Indonesian Economy on the Rise

By Anthony J. Bauer, Head of Private Equity at Hennessy and Associates

Indonesia has long been regarded with scepticism and had been, for the last ten years, judged as one of the so-called “Fragile Five” emerging markets, in other words, its economy was viewed as highly vulnerable to capital outflows and a currency slump whenever global interest rates rose.

But now, after much monetary tightening led by the U.S. Federal Reserve, Southeast Asia’s biggest economy has proved to be resilient and has prompted analysts to re-evaluate its current standing and long-term outlook.

Its central bank is among the most compliant in the world and has given no hint of when it might lift rates, inflation is just inching above the 2%-4% target range, and its currency is one of the Asia’s best performing currencies among the emerging markets.

Of course, there are always concerns over some socio-political risks, although not as much as the other “Fragile Five,” but its policymakers seemed to have learnt many lessons from past crises and are now devising progressive policies, such as setting up a domestic non-deliverable forward foreign exchange market, promoting greater use of other currencies in trade, and selling more bonds to local investors.

The government has reduced its bond sale targets and fund energy subsidies to protect its huge population from high global oil prices, and its stock market is up by more than 5% year-to-date, after a very busy IPO schedule this year, while most other major Asian markets have fallen.

Its financial market stability should see its economy grow by around 5% per year for the foreseeable future, and, in addition to the fact that the country is trying to get more out of its ample resources, such as minerals like nickel ore, by processing more at home, it can realistically have a goal of becoming a wealthy country by 2045, on its 100th independence anniversary.

The main concerns at the present include a court challenge to the government’s flagship Job Creation law, and questions over whether Indonesia’s stability can sustain with the Fed’s  aggressive rates raising, global commodity prices cooling and global recession risks increasing.

However, with many foreign investors backing Indonesia’s growth story, many analysts are predicting the country’s continued recovery from the pandemic downturn.