Economic outlook brightens for Indonesia

Indonesia's rupiah may have slipped against the dollar, but the economic backdrop remains favourable.

It's been a bad month for emerging-market currencies so far, with Indonesia's rupiah slipping to its lowest level against the dollar since the Asian crisis in the late 1990s. Luckily, this shouldn't mean that another crisis is on the cards; it's more a question of dollar strength than Indonesian weakness.

Indonesia's current-account deficit is a sustainable 3% of GDP, so it should not be vulnerable to capital fleeing the country as higher American interest rates make emerging markets less appealing.

Indeed, investors have been encouraged by the newly elected president, Joko Widodo, who has made progress in a key area: trimming fuel subsidies. This should free up money to invest in infrastructure, which is crucial to boosting long-term growth.

Government spending on wasteful subsidies should decline to just 1% of government spending this year, down from 15% previously, says Capital Economics.

The economic backdrop remains favourable. Growth has eased from 6% in 2012 to 5% last year as Chinese demand for commodity exports has weakened. But falling oil prices have kept a lid on inflation and consumption is holding up well, says Deutsche Bank. There is room for interest-rate cuts.

Longer term, the domestic economy should keep growing rapidly. Almost half the 250-million-strong population are under 24. A new consumer society is establishing itself, says Shaun Port in City AM. Ikea launched its first store in Indonesia last year. The overall market looks pricey, but the US-listed Aberdeen Indonesia fund (US: IF) is trading on a discount to net asset value of 11%.

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