Indonesia's expanded ban on palm oil exports, now covering crude and refined products, compounds the food commodity price pressures driven by post-Covid demand recovery, the legacy of under-investment in production, and the Russia-Ukraine War (particularly for wheat, but also for sunflower oil).
The export ban also provides the latest example in EM of populist concerns distracting from sensible economic policy and a focus on structural reform.
The silver lining for food purchasers in poor countries (eg Bangladesh, Egypt, Lebanon, Jordan, Nigeria, Pakistan, Philippines) and for bulls on Indonesia equities is that the ban should not last very long.
Indonesia the king pin in Palm Oil
Palm drives over a third of the global vegetable oil market and Indonesia accounts for almost 60% of palm oil production. Weighted average vegetable oil prices, tracked by UN FAO, are already up 56% in the year to end-March 2022.
EM countries vulnerable to food price spike
The countries in EM most exposed to roaring food prices are those which are relatively poor, where a high proportion of household budget is spent on food staples, and those which are net importers.
In our coverage of EM equity markets, the following countries fit this description: Bangladesh, Egypt, Jordan, Lebanon, Nigeria, Pakistan, and the Philippines.
For Indonesia, not a sustainable policy
For Indonesia, the export ban is a blunt and, at best, short-term tool to bring down domestic palm oil cooking prices.
Short-term, there are limits to local storage capacity for output that is not exported. According Gro Intelligence and Reuters, there is 5mt of palm oil in storage with capacity for up to another 2mt, which might be filled within a month. According to data tracked by USDA, the next six-month season usually sees above average harvest for the Palm Oil sector in Indonesia, with a peak in October.
Medium-term, a reduction in export earnings likely drags down the currency, which, in turn, drives up imported inflation (higher cost of all imports). Palm Oil accounts for 10% of Indonesia's exports.
Therefore, while this ban is clearly negative for those on the wrong end of food commodity price inflation, it may not last beyond a couple of months. The same cannot be said of the other factors pushing global food prices higher.
Reform distracted by populism
The ban is another example of how populism in a time of stress is de-railing sensible policy in what were some of the best structural reform candidates in EM, following:
India – the retraction of the Farmers Laws in advance of this year's state elections;
Pakistan – the food and fuel relief package which has threatened the IMF programme; and
Philippines – the shift from tax reform and infrastructure upgrades to the upcoming election.
Indonesia equities
Indonesia equities have outperformed regional peer Malaysia but remain reasonably attractively valued.
The Jakarta Composite is an outperformer: up 9% ytd and up 23% in the last 12 months compared to the Bursa Malaysia, which is down about 2% on both of these time frames.
Trailing PB of 2.2x (for 10.4% ROE) is in line with the 5-year median. Forward 2023 PE is 17.6x (for 10% earnings growth and 2.5% dividend yield).
Related reading
Food prices boil to new peak as Russia-Ukraine War bites, 8 April 2022
Indonesia: A liquid alternative for Frontier equity investors, October 2020
Indonesia adds reform to its cheap valuation, October 2020
ASEAN abandoned in the foreign rush to China and India, November 2021