Our view is based on three reasons: 1) Indonesia offers a stagflation hedge given its net commodity exporter status; 2) Its domestic demand economy is a safer play amid global demand uncertainty; and 3) Against a backdrop of deglobalization, it also offers a positive medium-term structural growth story.

Indeed, amid stagflation concerns, Indonesia seems well-placed as one of only three net commodity exporters within Asia (Australia and Malaysia being the other two). While Indonesia has tended to suffer from liquidity constraints in the past, given its net saving deficit status, positive terms-of-trade now provide the liquidity to fund Indonesia’s domestic demand.

Indonesia’s improving current account balance correlates inversely with the loan-to-deposit ratio, providing banks with more room to provide new lending. Positive terms-of-trade also provide the fiscal resources for policymakers to fund policy measures, helping to lend some cushion to the growth cycle.

As global recession concerns grow, investors have expressed concerns that Indonesia could be exposed on the downside. After all, commodities do not usually perform well in a global downturn.

While commodity price cycles have tended to be influenced by global demand, we think supply-side factors such as environmental, social and governance (ESG), weak capital expenditure (capex) expansion in traditional energy sources, weather disruptions and geopolitical tensions will also play an important role this time round. As such, our commodity teams’ price forecasts and the commodity futures curve suggest that even as prices moderate, they are likely to average at a level higher than 2019 pre-COVID-19 levels.

If this is the case, this would imply a redistribution of export income away from net commodity importers to net commodity exporters like Indonesia, favorably resetting its current account balance. Indeed, we expect Indonesia to see a current account surplus of +1.3 percent of gross domestic product in 2022 and a mild current account deficit of -0.3 percent of GDP in 2023. This would be a turnaround from the wider current account deficits seen in the past.

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