Amid persistent global uncertainty, resilient Indonesia is a rare safe haven. Or is it?
Recent weeks have been kind to the fourth most populated country in the world. When even emerging stars like China or Brazil are downgrading their prevision for this year, the archipelago is roaring ahead: strong domestic consumption has shielded the country from a general slowdown in global trade, and should allow it to clock another 6 per cent growth for the fifth consecutive quarter. Unsurprisingly, the country has become the darling of foreign investors.
This is not just a fad - on the face of it. Indonesia's best asset, its increasingly rich 240m population, constitutes a powerful, sustainable motor for domestic driven growth - its dependence on exports amounts to only 20% of GDP, as opposed to more than 60% in Thailand and Vietnam. Demography also helps, with a big numbers of youngsters soon joining in the workforce, and a low dependency ratio.
But this resilience is also the fruit of sound macro economic policy: key structural reforms have been implemented by the government, such as changing laws and unlocking funds to develop infrastructure; the financial system is well managed; inflation expectations are well anchored, thanks to a fine tuned interest rate policy; prudent fiscal management has contained both deficit and debt to a very healthy level.
Such robustness has recently been recognized by Moody’s, who upgraded Indonesia to investment grade a few weeks ago. And by investors, who’ve poured much hard cash in the country over the past few months. All this has strengthened the view that Indonesia is one of the only emerging markets able to 'decouple' from the uncertain cycles of Western macroeconomics – and lifted the Indonesian Rupiah to new heights.
How long this will last, however, is the real question. Indonesia's consumption boom largely relies on Indonesia's workers earning better wages. But quite a lot of salaries are closely linked to how commodities perform, even if few jobs directly depend on mining nationwide: a large part of employment is created by agriculture - in particular production of palm oil - and mining equipment makers and infrastructure companies, both large employers, depend on high commodity prices to maintain their activity. So domestic consumption is actually quite exposed to a potential (and probable) downturn in those markets this year.
The long-term macro policy is also in question. Even if nothing is firmly in the cards yet, the government has announced measures to support the economy in case global demands severely slumps. This would involve more government spending, and possible interest rate cuts. But the devil of inflation is still lurking behind the corner, and Indonesia has a history of cutting rates before everyone else. A premature loosening of fiscal and monetary policies could bring the villain back on stage.
Finally, whilst Indonesia's protection from trade headwinds is a good thing in this gloomy climate, it also means that it will benefits less once things start to improve. The rally of funds have made the Jakarta stock exchange a relatively expensive one, so investors, reassured by better macro prospects, will start to look for cheaper alternatives. They will, above all, prefer to invest in stocks and markets more exposed to trade cycles. An early improvement of the global trend is of course optimistic - but it’s worth keeping this in mind for the long run.
So Indonesia looks good, but maybe it’s not quite the shiny shelter you see from afar. Now, its 240m people are unlikely to stop consuming overnight – and it's a massive pool yet to be tapped by many multinationals. Perhaps this is where golden opportunities really abound.