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Fed Rate Rise And Indonesia: You Should Be “Shock Proof”

Business, China, Company Strategy, India, Indonesia, Oil & Gas
By John Richardson on 16-Sep-2015


By John Richardson

AS you waited for your flight, you picked up a nice glossy magazine that talked about the “Asian economic miracle” in the kind of one-dimensional language that might have got some of you into this mess in the first place.

You then returned to your chemicals company to read report after report by your internal data crunchers that essentially said one thing and one thing only: Nothing can go wrong.

The reason was that the data crunchers were like you. They also read the same glossy magazines and listened to the same almost endlessly upbeat TV reports about growth only heading in one direction. This shapred their assumptions on say GDP growth and the rise in per capita chemicals consumption

Extreme and unfair? I hope so. I really hope I am wrong and that instead chemicals companies the world over have long held sober, realistic views about the sustainable growth prospects in the developing countries of Asia.

Such companies will, as a result, not be the slightest bit phased by all the uncertainty over this week’s decision by the Fed over whether or not to raise interest rates in September. This decision won’t really matter a jot to these companies, other than perhaps the need to cope with a bit more short-term volatility in oil prices.

These types of chemicals companies will not really care about the Fed decision because they already have contingency plans in place to deal with the six big immediate threats arising from a rate rise.

And printed out and pinned on their boardroom walls will be words to this effect, regarding their long-term approach to all developing markets:

Growth will sometimes be gradual, and sometimes go backwards. Turning a decent profit and winning growing market share (the latter may often come well before the former) will thus continue to be a long hard slog.

But the opportunities for huge volume gains, and so eventually great profits are huge if we keep our focus on two things and two things only: Making our products affordable in the real context of each market, whilst also growing our sales through helping meet basic needs, such as modern sanitation, irrigation, potable water supply and reduced carbon footprint.

These types of chemicals companies will have the right types of strategic thinkers making up their boards of directors.

They will also have great people on the ground in all the key markets in Asia, feeding high quality data and analysis back to the boards. These people on the ground will be trusted by the boards, as they are next generation of top management.

These great people on the ground, in markets such as Indonesia and India, will also be fantastic in building and maintaining excellent relationships with customers and suppliers.

So as one vice president of sales for a leading chemicals company told me the other week: “I have the sales team in place that can sell more volumes,  not less volumes, in a difficult market. What makes a great sales person is someone who can do well in difficult times.”

As I focus on Indonesia today (I will look at India tomorrow), the “Class A” chemicals companies which I have described above will already know that:

  • During Indonesia’s long commodities-driven economic boom, “inequality grew sharply, as high-income households benefited much more from the boom than did low income households,”wrote John West, Executive Director of the Asian Century Institute
  • About 65 million people still lived near poverty (between $1.25 and $2 a day), and were thus highly vulnerable to food price increases, health shocks (like a sudden serious illness) and natural disasters — especially since large numbers had no social protection, he said.
  • In the 2012 OECD PISA study, which focused on the education abilities of 15 year old students in 64 countries, Indonesia had the second lowest score.
  • “Over the coming decade, Indonesia will need economic growth rates of over 5% to avoid serious unemployment problems and the risks to social and political stability that this entails. Already, more 20% of the youth population is unemployed. To make serious progress in climbing the development ladder would require growth rates around 10%,” he added.
  • The World Economic Forum ranked Indonesia’s infrastructure 61st out of 144 countries that it recently surveyed. A good example of this problem is that whilst traffic volume on Indonesia’s roads has risen by 300% over the last decade, the total length of its road network has only risen by 35%.

There are plenty of positive statistics you can quote on Indonesia as well – for example, the share of people living in poverty was cut from 24% in 1999 to 11% in 2013.

But realism is never the same as pessimism. It is instead just sensible planning.