Indonesia – the next economic powerhouse
I WAS in Singapore on July 17, meeting up with some fund manager friends when news broke about the bombings in Jakarta. The initial reaction was of sadness and sympathy for the victims and Indonesia in general.
We also thought that it could be an opportunity to invest more in Indonesia’s stock market if it were to correct sharply.
The Jakarta Stock Exchange opened down 2% that morning but quickly recovered within hours and closed the day down by only 0.5%.
While the hunch did not turn out to be correct, Indonesia’s stock market reaction illustrates that investors today have much more confidence in the country’s management.
Similarly, Indonesia’s government also clearly projected its financial confidence later that day when it went ahead and successfully sold 35 billion yen (US$375mil) 10-year samurai bonds to global investors.
Indonesia is no longer a developing economy dependent largely on agriculture and mining. Politically and economically, it has been transformed since the end of the Asian financial crisis in 1999.
My many visits to Indonesia over the past few years, doing the leg work of speaking to many company directors, investment analysts, bankers and so on, have convinced me that Indonesia is on a very strong and progressive path, especially in the last two to three years.
In a way, Indonesia is in a similar situation as China was 10 years ago, when the vast Chinese population moved beyond the subsistence level and consumption power was increasing with accumulated wealth as the economy grew at a fast pace.
Today, Indonesia may already be on the cusp of such a transition.
We know Indonesia has the basic ingredients for success, among which are:
·The fourth largest population in the world at 226 million – which also means a big domestic consumer base;
·Huge natural resources – Indonesia is the largest producer of palm oil in the world and is a major producer of crude oil, natural gas, iron ore, tin, lead, gold, etc.; and
·Young urban population – 50% of Indonesians live in urban areas (a rate higher than in China or India) and more than 52% of the population is aged 20-54. Dynamic young urban population’s productivity growth would be at a faster pace with the right economic environment.
There are compelling reasons to believe that with the right catalysts, Indonesia may grow as fast as China or faster in the years ahead.
Among the key catalysts for Indonesia to emerge as an economic star in the global economy are:
·Leadership in Jakarta continues to provide political stability and sound economic policies: President Susilo Bambang Yudhoyono did a good job steering the economy in his first term and he was re-elected with a strong 60% of the popular vote for another five-year term on July 8.
Yudhoyono’s Democratic Party holds the most parliamentary seats (150) and with his coalition holding more than 56% of parliamentary seats, Yudhoyono will have more say now than during his first term when his party held fewer seats (55) than other coalition partners.
The current leadership team has a good track record and credentials in managing the economy; that includes the Vice President-elect Boediono, who was Finance Minister and Central Bank governor before, and the current Finance Minister Sri Mulyani Indrawati, both of whom are well respected technocrats.
·Infrastructure development: Indonesia has a pressing need for great infrastructure like many developing nations.
The mega infrastructure proposed during the first term of Yudhoyono’s presidency did not take off well, but with Yudhoyono now having greater control over the parliament, this is likely to change.
In response to the economic downturn, Indonesia set aside US$7.5bil in the 2009 budget for infrastructure spending and an additional US$703mil for labour intensive infrastructure projects.
Infrastructure development will help spur economic growth, improve efficiency in Indonesia, much like how such investments boosted the economies of Malaysia in the 1990s and China in 2000s.
·Banking system reform continues to provide the lifeblood for the economy to grow: The banking system underwent drastic reform after the Asian financial crisis with the Indonesia Bank Restructuring Agency, resulting in the demise of insolvent banks and ownership changes in major private banks.
The recapitalisation and reform resulted in one of the most liberalised banking systems in Asia, with little restrictions on foreign ownership.
The banking reform also fostered healthy competition and that in turn has benefited many Indonesian companies and consumers alike.
In Indonesia, the household debt to gross domestic product ratio is 11.2, one of the lowest in the region when compared with Taiwan (53.8), Hong Kong (53.2) or Malaysia (46.7).
This means that consumers not only have room to borrow for large purchases such as cars and homes, but banks also have huge opportunities to sell their loans to Indonesian households.
Ten years ago, banks preferred to lend to big corporations and the average Indonesian would have difficulty getting consumer financing, plus they would have had to pay interest rates in excess of 20% a year.
Today, Indonesian banks are actively courting consumers to borrow from them.
In addition, the bank base lending rates have declined substantially (see chart) and home mortgage rates, for example, are now below 10%, the lowest ever.
·Confidence of Indonesians in their economy and stock markets: People I met over the past two to three years, from senior management of companies to young executives, are confident about the prospects in Indonesia. This is also a reflection of how they overwhelmingly voted for Yudhoyono this past election.
Recent events have proved that Indonesia has not only the economic resilience but also the confidence to be a major economic powerhouse in the future.
Indonesia is moving in the right direction to be a formidable global economic powerhouse.
The rest of Asia should view the emergence of Indonesia not as a threat, but as a motivation for healthy competition.
Just like the emergence of China, which helped advance the economies of North Asia such as Taiwan, South Korea, Hong Kong and Macau in the past 20 years, I believe Indonesia’s economic growth in the next decade will do the same for South-East Asia.