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Helping Address Humanity’s Greatest Challenges by Investing in Emerging Markets

Power of Ideas
Helping Address Humanity’s Greatest Challenges by Investing in Emerging Markets

Humanity faces great challenges—climate change, poverty and inequality, war and conflict, health-care access and inequality, and more. With approximately 83 percent (and growing) of the global population living in developing economies, according to the United Nations, it is imperative that solutions to these grand challenges prioritize addressing the issues within these economies.

At the same time, the above challenges intensify market dislocations, including disruptions in supply chains, energy and food scarcity, and volatility in cross-border trade and investment dynamics. This uncertainty exacerbates economic complexities, and for many investors, finding suitable investments for both commercial and development goals is becoming increasingly difficult.

The question is then: Can investing in emerging markets both help to address humanity’s challenges and provide investors with alternative sources of suitable risk-adjusted returns?

Indonesia presents a compelling case for investors seeking potential opportunities.

Navigating Complexity in Search of Opportunity

There are vast differences among developing economies in terms of economic prosperity and human development, political systems, cultural and social factors, and, for investors, investment opportunities. Generally, for a country to be an attractive investment environment, political stability and a conducive regulatory environment are minimum requirements.

In addition, positive demographic profiles and productivity, robust local institutions and markets, and well-managed natural resources can act as drivers and enablers for economic growth, further improving investment prospects.

However, even for markets that exhibit these factors, some investors will still want a local partner that understands the local regulatory landscape, stakeholders, and opportunities. Understanding the nuances of individual countries, especially at the sector and company level, is critical to crafting successful investment strategies. This is especially true for investors with limited investment experience in the country or region who may not be confident in navigating the regulatory, political, and economic complexities without a partner who is better positioned to do these things.

Beyond providing local expertise and experience, investors may also want local partners to have skin in the game. The higher the ratio of the local partner’s investment to the investors’ portion, the more significant the partnership; a one-to-one ratio demonstrates taking on equal risk—and equal sharing of the rewards.

A Case for Indonesia

With a stable democracy, over 70 percent of the population aged between 15 and 64 (as reported by the Official Monetary and Financial Institutions Forum), a strong post-COVID recovery, and significant natural wealth (e.g., nickel, cobalt, and tropical forest area), Indonesia presents a compelling case for investors seeking potential opportunities.

A fundamental part of developing economies’ narrative as investment destinations and areas of high growth is their potential to catch up with more advanced economies, given the low penetration across key areas. In Indonesia, areas such as fixed broadband, domestic credit to private sector, and warehouse space signal much-needed development and growth potential, according to ITU and the World Bank.

The potential returns on investment are amplified when there is scope for operational alpha (performance optimization and value creation), through improvements in human resources, technology, and strategies to reduce inefficiencies, boost performance, and ultimately, increase valuations. Often, developing economies have the most potential for this improvement, especially those with significant state participation in the economy.

Catalyzing Investment and Supporting Sustainable Development

The Indonesia Investment Authority (INA), Indonesia’s first and only sovereign wealth fund established in 2020, aims to act as the trusted local partner for investors in Indonesia and be the catalyst for investment in the opportunities that the country provides.

In the two years since our inception, we have deployed more than US$3 billion in capital alongside our investor partners. This includes partnerships with sovereign funds such as Abu Dhabi Investment Authority, GIC, Abu Dhabi Growth Fund, and Silk Road Fund, strategic industry leaders such as Masdar and DP World in renewable energy and ports respectively, and other reputable institutional investors such as BlackRock and Allianz Global Investors.

By focusing on investments in infrastructure and logistics, digitalization, health care, and green energy and transformation, INA’s objective is to contribute to Indonesia’s sustainable development, while still achieving attractive risk-adjusted returns for itself and its investment partners.

As humanity strives to develop solutions to our greatest challenges, and as investors seek to navigate complexities in search of opportunities, it is pivotal to recognize and capitalize on the role of emerging markets. The Indonesian proverb, “Bersakit-sakit dahulu, bersenang-senang kemudian,” resonates with this journey, translating to “Endure first, enjoy afterwards.” Only by being patient, resilient, and putting in the effort and resources to address challenges now can we ensure that future generations can enjoy a more prosperous and sustainable tomorrow.