Indonesia began 2014 facing the prospect of political uncertainty and an economy seen as extremely vulnerable to the U.S. Federal Reserve’s monetary “tapering.” Someone forgot to tell Indonesians though, as suddenly investor and consumer confidence is on the rise.
On Wednesday, Indonesian stocks hit their highest level since October, with the Jakarta Composite Index finishing at 4,592. The benchmark index has enjoyed a 7.5 percent gain over the past year, despite a general retreat among emerging market bourses and predictions of a mass exodus of capital to developed markets.
In a new report, JPMorgan upgraded its rating on Indonesian stocks to “overweight,” with economist Adrian Mowat saying the Southeast Asian heavyweight “is proving adaptive and resilient faced with tapering.”
According to Bloomberg News, foreign investors have increased their holdings of Indonesian shares for 10 straight days, acquiring a net $401 million. The Indonesian rupiah has also strengthened after the nation posted a $1.5 billion trade surplus for December, its biggest in more than two years.
Confident Consumers
Adding to the positive news, on Tuesday, the ANZ-Roy Morgan Indonesian Consumer Confidence survey showed a rise in consumer sentiment in January, with Indonesians more confident about their personal financial situations and the economy’s five-year outlook.
According to the survey, 43 percent of Indonesians described their families as “better off” financially than a year ago compared to 11 percent who said they were “worse off,” while 70 percent expected to have improved family finances next year.
Indonesians remain extremely confident about the economic outlook, with 90 percent expecting “good times” over the next five years, and 79 percent predicting better conditions in the year ahead.
Summarizing the survey’s findings, ANZ’s chief economist Asia-Pacific, Glen Maguire said: “2013 was a difficult year for the Indonesian economy. Fortunately, the Indonesian economy now appears to be starting 2014 on a more secure footing.
“Consumer confidence is likely to continue improving as the difficulties of the 2013 ‘taper tantrums’ recede and the progression of actual taper is not as disruptive for the Indonesian economy as many had feared. To be sure, the vast majority of Indonesians continue to express confidence in the short and medium-term outlooks, anticipating both their own circumstances and the economy more generally to improve.”
Economic Worries
Despite the positive data, the majority Muslim nation of 250 million people remains exposed to both economic and political risks, according to analysts.
Maguire noted that “there are some significant uncertainties on the outlook, with Indonesia vulnerable to rapidly shifting international sentiment as it is a twin-deficit economy…Headline consumer confidence fell over the volatile periods of 2013 when the Indonesian rupiah was weakening and capital was leaving the country in the second quarter. This proved a handy leading indicator of softening nominal retail spending in the third quarter.
“Despite these uncertainties we note some key structural trends as Indonesia’s ‘consuming class’ continues to grow, with perceptions on personal financial conditions a handy leading indicator of demand for financial services.”
The rupiah is also considered at risk of another slump, should a clampdown on commodity exports force the trade balance back into the red. The central bank raised its benchmark interest rate by 1.75 percentage points in 2013 to help rein in the current-account deficit, but is expected to leave policy settings on hold for the immediate future.
Investment is also expected to slow in 2014 after posting its highest level last year since 2010, with investors awaiting the outcome of upcoming polls.
In December, the International Monetary Fund said Indonesia faced a more challenging global environment, with growth predicted to slow to around 5 to 5.5 percent this year on weaker investment and external demand.
“Indonesia’s longer-term outlook hinges on the pace of structural reforms to raise productivity, create new export markets, and generate more inclusive growth. Key reforms include accelerated infrastructure investment, a more predictable trade and investment regime, greater labor market flexibility, and deeper financial markets,” the international financial organization said.
Reformist Candidate?
In April, Indonesians vote in legislative elections set to have a major bearing on July’s presidential poll, given that a presidential candidate must be backed by parties with at least 20 percent of the legislative votes.
Current President Susilo Bambang Yudhoyono (SBY) is barred from seeking a third term in office and is seen as likely to be replaced by reform-minded Jakarta governor Joko Widodo. Known as Jokowi, the 52-year-old is considered popular among younger voters for his “informal” style, although he is yet to officially secure his party’s nomination.
“Mr Yudhoyono’s government has abjectly failed to deal with many of the country’s problems, especially its endemic corruption and lousy infrastructure. Jokowi, the argument goes, could be just the man to inject much-needed drive and clarity into Indonesia’s lumbering governmental system,” The Economist said.
The other front-runner is former Gen. Prabowo Subianto, a candidate seen as potentially fulfilling voters’ desire for a “strong leader.”
Writing in The Diplomat, Jakarta resident Edward Parker commented that the nation’s recent accomplishments had been “nothing short of outstanding” since the end of the Suharto regime.
“Today, democratic institutions and political stability reassure consumers and attract investors; the streets of Jakarta look a lot more attractive than the streets of Bangkok right now,” he said.
It’s all a long way from talk of a crisis, but Indonesians won’t mind a bit.