In contrast to the troubling demographic trends in much of the developed world, Indonesia is poised to leverage its very young population and strategic position to become one of the world’s largest economies in the years ahead.
Edward Gustely, co-founder and managing director of Jakarta-based Penida Capital Advisors offered his take on how the country is fairing through COVID and why Indonesia is such a strategically important country.
Here's what he had to say in a recent interview with FS Insider (see Investors Should All Have Indonesia on their Radar Right Now, Says Penida Capital's Ed Gustely for audio).
COVID Still a Battle for Archipelago Nation
The Delta variant hit southeast asia hard, and Indonesia is taking the brunt of that force.
While indications are that the surge in cases may have peaked, Indonesia recently surpassed India in daily deaths and the number of cases, Gustely noted. It did strain the healthcare system, but Indonesia has good policies and procedures in place to deal with the virus.
The current surge has exposed some weaknesses in Indonesia’s systems and responses, he added, and with vaccination rates still very low in the country at only 10 percent, the question has become one of resources.
Availability of vaccines is a sticking point for Indonesia, and while the Chinese stepped up early on to offer Sinovac — in what Gustely feels is a mea culpa of sorts — the U.S. has recently stepped in to help by providing doses as well.
“The U.S. has recently contributed about 4 million doses of the Moderna vaccine to Indonesia,” Gustely said. “We're in talks now, and hopefully the Pfizer vaccine should become available here by September or October. So that's a positive sign. We’ll wait and see, but in the meantime Indonesia is doing the best that any country can do in these circumstances. Everyone's doing their best to stay healthy.”
Leveraging Favorable Demographics
Despite the difficulties the pandemic poses, Indonesia has excellent prospects as a very young country in terms of the average age of its population, and is likely to emerge much stronger because of it.
Indonesia is a country of 275 million people — the fourth largest by population in the world, after China, India and the United States — and its land mass extends across 14,000 islands, stretching the distance from New York to Los Angeles, Gustely stated.
Even before the pandemic, Indonesia was on the rise. It is a member of the Association of Southeast Asian Nations, or ASEAN, and is also a member of the G20.
However, because of its growth prospects and demographic strength, Indonesia is poised to move up from being the 16th largest economy in the world to the seventh largest economy within 10 years, Gustely said. A large part of this growth comes from the fact that half of Indonesia’s population is under the age of 30.
“Indonesia went from a World Bank classification of a middle-income status country to middle-upper status,” Gustely said. “This demographic dividend (is) built on a youthful population and increased productivity, and Indonesia's ability to begin to connect to what we call the fourth industrial revolution, where they are taking advantage of advanced technologies, data and the export base that Indonesia provides to other emerging markets. … I use an analogy of where the United States was in the 1950s. We had Baby Boomers and a sense of optimism and opportunity for people to grow and develop. (Indonesia) has democracy that is now pretty much set in place, and it can grow and develop those opportunities in a fashion that links it to the rest of the world.”
Abundant Resources and Capital
Indonesia has other advantages, Gustely noted. It is very well positioned in terms of natural resources, and has the largest reserve of nickel in the world. It also has ample amounts of manganese and cobalt.
This is important because electrical automotive manufacturers, including Tesla, have started a dialogue with Indonesia about production of EVs and the batteries they require to operate. Indonesia’s position is also strategically significant to automotive manufacturers because of where it sits in the region.
The automotive sector has been growing for the last several years in Indonesia, Gustely noted, adding that Japanese auto manufacturers use it as an export hub to markets in Africa and to central Asian markets.
China has also invested heavily in its nickel industry, to the tune of more than $24 billion — with plans to invest another $10 billion in the industry — in an attempt to build out smelter facilities and maintain access.
The challenge for Indonesia is to begin to link its mineral policy and natural resource policy with its industrial policy, Gustely stated. That means it needs to eliminate the export of raw materials and instead turn Indonesia into a value-added base by making those natural resources into finished products.
It also has massive geothermal resources it can leverage, which could be tapped to power the EV space and other industries as well. Amazon has committed to building new data centers in Indonesia, Gustely noted, and those new data centers will be required to run on renewable energy.
Indonesia sits on the world's largest reserve of geothermal power and is now second only to the United States in using this resource, Gustely noted.
“Scaling investment is going to be a challenge simply because geothermal presents a lot of front-end risks with regard to drilling holes and making sure that you have what you think you have,” he said. “The government of Indonesia needs to do a better job of assisting producers of geothermal power and taking some of that upfront risk and de-risking projects. … Those are aspects that Indonesia is focusing on to better address this and (access) not only the financial capital, but the intellectual capital required, that Indonesia must import in order to build out its industrialization strategy and drive those policies to accommodate foreign investors.”
Strategically, Indonesia sits at a key point between China and the West. It has traditionally taken a neutral stance, but both sides are working to gain traction in the largest island nation on the planet.
China has made substantial inroads into Indonesia and thinks of itself as a “Big Brother” to Indonesia, a role that formerly fell to the United States.
The growth of China’s large footprint in Indonesia has accelerated the U.S. government’s interest in considering strategies to either slow down that advancement or, alternatively, for the U.S. to up its game in planting flags in Indonesia, but in more of a “Good Brother” approach on an equal playing field, Gustely said.
“The U.S. has a role to play, and we're hopeful that they will begin to focus more attention away from machinations of what's taking place in China, which perhaps involves de-risking its footprint in China and relocating a lot of the industries that are looking for a new home... The U.S. is also engaging other democracies in the region, and Japan, Korea, Australia and India are all stepping up their game and engaging with Indonesia, so that there is this club of democracy, trying to advance market-oriented economies based on democratic, open principles. China has taken notice of this at times, and will have fits about that. But I think this will continue to be the trend going forward.”
This may be one of the most important emerging economies in the years and decades ahead. To learn more, be sure to listen to our full-length interview with Edward Gustely on why Investors Should All Have Indonesia on their Radar Right Now. If you're not already a subscriber to our FS Insider podcast where we interview book authors, strategists and industry experts 3 days/week on all things economics, finance and markets...
Written by Ethan D. Mizer