Emerging markets have led the way for a global market rally in recent months, with many broad ETFs (such as ADRE and EEM) rising more than 40% since bottoming out in March. While nearly all emerging markets are in the black for 2009, no market has experienced a more rapid recovery than Indonesia. After tumbling by more than half in 2008, Indonesia’s Jakarta Composite Index has surged in 2009. Before a recent pull back, Van Eck‘s Market Vectors Indonesia Index (IDX), which tracks the broad Indonesian stock market, had more than doubled since its January launch, and still remains up more than 80% since inception. So what’s driving this remarkable rally in 2009? The answer lies in the past.
In the late 1990s, Southeast Asia experienced a massive economic crisis brought on by excessive borrowing and asset price bubbles (sound familiar?). Although the entire region suffered from the crisis, Indonesia was particularly hard hit, and its currency and banking sector collapsed as a result. In the aftermath of the crisis, General Suharto, who had served as the country’s dictator for more than 30 years, was forced from power. In embracing democracy, Indonesia also enacted many sound fiscal and monetary policies that led to a relatively quick recovery and years of strong growth.
Now history appears to be repeating itself.
In 2008, the global economic crisis hit Indonesia particularly hard, with the Jakarta Composite index falling more than 50%. Now, on the strength of its natural resource and export industries, Indonesian markets have clawed back much of their lost ground. To uncover the source of the 2009 rally, it’s helpful to look to Indonesia’s development between 2003 and 2007. During this period, the Indonesian economy made several significant strides, including:
- Reducing government debt as a percentage of GDP from 61% to 35%
- Reducing debt/asset ratios for nonfinancial companies from 41% to 31%
- Increasing private investment from 19.6% of GDP to 22.4%
- Increasing international reserves from $36.3 billion to $56.9 billion
These changes, born of shrewd policy changes and disciplined government, set the stage for the remarkable resiliency that we’re seeing today. Had the crisis hit a few years earlier, Indonesia may have been too burdened by debt and too vulnerable to another currency collapse to recover so quickly. Instead, on the strength of rising global commodity prices, resource-rich Indonesia has thrived, and its ability to bounce back from such a severe downturn should help to placate worries about its stability. While investors can gain access to Indonesian markets through more diversified emerging markets funds, the number of Indonesia-only funds is limited, with IDX being one of the only options. But given the strong year-to-date performance, as well as the sheer size of the Indonesian market (little known fact – it’s the world’s fourth most populous country with almost 240 million residents), it would be surprising if we don’t see similar ETFs launched soon.