A pivotal year for Indonesia

Dancersin Indonesia © Getty Images
Indonesia’s tourist industry has enormous potential

The Jakarta index has soared and Indonesia’s economy could now accelerate. But will corruption and religious tension spoil the story? We’ll soon know, says Jonathan Compton.

Investors in emerging markets often overlook Indonesia. It receives a fraction of the media coverage of much smaller Asian economies, such as Hong Kong or Singapore. Yet it has it all. It is the largest country in Southeast Asia. It’s the fourth-biggest country in the world by population, with 268 million people. It contains abundant natural resources – coal, metals, oil, timber and agricultural products – while the seas around its 18,000 islands (of which about 1,000 are permanently occupied) teem with fish.

This century its economic growth has reached 4.5%-5.5% per annum, meaning the economy doubles in size every 15 years. This helps explain why Indonesia’s Jakarta index has risen more than fivefold in sterling terms since New Year’s Day 2000, while British stocks have returned around 20% and their US counterparts about double that. What’s more, Indonesia is about to reach an economic tipping point – something that should turbo charge its growth

Growth could move up a gear…

There are several reasons for this. The first is great demographics: 27% of the population is under 14. This group will soon provide a rapidly expanding pool of labour and eager new consumers and savers; meanwhile, the costs of an ageing population are absent, as over-65s comprise just 6% of the total. There is also a rapid shift in population from the land to the cities. Urbanisation invariably leads to considerable gains in overall productivity, as seen recently in China and in Europe in the 19th century.

Although GDP-per-head in Indonesia has more than doubled since 2000, it is still relatively low at around $4,200. In about four years’ time, at this rate, it will have exceeded $5,000, a threshold historically associated with domestic consumption taking off and credit becoming more widely available. This in turn leads to a rapid expansion in the services sector. Consumption, credit availability and services are the three main supports for all advanced economies.

There is also ample room for Indonesia to borrow more to fund expansion. Public debt is below 30% of GDP (compared with 90% in Britain). If an emerging market has to rely purely on domestic savings – which in Indonesia are low compared with similar countries – to finance development, then investment in vital infrastructure, plant and equipment will be lacklustre, implying lower future productivity and growth.

Finally, Indonesia has embarked on structural reforms such as paring back onerous regulations governing foreign investment and improving infrastructure in some key areas. This bodes especially well for tourism. The country abounds in ancient monuments, spectacular topography, forests, wildlife and pristine beaches, and is also incredibly cheap.
Yet it attracts fewer tourists than tiny Singapore.

In terms of revenue from tourism it earns half that of user-unfriendly destinations, such as Russia. The scope, then, is enormous. Despite all this potential, however, it’s interesting to note that Indonesia is still considered an economic minnow. The value of all its listed companies is about the same as Warren Buffett’s Berkshire Hathaway. This is due to the country’s political, ethnic and religious history and, most of all, endemic corruption. These have hampered growth in the past and continue to threaten Indonesia’s future.