Investors Are Betting On The Continued Growth Of Booming Indonesian Economy | Invest Islands

Investors Are Betting On The Continued Growth Of Booming Indonesian Economy

Viewed with 347 years of hindsight, it was possibly history’s most one-sided trade. In 1667, when spices were worth more than gold, England and Holland agreed to divvy up two islands over which both claimed sovereignty.

The Dutch took Run, a remote outpost of Indonesia’s Spice Islands, where the aroma of nutmeg, cloves and cinnamon scents the breeze. The English got what would become Manhattan.

Today, while New York reigns as the world’s financial capital, Run doesn’t have a single bank branch.

“Even just an ATM would be nice,” Burhan, 42, a batik-shirted schoolteacher, nutmeg farmer and guesthouse owner, says as he sits on his porch overlooking the volcano-studded Banda Sea, 1,550 miles and two time zones east of Jakarta.

Burhan, who like many Indonesians goes by one name, may not have long to wait. The country’s biggest banks, among the most profitable on the planet, according to Bloomberg data, are emerging from their big-city strongholds to compete for customers in the farthest flung of the 17,500 islands that make up the world’s fourth-most-populous nation. Some even plan to use boats that double as floating ATMs.

The banks’ challenge: to maintain an average 24.3 percent return on equity that dwarfs that of other banks in the world’s 20 biggest economies — including the 9.4 percent U.S. lenders deliver.

Enriched by a 13-year consumption- and resource-driven economic surge, Indonesians have accumulated assets faster than the residents of any other major Asia-Pacific country, according to Credit Suisse, which reported in October that average wealth per adult had jumped almost fivefold to $11,839 since 2000.

By 2030, Indonesian economy, the world’s 17th-largest, with a gross domestic product of $878 billion, will have overtaken Germany and Britain to rank seventh, according to a McKinsey forecast.

Already, parts of Indonesia’s capital resemble upmarket British or German neighborhoods. The McLaren dealership has sold 19 of the $750,000 British sports cars since November 2012.

As of May 20, the Jakarta Composite Index outperformed this year’s 3.3 percent rise in the MSCI Emerging Markets Index to leap 21.4 percent in dollar terms, making it the world’s sixth-best performer of 93 indexes Bloomberg tracks.

Indonesia is the world’s biggest exporter of power-station coal, nickel, tin and palm oil and home to the world’s biggest gold mine and recoverable copper reserve. As such, it hasn’t been immune to tumbling commodities prices and a slowdown in its biggest export market, China.

In 2013, Indonesia’s growth declined to 5.8 percent from 6.3 percent in 2012. Last year, a slowing economy, a rising current-account deficit and capital flight from developing nations by skittish foreign investors wiped 20 percent from the capitalization of the Jakarta Stock Exchange.

That’s now changed. Beginning in May 2013, Agus Martowardojo, Indonesia’s central bank governor, reacted swiftly to foreign capital flight by raising interest rates five times to 7.5 percent. The rupiah surged 6 percent this year as of May 20 — the biggest rise among 11 Asian currencies; and bonds jumped 6.9 percent.

The tactic also brought annualized inflation down to 7.25 percent in April from 8.22 percent in January and helped cut the current-account deficit to $4.1 billion in the first quarter of 2014 from $8.5 billion in the third quarter of 2013.

“Compared to Brazil and Russia, Indonesian economy is the best-run large commodity economy,” says Ruchir Sharma, who oversees $25 billion, including shares in Indonesian companies, as head of emerging markets at Morgan Stanley Investment.

The question for investors now is how well the next government will run the economy. In October, President Susilo Bambang Yudhoyono must step down after his second five-year term. The favorite to replace him in July’s election is Jakarta Governor Joko Widodo.

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