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Indonesia: Seize The Day

Business, Company Strategy, Economics, India, Indonesia
By John Richardson on 14-Jan-2015


By John Richardson

IT WAS criminally wrong. Yes, criminally wrong. Financial speculators drove up the price oil to $100 a barrel and more, which forced developing countries to waste many billions of dollars on fuel subsidies.

This was money that should and could have been spent on better infrastructure, education, healthcare and sanitation.

The irony when all this was happening was that many “analysts” in the West pointed to the strong price of oil as proof that the global economy was booming – led by developing countries.

Sure, poverty alleviation happened during 2009 and up until the second half of last year, when oil markets were one-way bet for the speculators because of the Fed’s quantitative easing programme and economic stimulus in China.

But many millions, probably hundreds of millions, more people would have been able to escape from extreme poverty if crude had been properly priced. This would have enabled politicians in countries such as Indonesia to get rid of fuel subsidies and spend the money saved where it needed to be spent.

Better late than never, though – and so it was nothing short of fantastic news that Indonesia’s president, Joko Widowo, announced a major rollback of fuel subsides on 1 January. Subsidies on gasoline have been completely scrapped, with subsidies on diesel reduced to just 1,000 Rupiahs per litre (8 US cents).

The political risk of cutting subsidies has been minimised by the slump in oil prices, as the cost of gasoline in Indonesia is now 7,600 Rupiah. This compares with a subsidised price of 8,600 per litre in December, when oil prices were higher.

Now the real hard work begins, as Indonesia needs to put the $16bn-$18bn it is expected to save in subsidies every year to good work.

Mr Joko, or Jokowi as he is known, has already put the money to work by launching:

  • Free health insurance for the poor, along with a guarantee of 12 years free schooling and free university education.
  • Construction projects which between 2015 and 2019 could see 2,600 kilometres of roads built, 15 airports, 24 seaports and 3,258 kilometres of new railway lines.

He also needs to tackle corruption, rigid labour laws and other protectionist policies that are holding back investment.

“Corruption and low law enforcement have been weighing the economy down with high overhead costs,” said Wisnu Wardana,  an economist at Indonesia’s PT Bank CIMB Niaga.

The president should improve the welfare of judicial officers in order to minimise incentives for wrongdoing, and pick a “pilot sector” in which he can eradicate corruption, he added.

Jokowi should also make use of new land acquisition rules for public-interest infrastructure development that took effect this month, which would accelerate investment in toll roads, airports and railways said Kevin O’Rourke, a political analyst who wrote “Reformasi: The Struggle for Power in Post-Soeharto Indonesia.”

He added that the president should also focus on better oversight and accountability in the bureaucracy, whilst ensuring government promotion’s based on merit.

It is an immense challenge and O’Rourke was hopefully on the money when he forecasted that: “In practice, I suspect Widodo may focus for the next year or two on just trying to tinker around the edges of problems, applying common-sense solutions to the more egregious inefficiencies, while boosting tax collection and ramping- up spending.”

It is better to focus on a few big challenges rather than try to do too much at one, as this is likely to end in failure. I thus hope that India’s prime minister, Narendra Modi, sticks with his current top priority: A lot more toilets.

Back to Indonesia. What is the scale of the opportunity here for the petrochemicals industry?

The above chart shows that, despite a population of 255 million, Indonesia’s polyvinyl chloride consumption was estimated at approximately 500,000 tonnes in 2014.

This compares with Vietnam at around 400,000 tonnes and Thailand at roughly 650,000 tonnes. Vietnam and Thailand have populations of 93 million and 68 million respectively.

As you can also see from the chart above, the story is similar in polypropylene as is the case in many other petrochemicals.

Some 60% of Indonesians live on less than $2 a day. Better infrastructure, education, healthcare and sanitation etc. will allow many more millions of people to escape from extreme poverty and so start buying much-greater volumes of modern-day consumer – which are, of course, made from petrochemicals.

If you do some very simple maths, let’s assume that 30% of these people – 76.5 million – end up earning, say, $5 a day by the end of 2020. That’s $3 times 76.5 million times 365 days in the year: $83.8bn of extra income. Wow!!

Ignoring dollars and cents, this is also the right thing to do. If we can reduce the quantity of human misery, well, that has to be a good thing, surely?

Petrochemicals companies should seize the day. Now is the time for both Indonesian and overseas companies to partner the government by providing the goods and services essential to get these infrastructure investments off the ground.