Economic Crisis

Aug 23rd, 2007, in Business & Economy, by

Indonesia is especially vulnerable to world economic shocks.

According to Universitas Gadjah Mada (UGM) Yogyakarta economist, Sri Adiningsih, Indonesia is of the "small open economy" type and therefore highly vulnerable to shocks and disturbances to the world economy like the current "sub-prime mortgage" problem in America.

The crisis in America will affect Indonesia, because apart from the fact that the American economy is so big America is also a very important economic partner of Indonesia.

One of the side-effects of the mini-crisis, he says, is the strengthening of the yen, which causes yen funds to return to Japan:

Indonesia has a big foreign debt compared to Japan, this is more concerning as the yen strengthens.

Of most concern is the position of the rupiah, he says, because imports remain a fundamentally important part of the workings of the economy, and given the volatility of the rupiah the cost of importing could rise wildly. antara


5 Comments on “Economic Crisis”

  1. avatar Falcon says:

    It is too precautions with yen the concern. More important what should be on the agenda of Indonesia financial watch dog committee and the central bank are; the banks, pension funds and financial institutions including their offshore registered companies with the help of brokers or investment bankers, foreign or foreign locally address placing their funds in such investment vehicle especially in view that there are so much un-utilized funds where they are unwilling to lend given the high local risk exposure in addition to stagnant micro economy. Instead may be some of these such funds may filter through their investment arm seeking a higher return at the sub prime market while arbitraging the exchange rate. There are still many unresolved BLBI cases and another shock leading to liquidity injection will seriously harm the Central Bank despite of its increasing reserves. The central bank of Japan is in a much stronger position to guard the impact of carry trade. Most important is the the fundamental of Indonesia financial institution are strictly controlled and audited.

  2. avatar John Orford says:

    Of course problems in america will affect Indonesia — but let’s face it the only country in the world that wouldn’t be affected by america’s problems is north korea (and extremely closed economy).

    In fact, open economies (how open is ri’s economy actually?) are more resistant to financial shocks – as they must to react quicker and be more agile to overcome them.

    For example, inflation is lower in open economies, because trade is so important, therefore companies must keep their prices low and competitive.

  3. avatar Falcon says:

    The chinese government has roughly $100 billion invested in american mortgaged backed security. Bank of China and Industrial and
    Commercial Bank of China claimed to have exposure in the subprime market. Should we be concerned with the Indonesian banks?.

  4. avatar Sputjam says:

    Huge Fund managers are working in tandem with the media to paint glowing pictures of certain assets before they overwhelm their target.
    History have shown that Japan was the first in the eighties, asia in 1997, technologies stock in early 2000, and now subprime loan.
    Did you not notice what glowing news of US housing market was before the crash?
    Similar attribute was given to technology and asia before they were done in. In the end, the smaller punter have to think and act the opposite to what they read in the news or try to understand the finer prints that was written.

    Small open countries are sitting targets. Best form a united currency like the EU for ASEAN nations or even better still all ASEAN currency are pegged to one another instead of pegged to the US dollar. AFTA(ASEAN Free trade area) cannot be succesfully implemented without a stable localised currency.
    Of course the forex traders will oppose this as their maximise their profits on market volatility, which is a burden to long term investors in manufacturing.

  5. avatar Dragonwall says:

    I see the pinch in some who seemed to have seen an economic yo yo and a squeeze right down Indonesia’s economy forcing BI to seek alternative measures and counter measures. For What. BI doesn’t seem to have a long term plan in mind. They were always talking. It is like they are paid today so they just refer how they can take care of their stomach now. When it come a time of difficulty we will settle that later. Such attitude can never get Indonesia out of trouble let alone an economic crisis.

    Different countries in Asia were placed at different level of economic growth. Which country would agree to create an Asean or Asian currency unit!

    Countries like MALAYSIA, SINGAPORE, CHINA & HK, JAPAN, S. KOREA will not agree to that. For countries like PHILIPPINES, THAILAND, VIETNAM BURMA, CAMBODIA they might want. But does INDONESIA want it?

    A window time of ten years could be given and we will still see no takers.

    According to report BI has plans to cut interest rates again. Portfolio managers suggesting against the idea of cutting rates as it might cause another capital flights because investors in the Indo market are actual hedgers and by cutting rate it is likely to worsen the economic situation.

    I wonder who might be right. BI was suppose to know what to do, or don’t they? They were supposed to be topnotch people with at least a qualification in economic, management, or actuary science and some even had PHD degrees.

