Indonesia has now fully recovered from Asian crises of late 1990s as economy has been restructured and crises related debt has been repaid to IMF and other debtors. However, only now, 19 years after the crises, infrastructure investments are gaining traction while at the same time both corporate and consumer confidence have recovered to pre-crises levels. Thus, as current drivers are rather strong and structural, it will take more than external hiccups to stop the positive developments that currently under way.
Base for investments
- Demographics: Fourth largest population globally with 255m people and 50% of population is younger than 30 years old. This will create structurally sound base for long-term economic growth.
- In terms of GDP, Indonesia is 15th largest economy in the world in 2016. Ranking should improve considerable within the next 15 years as Indonesia overtakes many top-10 countries such as UK, Italy, Spain etc.
- Indonesia’s nominal GDP was USD866bn in 2015e, whereas India’s nominal GDP was USD1700bn – this was created with only 1/5 of the population of India. Thus, Indonesia’s growth has been very efficient.
- Stock market to GDP ratio is only 50% (Q1/2016), whereas in other Asian countries same ratio is 80-200%. We see that Indonesia’s ratio will climb towards Asian average of around 100%.
- Low starting base in nearly all economic sectors. This will create strong structural growth base for at least the next 5-10 yrs.
- FDI (foreign direct investments) flows have been robust in recent years due to rapidly expanding middle class and low cost production. Beneficiaries of this trend include industrial property players, contractors, media, consumer companies etc.
- President Joko Widodo (Jokowi), who was elected in 2014, has been very efficient in implementing much needed economic reforms: fuel subsidy was abolished in early 2015, operating environment for both foreign and local corporates have been relaxed, red tape has been cut, Tax Amnesty program has been implemented etc.
- Infrastructure investment cycle has gained speed during Jokowi’s tenure. Infrastructure improvement is the most single important factor to follow in Indonesia as country’s logistics costs are still above 25% of GDP.
- Middle class expansion: 50m new consumer will be classified as middle-income earners by 2019 due to rising wages and attractive demographics. This will create demand for non-traditional products from banking to luxury products. Beneficiaries include retails formats, financials, property, consumer goods companies.
- Tourism (ex-Bali), O&G efforts, organized retailing, insurance (both life & non-life), food production, organized farming (ex oil-palm and rubber), EPC projects, ports etc.
- Indonesia has no shortage of ideas and new themes emerging.
- In Indonesia, like in many other emerging countries, politics have usually been the main risk factor. Presidential elections in 2014 were one of the most important single political events in Indonesia’s history, as Joko Widodo was elected to lead the country. Reform oriented Jokowi is the first President, that has no linkages to corrupted Suharto era political or business circles. Jokowi represents completely new kind of thinking compared to earlier leaders.
- Like in many other relatively new and developing democracies, there are many parties with vested interests who wish to have what they say, thus there are plenty of colorful political noises going around, that need to be filtered from the real action that’s happening.
- Inflation in Indonesia during past 30 years has been closer to 10% than 5%, but as Indonesia Central Bank (BI) gained independence in 2004, they have started to target inflation, where BI has been rather successful in recent years. In Q4/2016 inflation was around 3%.
- Indonesia is the largest Muslim country globally (85% of population), but it is also the most moderate and secular one. After unfortunate Bali bombings of 2002, there have been no major incidents from radical groups. In addition, government is very much against any radical movements. Generally speaking, when country grows wealthier and middle income group expands, there tend to be less and less radical movements as larger part of the population is more satisfied with their lives.
- As Indonesia belongs to active volcanic and earthquake prone zone globally with Italy, Mexico, Chile and similar countries, there is always a risk of more volcanic action and earthquakes. This risk, however, is already implied in Indonesia’s risk premium.
- In Indonesia, domestic investor base (both institutional and retail) is still relatively small compared to neighboring countries such as Malaysia and Thailand, where domestic institutions support capital markets when global asset market act in volatile fashion. Thus, Indonesia is more susceptible for volatility compared to other countries where capital markets are more developed and more liquid.