Back in May I wrote a small post on Indonesia in which I highlighted that our much forgotten northern neighbour was growing strongly and although there were significant risks in the endeavour it was probably worth taking a second look at the country.
This week Indonesia once again reported that it was grow strongly:
Indonesia’s economy expanded a higher-than-expected 6.4% in the second quarter as robust domestic demand offset a decline in the international appetite for its exports.
In the three months ended June 30, Southeast Asia’s largest economy continued to rack up some of the strongest economic growth in the world, as the archipelago’s growing consumer class was relatively unaffected by global debt problems and slowdowns that are dousing demand in many developed countries.
The risks are, however, due to the global economic slowdown especially in the arena of commodities. Much like Australia, Indonesia is highly exposed to the price coal which has led the country’s commodities boom. As the boom fades the country’s exports are fading leading to a trade deficit:
Indonesia said Wednesday it recorded an all-time trade deficit in June, and that ongoing global worries might result in a full-year trade deficit for the Southeast Asian country.
June’s data released by the Central Statistics Agency showed a deficit of $1.3 billion, Dow Jones Newswires reported.
“We’ve never recorded a deficit this huge, even during crises,” Satwiko Darmesto, a director with the Central Statistics Agency, was quoted as saying.
“We may post an annual trade deficit this year due to the impact of euro zone [worries] and the situation in China and India,” he added.
During the 2008-2009 global economic slowdown, Indonesia’s exports were supported by demand from Asian giants such as China and India. This year, however, demand from both countries has slowed.
“The trade-deficit figure is a worrying one, but the biggest worry would be if the data shows China’s demand significantly slowed,” Bank Danamon economist Anton Hendranata said.
As you can see from the chart below, this is not a normal event for Indonesia:
As I have mentioned previously, there is growing evidence of Indonesian middle class wealth shown by the increase in sales in luxury vehicles and goods. Consumption makes up over 60% of the Indonesia economy and the growing consumer base has recently been pulling in ever greater amounts of imports. As we know from Australia, consumer economies tend to see expansion in local credit which requires the support of foreign investment to remain economically viable, and this is where Indonesia’s macro risks now lie.
Commodity prices falls have the potential to slow ( or reverse ) foreign investment which will in turn put downward pressure on the rupiah. If this continues then Indonesia could find itself with a balance of payments problem. For now, however, the rising costs in China and troubles in some other parts of South East Asia see Indonesia in a “sweet spot”.
Whether that growth suddenly fades, like in the case of India, or accelerates away as in the case of China has a lot to do with how the country handles the next stage of development. The recent country-wide power failures in India show that economic expansion without significant infrastructure investment is a false step, and Indonesia shares some of these issues.
Foreign investment would by wisely used to improve productivity enhancing infrastructure, especially in the areas of logistics and energy but this appears to be lacking in the case of Indonesia with many large projects still in design stage. Early this year S&P warned that infrastructure was becoming a limitation to growth:
Indonesia lags some of its regional peers in efficiency and productivity mostly because of the poor state of its roads, airports, and other economic lifelines. The poor and deteriorating quality is shown in increasing congestion in urban areas, high transport costs, electricity blackouts, and limited access to improved sanitation.
“The inadequacies in Indonesia’s transportation infrastructure are likely to hinder the country’s global competitiveness unless addressed,” said Standard & Poor’s credit analyst Rajiv Vishwanathan. “Indonesia is also at risk of deeper power shortages over the next few years as demand multiplies.”
The big unknown in all of this is the political risk. As Australia has experienced with the likes of Intrepid Mines these can be significant , although I note that this story is on-going. It is obvious Indonesia has taken great steps forward under Susilo Bambang Yudhoyono but there is still major influence from powerful oligarchies in the nation, much like the chaebols of old in South Korea.
As I stated above. in order to maintain high levels of economic expansion Indonesia will require rapid improvement in public infrastructure which will in turn need an open and accountable government. This is something that appears to be lacking and the major political parties are heavy with oligarchical representation more interested in nest feathering than delivering services.
But, at least for now, Indonesia continues to grow strongly. A risky option maybe, but one worth continuing to watch closely.