Thursday 28 Mar 2024
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SINGAPORE (June 8): Southeast Asian giant Indonesia is finally turning things around.

“Unlike in past trips, we are now confident stating that we think Indonesia is harnessing its long-term potential into near-term economic and investment realities,” says Henry Mcvey, the head of global investment firm KKR’s Global Macro and Asset Allocation team.

Backed by the immense potential of a working age population that is not due to peak for several decades, the world’s fourth most populous country has found itself bogged down by political-economic factors that have hampered its growth.

In 2013, Mcvey reported the country needed to “clean up its finances, improve its infrastructure, and further diversify its economy before it would be 'all clear' for increased capital deployment by foreigners.”

Just four years later, Mcvey says the outlook for Indonesia now appears quite different.

“Within our ASEAN footprint, Indonesia has clearly emerged as one of the most attractive pure-plays on our view that global capital flows will increasingly migrate towards economies with large domestic consumption,” Mcvey says in a report on Wednesday.

Since his last report on Indonesia, Mcvey says government funding for infrastructure projects has more than doubled, its reserve base is now near record levels, and there is no excessive credit overhang to worry about.

“Perhaps more important, though, is that central bankers, government officials, and CEOs all now seem more committed to delivering on the ‘game plan’ needed to elevate Indonesia into one of the elite destinations for investor capital,” Mcvey says.

To sustain the country’s current momentum, Mcvey says continued progress on the reform front is a prerequisite for achieving higher productivity and potential GDP growth.

In addition, the country must continue its commitment to keep inflation under control.

And finally, Mcvey believes Indonesia must continue to diversify its large base of foreigners that own its bonds. This is to reduce the risk of capital flight, should the European Central Bank, the Bank of Japan or the Federal Reserve tighten their monetary policies sharply or in the event anti-corruption policies cause a sudden rush of domestic capital flight.

"To be sure, there are still risks,” Mcvey warns. “But our research and our visits lead us to conclude that Southeast Asia, Indonesia in particular, may be one of the areas where investors are not fully up to speed on the compelling macro backdrop.”

“In our view, therein lies the opportunity," he adds.

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