Earlier this year, India conducted one of the world’s largest exercises in democracy when more than 710 million citizens headed to the polls to complete general elections. Following the announcement of the results, several India ETFs (such as PIN, INP, and EPI) surged more than 20% in a single session on news that the Indian National Congress, generally regarded as a pro-business party, won the ability to form a majority government in Delhi without major allies. This week Indonesia, one of the world’s most populous countries and fastest-growing economies, will hold national elections that will be monitored closely by investors around the world.
From Chaos to Civilization
Following its declaration of independence from the Netherlands in 1945, Indonesia battled extreme poverty for several decades. In 1965, authoritarian president Suharto took control of the country, spurring growth through western investment and foreign aid, but also breeding a culture of corruption and implementing reckless economic policies that eventually led to the collapse of the country’s currency and financial system in the late 1990s.
Since then, however, Indonesia has staged an impressive recovery, thanks in large part to policies introduced by current president Susilo Bambang Yudhoyono. During his first five years in power, Yudhoyono has ended a civil war, reined in spending, and waged campaigns against both Islamic terrorists and corruption. Indonesia’s economy is projected to grow at about 4% this year, making it one of the only nations (along with India and China) expected to expand in 2009. The country’s stock market is up more than 50% year-to-date, and many foreign companies are planning major investments. The nation once plagued by instability, frequent terrorist attacks, and a decades-long civil war has now become one of the world’s hottest markets.
Although Yudhoyono is widely expected to win reelection, he remains under pressure to further improve Indonesia’s economy. During his first term, Yudhoyono filled his cabinet with several members of rival political parties in an effort to placate opponents and avoid destabilizing protests.
But Yudhoyono clearly believes this policy has prohibited him from pushing for necessary reforms, and he will likely change the composition of his cabinet significantly if reelected. “Good governance, bureaucratic reform, the anti-corruption campaign all have to be intensified,” said Yudhoyono in an interview prior to the elections.
Indonesia, a nation comprised of more than 17,000 islands, is the world’s fourth most populous country, and an important trade partner of Japan, China, the U.S., and several other Asian economies. The island nation is Southeast Asia’s only member of OPEC, and a major producer of petroleum, natural gas, and agricultural products.
As such, Indonesia is an extremely important component of the global economy, and the presence of a pro-business, anti-corruption leader will no doubt be beneficial to investors around the world. Yudhoyono’s closest rival is Megawati Sukarnoputri, a former president who in 2004 ranked as the eighth most powerful woman in the world according to Forbes. Having since fallen from the list, Sukarnoputri is pushing an anti-free trade stance in her campaign.
Although Yudhoyono has broad-based support, he does have his share of detractors who are unsatisfied with the pace at which reform has come and allege that the president has been complicit in human rights violations, most notably in East Timor.
ETFs to Watch
As millions of Indonesians head out to vote this week, here are three ETFs to keep an eye on:
- Market Vectors Indonesia Index ETF (NYSEARCA:IDX): One of the top-performing ETFs so far in 2009, IDX could see some higher than average trading volumes in the coming weeks as investors await confirmation that Yudhoyono will remain in charge in Indonesia. IDX has surged more than 80% since its launch in January on the back of rising commodity prices and recoveries in many key sectors. Now investors will likely look to Yudhoyono to implement policies that will sustain economic growth and put Indonesia’s growth prospects on par with China.
- iShares MSCI Japan Index Fund (NYSEARCA:EWJ): As Indonesia’s largest trading partner, Japan has a great deal at stake in this week’s election, particularly considering that one of the leading candidates is running on an anti-free trade platform. Although no outcome is likely to drastically reduce trade between these nations, Japan would likely be a major beneficiary of continued reform and development in Indonesia. In particular, Indonesia is a major importer of machinery and equipment and chemicals.
- SPDR S&P Emerging Asia Pacific ETF (NYSEARCA:GMF): In today’s world, global and regional economies are more interconnected than ever, and the ripple effects of major political developments are increasingly pronounced. GMF offers exposure to a number of emerging economies in the Asia Pacific region, including China, Taiwan, India, Malaysia, Indonesia, and Thailand.
Disclosure: No positions at time of writing.