Indonesia - unlocking the potential
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Indonesia – unlocking the potential

Dara White, Head of Global Emerging Market Equity, and Krishan Selva, Client Portfolio Manager, look at why the future could continue to be very bright for the country

  • Previously Indonesia has been vulnerable to the commodity cycle, but the country is forging a unique path to unlock its economic potential
  • Government policies have boosted exports, economic growth and attracted much needed long-term investment
  • The country has witnessed an impressive resurgence, with improved macroeconomic performance and attractive investment opportunities

It’s often cited that the larger a country, the more its economic potential. If this is the case, the economics of land and labour are certainly in Indonesia’s favour. It is the fourth most populous country in the world with 282 million people1, and with ageing demographics making headlines in recent months, Indonesia’s is certainly favourable with a median age of 292, younger than both China and India. Its young, educated and growing middle class, all 167 million3 of them, will be vital for the consumption of goods and services which drives economic growth and investment. Furthermore, Indonesia’s location between the Pacific and Indian oceans connects East Asia, South Asia and Oceania, making it ideal for trade. In fact, located off Indonesia is the Strait of Malacca, one of the most important shipping lanes in the world. Trade is an essential part of the Indonesian story.

Bucking the Asia trend

The playbook for many Asian economies has been the migration from rural subsistence farming into urban factory work, making goods for export. Indonesia’s competitive advantage lies in its abundance of natural resources such as palm oil, coal, iron, steel and nickel, which it has been successful in exporting. During the 2000-2008 commodity cycle the economy grew significantly, gross domestic product (GDP) per capita increased threefold (Figure 1) and foreign direct investment (FDI) was substantial. However, following the global financial crisis commodity prices plummeted, exports stagnated and FDI slowed materially. The country was too susceptible to the boom-and-bust nature of the commodity cycle and its implications on public spending, specifically education and healthcare, were concerning for its population.

Figure 1: Indonesia GDP per capita (US$), 2000-2024
Chart showing Indonesia GDP per capita (US$), 2000-2024

Source: Bloomberg, as at June 2024. Figures for 2023 and 2024 are forward-looking

For Indonesia to achieve its potential it required a competent government with supportive policies and structural reforms. In 2014 it elected a charismatic leader, Joko Widodo, more commonly referred to as Jokowi. He was a successful businessman before breaking into the political scene at a local level and working his way to the top of government with a reputation for getting things done.

Infrastructure investment lays the foundations for future economic growth and productivity, which in turn can be a catalyst for further FDI. Jokowi has focused his political capital on structural reforms to support economic growth and infrastructure projects and under his leadership there have been some significant infrastructure projects: 18 ports, 21 airports and 17,000km of toll roads have been built4. These projects have among other things helped create jobs, lower distribution costs and provide social mobility.

Catalysts for success

One of the key successes under the Jokowi government is the industrial policy of downstreaming, which involves banning the export of low value raw commodities – tin ore in 2014, nickel ore in 2020, with bauxite expected in June 2023 – in favour of exporting finished products, bringing more of the value chain home. Nickel is a great example of how this policy has benefited the economy. Nickel is a key component for electric vehicle (EV) batteries and as the world’s largest producer of nickel, Indonesia is expected to become the fourth largest producer of the “green commodities” used in batteries and power grids which will generate significant revenue for the country. 

The Jokowi government’s industrial policy has incentivised multinational companies to invest heavily into Indonesia, from building refineries that process raw commodities to setting up a special EV ecosystem fund to help develop this emerging industry. In fact, since the raw nickel export ban, the number of nickel smelters has grown from two in 2021 to 15 and is forecast to reach 30 by the end of 20235.

Downstreaming has been a significant catalyst for Indonesia’s economy. Its current account is in surplus, with iron and steel having contributed 70% of the trade surplus over the past 12 months6. This has boosted foreign reserves to record levels and supports a more robust economy and currency. More recently we have seen Indonesia become one of the more resilient emerging market economies (Figure 2), maintaining relatively low inflation even as food and energy prices surged elsewhere due to the war in Ukraine, and successfully weathering the impact of higher US interest rates and a strong dollar. The reopening of China’s economy has also been a tailwind for Indonesia. China accounts for 26% of Indonesian exports, up from 15% in 2019. Indonesia now runs a trade surplus with China, versus a $17 billion deficit in 20197, again mainly because of downstreaming. The resulting macroeconomic stability has had positive knock-on effects for the bond market and supports the financial sector.

