Jakarta's gleaming new MRT is one example of the Indonesian government's persistence in infrastructure development despite slowing global economic growth. (Antara Photo/Sigid Kurniawan)

Indonesia, Southeast Asia Enter Golden Age of Economy: HSBC

BY :DIANA MARISKA

JANUARY 23, 2020

Jakarta. Despite the forecast of slow global economic growth in 2020, Southeast Asia, including Indonesia, is expected to enter an economic golden age that will take the region well on the path to become the world's fourth-largest economic bloc in the next decade.  

HSBC Private Banking's chief market strategist for Southeast Asia, James Cheo, said he is convinced the region could ride out the current global slowdown and soon catch up with the world's economic powerhouses.  

"The most exciting story, if we look at the next decade, is Southeast Asia. The next ten years could very well be the region's golden age because if it continues to grow, say, at its current pace, it can become the fourth largest economic bloc, behind the US, Europe and China," Cheo said to the Jakarta Globe.

Cheo pointed out there are at least three supporting factors behind Southeast Asia's economic rise. First is the demographic bonus that many countries in the region are already enjoying.

"Sixty percent of Southeast Asians are under the age of 35. In the next ten years, they will come of age: they'll start working and get their first paycheck. They will increase their purchases. They'll buy cars. They'll get married and buy a house. They'll have kids and spend more money on education, and of course, they'll travel to see the world," Cheo said.

Second, urbanization is getting more widespread in Southeast Asia, not only in big metropolitans but also in second-tier cities. 

The third is the fact that Southeast Asia is "more digital" than the rest of the world. Southeast Asians spend an average of four hours on their mobile phones every day, much longer than people in other areas of the globe. "There are around 360 million mobile phone users in the region, but still only half use them to make transactions. There's a huge opportunity here as well," Cheo said.

Indonesian Economy Going in Right Direction

Cheo believes these three factors are going to be very relevant in Indonesia. Especially since surveys and studies have suggested Indonesia could be one of the leading emerging markets in 2020.

Cheo said Indonesia is going in the right direction, particularly in terms of investment.

"Indonesia has moved up consistently in the world's investment ranking in the past few years. This is what investors are looking out for: you don't always have to be number one or be perfect, but it's better if you always move up. If Indonesia continues to improve its ranking, investors will believe this is a place to invest in," he said. 

There are several investment sectors with bright potentials in Indonesia this year. The first is consumption – the backbone of global economic growth.

The next one is infrastructure, currently one of the Indonesian government's priority sectors. Cheo noted the increase in infrastructural spending is not only happening in Indonesia but also in other Southeast Asian countries, including Malaysia and Thailand.

The government's focus on infrastructure development will benefit the overall investment climate – and may bring in more foreign direct investment. As Cheo pointed out, government support is a crucial consideration for direct investors before investing in a country.

"They will compare countries – which is the best in terms of cost and accessibility, and quickness of manufacturing. The government can make a lot of things easier for investors, from setting up investment to infrastructure and labor costs," Cheo said.

Meanwhile, investors may want to avoid investing in the commodity sector this year. Particularly, in commodities sold in the global market, since with the forecast of slow growth, global demand is expected to be weak, he said.

Cheo did not think Indonesia posed any particular risks for investors, but they should still watch out for global risks that may affect their investment in Indonesia.

Uncontrollable and sudden inflation in the US is probably the most significant threat there is, even if the probability of that happening is pretty low. "If inflation gets out of control, global central banks, particularly the Federal Reserve, will have to raise rates instead of cutting or holding them steady. It's a key risk," Cheo said.

Speaking of sweeping regulatory reforms – especially in taxation and labor laws – promised by the Indonesian government, Cheo said now is the right time to push through significant changes. However, he warned foreign investors not to expect a complete overhaul of local bureaucracy, though they should still see the government's insistence on reform as a sign of good things to come.

Slowing Global Economy

HSBC Private Banking predicted the slow global economic growth might last well until 2021. Global GDP growth is expected to reach 2.5 percent in 2020 and then up slightly to 2.6 percent in 2021.

Manufacturing, trade and investment are expected to remain weak, with consumer spending being the one sector strong enough to become the backbone of global growth.

However, despite the generally underwhelming prediction, news of a new trade deal between the United States and China comes as a bit of fresh air.

"[The deal] is good news after 18-20 months of tension and negotiation. It would help us by creating at least some semblance of stability because last year things had gone downhill very dramatically," Cheo said while reminding that the new deal is still a long way from complete.

According to Cheo, even if global growth remains slow, the Asian market will stand out since consumers in the region do not seem to be affected by "the rest of the world going down."

He said investors should target sectors popular with Asian consumers: service, travel and entertainment.

 

SHARE

RECOMMENDED STORIES