In 2013, Indonesia was one of the so-called “ fragile five” emerging countries. It has since made a major comeback. In May its sovereign debt was upgraded to investment grade for the first time since the Asian financial crisis in 1997.
The country now has its best ranking in seven years in our proprietary Country Risk Index 6. The country benefits from favourable demographics, a high investment-to-GDP ratio and broadly improved fundamentals.
The nation is seeing the fruits of structural reforms announced in recent years to improve the business environment, productivity and competitiveness. The country has climbed 15 places in the World Bank’s Ease of Doing Business index to 91st place.
However, the report reads Indonesia has still a relatively closed economy, which means it is somewhat immune to global economic cycle developments (compare its smooth GDP growth in the chart to Singapore’s more cyclical evolution). It is not part of the Asian manufacturing supply chain, but is a top regional resource exporter, in particular to China (its primary sector accounts for 26% of GDP).
Indonesia has seen improving growth for the past two years as private investment and exports have significantly rebounded. Consumer spending has been disappointing (as measured by retail sales, see chart) but is expected to bounce.
Very high consumer confidence and improving labour conditions should support a recovery in Indonesia’s household spending in the second half of 2017. Meanwhile, contained inflation means monetary policy is expected to remain on hold this year.
Indonesia is Asean’s unlikely e-commerce champion. It is the trade bloc’s fastest and largest growing online retail market. This is partly thanks to Chinese behemoths Tencent and Alibaba taking equity chunks of local players. Domestic companies are also proving adept at creating bundled ecosystem models.
The country has a clear attraction: it is the world’s fourth largest population, half of which is under 30. Crucially, Indonesia’s PPP-adjusted GDP per capita has only just passed the threshold level at which online retail sales normally inflect upwards ($10,000).
Patrick Zweifel is chief economist at Pictet Asset Management.