The archipelago nation of Indonesia is part of the emerging markets bubble. The emerging markets bubble started inflating in 2009 as China embarked on an aggressive credit-driven construction and infrastructure boom that led to a surge in demand for raw materials, many of which are exported by emerging market nations. The growing commodities export boom bolstered the fortunes of EM nations, which piqued the interest of investors who were looking to diversify away from hard-hit Western economies.

A global carry trade developed in which investors borrowed cheaply from the U.S. and Japan, and plowed the proceeds into higher-yielding EM assets, especially bonds, while earning the difference or the “spread.” The surge of liquidity into emerging market assets created a bond bubble, which helped to push borrowing costs to abnormally low levels for such fast-growing economies, which in turn enabled a government-driven infrastructure spending boom, explosive credit growth, and property bubbles across the emerging world.

Foreign direct investment (net inflows, current dollars) more than tripled:

During this time, Indonesian equities quintupled:

Indonesia’s Growth Is Fueled By A Credit Bubble

Record low interest rates have fueled an epic credit and consumption boom in Indonesia, which is no small matter given the fact that domestic consumer spending accounts for nearly 60 percent of the country’s overall $878 billion economy. For the past half-decade, Indonesia’s annual GDP growth rate has averaged about 6 percent – the fastest in Southeast Asia – thanks largely to their consumer spending boom.
The chart of loans to Indonesia’s private sector provides a graphical view of Indonesia’s credit bubble:


Domestic credit to Indonesia’s private sector as a percentage of GDP shows that leverage has been increasing as well:

With such rapid consumer credit growth, it’s unsurprising to see a concomitant rise in consumer spending:

Indonesia Also Has A Property Bubble

Cheap credit and property bubbles go hand in hand, and Indonesia’s bubble economy is no exception. Though data for all Indonesian property markets are scarce, property markets in Jakarta and Bali are becoming frothy, especially at the higher end of the market. Jakarta condominium prices rose between 11 and 17 percent on average between the first half of 2012 and 2013, after rising by more than 50 percent since late 2008. Luxury real estate prices in Jakarta soared by 38 percent in 2012, while luxury properties in Bali rose by 20 percent – the strongest price increases of all global luxury housing markets.  A small two-room apartment on the outskirts of Jakarta can cost nearly $80,000 USD (RM253,373), making housing unaffordable for many ordinary Indonesians.

The surge in real estate activity spurred a 70 percent rally in Indonesian property shares in the first five months of 2013 (though they have sold off since then). Even Indonesia’s central bank has become worried about a property and credit bubble, causing them to issue new rules to curb speculation, including mandating a minimum 40 percent down payment for the purchase of a second house or apartment (bigger than 70 m²).
While domestic consumption accounts for nearly two-thirds of Indonesia’s economy, raw materials account for much of the other third. Unfortunately, this part of Indonesia’s economy is also experiencing a bubble due to its reliance upon exports to China. In recent years, China has been building countless empty “ghost cities” and other wildly ambitious infrastructure projects for the sake of boosting economic growth, much of which is funded by a teetering multi-trillion dollar debt bubble. Indonesia provides a good portion of China’s coal needs, which have boosted the country’s exports:

The popping of China’s bubble will hit Indonesia’s export sector very hard (Australia’s as well), and the recent decline of the country’s exports due to China’s slowdown is a preview of what is ahead. The fading of Indonesia’s export boom has already contributed to the country’s record trade deficit:

The weak rupiah has caused Indonesia’s inflation rate to roughly double since the start of 2013, which forced their central bank to raise its benchmark interest rate from 5.75 percent to 7.25 percent. (The chart below is the U.S. dollar to rupiah exchange rate)