While America sits down to plates filled with barbequed meats and scrumptious salads of greens and red tomatoes, with corn cobs steaming and beer chilling, Indonesia will be executing by firing squad 16 death row inmates including a 57-year-old British grandmother caught carrying 10 pounds of cocaine.
How’s that for an opening paragraph to an article on the Indonesian economy? A shocker, I know, but it puts life into perspective doesn’t it? I have written before about what I believe is the upcoming boom in commodities, especially precious metals like gold. So with that in mind, I decided to look at some major developing market economies that are commodity driven, Indonesia being one of them.
In the last quarter, GDP growth came in at a respectable 4.92%, down slightly from 5% in the previous quarter. Industry and manufacturing account for approximately 46% of that growth, while mining comes in at around 12%. It is the mining sector that I believe will begin to represent a larger portion of GDP throughout 2016 and probably well into 2017.
The Jakarta Stock Market benchmark index (JCI) is a positive 4.98% YTD; however, since its lowest point back at the end of January it is up around 9%. The index itself, which is cap-weighted, does not capture the entire growth in the mining sector. For instance, Aneka Tambang Persero Tbk PT (ANTM:IJ), a company involved in the mining of coal but also gold, is up a healthy 118% YTD.
Other coal mining companies with impressive returns are Bumi Resources Tbk PT (BUMI:IJ) up 52% YTD and Tambang Batubara Bukit Asam Persero Tbk PT (PTBA:IJ) up 63% YTD. But the company that wins dramatically in this sector has to be Delta Dunia Makmur Tbk PT (DOID:IJ), up a whopping 261% YTD! Growth in the coal mining industry is being driven by the higher domestic demand needed to fuel the ambitious 35,000 MW generation power plants coming online. Coal exports have dropped to 14%.
Gold is also in high demand, and the government is being asked to reopen a mine on Buru Island that it had closed because of the toxic process being used by locals to extract the metal. Since then, multinationals from Australia and Britain have expressed interest in extracting the metal using safer, more modern techniques. Hopefully the government concedes. Indonesia last year produced 75 tons of gold representing 2.5% of global production, but with this mine coming back online that tonnage would no doubt increase substantially.
So whether you’re enjoying a backyard barbeque or lying on the sand listening to the sounds of waves and seagulls, take a moment to think of those 16 people about to be put to death at the end of Ramadan, July 5.
Peter Kohli, CEO of emerging market specialist DMS Funds.