Indonesia repays IMF loan early -- Good for SE Asia funds

October 25, 2006

Indonesia repaid the remaining $3.2 billion loan to the International Monetary Fund (IMF) ahead of schedule last week. In doing so, it joins Brazil and Argentina who also repaid their IMF loans early last year. The original loan was for $11.1 billion, and was scheduled to be paid off by 2010.

Early repayment means that its economy is recovering faster than expected from the 1998 market crash that affected all of Southeast Asia.

What It Means:
Indonesia has an annual GDP growth rate of 5.6%, and is the 17th largest economy in the world, ahead of Australia, Argentina and Thailand. However, its inflation rate is 10.5%, partly due to an elimination of government oil subsidies, causing gas prices to skyrocket. Unemployment is 11.8% and its total public debt is nearly 50% of GDP.

As Indonesia has reduced its debt, its economic growth has increased. However, it is not growing as fast as its neighbors China, Vietnam and India. Its capital markets are thinly traded, which makes it more easily controlled by a small group of investors, and therefore more volatile.

Despite this, the outlook for the Indonesian economy is moderately strong, thanks to ongoing government initiatives. The currency is free to float, and the capital markets are fairly open and transparent, both of which encourage foreign direct investment in the country.

Action Steps:
Indonesia is still too volatile for the average individual investor. However, East Asian funds with exposure to Indonesian companies should benefit from the country’s continued financial responsibility.

Source: International Monetary Fund web site, CIA Factbook