Indonesia, the world's largest archipelagic nation with 17,000 islands, is often referred to as the "Land of the Thousand Islands." Its captivating nature landscapes, such as Bali, attract millions of visitors annually. Beyond its abundant tourism resources, Indonesia stands as the fourth most populous country worldwide and maintains a stable economic growth rate of around 5%. The country's vast market potential, youthful population, and improving infrastructure have positioned Indonesia as a new focal point for investors.  

Indonesia has recently concluded its general election, with a turnout of over 200 million participating in the voting process. The newly elected president, Prabowo Subianto, is expected to uphold the economic policies implemented by his predecessor, injecting fresh momentum into the Indonesian stock market. As a result, the Jakarta Composite Index recently reached historic highs.  

In this edition of Poseidon’s Foresight, we will delve deep into the Indonesian market, providing analysis and insights on recent market development.

Summary

• Indonesia, a major player in the global agricultural market, holds significant positions in palm oil, rubber, and coffee beans production. It is also home to the world's largest geothermal reserves.  
• Indonesia's abundant reserves of raw materials, particularly nickel and cobalt, have positioned the country as a significant supplier in the electric vehicle industry, attracting substantial foreign investments.
• With the world's fourth largest population and approximately 70% falling within the working-age range, Indonesia possesses significant labor force potential. However, it must address various challenges to effectively utilize its demographic dividend for sustained economic growth.

The History of Indonesia's Economy

Since gaining independence from Dutch colonial rule in 1945, Indonesia's economy has primarily relied on agricultural exports, including rubber, palm oil, and coffee. In the 1970s, Indonesia embarked on its industrialization journey, implementing a series of favorable policies to attract foreign direct investment. Consequently, industries like textiles, apparel, and electronics experienced rapid growth. At the same time, Indonesia harnessed its abundant natural resources, particularly petroleum, natural gas, and coal, as significant contributors to its economic expansion through exports.

However, Indonesia's economy suffered a severe setback during the Asian financial crisis in 1997. During this period, the Indonesian rupiah faced intense selling pressure and underwent a sharp depreciation. In an attempt to maintain currency stability, the Indonesian government utilized a significant portion of its foreign exchange reserves, but it struggled to effectively protect the currency. Within one year, the Indonesian rupiah depreciated by 85% against the US dollar. This significant currency depreciation, coupled with capital outflows, further exacerbated domestic price surges in Indonesia. In 1998, Indonesia's GDP plummeted by 13%, and inflation soared to 58%. The economic crisis not only resulted in substantial losses on the Indonesian economy but also sparked political and social unrest, ultimately leading to the ousting of President Suharto, who had held power for 32 years.

In response to the crisis, Indonesia swiftly implemented tight monetary policies, resulting in a surge in interest rates from 22% in January 1998 to 70% by September 1998. Additionally, the International Monetary Fund (IMF) extended economic assistance in the forms of short-term loans, injecting liquidity into the Indonesian economy. With improvements in the international trade environment and a boost in export revenues, Indonesia's economy finally began to recover in 1999. Following the Asian financial crisis, the Indonesian government formulated a series of policies to strengthen the economy, including enhancing bank supervision, maintaining fiscal discipline, and diversifying the economy by reducing reliance on volatile sectors such as energy production. At the same time, the Indonesian government adopted a clear focus on sustainable and stable economic development, prioritizing it over pursuing fast-paced yet unsustainable growth. With more robust macroeconomic management, a healthy banking sector, and ample foreign exchange reserves, Indonesia successfully weathered the global financial crisis in 2008 and maintained positive GDP growth. Over the past two decades, apart from a brief economic contraction during the pandemic, Indonesia has sustained a stable growth trajectory, with an average annual growth rate of approximately 5%.  

Abundant Natural Resources

As the largest country in Southeast Asia by area, Indonesia holds a significant position in the global agricultural market. Notably, Indonesia is the world's largest exporter of palm oil, the second-largest exporter of rubber, and the fourth-largest exporter of coffee beans. The palm oil industry, in particular, plays a crucial role in the Indonesian economy, producing over 30 million tons annually. It contributes 4.5% to Indonesia's GDP and provides employment opportunities for three million people. For rural populations in Indonesia, the palm oil sector offers a vital pathway to escape poverty and achieve stable incomes.

In terms of mineral resources, Indonesia possesses vast reserves of traditional energy sources such as oil, natural gas, and coal. The mining sector holds a significant position in Indonesia's economy, contributing approximately one-tenth of the country's GDP. Taking the coal industry as an example, Indonesia not only ranks as the world's third-largest coal producer but also holds the top spot as the largest coal exporter. In 2023, Indonesia recorded a historic coal production level of 775 million tons, with over 500 million tons being exported to international markets. Among the major coal mining companies in Indonesia, Bayan Resources (BYAN.JK) stands out with its identified and estimated reserves of up to 1.7 billion tons, indicating a potential supply that could last for 41 years. As the demand for coal increased due to the Russia-Ukraine war, Bayan Resources has experienced a substantial increase in its stock value, making it the fifth-largest company by market value in Indonesia, with a market capitalization of approximately 650 trillion Indonesian rupiahs (US$41.5 billion).

