The strongest stockmarket in the Asia-Pacific region in the global rally has not been, as you might expect, China – but Indonesia. At time of writing its market is up 91% in dollar terms for the year.
The economy of this nation of a quarter of a billion people and 17,000 islands has continued to grow right through the worst of the world recession, benefiting from a powerful combination of positive factors:
• No bad debt problem. A legacy of the suffering experienced in the 1997/98 Asian crisis, when the economy contracted by 14%, has been conservative lending and investment policies by Indonesian banks, and conservative attitudes towards borrowing by Indonesian companies and consumers. So, no sub-prime or similar rubbish to poison the credit system.
• Abundant natural resources. Indonesia is the world’s largest exporter of steam coal, has the greatest proven reserves of natural gas in the Asia-Pacific, and is the major producer of palm oil. It also has huge resources of copper, nickel and gold.
• Political progress. The re-election as president in July of Susilo Bambang Yudhoyono (whom everyone calls “SBY”) has strengthened his position to improve governance – in particular, to curb the corruption that infests all levels of society.
Indonesia has had a solid long-term record of economic expansion and rising living standards for decades, but has never achieved the spectacular growth rates seen in China and other Asian “tigers.”
There has been a succession of territorial/breakaway problems (East Timor, Aceh, Papua/Irian), and racial tension (ethnic Chinese, although only 3% of the population, still control 80% of private-sector business).
More recently the rise of fundamentalism in what is the world’s most populous Muslim nation has produced terrorism by Islamic militants and localised attacks on Christian churches and mosques of minority sects.
Democracy takes root
Nevertheless, Indonesia has become more stable socially, particularly since SBY first became president. For example, he fixed the problem of Aceh, the would-be breakaway region at the northern tip of Sumatra, through a combination of suppressing militants and granting local autonomy.
Over the past decade, democracy has been strengthened by three successive presidential elections generally regarded as free and fair.
SBY, a former general, made a start in his first term towards tackling some of the nation’s fundamental problems. He curbed the political and economic power of the army, decentralised political authority, and began to attack corruption – he refused to intervene when his daughter’s father-in-law was convicted for graft.
Now he has been re-elected, securing 60% of the total vote in the latest presidential poll, he is in a more powerful position to combat Islamic militancy and corruption, and to improve the efficiency of the economy by selling stakes in state-owned enterprises to private business.
Garuda, the national carrier that is one of the few airlines in the world to remain profitable, plans its first stock-exchange listing next year, offering 15%-20% of its equity to private investors.
SBY certainly needs to do much more, as many major problems remain.
Although foreign direct investment in factories and business operations reached $15 billion last year, that was only 15% as much as China attracted.
Foreign investors have been discouraged by the dead weight of bureaucracy, a corrupt legal system, a decrepit infrastructure, opposition from the closely intertwined political and business elites, and public hostility. A new mining law passed last year gives greater powers to corrupt district authorities and forces mine operators to process raw materials locally.
Investment in infrastructure has been “bordering on the pathetic,” comments CLSA strategist Christopher Wood, who says SBY’s new cabinet, to be announced next month, needs to be “filled with competent technocrats,” not, as in his first term of office, “financially endowed cronies.”
Neutralising the negative factors are the positives…
In many ways, Indonesia is well positioned to exploit its fortunate situation as a supplier of energy, metal and agricultural commodities to the resource-deficient economies of China and India, which now take far more of its exports than America.
There is also plenty of potential for domestic growth. Over the past quarter of a century, per capita incomes have more than doubled, and recently consumer spending has been growing at 10% a year.
As in other Asian countries, the middle class is expanding rapidly. The proportion of Indonesians living in cities has doubled since 1975 and is expected to double again by 2025, reaching 60% of the population.
Positive factors combine to lift the growth rate
Prospects such as these are attracting the interest of foreign companies that are scrambling to acquire coal deposits, expand production of palm oil and other tropical crops, buy into supply of consumer goods such as cigarettes, and exploit cheap labour (wage levels are well below those of coastal China).
The economy is in sound shape, with a fiscal deficit this year equivalent to only 2.5% of economic output, falling inflation, and low external debt (29% of GDP). The FT says Indonesia “has relied on resilient domestic consumption, supported by handouts the state can actually afford.”
Chetan Ahya of investment bank Morgan Stanley reckons that “a confluence of benign factors” could lift the growth rate of the economy from the 5%-6% average of the 2003-08 period to 6%-7% from 2011 onwards, bringing about an $800 billion economy by 2014.
Prospects such as these have given rise to suggestions that Indonesia should be added to the BRIC grouping as one of the handful of really large emerging economies where international investors should focus their interest.
Although there are almost 400 companies listed on the national stock exchange, many of them are small and their shares illiquid. The Jakarta market is still only a third of the size of neighbouring Singapore’s.
If you are an individual investor interested in taking a stake in Indonesia’s future, I think it would be best to do so through a collective vehicle such as the exchange-traded fund Market Vectors Indonesia Index (NYSE:IDX) listed in New York, the Singapore-based mutual fund Aberdeen Indonesia Equity or Fidelity’s Hong Kong-based Indonesia Fund.
• This article was written by Martin Spring in On Target, a private newsletter on investment and global strategy. Email
Afrodyn@aol.com
to be included on the recipient list.