Indonesia enters 2017 with its financial markets having posted an extremely strong year in 2016 and benefiting from the resurgence in commodity prices. Overseas investors have been coming calling in increasing numbers, lured by the nation's rising middle class. At the same time, however, doubts are emerging about the viability of the leadership of reformist president Joko "Jokowi" Widodo.
The S&P Dow Jones Indonesia rose 15.0% last year, behind only Thailand's 25% rise for Asian markets. Rising commodity prices have boosted Asia's occasional OPEC member -- an on-again-off-again relationship that the country suspended (again) in November. Indonesia is also the world's leading producer of palm oil.
Jokowi has initiated an apparently successful tax amnesty to lure overseas and undeclared domestic assets into the mainstream economy. His aim is to spend heavily on much-needed infrastructure. He has also abolished a decades-long gasoline subsidy, without much of a backlash, which has also freed up cash in the budget.
But he faces increasing pressure. As the first political outsider to take the highest office, he quickly attempted to cement power by appointing several political veterans to posts in his cabinet. He has reshuffled it twice, most recently last July when he purged several ministers who had publicly expressed doubt or even opposition to the government's stance on various issues.
Islamic hardliners appear first in line to attempt to take Jokowi and his allies down. For instance, "Ahok," Jokowi's hand-picked successor as the governor of Jakarta, is currently on trial for blasphemy. Many observers had expected Jokowi to attempt to hand presidential power over to Ahok when his two-term limit expires.
Full name Basuki Tjahaja Purnama, Ahok is ethnically Chinese and a Christian, both firsts for his post. Standing for re-election, he is accused of citing the Quran inappropriately during a campaign speech last September. He quoted a verse in the holy book that he said showed voters should not be fooled by religious leaders claiming that a non-Muslim should not lead Muslims. An edited version of the speech went viral with several words missing, making it seem as though he was saying the Quran was misleading, rather than the Islamic leaders referring to it.
Now Indonesia is caught up in another scandal with religious overtones. The country has suspended military cooperation with Australia after it said material that was offensive to Indonesians was found on an Australian military base. Reports in the Indonesian media said a laminated paper at a special-forces base insulted the Pancasila, the country's philosophical foundation.
That has as one of its tenets the "Belief in Almighty God," which deliberately avoids the use of the word "Allah" in that instance but insists on monotheism. While the two militaries get along well, joined among other issues in the fight against terrorism, Damien Kingsbury, a professor of international relations at Deakin University in Melbourne, said the military establishment may be attempting to embarrass Jokowi on the issue.
Can the country separate business from belief? 2017 will be a staunch test.
Real estate investors appear undeterred. They invested at least $2.8 billion in projects in Indonesia last year, according to Reuters, including a $1 billion tower that the Chinese state-owned enterprise China Communications Construction Group (CCCGY) is building in Jakarta to appeal to young, middle-income couples.
Mitsubishi (MSBHY) , Tokyu Land T:8815, Hongkong Land (HNGKY) and Sime Darby KL:SIME also have property deals under way in Jakarta and its surrounds, with 200,000 people moving to the Indonesian capital each year and a young, middle-income population of 55 million families.
Indonesia has also made it easier to own a home. The central bank cut interest rates three times by a total of 150 basis points to 4.75% in 2016. It also lowered minimum down payments. Land prices have also fallen, reflecting the earlier slump in commodities, and encouraging local developers to seek foreign partners to front up cash. According to Ali Tranghanda, executive director at Indonesia Property Watch, property sales will grow at least 15% this year, for the first annual growth since 2013.
To play the domestic story, it makes sense to focus on consumer stocks and the financial names that might benefit from increased mortgage lending. Gross domestic product gains are not stellar, but look set to have run around 5% for 2016 compared with the prior year.
The country rose 15 places in the World Bank's "Doing Business" look-ahead for 2017, putting it among the top 10 gainers. Though it remains 91st in the world, it also moved up 11 places in the 2016 report, further boosting prospects for domestic-led recovery. Business-friendly moves include abolishing minimum capital requirements for small- and mid-size businesses and introducing online tax filings.
CLSA's Asia equity strategist, Chris Wood, has 4% of his Asia ex-Japan portfolio allocated to Indonesia, virtually double the 2.4% weighting in the MSCI Asia Pacific ex-Japan index. His leading thematic pick for long-only investors is Astra International (PTAIY) . Although it is a conglomerate with operations in industries such as financial services and information/technology, Wood favors it as a play on the automobile sector in Indonesia. Astra has subsidiaries with Toyota Motor (TM) , Daihatsu Motor (DHTMY) , Honda Motor (HMC) , BMW (BMWYY) and Peugeot (PEUGF) , among other brands.