BUIDING INFRASTRUCTURE TO DEVELOP THE NATION

One of the tangible features of the progress of a country was good, adequate and well maintained infrastructure. The USA and European states had excellent infra-structure, so it was not surprising that they were in the state of advance nations since the 19^th century.

In Asia, perhaps only Japan, South Korea, Singapore, Hong Kong, Taiwan and China could equal America and the USA in terms of the infra structure. As with China, economic advancement was only seen in the past decade as they spurred on infra structure development. The huge population, around 1.6 billion people did not keep them from developing the Government even saw infra structure development projects as means to put more of their people to work.

By theory, good infra structure needed budget allocation of 5% of GDP of a nation. So if Indonesia’s GDP this year was around Rp 8,200 trillion, the size of budget for infrastructure in APBN State Budget should be around Rp 410 trillion.

Unfortunately in the past or present APBN state budget the portion for infrastructure never exceeded Rp 200 trillion. Meaning, infra structure development in Indonesia was still left behind against that in other Southeast Asian countries. And yet it was understood that good infra structure was the pre-requirement for drumming up foreign investors. Some international rating agencies had defined infra-structure as one of the key components of nation’s competitiveness.

As a matter of fact the condition of infrastructure, especially roads in Indonesia was still bad and way behind even other ASEAN countries. And yet infra structure was pre condition to economic and social development. Increase of 1% of infra structure would step up GDP increase by 1%. hence it seemed right if infra structure building became a priority.

There was still four months left before this year was over. The Government must make the best of the remaining time to jack up budget absorption in infra structure projects. Considering that infrastructure projects were multi-year project, the Government must prepare sufficient fund to finance infra structure projects for the on-going year and the years to come. If there was left over fund from other budget posts each year, as long as it was politically and legally justifiable to use the fund for infra-structure building, it was advisable that the carry over fund be entirely used.

Infrastructure restoration, especially road building and restoration became strategic and indispensable. The use-worthy status of roads were not just for public convenience but they were also vital for good business climate.

Many surveys unveiled that bad infra-structure means extra burden of 17% of the average expenditure of each company resulting in high cost economy. Business climate was no longer attractive while business could not run well. In the end it was the consumers and the public who were being disadvantaged by the stagnated transportation. Unfortunately, infrastructure projects were always handicap by the limited budget which had its impact on degraded quality or reduced scope of projects.

 
Only trouble was that downgrading of roads quality was made worse by corruption practices. Hence the commitment to infra-structure upgrading must also be accompanied by the commitment to safeguard budget spending. The limited budget must be spent 100% on target achievement without spill over here and there. Admittedly, to be true to commitment might be easier said than done.

It should be understood that to be use worthy for infra structure was more than just a matter of good construction but also to be properly designed and be functional as medium of connectivity. Supposedly business players were playing more active role in enhancing infra structure development.

A sound evident of how bad infrastructure affected economy could be seen in India. India’s economy grew by 4.4% in quarter II of 2013, the lowest since 2009. The condition forced India’s monetary authority to anticipate slump of Indian Rupee. Analysts put the blame on investment slowdown, high inflation and low export, so India’s economic performance was below projection, which was originally targeted at 4.7% and the underlying cause was poor infrastructure.

India was now struggling to win back investors’ trust and to strengthen the value of Rupee against USD. Released data had it that this downturn was happening three times consecutively which led the India Government to underscore their economy. India’s economic growth percentage was at the lowest level since 2009, when India and other developing countries had to face financial crisis.

To learn a lesson from India and Indonesia’s own experience, the Government of RI must be aware of the importance of prioritizing infrastructure development. So far the problem was not in the budget because the entire budget in the APBN had been sufficient, but in the management of budget and funding.

To be exact, the Government and House [the Budgeting Board] must have proper mindset and share the same perception about increasing allocation for infra-structure development and reduce allocations for less significant sectors. “Less significant” should be understood as not bringing any direct or indirect benefit on economy. For example travel expenses for Government officials, which could be reduced significantly. It was a matter of political will not of justice of injustice.

Toward change of Government to be in office next year, it was advisable for the present Government to will admirable souvenir for the next Government in the form of good infra-structure. And naturally the next Government should continue the process of building basic infra structure overlay. Indonesia's competitiveness through basic infra structure would be at stake when the ASEAN Economic Community was in effect by January 1, 2016.

