The collapse of Corporate Indonesia

The global financial crisis has hurt the big Indonesian companies so bad that they are forced to sell their assets to repay debts. One example is the Bakrie group of companies. The largest corporation in Indonesia borrowed heavily during the past two years to finance an expansion drive. As a result, Bakrie stocks are now worth only a fraction of what they used to be. On October 7, 2008, the Indonesian Stock Market suspended trading of six Bakrie companies, which together accounted for about a third of daily trading value in the market. Now Bakrie is very desperate (who wants to buy those cheap and silly papers anyway).The government and the political elite are by any means trying  to bail out Bakrie, including urging state-owned companies to buy Bakrie stocks (for a very specific reason, they have to bail out Aburizal Bakrie). Other investors are cautious and uncertain. Only the foreign investers who might be interested. But at lowest price of course. In the banking sector meanwhile, Central Bank Governor Boediono said that the US financial meltdown will not have significant impact on Indonesian local banks (officialdom is always optimistic as ever). But the facts are different. An Indonesian depositor had difficulty withdrawing million of his own money from a local private bank. The bank simply did not have enough liquidity (most probably some of the money is deposited abroad or invested somewhere). Many others are likely to do so as they want blanket gurantees. A number of Indonesian banks, including Bank BNI, BRI, Bank Mandiri, Bank NISP and Bank Lippo have deposits in the Indonesian Central Bank-owned Bank Indover based in Amsterdam. The bank was hit hard by the credit crunch and had to be closed down. On October 6, 2008, the Indover Bank failed to meet a withdrawal request of 100 million euros. It is not clear whether or not the Indonesian bank deposits can be recovered. Based on existing regulations, the Central Bank can’t bail out Indover Bank by injecting funds. But now, the government is lobbying the lawmakers at DPR to change the legislation on grounds that if not, the shareholders will lose their money and on the part of Indonesia, it will lose its overall credibility. Indonesia’s largest bank, Bank Mandiri wanted an acquisition of Bank Indover but that effort also failed. The collapse of Lehman Brothers is to be blamed for the collapse of Bank Indover’s Credit Default Swaps (CDS). Who else are to blame? The rating agencies such Moody’s, Standard and Poor’s, JP Morgan and so forth. They are the ones who practically fooled every investor on earth. A class action should be launched against them. Also to blame were irresponsible Indonesian policy makers and elite who adopted laissez faire capitalism and the free market as their true ideology without check and balances (their Indonesian values and nationalism must be questioned). What’s happening to the state-owned companies? Sooner or later fall in the hands of the foreigners (why sell the cash cows?) Privatization violates the ‘45 Constitution. BUMNs are supposed to be one of the pillars of the Indonesian economy according the ’45 Constitution. What about the Indonesian property players? A shareholder of the prestigious Senayan City was reportedly offering his stake for sale (he borrowed money to build another high-rise project and can’t pay back). Other property projects are lacking buyers as well (don’t believe in the “sold” signs). What about the large export-driven companies? They are also on the verge of collapse due to drop in commodity prices such as CPO, coal and rubber. There is no more market in the US, Europe or even in China and India. As a result people, and especially the plantation workers will be out of work and can’t feed their families (1 million hectares of crude palm oil plantations are abandoned and harvests are rottening). Who says the global financial meltdown won’t affect the Indonesian economy? We are already feeling the pain. Capitalism has failed as proved by the crisis in the US and Europe. Neither can it work in Indonesia where the gap between the rich and the poor is too wide.

