Indonesia’s Economic Growth Fuels Investors’ Optimism

With 2010 GDP estimated at $700 billion, GDP growth at 6 percent and its share of the world total GDP estimated at 1.4 percent, Indonesia seems ready to take off.


Even as Islamic countries are roiled by political unrest, Indonesia, the world’s most populous Islamic country, is being touted as part of the new emerging growth market. With 2010 GDP estimated at $700 billion, GDP growth at 6 percent and its share of the world total GDP estimated at 1.4 percent, Indonesia seems ready to take off.

Indonesia has vast natural resources anchored by over 4 billion tons of coal reserves. Coal mining in Indonesia has grown dramatically since the early 1990’s.

Indonesia has a dynamic consumer base and its GDP growth is now stronger than emerging countries such as Mexico, South Korea and Turkey. Most important, investors say that the 250 million people strong country has cleaned up its banking system, brought inflation under control and shed the authoritarian past exemplified by 30 years of General Suharto’s rule.

“Indonesia has moved beyond Suharto,” says Alice Fricke, who follows Indonesia as VP of Asian Equities for Auerbach & Grayson, a New York broker dealer that specializes in global markets. “They’ve done a good job of restructuring,” says Fricke. If governance is one of the major issues that inhibit investment in emerging countries such as Indonesia, they have taken major strides in improving governance, Fricke and others say.

Coal still is Indonesia’s big play. And with both India and China now needing to import coal to fuel their power growth, Indonesia and its proximity to the two countries makes it the most likely beneficiary. “The big growth story in the coal space has been Indonesia,” noted James Campbell, head of business development and strategy for Bumi, Indonesia’s largest coal producer. “The growth of Indonesian coal has gone from zero to hero in the last 10 years.”


But it is Indonesia’s economic growth that has investors optimistic, especially because it is expected to be fueld by strong consumer demand. Domestic consumption, currently about 60 percent of GDP, is expected to be a key driver of Indonesia’s economic growth. The country is experiencing a demographic dividend phase, says investor Sandiaga S. Uno, Founding Partner of Saratoga Capital at a recent conference in Djakarta, “The productive-age population bulges while the dependency ratio declines. This is a golden period for the country’s economic development and will ensure growth in domestic demand”.

Most important, there is new confidence in Indonesia. Problem areas such as the banks have been dealt with, partially by nationalization and partially with new ownership. “There’s more transparency than ever,” says Fricke. All of the major banks now follow centralized, rigorous credit approval and audit processes. And analysts point out that some banks have even gone to lengths to open up offices so that no meetings can take place behind closed doors.

For all its potential, Indonesia still is a small economy with a relatively small stock market and its largest companies have market caps no greater than $25 billion. Is the market large enough to accommodate a flow of new capital?

The Indonesian market was up 45 percent last year. And it continues to have the potential of outperforming the MSCI. Nonetheless, says Fricke of Auerbach & Grayson, “It can only be a small portion of the international manager’s portfolio without overweighting,”