“Hitting the BRIC Wall - Indonesia’s Fight for Inclusion Amongst the Emerging Market Leaders”

                At a recent investors’ conference held by Royal Bank of Scotland Plc, participants voted for Turkey and not Indonesia to be the next country to join the BRIC group of emerging-markets economies, which includes Brazil, Russia, India and China. 35% of respondents favored Turkey, with 23% favoring Indonesia and 16% choosing Mexico, according to a summary of the results from RBS late February. With economic growth among the strongest in Southeast Asia and brightening future prospects for the resource-rich country, economists are determining whether it should be the next country added to the BRIC grouping of global powerhouses-to-be. But uncertainty still remains amongst the analysts of the world. “Should Indonesia be included in the BRIC grouping, or not?”

With 240 million people, Indonesia is the fourth most populous country in the world. It is also the biggest Muslim nation, with a youthful democracy that followed the decades of post-colonial dictatorships under Presidents Sukarno and Suharto that ended in the late 1990s. It is an understatement to say that Indonesia “is doing well” – its economic growth is hit 6% last year after gross domestic product (GDP) rose to 6.2%. There are few who deny that Indonesia will repeat the feat this year, with estimates of year end GDP growth as high as 6.6%. The Jakarta Composite Index, Asia's second-best performing stock exchange after Japan, hit a record high mid 2010 following the appointment of Darmin Nasution as Bank Indonesia's new head, ending a period of uncertainty regarding the country’s central bank. Foreign direct investment (a significant indicator of investor confidence) has continuously grown for the Southeast Asian nation reaching $13 trillion for 2010, a 22% increase on the previous year. And when the 2008 global recession hit, Indonesia weathered the storm with relatively little difficulty due to abundant natural resources, a growing middle class, low levels of government and household debt, and of course, a $690 billion dollar economy (Southeast Asia’s largest). Perhaps this is why Indonesia moved a step closer to investment grade last month when Moody's upgraded its sovereign debt rating to Ba1, putting it ahead of BRIC rival Turkey who is at a Ba2 rating. When Jim O’Neill, global economist for Goldman Sachs produced the BRIC acronym in 2001, he projected that the combined economic size of the four countries would be bigger than all G-7 countries except the United States by 2050 (The other G-7 countries being Japan, Germany, the United Kingdom, France, Italy and Canada). This grouping of countries would be the fastest growing and strongest of the economies outside of the G-7: the leaders of the emerging markets. By this criterion, it would seem that Indonesia is an obvious candidate for this grouping, but there are concerns amongst the economists and analysts who are watching closely.

While a Standard Chartered Bank report released around the same time as the RBS poll results pointed to Indonesia’s political stability and strong economic fundamentals as reasons to invest in the country, it also noted investor concerns. “The lack of trans-Java and trans-Sumatra highways, inadequate power supply and insufficient seaport facilities in the world’s biggest archipelago, has become the biggest impediment to foreign direct investment,” the report said, also noting that these problems limited the nation’s growth to an average 5.1 percent over the last 9 years. Another concern shared amongst investors is perhaps the biggest: Corruption. Indonesia is known for a culture of bribery and kickbacks that has pervaded everyday life - politics, bureaucracy, the legal system, and business. Indonesia’s years of democracy have seen a crackdown on this illegal activity, but new cases involving kickbacks, bribery, and extortion are still frequent and common. In fact, at one point the campaigners Transparency International had given Indonesia the title of “Most Corrupt Place in the World.” Indonesia no longer enjoys this proud distinction (Somalia was the 2010 “winner”), but according to Transparency International, Indonesia still has much work to do, even if it has made progress.

Still, other analysts suggest that Indonesia should be included in the BRIC grouping ahead of Turkey and even Russia, an existing member. Although a nation of 70 million, Turkey and Indonesia share several similarities. Both are moderate Muslim majority nations. Both escaped the global economic downturn. Both are oil and gas producers, although neither is self-sufficient. A big difference is that Turkey is expecting 4.5 percent growth this year, while Indonesia is looking at growth of over 6%. And a senior institutional investor noted recently, “Where else do global investors put their money in Asia after China and India? There aren’t many alternatives. Indonesia’s very attractive.” And for a good number of money managers and economists, the excitement over Russia’s inclusion since the early 2000s has all but died. Economists have cited Russia’s policymaking in the Kremlin, demographic atrophy, endemic corruption, and its heavy and almost singular reliance on its natural resources as reasons why it can’t be trusted as more than a “one trick pony.” And while Indonesia has successfully made strides in its struggle with corruption, Russia seems unable (or unwilling) to do likewise and actually rated below Indonesia in several global corruption assessments. Richard Shaw, Managing Principal of QVM Group, a South Glastonbury, CT investment advisory firm put it best - "Russia is just not a good place to put your money."  

If those voting participants at the RBS investors’ conference were truly deciding, then it would be Turkey and not Indonesia to be the next in joining (or Russia staying in) the BRIC group of emerging market leaders. However, it is Indonesia that will prove most worthy of the BRIC distinction in the coming years, whether it receives the distinction or not.