It is time to be bullish on emerging markets and look at their long-term prospects.The recent emerging market capital outflows and the impact on emerging market currencies of the U.S. Federal Reserve’s tapering of its quantitative easing should be viewed as just a bump in the road.
It’s hard to ignore the news when plotting or adjusting an investment strategy, and issues impacting emerging markets as a class of investments have definitely been in the news. If one can get beyond the headlines, two key factors should be focused on, population growth and the growth of middle class consumers.
A region that is projected to be a hot spot of global economic growth over the coming decades is Southeast Asia. It has been ignored by many global investors, and has been in China’s shadow for too long. I am convinced that the region will come into its own over the coming decades. Key to understanding the region’s importance for investors is to look at the amount of foreign direct investment. In 2012, foreign direct investment into China totaled $121 billion. Southeast Asia was the recipient of almost that much, $111 billion.
The ten countries that make up the Association of Southeast Asian Nations (ASEAN) have a population of 620 million. This population is larger than the combined population of North America, Latin America and the Caribbean. It is also larger than that of the eurozone or North Africa and the Middle East together.The five core ASEAN countries, Indonesia, Malaysia, the Philippines, Singapore and Thailand have grown faster than any other geographical group of countries over the past five years. These ASEAN countries had a combined gross domestic product of over $2.2 trillion in 2012, larger than that of Russia, and about the same as that of Brazil. Many economists expect the region’s GDP to double by 2020.
One Southeast Asian country, Indonesia. stands out as deserving more attention than the others in the region. With a population of 250 million, not only is Indonesia the largest country in Southeast Asia, it also the fourth most populated country in the world.
Since the early 1990s, Indonesia has made significant strides. The country has adopted a more inclusive political system, reduced the authority of its military, empowered local jurisdictions, achieved political stability across its vast archipelago, and for the most part prospered economically.
Since Indonesia is a major emerging market, I have been pushing for the country to be formally added to the BRIC group of countries, which now include not only Brazil, Russia, India and China but also South Africa. This, by itself, would bring well deserved attention to Indonesia.
But all is not rosy in Indonesia. As was the case with most emerging markets, Indonesia was hit by the repatriation of capital in response to the anticipation of the tapering of quantitative easing, and then by the beginning of tapering itself. Indonesia’s stock market and its currency were also hard hit.
Indonesia has relied on exports for its growth, and most of those exports have been commodities, with China being the principal customer. For the five year period of 2005 through 2011 Indonesia doubled its annual exports from $84 billion to $204 billion.
From 2000 to 2013 Indonesia’s GDP grew at an average annual rate of 5.4 percent. For the third quarter of 2013, the country’s economy grew 5.62 percent. compared to the same quarter of 2012. China’s growth rate has exceeded that of Indonesia, but China has its own set of challenges. Indonesia’s historical growth rate is impressive, especially when one compares it to that of the U.S. or the eurozone.
Indonesia is a major player in global metal markets. The country accounts for around 20 percent of the world’s nickel supply and 10 percent of its aluminium supply. Rubber, palm oil, coal and iron ore accounted for over one-half of the of Indonesia’s exports. Due to decreased demand from China, Indonesia was significantly impacted by a decline in the price of many commodities.. Over the past few years, easy credit thanks to the U.S. Federal Reserve and a booming market for commodities avoided Jakarta from having to make what many see as needed structural changes in the country’s economy.
This year is an election year in Indonesia. Both legislative and presidential elections are scheduled, and concerns have been voiced about the political impact of nationalism and populism in the elections. There is a general hope that the outcome of the July presidential elections will be crucial in cementing democratic reforms. A major challenge for the country’s new regime will be how to rapidly increase its middle class, and to increase the size of its consumer market.
Indonesia’s ore and concentrate exports have come to a complete halt, after both a ban on ore shipments and an export tax were imposed a couple of weeks ago. I understand the government’s political and economic objectives of forcing local producers and exporters to process ore domestically to boost industrial development. I can also understand the government’s frustration that mining companies haven’t established processing facilities in the country at all, or at a fast enough rate. This ban on exports plays well to many of the country’s population, especially in an election year, but my conclusion is that this ban will not last for long.
In conclusion, global investors should put Indonesia on their radar screens and find a way to participate in the future growth of the world’s fourth most populous country.
Author: Jeffrey Friedland
Jeffrey Friedland is the author of “All Roads Lead to China: An Investor Road Map to the World’s Fastest Growing Economy,” which is available in print and Kindle editions at Amazon and other booksellers.
He is the CEO of Friedland Global Capital, a firm that assists companies in emerging and frontier markets in achieving their corporate finance objectives, and accessing global equity capital.