Only a few months ago, emerging markets were more worried about inflation than growth. Now it’s the other way around. Indonesia has become the latest developing country to cut interest rates in order to temper the impact of a global slowdown. The central bank had plenty of room to act. Inflation has already fallen to a historically low annual rate of 4.6% and a global downturn implies further falls.
A decoupled economy?
Indonesia is better placed than most countries to withstand a global slowdown, says Capital Economics. It is “one of the least vulnerable economies in Asia to weak export demand” because consumption accounts for more than 60% of the economy. Exports are worth only around a fifth of GDP, compared to 50% in much of the region. Shipments to America and Europe amount to just 20% of the total; most exports go elsewhere in Asia.
Indonesia’s comparatively low exposure to the global economy and solid consumption ensured that, during the global crisis of 2008/2009, Indonesia grew by 4.5%. Since then growth has rebounded, reaching 6.5% this year. The country’s long-term prospects are bright. Standard Chartered thinks that the economy, currently worth just over $700bn, could expand almost 13-fold to $9trn by 2030, and become the world’s sixth-biggest economy after China, America, India, Brazil and Japan. It is currently the 18th-biggest economy.
Great domestic potential
The domestic economy is powered by the rapidly growing population of 240 million people. By 2030, the population will have reached 315 million, according to Standard Chartered. The World Bank expects the working-age population to peak in 2040; China’s is likely to peak this decade. Indonesia’s labour force is not only huge, but it is also increasingly rich. As the new middle classes flex their financial muscle, spending is rising rapidly. Car sales hit a record this summer.
The number of new millionaires is rising faster than in China and India, according to a study by CLSA and Julius Baer. The latest sign of mounting wealth, says Anthony Deutsch on FT.com, is that the number of registered orthodontists quadrupled to 160 this year. There is ample scope for spending to rise over the next few years as consumers have little debt. Another long-term advantage for Indonesia is that it is “flush with natural resources”, says Kevin Grewal on Seekingalpha.com. It is the world’s largest exporter of thermal coal and palm oil and has plenty of crude oil, natural gas, tin, copper and gold.
Indonesia also boasts labour costs among the lowest in the region, so it is “quickly becoming an increasingly popular destination” for investment, says Eric Dutram, also on Seekingalpha.com. Following years of deleveraging, the national debt-to-GDP ratio is a mere 26%, giving the government scope to boost spending to counteract a slowdown. From near-collapse after the Asian crisis, and despite problems such as corruption and red tape, Indonesia is widely talked of as a new ‘BRIC’ state.
How to invest
However, while the economy may not be hit hard by a Western downturn, the stockmarket can’t decouple from global sentiment, as the summer slide shows. So while Indonesia’s long-term prospects are excellent, the murky near-term outlook for the world economy means that the next few months could be unusually volatile. If you’re looking for a way to play the market, MoneyWeek Asia’s Cris Sholto Heaton favours Aberdeen’s US-listed Indonesia Fund (NYSE: IF). It is currently on an 8.3% discount to net asset value. (See MoneyWeek Asia for more.)