Indonesia: an Asian powerhouse

In the late 1990s, Indonesia was “on the brink of anarchy”, says Klaus Methfessel on Wiwo.de. Today, having ditched its military dictatorship, it has become a stable democracy and the second-fastest grower in the G20 – the economy will expand by over 6% this year.

In the last 12 years, GDP has grown by an average of 5.2%. Only China and India have done better. Standard Chartered made headlines last year by saying it thought Indonesia’s economy could expand 13-fold by 2030.

The fundamentals certainly bode well. Inflation has fallen to 5% and public borrowing is down to a “sensational” 25% of GDP. The trade balance is in surplus. The country has a wide range of natural resources – pretty much everything apart from rare earth metals. The 240 million-strong population is young, ensuring an increase in the working-age population for years to come.

The large and increasingly wealthy population is underpinning the domestic economy, which accounts for around 60% of GDP. So unlike most other Asian economies, Indonesia doesn’t depend on exports. It is “well placed to withstand the impact of weaker global demand and should continue to outperform most ofthe rest of Asia”, says Capital Economics.

It also “bodes well for Indonesia’s medium-term outlook” that the improving business environment and low interest rates are stimulating investment and thus raising the economy’s productive potential. Investment reached 32% of GDP last year, up from under 20% ten years ago.

Infrastructure is key, says Florian Willerhausen on Wiwo.de, with the government set to allocate $76bn to it in the next three years. Near-permanent gridlock in Jakarta has deterred foreign investment, while complicated tax laws are also a problem. Politics also bears watching, as Eric Bellman points out in The Wall Street Journal. Recent restrictions on bank and mining firm ownership struck many as unnecessarily protectionist.

Indonesia’s compelling overall outlook has driven the Jakarta Composite index to record highs of late. No emerging market, however, can decouple from global sentiment, which suggests that the index’s short-term prospects are inauspicious. But the US-listed Aberdeen Indonesia Fund (IF) is currently on a discount of 11%, and thus looks worth tucking away.

Merryn

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