Why Mr. Boediono didn't lower the BI Rates

[back to our main discussion ^_^] some of you may have aware how Mr. Boediono [the Indonesian Central Bank Governor] has decide to raise BI Rate. Yet no one in the news i read give any compliment about this policy, many criticize how the rate will crush the expansion of Indonesian economics.

Since banks play a major role in indonesian economics, most company got their finance from banks, rather than issuing obligation or stocks. The rate hikes will make bank liquidity source become more expensive, and this will cause banks to increase their lending rate also, while the lending rates increase will mean heavier burden for company, in significant way, company will forced to do lay off to spend less money in HR.

looking at the bright side, may be, just may be Mr. Boediono have some concern that in fact, Indonesian economics are build majorly on top of foreign investment, that making the foreign investment come to our economy is important. And with the rates cut in other countries Indonesia will gain from incoming investment. And also, Indonesian banks have problems with their expansion volume also. Note that these years (2007-2008) Indonesian banks book a massive around 20-30% of Lending Growth, this in my opinion will lead to less prudent banking practice [this is also the roots of current US crisis].

so, how the thing will go on is something beyond our reach this time, i have confidence on Mr Boediono personality, personally, i hope he and government as a whole make a right troubleshooting policy for this bumpy moment.

well, for you [and me] my fellow analyst, maybe it is time to include pessimistic scenario in your analysis, just for protection, your own protection [serious mode : ON]. good night and take care.

update to mortgage article blogs

update to my previous "blog on mortgage article", i found this Mortgage and More Blog. The Blog have some decent article about personal loan management and also about the mortgage itself. However, some patient proven to be useful here, since "the more" parts of this blog often are not related to mortgage and personal loan. The blog design not so cool, but however that's not so important if you seek knowledge, right!

While read this blog, i found that the perspective of this blog owner is acceptable at certain aspect. However double check the fact printed on this blog. Use google or other common information source (wiki, other search engine, etc) to double check the number.

Moreover, if you need to find some honest, earthly and informative blog on mortgage and personal loan, you can stop by this blog.

Hey, leave message that i drive you to that blog okay! Just to notice him that there is nice people outthere (like me ^_^), maybe...... just maybe, he will give me something in return.

The Poor's Bank

This post translated from ruli_pribadi@yahoo.com post on PAS-ITB mailing list, the article posted here using explicit permission from the writer.

Approximately 100 years ago, man seek method to flying the sky. Many has doubt on this dream, some thought they were bunch of nuts. But however, in the year of 1903, Wright brothers has flew their first airplane, it only flew for 12 second for 120 feet distance, this is the seed of hope that world will change to a better place, and it was only 65 years later that 1st human arrive on the moon. (Muhammad Yunus Speech in the Micro Credit Summit 1997)

Just a century ago, man assumed going to space was impossible. But these days, in this very 21st Century we witness how the edge of possibility has change. We might have had flew the sky furthermore the space and deny the impossibility of the idea, however the adge of possibility here beneath the sky in our own earth still likely to be the same, we always taught that poverty was absolute, something unchangeable, then we are comforted to believe that without further search.

In a country where social welfare seems to be an imposibility; in a country where woman classified as marginal citizen, overwhelming starvation, political instability exist due to frequent coup d'etat and natural disaster happen so often a phenomenal banking institution had been created, a seed of revolutionary school of thought in combating poverty across the earth.

Muhammad Yunus, a professor in Economics was disturbed by economic study that justify the presence of poverty caused by people unwillingness to be productive; in his search, he found that poverty in Bangladesh primarily caused by nonavailability of people access towards economic assets. Poorest people of Bangladesh always marginalized by banking system; labeled as a non-bankable group, chained by religiousity and old custom; help by government or world institution rarely get into their hand.

The poor which physically weak does not require a donation, for donation only increase their burden, take their incentif and rape their pride, Yunus has found that within everybody’s will there is enterpreneurship available to be valued. The poor survivability was an undeniable proof that they still have willingness to strife, Yunus has proven that beggar, small enterpreneur, house mother has a competency for being a succesful enterpreneur.

