If the Indonesian market is not the cheapest emerging market, it is probably one of the best positioned for the future. Therefore, we invest in it as part of our dynamic portfolio.
An excellent 2022 year
Indonesia had a good 2022, with GDP up 5.3%. This number, the best in nearly a decade, is partly due to the country’s reopening after the pandemic and a solid investment. With an increase of 3.9% over the year, it is in line with the figure for 2021 but remains withdrawn in the face of pre-pandemic levels. While private demand and investment have supported growth, the economy has also benefited from another driver: its raw materials and agricultural product exports have peaked.
The country is the world’s largest exporter of palm oil and the world’s largest coal exporter and nickel producer. He was, therefore, ideally placed to benefit from the problems of supply of food oils, hydrocarbons and nickel that we have witnessed in the ...
A new year on a false rhythm
On the other hand, 2023 began on a false pace and looks a little less dynamic. The economy recorded a contraction of 0.92% in the first quarter compared to the previous quarter. However, over one year, it still grew by 5.03%. The decline in commodity prices is a significant factor. After the peaks of last year, prices have eased, slowing down Indonesian exports (in value, if not in volume). In addition, after the rebound in consumption following the end of the pandemic-related restrictions, some contraction in private demand is not unexpected.
Nevertheless, the country should maintain strong momentum in 2023. On the one hand, the labour market is doing well. The unemployment rate is meagre (5.45% in March), and the participation rate exceeds 69%, which should continue supporting household incomes and expenses. Their good form is reinforced by the fact that Indonesia has suffered less from the surge in inflation than our Western economies, and their purchasing power has therefore been less eroded. Even at its peak in September, Indonesian inflation remained slightly below 6.0%. In April, it was no longer above 4.33%. The six policy rate hikes granted by the Central Bank of Indonesia to push the primary reference rate to 5.75% have thus largely succeeded in countering inflation and bringing it close to its target (inflation between 2% and 4%).
This had a double advantage: first, since inflation is no longer far from the account, the Indonesian central bank can afford to end the upward movement, and one or more policy rate cuts are possible later in the year. This would not fail to stimulate consumption (which remains the main engine of the economy) but also investment, which should well support it in the coming years. As a result, we expect growth of around 4.5% for the current year, which could be followed by a return of 5% by 2024.
The second advantage of this desire to control inflation is that it strengthens the credibility of the monetary authorities. At the same time, Indonesia’s responsible fiscal policy offers investors much better governance than many other emerging markets, despite sometimes surprising - and very frowned upon - political decisions in the West on matters of morals.
Battery power
Suppose the country promised a wave of investment. In that case, it is because it is particularly well positioned to take advantage of the energy transition and become a power in the battery sector.
As has been said, it is the world’s largest nickel producer and the raw material necessary for their production. And Jakarta intends to maximise this resource. Instead of exporting its raw materials in crude, leaving it to others to add value, the authorities prohibit exports of the raw resource and encourage the movement of the value chain to the archipelago to keep the bulk of the financial benefits associated with this resource. Asian investors - especially those from South Korea and China - have clearly understood this desire to develop the entire production chain in Indonesia and are ready to become privileged partners in this effort. In recent years, many have invested in the archipelago.
And since strategy works rather well with nickel, the country intends to follow it with cobalt. And here, too, it is in collaboration with Chinese actors that Indonesia develops the sector. Now the world’s second-largest producer, behind the Democratic Republic of the Congo, Indonesia is preparing to offer users a more transparent and less controversial source of cobalt. Enough to make the country a key player in the energy transition. This should strengthen investment in the country in the coming years.
An exciting market, but not cheap
With an interesting long-term strategy, a good portfolio of natural resources, good public finance management and a strong central bank, Indonesia is one of the most promising emerging markets. But alas, it is paid for. As a result, at this stage, the ratios of the Jakarta stock exchange are less attractive than those of the emerging countries as a whole.
It should also be noted that the financial sector dominates the MSCI Indonesia index (57.5% of the total), far ahead of communications (12%), while raw materials and energy represent only 7.6% and 4.8%, respectively. This is a stock exchange which, like the economy, is mainly oriented towards the domestic market and on which exports have limited weight. This makes it relatively uncorrelated with other global exchanges, bringing a significant advantage in portfolio diversification. But unfortunately, given the price level, we are not considering it in our portfolio.
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