Business News - September 6, 2013

TO SACRIFICE FOR NATIONAL ECONOMY

All the hassles in Indonesia’s economy lately opened opportunity for speculators. One of the indicators of economic weakening was nose-diving of currency exchange rate value. Fluctuation of Rupiah exchange rate value against USD was getting steeper time after time.

There was general perception that each time there was unrest in currency exchange rate, there was bound to be some speculators who were taking advantage of the situation. To illustrate speculators cleans weep USD when the price came to Rp 9,500 per USD. The dollars were hedged while waiting for another opportunity. Speculators might even spread rumors to make the public panic.

As people’s panic heightened, price of USD tuned more expensive. That was the time they release their USD at Rp 10,000.- per Dollar. All in all they reaped profit of Rp 500 per USD. It was easy to imagine how speculators make profit in a split second from changing exchange rate.

One thinkable way to neutralize speculative attitude was by inducing nationalistic sentiment. It was about time to stop speculators from taking excessive profit by changing habit of the money market into constructive paradigm. Speculators must be made aware that the monetary advantage they were enjoying was obtained at the cost of disadvantage to national economy which in the end would backlash on them through inflation etc. There would be more people who suffer inducing the speculators themselves.

Before Rupiah exchange rate value touched the Rp 11,000.- level BI had made maneuvers to rescue Rupiah. Among the measures taken was to increase BI’s benchmark rate. The objective was to control inflation and pressures on Rupiah could be eased. Although the direct effect was not visible, at least BI’s step had helped to ease panic in the market.

The only thing was that chain effect of increased BI rate was inevitable as banks were preparing to adjust their credit interest in the near future. They argued that if credit interest was not increased, the profit level would be reduced by increasing cost. It seemed reasonable that the Indonesian Chamber of Commerce [KADIN] had pled banks at home to sacrifice to restore domestic economic adverse condition.

Sacrifice of the banking sector could be implemented by way of increasing fixed deposit interest without increasing credit interest.

Banks operating in Indonesia tend to make big profit. National economy was not in the state of good health, so if the remedy tend to be painful, banks should try to cope with it. Meaning if they were pled not to increase credit interest to push national economic growth, it was a sacrifice worthy of appreciation.

To the Government it was recommended to encourage companies whose capacity was good to increase export procedures and giving them soft loan for strengthening capital. KADIN also proposed to set up a service center to help companies having difficulties in applying for business permit. It was even proposed to set up a crisis center of complaint center if deemed necessary.

KADIN was ready to set up a complaint center provided that the Government would help in terms of permit issuance. Ease in doing business for exporters was expected to step up export and increase employment opportunities at home.

KADIN reminded the Government it might be necessary for the Government tighten waist belt after announcing the Four sided Economic condition at home, which was believed to be necessary.

The Government must be able to restrict oil-gas importing, dependency on imported raw materials and import of luxurious goods not related to industry and not related to public need. Indonesia’s condition today was like a patient not just suffering from flu but also other complications like stroke and heart attack, so comprehensive treatment was called for.

The Government was also reminded that to tighten waist belt could be by way of minimizing travel expenses for Government officials and minimizing use of technology for less important teleconferences. To make more for ex, the Government was advised to aggressively launch promotion for tourism which was highly potential.

Arrival procedures for foreign tourists should be made easy not just in Jakarta and Bali but also in other regions. A small country like Singapore could coin around USD 5 billion per year from Indonesian citizens to come to Singapore to shop or to get medical treatment. Indonesia treasured abundant natural resources and rich heritage which could serve as tourist destination whether for culinary tourism, cultural tourism etc.

In short, the above KADIN’s recommendation was worth taking into consideration by the Government as they were feasible and reasonable. It was true that the Government had schemed up Four Economic Strategy Package but they still needed to be elaborated into more detailed technical guidelines where by to put them in effect. The faster the better, but sense of crisis was called for from all parties as well as willingness to sacrifice a little for the sake of national economic restoration.

Business News - September 6, 2013

MARKET LOOKING FORWARD TO GOVERNMENT NEXT ACTION

The money market

Rupiah exchange rate value against USD had been stable for 2 days at the level RP 10,000.-. In moody upswing for a moment to Rp 11,000.- but the cooled down again to Rp 10,900.- and remained settled still  noon. BI’s decision to increase BI rate by 50 basic point to 7% served as good tonic for Rupiah. At the spot market, Rupiah strengthened by 3.08% to Rp 10,935 per USD against the previous position of Rp 11,265 per USD. Strengthening of Rupiah was already happening during closing session on Thursday [29/8] to the level of Rp 10,290.- per USD to the level of Rp 10,920 per USD.

