Luck is when opportunity meets preparation. After a painful decade of underperformance, we see the stars are aligned for Indonesia to outperform. Commodity supercycle, the rotation from growth to value stocks, investors pivoting to other markets after China tech clampdown, and rising geopolitical tension are favourable backdrops for Indonesia. Having Indonesia as our home turf allows us to see internal reforms happening at the margin that will amplify this external tailwind. Indonesia 2.0 is a rediscovery that will surprise you in many ways.
Luck is when opportunity meets preparation. After a painful decade of underperformance, we see the stars are aligned for Indonesia to outperform. Commodity supercycle, the rotation from growth to value stocks, investors pivoting to other markets after China tech clampdown, and rising geopolitical tension are favourable backdrops for Indonesia. Having Indonesia as our home turf allows us to see internal reforms happening at the margin that will amplify this external tailwind. Indonesia 2.0 is a rediscovery that will surprise you in many ways.
Everyone has a plan ‘till they get punched in the mouth. This frequently cited quote by Mike Tyson gains more relevance today. Politicians may aspire with plans to increase their odds of being elected. Greening economy projects, waging war against inequality, exerting political dominance over other countries, and other populist policies are some of the examples. However, all these means nothing if their leadership fails to bring food on the table.
In our past blog (link), we pointed out how supply chain issues, tight agriculture market, energy crisis, and geopolitical tension crystallised in the great rally of ammonia and fertiliser prices. If we consider the factors at play, this might be the warning shot of an upcoming food crisis.
Skyrocketing food prices have been associated with social unrest and we are at all-time high
Source: Lagi, et al. (2011)
It is pretty straight forward why high and volatile food prices could destabilise a society. Food is both essential and have a significant share of our daily spending. Based on 2018 Euromonitor data, food on average accounted for 28.7% of consumer spending in 51 countries throughout the globe. For some countries like Bangladesh, Myanmar, Kenya and Ethiopia, this figure can be as high as 53% to 59% .
There are anecdotal evidence in the past whereby food problems led into social unrest. In 1789, the famine led French peasants to storm the Bastille prison and ended up overturning the French empire. In the modern era, the high food prices in 2008 and 2011 sparked numerous civil unrests in the Middle East.
Before the recent boom, commodities were the sucker’s bet of the last decade. At the start of its gracious fall in the 2010s, the substantial commodity investments in the 2000s left the world with abundant stocks of commodities. This time around, the prolonged relaxed financial conditions and minimum investments in this sector drift the world into the opposite setting. There is a lot of liquidity, yet so few goods.
If we consider commodity as a currency of its own, we are seeing where Gresham’s rule of bad money drives out good money in action. The rapid expansion of liquidity without a respective production expansion of commodities led to the appreciation of the latter.
Today, food prices already exceeded the highs of 2011 and are yet to lose their steam.
Source: Bloomberg
Countries are taking food protectionism measures to stabilise domestic food prices
We find the severity of the potential food crisis cannot be underestimated. Case in point would be the magnitude of Russia-Ukraine war in escalating this matter.
Both Russia and Ukraine play significant roles in the agriculture or fertiliser market. Russia is the biggest exporter of wheat (18% of global export) and a major exporter of sunflower oil (18% of global export) and fertilizers (20% of global ammonia export). On the other hand, Ukraine is also a major exporter of wheat (15% of global export) and the biggest sunflower oil exporter (37.5% of global export).
The prolonged Russia-Ukraine conflict adversely impacts both near and long-term supply. Near-term supply has been affected because of the logistical hurdles made by the war. The future supply is at risk because Ukraine might miss this spring planting season. The ramifications of sudden drop in food exports at a time of tight stock will be painful and costly to bear by the rest of the world.
For some countries, such as those in the African continent, food affordability and availability will become major issues. From the following graph, we could see how Russia and Ukraine war could jeopardise the procurement of wheat in Africa.
Source: UNCTAD (March 2022)
This concern over food insecurity gained the spotlight in the world’s most populated country, China. During the 13th National Committee of the Chinese People’s Political Consultative Conference on 7 March 2022, China President Xi Jinping underscored the importance of food security and ordered greater self-reliance in its production. Below was his speech as quoted by South China Morning Post:
“Vigilance in food security must not slacken, we must not think that food ceases being an issue after industrialisation, and we cannot count on international supplies to solve the problem… We must plan ahead by adhering to the principles of domestic production and self-reliance while ensuring an appropriate level of imports and technology-backed development… the rice bowls of the Chinese people are filled with Chinese grain”
There is no smoke without fire. The mounting food security risk is even more visible with the spreading food protectionism measures. China, Russia, Ukraine, Algeria, Hungary, Moldova, Turkey, Egypt, Serbia, and Indonesia are growing list of countries that curbs food or fertiliser exports.