While Indonesia continues to advance its fossil fuel industry, it is also actively promoting the development of renewable energy sources. Situated within the Pacific Ring of Fire, Indonesia benefits from significant seismic activity, which provides abundant geothermal energy potential. Experts estimate that Indonesia possesses approximately 40% of the world's geothermal resources, totaling nearly 28 million megawatts. To put this number into perspective, let's compare it with Taiwan's power generation capacity. In 2022, Taiwan's total power generation capacity, including fossil fuel, hydro, and renewable energy, amounted to 61.94 million megawatts, according to Taiwan's Energy Administration. This implies that Indonesia has the potential to achieve nearly half of Taiwan's entire power generation capacity solely through geothermal energy. Currently, Indonesia ranks second globally in geothermal energy production, trailing only the United States. To drive the development of renewable energy, the Indonesian government aims to increase the contribution of renewable energy to 23% of total power generation by 2025, gradually transitioning from fossil fuels to renewable sources, and achieving carbon neutrality by 2060. Benefiting from government-driven policies, many domestic companies in Indonesia have made substantial investments in constructing geothermal power plants. Among them, Barito Renewables Energy (BREN.JK), currently the largest geothermal power producer in Indonesia, has experienced a significant rise in stock prices since its initial public offering in October 2023. It is now the third-largest company in Indonesia based on market value, with a market capitalization of approximately 732 trillion Indonesian rupiahs (US$46.7 billion).

Apart from energy, Indonesia is also a significant supplier of raw materials for the electric vehicle industry. The country boasts abundant mineral resources, including 1.5 billion tons of nickel, 640 million tons of copper, 927 million tons of bauxite, and 1.2 billion tons of tin. As the world's largest exporter of nickel and the second-largest exporter of cobalt, Indonesia plays a crucial role in the production of lithium-ion batteries for electric vehicles, which account for approximately 40% of the total vehicle production cost.

The abundant reserves of raw materials in Indonesia have garnered global attention. Driven by growing foreign investments, Indonesia's electric vehicle supply chain is becoming increasingly more comprehensive, encompassing nickel mining and smelting, battery production, and electric vehicle manufacturing. For instance, Chinese nickel and cobalt giants, Huayou Cobalt and Tsingshan Holding Group, have invested over US$2 billion in Indonesia to build nickel mining and smelting facilities. Additionally, leading lithium-ion battery manufacturers, CATL and LG Energy Solution, have invested US$5.2 billion and US$9.8 billion respectively in Indonesia to establish electric vehicle battery production bases. Furthermore, automotive giants such as Hyundai and Toyota have also invested $1.1 billion and $2.9 billion respectively to set up electric vehicle production plants in Indonesia.

The Indonesian government plans to leverage its abundant nickel and cobalt resources, in order to establish itself as a leading electric vehicle production and export hub in Southeast Asia. Driven by foreign investment in the electric vehicle industry, Indonesia has witnessed record-high levels of foreign direct investment. In 2023, the total foreign direct investment in Indonesia reached 744 trillion Indonesian rupiahs (approximately US$47.3 billion), reflecting a 14% year-on-year increase.

Demographic Dividend

Indonesia, ranked as the fourth most populous country globally, currently has a population of 274 million, and this figure is projected to reach 324 million by 2045. Approximately 70% of Indonesia's population falls within the working-age range of 15 to 64 years old, with a median age of 29, indicating a significant labor force potential. However, there has been a decline in the country's child population and birth rates in recent years. From 1990 to 2022, the percentage of the population aged 15 and below dropped from 36% to 25%, while the fertility rate decreased from 3.1 children per woman to 2.2. Experts predict that Indonesia's working-age population will continue to grow over the next 15 years, providing the country with a significant and valuable labor force. However, as the population gradually ages, Indonesia must address various challenges to effectively harness the potential of its demographic dividend and translate it into sustained economic growth.

One of the key challenges Indonesian youth faces today is the access to high-quality education, especially in rural areas. UNICEF data reveals that nearly a quarter of the country's 46 million adolescents aged 15 to 19 lack access to education, employment, or job training. Insufficient funding for schools and a shortage of qualified school teachers hinder young people from acquiring the necessary skills needed for future employment. Moreover, Indonesia still grapples with a relatively high youth unemployment rate. Although the youth unemployment rate has dropped from 26% in 2005 to 13% in 2023, many graduates still lack the vocational skills required for employment in high-tech industries. For instance, the electric vehicle manufacturing industry remains heavily reliant on foreign labor. Furthermore, traditional societal values in Indonesia restrict educational opportunities for young women. UNICEF estimates that approximately one in nine Indonesian girls are married before the age of 18, resulting in lower school enrollment rate and higher dropout rate among young women, thereby limiting their personal and professional growth. UNICEF estimates that child marriage in Indonesia causes economic losses equivalent to at least 1.7% of its GDP.

Conclusion

With its abundant natural resources, demographic dividend, and increasing foreign investment, Indonesia holds significant investment potential. Investors can tap into Indonesian market through direct or indirect investment, such as purchasing stocks or bonds, or investing in corresponding exchange-traded funds (ETFs). It is worth noting that Indonesia's current government credit rating stands at BBB (borderline investment grade), which means that most of the country's non-government bonds are below investment grade. In addition, factors such as natural disasters, regulatory complexity, and currency volatility add to investment uncertainty. Therefore, for foreign investors who are considering investing in Indonesian stocks and bonds, it is crucial to conduct a thorough analysis prior to making any investment decisions.

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