I wrote about Indonesia a little while back. It’s a place I really like and believe will continue to grow and expand. When I was first there over 15 years ago the place was a shambles. Today it’s totally unrecognizable.
Why is it that Indonesia has fared so well compared to the rest of the world, and in fact, even better than most of its Asian counterparts over the last few years?
Two main reasons that I can think of, but first a note… I’m open to being wrong on this (inconceivable I know, but hey if George Bush can make it to the highest office in the land, then I’m willing to consider the possibility), but I believe it has to do with the domestic economy being largely independent of government.
90 percent of Indonesian GDP comes directly from the private sector. Government doesn’t play anywhere near as large a part in the economic output as they do in other… umm (cough) “free markets”.
Additionally the country, contrary to popular belief, is not solely a “commodity producer”. Believe it or not, only 10 percent of its exports come from commodities. Its growth comes largely from its own consumers. The middle class is rising quickly with incomes having doubled in the last 5 years alone. This doubling in incomes still leaves Indonesia with the enviable position of having the cheapest labour costs of any Asian country. In other words incomes can continue to rise, causing labour costs to rise, without affecting the countries low labour cost position.
Although I just said it’s growth is not dependent on commodities, it still produces a lot of oil, gold and another highly valuable product, one which China and India need in large quantities and are relatively price-insensitive to. It’s a product that has been hand crafted over millions of years by nature into exquisite shapes and forms, that if it were somewhat more rare, would adorn ladies necks the world over.
Heh! pray tell?
Thermal coal (yeah I know I got the same response from my adoring, yet disgruntled wife). It’s the largest exporter of the stuff on the planet, and the demand continues to grow. Despite all the chatter about reducing its use in electricity generation, etc. demand from Asia and elsewhere is still charging ahead unabated.
While it is not as large a player in terms of its proportion to both GDP and exports as thermal coal, Indonesia also takes the crown for the world’s largest producer and exporter of palm oil. Since governments the world over are hell-bent on saving us all from ourselves, the growth of alternative energy continues unabated, which benefits the palm oil market. Think bio-diesel.
While it’s not a factor that is quantifiable, another reason Indonesian markets have done so well is that Western governments and there populace suffer under the illusion of competence; while Indonesia suffers under the illusion of incompetence. The countries assets have thus been priced accordingly, but are now in the process of becoming re-valued, and even arguably over-valued in some instances.
Proceed with Caution
But alas the ‘tinkerers’ cannot be satisfied to leave well enough alone. Despite Indonesia’s success and upward trajectory, certain international ‘organizations’ seem fit to put an end, or at least a pause to the momentum. I submit to you the following:
“Carefully designed capital controls could also be part of the appropriate response in certain limited circumstances, but these are exceptional measures,” This from Naoyuki Shinohara an IMF deputy managing director.
Mmmmm, I feel so much more confident that the IMF is happy to push for regulating, or somehow ‘limiting’ capital to the country. The IMF’s influence the world over continues to instill dread, fear and loathing in me. I can’t think of a more useless organization.
Capital controls are scary, but another ‘caution’ flag on Indonesia is the torrid pace with which the Jakarta Composite has rocketed ahead. It’s the best performer among 20 Asia Pacific benchmarks tracked by Bloomberg over the past 12 months, providing investors with a 143 percent return in U.S. dollar terms. It is up 12 percent this year alone, on anticipation of accelerating economic growth after Standard & Poor’s upgraded the nation’s sovereign debt ratings.
The stock gauge is trading at 20.2 times earnings. Compare this with a five-year low of 6.6 times in October 2008. By any measure the index is the most expensive in Asia after China, India and Taiwan. The growth is deserved, but does it still scream bargain to us? Not really.
We want to be buyers of these high-growth markets, but we need to be patient and time our entries, not chase after the growth indiscriminately. So although we love Indonesia, let’s keep our powder dry and wait for a better entry, which will surely come, if the ‘powers that be’ have their say anyway!
Live Like You Mean It,
Chris Tell