Figure 2: G20 countries forecasted growth in 2023
Chart showing G20 countries forecasted growth in 2023

Source: Bloomberg, as at June 2023

So we are certainly optimistic on the Indonesian economy. However, we must also evaluate the risks. We will be monitoring the next election, set for February 2024. Presidents can only serve two terms in Indonesia and Jokowi’s era will come to an end. While there is an expectation of continuity to the path he has laid, the leading candidates share popularity and are hard to separate.

Geopolitics is another area to monitor and can play a critical role in Indonesia reaching its potential with FDI crucial to it growing its economy faster. US-China tensions have been making all the headlines, and Indonesia has maintained a balance between the two nations. However, given significant investment from China any potential sanctions may risk slowing potential growth. Indonesia has been proactive, though, learning the lessons from the decade of stagnation. As of 2021 exports were only 22% of GDP8 and government policy to focus on downstreaming and consumption has been pivotal to this. The government has also been savvy on the global stage, demonstrated by Jokowi’s recent visits to both Moscow and Kiev, pushing for peace in Europe, and illustrates Indonesia’s neutral status. Indonesia also hosted the G20 in Bali, cementing its growing presence in the region.

Looking ahead

The positive news for investors is that Indonesia remains on a solid footing, supported by strong macroeconomic fundamentals and its consumer base. The International Monetary Fund recently forecast that the country is set to be one of the top growing economies over the next five years. Total GDP is expected to be $7.3 trillion by 20459, a projection which would rank it in the top five globally. GDP per capita is rising, from $700 in 2000 to $4,700 now10 – a more than 10% compounded annual growth rate. All of this points to consumption being a major economic driver, and it currently accounts for more than 60% of GDP11.

As investors this is music to our ears and creates opportunities across sectors: from financials, where their banks’ conservative nature and strong economic oversight will benefit from the increased financial penetration; to consumer discretionary, where the likes of auto-manufactures will benefit from the wealth effect as well as the newly developing EV supply chain.

If the government can continue to support the economy with proactive policy the future will continue to be very bright for Indonesia. The country is a prime example of the power of structural reforms on an economy, and all hopes are that the policy momentum continues. If it stays on its current path it could become one of the leading economies in the world. We view Indonesia as an important part of the emerging markets universe and an important source of investment opportunity.

20 June 2023
Krishan Selva
Krishan Selva
Client Portfolio Manager
Dara White
Dara White
Global Head of Emerging Market Equities
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Indonesia – unlocking the potential

1 Based on Worldometer elaboration of the latest United Nations data, 30 May 2023
2 World Economics, May 2023
3 World Bank, 2023. Concrete middle class accounts for 52 million people, who spend $7.75-$38 a day, and aspiring middle class accounts for 115 million people who spend $3.30-$7.75 a day
4 PWC, Jokowi Builds 1,700 km Toll Roads, 2.1 Times the Length of the Previous Era, 29 September 2022
5 Reuters, January 2023
6 BPS & Verdhana research, 2023
7 CEIC, Verdhana research, 2023
8 The Global Economy.com, 2023
9 World Bank, 2023
10 CEIC data, 2022
11 CEIC data, 2022

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This document may be made available to you by an affiliated company which is part of the Columbia Threadneedle Investments group of companies: Columbia Threadneedle Management Limited in the UK; Columbia Threadneedle Netherlands B.V., regulated by the Dutch Authority for the Financial Markets (AFM), registered No. 08068841.

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Important information

For use by professional clients and/or equivalent investor types in your jurisdiction (not to be used with or passed on to retail clients). For marketing purposes.

