It’s a country located on major ancient trade routes and has a history rich with invasions leading to a multicultural and multi-ethnic demographic. After its independence in the mid-1940s, the multitudes retain their religious affinities and speak at least 100 local dialects. The prospects for this democratic country are bright, with a predominantly young educated population, a burgeoning middle class with growing disposable income, low penetration rates of consumer credit and a dire need for infrastructure.
We are talking not of India, but of Indonesia.
The similarities are uncanny, yet Indonesia actually looks better on several metrics. Much like in India, a crisis led to Indonesia’s liberalization. However, the seeds were sown three decades earlier than India, and hence, Indonesia has a history of being a darling of foreign flows in the region.
That infatuation is very likely to return, perhaps even at the expense of India. As we always bemoan, very little has been done to attract capital of true economic value in India, all that comes its way is asset—either stocks or real estate—inflating flows. This hot money will always seek the next new destination.
A young population can make macroeconomic charts look attractive, but a portion of a large population such as India’s is actually a drag. Indonesia’s population, both young and significant in number, looks better off on several counts—access to education, electricity and other basic necessities.
Hardest hit from the fallout of the Asian crisis, Indonesia spent a lost decade trying to shore up its public and private finances. Public sector debt as a percentage of GDP has fallen to less than one-third of its post-crisis high. Currency gains have contributed little, but more than a 30 percentage points fall has come from an outright decline in debt. As a result, the government’s house is in good fiscal order and the fiscal gap has been closed. Compare that with India’s gaping fiscal hole of 11% of GDP.
Private sector net gearing at its peak was 120%, courtesy of copious amount of external borrowing. When the Indonesian rupiah was devalued during the Asian crisis, foreign debt holdings ballooned resulting in an exponential increase in debt servicing levels. After 10 years, the deleveraging efforts are commendable. Corporate net gearing is less than 15%—another uncanny similarity to India back in 2003.
After the crisis, Indonesia went through a period when there was no material investment either by the public or the private sector, nor were there any material foreign inflows. This period coincided with wide-scale unemployment and declining real wages. Unemployment still persists.
Indonesia reinforced its democratic credentials after last year’s win of incumbent President Susilo Bambang Yudhoyono. SBY, as the President is known, is the first real democratically elected leader since the dictator Suharto was overthrown in 1998 and Indonesia muddled through three different leaders for the six years that followed. Coalition politics is on the decline in Indonesia, but this politics of convenience has become ever more prevalent in India.
President SBY has set a few great precedents with his cabinet nominees. His former vice-president, who was actually from the political party floated by Suharto, has been replaced by the former central bank governor. The finance minister is a young, reform-oriented technocrat, which is not exactly something India can lay claim to.
Reforms have been slow in President SBY’s first term, but the pace is not very different from India’s after 60 years of democracy. Indonesia is already talking of attacking its fuel subsidy while India continues with its muddled system. A lot is left to be done for infrastructure in Indonesia, but we question the private participation in Indian infrastructure had it not been for abundant liquidity of the past few years and the lure of inflating already inflated real estate.
Indonesia has had the infamy of being ranked the most corrupt country for several decades. Since 1996, Indonesia has vacated the throne to 69 other gems such as Pakistan and Uzbekistan. Soon after coming to power in 2004, President SBY formed the corruption eradication commission (KPK). KPK since has become a feared organization with several prominent scalps to its credit.
Clearly Indonesia is trying to fight off its non-acceptance on the global platform, whereas India has settled into a comfortable state of acceptance. At the end of it, as every Indian knows, when it comes to the situation on the ground, business in India still gives the underside of the table a thorough workout.
Another constant worry for investors in Indonesia is who to get into bed with. Suharto, the displaced dictator, is gone, but the families that flourished under his reign still rule business. Cronyism and political affiliations are easily traceable with Indian family businesses as well.
A saving grace for India remains that public markets in Indonesia are still rather illiquid. However, complacency will be foolhardy.
Rajeshree Varangaonkar and Bharat Indurkar have day jobs with US-based hedge funds. They will write every other Thursday. Send your comments to firstname.lastname@example.org