Indonesia’s day in the sun

Following years of reform, Indonesia has finally emerged as Asia's latest economic powerhouse.

Not long ago, Indonesia was considered a basket case hit by the Asian crisis and mired in autocracy and violence. Now it's a largely peaceful democracy that has gradually opened up its economy, got its inflation and public debt under control 6% and 25% of GDP respectively and gained a reputation as a new Asian powerhouse.

"Long overshadowed by China and India, Indonesia is finally enjoying its day in the sun," says Joe Cochrane in The New York Times. Growth in Asia's top two economies has moved down a gear, but Indonesia has kept humming. Annual GDP growth has averaged 5.4% since 2000; in the global crisis of 2009 it merely dipped below 5%.

A key advantage is that, unlike most of the region, it doesn't depend on exports, so if global demand for its many commodities is subdued, as it is now, the domestic economy, worth 60% of GDP, will offset the external slowdown.

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The country has 240 million people and a young labour force, which suggests that strong recent consumption can continue for years to come. According to the Boston Consulting Group, the number of middle-class consumers in Indonesia should double by 2020 to 141 million more than the population of Thailand. Household debt as a proportion of GDP has reached just 20%, one of the lowest ratios in the region.

Eye-catching statistics, such as the first quarter's18% annual jump in car sales, has prompted a surge of foreign direct investment. Between January and March, it surged by 27% year-on-year to a new record.

Late last year cosmetics giant L'Oral opened its biggest factory in the world in Java province. General Motors has invested $150m in an Indonesian plant and says this represents "a huge vote of confidence" in the country.

So the overall outlook is bright, although it would be brighter if the government clamped down further on corruption and red tape, says Cochrane. An interest-rate hike is looking likely to temper inflation in the near future inflation remains above the central bank's 3.5%-5.5% target range. That could subdue the fast-rising Jakarta Composite Index, which has just hit a new record above 5,000.

It looks pricey on a price-to-earnings ratio of 19, but investors can gain access through the US-listed Aberdeen Indonesia Fund (IF), which is weighted towards the domestic economy. It currently trades on a discount to net asset value of 9%.