A surprise winner as emerging markets tumble


Call it a tantrum, multiplied by 10. Developing countries are reeling from Federal Reserve interest rate hikes and China’s economic slowdown. They are burning through their foreign exchange reserves at the fastest rate since 2008, to defend their currencies and cover higher import bills for food and fuel. Foreign investors are heading for the exits, while frontier economies such as Sri Lanka and Bangladesh have requested bailouts from the International Monetary Fund. The picture is not pretty.

Amidst the chaos is a surprise winner. Indonesia, which was named one of the fragile five less than a decade ago for its vulnerable currency and reliance on foreign exchange, has been a haven of relative calm.

The rupee, down just 3.8%, is the third best performing Asian currency this year. This is all the more remarkable as Bank Indonesia resisted the Fed’s wake and only started raising interest rates this week, by a modest 25 basis points.

Its stock market is another winner. The iShares MSCI Indonesia ETF is up 5.6% this year, beating the 13.1% decline in the S&P 500 index. Strong demand for equities helped stabilize portfolio flows from Indonesia.

When global markets become turbulent, investors flee countries with what are known as twin deficits – the current account and the fiscal balance. Indonesia has been relatively immune, as it is making progress on both fronts.

President Joko Widodo is expected to send a thank you card to Russian Vladimir Putin. The conflict in Ukraine has pushed up the prices of palm oil and coal, which Indonesia exports. These two commodities alone have boosted the country’s current account by 2.4% of its gross domestic product since 2019, with a third coming from palm oil and the rest from high coal prices, according to HSBC Holdings Plc. Indonesia now posts a strong current account surplus for the first time since 2011.

Like everywhere else, over the past two years, Jakarta has spent heavily to counter the pandemic-induced slowdowns. But Jokowi, as the president is known, has pledged to put his budget in order. Earlier this week, the government pledged to reduce its 2023 budget deficit to the 3% of GDP target.

Jakarta will reduce its fuel subsidies, which represent up to 2.7% of its GDP this year. The price of the most consumed gasoline has been set at 7,650 rupees ($0.52) per liter since 2019, around 40% lower than the current market price, according to Maybank economist Lee Ju Ye.

But Indonesia wants to be seen as much more than just a source of raw materials – at least that’s not Jokowi’s favorite narrative. After all, we can cite Chile, Saudi Arabia for lithium, a key ingredient in electric vehicle batteries. Chile has failed to capture the epic shift to electric vehicles and is benefiting from IMF assistance.

Jokowi wants to create an entire electric vehicle manufacturing industry in his country, rather than just being an exporter of nickel, another key ingredient in electric vehicle batteries. In a recent interview with Bloomberg News, he confirmed that Indonesia may impose an export tax on nickel this year to incentivize global manufacturers to open EV factories there. Jokowi even wants Tesla Inc. to build cars locally.

So far, many manufacturers are responding. In April, South Korea’s LG Energy Solution Ltd, the world’s second-largest battery maker, signed a $9 billion deal to build a supply chain from mining to manufacturing. Meanwhile, China’s Contemporary Amperex Technology Co., the world’s largest, is building production lines in a nearly $6 billion deal.

Jakarta has cut commodity supplies in the past – a temporary ban on palm oil in the spring for example – so it makes sense for foreign companies to place factories close to resources and take political priorities into account. . After all, Indonesia has more than 20% of the world’s nickel reserves.

None of the promises of electric vehicle manufacturers are yet reflected in economic statistics; building factories takes time. But they nonetheless boosted asset managers’ confidence that Indonesia will see robust foreign direct investment, which is more stable than portfolio flows, and that perhaps the industry, whose share of 20 percent of the economic pie has barely moved over the past decade, could give its commodity-fueled economic growth a boost.

The Russian-Ukrainian conflict has caused a shift of global economic power to resource-rich countries. However, having precious reserves of metals is not enough. The government needs to know not to waste its wealth and know how to leverage its power to move up the value chain. Jokowi has done very well for Indonesia, even before his vision became a reality.

More from Bloomberg Opinion:

• Indonesia is going Chinese with this debt frenzy: Shuli Ren

• Elon Musk can make an even smarter offer now: Anjani Trivedi

• Can greener nickel meet the dream of an electric vehicle? : Elements of Clara F Marques

This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

Shuli Ren is a Bloomberg Opinion columnist covering Asian markets. A former investment banker, she was a markets reporter for Barron’s. She holds the CFA charter.

More stories like this are available at bloomberg.com/opinion

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