Mannequin in Jakarta by Jonathan McIntosh

This could well be a case of the hare and the tortoise. So much noise is made about the rapid growth of India and China that Asia’s third most populous country is often overlooked. For sure, Indonesia still bears some scars from the Asian crisis of a decade ago and GDP growth of about around 6 percent is nothing very startling.

But Indonesia trundles forward and looks far better placed than most – not least China – to weather any sharp downturn in western import markets, or a financial crisis engulfing those who have allowed easy credit to expand longer than is prudent.

For sure there are grumbles from local and foreigners alike. Indonesians, especially lower income ones, complain about rising food and fuel inflation and increasing income gaps. Foreigners complain about bureaucracy, corruption and a new investment law that has a long exceptions list and often vague wording reflecting nationalistic instincts and political ploys. It still has no new mining law to reconcile foreign, national and local autonomy issues and spur the investment needed if Indonesia’s position as a mineral exporter is to be sustained.

Capital, especially foreign capital, frets about labor laws that provide levels of job security unknown in the likes of China and Vietnam. Everyone complains about inadequate power and shoddy transport infrastructure that is hobbled by uncertain relationships between the government and private sector and central and local governments. Parliament is fractious and the president’s need for a disparate coalition means endless delays and compromises. Cautious budgeting, administrative incompetence and price controls on power contribute to the problems. Centralized, big ticket corruption is down but the judiciary still stinks.

Indeed, to hear all the complaints it is quite a surprise to learn that the economy is growing at 6.3 percent, that non-commodity exports are faring well enough and that economic growth could well accelerate to over 6.5 percent in 2008. Domestic demand is strong, at least in regions where high commodity prices are flowing through to households and government spending on infrastructure should begin to kick in soon. With an election due in 2009, the government has every reason to provide some stimulus over the next 18 months.

The naysayers believe this relative improvement is largely due to a run of good luck with commodity exports. High oil prices are a domestic problem for the government, which has to either allow local prices to rise or see the budget take a hit. Overall, however, high energy prices are good for Indonesia, which is no longer a net oil exporter but does export gas and huge amounts of coal. Although new investment in oil and mining has been far too slow due to bureaucratic and political obstacles, plantation investment has been roaring ahead – bad news for the rainforest but not bad for employment and exports.

Then there are the high prices for palm oil, copper gold, nickel, rubber and most other commodities. Some of this may be unsustainable in the longer term, however, agricultural commodities could be seeing a longer cycle as global demand growth, boosted by bio-fuels, appears to be outrunning supply potential. That may not be the case with most minerals. Nonetheless, a strong case can be made for the argument that commodities now are in shorter supply than cheap labor in export manufacturing centers such as China and India. Indonesia, with a predominance of commodity exports, thus should have sustained gains in its terms of trade.

As it is, the terms of trade can withstand some deterioration and accommodate faster domestic demand, at least for a couple of years, without running into major financing problems. The current account has been in surplus for almost a decade, hit US$9 billion in 2006 and will probably be more this year. External debt is down to around 35 percent of GDP and public debt, approaching 100 percent just after the Asian crisis, is down to a similar level. The government’s budget has a deficit of only 1 percent of GDP, giving scope for stimulus.

Even the non-resources export sector is doing much better than is usually imagined given the complaints about wage costs relative to Vietnam, labor law issues and poor port infrastructure. But textiles and footwear have been more than maintaining global market share.

Overall Indonesia is less dependent on the US market –12 percent of exports – than almost anywhere in Asia. The largest market, Japan, may be growing slowly but overall Asia accounts for over 50 percent and the EU around 16 percent. Exports to China are 9 percent but growing fast – and sure to get bigger as it invests in gas and other resource projects.

Indonesia also has reasonable hope of gaining ground in the skill and creativity industries, from locally designed furniture and jewelry to high-value ceramics. Tourism potential is insufficiently exploited, partly due to the sustained fallout from the Bali and other bombings and partly because of the poor safety records of Indonesian airlines. It has so far attracted very few Chinese visitors compared with other SE Asian destinations despite its wealth of scenic and cultural attractions.

For most investors however, the biggest attraction is the potential of a domestic market underpinned by a steady rise in the labor force. Some middle technology industries like car parts and motorbikes now have volumes which can make them internationally competitive. It is reasonable to expect a medium term growth of at least 5 percent. Of course this looks unexciting compared with China and India, but since the start of the decade it has been achieved in the face of extremely conservative fiscal and monetary policies marked by a stable exchange rate and the rebuilding of a banking system, now with significant foreign ownership, with high capital to risk asset ratios and return on capital. In short, the country is living within it means. That could be a priceless asset as the world teeters on the edge of more financial turmoil.

There are as always possible political setbacks. A return to the instability and drift of the Megawati Sukarnoputri era – a possibility – is one. But change, if it comes, is more likely to be a reshuffling of existing players. Militant Islam is not a threat. Perhaps more relevant is the possible rise of Indonesian Peronism, a populist nationalism which appeals to some in Megawati’s PDI, and some in the military. But the risk of a serious ideological shift or social disorder is no greater than in India and probably less than in China.

None of this makes the Jakarta stock market or the rupiah a must buy at present. It merely serves to put Indonesia’s relative economic merits into a broader Asian perspective.