I tend to get a bit excited when talking about the prospects of Indonesia, not least because I'm a mad-keen scuba diver. The world's largest archipelago has plenty of isolated spots that still remain untouched by the heavy hand of man, making it one of the best places in the world to strap on a tank and slip under the waves.
I also see a lot of economic potential. Progressive President Joko Widodo, universally known as Jokowi, is the first leader to come from outside the military and political elite. After his recent re-election, he'll have another five years through 2024 to push his agenda of reform and opening up, with the attraction of foreign investment a key component of the plan.
Jokowi has just announced his cabinet for his new term. The cabinet is big enough, at 38 people, to store a grand piano standing up. But its makeup demonstrates that we should expect great things from his next five years in office. Jokowi's stated aim is to set Indonesia on course to become a developed nation by 2045.
If he pulls off his goal, Indonesia will be a US$7 trillion economy by 2045, making it one of the five biggest in the world. He also aims to ensure an average per-capita income of 27 million rupiah per month (about US$2,000).
The country's most-famous entrepreneur, Nadiem Makarim, has been named minister of education and culture. Makarim is the co-founder and ex-CEO of Indonesia's first "unicorn," Gojek. The company began by offering seats on a scooter but has expanded into a "superapp" with a hand in digital payments and grocery delivery. You can even book a massage or manicure on Gojek, which was valued at US$9.5 billion in its last finance round.
The inclusion in the cabinet of the Brown and Harvard Business School grad will add exciting ideas as to how to enhance the country's wealthy stock of human capital. Makarim is likely to stress the use of technology to improve education and workplace readiness across the country, which for now has an economy that revolves around Jakarta and its island, Java.
The other noteworthy move is the appointment of Jokowi's bitter opponent in the presidential election, the former army officer Prabowo Subianto, to the post of defense minister. I'm no fan of Prabowo, who used to be married to a daughter of dictator Suharto and served in Indonesia's feared special forces, the Kopassus. Prabowo aligned himself with the religious extremist element of Indonesian politics in a bid to get himself elected. But his inclusion brings the party he heads, Gerindra, into the fold, and makes it far less likely that Jokowi will face the bitter infighting and pressure from Islamists that characterized the last 18 months or so of his first term.
Jokowi's coalition now has a three-quarters majority in parliament, so he should be able to revise legislation that hinders foreign investment and job creation and push through the wealth-spreading move of the capital from Jakarta to Borneo, something he wants to see happen by the end of his term. Jokowi is also set on making the tax structure more attractive, cutting the corporate income tax rate from 25% to 22% in 2021, and to 20% from 2023 on.
Jokowi re-appointed Finance Minister Mulyani Indrawati, who has brought government finances under control and helped secure multiple sovereign credit upgrades for Indonesia. Former industry minister Airlangga Hartarto, a fan of the digital economy, heads Jokowi's economics team. There was a 1.3% market spike on the Jakarta Stock Exchange showing support of these level heads, taking Indonesian stocks to a six-week high. They're up 4.2% since Oct. 7.
U.S. investors have two targeted ways of playing the Indonesia story. The iShares MSCI Indonesia ETF (EIDO) is the largest country-specific investment tool available, at US$463 million in assets.
The VanEck Vectors Indonesia Index ETF
Those consumer-oriented plays are the way to go. The world's fourth-largest country by population and largest Muslim-majority nation is a giant Southeast Asian market. Like one of its not-so-dormant volcanoes, the giant is rumbling to life thanks to rapid technology adoption and an increasingly affluent middle class.
It is not the easiest country to lead. With more than 17,000 islands and a diverse ethnic population, there are plenty of regional agendas to address. Its westernmost province, Aceh, is ruled by strict shariah law, while most of the country has secular leadership. Hindu-dominant Bali is its laid-back and successful tourist capital. Far to the east, there's a fierce fight for self-determination in resource-rich West Papua.
While Jokowi was squaring away his long list of ministers, the country's central bank, Bank Indonesia, cut interest rates on Thursday. That's the fourth straight such cut in a row in a bid to boost growth against a challenging global backdrop. The seven-day repo rate now stands at 5.0% and Bank Indonesia says it will work with the government to lure more foreign direct investment into Indonesia. Nomura expects another cut next month.
The central bank now believes the economy will grow toward the low end of its 5.1% to 5.5% forecast for 2019. It anticipates a modest pickup in 2020. There may be a challenge to growth later this year and a hit to consumer confidence if the government removes price controls over electricity and energy. Higher prices would boost inflation.
Société Générale economist Kunal Kundu is cautious about Jokowi's prospects of pulling a move off to propel Indonesia into the world's top five economies or creating average upper-middle-class wealth by 2045. It took Indonesia 58 years since independence almost 75 years ago to move out of the "low income" group, which it did in 2003. South Korea and Singapore have been the flagbearers for Asian economic advance, Malaysia is now solidly middle class, and Thailand and even the Philippines have progressed faster than Indonesia.
To achieve Jokowi's goals, the economy will need real GDP growth of roughly 7% per year over the next 26 years, fighting against a currency averaging 3.4% depreciation per year against the U.S. dollar. Average annual growth is now around 5%.
"Indonesia must turn things around very quickly to address the major challenges facing the economy to achieve the objective," Kundu writes in a report on the cabinet. "Without major investment and high productivity, this appears unachievable."
Kundu's base case is for 5.5% growth per year in real terms for the rest of Jokowi's term. Indonesia is growing at a faster pace than most nations at a similar level of development. But it needs to grow faster.
With his sizable mandate and willingness to push reform, attract foreign investment and stimulate growth, the likeable Metallica fan and rock-band guitarist of a president better get to work.