    All these reports and precautionary steps taken by BI and what they consider to be helping the RP to strengthen doesn’t seemed to work at all after given the time from 1996 until today it is 11 years and Indonesia doesn’t seemed to have someone capable of stabilizing or apprehending the situation.

    I would like to suggest something to see if it is applicable.

    IF YOU HAVE 1 MILLION DOLLARS WHAT WILL YOU DO? SPLIT IT UP INTO INVESTMENT IN ANNUITIES, CURRENCIRES, PORTFOLIO AND INTEREST RATES. SO IF THE INTEREST RATES ARE LOW WHAT WILL YOU DO?

    So if Indonesia wants to save her economy someone must bear the brunt of the aftermath. The Tax Department of course. Side effect meaning APBN APBD Military and Arms spending will be cut. By the time when the market if flourishing, no one will have time for politic.

    1. BI should stop buying foreign currencies for hedging.
    2. Present rate is @ 10% and because RP is a weak currency no one will be attracted
    to low interest rates like in US when the stock market crash and defaults in
    payment began to rise causing huge volume of foreclosures with banks stock piling
    up houses and no cash. Homeowners unable to pay back the loan will have bad
    credit reports but the bank still is unable to recover the loss incurred. At the end of
    the year all profits from the bank will be taken to cover the loss and the rest write
    off as bad debts and willnot pay taxes to the government.
    3. Raise the rates to between 18 & 21 %. This is what happened to Thailand. At
    that time the Bahts were not too shaky making earning interest rates a viable
    investment. So investors or hedgers start to throw foreign currencies and start
    buying Bahts. The Baht bulls up on the buy and investment flow increases. This
    automatically strengthen the Bahts and stabilize.
    4. Indonesia’s situation is exactly the same as Thailand before. Start drawing in
    investment by increasing the rates to attract investors. Whether the investor
    is a hedger, fund and portfolio manager or direct investment it doesn’t matter.
    When people see the interest rates going up it becomes a viable and attractive
    investment for them. Not forgetting the RP is shaky and sliding beyond
    10,000 – 1 USD. After a short period Indonesia will see a substantial flow of
    cash pumping into the country.
    5. High interest rates will be substantiated with high lending rates. In the event the
    bank suffering some losses they will report a loss in PNL thus will not become
    taxable. Slight losses will not be carried over but write off as loss like in credit
    cards.
    6. Bankers still make a big chunk from credit cards. Any default in non-payment
    of credit cards debt is usually write off.
    7. Indonesia’s hoarders of foreign currencies and precious metals will start selling
    them in favor of high interest rates. This eventually create a panic buy in
    RP and the more the RP is in demand the stronger the currency it
    becomes. So there will be no capital flights but a reverse action.
    8. From sliding beyond 10,000 it will gradually strengthen to 8,000 using 40% bait
    in exchange for the RP to strengthen by 30% is a reasonable deal for BI.
    9. In approximate 3 to 4 years no other currencies will offer the attraction as the
    RP. BI starts acquiring foreign currencies in anticipation of sell out of
    RP in profit taking. By that time the RP is already stabilize quite a
    substantially.
    10 Keep pushing the attraction and slowly the RP should come around 6,500 &
    7,000.meaning the gap will be closing up by 10 years. By this time the economy
    will starts to heat up so BI can start cutting the rates little by little.
    11 Repayment of loans @ 25 % will slowly average out to 18 & 20% whereas
    interest earning of 21% will average out to 16%.
    12 During the period of restructuring the economy all payments to IMF and WB shall
    be reschedule and deferred.
    13 Banks should submit quarterly report for performance monitoring.
    14 Bi have to force all smaller banks to merge to around 10 & 15 banks with
    Indonesian banks outnumbering the foreign banks. Raise the limit of PUC for
    each bank.
    15 A state owned company set up as an investment arms for rescue purposes. In
    the event something went wrong to the RP, BI will not intervene but this
    company will take BI’s place. This will not disrupt BI’s activities.

    ______________________

    If Indonesia can stand the strain the 3-4 years of hard work and careful monitoring will prove to the rest of the world in physical performance and not paper value that the RP is strengthening.

    The government must suppress the essentials at about the same time when BI takes action, this will gradually decrease the chance of of uprisals when Indonesians see the economy really began to take shape and will further ease their consumer spending.

    At this time investors and companies in Indonesia should give rise to their salary because the exchange rates against their foreign currencies makes them capable of doing so without hurting their pocket and so are those civil servants with allocations from APBN and APBD. Business Chinese and working pris will level out when both don’t mix and the gap will close up bit by bit.

