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Is Investing in Indonesia Worth the Risks?

By Molly McCluskey - Oct 31, 2012 at 9:39AM

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Southeast Asia's largest economy has high levels of consumer confidence, and corruption.

With the largest economy in Southeast Asia and a level of consumer confidence that's one of the highest in the world, Indonesia continues to court foreign investment. But concerns about corruption and irregular governmental and corporate governance mar an otherwise hospitable market.

Is this investing opportunity worth the risk?

The past is prologue
Seven months ago, I wrote about Indonesia's aggressive marketing campaign to lure foreign investors to its sunny shores. Then, as now, the archipelago was billing itself as a prime destination for western funds, claiming political stability, sound macroeconomic policy, and a young demographic.

In the previous article, I strongly advised against investing directly in Indonesia and recommended instead investing in American companies with a presence in Indonesia. After all, many of the ideas the country is selling are real: It is ideally situated between Asia and Australia, it does have a young labor market, and it is in fact the largest economy in Southeast Asia. You only have to look at the Indonesia Composite Index (INDEX: ^JKSE) to see the nearly consistent growth over the past three years. And, of course, there are those 17,500 islands ready for paving, drilling, and mocha lattes.

In order to see if anything's changed in the past seven months, let's take a look at some American companies with Indonesian operations.

A booming industry (with a bust)
In March, I wrote: "While Chevron (CVX -1.39%) may be second in size to Exxon (XOM -1.40%), the company's commitment to cleaner energy, including its role as the leading global producer of geothermal, makes it a better bet than its rival. Chevron has a huge presence in Indonesia, both as the country's largest crude-oil producer and through the company's island-based geothermal operations." I warned of ongoing issues with oil spills and problems in Latin America.

Since then, four Chevron workers and two contractors in Sumatra have been arrested as the Indonesian attorney general investigates fraud at an oil-contamination site. The attorney general has implicated seven people in all who allegedly took money for a project that wasn't completed. Chevron, based in San Ramon, Calif., issued a statement that it was "very concerned" abut its people, who remain incarcerated for questioning despite a lack of official charges.

Caffeinate me
I wrote the last article about Indonesia while sitting on the back deck of the Starbucks (SBUX 1.95%) in Ubud, sipping a latte and watching the evening performance at the Water Lily Palace. Shortly after, the stock hit its 52-week high of $62, before dropping in August to $43 -- not its 52-week low, but close. There are 109 Starbucks in Indonesia at last count, and while not all of them have quite such a spectacular view, the lines at each store I saw in my month of touring the country were consistently long. With an exploding middle class obsessed with status symbols, those lines won't get shorter anytime soon.

Slip n' slide
Surprised by the number of Quiksilver (NYSE: ZQK) stores in Indonesia, I dug into the company's financials in March to determine whether it was worth American investment dollars. I wrote of the California-based company: "The board-shorts company, which also owns ROXY swimsuit brand and DC Shoes, is drowning in its debt-to-equity ratio, has a negative profit margin, and suffers an operating margin so slim it would fit into a junior swimsuit." The outlook hasn't gotten any better. At the time, it was trading for $4 a share, which wouldn't even buy decent board wax. Now? It's $3 a share. Buying a tube of lip balm will have better long-term benefits.

Molly McCluskey spent a month traveling in Indonesia. Follow her travel and finance tweets on Twitter at @MollyEMcCluskey. She owns shares of Starbucks. The Motley Fool owns shares of ExxonMobil. The Fool owns shares of and has written puts on Starbucks. Motley Fool newsletter services have recommended buying shares of Starbucks and Chevron. Motley Fool newsletter services have recommended writing covered calls on Starbucks. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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