Grameen Bank launch a micro credit for the poorest and for they who have willingness to improve their life quality. The credit scheme was given to a group of people, for they can cheer one another. For this scheme, Yunus claim that micro credit not a naif altruistic action, but they have a profit reasoning, NPL for micro credit only accounted for 2%, far superior to investment credit that usually consist of 3-4% NPL.

For 25 year since its establishment Greemen Bank always account a profit balance, this became a proof that the poor also credible for credit stream.

By witnessing this unprecedented fight against poverty, is it not that we reflect upon our own nation, is there anything we could do about it?

:: sub prime mortgage and Indonesia

Sid H. Kusuma as published by detikFinance write a comprehensive resume on Sub prime Mortgage in US economy.

For the rest of you who didn't familiar with the topics, let's start with the linguistic terms. To put it simple, Sub prime Mortgage is a mortgage given to a sub prime debtor. in US, mortgage debtor was also rated (that's not happen in Indonesia). The credit firm heavily depend on 3rd party scoring company to classify the fitness of any mortgage application. there is FICO method for example, it give mortgage score of 300 to 850 on account of [1] Payment history 35% [2] Amount Owed 30% [3] Length of Credit History 15% [4] New credit 10% and [5] Type of Credit Used. Sub prime debtor is a debtor with FICO rate less than 620.

Sub prime debtor is a high risk debtor, to overcome this matter credit firm then compensates the high risk profile with higher interest rate as insurance of credit stream in accordance to higher risk higher return philosophy. High interest rate however is hard to sell, since people within sub prime area had less money to pay the interest rate, to overcome this, then credit company develop a product that is affordable by sub prime debtor at least in the earlier year of debtor payment period. The most famous scheme for sub prime mortgage in US is 2/28 ARM scheme in which 75% of Sub prime Mortgage originated, it has 2 years of lower (read: teaser) rate then after 2 years it become adjustable rate.

Problem with sub prime mortgage happen after the teaser period or the 'helping part' is over. Since the idea of teaser period was giving debtor opportunity to increase the quality of their financial performance so they could coup with the interest rate of their mortgage. But, what will happen if their financial strength didn’t get any better? This is the cause of Sub prime Mortgage crisis in US. After certain period of time, the credit quality plummeted, because debtor cannot pay their increasing installment.

The complexity of US economic allows this crisis to be delivered through contagion effect to overall country’s economic condition.

Indonesia not directly affected by this crisis since no Indonesian firm have significant investment on this sub prime mortgage and no Indonesian firm have significant investment on any company affected by the crisis.

But however, the crisis affect Indonesia too, the extraordinary volatility of exchange rate and stock market showing that Indonesian market not immune from the crisis’ contagious effect. Notably, Drajad Wibowo, a legislator at DPR (Indonesian parliament) have comment on sub prime crisis effect upon Indonesian economy that Indonesian economic growth would be lower than it is as predicted by Indonesian government. He said that government prediction of 6,8% of economic growth seems to be impossible, it is appropriate to say that Indonesian economic growth in 2008 only on 6,1% figure.

It is very reasonable for Dradjat Wibowo to say such opinion, since US as world largest consumer basis also consume Indonesian product. By the crisis, inflation are high, rates increase will slow people consumption in US, and if consumption is slow, demand for Indonesian product will be slower too.

:: 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).

Outlook :: Increasing Debt burden

Kompas Update, 12 February 2008

As stated by General Director of Debt Management at Ministry of Finance, there is an increase in due debt payment in account of exchange rate movement; but however since there is also an increase in debt draw down the overall picture will be likely unaffected. As presented in hearing with tenth commision of the parlemen (Komisi XI DPR); net overseas finance in state budget (APBN) will have an uplift of 4,5 trio IDR; from 16,7 trio IDR to 21,2 trio IDR. On other occassion, Kusfiardi, Coordinator of anti-debt Coalition said that moratorium is the only way that gov. should seek in order to relieve debt burden and also gov. are required to maintain more controlled exchange rate to preserve stability.

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