    Security personnel top the list of the rise and second in line are the government sectors handling imports, dutiables, tax office, etc Then those civil servants in the service sector.
    This will slowly cut them off the urge to receive bribes making the fluency in obtaining things to be done through bureaucratic process much easier.
    People will tend to see the change and thus the image of Indonesia’s discrimination and pungli will soon be eradicated. Assimilation will thus come hand in hand with progress. Like the saying goes, Birds of the same feather flock together.

    Please do not have the fear factor. In any step taken in term of economic it is always risky by pre-calculated risk. Logical thinking will tell us what goes up must come down. Over buying the RP will heat up the economy and so some gas need to be release. BUT FOR THE RP TO GO DOWN IT WILL BE HARD TO COME UP (STRENGTHEN).

    When Indonesia’s then Economic Minister decides to devalue the RP from 500 to 1000 that was in fact a mistake. It had lead the RP in what is today’s economic disaster because in short period of five years the RP slid to 2000 plus. This was how they enrich themselves overnight. Borrow large amount of money and change to US and the following day sell the US and return the RP to make 100% FOC. They quickly hoard USD with what they got and late release when RP got worst. This was how the RP suffered and attack from unforeseen hoarders. Sorosa may be the culprit with US backing them but the money he made in Asia he lost them all in Russia.

    Let Indonesia not make such a mistake again. Be prepared to sacrifice and learn from mistake not repeating mistake and regret.
    Though Indonesia may have resources, but with resources that you are unable to make use of is as good as not having it.

    Investment arms will help Indonesia neutralize her incapabilities and serve as a foreign reserve and in time of needs it can also come in handy for the rescue.
    Real professional must be in the play, not those cronies.

    _____________________________

    In the days of Soeharto many take him for a tyrant, having KKN with the Chinese and enriching themselves.

    Politic is not what is shown on the surface. Why the army were so obedient and loyal to him. Money. When did he got that from?

    The amount of salary the army receive is insufficient enough let alone to take care of the family.

    It is those rich businessmen that was set in play on the quite side. How?

    Some of their salaries were subsidized not by the government but by these rich businessmen. And how these businessmen could afford it. Buy given money making projects to enable them to cover up such payouts.

    So on the surface it is KKN all the way, hang Soeharto and all those crap. What happened behind the seen will just lie buried forever. No one will ever learn the trick of maintaining a stable government.

    When a government is rich KKN will not appear, it is when the government who is not rich and had to take care of that many millions of people to feed that he had to resort to such tactic. Of course there are those gfn sh*t lynching on such opportunities and the so called tyrant had to take the fall.

    __________________________

    One of the side-effects of the mini-crisis, he says, is the strengthening of the yen, which causes yen funds to return to Japan:

    When the RP strengthen it will attract investors running back to buy up RP.

    Of most concern is the position of the rupiah, he says, because imports remain a fundamentally important part of the workings of the economy, and given the volatility of the rupiah the cost of importing could rise wildly.

    Therefore the government must react at about the same time BI takes action by suppressing essentials.
    There were @ 4000 odd items to be de-listed as dutiable, more should be added to compliment in subduing hyperinflation by preventing it from happening.

    __________________________

    The foreign investment arms could be attracted in such a manner.

    1. Set up as an investment company.
    2. Bring in shareholders. (A kind of unofficial loan)
    3. Go along hand in hand with BI. This act as a secondary BI, a secondary
    Indonesian foreign reserve, a secondary counter attack weapon and a rescue
    unit.
    4. After 4 – 5 years of solid performance, go public selling part of their shares for
    more value. When people sees a blue chip high performance share, you don’t
    need to invite, everyone will rush for it. By this time, let say a 10 billion USD
    entity will be worth somewhere around 15 to 20 billion depending on how
    aggresvie the portfolio is being managed. When it is going public it will be
    offered at a premium that will make the share worth a value somewhere around
    100 – 120 billion USD.
    5. Re-invest all such derivative funds and expand further and create a bigger
    portfolio. Such re-invested funds will be for the next 4-5 years be worth round
    some 300 – 400 billion. Not forgetting the earlier block’s income complimenting
    this bigger block throughout the next 4-5 years. All in it will come close to
    around 700 billion USD. The figure may not be that big taking into consideration
    the risk factor give and take loss of up to 100 billion USD.

    If you walk into a casino and bet 10 $ each time so for the next 20 times you will get only 200$. Some loss may incur.
    But if you start with 10$ gradually increase over 20 times can you imagine how much will it be at the end!.
    Yes the investment arm there is risk but precalculated and depending on how
    conservative or aggressive you want it to be.

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