Another Emerging Asian Giant
Indonesia’s stock-market has once again been a global leader on the upside, and the best performer in Asia since the end of 2010 – but how many of us have invested there?
This huge nation is overshadowed by the region’s even larger ones. Yet, unlike China and India, individual investors have free access to its shares listed in Jakarta. And, unlike Japan, it’s packed with fast-growing companies.
It is both a play on natural resources, like Australia, and on surging consumer demand from an exploding middle class, like India.
Commodities account for two-thirds of its exports. It’s the biggest supplier of globally-traded coal and palm oil. It has copper, nickel, tin and gold. It has the greatest proven reserves of natural gas in the Asia-Pacific, which it already ships in liquid form to Japan and India.
But its economic growth, expected to reach 6 to 6½ per cent this year, is also driven by strong private consumption, with consumer confidence rising as Indonesia proves its capacity to withstand the impact of sluggish growth in the US, crisis in Europe and slowdown in China.
The economy is also being boosted by an accelerating investment cycle. It now has the second highest investment-to-GDP ratio in Asia after China, running at 32 per cent of nominal GDP. Yet, unlike China, there are no worries about investment being excessive, as Indonesia actually needs huge upgrading of its infrastructure.
Its economy has grown at annual rates of more than 5 per cent in seven of the past eight years. Even in 2009, when many countries slumped into recession with the bursting of the credit bubble, Indonesia managed to achieve growth of 4½ per cent.
Last year it grew at the fastest pace since before the Asian financial crisis. OECD expects it to be the only major economy that will grow faster over the next five years than it did over the past five, achieving an average 6.6 per cent.
Foreign investors are increasingly drawn to the profitable opportunities in what is Southeast Asia’s largest economy. They poured in a record $20 billion last year, up from $17 billion in 2010.
The attractions are not only the strengths in natural resources, consumer demand and capital investment, but also the broader fundamentals:
► No debt problem to hold back economic growth. With economies of world leaders such as the US and Germany loaded down with public debt ratios of above 80 per cent of GDP, and still rising, Indonesia’s figure of around 30 per cent looks great.
There is no private debt problem, either. After the trauma suffered in the wake of the 1997/98 Asian crisis, when their economy contracted by 13 per cent, the recapitalized Indonesia banks have pursued conservative lending and investment policies, while companies and consumers have been conservative borrowers. So… no sub-prime or similar officially-promoted rubbish to poison the credit system.
Rating agencies Moody’s and Fitch recently upgraded the nation’s sovereign debt to “investment” ranking, a category that now allows pension and other long-term institutional funds in the West to invest in Indonesia.
Last month the country achieved a record-low yield on the largest-ever longdated bond issue in Asia, selling 30-year securities at a yield of just 5.375 per cent in its national currency, the rupiah.
► The annual fiscal deficit is minimal (at 1 per cent of GDP), inflation remains benign (at a 22-month low in January of 3.65 per cent a year), forex reserves have more than doubled since 2008 and the rupiah has strengthened steadily against the dollar.
► Rising incomes are producing an exploding bourgeoisie. Nomura, the Japanese bank, reckons Indonesia now has a middle class – which it defines as households with an average disposable income of more than $3,000 a year – of about 50 million. It could reach 150 million within a few years, making it larger than India’s.
Unlike China and Japan, it has favourable demographics. More than half its people are younger than 30. Some 2 million leave school every year and pour into the work force. This is driving down the dependency ratio of retirees to workers.
The big problem of the Indonesia economy is infrastructure, which is seriously deficient after more than a decade of under-investment following the Asian crisis.
Ports are clogged, roads are seriously congested and there are frequent blackouts in power supply. It costs more to transport goods within the country than to import them. Cement costs ten times more in the province of Papua than on Java.
Ordinary folk are deprived of basic services. Two-fifths of Indonesians live without electricity and even fewer have access to clean water. Public transport is “a nightmare.”
Yet it seems that a breakthrough is coming at last.
A major obstacle has been difficulties in procuring the land needed for public projects. There are legal uncertainties such as thousands of overlapping claims to title, bureaucratic processes that are complex and riddled with corruption, and the owners well-informed by political insiders are able to hold out for high acquisition prices.
CopyRight – OnTarget 2012 by Martin Spring