Emerging Markets: What’s driving Indonesia’s resurgence

A pick-up in cyclical growth in Indonesia is creating opportunities for emerging market investors, argues Pendal’s PAUL WIMBORNE

• Indonesia set for growth
• Retailers, auto dealers and banks well-placed
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• Join a live webinar with Pendal EM expert James Syme on May 16

INDONESIA has been attracting the attention of investors recently.

What’s driving the interest?

South-east Asia’s biggest economy is a large exporter of commodities like palm oil, coal and nickel — many of which are priced higher since Russia’s invasion of Ukraine.

The rising value of exports follows a period of reduced imports during the pandemic, leaving the Indonesian trade balance strongly in surplus.

“For us, that’s a sign that Indonesia can start to import more on the domestic side of its economy without causing imbalances,” says Wimborne, co-manager of Pendal Global Emerging Market Opportunities Fund.

“So, from a cyclical point of view, Indonesia’s economy looks very well set for above trend growth over the next few years.

“Indonesia is at that sweet spot in the cycle where the export side of its economy is doing well, the currency has the potential to go stronger and domestic demand — which has been subdued for 10 years — looks like it could pick up.”

Return to growth

A return to growth for Indonesia comes after a decade of below-trend growth — a hangover from a consumption binge fuelled by quantitative easing in the wake of the global financial crisis.

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“Money was being pushed from the developed world to the emerging world. Like many other emerging markets, Indonesia started to suck in more and more imports, and it led to big imbalances in the economy,” says Wimborne.

“Trade deficits, current account deficits — this is always where the cyclical parts of emerging markets start to become a problem.”

As US and European regulators began to taper quantitative easing in 2013, money started to reverse out of emerging markets and those imbalances became unsustainable, he says.

“At the same time, commodity prices started to fall so the export side of Indonesia’s economy also fell, which exacerbated these imbalances.”

Now, the cycle is turning in Indonesia’s favour with China’s re-opening set to keep a floor under commodity prices.

“Even if commodities fell a bit from here, Indonesia’s trade surplus is at record levels so they would still be in a very good position.”

Boost from manufacturing and labour reform

Wimborne says Indonesia is also placed to benefit from the government’s push to encourage more manufacturing and reform labour markets.

“Indonesia has made some very interesting policy changes which are helping to drive the value add component of its exports.

“The best example is nickel, where a decade ago they implemented a partial ban on selling raw nickel ore to encourage investment in processing plants.

“This encouraged foreign, direct investment into the country and enabled them to capture more of the value add of what they are exporting.”

The political background means the outcome of next year’s election will be important to the country’s economic prospects.

“At the moment they have a big tent coalition,” says Wimborne. “The losing candidate from the last election is part of the cabinet and is one the leading candidates to win the next election.

“We would expect that big tent coalition to hold together and for politics to be relatively stable despite the election year.”

Wimborne’s preferred exposure to Indonesia is through companies that benefit from rising domestic demand, like banks, retailers and auto dealers.

About Paul Wimborne and Pendal Global Emerging Markets Opportunities Fund

Paul Wimborne is a senior portfolio manager and co-manager of Pendal’s Global Emerging Markets Opportunities Fund with James Syme and Ada Chan.

The fund aims to add value through a combination of country allocation and individual stock selection.

The country allocation process is based on analysis of a country’s economic growth, monetary policy, market liquidity, currency, governance/politics and equity market valuation.

The stock selection process focuses on buying quality growth stocks at attractive valuations.

Find out more about Pendal Global Emerging Markets Opportunities Fund
 
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