A resource-rich country like Indonesia may fare better in facing a food crisis
Source: World Bank & United Nations
Indonesia has adequate resiliency in the mounting food insecurity globally. In terms of food production, the country is well-known to have a 59% share in global palm oil production. This vegetable oil is extremely efficient. Palm oil supplies 40% of the world’s vegetable oil demand with only 6% of land used for vegetable oils. These economics made the commodity simply irreplaceable.
Furthermore, the USDA ranked Indonesia as the fourth biggest producer of rice with a 7% global market share. This country is also ranked the twelfth largest producer of corn with 1% global market share.
Given this natural advantage, Indonesia is inherently a net exporter of foods. The skyrocketing price of global food prices would suggest that the country will see its surplus widen. As such, Indonesia should benefit from either relative resiliency in inflation or a widening trade surplus.
According to The Economist’s research on the food security index 2021, Indonesia ranked 37th of 113 countries globally in terms of the availability of food supply. Ample land for production, low volatility of production, and strong food security policies and agency are reasons why Indonesia fared well on this subject.
Furthermore, Indonesia’s food security improvement between 2012 and 2021 ranks 24th among world countries. Based on our past on-the-ground observation, infrastructures development and strengthening of food security policies and enforcement are the reasons for the improvement. We discussed more detail about Indonesia infrastructure development in our Q1 2019 report (link).
We think that Indonesia’s resiliency in food security is pretty much reflected in the marginal food cost increase relative to the global average from 2010-to 2021.
Source: Global Food Security Index (2021)
In the world of commodities shortage and abundant liquidity, those who own the former will stand to benefit. Besides food, Indonesia produces lots of commodities and has been regarded as resource-rich land for decades. How will the booming commodity market affect Indonesia? How it be different this time? Stay tuned to our blog!
Share
Everyone has a plan ‘till they get punched in the mouth. This frequently cited quote by Mike Tyson gains more relevance today. Politicians may aspire with plans to increase their odds of being elected. Greening economy projects, waging war against inequality, exerting political dominance over other countries, and other populist policies are some of the examples. However, all these means nothing if their leadership fails to bring food on the table.
In our past blog (link), we pointed out how supply chain issues, tight agriculture market, energy crisis, and geopolitical tension crystallised in the great rally of ammonia and fertiliser prices. If we consider the factors at play, this might be the warning shot of an upcoming food crisis.
Skyrocketing food prices have been associated with social unrest and we are at all-time high
Source: Lagi, et al. (2011)
It is pretty straight forward why high and volatile food prices could destabilise a society. Food is both essential and have a significant share of our daily spending. Based on 2018 Euromonitor data, food on average accounted for 28.7% of consumer spending in 51 countries throughout the globe. For some countries like Bangladesh, Myanmar, Kenya and Ethiopia, this figure can be as high as 53% to 59% .
There are anecdotal evidence in the past whereby food problems led into social unrest. In 1789, the famine led French peasants to storm the Bastille prison and ended up overturning the French empire. In the modern era, the high food prices in 2008 and 2011 sparked numerous civil unrests in the Middle East.
Before the recent boom, commodities were the sucker’s bet of the last decade. At the start of its gracious fall in the 2010s, the substantial commodity investments in the 2000s left the world with abundant stocks of commodities. This time around, the prolonged relaxed financial conditions and minimum investments in this sector drift the world into the opposite setting. There is a lot of liquidity, yet so few goods.
If we consider commodity as a currency of its own, we are seeing where Gresham’s rule of bad money drives out good money in action. The rapid expansion of liquidity without a respective production expansion of commodities led to the appreciation of the latter.
Today, food prices already exceeded the highs of 2011 and are yet to lose their steam.
Source: Bloomberg
Countries are taking food protectionism measures to stabilise domestic food prices
We find the severity of the potential food crisis cannot be underestimated. Case in point would be the magnitude of Russia-Ukraine war in escalating this matter.
