Just over a decade ago, Indonesia was considered “a basket-case”, says The Economist. It faced economic collapse after the Asian crisis hammered companies overexposed to foreign-currency debt and caused the banking system to implode. Meanwhile, political chaos also appeared on the cards.
But now Indonesia has become a “stable, largely peaceful” democracy. It is also widely seen as an extra ‘I’ in the Bric (Brazil, Russia, India and China) group of fast-growing emerging markets. Along with rising global risk appetite, this helps explain why the Jakarta Composite index is Asia’s best-performing market this year, up 123% in dollar terms.
President Susilo Bambang Yudhoyono has, helpfully, just been re-elected with a large majority, which gives him a mandate for further reforms. Since 2004, he has “managed to preserve tranquility and pursued mostly free-market policies”, says Martin Hutchinson on Breakingviews.com. After rising by more than 5% a year in 2003-07, economic growth has dipped but is still expected to reach 4% in 2009 and climb next year. Indeed, only India and China are growing faster.
Indonesia is helped by the fact that, unlike in most Asian countries, growth is propelled largely by domestic demand – exports comprise just 25% of GDP. This appears to be picking up again, with bank loans up 14.6% year-on-year in July. Sound management over the past few years has also put the economy on a more solid footing.
Keeping a tight lid on spending has helped lower debt quickly: public debt has fallen from 80% in 1999 to just over 30% by the end of last year. Companies have trimmed borrowings too: corporate debt is down from almost 50% of GDP to 15%. Lower debt has also reduced interest rates across the economy, cutting the cost of borrowing to invest.
That bodes well for the long term, and there are further reasons for optimism. Indonesia is resource-rich, with exports including palm oil, cocoa, coffee, coal and oil. Exposure to regional heavyweights India and China is increasing rapidly; in the first half of 2009, these countries accounted for 17% of its total exports, compared to 10% for the US, notes Christopher Wood of CLSA.
The demographic outlook is excellent too, with 44% of the 240 million population under 24. Further, more than 90% of these are literate, compared to 61% in India. And there is ample scope for Indonesia’s growing middle class to boost consumption, not least because household debt is still just 11.4% of GDP, as Morgan Stanley points out.
On the debit side of the ledger, corruption remains a major headache, with Indonesia ranked behind Nigeria on Transparency International’s 2008 list, as Hutchinson notes. “Petty protectionism and restrictive labour laws” are still driving too many firms away, says The Economist, and the infrastructure is still very patchy – although now there is at least plenty of money available to spend on it.
But as David Stevenson points out in the FT, “there’s the prospect of sustainable long-term growth that is not reliant on monetary easing and low interest rates”. The local market is far from cheap, however, with forecast p/es in the high teens. Like all risky assets it is vulnerable to a slide in Western indices if the recovery proves disappointing.
Given this, Aberdeen’s Indonesia Fund looks the best of the few ways into this potential Bric country. It is listed on the US market (US: IF) and concentrates on companies with “Western-style” corporate governance, says Stevenson; top holdings include Unilever Indonesia. The fund is still good value on a 6% discount from its net asset value.