Vietnam vs. Indonesia
While the whole world seems to be keen to invest in Vietnam, interest in Indonesia has cooled down considerably in recent years. Vietnam’s success story is based on privatizations, better protection of intellectual property and clear policy choices aimed at a rapid development of the export sector. In Indonesia, almost the opposite is happening: the government is becoming increasingly populistic to support the consumer, at the expense of business’s competitiveness. The big export companies stay away or leave for other Asian countries, and preferably Vietnam.
Currently, the emerging world almost shows no greater contrast than that between Vietnam and Indonesia. This mainly concerns clear strategic policy choices and effective implementation. Vietnam shows impressive results. Of course, the political system is of great importance: choices are easier to make and reforms are easier to implement if policymakers do not have to take into account re-elections or unwilling local governments. But even so: the export success of Vietnam in recent decades is extraordinary. Over the last twenty years, Vietnamese exports have grown five times faster than the average growth in the emerging world and twice as fast as the export growth in China, the country known as the export champion. And especially in the last years, Vietnam leaves the competition behind.
The strong inflow of foreign capital – direct investment alone comes in around $20bn a year – keeps the currency stable, making it relatively easy for the authorities to keep inflation and interest rates low. The consumption boom that results from this is currently one of the strongest in the entire emerging world.
Inflation in Indonesia has also been low in recent years, and also here foreign capital inflows have been crucial. The big difference with Vietnam, however, is that direct investments hardly go to the industrial sector and the interest rate differential between Indonesia and the US has attracted a lot of speculative money. Now that the government in Jakarta is clearly steering a more populist course, the latter investments are under pressure and it becomes more difficult to keep the rupiah stable. This will likely lead to higher inflation, which may be a reason for the government to support the Indonesian consumer with even more price interventions. All in all, the investment climate is unlikely to improve. And precisely this is the key to productive foreign direct investments, export success and high and stable economic growth. In the nineties, tiger Indonesia was miles ahead of poverty-stricken Vietnam. Now the rapidly developing Vietnam has become an example for the stagnating and increasingly withdrawn Indonesia.
Maarten-Jan Bakkum is senior Emerging Markets strategist at NN Investment Partners