Thomas White Global Investing
Indonesia Stamp
January 13, 2012
A Postcard from Asia Pacific
Indonesia: Asia’s best kept secret

Signs of the times

The commodities boom in Indonesia has spurred demand for desirable gadgets such as smartphones and scooters, in this 238 million strong economy.

Until recently, any mention of Asia would have conjured up images of China, the backyard of global manufacturing, and India, the hub of IT outsourcing. Typically, Indonesia, despite its large commodities base and strong domestic consumption, rarely has received the attention it has deserved. This is in part due to the public perception that Indonesia is merely a conservative Islamic country that is also home to the largest Muslim community anywhere in the world. Not any longer. The South-East Asian archipelago has been singled out even by generally pessimistic economy watchers, such as Nouriel Roubini, as a growth model worthy of emulation, while rating agencies have also acknowledged the country’s remarkable turnaround.

The global attention showered on the country is hardly surprising considering the progress it has made since the nightmare of the Asian financial crisis of 1997-98, when Indonesia’s GDP contracted 13% a year, not to mention the flight of capital and the collapse of its currency, the rupiah. Roubini now points out Indonesia’s strong domestic consumption, which accounts for two-thirds of its GDP, as well as the country’s low debt, low inflation, a young population, and fast growth. On a visit to Indonesia in October last year, the celebrated economist also put things in perspective when he warned that China, the other big elephant in the room, could be headed for a hard landing, as reported in the Financial Times.

It is obvious that the consumer boom in Indonesia is powering its economic growth. Indonesia sells coal and gas to India and China, while palm oil, another big commodity, is exported to countries far and wide. The money that pours in from these pricey exports feeds the fattened consumer who in turn spends it on desirable devices such as smartphones and the much sought after two-wheel motorcycles. Small wonder Indonesia clocked a growth rate of 6% last year, which made it a leading performer among the exclusive G-20 club of nations. So much so that Indonesians are convinced they want a seat beside the BRIC group of emerging economies.

Still, one data point or a rosy assessment from an economist alone won’t make an economy attractive, but a rating upgrade certainly does. Fitch Ratings recently brought Indonesia back to investment grade, a distinction that the country had lost 14 years back during the financial crisis, according to an FT report. Fitch also forecasted that Indonesia will grow at the rate of 6% until 2013 notwithstanding global economic worries, while the country’s large foreign reserves should help it withstand external shocks.

Such economic environments usually offer enterprising individuals the ideal setting for wealth creation. Understandably, Indonesian tycoons of the likes of Susilo Wonowidjojo and Samin Tan figured on the list of the world’s wealthiest businessmen in 2011 published by Forbes magazine, a pointer to the strength of the Indonesian economy and its robust stock market.

However, beneath the glitz and glamor of exuberant consumerism lurk some fundamental issues, which may need to be addressed. Indonesia is now ranked below the Philippines, Malaysia, and Thailand on a World Bank Logistics Performance Index, according to the Economist. And the country, in many ways, resembles Brazil in its sole dependence on commodities. Published in an FT report, Fitch cautioned that Indonesia, with its economy growing at a decent rate, has to be on its guard against “structural weaknesses” such as corruption, low average incomes, and poor infrastructure. For instance, the country’s manufacturing sector, the core of any growing economy, is lagging behind other segments. Alongside, a huge share of Indonesia’s coveted consumer goods is imported. Yet, these are problems not unique to Indonesia, and often pop up as familiar threads running through most commentaries on fast-growing emerging markets.

Encouragingly though, Indonesia recently has made some moves in the right direction. The country has proposed a land acquisition bill, which if enacted, would get infrastructure projects progressing at a speedier pace. The government also has plans to push the country up the value chain by urging mining companies to set up local smelters, which would help them export higher-value goods and not just raw materials. What’s more, the murmurs against corruption in high offices have grown shriller at the turn of the year as the country’s disenchanted teenagers, who comprise about 28% of the population, have taken to the streets demanding more transparency. Small strides yes. But these are steps that could put Indonesia, already a star performer, on an even faster track yet.

Image Credit: Ivan Bandura under a Creative Commons license

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