Indonesia is positioned to remain one of the fastest growing economies in Asia after China, India and Vietnam. Indonesia has the largest economy in Southeast Asia and is a member of the G-20 group of countries. As one of the emerging economies, Indonesia charted a healthy growth averaging 5.1 percent per annum over the 2000-2009 period underpinned by resilient domestic demand and a series of economic reforms. In comparison, the ASEAN economies registered an average GDP growth of 4.6 percent per annum over the same period.
Indonesia’s domestic demand is supported by a large population base of around 232 million people, making it the fourth most populated country in the world after China, India and the U.S. In recent years, Indonesia’s political stability and the government’s liberalisation of the economy coupled with sound fiscal and debt management have provided a conducive environment for the country to achieve robust economic growth.
*Bloomberg Consensus Forecast, July 2010
Factors Driving Indonesia’s Economic Performance
Despite the global economic slowdown in 2009, Indonesia was one of the few countries that managed to register a positive GDP growth of 4.5 percent on the back of resilient domestic demand. Domestic demand was driven by consumer spending, which accounts for 57.4 percent of GDP, and investment spending, which represents 23.4 percent of GDP. In the first half of 2010, GDP growth rebounded by 5.9 percent with consumer spending sustained at 4.5 percent and investment spending rising by 7.9 percent. The factors that contributed to the rapid GDP growth of Indonesia are:
Healthy consumer spending: Over the 2000-2009 period, consumer spending in Indonesia grew at a healthy rate averaging 4.1 percent per annum fuelled by higher disposable incomes amidst accommodative interest rates and manageable inflationary pressures. Consumer spending has also been supported by the rising urbanisation trend with the urban population ratio rising from 42 percent2 in 2000 to 51.5 percent2 in 2008. Meanwhile, the central bank kept its reference rate, the benchmark interest rate of Indonesia, unchanged at a historical low of 6.5 percent as Indonesia’s inflation rate moderated from 10.3 percent in 2008 to 4.9 percent in 2009 and 4 percent in the first half of 2010.
Strong Foreign Direct Investments: In view of its vast opportunities, Indonesia has enjoyed rising inflows of foreign direct investments (FDI), mainly in the mining, manufacturing and transportation & communication sectors. Total FDI into Indonesia amounted to US$34.4 billion3 over the 2005-2009 period. FDI in the mining sector was driven by higher commodity prices while the transportation & communication sector benefited from increasing urbanisation trends.
Robust commodity exports: Exports have also been an important source of growth for Indonesia, accounting for 43 percent of GDP in 2009. Indonesia’s major commodity exports include oil & gas and coal which contribute 17 percent and 12 percent respectively to total exports in 2009. Meanwhile, exports of manufacturing products were driven by machinery and transportation equipment which comprise 14 percent of total exports in 2009.
Political stability and economic reforms: Indonesia’s economic growth over the 2000-2009 period was also attributed to the country’s political stability and a series of successful economic reforms. After President Susilo Bambang Yudhoyono took office in 2004, a comprehensive set of economic programs were implemented, such as creating more jobs, addressing corruption issues and increasing infrastructure investment spending. Subsequently, Indonesia’s economy grew at a respectable average growth of 5.7 percent per annum during his first term (2004-2009). This economic performance has helped President Yudhoyono to secure a second term following a decisive victory in the 2009 general elections where he garnered more than 60 percent of the votes cast. The smooth running and decisive outcome of the 2009 general elections have cemented the country’s democratic credentials, underpinning the country’s political stability and policy continuity.
Healthy fiscal position: Due to its sound fiscal and debt management, Indonesia’s fiscal position has improved in recent years. The government maintained a fiscal deficit of less than 3 percent of GDP over the 2000-2009 period. Despite the global economic slowdown in 2009, Indonesia registered a prudent fiscal deficit of 1.6 percent in 2009 compared to 0.1 percent in 2008. Meanwhile, the government’s commitment to reduce public debt resulted in the public sector debt-to-GDP ratio declining significantly from 88 percent in 2000 to 28 percent in 2009, the lowest among ASEAN countries.
Stable currency: The Indonesian Rupiah was one of the best performing Asian currencies in 2009 with a gain of 19.5 percent against the U.S. dollar due to the inflows of foreign funds. On a year to date basis to 28 July 2010, the Rupiah appreciated further by 5.3 percent against the U.S. dollar. Over the same period, the Rupiah depreciated by 2.4 percent against the Malaysian Ringgit.
The steady accumulation of foreign reserves has enhanced Indonesia’s liquidity position and serves as a buffer against potential financial crises. Foreign reserves rose from US$29.4 billion in 2000 to a record high of US$78.8 billion in July 2010 driven mainly by healthy trade surpluses and capital inflows.
Table 1: Performance of Jakarta Composite Index
*Year to date as at 28 July 2010
Due to its large domestic demand base, Indonesia’s economic performance is envisaged to be more resilient than other economies in the event of a slower global economic environment. Looking ahead, Indonesia’s GDP growth is projected to rebound from 4.5 percent in 2009 to 5.8 percent4 for 2010 and 6.2 percent4 in 2011 on the back of resilient consumer spending and investment spending as well as strong global demand for commodities.
Domestic demand is also expected to benefit from an accommodative interest rate environment amidst manageable inflationary pressures. Indonesia’s inflation rate, which is driven mainly by food prices, is projected at 4.9 percent5 for 2010 and 6 percent5 for 2011. Nonetheless, the inflation rate is expected to remain manageable in the medium term amidst a stable outlook for the Rupiah.
The overall economy is well-positioned to benefit from the positive political landscape as the re-election of President Yudhoyono coupled with the appointment of technocrats to the cabinet is expected to ensure continuity of economic reforms.
Outlook for The Indonesian Market
Indonesia’s stockmarket is the third largest among ASEAN countries with a market capitalisation of US$261 billion as at 30 June 2010.
After registering a 114.7 percent return in Ringgit terms for 2009, the Jakarta Composite Index continued to be one of the best performing regional markets with a gain of 17.5 percent on a year-to-date basis to 28 July 2010 amidst robust economic activities. From 2006 to the 28 July of 2010, the Jakarta Composite Index registered a total return of 143 percent in Ringgit terms (163 percent in Rupiah terms) or a commendable annualized return of 21.4 percent.
In terms of valuations, the prospective Price-to-Earnings (P/E) ratio of the Jakarta Composite Index (JCI) is 15.2x based on 2010 earnings and 12.7x based on 2011 earnings as at 28 July 2010, which is comparable to its 9-year average P/E ratio of 12.5x. Selected stocks listed on the Indonesia market are supported by strong corporate balance sheets, sound fundamentals and fair valuations.
1 ASEAN countries excluding Vietnam: Malaysia, Singapore, Thailand and Philippines
2 World Bank
3 Bank Indonesia
4 Bloomberg Consensus Forecast, July 2010
5 Bloomberg Consensus Forecast, August 2010
Source: www.publicmutual.com.my a Malaysian-based website
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