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Indonesia: Realising Its ‘Demographic Dividends’
Perspective | 18 November 2011
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Opening ceremony of an international sports meet is a charm offensive opportunity that the host nation seized to present its best to the world. On that count alone, the glitzy opening of the 26th South East Asia Games at Palembang – breathtaking fireworks, captivating light-displays as well as enchanting traditional dances and songs – was a seemingly perfect coming-up party for Indonesia. Perfect, it would indeed be, if the build-up to the biennale meet was not dogged by the many negativities that dominated headlines of local and regional newspapers.

For investors, the above offers valuable parallels to the Indonesian economy that is now basking in positive spotlight. With the developed economies deeply embroiled in their respective quagmire, many are pinning hopes on the emerging economies to pick up the slack and power global growth. Indonesia, the fourth largest country in the world and home to the largest Muslim population, is hailed as the next rising star to join the coveted ranks of the BRIC (Brazil, Russia, India and China).

Impressive Progress
To be fair, the current favourable light shone on Indonesia is not without merit. The archipelago nation was a major casualty in the 1997 Asian Financial Crisis – after the collapse of the Thai Baht, the Indonesian Rupiah plunged from a pre-crisis level of Rp2,600 to US$1 to a devastating low of Rp14,000. This resulted in a 13.1% gross domestic product (GDP) contraction and a 58.4% inflation spike in 1998. Since then, GDP has expanded at an average rate of more than 5% per annum and is expected to chalk up 6.5% this year.

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Source: World Bank and BPS-Statistics Indonesia

While some might point out that the economic turnaround was underscored by the nation’s commodities boom that rode on the insatiable growth appetite of China and India, credit ought to be given to its political transformation. In the wake of the 1997 Crisis, President Suharto’s three decade-long power grip was loosened and a one-man, one-vote presidential election system was constitutionalised. The current president Dr Susilo Bambang Yudhoyono, who campaigned on a reform-minded agenda and re-elected with a strong mandate in 2009, has placed rooting out corruption as one of his top priorities.

More importantly, the bright spot that is buoying investors’ optimism is the Indonesian consumer. With a population of over 230 million, internal consumption accounts for approximately 60% of the national GDP. Having close to 27% of its population under the age of fifteen, huge potential in the consumer market awaits to be unleashed as the proportion of working class rises substantially in the next decade. Termed as the ‘demographic dividend’, Indonesia hopes to realise this potential, giving it an advantage over ageing economies such as China.

Realising ‘Dividend’
Looking at the unemployment figures from 2005 to 2010, Indonesia would seem to be on the right track with the overall rate coming down from 11.2% to 7.1%. However, taking a closer look at the university-educated unemployed revealed a worryingly tale: The segment was on a reverse trend with unemployment hiking up from 3.6% in 2005 to 8.5% in 2010. Similarly downbeat was the World Bank’s estimates, which indicated that more than half of the population lives on less than US$2 per day. All these data point to the same conclusion – to realise its ‘demographic dividend’, Indonesia has to create jobs and especially those that are of better-quality and higher-paying.

For that to materlise, Indonesia needs to foster an attractive climate to bring in more foreign direct investment. Infrastructure development should feature top on the list as its ports, electrical grids and roads are deemed the most over-stretched in the region. This has been a major disincentive that puts off foreign investment due to the exorbitant transportation costs to be incurred. Government’s actions should also be more consistent with the investor-friendly slogan that it loudly proclaims. In particular, the recent announcement to review and revise all its contracts with foreign companies does no favour to its already poor standing among the international business community.

Political and policy risks are likely to be the biggest wildcards in the economic progress of Indonesia. For the next presidential election in 2014, given steady-hand incumbent Dr Yudhoyono is constitutionally barred to seek a third term, markets are keeping a close watch on the potential candidates. Hopes are high that Indonesia can realise its potential, living up to its hype as the next rising nation.

Palm Oil Tops Indonesia’s Agriculture Industry
Besides the demographic advantage, Indonesia’s economic turnaround was underscored by a commodities boom that rode on the insatiable growth appetite of China and India. Here, we take a closer look at one of the key beneficiaries – the palm oil industry.

Agriculture is one of Indonesia’s largest economic drivers, accounting for 38.3% of the country’s employment and 15.3% of its GDP in 2010. Palm oil, Indonesia’s most dynamic export, topped the country’s area planted by crops, covering more than 5 million hectares. The government’s committed focus in palm oil is evident. From 1995 to 2010, the area of palm oil plantations grew by a stunning 407% whereas the planted areas of cane sugar and dry rubber plantations, the second and third largest crops by production, were either flat or declined. As of 2010, cane sugar and dry rubber plantations covered 429,400 hectares and 472,200 hectares respectively.

