An Italian restaurant in Jakarta
By John Richardson
ELEVEN-year-old Nurafidah spends her mornings at school and her afternoons hunting for recyclable plastic, aluminium and glass in Jakarta’s giant rubbish dump – Bantar Gebang. She wants to grow up to be a chef.
“She is not alone. Many children of the dump are sure they want to be doctors, midwives and in the police force. Some hope to be in the military, others want to be singers,” writes the Jakarta Post, in this article.
But the children who help make up the 2,000 or so families that live on the edge of Bantar Gebang, in makeshift shacks made from scrap wood, rags and old plastic advertisements, are often unable to even go to school. And, of course, those children whose parents can afford to send them to school are at huge risk of disease and so run the risk of missing the opportunity to be properly educated.
Tens of millions of more people have been lifted out of extreme poverty, thanks to Indonesia’s economic recovery following the Asian Financial Crisis.
Very recently, the consensus view was that the recovery was mainly the result of deep structural reforms to the economy, including better education, improved infrastructure and much-less corruption. Thus, it was felt that not only would those tens of millions remain out of poverty, but that many more Indonesians would also soon join them.
But now a lot of people are worried that soaring commodity prices was one of the two main reasons why Indonesia enjoyed such a strong rebound from the 1997-1998 crisis. Commodity prices have now peaked and will decline over the long term because the China investment boom is over, they think. We agree.
Less debatable is the eventual end of what is now recognised as the second-biggest reason why Indonesia’s economy has prospered so well: The US Fed’s quantitative (QE) easing programme.
While, of course, the commodities boom predated 2008, QE only kicked in after the collapse of Lehman Bros in September of that year. QE involves the Fed buying $US85 billion worth of Treasury and mortgage-backed bonds each month.
QE led to a flood of cheap credit into many emerging markets. But since May, when the Fed first hinted that it would soon wind-down its bond buying, there has been a stampede for the exit. Some $60bn of funds has flowed out of emerging market equity and bond funds since May, according to the Financial Times. Emerging market currencies – particularly the Indonesian rupiah and the Indian rupee – have also collapsed in value against the US dollar.
On Wednesday of this week, the US Fed’s latest Federal Open Market Committee Meeting is expected to announce more details of when it will start tapering-back QE. We should also find out more about the economic conditions that the Fed will expect before it starts reducing bond purchases.
The worrying thing for many Asian economies ex-China is that few analysts believe that the Fed will backtrack from its intention to taper QE sooner rather than the later.
And so on Thursday we might see another round of selling of the Indonesian rupiah, along with further capital flight from the country’s bond and equity markets.
Separating short-term investor panic from the real shift in long-term fundamentals is never easy. It could be that excessive pessimism has too quickly followed excessive optimism, as so often happens.
But it has been obvious for a long time that Indonesia was not as good as its equity, currency and bond markets used to indicate.
Chemicals companies need to ask themselves these questions: Were we suckered-in by all the investor euphoria that shaped the consensus view on Indonesia before May of this year, and, if so, how do we put the systems in place to stop this happening again?
They also need to revise-down their demand-growth estimates for 2014 and beyond because, sadly, this crisis is not going to disappear anytime soon.
Chemicals companies then have an enormous opportunity to stick with Indonesia in the long term by helping its government deal with:
- Infrastructure deficiencies that make a kilo of oranges 50% for more expensive than in Indonesia and China, said Reuters in this article.
- Poor infrastructure, rising wage costs and the limited skills of its workers which mean that Indonesia cannot compete with very low cost manufacturers, such those in Bangladesh. It also struggles to compete with more advanced manufacturing nations such as Thailand and Malaysia, added Reuters.
- Poor water supply and sanitation. Two of the four most important causes of under-five mortality in Indonesia —diarrhoea and typhoid—are fecal-borne illnesses directly linked to poor water supply, sanitation, and hygiene, according to the World Bank. Impediments to water supply also lead to women and children from low-income households spending too much time fetching water.
It used to be the case that you could build the chemicals plants and the demand would inevitably arrive when we were in the midst of the economic Supercycle. But Indonesia serves as a further example of how this will not happen anymore.
Chemicals companies instead need to seed future demand by, as we said, working with governments – and NGOs and charities – to for example, pay for better sanitation and water supply and organise and fund education programmes for schoolchildren and adults.
We know that many companies are already doing this. But did enough companies do enough during the economic Supercycle, when volumes and margins seemed guaranteed?
In Indonesia alone, some 100 million of its 240 million population lives on below $2 a day, according to an Indonesian government estimate. Providing the basic essentials to help a lot more of these people escape such extreme poverty will unlock a lot more chemicals and polymers demand.
And wouldn’t it also be great if Nurafidah is able to become a chef? That would, by itself, make it worth going to work in the morning.