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Many ETF investors have only a vague understanding of Indonesia, but it is a very important country with a population exceeding the US. It represents the largest Muslim country in the world and lies at a geographically strategic position as the next critical gateway of trade and commerce. It has also been one of the best performing markets in the world over the past 18 months and I use the closed-ended Indonesian Fund (NYSEMKT:IF) as a proxy for its stock market in our World Country ETF Rotation Strategy.

Mark Headly, CEO of Matthews Funds wrote the following update after a recent visit.

A few days visiting Indonesian companies in the sprawling capital city of Jakarta was enough to remind one of the complexities of this vast archipelago nation. With over 13,000 islands and more than 100 language groups, Indonesia is one of the most diverse nations on the planet. Both government and company management alike face many challenges in such an environment. Indonesia has gone through intense trials since the Asian Crisis ripped its economy and political system apart. On a visit in 2002, a tank was parked in front of my hotel. General Suharto's thirty year dictatorship left a vacuum that was very hard for a young democracy to fill. The hostility towards the small domestic Chinese population that dominated much of Indonesia's business community was particularly intense.

Today, one finds a relatively serene environment, but security at hotels and office buildings is tight, with all vehicles carefully inspected before they are allowed through security posts. The damage to Indonesia's reputation by the bombing in Bali and a prominent Jakarta hotel lingers on. Otherwise, this society seems to be moving forward with significant activity on the streets and in shops. Jakarta has progressed immensely from my first visit in 1991, but much remains to be done. Major infrastructure projects have been stalled for years. Urban unemployment remains high as foreign direct investors continue to shun a country known for aggressive labor unions, high levels of corruption and unreliable infrastructure.

A whole new social contract is being hammered out between the dominant island of Java and the many outlying population centers. In recent years, Indonesia has made money by selling it resources, agricultural goods and exported labor with much of this activity occurring on the outer islands of Sumatra and Kalimantan. For Indonesia to fully regain the confidence of international and domestic investors, the development of the major cities must proceed with government efforts that meet the needs of their populations and the business community. While this will not be easy, the odds seem in favor of Indonesia's millions of young and enthusiastic citizens.

Source: Eye on Indonesia