushing poverty, terrorist threats and chronic inefficiencies. And those are just the concerns investors focus. Any Asia-wide outbreak of bird flu, for example, could hit Indonesia hard.

Yudhoyono says he's tackling the problems that cost Indonesia the foreign direct investment it needs. Earlier this month, he almost tripled kerosene prices and more than doubled diesel tariffs to cap fuel subsidies and reduce the budget deficit.

While a tricky maneuver for any leader, that's a particularly perilous one in Indonesia. In 1998, the removal of subsidies fueled violent protests that toppled President Suharto. Yet Standard & Poor's on Oct. 3 said Yudhoyono's move was ``encouraging'' and will spur investor confidence.

It's a reminder that in any Google versus Indonesia debate, Asia's No. 7 economy may not be as bad a bet as you think.

To contact the writer of this column:
William Pesek Jr. in Tokyo at and OMmWb4


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