At over 3000 miles apart, India and Indonesia bookend Asia. Yet, over the last few years they have followed remarkably similar paths towards economic transformation.
Their economies have been turbocharged by targeted policy efforts, increasing private investment and demographic changes. Both countries have improved balance sheets and strong currencies. As a result, they are piquing the interest of investors – including Henderson Far East Income Limited.
When first elected as prime minister ten years ago, one of Narendra Modi’s key aims was a total reform of the Indian economy. This was intended to attract both internal and external investment, boosting economic growth.
Modi’s governments have introduced a swathe of reforms to support these aims. These include reducing the corporate tax rate, addressing the long-standing bad debts at state banks and allowing increased international investment in previously protected industries.
There is further to go. Private investment and production have grown rapidly. Some companies have chosen to move production to India, away from out-of-favour China. At the same time, a growing urban middle class is creating a new domestic market.
We increased our allocation to India in 2023. One area benefiting from the reforms is India’s energy sector. In HFEL we invest in both NTPC and Power Grid. Energy companies have been supported by regulatory intervention that reduced the burden of subsidising low-paying sectors and increasing renewable energy capacity. Meanwhile, demand is growing from urban households and expanding manufacturing.
A similar story has played out in Indonesia. In his ten years as president, Joko Widodo (popularly known as Jokowi) has overseen extensive economic reforms. Indonesia has a natural advantage over other economies due to its nickel deposits. Nickel is an essential component in technology and electrical vehicles.
Even so, a previously nationalised and inefficient industry was reformed to become much more competitive. Elsewhere, labour laws were reformed, and some nationalised sectors opened up. The government has also invested in infrastructure, which should have an impact in future years.
As a result, Indonesia has seen 5% average annual growth consistently over the last decade, bar 2020-21. While this is lower than for some peers, its stability has improved investor and consumer confidence. Jokowi’s chosen successor Prabowo Subianto won the recent Presidential election. He is expected to continue the reform agenda.
Inflated commodity prices and a strong recovery from the Covid pandemic leave Indonesia’s economy in something of a ‘sweet spot’ in our view. Indonesia is also benefitting from the largest working age population in the region, which could fuel further growth.
We also increased our allocation to Indonesia in 2023. Part of this allocation is an investment in Indonesian banks, which benefit from increasing lending in a growing economy. The two that we currently invest in are Bank Negara Indonesia and Bank Mandiri, which both lend to larger, growing businesses.
Glossary
Balance sheet – A financial statement that summarises a company’s assets, liabilities and shareholders’ equity at a particular point in time. Each segment gives investors an idea as to what the company owns and owes, as well as the amount invested by shareholders. It is called a balance sheet because of the accounting equation: assets = liabilities + shareholders’ equity.
Commodity – A physical good such as oil, gold or wheat.
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