Notably, Indonesia’s palm oil production is the world’s largest with output reaching 21.3 million metric tonnes in 2010. The United States Department of Agriculture estimates palm oil production from Indonesia in 2011/2012 (marketing year beginning October 2011) to reach 25.4 million metric tonnes followed by Malaysia at 18.4 million metric tonnes.

6 Largest Estates Production by Crops, Indonesia (Tonne), 2005 – 2010*

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1) Including production which uses raw materials from smallholder
*) Preliminary figures
Source: BPS-Statistics Indonesia

Companies Cheer On Higher CPO Prices
Stronger prices of crude palm oil (CPO) have spurred the profitability of the players in its industry, in particular Golden Agri-Resources (GAR) which is the largest palm oil plantation company in Indonesia. In 3Q11, the company achieved a 61.9% year-on-year growth in its revenue to rake in US$1.6 billion while its bottom line grew by 10.5% to US$109.6 million. GAR’s total planted area continues to be the largest in Indonesia at 448,924 hectares as at 30 September 2011.

Meanwhile, agribusiness giant Wilmar International recently reported a sharp 68.7% year-on-year increase in its 3Q11 revenue along with a 23.7% growth in earnings as sales volume rose across all business segments. With more than 50% of its revenue coming from China, Wilmar’s performance faces adverse influence from the country’s price cap and import tax on cooking oil.

As the company ventures into other commodities, palm oil still remains Wilmar’s main revenue driver. As at 30 September 2011, 74% of Wilmar’s palm oil plantation is situated in Indonesia, covering 183,708 hectares of planted area. The remaining 26% is located in Malaysia and Africa.

Competition Heightened With Tax Reduction
In its financial report, Wilmar highlighted that the export duties for CPO averaged 16.9% per month during 3Q11, compared to an average of only 4.5% per month in 3Q10. Previously, the company’s margins were eroded partly due to the increased palm oil export tax in Indonesia. The country’s export tax policy for palm oil fluctuates with the international CPO prices as a measure to protect its domestic cooking oil supply at stable prices. In an effort to lift its palm oil industry, the Indonesian government stepped in to cut its export taxes for the processed grades of CPO. According to Bloomberg, Indonesia reduced the tax rate for CPO exports for November to 15%, down from 16.5% in October.

Chairman and chief executive officer Kuok Khoon Hong pointed out that “Palm and Laurics will benefit from the recent changes in the Indonesian export duty structure for palm products, which is highly advantageous for downstream processing margins.”

The tax cut unquestionably benefited palm oil businesses in Indonesia. On the flip side, the move created a stir amongst the neighbouring countries with concerns that Indonesia’s reduced CPO export tax would give it a price advantage. “The market has been distorted. I am planning to hold discussions with my Indonesian counterpart on this matter and am awaiting a date,” said Malaysia’s Plantation Industries and Commodities Minister, Tan Sri Bernard Dompok.

Aggressive growth in the palm oil industry comes with a price to pay as Indonesia faces the challenge of rapid deforestation. Nevertheless, palm oil will remain as one of the major contributors of Indonesia’s export. Its increasing use in the commercial food industry, together with the strong CPO prices, would provide the growth support for the commodity. While the direct competition from Malaysia would continue to be the limiting factor for Indonesia’s palm oil industry, it should not be seen as a surprise that other countries such as Thailand and South Africa escalate their oil palm plantations for a bigger share of the booming industry.

This is a co-written article of Shares Investment, which lays out the analytical ideas and thoughts of the authors, who are well versed in investments and market concepts.

Golden Agri-Resources  0.205 -0.005 -2.38%   
Business: Co is engaged in cultivating & harvesting oil palm trees, processing fresh fruit bunches (FFB) into crude palm oil (CPO) & palm kernel (PK), & refining CPO into industrial & consumer pdts.

Insight: May-19, 1Q19 revenue fell 11% due to softer crude ... Read More
Wilmar Int'l  3.590 +0.03 +0.84%   
Business: Co's integrated agribusiness model encompasses the entire value chain of the agricultural commodity processing biz, from origination and processing to branding, merchandising and distribution of a wide range of agricultural pdts.

Insight: May-19, 1Q19 revenue fell 6.2% to US$10.4b driven ... Read More

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