Indonesia: watch the politics

For all the fuss over emerging market giants, such as China and Brazil, Indonesia has been a better investment in recent years, says Nicholas Pardini on Seekingalpha.com. Since January 2010, the Jakarta Index has risen by almost 50% to a record peak.

Indonesia is often seen as a relative haven. Owing to its huge domestic market it has 240 million people it is less dependent on exports than most of Asia. HSBC notes that exports comprise just over 20% of GDP, compared to 60% in Thailand. Strong consumption and investment offset weaker exports in the final quarter of 2011: annual GDP growth hit 6.5%.

There is ample scope for consumers to flex their muscles further, with mortgage debt at a mere 15% of GDP and interest rates at a record low. The country boasts raw materials ranging from coal and nickel to palm oil and natural gas. Sound economic fundamentals public debt has been reduced to 24% of GDP are further elements of the investment story. Standard Chartered thinks the economy could be 13 times bigger by 2030.

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A word of warning, however, says Lex in the Financial Times: "keep a close eye" on politics. The government had intended to raise the price of subsidised fuel by a third last week, but it was defeated in parliament. This has put added strain on the budget, as the fuel subsidy accounted for 20% of government spending last year, more than capital spending. "In a country that desperately needs to improve its infrastructure, that is misallocation on a grand scale." Expect more populism in the run-up to the 2014 election.

The government is now reconsidering plans to limit subsidised fuel use for private cars, as Capital Economics points out. Failure to reform the fuel subsidy system undermines long-term growth prospects. Meanwhile, the short-term future could also prove bumpy. Fast wage increases, rebounding food prices, loose monetary policy and above-trend GDP growth could all push inflation above target, necessitating eventual interest-rate hikes.

The worsening European crisis is likely to undermine sentiment towards all risky assets, while the market's 2012 p/e of 14 looks expensive compared to the region's 11.5. Investors keen to bet on Indonesia's long-term future may be offered a cheaper entry point later this year.