Global fund manager Franklin Templeton Investments ranks Indonesia, the largest economy in Southeast Asia, ahead of Thailand, Malaysia and China in its proprietary Local Markets Resilience Index, marking the country as one of the strongest emerging markets. Templeton’s proprietary Local Markets Resilience Index assessed investment risks and opportunities in growing markets and evaluates Indonesia as one of the few markets that despite rising global uncertainties offer robust economic growth.
Spurred by higher commodity prices and stronger consumption Indonesia’s GDP expanded 5,2 percent in April to June from the same period last year, a growth that was much faster than expected by policymakers and observers. In a commentary send to Jakarta Globe, Templeton’s chief investment officer, Michael Hasenstab, said he is not surprised about Indonesia’s strongest economic growth since the last ten quarters as reported by several news media last week. A prudent fiscal policy, favorable demographics, healthy level of foreign exchange reserves and continuing structural reforms have entrenched macroeconomic stability in Indonesia over the last years, Hasenstab explained further.
Hasenstab said, Indonesia responded deterioration stemming from weak commodity prices and a deceleration in China’s economy by shedding off most subsidies in fuel as well as reducing volatility in fiscal and monetary deficits besides others. Furthermore the country’s government has been maintaining a prudent fiscal deficit management in the last years, in line with an imposed legal deficit cap of three percent of the gross domestic product (GDP). Newly elected Finance Minister Sri Mulyani Indrawati laid out a series of budget cuts as one of her first actions in office to maintain the deficit below 2,5 percent of the GDP. According to Hasenstab the country’s central bank, Bank Indonesia, now can make a more credible monetary policy, since the main culprits missing its own inflation targets were eliminated. Inflation itself has been small this year as it cooled of further from 3,4 percent in June to 3,2 percent in July. This allowed Bank Indonesia to cut benchmark interest rate by 1 percentage point so far to 6.5 percent this year in order to revitalize growth.
Indonesia’s small current account deficit shields the country at the current stance from external shocks, Hasenstab explains. Bank Indonesia sat on a USD 111,4 billion foreign exchange reserve by the end of last month, capable of covering more than twice the level of short-term debt. Indonesia’s demographics provide a solid underpinning for current and future domestic demand with only about five percent of the country’s population being 65 or older. Paired with a steady increase in urbanization and a decline in unemployment rate from 10 percent in the mid-2000s to 5,5 percent currently, Indonesia’s demographics are very favorable for future economic developments, Hasenstab said in the commentary. Domestic demand is the fundamental strength in Indonesia’s economy, he adds.