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2 July 2020 (closed)
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Investors in Asian markets should not be overly concerned about slowing economic growth in China or bullish US dollar momentum ahead of higher US interest rates as economic growth rates in this region are still significantly higher than in other parts of the world. Thanks to a burgeoning middle class segment (which constitutes a strong consumer force), Asia has great prospects for the long-term. This is the message conveyed in the words of Christophe Palumbo, Senior Business Development Manager at Aberdeen Asset Management.
According to Palumbo the middle class segment is growing rapidly in Asia, even in times of slowing economic expansion, and by 2030 he expects that over half of the world’s total middle class households will live on the Asian continent (from currently about 30 percent). This rapidly growing consumer force will consume more and higher quality products and therefore opens up ample opportunities for investors in Asia.
Although investors tend to be focused on record high stock indices in the USA, China’s slowing economic growth, the impact of the appreciating US dollar against most other currencies, low petroleum prices, and the monetary stimulus provided by the European Central Bank (ECB), Palumbo claims that these issues are either a short-term obstacle only or unfounded concern.
Asia imports roughly two million barrels of oil per day and thus constitutes the world’s largest oil importer. Therefore, the low petroleum prices imply that Asian governments are able to save money and spend these funds on structural economic or social development. Moreover, many Asian countries have relatively low debt burdens (compared to developed countries) and sufficient foreign exchange reserves.
Palumbo also sees something positive behind China’s slowing economic expansion as this development is caused by the internal rebalancing of the domestic economy. The government is shifting the economy from being export-driven to an economy that is consumption-driven. Imbalances in the country’s financial system are tackled and the government combats pollution in the cities and industrial estates. As such, economic growth in China will become more sustainable on the middle and longer term. In 2014 economic growth in China - the world’s second largest economy - fell to 7.4 percent (y/y), or the lowest growth pace in 24 years primarily caused by the country’s cooling property market, collapsing credit, and spiking bad loans.
Despite concerns about slowing economic growth in Asia, investors should not forget that countries such as China, India and the Philippines are still recording economic growth of at least 6 percent (y/y), well above economic growth figures in the developed world.
Indonesia is one of these Asian markets that contains solid prospects. The middle class is projected to grow from about 80 million people currently to about 140 million by the year 2030 (McKinsey estimate). This rapidly expanding middle class segment is an important asset for the economy as it spurs investment. The Indonesian population is also a young population as about 53 percent of the total population is below the age of 30 years. However, employment opportunities, healthcare and education are required to tap this demographic bonus. If not, it may become a demographic burden.
Read Section: Analysis Composition Population of Indonesia
Supported by low petroleum prices, the Indonesian government recently scrapped a large chunk of fuel subsidies and thereby saved significant funds that can now be allocated to structural economic and social development. In the revised 2015 State Budget a large part of these saved funds have been allocated to infrastructure development in Southeast Asia’s largest economy. As a side-effect this will make Indonesia more attractive for foreign investors as Indonesia’s weak infrastructure has been one of the obstacles to foreign direct investment.
However, slowing economic growth in China has impacted negatively on Indonesia's economy as it led to declining foreign exchange earnings from the export sector. Global demand for commodities has been sluggish thereby causing declining commodity prices in recent years. Indonesia - an important (raw) commodity exporter - has thus been affected.
Similarly, bullish US dollar momentum ahead of higher US interest rates is also troublesome as imports become more expensive (imported inflation) and Indonesian companies’ foreign debt burden increases. On the other hand, the weak rupiah also makes Indonesian exports more attractive and can help to narrow the country’s wide current account deficit.
Regarding higher US interest rates, it should also be noted that Indonesia is one of the emerging economies that is highly vulnerable to capital outflows as the country has been plagued by a wide current account deficit and has a relatively low level of foreign exchange reserves (USD $115.5 billion at the end of February 2015) compared to its regional peers.