Both Russia and Ukraine play significant roles in the agriculture or fertiliser market. Russia is the biggest exporter of wheat (18% of global export) and a major exporter of sunflower oil (18% of global export) and fertilizers (20% of global ammonia export). On the other hand, Ukraine is also a major exporter of wheat (15% of global export) and the biggest sunflower oil exporter (37.5% of global export).
The prolonged Russia-Ukraine conflict adversely impacts both near and long-term supply. Near-term supply has been affected because of the logistical hurdles made by the war. The future supply is at risk because Ukraine might miss this spring planting season. The ramifications of sudden drop in food exports at a time of tight stock will be painful and costly to bear by the rest of the world.
For some countries, such as those in the African continent, food affordability and availability will become major issues. From the following graph, we could see how Russia and Ukraine war could jeopardise the procurement of wheat in Africa.
Source: UNCTAD (March 2022)
This concern over food insecurity gained the spotlight in the world’s most populated country, China. During the 13th National Committee of the Chinese People’s Political Consultative Conference on 7 March 2022, China President Xi Jinping underscored the importance of food security and ordered greater self-reliance in its production. Below was his speech as quoted by South China Morning Post:
“Vigilance in food security must not slacken, we must not think that food ceases being an issue after industrialisation, and we cannot count on international supplies to solve the problem… We must plan ahead by adhering to the principles of domestic production and self-reliance while ensuring an appropriate level of imports and technology-backed development… the rice bowls of the Chinese people are filled with Chinese grain”
There is no smoke without fire. The mounting food security risk is even more visible with the spreading food protectionism measures. China, Russia, Ukraine, Algeria, Hungary, Moldova, Turkey, Egypt, Serbia, and Indonesia are growing list of countries that curbs food or fertiliser exports.
A resource-rich country like Indonesia may fare better in facing a food crisis
Source: World Bank & United Nations
Indonesia has adequate resiliency in the mounting food insecurity globally. In terms of food production, the country is well-known to have a 59% share in global palm oil production. This vegetable oil is extremely efficient. Palm oil supplies 40% of the world’s vegetable oil demand with only 6% of land used for vegetable oils. These economics made the commodity simply irreplaceable.
Furthermore, the USDA ranked Indonesia as the fourth biggest producer of rice with a 7% global market share. This country is also ranked the twelfth largest producer of corn with 1% global market share.
Given this natural advantage, Indonesia is inherently a net exporter of foods. The skyrocketing price of global food prices would suggest that the country will see its surplus widen. As such, Indonesia should benefit from either relative resiliency in inflation or a widening trade surplus.
According to The Economist’s research on the food security index 2021, Indonesia ranked 37th of 113 countries globally in terms of the availability of food supply. Ample land for production, low volatility of production, and strong food security policies and agency are reasons why Indonesia fared well on this subject.
Furthermore, Indonesia’s food security improvement between 2012 and 2021 ranks 24th among world countries. Based on our past on-the-ground observation, infrastructures development and strengthening of food security policies and enforcement are the reasons for the improvement. We discussed more detail about Indonesia infrastructure development in our Q1 2019 report (link).
We think that Indonesia’s resiliency in food security is pretty much reflected in the marginal food cost increase relative to the global average from 2010-to 2021.
Source: Global Food Security Index (2021)
In the world of commodities shortage and abundant liquidity, those who own the former will stand to benefit. Besides food, Indonesia produces lots of commodities and has been regarded as resource-rich land for decades. How will the booming commodity market affect Indonesia? How it be different this time? Stay tuned to our blog!
While China’s push in technology is hardly news, its rising tensions with the West have sped up their need to become less dependent on foreign technology. In its 14th Five-Year Plan on Digital Economy, China’s leaders emphasise, once again, their ambitions for the country to seize the leading position in the global technology race. The plan highlights China’s intention to boosts its global competitiveness in advanced technologies such as semiconductors and artificial intelligence. And blockchain was listed as a “key digital technology” alongside AI and cloud computing, which we coined as the “ABC”.
China’s Ambition in Blockchain Begins with Digital Currency
Over the past decades, China’s technological advances have mixed performance. While leading in 5G deployment, it lags behind western countries in technologies with more strategic positions, such as artificial intelligence and semiconductors. The catch up race has been painful and costly. However, China may have indeed established a strong head start when it comes to blockchain.
While the initial concept of blockchain technology is underpinned by its decentralised nature, China’s version is different. It is a centralised operation which guarantees complete state control over the development and application of the technology. China’s drive for blockchain technology goes beyond economic ambitions. The technology essentially allows for effective government surveillance capabilities at both micro and macro levels.
