Indonesia: an intriguing market for investors

Joko Widodo, Indonesia&#039;s president © Muhammad Fadli/Bloomberg via Getty Images — President Joko Widodo is coming to resemble Indonesia’s oligarchy

(Image credit: Joko Widodo, Indonesia's president © Muhammad Fadli/Bloomberg via Getty Images)

“There are cruel limits to how much and how fast a nation can change,” says Una Galani on Breakingviews. Observers had high hopes for Indonesian president Joko Widodo (known as “Jokowi”) when he came to power in 2014. But instead of taking on his nation’s “entrenched oligarchy”, which has long held back development, he has increasingly “come to resemble” it.

A new biography by Ben Bland praises Jokowi for his efforts to remove red tape and boost infrastructure spending, but also criticises a government marked by “protectionist instincts” and capricious policymaking. A case in point was last year’s decision to spend $33bn on moving the capital city out of Jakarta and into the jungle of East Kalimantan.

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The IDX Composite, the local stockmarket’s benchmark index, has tumbled more than 16% so far this year. It has gained an underwhelming 4% in the six years since Jokowi took office. The country’s rupiah currency has been one of Asia’s worst performers this year, shedding more than 5% against the US dollar.

Bullying the central bank

Parliamentary proposals to change the mandate of Bank Indonesia, the central bank, and bring in more direct political control have spooked markets, says Gareth Leather of Capital Economics.

Central bank independence was “already in question” after it stepped in to fund directly $40bn of this year’s ballooning government budget deficit.

Still, policymakers know they cannot push things too far. Foreign investors own about 30% of government bonds, so Jakarta risks massive capital flight if it doesn’t offer a stable investment environment. Indonesia depends on foreign capital to fill the gap created by twin government and current-account deficits, says Trinh Nguyen on carnegieendowment.org. So the economy is at the whim of foreigners’ “appetite for risk”.

Yet foreign money managers have good reason to send in their cash. With 268 million people this is the largest economy in southeast Asia. A young population will provide a favourable tailwind for “the next 30 years”.

A small manufacturing sector means that exports account for just 18.4% of GDP, far less than neighbouring economies. At a time of slowing global trade a strong focus on the domestic market may prove a strength.

With GDP per capita of just $4,135, the economy has ample room for catch-up growth. Patient investors may one day be rewarded.

Alex is an investment writer who has been contributing to MoneyWeek since 2015. He has been the magazine’s markets editor since 2019.

Alex has a passion for demystifying the often arcane world of finance for a general readership. While financial media tends to focus compulsively on the latest trend, the best opportunities can lie forgotten elsewhere.

He is especially interested in European equities – where his fluent French helps him to cover the continent’s largest bourse – and emerging markets, where his experience living in Beijing, and conversational Chinese, prove useful.

Hailing from Leeds, he studied Philosophy, Politics and Economics at the University of Oxford. He also holds a Master of Public Health from the University of Manchester.