Black Wednesday

Today, October 8, 2008, the Indonesian stock market was suspended after the main index plunged more than 10 % in morning trade. What does it tell us all? We all will be affected by the global crisis (although officialdom won’t admit it). I personally think that the global financial crisis will sooner or later roll into the Indonesian economy. Those of you who are market players will really feel the pinch as stock prices go deep down the ravine. Price of preferred Bumi Resources shares dropped to only Rp 2,174 from the Rp 8,000 level. All Bakrie stocks dropped more than 40%. Officialdom meanwhile played down the seriousness of the possible impact of the global crisis on Indonesia’s economy (they have to be optimistic to promote a positive sentiment). Seen from the series of meetings by  the president, ministers and businessmen, the mood was optimistic and Indonesia has the necessary steps to cope with the looming crisis. They also believed there won’t be a repercussion of the 1998 crisis (underneath all that, they are all jittery). Central Bank Governor Boediono increased the BI rate to prevent the rupiah currency from devaluating. There won’t be any credit funds around (how can infrastructure projects continue without credit funds?). Government bonds (SUN) are no longer attractive. Trade Minister Mari Elka Pangestu was too optimistic. She said exports will not be affected much unless the global crisis is prolonged. She should have said “immediately prevent is import from countries affected by the crisis” to be credible on her part. Price of commodites such as CPO, coal, rubber, oil, nickel and others are falling (besides the resources are all over-exploited and drained out). And the likelyhood is that many people will be out of their jobs. From the social perspective, the greatest threat is unemployment and increasing number of poor people. Look at America which has become the model economy of the world. Although the US Congress finally passed the bill for the $700 billion bailout funds from the government, Americans are not better off. The market sentiment may be slightly up but will surely go down again. As for the ordinary Americans, they are feeling the real pain now. Indonesia has long been dictated by the West in implementing its economic policies. Now we have to pay back soon what we owed to them to save their own neck (the government has to renegotiate debts with Western creditors). The West bailed Indonesia out of crisis in 1998 but now, in the case of crisis, what can they bail us out with? It’s about time that we rise on our own feet and stop aping Western economic policies and engage in our own concept of people’s based economy.

Failed policies, why not a public debate first?

Raising subsidized fuel prices and giving away cash disbursements to the poor people are not the only solution for this country. Such policies will only make more and more millions suffer and raise the number of poor who are already struggling for their daily lives due to rising fuel and food prices. Under a capitalist regime, the policy of increasing fuel prices may look and sound good. But in the case of Indonesia, more and more millions of people who are already struggling for their daily lives, will suffer even more (watch out for demos, increased crime rate and suicides). Current economic policies have not worked. For the common people, life is far more difficult. Farmers are not better off in terms of their welfare and fishermen can no longer afford to go to sea. Cash disbursements of a mere Rp 100,000 a month to the poor will only last for two days (Rp 14 trillion in 7 months, Rp 100,000 per family each month). And it can be misinterpreted as political bribes to win the hearts of the people. Yudhoyono’s call for saving energy may be a good call but not for the common people who have yet to enjoy electricity, affordable basic needs, education, health and a decent life (It’s a call for the elite people, officials, MPs and businessmen!). People don’t buy policies under the pretext of external factors such as rising global oil and food prices and most of all, bailing out the state budget. There are other alternatives which Indonesia can take in the course of saving the nation. One way is having the courage to resist foreign influence, get rid of the oil mafia practices and implement own genuine Indonesian economic policies. They can be among others, renegotiating oil production sharing contracts with foreign companies, covering the Rp 35 trillion budget deficit using the abundant funds intended for spending (government only spent 5% of that), rescheduling repayment of foreign debt (the bulk of the money is untouched for the creditors) and making the state oil enterprise, Pertamina, efficient. But Yudhoyono insisted no other economic solutions will work except for increasing fuel. Such dogmatic thinking is undemocratic in nature (intellectual arrogance?). He should have accommodated the theories and analysis of other economists outside the government. Or at least engage in a public and open debate first with economists who believe they their theories are applicable (why not a debate with Rizal Ramli?). This way, he will save his own credibility which is now seen and portrayed as more serving the interests of the foreigners, foreign bond holders and his own political ambition.

