The enthusiasm for emerging markets is in full swing. Buoyed by the prospect of lower bond yields in the United States and a weaker US dollar, which is encouraging investors to look for alternative investments and markets, interest in these markets is growing.
However, for the moment, Indonesia is not reaping many benefits. The country remains very promising in our eyes, but it is currently facing a difficult period.
Prabowo Subianto is not the only problem
Since the end of the presidency of the very popular reformer Jokowi, investors in Indonesia have been on the alert.
In full development, the country is facing several transitions that are not easy. Decided under Jokowi, the vast infrastructure investment programme – and in particular the construction of a new capital, Nusantara – requires significant public investment. To finance it, a substantial increase in tax revenue is necessary.
Limited credit access for its population
At the same time, 60% of Indonesians work in the informal sector. It is therefore mainly on the others that the bulk of the tax burden falls, which is not very popular with the population.
In a country that is modernising, where households aim to improve their quality of life, access to property is also a problem. Very classic in their approach, the local banks that dominate this market restrict access to real estate credit to those with stable incomes, thus excluding the majority of the population.
Discontent is therefore growing, especially since the new President, Prabowo Subianto, is adding fuel to the fire by implementing unpopular decisions. A former general in the armed forces, he does not hesitate to put his men at the heart of the state.
Political issues add more controversies
He has also created 23 (!) new ministries at a time when households are being asked to make additional efforts, established a sovereign wealth fund whose management remains somewhat opaque, and introduced a controversial food program.
Supposed to offer schoolchildren free meals, it is financed at the expense of the education and health sectors. Poorly managed, it quickly became one of the most essential items in the state budget (nearly 9% of the total), behind military spending (15%).
Tariffs and investor mistrust
In addition to the problems on the internal market front, there is a complicated external environment. With few trade agreements, Indonesia is impacted by significant customs duties when exporting to many destinations. The 19% tariffs imposed by the White House on him do not help.
More generally, Indonesia, which was an ideal candidate to take advantage of the China+1 strategy, which many companies were adopting to diversify their production chains, is perceived as being less stable than its competitors, such as Vietnam.
This is weighing on investor interest in the market and has led to a decline in foreign direct investment in recent months. For the time being, investment in the Jakarta stock exchange is not very sensitive to this mistrust and has increased by 15% since the beginning of the year in local currency (prices and dividends).
On the other hand, the local rupiah suffered a real rush to the exit following the violence in the streets of several cities in the country and the central bank's decision to lower its key rates in an effort to revive the economy. It also depreciated by around 15%, erasing the performance of the equity market (in euros) in the process.
Growing pains but a bright future
After a long period of growth, driven by Jokowi's reforms, which have significantly improved the country's competitiveness, the updating of infrastructure and the development of the mining sector – the country is rich in nickel – Indonesia is experiencing some growing pains.
To find its way, it will have to resize the state, gradually reduce the share of the informal sector in the economy, expand the range of opportunities for those who depend on it, and better integrate young people into the job market, notably through an additional effort in training.
Nevertheless, while it is clear that reforms will be necessary, it is also certain that the foundations have been laid, and the country has a very bright future.
Indonesia, with its 285 million inhabitants, is still a candidate to become a critical export base, thanks to its abundant and increasingly well-trained workforce, which has attracted many players (predominantly Asian) in the energy transition sector. This makes Indonesia an up-and-coming market.
Its gradual opening up and integration into world trade enable it to achieve levels of growth well above those it currently experiences.
Jakarta is well aware of this need and has just signed, for example, a free trade agreement with the European Union that will eliminate tariffs on 98% of Indonesian exports to the old continent and significantly reduce non-tariff barriers to trade between the two.
A promising yet volatile market
Indonesia may be going through a difficult period, but it remains one of the most promising emerging markets in our eyes.
Rich in raw materials that position it on the front line to benefit from the energy transition, with a young and abundant workforce and a market whose size and potential are impressive, and betting big on its future, the country is simply waiting for the wave of reforms that will allow it to grow even more.
Of course, such a bet can take time. However, at this stage, the price of the entry ticket for the Jakarta Stock Exchange seems very attractive to us. It offers a high dividend yield, close to 5%, and a lower price level than emerging markets as a whole, with a price-to-earnings ratio for the next twelve months of less than 12x.
Of course, this volatile market is not suitable for everyone, and investors with a defensive profile can move on. But Indonesia continues to incorporate our portfolio strategy.
The Jakarta Stock Exchange's benchmark index
Despite the turbulence, the Jakarta market is growing in local currency. The sharp decline in the rupiah wiped out this movement.