Pacific Money

The Next Asian Tiger

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Pacific Money

The Next Asian Tiger

Peaceful and populous Indonesia is set to buck predictions of a global economic downturn.

When American economist Nouriel Roubini sets his sights on a country, it is often a cause for concern. Roubini is known by the comic book-villain monikers "Dr. Doom" and “Permabear”, nicknames he earned after successfully predicting the collapse of the U.S. subprime mortgage market and subsequent global economic crisis. He has since remained fairly bearish about global prospects, especially for certain emerging markets – China and Russia in particular. For the former, he has predicted an extremely difficult 2013.

Yet Roubini has been so optimistic about Indonesia over the last two years that his downbeat profile must seem quite misplaced to leaders in Jakarta. In fact, Roubini sees Indonesia as a much more eligible member of the "BRICs" club than Russia, even if such a swap would rather ruin the acronym. As Indonesia's GDP growth is forecast to come in at 6% this year by the IMF (a slight moderation from last year's post-1997 Asian financial crisis high of 6.5%), it seems that Roubini is not alone in seeing strength in the South East Asian economic bloc.

Indonesia has indeed successfully overcome several setbacks in the last 15 years. In addition to the Asian financial crisis, the country underwent a political re-structuring, the devastating 2004 Tsunami and periods of domestic unrest and instability. Yet Roubini has identified several key asset markets in which Indonesia is attracting serious foreign investment. These include coal (much of which competes with Australian coal in China), palm oil and timber. The country’s population is also large – at 230 million, the 4th largest in the world – and thus has some of the "large market" allure that favors well-peopled economies when investment and expansion decisions are made.

Nouriel Roubini is not alone in his optimism about Indonesia. The IMF and the OECD have both recently issued favorable reports on Indonesia’s economy (albeit pointing out a need for some reforms). Indeed, one of Indonesia’s key strengths is the role domestic demand plays in its GDP composition.  Whilst other exporting nations have a dangerously low share of homegrown consumption in their GDP, Indonesia’s domestic demand accounts for two thirds of its economy. In a world of anemic global demand, strong consumption is a trump card.

If we were to look for weaknesses that threaten the country's growth, falling Chinese demand for coking coal is a probable risk.  As the China growth story unwinds, Indonesia would not be alone in having put a bit too much faith in perpetual miracles from that buyer (just ask the Australians). Also, Indonesia's balance of trade (exports minus imports) has weakened recently. Although the government seems unfazed by this, arguing that it is a natural part of growth as Indonesian companies import higher-value goods, it is worth keeping an eye on.

Another issue was highlighted in a recent survey by Credit Lyonnais Securities Asia, an independent brokerage and investment group that releases regular report cards on Asian markets. Indonesia came last in the rankings: it scored very poorly for rules, governance and regulatory environment. Such issues will limit the country's economic future if they are not addressed.

This governance and standards problem has already hit the media, with the London-listed parent of Indonesian coal company Bumi Resources announcing an enquiry into multimillion-dollar irregularities at its subsidiaries, including PT Bumi resources, which is listed in Jakarta.


The good news is that Indonesia has overcome much bigger problems pretty successfully in the past. Growth is holding up and the government is in a fairly strong position should more support be necessary. If the will can be found, there is ample room to keep the momentum going. With even Nouriel Roubini in their corner, Jakarta should be feeling fairly confident.