For intergenerational investors like foreign pension plans that have been ramping up exposure to alternative assets and leveraging their patient capital, it’s worth paying attention to Indonesia’s potential.
“If you follow the logic that the country’s going to be the fourth or fifth largest economy in the world . . . then to me it’s too big to ignore,” said Josef Pilger, global pension and retirement leader at EY, during the Canadian Investment Review’s podcast “Pension Passport.”
But Indonesia’s growth story doesn’t come without risks. “The decent performance of the economy has met some large vulnerabilities and the main one of these is the big and expanding current and trade account deficit,” said Gareth Leather, senior Asia economist from Capital Economics, also speaking during the podcast. “And what that means is it makes the currency, the rupiah, quite vulnerable to sudden shifts in global risk appetite.”
As well, he notes the country has a high level of foreign currency debt.
In the coming years, Indonesia needs to focus on infrastructure, said Leather. “It takes quite a long time to transport goods by sea, the roads are always clogged up and this is the big criticism that foreign investors have of Indonesia.”
And the major demand for new infrastructure could represent a major opportunity for institutional investors looking at the country, said Pilger. “The country has developed some pretty good internal capabilities to deal with infrastructure and has done a lot of infrastructure investment itself,” he noted, highlighting that between 2020 and 2024, Indonesia needs to spend about US$441 billion on new infrastructure.
The largest demands for infrastructure are centred on generating enough power for the Indonesia’s enormous population, as well as transportation services, given the need for connectivity between some 1,700 islands. Other infrastructure opportunities include new airports, seaports, hospitals and schools, added Pilger.
Apart from investing in infrastructure equity, debt investments could be another way to play the country’s infrastructure growth, he said. In taking on various infrastructure projects, many state-owned enterprises have racked up a lot of debt, creating the opportunity for institutional investors to consider various related debt instruments.
For investors considering a foray into new countries like Indonesia, Pilger highlights the importance of building internal capabilities and creating partnerships with local firms that have experience on the ground.