Indonesia: time to buy

Along with India, Indonesia has borne the brunt of the emerging-market sell-off. The Jakarta Composite Index has slumped by 12% in a fortnight.

All emerging markets have been hit now that the threat of tighter money is looming in the US, making emerging assets less appealing. But Indonesia's recent data haven't impressed investors either, notes Bloomberg.com. Annual GDP growth has edged below 6% for the first time since 2010. Exports fell by 4.5% year-on-year in June as commodity prices softened. Inflation is at a four-year high of 8.6%. The central bank has had to raise interest rates, tempering growth further.

But the main worry for investors is the unexpectedly large current-account deficit 4.4% of GDP that Indonesia notched up in the last quarter. This deficit with the rest of the world means that the country needs foreign money to fund its economy. Countries with external deficits are thus seen as especially vulnerable to capital outflows from emerging markets to less risky ones.

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However, "despite the gloom, all is not lost for Jakarta", says Abheek Bhattacharya in The Wall Street Journal. The foreign capital that plugs the current-account gap is largely made up of foreign direct investment (FDI) flows. These are far less prone to swift reversals than foreign investments in stocks or bonds, so-called hot money' that can turn tail swiftly. Last year FDI comprised 58% of Indonesia's deficit, compared to 23% of India's in the year to March.

Moreover, Indonesia has reduced fuel subsidies, which had boosted oil demand and hence oil imports. These, along with ebbing exports of other commodities, are the reason Indonesia notched up its first current-account deficit since 1997 last year, says The Economist. According to Nomura, the deficit is now on track to shrink to 2.8% of GDP.

And while further interest-rate hikes designed to defend the rupiah will hamper growth, the long-term story is positive. Indonesia has a young labour force and the number of middle-class consumers is set to double by 2020. So Indonesia is far less dependent on exports than most of Asia. Public debt is only 25% of GDP and household debt is also low. The market jitters have raised the discount to net asset value of the US-listed Aberdeen Indonesia Fund (NYSE: IF) to an unusually large 13%. Time to stock up.

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