The Chinese government has been investing in the financial application of the blockchain technology. The development of the digital yuan is among the core strategic priorities. The large scale domestic rollout of the digital yuan would align with Beijing’s push for financial security. The use of its CBDC not only increases its ability to monitor financial activity and tackle illicit activities, it provides Beijing an independent source of valuable customer data, meaning they will no longer need to obtain customer information from payment companies to monitor citizens’ transaction.
Image credit: TechNode/Jiayi Shi
But the Ambition Goes Far Beyond Digital Currency
The digital yuan is positioned to serve as the infrastructure for the country’s international economic agenda which is underpinned by the expansion of a China-centric digital ecosystem that encompasses technologies such as 5G, IoT, AI and big data. And since blockchain run on the internet, it is imaginable that China will try to control the underlying communication protocol, domestic national cloud infrastructure and AI at the same time. However, the government is having a difficult time censoring and controlling the exchange of information between computers due to the distributed nature underpinning TCP/IP (transmission control protocol/internet protocol), the communication protocol that governs how data moves around the Internet.
Noting this stumbling block, Huawei proposed the “New IP” to replace TCP/IP. The New IP proposal emerged at a 2019 meeting of the International Telecommunication Union, a UN agency responsible for all matters related to information and communication technologies. The New IP is designed to offer more efficient addressing and network management than the existing TCP/IP standard, but it is likely to come with hooks that allow authoritarian nations to censor and surveil their residents, including features such as a “shut up command”. The new model is said to replace current centralised parts of the internet, such as Domain Name system (DNS), with Distributed Ledger Technology (DLT) solutions. However, as aforementioned, the blockchain technology proposed by China is likely to differ from commonly known definition of the technology, decentralisation is out of the question in China, but advanced adoptions of the ABC can be expected in areas ranging from energy conservation to urban management and law enforcement.
Cities of the Future
The government sees blockchain as a key pillar of its smart city infrastructure initiative that is currently being built across China. A smart city is an ideological term that refers to the development of cities that utilises advanced digital technologies including the likes of blockchain and IoT, as well as robotics and AI to optimise urban management and services including road network management, public health, energy generation, communication and food safety. Local tech giants including Alibaba and Tencent are also heavily involved in supporting the development.
At present, there are 11 regions in China using blockchain technology to build a smart city system. Among them, the Xiongan New Area (possible future capital) was the first to be transformed into an intelligent city prototype. In 2018, Ant Financial, serving as the core blockchain technology provider, launched the blockchain rental application platform in Xiongan. This means that individuals will have their own credit score based on their rental related record. Blockchain also became an integral part of Shanghai’s smart city program, where it helps to collect and store vast quantities of data to assess optimisation levels for garbage classification management. The blend of blockchain with other technologies within the smart city ecosystem is likely to expand as China’s ambitious aspirations to take the lead on blockchain meets its equally ambitious aspirations to accelerate itssmart city development.
Xiongan Railway Station of the Beijing-Xiongan intercity railway in Xiongan New Area, north China’s Hebei Province.
Image credit: Xinhua/Xing Guangli
Invest in the ABC Before They Change the World
The above are only a few examples among the many use cases of blockchain in China. The Chinese government’s approach towards blockchain and its integration with other cutting-edge technologies provides it a first-mover advantage over other countries that are yet to make a move in this field.
Having said that, it may be many years till the country reaches notable success in the advance technology sphere given it is still far from technological self-sufficiency and remains reliant on foreign technologies such as chips design and manufacturing. China will likely face stiffer challenges in acquiring foreign technologies such as on semiconductors due to growing western consensus to curb its access. Its roadmap to becoming a global leader in critical technologies of the future will require the integration of advanced technologies which will be crucial to the development of other advanced industrial sectors. As such, the ABC strategy may present profitable opportunities in years to come as countries increasingly dedicate resources in technology sector as part of their national strategic plans.
Share
While China’s push in technology is hardly news, its rising tensions with the West have sped up their need to become less dependent on foreign technology. In its 14th Five-Year Plan on Digital Economy, China’s leaders emphasise, once again, their ambitions for the country to seize the leading position in the global technology race. The plan highlights China’s intention to boosts its global competitiveness in advanced technologies such as semiconductors and artificial intelligence. And blockchain was listed as a “key digital technology” alongside AI and cloud computing, which we coined as the “ABC”.
