HOME > News & Trends

Indonesian Reforms Key for Economic Growth, Investment Opportunities

Like most bottom-up stock pickers, Kenneth Lowe, portfolio manager, and Sid Bhargava, research analyst at Matthews International Capital Management, have been able to successfully find a number of different and interesting investment opportunities in Indonesia, in sectors as diverse as utilities and financial services.

But like most other investors, they are also keen to see some macro changes take place in Indonesia, an economy that over the past few years, has been growing steadily in importance within the emerging markets universe. Those changes, they say, would help to make Indonesia much more attractive to foreign investment and would help bring about greater and more long-term economic growth.

When and to what extent these reforms would come into effect is yet to be seen, since both candidates in Indonesia’s recent presidential elections, Joko Widodo and Prabwo Subianto, have claimed victory. Although most polls indicate that Widodo, who’s popularly known as “Jokowi” and is the governor of Indonesian capital city Jakarta, is in the lead, the official word won’t be out till July 22, when election results from the thousands of islands that make up the Indonesian archipelago will be tallied up. And it’s only after that date that investors will have a clearer picture on who will deliver and, more importantly, how they will deliver several much-needed reforms. In the run-up to that date, here’s how Lowe and Bhargava see Indonesia:

Long Term Strengths/Short Term Challenges, Including Corruption

Indonesia is the largest economy in Southeast Asia and has been growing at a nice clip. It has the trappings necessary for long-term economic growth, Lowe said, and its demographics are particularly favorable, since half the country is under the age of 30, which means that over time, domestic consumption will be a key driver of economic growth.

However, making sure that that can happen by enabling the right kind of environment will be key for the new president, and to a large degree, that means encouraging productivity by making the corporate sector much more open, transparent and vibrant.

Corruption is a big problem in Indonesia and “a lot of the industry sectors typically have powerful, well connected incumbents in place, which may be good from a minority shareholder perspective but it’s not good in the long-term,” Lowe said.

“There’s scope for productivity gains, which would translate to GDP growth, but industry is still dominated by the Old Guard, as it were, and it would be healthy for them to face some competition.”

Indonesia also depends quite heavily on exports to China, whether that be coal or palm oil, but now, “it looks as though the decade of Chinese growth that has helped Indonesia is now starting to top out,” Lowe said. In that same vein, Chinese goods have been flooding the Indonesian market in the past years, but many of these can be produced in Indonesia itself for domestic consumption, Bhargava said, given the right environment.

Cutting Fuel Subsidies/Investing in Infrastructure a Priority

Perhaps the most crucial item on the new president’s agenda is the issue of fuel subsidies. Indonesia spends around 12% to 13% of its income on fuel subsidies, Bhargava said, and this has proven a real drain on finances, particularly as the sale of cars in Asia continues to rise and oil prices increase. Fuel subsidies help keep prices stable for the Indonesian people, but things have reached a point where the regime has to be revised, he said, and both presidential candidates have said they would address the issue.

Because of the hefty fuel subsidy bill, Indonesia has neglected spending on infrastructure, and “things have now reached a place where there’s a bit of a mismatch between growth and infrastructure,” Bhargava said, “ and whether it’s roads in urban areas like Jakarta, or irrigation in agricultural areas, infrastructure has been neglected.”

Both presidential candidates have verbally committed to seriously beefing up infrastructure in the country. However, doing so will also mean creating a conducive investment climate for infrastructure finance, Lowe said. Many planned projects have not come to fruition because of the existing legal framework for land grants, which are not favorable for investors, and make it difficult to acquire land. Unless this also changes, then it will be difficult for infrastructure spending to take off.  

A Strong Leader is Key

Indonesians have been deeply disappointed with the inability of outgoing president, Susilo Bambang Yudhoyono, to deliver on the above and other key issues, despite making promises.

Which means that what’s needed above all else, for the domestic population as well for foreign investors, is strong leadership, Bhargava said, and a president who can see through and carry out reforms, even if they’re tough and controversial. Both candidates have made the right speeches and included the key issues as part of their campaign, but it remains to see who will actually be able to deliver.

While Subianto is one of the Old Guard and harks back to the days of dictatorship in Indonesia (he was married to the daughter of former president Suharto, who was in power for 31 years), Jokowi, although highly popular, hasn’t been mayor of Jakarta for very long, Lowe said, which makes it difficult to assess what he’s really capable of. “He doesn’t have a track record like [Narendra] Modi in India, so it’s very difficult to measure,” he said. “What Indonesia needs, though, is someone who can get things done, even if that’s going to be difficult.”

Page 1 of 2
Single page view Reprints Discuss this story
This is where the comments go.

Related

Indonesia Facing Daunting Problems Despite Strong Past Economic Performance

Indonesia continued to grow during the financial crisis even as the economics of other countries were contracting at alarming rates.

Advertisement. Closing in 15 seconds.