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.

:: 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.

opinion :: price hiking in Indonesia

Just this weekend me and my family go shopping for our routine consumables. Usually it cost about somewhere between 250K to 300K IDR for 2 weeks consumables consist of my baby's consumables (diaper, milk, cotton balls, etc) and few goods for me and wife, But at that time it cost me nearly 500K IDR for my usual stuff. It worry me so i collect few fact on Indonesia's Inflation.


Judging from the trend it is obvious that we experiencing a sharp rising in inflation, not that spiral inflation high or one-shot inflation high like it is in the past, but still it's a price hike. You can fetch the inflation detail here it's in Bahasa thought, so here is the summary of it as of January 2008 :

• Food 2,77 percent,
  
• Processed Food, Cigarette and Tobacco 2,02 percent,
  
• Housing, water, electricity, oil and gas 1,80 percent,
  
• Cloth 2,31 percent,
  
• Health 0,72 percent,
  
• Education, Recreation and Sport 0,01 percent
• Financial Service, Transportation and Communication 0,24 percent.

And now for the worst part of this log. I just found that in accordance to the inflation fact, Central bank has expected to raise the interest rate. This would mean a slowdown in our economy since ID's economy still recovering from 1998's crisis that LDR is plummeted to lower than 50%, These days we experience a relatively high growth for fact that lower rate had lure more businessman expand their business using the bank's money (debt).