The 1 thing which makes Indoensia grow FAST, Sharpfokus55
1st 4 minute mile
Do you know Roger Bannister? He’s the first man to run a 4 minute mile. In 1954. Except he isn’t. The 1st 4 min mile was run in 1770 in London by James Parrott. Why is it not recognized? Because Parrott ran for money. Without incentives, it took 200 years to get back to the same level.
Disincentive
Subsidy
Incentives like money work well to bring things up. What’s an example of the opposite, a disincentive? Something for nothing. Here in Indonesia we have plenty of examples in the form of subsidies & without the need for tests or a laboratory, we can see clearly how they (don’t) work.
2000-2011
Every Indonesian President has struggled with 1 thing, fuel subsidies. Why is beyond me. The key is to look at subsidies in real $ terms. After the late 90s Rp collapse subsidized fuel prices were raised almost 10X from 2000-2011. The economy in $s boomed, growing an average 20% a year!
Last 7 years
Since 2011 when fuel prices reached about $0.5 they have remained the same. No more increase. $0.5 today. What has happened to the economy? GDP growth in $s has slowed down dramatically, from previously 20% (& as high as 40%), in the 2Q of 2018 the economy grew less than 2% from a year ago.
Palm fuel
Desperate President
We now have a president, who like many before him, is starting to behave like a desperate man. He has turned down opportunities to raise energy prices several times now has allowed the budget subsidy to more than triple & thinks he has found an alternative. That’s palm oil & biodiesel.
Biofuel
His government has tripled the budget allocated for fuel subsidies & he’s proposing massive increases in biodiesel. The great idea to make this work is to take the money from palm oil companies to use to buy their own palm oil to be converted to fuel. Re read that & let it sink in....
10 year average prices
As you can imagine, this makes no sense. If you told it to a small child they’d see the circular argument. Also biodiesel itself makes no sense. While the palm oil price is now close to oil prices, the 10 year average is $300 higher. I’ve only ever once once seen Palm cheaper than oil.
Inventories
Growth to 2.5
There’s another bigger issue about to strike too. For the last 20 years, the palm oil price has been flat, RM2500 then & (even less than) RM2500 now. During that period supply grew fast & inventories as measured in Malaysia tripled from 800k tons to. 2.4m tons (3 years average).
Flat for 7 years
The July inventory number in Malaysia was 2.2m tons & that’s the same as the 3 year average now. This is down from the peak of 2.4 last year The inventory level first reached 2.1m tons 7 years ago in 2011. You can see that it is no longer rising, has been flat & is starting to fall, fast!
Price will jump
If the price of palm oil was flat for 20 years while inventories tripled, what do you think is now going to happen with inventories falling? The price will rise. How high? I don’t know but it would make sense that we will see levels we’ve never seen before, which means above $1,400.
Jokowi will fail
This is not something far into the future, it’s happening right now: Jokowi’s fuel plans are going to get blown clean out of the water. There will be no alternative but to get rid of the disincentive subsidy. Without it, Indonesian economic growth can return to the 20% of before. Stocks will soar.
Have a great week!
Sebastian
Do you know Roger Bannister? He’s the first man to run a 4 minute mile. In 1954. Except he isn’t. The 1st 4 min mile was run in 1770 in London by James Parrott. Why is it not recognized? Because Parrott ran for money. Without incentives, it took 200 years to get back to the same level.
Disincentive
Subsidy
Incentives like money work well to bring things up. What’s an example of the opposite, a disincentive? Something for nothing. Here in Indonesia we have plenty of examples in the form of subsidies & without the need for tests or a laboratory, we can see clearly how they (don’t) work.
2000-2011
Every Indonesian President has struggled with 1 thing, fuel subsidies. Why is beyond me. The key is to look at subsidies in real $ terms. After the late 90s Rp collapse subsidized fuel prices were raised almost 10X from 2000-2011. The economy in $s boomed, growing an average 20% a year!
Last 7 years
Since 2011 when fuel prices reached about $0.5 they have remained the same. No more increase. $0.5 today. What has happened to the economy? GDP growth in $s has slowed down dramatically, from previously 20% (& as high as 40%), in the 2Q of 2018 the economy grew less than 2% from a year ago.
Palm fuel
Desperate President
We now have a president, who like many before him, is starting to behave like a desperate man. He has turned down opportunities to raise energy prices several times now has allowed the budget subsidy to more than triple & thinks he has found an alternative. That’s palm oil & biodiesel.
Biofuel
His government has tripled the budget allocated for fuel subsidies & he’s proposing massive increases in biodiesel. The great idea to make this work is to take the money from palm oil companies to use to buy their own palm oil to be converted to fuel. Re read that & let it sink in....
10 year average prices
As you can imagine, this makes no sense. If you told it to a small child they’d see the circular argument. Also biodiesel itself makes no sense. While the palm oil price is now close to oil prices, the 10 year average is $300 higher. I’ve only ever once once seen Palm cheaper than oil.
Inventories
Growth to 2.5
There’s another bigger issue about to strike too. For the last 20 years, the palm oil price has been flat, RM2500 then & (even less than) RM2500 now. During that period supply grew fast & inventories as measured in Malaysia tripled from 800k tons to. 2.4m tons (3 years average).
Flat for 7 years
The July inventory number in Malaysia was 2.2m tons & that’s the same as the 3 year average now. This is down from the peak of 2.4 last year The inventory level first reached 2.1m tons 7 years ago in 2011. You can see that it is no longer rising, has been flat & is starting to fall, fast!
Price will jump
If the price of palm oil was flat for 20 years while inventories tripled, what do you think is now going to happen with inventories falling? The price will rise. How high? I don’t know but it would make sense that we will see levels we’ve never seen before, which means above $1,400.
Jokowi will fail
This is not something far into the future, it’s happening right now: Jokowi’s fuel plans are going to get blown clean out of the water. There will be no alternative but to get rid of the disincentive subsidy. Without it, Indonesian economic growth can return to the 20% of before. Stocks will soar.
Have a great week!
Sebastian