China’s Ambition in Blockchain Begins with Digital Currency
Over the past decades, China’s technological advances have mixed performance. While leading in 5G deployment, it lags behind western countries in technologies with more strategic positions, such as artificial intelligence and semiconductors. The catch up race has been painful and costly. However, China may have indeed established a strong head start when it comes to blockchain.
While the initial concept of blockchain technology is underpinned by its decentralised nature, China’s version is different. It is a centralised operation which guarantees complete state control over the development and application of the technology. China’s drive for blockchain technology goes beyond economic ambitions. The technology essentially allows for effective government surveillance capabilities at both micro and macro levels.
The Chinese government has been investing in the financial application of the blockchain technology. The development of the digital yuan is among the core strategic priorities. The large scale domestic rollout of the digital yuan would align with Beijing’s push for financial security. The use of its CBDC not only increases its ability to monitor financial activity and tackle illicit activities, it provides Beijing an independent source of valuable customer data, meaning they will no longer need to obtain customer information from payment companies to monitor citizens’ transaction.
Image credit: TechNode/Jiayi Shi
But the Ambition Goes Far Beyond Digital Currency
The digital yuan is positioned to serve as the infrastructure for the country’s international economic agenda which is underpinned by the expansion of a China-centric digital ecosystem that encompasses technologies such as 5G, IoT, AI and big data. And since blockchain run on the internet, it is imaginable that China will try to control the underlying communication protocol, domestic national cloud infrastructure and AI at the same time. However, the government is having a difficult time censoring and controlling the exchange of information between computers due to the distributed nature underpinning TCP/IP (transmission control protocol/internet protocol), the communication protocol that governs how data moves around the Internet.
Noting this stumbling block, Huawei proposed the “New IP” to replace TCP/IP. The New IP proposal emerged at a 2019 meeting of the International Telecommunication Union, a UN agency responsible for all matters related to information and communication technologies. The New IP is designed to offer more efficient addressing and network management than the existing TCP/IP standard, but it is likely to come with hooks that allow authoritarian nations to censor and surveil their residents, including features such as a “shut up command”. The new model is said to replace current centralised parts of the internet, such as Domain Name system (DNS), with Distributed Ledger Technology (DLT) solutions. However, as aforementioned, the blockchain technology proposed by China is likely to differ from commonly known definition of the technology, decentralisation is out of the question in China, but advanced adoptions of the ABC can be expected in areas ranging from energy conservation to urban management and law enforcement.
Cities of the Future
The government sees blockchain as a key pillar of its smart city infrastructure initiative that is currently being built across China. A smart city is an ideological term that refers to the development of cities that utilises advanced digital technologies including the likes of blockchain and IoT, as well as robotics and AI to optimise urban management and services including road network management, public health, energy generation, communication and food safety. Local tech giants including Alibaba and Tencent are also heavily involved in supporting the development.
At present, there are 11 regions in China using blockchain technology to build a smart city system. Among them, the Xiongan New Area (possible future capital) was the first to be transformed into an intelligent city prototype. In 2018, Ant Financial, serving as the core blockchain technology provider, launched the blockchain rental application platform in Xiongan. This means that individuals will have their own credit score based on their rental related record. Blockchain also became an integral part of Shanghai’s smart city program, where it helps to collect and store vast quantities of data to assess optimisation levels for garbage classification management. The blend of blockchain with other technologies within the smart city ecosystem is likely to expand as China’s ambitious aspirations to take the lead on blockchain meets its equally ambitious aspirations to accelerate itssmart city development.
Xiongan Railway Station of the Beijing-Xiongan intercity railway in Xiongan New Area, north China’s Hebei Province.
Image credit: Xinhua/Xing Guangli
Invest in the ABC Before They Change the World
The above are only a few examples among the many use cases of blockchain in China. The Chinese government’s approach towards blockchain and its integration with other cutting-edge technologies provides it a first-mover advantage over other countries that are yet to make a move in this field.
Having said that, it may be many years till the country reaches notable success in the advance technology sphere given it is still far from technological self-sufficiency and remains reliant on foreign technologies such as chips design and manufacturing. China will likely face stiffer challenges in acquiring foreign technologies such as on semiconductors due to growing western consensus to curb its access. Its roadmap to becoming a global leader in critical technologies of the future will require the integration of advanced technologies which will be crucial to the development of other advanced industrial sectors. As such, the ABC strategy may present profitable opportunities in years to come as countries increasingly dedicate resources in technology sector as part of their national strategic plans.
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