Indonesian Economy: Concerns Going Forward

Includes: IDX
by: Emerging Money

By Sean Geary

As a result of the global commodities supercycle, the Indonesian economy (NYSEARCA:IDX) has experienced growth unprecedented in the country's previously tumultuous history.

Equities with large Indonesian exposure have been darlings of the emerging market community. However, concerns are starting to mount that political uncertainty in addition to a lack of improvements in infrastructure and productivity will begin to impede the country's progress.

The progress made by the Indonesian economy over the last decade is nothing short of remarkable, transitioning from an incredibly poor country to one of the stars of the emerging investment world. In the past three years, the Market Vectors Indonesia Index ETF tracking the Indonesian economy has more than tripled. However, in the wake of slowing global growth and a concomitant decrease in demand for commodities, investors are starting to take a closer look at the fundamentals of the Indonesian economy.

Simply, Indonesia needs to improve its infrastructure and productivity if the country hopes to continue its enviable growth rate. Infrastructure in the archipelago is sorely lacking -- Jakarta remains the largest city in the world without a metro and the city's traffic problems belie the necessity of public transit solutions. Other segments of the economy are hampered by the lack of adequate infrastructure from aviation to freight transport as airports, roads and ports are insufficient.

The gains made recently by the Indonesian economy stem mostly from the boom in commodities, not enhanced productivity. Although the increased wealth in Indonesia has aided consumption, the sustainability of elevated consumption remains in question if the country remains over-reliant on commodity exports and does not develop value-added industries to help drive the Indonesian economy.

Signs of strain are already starting to show. The country's positive balance of trade shrank by more than half from June 2011 to June 2012. The country's currency, the ruppiah, has declined more than 12% against the dollar over the past 12 months making it one of the worst performing currencies on the planet. Analysts at JP Morgan believe that a "macro slowdown is inevitable."

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