Is 2020 the year to invest in Indonesia?
As the largest economy in Southeast Asia, should we be investing in Indonesia?
Investment Indonesia 2020
Indonesia is not only the largest country in Southeast Asia, it boasts the largest economy, too. This archipelago nation has charted impressive economic growth since the 1997 Asian Financial crisis and is now the world’s 10th largest economy in terms of purchasing power parity and a member of the prestigious G20. Unsurprising, perhaps, that more investors than ever are looking to invest in Indonesia.
In 2014, former Goldman Sachs economist (and creator of the term “BRIC” countries) Jim O’Neil identified Indonesia, along with Mexico, Nigeria and Turkey as the economic powerhouses of the future. He gave them the investment acronym MINT and excited the world with his expectation that investment opportunities in Indonesia would show strong growth and provide high returns for investors over the coming decade.
While different, the four countries had many important common qualities including a young population (Indonesia 264m) that makes a strong workforce, business-growth friendly legal systems and governments with a pro-economic growth stance.
Indonesia has come from one of the poorest countries to a lower middle-income nation with a GDP per capita that has risen from $823 in 2000, to $3,932, in 2018.
The World Bank reports that over the medium term, the country’s “economic outlook continues to be positive, with domestic demand the main driver of growth.” It comments that “supported by robust investment, stable inflation and a strong job market, Indonesia’s economic growth is forecast to reach 5.2 per cent in 2019.”
Annual headline inflation is currently 3.2 per cent, having been stable for 4 consecutive years at less than 3.9 per cent, and according to Statista, is forecast to continue this way until 2024.
Indonesia is certainly blessed by its advantageous geographical placement that offers everything from idyllic beach islands and world-class diving to stunning mountains and remarkable rainforests. Tourism has grown from 2.49 million visitors in 2010, to 6 million in 2018 and the trend is expected to continue. Even the Obamas have been spotted in Bali.
The government looks keen to capitalise on its popularity, developing 10 other destinations including Lake Toba in North Sumatra and the World Bank’s latest Indonesia Economic Report identified tourism as an important area to generate significant private investment for the nation.
With all of its advantages comes the troubling fact the archipelago is also tectonically unstable; it houses a string of volcanoes and is prone to earthquakes. Indeed, the country is currently planning to build a new capital city in Borneo to relocate to, to relieve the burden on Jakarta, which is slowly sinking into the swampy land on which it is built.
However, as a result the land is extremely fertile, making it one of the world’s main suppliers of commodities such as palm oil, rubber, coffee and cocoa as well as sugar, tea and tobacco. Agriculture contributes about 14 per cent to Indonesia’s GDP.
Indonesia is also a major exporter of crude petroleum and natural gas as well as a leading producer of industrial metals. Mining accounts for roughly a tenth of the GDP.
Manufacturing accounts for around 20 per cent of the GDP and Indonesia is the second largest car manufacturing nation in Southeast Asia after Thailand.
While mining, energy and agriculture used to be the areas dominating investment portfolios, technology is proving to be Indonesia’s new lure. Local internet start-ups such as travel booking company Traveloka and ecommerce group Tokopedia have attracted investments from the likes of US travel company Expedia and Chinese internet group Alibaba.
But while life has improved for many, poverty is still an enormous issue and one that the country has been tackling. The World Bank points out that Indonesia has impressively managed to more than halve the poverty rate since 1999, to 9.4 per cent in 2019.
However, the nation is still struggling to pull 25.9 million of its citizens from below the poverty line. What’s more, in 2018, 20 per cent of the population earned just enough to keep them from falling into poverty.
Indonesia’s success has been aided by the government’s ambitious 20-year development plan, known as the Rencana Pembangunan Jangka Menengah Nasional (RPJPM) put in the place in 2005 and running until 2025.
Divided into four, five-year stages and covering everything from infrastructure development and social assistance programs to education and healthcare, the plan’s aim is to significantly reform Indonesia and improve life for its citizens.
According to a study by McKinsey & Company, by 2030 Indonesia could move up from its current position of 16, to become the world’s 7th largest economy, overtaking both Germany and the UK. With a predicted population of 280 million, it could have a remarkable 180 million people in the workforce.
Looking at Indonesia business opportunities, foreign direct investment is currently being attracted from Masayoshi Son, founder of Japanese telecom and investment conglomerate SoftBank.
Speaking to Jakarta Post following a meeting with Indonesian President Joko Widodo, Son revealed that he is interested in backing the new proposed “smart” capital city, commenting: “We won’t discuss the specific number yet, but a new smart city, the newest technology, a clean city and a lot of AI (artificial intelligence) – that’s what I’m interested in supporting.”
Indeed SoftBank has already proved it is keen to invest in Indonesia, having partnered with Indonesian property developer Lippo Karawaci (IDX:LPKR) for the development and deployment of AI and IoT-powered solutions in Lippo Village in Karawaci, near Jakarta.
India’s Sequoia Capital also recently invested $100m in Indonesia’s online marketplace Tokopedia.
Anthony Eaton, fund manager of JM Finn Global Opportunities fund, has invested in several shares in the country including Indonesia’s largest toll road operator Jasa Marga (Persero) (IDX:JSMR).
Eaton explained to The Telegraph: “Indonesia consumers are increasingly having more and more disposable incomes. Young adults in Indonesia are no longer commuting on bicycles, instead they are now buying cars.” He rationalises that as car ownership increases, so too will the profits for the company.
However, for private investors, it is likely to be impractical to try to research individual companies in order to invest in the Indonesia stock market. What’s more, there are currently no specialist funds that solely invest in Indonesia stock.
Investors can only choose global funds that have some exposure to Indonesian companies.
Morningstar analyst Monika Dutt highlights iShares Edge MSCI EM Volatility ETF (EMMV) as a silver rated fund that includes Indonesian PT Bank Central Asia Tbk as one of its top three holdings.
20-year RPJPM development plan
Financial site The Balance points out that if you are keen to invest in Indonesia it is worth remembering that while the country may be less risky than many emerging markets, strong historic growth can make a country a target for inflation. The nation is also prone to greater geopolitical risk than developed countries and will be observing the US-China trade negotiations with great interest.
Financial site The Balance points out that if you are keen to invest in Indonesia it is worth remembering that while the country may be less risky than many emerging markets, strong historic growth can make a country a target for inflation. The nation is also prone to greater geopolitical risk than developed countries. Indeed, like the rest of Southeast Asia, Indonesia will be observing the US-China trade negotiations with great interest.
Emerging markets are also notoriously risky, so financial experts would advise that those wishing to invest in Indonesia should allocate only a small chunk of their portfolio to it.
But of course, part of the attraction of emerging economies is the number of problems to be solved – that might just prove lucrative investment opportunities for savvy investors.
FURTHER READING: Is 2020 the year to invest in Vietnam?
FURTHER READING: What will the outcome of the 2020 US election mean for markets?