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Why Investors Are Flooding Back Into INDONESIA

Why Investors Are Flooding Back Into INDONESIA

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Published by R. Iwan Budhiarta
Current Status of Economic and Investment Aspects in Indonesia, one of the Largest Countries in Asia.
Current Status of Economic and Investment Aspects in Indonesia, one of the Largest Countries in Asia.

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Published by: R. Iwan Budhiarta on Aug 10, 2010
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01/05/2011

 
Why investors are flooding back into INDONESIA
There's been a lot of talk about how emerging markets are now safer than the developedworld. And for the most part, this is just talk.You can point as much as you like to stronger growth prospects and better balance sheets. Itdoesn't make much difference yet. When a crisis comes, foreign investors still flee back tothe familiar. Look at the way the dollar soared during the panic over Europe and is nowcollapsing as fears recede.But while emerging markets aren't the new safe havens, attitudes are shifting. There's beena reassessment of risk. And few places demonstrate this better than Indonesia...
The only reason is... A very strong recovery
Indonesia has come out of the crisis well. Last week's statistics showed that GDP growth inthe second quarter had picked up to 6.2% year-on-year. 
 
  And this should be sustained even if much of the world is slowing. Consumer confidenceremained solid. That's crucial since Indonesia's economy is heavily geared to domesticconsumption.Investment - which is where the country lags behind much of Asia - was up 8% year-on-year and rising bank credit should help support this. The loan to GDP ratio remains low at under 30%. There's enormous scope for this to rise - financial services in Indonesia is one of Asia'sbest potential growth markets.The only real cloud is inflation, up to 6.2% year-on-year in July. That partly reflects a recentrise in electricity tariffs. But strong demand and falling spare capacity mean that underlyingpressures are building. The central bank will probably have to work hard to keep within its4%-6% target range in the months ahead.
The impact is... Investors are flooding back
But the economy is only part of the story. Financial markets tell us what investors think of Indonesia's prospects. And the verdict is positive. The Jakarta Composite Index is one of thefew around the world to pass its pre-crisis peak. 
 
 Meanwhile, foreign holdings of Indonesian government bonds are also at a new high (seechart below). Indeed, enthusiastic foreign buying has pushed down yields to record lowsacross the curve. The two-year bond hit 6.5% and the ten-year fell to 8% in June.

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