Indonesia has thrown off its ‘fragile’ tag, with strong economic management. It is creating some interesting opportunities, says Emily Fletcher, manager of the BlackRock Frontiers Investment trust.
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On the BlackRock Frontiers Investment trust, the strength of individual companies is important. But even the strongest, most well-run company struggles to flourish in a country with weak growth, a poor rule of law, or political disruption. We want both – companies that exhibit strong fundamentals, and a supportive backdrop with positive macroeconomic tailwinds.
Indonesia has many of the qualities we are looking for and is a major country weighting in the BlackRock Frontiers portfolio. Just a few years ago, Indonesia was considered one of the ‘Fragile Five’ – a group of countries that were considered particularly vulnerable to a jump in US interest rates. But through a combination of strong economic leadership, a recent commodities boom, and thoughtful, forward-looking industrial strategy, its attractiveness has increased.
Good economic management
Since President Jokowi came to power in 2014 the country has experienced significant economic development, whereby its current account returned to surplus in 2021.1
The country has kept inflation tightly under control through orthodox and effective monetary policy, which saw rates move from 3% to 6% over the past year. While the central bank has used some foreign reserves to support the currency, they chose to increase rates alongside the US Federal Reserve in order to help prevent capital outflows. With inflation at around 2%, real rates remain attractive and should provide flexibility for policymakers to cut rates as global conditions turn.
President Jokowi has visually lifted people out of poverty, which has had a positive impact on employment, incomes, and confidence, which should continue to feed in future growth. From this lens, structurally, the country has demographics on its side. It is the world’s fourth most populous country – with 280m people2 and a growing middle class.
The commodities boom
The country’s economy has had a natural tailwind from the commodity boom of 2020-2022. Indonesia is a significant coal exporter, a major oil and gas producer, and – perhaps most importantly – a key exporter of metal ores, principally nickel, which are key metals for the world’s transition to lower carbon fuels.
Rising commodity prices boosted the country’s coffers, restoring its current account balance to good health and allowing economic growth to flourish. It propelled the country to 5.3% GDP growth in 2022.3 While this is likely to moderate to 5% in 2023, it is still stronger than the majority of its regional and global peers.
Industrial strategy
However, it is not enough simply to rely on selling commodities to the rest of the world. Relying on natural resources alone will leave a country vulnerable to the caprices of commodity markets. The Indonesian government has recognised this and built a smart new industrial strategy.
The country has been focusing on downstream materials supply chain investment to increase the domestic share of valued-added manufacturing, rather than just mining and exporting raw materials. It has put incentives in place to encourage companies to set up manufacturing plants in the country, rather than just buy their resources there.
Perhaps more importantly, the Indonesian government has set out its ambition for the country to become one of the largest producers of ‘green metals’ globally. It is striving to become a regional hub for electric vehicle batteries. It has a good claim to these ambitions, as home to almost all the metals needed for the battery supply chain. The exception is lithium and it has built partnerships in Africa for its supply.4
Nickel is likely to be particularly important. Indonesia is the world’s largest producer.5 Demand for nickel continues apace as the key component in stainless steel. Estimates suggest that electric batteries could ultimately scoop up almost one-third of overall nickel demand.6
Our investment approach
As the country grows, and the consumer economy flourishes, we believe companies such as Bank Central Asia or Astra International Indonesia could be beneficiaries. The regional banks are helping to drive financial inclusion. Astra International is a conglomerate with interests in financial services, the automotive industry, infrastructure and logistics. We hope they will grow as the nation develops.
Indonesia is the kind of growth story we are looking to support with the BlackRock Frontiers Investment Trust. It is in the foothills of an exciting economic development path and we believe companies in the country will have a natural tailwind.
Sources:
1 Indonesia and the IMF - IMF – 14/11/23
2 Indonesia and the IMF - IMF – 14/11/23
3 Consultation with Indonesia IMF – 22/06/23
4 Indonesia EV hub ambitions SPG Global – 29/03/23
5 Nickel production in Indonesia - Mining Technology – 04/07/23
6 Battery makers respond to surging demand – McKinsey – 18/10/23
Risk Warnings
Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy.
Investors should refer to the prospectus or offering documentation for the funds full list of risks.
Trust Specific Risks
Exchange rate risk: The return of your investment may increase or decrease as a result of currency fluctuations.
Counterparty risk: The insolvency of any institutions providing services such as safekeeping of assets or acting as counterparty to derivatives or other instruments, may expose the Fund to financial loss.
Currency risk: The return of your investment may increase or decrease as a result of currency fluctuations.
Emerging Markets risk: Emerging market investments are usually associated with higher investment risk than developed market investments. Therefore, the value of these investments may be unpredictable and subject to greater variation.
Frontier Markets risk: The Company invests in a number of developing emerging markets (“Frontier Markets”). Frontier Markets tend to be more volatile than more established markets and therefore present a higher degree of risk as they are less well regulated and may be affected by political and social instability and other factors.
Gearing risk: Investment strategies, such as borrowing, used by the Trust can result in even larger losses suffered when the value of the underlying investments fall.
