The Asian crisis of the late 1990s left Indonesia facing economic collapse. But since then, “the transformation has been amazing”, says Shane Oliver of AMP Capital Investors. Now southeast Asia’s biggest economy is set to grow by 6% this year, according to the IMF. That follows a resilient 4% in 2009. Indeed, it’s being widely touted as becoming an extra ‘I’ in the Bric group of emerging markets.
How Indonesia bounced
So what changed? Sure, there was a gradual transition from dictatorship to democracy, coupled with pervasive deregulation. But the “steady repair” of government and corporate balance sheets was key to the turnaround, as Morgan Stanley points out. When the Asian crisis struck, the currency plummeted, leading to widespread corporate bankruptcies – many debts were held in foreign currencies – and a banking system bail-out.
Now corporate debt has been worked off, falling to 15% from around 50% of GDP. Public debt, meanwhile, is just 29% of GDP, down from 80% in 1999. Indonesia’s external debt has fallen from 150% of GDP to just 30%. It has a current-account surplus and a budget deficit of under 2% of GDP. All this deleveraging, along with the improved political environment, has lowered interest rates across the economy.
That has attracted money from increasingly confident foreign investors, boosting the economy’s potential growth rate, says Morgan Stanley. A stronger currency has also helped keep a lid on inflation, which is under 6%.
A commodities powerhouse
It also bodes well for the long-term that Indonesia has an abundant supply of natural resources. It’s the biggest supplier of palm oil and one of the three top exporters of natural gas, says William Mellor on Bloomberg.com. It boasts the world’s biggest gold mine and the single largest reserve of recoverable copper, while it also exports coffee and cocoa.
Indonesia is also “thought to hold more than 40% of the world’s geothermal energy potential”, giving it scope to be “a major player” in the alternative energy industry, says Eric Dutram on Seekingalpha.com. Indonesia is extending its links with regional heavyweight China, with trade more than doubling to $25bn between 2005 and 2009. The country boasts a population of almost 250 million well-educated people, with a burgeoning 35 million-strong (and still virtually debt-free) middle class, according to the World Bank.
Unlike most of Asia, which is export-dependent, private consumption comprises 61% of GDP. That helped fend off the crisis and, along with higher investment, is underpinning continued recovery. Car sales and bank lending are on the up, while the government has increased spending on infrastructure. As Aberdeen’s Hugh Young says, “Indonesia’s potential is dramatic.” So much so that Capital Economics expects it to gain investment-grade status soon.
A solid long-term bet
Corruption does remain a problem and a recent spat within the government shows that not everyone is happy with the free-market reformist direction of the past few years. The finance minister, Sri Mulyani Indrawati, has resigned after anti-reform lawmakers spent months trying to oust her. But her replacement has shown he has “the courage to stand up to vested interests”, says Standard Chartered, so structural reform will continue.
Given all this, Indonesia looks compelling. With the overall market still among Asia’s priciest, the best bet is Aberdeen’s US-listed Indonesia Fund (US:IF), on an 8% discount to its net asset value.