Foreign investment in a country’s stock or bond markets “is often nicknamed hot money, with good reason”, says Shuli Ren on Bloomberg. “It moves fast, but not always in the right direction.” This year, for instance, Brazil has been the hot favourite among emerging-market investors, whileforeign investors have been net sellers of Indonesian stocks – even though they have hit a record and the fundamentals remain encouraging.
Last June, for instance, credit-ratings agency Standard & Poor’s promoted Indonesian paper from junk to investment grade, becoming the third of the three main ratings agencies to give a seal of approval to the economy’s progress in recent years. Under president Joko Widodo (known as Jokowi), who was elected in 2014, the economy has cut red tape, reduced fuel subsidies and introduced a tax amnesty to increase revenue and temper the deficit. That has produced cash to spend on infrastructure.
External borrowing has been cut. Both the budget deficit and the current-account deficit now look “manageable”, according to investment bank DBS. The external deficit is down to 1.8% of GDP. The good news has not gone unnoticed, adds Ren. The World Economic Forum has upgraded Indonesia’s competitiveness ranking to 36th this year, up from 41st in 2016, calling it “one of the top innovators” in emerging markets.
The short-term cyclical outlook is also auspicious, as Börse Online points out. Indonesia exports commodities including natural gas, rice, palm oil, tin and copper, so the rebound in raw materials prices has helped, and a fall in inflation has produced scope for interest-rate reductions. Consumption growth is a steady 5% year-on-year, says DBS. GDP should expand by 5.3% next year.
The political backdrop, however, bears watching, says The Economist. A more uncompromising version of Islam appears to be spreading. An ally of Jokowi’s was imprisoned by Islamists on trumped-up charges after he ran for re-election as governor of Jakarta, the capital city.
It’s far from clear Jokowi will be re-elected, which could hamper vital further reforms, such as simplifying rules governing how much of an industry can be in foreign hands. For now, however, Indonesia, with a huge domestic market and promising demographics, still looks appealing. The Aberdeen Indonesia fund (NYSE: IF) is on a 7% discount to its net asset value.