There are economic success stories, and then there are economic miracles. Indonesia, the world’s fourth most populous nation, saw truly miraculous growth in recent decades.
In just 15 years, the country’s gross national per capita income has soared from around $2,500 to roughly $9,500. In addition, the Indonesian economy is on pace to reach $1 trillion by next year, up from just $114 billion in 1990, according to the World Bank.
Much of the tremendous growth has come from favorable trade flows with China, its largest trading partner. Yet the Indonesian economy has grown large enough to escape from China’s shadow, and the markets are now decoupling. For example, Chinese stocks are soaring this year, but the Jakarta stock market index is off more than five percent thus far in 2015.
As a result, it’s no surprise the three equity exchange-traded funds focused on the country––the iShares MSCI Indonesia ETF (EIDO), Market Vectors Indonesia Index ETF (IDX) and Market Vectors Indonesia Small-Cap ETF (IDXJ)––all hit 52-week lows during the past two weeks.
The disconnect between Indonesia’s bright economic future and the current malaise in Indonesian equities is the inevitable result of a fast-growing economy that eventually induces bottlenecks. These days, Indonesia is wrestling with a strained infrastructure and a sclerotic bureaucracy. Tackling those challenges will be crucial as Indonesia seeks to rev up its growth engine.
After some recent downward revisions, the Indonesian economy is now expected to grow around 5 percent this year. That’s a growth rate that Western economies would envy, but marks the lowest growth rate for Indonesia since 2006.
Much of the blame can be pinned on troubled commodities markets, as Indonesia is a key exporter of coal, palm oil, copper and other industrial raw materials. Yet economists also have concerns about government policies and their impact on growth.
Indonesian Prime Minister Joko Widodo came into office last summer amid high hopes for reform. Widodo is the first leader in Indonesia’s young democracy that doesn’t hail from the established military or political elite.
His policies are being closely watched by Glovista Investments, an emerging markets-focused investment firm. “We are looking for emerging market economies where governments are pursuing reforms,” says Darshan Bhatt, Glovista’s deputy chief investment officer. He notes that Vietnam is also an appealing opportunity in that respect.
Indonesia’s new prime minister is still trying to gain traction with his reform agenda. iShares’ investment strategist Tushar Yadava notes that Widodo’s reform agenda is on ever weaker footing. “Falling approval ratings do not engender support at a time when it’s needed most,” he says.