Prof. Dr. Steve H. Hanke in restrospect

When Indonesia’s economy, the stock market and the currency collapsed in 1997, an unknown Johns Hopkins University professor was called in by then president Soeharto to help. The professor, Dr. Steve H. Hanke, proposed that the Currency Board System be implemented to fix the exchange rate of the battered Indonesian rupiah to the dollar. Soeharto was happy with the plan. He wanted to implement it. Some were enthusiastic to back the plan. But economists rallied to reject the plan. Soeharto was powerless. He didn’t dare defy his master’s order. Indonesia had for such a long time been dictated by the United States, the IMF, Japan, Singapore and the European countries. They had committed a US$ 43 billion bailout package. Soeharto had to succumb to the pressure by the IMF. He was powerless as he signed a letter of intent under the notorious look of IMF’s Michel Camdessus (your time is up old man!). US President Bill Clinton had telephoned Soeharto and ordered him to reject Hanke’s plan. But until now it is still a a mystery how Hanke met Soeharto without prior consent of the Indonesian finance ministry and the IMF. Ten years after the dramatic events, last Wednesday and Thursday (March 26-27, 2008), Hanke appeared again in Indonesia. He gave lectures at the Pelita Harapan University and a forum hosted by a prominent business magazine (Peter Gontha met him for the first time). During his time here, Hanke warned Bank Indonesia against further cuts in its benchmark interest rates due to increasing inflation pressure, called for strengthening of the rupiah by buying it in the market and reforming Indonesia’s labor regulations. But Hanke’s fiercest criticism was on Indonesia’s inability to make accurate budget assumptions (oil price is more than US$ 100 per barrel). He said the state budget is inefficient and not properly formulated such as allocating spending on fuel and electricity subsidies which should have been used for funding infrastructure developments. Dr. Steve H. Hanke had advised Soeharto with his CBS. It would be interesting to know what he would recommend if he is asked to advise current President Susilo Bambang Yudhoyono in fixing the current state of the economy.

Revamp the national food policy

Indonesia is on the brink of a food crisis. With 65% of the food demand dependent on imported products, it’s about time the government revamp its national food policy. Basic foodstuff prices on the international markets have increased at an average of 3.7% a month. Uncertainty in global weather has also affected world food production. Indonesia, which entirely relies on imported wheat, sugar, corn and soybeans, is very vulnerable to crisis. Rice production has gone down while prices have gone up and became unaffordable (in some areas, people consume recycled waste rice). Rice quality has gone down too. Farmers in South Sumatra blame it on poor distribution of fertilizers (low-grade as well). The price of wheat on the international market rises by an average of 10% causing the price of flour-based foods such as instant noodle and biscuits to increase by 3% (Indonesians eat a lot of Anthony Salim’s Indomie). Unlike India and China, Indonesia has no effective import incentives (why not lower import duties again?). At the same time, the government is negligent in protecting the farmers to sustain food production. One example is the national sugar production. By allowing import of more than 1.4 million tons of refined sugar, the cane sugar farmers can only sell their products for less than Rp 5,000 a kilogram. Refined sugar has flooded the market and sometimes cheaper than pure Indonesian white sugar. This has a devastating impact on the farmers’ welfare. In three years time, they will go bankrupt. The government should already be in panic as it does not have proper food stock planning and effective distribution to feed a nation of more than 230 million people. Revamp the national food policy soon!

State budget woes

Time: March 17, 2008. Place: Regional People’s Legislative Assembly. Persons: Finance Minister Sri Mulyani Indrawati and National Development Planning Board (Bappenas) chairman Paskah Suzetta. Subject: Talk on revising the 2008 State Budget (APBN). Are they still going to use the US$ 83 per barrel oil price assumption or are they going to revise it? The APBN 2008 was based on economic growth projection of 6.8%, currency rate of Rp 9.500 to the US dollar and inflation of 6.5%. Oil prices have gone up over US$ 110 per barrel. How are they going to cope with that? The rationale, economic growth assumption had to be lowered to 6%, the inflation projection had to be increased to 7% and change the oil price assumption to US$ 100 per barrel. But that is also difficult to undertake. Total subsidies which have to be allocated by the government has amounted to Rp 208 trillion. And if the APBN had to be revised based on new oil price assumption, the subsidies would increase to Rp 300 trillion. Both Sri Mulyani and Paskah Suzetta are unsure. Earlier, the government had said the APBN would be safe and will not affect Indonesia. But that’s a lie (government thinks common people are unaware). It’s dangerous and could seriously undermine the credibility of the government. Common sense tells us that it would be safe if Indonesia has all that oil (indeed, Indonesia is a rich country). But current oil production is less than 1 million barrels a day and most of that is controlled by the foreign oil companies. Indonesia could have earned windfall profits if it had controlled its own oil. But that was not the case. Now Indonesia has to import oil at market price of US$ 105 per barrel to meet its domestic demand meaning that its foreign exchange reserves had to be used to buy oil instead of financing Indonesia’s other development projects. The recession in the US indeed has affected other countries such as Indonesia. But Indonesia must bear in mind that the US economic downfall is only temporary. It will surely recover. Besides, the United States still have its own strategic oil reserves while Indonesia doesn’t (so quit blaming the poorly-formulated economic policies on external factors). Poor rich Indonesia!

