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India, Indonesia emerge as rising stars in global headwinds

Pimco picks these two resource-rich economies to be global growth leaders over the next few years.
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Scope for currency appreciation, growth outperformance and increased capital inflows should make India and Indonesia increasingly attractive to investors in the coming years.

The OECD, for example, forecasts India to grow 6% in 2023, outpacing China (5.4%), with Indonesia following closely behind in third place, at 4.7%. By contrast, the OECD projects the global economy to grow by 2.7%.

Over the secular horizon, PIMCO expects annual real GDP growth for India at 6%-7% and for Indonesia at 5%-6%. This is due to continued reform-oriented governance and macro stability, under the leaderships of Indian prime minister Narendra Modi and Indonesian president Joko Widodo, with a view to developing resilient economies.

“Both countries, with a combined population of 1.7 billion, benefit from younger demographics in contrast to the rapidly ageing populations in China and developed countries,” said Subhash Ganga, portfolio manager for Asia emerging markets at the US fund house.

Further, despite uncertain external conditions, India and Indonesia have effectively managed inflation and fiscal financing, he added.

“We believe currency valuations have not fully reflected these positive developments,” explained Stephen Chang, portfolio manager for Asia at Pimco. “We expect stable sovereign credit ratings with a potential for an upgrade.”

However, taxes and tight valuations make duration and credit less attractive. At the same time, the 2024 elections in each country pose a risk if the governments change.

Growth themes

Among key opportunities for investors, demographics – and, in particular, the large and growing size plus relatively youthful workforces of India and Indonesia – will play a significant role in their economic growth in the coming years, believes Pimco.

Further, the median population age is projected to remain under 40 until 2070 for Indonesia and until 2057 for India, rather than just 2027 for China. “This translates to a competitive advantage not only in terms of workforce, but also an opportunity to unleash the consumption, savings and investment power of a young population,” said Ganga.

Infrastructure development is another crucial area for investors to tap.

In India, Modi’s Union Budget for fiscal year 2023-24 allocated Rp10trn ($122bn) to infrastructure development – five times the amount spent in the previous nine years.

Meanwhile, since Widodo assumed leadership in Indonesia in 2014, over 2,000 kilometers of toll roads and 5,500 kilometers of non-toll roads have been constructed, as well as 16 airports, 18 seaports and 38 dams.

Investors can also expect to capitalise on the reform agenda in these economies. Examples in India include initiatives to leverage digital technology to improve the ease of living and doing business. According to Chang, the ‘Make in India’ initiative, launched in 2014 to make the country a global manufacturing hub, has helped foster innovation and attract foreign capital to key sectors like railways, defence, insurance and medical devices.

The turnaround in resource-rich Indonesia has been fuelled by the global commodity boom, he added, with regulatory and tax changes resulting in higher local investor ownership of government bonds, in turn helping to curb currency volatility, and in fewer restrictions on access for foreign investors.

At the same time, both India and Indonesia stand to gain further from shifting global value chains.

For instance, India’s services exports, led by IT and business process outsourcing services, have been fueling overall export growth. As for goods, India has sectoral advantages in automotives, chemicals, pharmaceuticals, industrial machinery and electronics.

For Indonesia, further downstream processing of its natural resources would be a key driver of its growth potential, added Ganga, citing success with nickel, a key ingredient in the lithium-ion batteries used for electric vehicles. Tourism is another key focus area for Indonesia.

This reflects another meaningful opportunity that Pimco sees for investors in India and Indonesia: the energy transition.

For example, by 2030, Indonesia is expected to be the world’s fourth-largest producer of “green commodities” used in batteries and grids, behind only Australia, Chile and Mongolia. Ganga also believes it is poised to be southeast Asia’s hub for the EV ecosystem.

In India, an aggressive energy transformation agenda that includes solar energy and a push for green hydrogen should help drive the country’s potential growth higher, added Ganga.

Part of the Mark Allen Group.