Reasons To Love Indonesia

Tom Burroughes

18 June 2013

The vast archipelago of Indonesia, slated to be one of those countries with rapid economic growth and wealth, is a favourite of Newton Fund manager Caroline Keen.

The resource-rich country, with a youthful population of over 250 million people, offers strong potential, she said in a recent note.

“The largest segment of Indonesia’s population comprises the high spenders’ age bracket of 25-44 years old. That Indonesia has such a youthful population is expected to boost consumption for many years to come as workers enter the jobs market and drive growth,” she said. “For Asia as a whole, we believe that demographic and urbanisation trends are still broadly positive, with the expansion in the middle classes, growing disposable incomes and rising levels of credit supporting consumption,” said Keen.

Indonesia’s potential, as WealthBriefingAsia was reminded of recently when speaking to private bankers in Singapore, is a cause for optimism in wealth management centres. According to a February 2013 report by PricewaterhouseCoopers, nations such as Brazil, Russia, India, China, Indonesia, Mexico and Turkey will grow at a much faster pace than established Group of Seven countries over the next four decades. (The G7 are France, the US, Germany, Italy, Japan, Canada and UK.) In purchasing power parity terms, the E7 countries could overtake the G7 before 2020 and by the middle of the century, China, the US and India could be by far the largest economies, with a big gap to Brazil in fourth place, ahead of Japan, PwC said.

As of 2011, there were just over 37,400 high net worth individuals in Indonesia, with a combined wealth of US$241 billion. This population is forecast to grow, according to researchers at WealthInsight, by 123 per cent, to reach just over 83,500 individuals by 2016. This represents a higher growth than other emerging markets such as China (83 per cent) and India (103 per cent).

Slightly more negatively, in early May, Standard & Poor’s, the ratings agency, cut its outlook on Indonesia to stable from positive. It said reform momentum in the world's most populous Muslim nation had declined. S&P affirmed its 'BB+' long-term and 'B' short-term sovereign credit ratings and 'axBBB+/axA-2' Asean regional scale rating on Indonesia.

Despite such question marks, a number of firms are flexing their muscles to obtain a larger slice of the Indonesia pie. For example, in May, it was reported that Singapore-headquartered DBS says it hoped its application to buy an initial 40 per cent stake in PT Bank Danamon Indonesia - leading to a possibly larger holding – will be approved by Bank Indonesia. Royal Bank of Canada’s wealth management business has recently boosted its Indonesia-focused sales team with three senior bankers.

Other banks building a presence include UBS, ANZ Indonesia, Bank Negara Indonesia (BNI), Bank Mandiri and Standard Chartered. Some of the big Western firms with bases in Singapore, for example, are used as offshore booking points for Indonesian clients. (To view a feature on Indonesia, written three years ago when the country’s potential was being grasped, click here.)

Elections in 2014

One potential risk factor is the national election in 2014, she said. “We are aware that 2014 is an election year in Indonesia and incumbent Susilo Bambang Yudhoyono, the country’s first directly elected president, is barred by the constitution from standing for a third term,” Keen said. “In the run-up to the presidential election, company investment may be muted, as a change can also be expected in the line-up of ruling politicians, decision makers and policies that influence the economy,” she said.

A politically difficult decision to cut fuel subsidies – a significant element of Indonesian government expenditure – preoccupies consumers, firms and investors. Addressing the fuel subsidy is absolutely necessary to help address the imbalances in the country; however, it is likely to cause a short-term spike in inflation. The very poor state of Indonesia’s infrastructure also contributes to inflationary pressures.

“For this reason, we invest mainly in well-positioned consumer companies with pricing power and that have a good handle on their distribution networks,” Keen said.

Newton, the investment house, is part of BNY Mellon; the latter firm had around $1.4 trillion of client money as at the end of March this year.