This document is intended for informational purposes only and should not be considered representative of any particular investment. This should not be considered an offer or solicitation to buy or sell any securities or other financial instruments, or to provide investment advice or services. Investing involves risk including the risk of loss of principal. Your capital is at risk.  Market risk may affect a single issuer, sector of the economy, industry or the market as a whole. The value of investments is not guaranteed, and therefore an investor may not get back the amount invested. International investing involves certain risks and volatility due to potential political, economic or currency fluctuations and different financial and accounting standards. The securities included herein are for illustrative purposes only, subject to change and should not be construed as a recommendation to buy or sell. Securities discussed may or may not prove profitable. The views expressed are as of the date given, may change as market or other conditions change and may differ from views expressed by other Columbia Threadneedle Investments (Columbia Threadneedle) associates or affiliates. Actual investments or investment decisions made by Columbia Threadneedle and its affiliates, whether for its own account or on behalf of clients, may not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not take into consideration individual investor circumstances. Investment decisions should always be made based on an investor’s specific financial needs, objectives, goals, time horizon and risk tolerance. Asset classes described may not be suitable for all investors. Past performance does not guarantee future results, and no forecast should be considered a guarantee either. Information and opinions provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. This document and its contents have not been reviewed by any regulatory authority.

In Australia: Issued by Threadneedle Investments Singapore (Pte.) Limited [“TIS”], ARBN 600 027 414.  TIS is exempt from the requirement to hold an Australian financial services licence under the Corporations Act 2001 (Cth) and relies on Class Order 03/1102 in respect of the financial services it provides to wholesale clients in Australia. This document should only be distributed in Australia to “wholesale clients” as defined in Section 761G of the Corporations Act.  TIS is regulated in Singapore (Registration number: 201101559W) by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289), which differ from Australian laws.

In Singapore: Issued by Threadneedle Investments Singapore (Pte.) Limited, 3 Killiney Road, #07-07, Winsland House 1, Singapore 239519, which is regulated in Singapore by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289). Registration number: 201101559W. This advertisement has not been reviewed by the Monetary Authority of Singapore.

In Hong Kong: Issued by Threadneedle Portfolio Services Hong Kong Limited 天利投資管理香港有限公司. Unit 3004, Two Exchange Square, 8 Connaught Place, Hong Kong, which is licensed by the Securities and Futures Commission (“SFC”) to conduct Type 1 regulated activities (CE:AQA779). Registered in Hong Kong under the Companies Ordinance (Chapter 622), No. 1173058.

In Japan: Issued by Columbia Threadneedle Investments Japan Co., Ltd. Financial Instruments Business Operator, The Director-General of Kanto Local Finance Bureau (FIBO) No.3281, and a member of Japan Investment Advisers Association and Type II Financial Instruments Firms Association.

In the UK: Issued by Threadneedle Asset Management Limited, No. 573204 and/or Columbia Threadneedle Management Limited, No. 517895, both registered in England and Wales and authorised and regulated in the UK by the Financial Conduct Authority.

In the EEA: Issued by Threadneedle Management Luxembourg S.A., registered with the Registre de Commerce et des Sociétés (Luxembourg), No. B 110242 and/or Columbia Threadneedle Netherlands B.V., regulated by the Dutch Authority for the Financial Markets (AFM), registered No. 08068841.

In Switzerland: Issued by Threadneedle Portfolio Services AG, an unregulated Swiss firm or Columbia Threadneedle Management (Swiss) GmbH, acting as representative office of Columbia Threadneedle Management Limited, authorised and regulated by the Swiss Financial Market Supervisory Authority (FINMA).

In the Middle East: This document is distributed by Columbia Threadneedle Investments (ME) Limited, which is regulated by the Dubai Financial Services Authority (DFSA).  For Distributors: This document is intended to provide distributors with information about Group products and services and is not for further distribution. For Institutional Clients: The information in this document is not intended as financial advice and is only intended for persons with appropriate investment knowledge and who meet the regulatory criteria to be classified as a Professional Client or Market Counterparties and no other Person should act upon it.

This document may be made available to you by an affiliated company which is part of the Columbia Threadneedle Investments group of companies: Columbia Threadneedle Management Limited in the UK; Columbia Threadneedle Netherlands B.V., regulated by the Dutch Authority for the Financial Markets (AFM), registered No. 08068841.

Columbia Threadneedle Investments is the global brand name of the Columbia and Threadneedle group of companies.

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