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Investors are betting on the continued growth of booming Indonesia

As Indonesians prepare to vote July 9 to elect the country’s first new president in 10 years, investors are betting that, whatever the outcome, millions of newly prosperous Indonesians will embrace financial services as enthusiastically as they have democracy. (Dimas Ardian/Bloomberg)

Viewed with 347 years of hindsight, it was possibly history’s most one-sided trade. In 1667, when spices were worth more than gold, England and Holland agreed to divvy up two islands over which both claimed sovereignty.

The Dutch took Run, a remote outpost of Indonesia’s Spice Islands, where the aroma of nutmeg, cloves and cinnamon scents the breeze. The English got what would become Manhattan.

Today, while New York reigns as the world’s financial capital, Run doesn’t have a single bank branch.

“Even just an ATM would be nice,” Burhan, 42, a batik-shirted schoolteacher, nutmeg farmer and guesthouse owner, says as he sits on his porch overlooking the volcano-studded Banda Sea, 1,550 miles and two time zones east of Jakarta.

Burhan, who like many Indonesians goes by one name, may not have long to wait. The country’s biggest banks, among the most profitable on the planet, according to Bloomberg data, are emerging from their big-city strongholds to compete for customers in the farthest flung of the 17,500 islands that make up the world’s fourth-most-populous nation. Some even plan to use boats that double as floating ATMs.

The banks’ challenge: to maintain an average 24.3 percent return on equity that dwarfs that of other banks in the world’s 20 biggest economies — including the 9.4 percent U.S. lenders deliver.

As Indonesians prepare to vote July 9 to elect the country’s first new president in 10 years, investors are betting that, whatever the outcome, millions of newly prosperous Indonesians will embrace financial services as enthusiastically as they have democracy — from cities such as Jakarta to villages such as Run.

Enriched by a 13-year consumption- and resource-driven economic surge, Indonesians have accumulated assets faster than the residents of any other major Asia-Pacific country, according to Credit Suisse, which reported in October that average wealth per adult had jumped almost fivefold to $11,839 since 2000.

By 2030, Indonesia, the world’s 17th-largest economy, with a gross domestic product of $878 billion, will have overtaken Germany and Britain to rank seventh, according to a McKinsey forecast.

Already, parts of Indonesia’s capital resemble upmarket British or German neighborhoods. The McLaren dealership has sold 19 of the $750,000 British sports cars since November 2012.

As of May 20, the Jakarta Composite Index outperformed this year’s 3.3 percent rise in the MSCI Emerging Markets Index to leap 21.4 percent in dollar terms, making it the world’s sixth-best performer of 93 indexes Bloomberg tracks.

Indonesia is the world’s biggest exporter of power-station coal, nickel, tin and palm oil and home to the world’s biggest gold mine and recoverable copper reserve. As such, it hasn’t been immune to tumbling commodities prices and a slowdown in its biggest export market, China.

In 2013, Indonesia’s growth declined to 5.8 percent from 6.3 percent in 2012. Last year, a slowing economy, a rising current-account deficit and capital flight from developing nations by skittish foreign investors wiped 20 percent from the capitalization of the Jakarta Stock Exchange.

That’s now changed. Beginning in May 2013, Agus Martowardojo, Indonesia’s central bank governor, reacted swiftly to foreign capital flight by raising interest rates five times to 7.5 percent. The rupiah surged 6 percent this year as of May 20 — the biggest rise among 11 Asian currencies; and bonds jumped 6.9 percent.

‘Best-run commodity economy’

The tactic also brought annualized inflation down to 7.25 percent in April from 8.22 percent in January and helped cut the current-account deficit to $4.1 billion in the first quarter of 2014 from $8.5 billion in the third quarter of 2013.

“Compared to Brazil and Russia, Indonesia is the best-run large commodity economy,” says Ruchir Sharma, who oversees $25 billion, including shares in Indonesian companies, as head of emerging markets at Morgan Stanley Investment.

The question for investors now is how well the next government will run the economy. In October, President Susilo Bambang Yudhoyono must step down after his second five-year term. The favorite to replace him in July’s election is Jakarta Governor Joko Widodo.

Whoever wins, Indonesians’ need for financial services will grow. Only 50 million of the country’s 250 million inhabitants have bank accounts, says Budi Gunadi Sadikin, chief of PT Bank Mandiri, the country’s largest lender by assets. “The penetration is very, very low,” he says.

Sadikin says he’s so determined to tap that new market that he’s opening 300 branches a year. Mandiri’s major rival, PT Bank Rakyat Indonesia, the country’s most profitable bank, has plans to open 570 branches focusing on microfinance loans to entrepreneurs and small businesses, Director Sofyan Basir says.

In the Indonesian archipelago, taking banking to the people means taking banks to the water. Rakyat is acquiring boats with ATMs to act as floating branches.

Rakyat and Mandiri also send cash via public water transport, watched over by armed guards. To service customers in Run, Rakyat has to send money from Ambon City — the provincial capital of Maluku, as the Spice Islands are known — to a bank on the island of Banda Neira. That’s an eight-hour trip by rusty ferry.

Treacherous reefs

From Banda Neira, it takes another two hours to reach the 2,000 inhabitants of Run by traveling in a smaller boat through treacherous currents and reefs.

The banks’ high returns are possible because they’re charging borrowers as much as 13 percent interest while paying depositors 7 percent or less for the funds.

By expanding into riskier microlending, Mandiri and Rakyat are able to charge even higher interest rates of 30 percent a year, according to Boston Consulting.

“For three to five years, the profitability numbers of Indonesian banks will continue to look very good compared with their global peers,” Sharma says.

In Maluku, the spice trade is undergoing a revival. In the 17th century, these islands were the world’s most valuable pieces of real estate — especially after doctors judged that nutmeg, which grew nowhere else, could cure bubonic plague.

In the 19th century, the islands lost their monopoly after the British transplanted nutmeg trees to their own colonies in Asia, Africa and the Americas.

Now, entrepreneurs from abroad are joining international aid workers to rebuild the Spice Islands nutmeg trade.

Dean Cycon, founder of Dean’s Beans Organic Coffee Co., visited Run last year and bought nutmeg to flavor his coffee. Next year, he says, he’ll return to collect a shipload — and perhaps open an account.

“As soon as they get round to opening a bank on Run,” he says. “I’ll be the first customer.”

The full version of this Bloomberg Markets article appears in the magazine’s June issue.

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