29 October 2015

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Sometimes it seems that a country’s official motto is come up with as an afterthought, offering little insight into the society it is describing. This can’t be said for Indonesia: “Bhinneka Tunggal Ika” (“Unity in Diversity”) speaks to both the strengths and challenges to be found in Southeast Asia’s largest economy.

Indonesia is one of the most ethnically diverse countries in the world. Almost 250 million people, speaking more than 300 local languages, live across the county’s 17,000 islands. The population ranges from a modern urban elite in the capital Jakarta to hunter-gatherers in the remote far western province of Papua. This scale and diversity has in the past made it difficult to harness the country’s full economic potential.

Headway amidst the headwinds

Over recent years, Indonesia has made some great strides. Now a member of the G20 group of nations, real GDP has averaged growth of 6% in the past decade while GDP per capita has advanced from USD1,400 to USD3,500 in the same period, according to the World Bank. Since the fall of the Suharto dictatorship in 1998, Indonesians have formed a robust democracy. The election of Jokowi – like many Indonesians he’s commonly referred to by a contraction of his full name – in May last year signals an exciting new era in politics.

The country is, however, facing some significant near-term headwinds. As one of the world’s mining powerhouses, Indonesia has been negatively affected by the fading commodity boom, while the economy is also facing the era of abundant global liquidity drawing to a close. Growth is slowing and the rupiah has come under severe pressure. Progress towards the much anticipated (and needed) improvements to infrastructure services has been disappointing leaving investors questioning Indonesia’s growth and reform story. The end result? Indonesia has been one of the worst performing markets in 2015, falling 18% in USD terms, as at 27 October, according to Bloomberg.

The view from the ground

Our recent visit to Jakarta confirmed as much. Both consumption and investment sentiment remain weak. Discretionary spending, such as automobiles and high end fashion, has been hurt by the Jokowi government’s fight against tax evasion and corruption. Property demand has fallen victim to macroprudential measures imposed by the central bank, aimed at mitigating systemic risk, and slower mortgage disbursement. Most corporates we met told us they are adopting a “wait and see attitude” to investment plans and keeping a close eye on progress infrastructure spending.

However, there are glimmers of hope. Construction companies are confident that infrastructure spending will accelerate in second half as government departments are under pressure to show more progress on meeting Jokowi’s ambitious targets. Contractors are starting to see a pick-up in their order books and remain optimistic they will meet their 2015 targets with a strong finish to the year.

Better days ahead

From an investment perspective, Indonesia has become more attractive. What was an expensive market has become a lot cheaper, offering opportunity for those prepared to look hard. With many investors assuming more bad news, we are getting ready to lean against the consensus and back the notion that the best days of Indonesia are not behind it. Similar to its land mass and population, the Indonesian market also offers a diverse set of opportunities. These range from state owned and private sector banks, both soft and hard commodities as well as some of the fastest growing consumer companies in Asia. As the Dutch East India Company discovered when it established trading posts in the 1600s, variety is indeed the spice of life in this fascinating country.

CARS ref: RSM-2297
This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or financial product or to adopt any investment strategy. The opinions expressed are as of 27 October 2015 and may change as subsequent conditions vary.

Real GDP has averaged growth of 6% in the past decade.