BI needs a transformational leadership

We have been going through a process to find the right person for Governor of Bank Indonesia (central bank). The position is a very prestigious and the person there ought to be someone who has a vision, an excellent track record, integrity and known by the international community. As we all know, BI is now a top heavy institution like an inverted pyramid. But it still lacks the independency. Due to this, a candidate from outside the current BI hierarchy would be more suitable. There has been a lot of political wrangling on the issue. The House of Representatives, DPR, recently conducted a fit and proper test on two candidates proposed by the president who has the prerogative right to nominate. Unfortunately, the DPR rejected them on grounds they didn’t have sufficient qualifications (including political lobby?). The ideal candidate would be someone who is a transformational leader. Unlike a transactional leader which uses power over rewards and punishments to lead, the transformational leader works together with his staff in a way that changes, or transforms the institution and people running it. He uses a partnership approach. The staff will follow a leader who inspires them. He has the vision and passion which can achieve great things by injecting a great deal of enthusiasm and energy. A transformational leader puts passion and energy into everything. He is charismatic but seeking to transform. In the case of BI, the institution needs transforming to become credible and independent. An example of a transformational leader is former central bank governor Rachmat Saleh who ruled BI for more than 10 years. But he had heaps of experience. He served the Federal Reserve Bank of India, worked in the US and the Netherlands . He was successful in transforming the central bank from its dire state in the past. Now, can the president propose such a transformational candidate for the BI leadership (better than Agus or Raden certainly)?

Digging into the statistics

The Biro Pusat Statistik (national statistic bureau) may not be as bad as many people think. The final analysis of an economic issue would depend on how good a person digs into the statistics. Former central bank director Cyrilus Harinowo was probably the only one of the few willing to do so and come out with an interesting finding. Crude palm oil exports in 2007 reached US$ 10.2 billion which surpassed crude oil exports worth US$ 9.2 billion. CPO exports also exceeded export of liquiefied natural gas (LNG). Harinowo, who competed in the race for Central Bank Governor in 2003, predicts that many more businessmen will be in the oil palm business while current data showed he number of plantations has increased significantly. He sees CPO exports will top 20 million tons this year. With CPO fetching US$ 1000 per ton at current rate, it is a great possibility that CPO exports will surpass oil and gas exports in 2008 as well. The former BI director sees further economic growth in the regions outside Java driven by rising commodity prices. Such condition will eventually promote wealth in the regions, encourage more local businessmen and boost welfare of the farmers. The new economic hubs will Palembang, Djambi and Pekanbaru in Sumatra, and Pontianak, Sampit and Pangkalan Bun in Kalimantan. Harinowo, who is good with figures, also attributed increasing growth to the policy of pemekaran wilayah (splitting of the big provinces into smaller regions) in line with the aspirations of the people seeking greater autonomy. But he suggested that a people-based economic policy will be more effective in stimulating growth in the regions. Growth in the provinces will in turn boost national economic growth to a higher level, and perhaps even higher than what the government had anticipated. Harinowo’s finding has signaled a new optimism but it’s a pity that he is no longer with the government.