Wednesday, March 19, 2008

:: ID Government debt via ORI v.4

Debt capability for any enitity either individual nor organization is relative. The simplest example if any of you applying credit card. Some of you will get silver card while other got gold or platinum card, some of you got IDR 4 Mil (about $400) limit while other got IDR 150 Mil (about $15.000) limit. What difference among the applicants that takes into account? To put it simple it was the illusion of repaying capabilities, not the repaying capabilities itself. Statistics you put on the application form will create illusion of your repaying capabilities on the analyst head.

Furthermore, it is exactly the same in the macro level application. The illution in which we ofthen say sovereign credibility is the main item that analyst put into account. If your country on war then your repaying capability would be assumed close to nothing, when your country got a grip on bullish commodities then it's repaying capability would be high. In micro level, i have conducting some analysis about this and has proven, this also happen within enterprise level.The more confidence (not capable) you are, the more aggressive your leverage policy.

Now let say illusion that been performed these days by Indonesian were the uprising price of it's main commodity (nickel, lead, CPO, etc) then it is sufficient for us to say that government still and will more confidence upon the economy in the future, thus ID Government will tend to increase it's debt.

is it good/bad?

there are 2 different opinion on this,
  1. in the long run things are getting better, debt will increase country economic capability and will decrease it's need of finance through debt. (the problem is according to my opinion earlier, the bigger the country's economic capability the more confidence it's government and the more tendency to increase it's debt. This will snowballing 'til something get wrong)
  2. how long is the long run? is it not to account the debt's interest as short term liability, if we continue to increase our debt, is it not increasing the repayment risk?
IMHO, it's all about balance. Balance in this context not define as one point all-problem-solved things. But balance that vary from one entity to other. And yes, we should use the momentum of bullish commodity price to increase our confidence; but still the key point is, the debt we acquire should be able increasing our economic capacity, and we should take into account our repayment capacity.

Now, about ORI (Obligasi Ritel Indonesia/Indonesia Retail Bond); this instrument was created in the circumstances of increasing dollar price,thus issuing bond in dollar might increase risk; this instrument basically is 5 year's bond in small figure nominal, the smallest fracture could be IDR 5 Million(about $500), with the bearish tendency on our key interest rate (which is good!) people seeking alternative to normal time-deposit in bank, while this instrument offering 2-3 percent incentive above normal time-deposit account in banks (ORI 1 gave 12,5% coupon, ORI2 gave about 10% coupon, ORI3 gave 9,25% Coupon, ORI4 will give 9,5% coupon). The issuance of retail bond give ID Gov. several advantage that :
  1. Spread risk, since the fracture size small the bondholder expected to be high. Though in my opinion this advantage would be weaken once the bond entering secondary market.
  2. Decreasing financial dependency on overseas bond
Being a muslim dominated country, however the ORI issuance raise some skepticism among people, since bond, an interest bearing liability (or in Islam called riba') are not allowed. I'm not in any judging position on the religion-context, thus i still say that, what i explained earlier in this post would be my stand point. It's all about ballance. And i'm quite confidence about the way the recent government handling ID businesses environment and furthermore ID economy (which is most likely not corrupt nor reckless).


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