 
The market responded positively to BI’s step to prepare fund of USD 12 billion [around Rp 132 trillion from Bilateral SWAP Arrangement /BSA with Bank of Japan to ease Rupiah restlessness. BI had extended BSA arrangement with BoJ representing Japan’s Finance Minister, to be effective per August 31, 2013.

Besides, BI rated the total for ex in store was still sufficient to withstand pressures on Balance of Payment. However the high degree of uncertainty of global economy in the future called for anticipative step. It was necessary to test effectiveness of the mixed policy and resilience in facing external turbulence, including second line defense in for ex sufficiency.

Beside BoJ, BI claimed they were probing for similar type off collaboration with other central banks in the region. This step complemented BI’s decision who had increased BI rate 50 bps to the level of 7% at the ad hoc meeting of BI’s Board of Governors on August 29, 2013. The decision was to anticipate inflation, Rupiah exchange rate value and deficit in current transaction. According to BI, increase of BI rate was necessary to cope with the dynamic national and global economy.

Meeting of the Board of Governors of BI on August 29, 2013decided to strengthen follow up of strategy mix as follows: Firstly, to increase BI rate by 50 bps to become 7%, Lending Facility [LF] interest by 25 bps to 7% and Deposit Facility Interest [DF] by % bps to 5.25%.

Secondly, to shorten time frame of month holding period of Indonesia Bank Certificate [SBI] from 6 months to 1 month.

Thirdly, to include Bank Indonesia Deposit Certificate [SDBI] as component of secondary Minimum Compulsory Giro [GWM].

Fourthly to foster inter-bank collaboration by extending Bilateral Swap Arrangement [BSA] between BI and BoJ representing the Finance Minister of Japan.

This follow up policy strengthened various policy mix previously stipulated, including overnight TD For ex [o/n], property credit and SBDI as per August 29 3012, expansion of FX swap as hedging instrument and Loan-to-Value Ratio of property credit and pipelining.

In response to the dynamic and fast changing national and global economy recently, the Board of Governors of BI felt it necessary to hold an extra monthly Board’s meeting [RDG] to thoroughly evaluate the monetary and marco economic condition and financial system which were under intensive pressure in line with mounting uncertainty of the global economy, high inflation expectation and disheartening condition of current transaction.

In particular, BI’s Board of Government was observing some important indicators of economy, monetary and finance. The continuing uncertainty of tapering of monetary stimulus by the Fed was constantly generating pressures on many countries. Capital outflow and increasing risk in investment caused downturn of share prices, increased bond’s yields and depreciation of currency value in nearly all emerging markets Indonesia no exception.

Heavy pressures on the global money market was happening amidst economic slowdown in the world and in Asia, including China and India and continuous downturn of primary commodity prices except oil, a condition which put pressures on Indonesia’s performance in trading and money market.

Pressures on Indonesia’s Balance of Payment was still continuing although at moderate intensity. Temporary data of import-export up to July 2013 had it that deficit in current transaction in quarter II-2013 came to 4.4% of GDP and was predicted to lessen to 3.4% GDP by quarter III - 2013.

Deficit was mainly in oil-gas trade balance, due to still high import of oil for domestic consumption. On the capital and financial side, surplus was reckoned to originated from foreign capital entering in the form of PMA and portofolio investment especially in State’s Promissory Notes [SBN] amidst outflow portofolio investment a the stock market. The condition was expect to balance up Indonesia’s Balance of Payment and stability of for ex reserves.

Inflation by consumer’s index [IHK] on y o y basis would still be high; but by m-t-m basis, inflation by IHK in August would by far be lower than last June, and was predicted to be back un the normal platform as per September next. As a whole, by considering realization until July and the coming months, BI predicted inflation by IHK by end of 2013 would be around 9.0% - 9.8%.

High inflation originated from volatile foods and administered prices while inflation was relatively under control. Rupiah weakening was still continuing, by external cause the way it was happening in all emerging markets, or by domestic deficit in current account, or inflation.

However, Rupiah vulnerability was still high, as reflected in high volatility and board trading width, among others due to market players’ reaction which tend to be overshooting. Economic activity was showing sign of slowdown as effect of world’s economic slowdown.

Up to Semester I-2013, Indonesia’s economic growth was posted at 5.9%, down against 2012 which was posted at 6.2%. the trend of downturn was predicted to continue through Semester II-2013 especially in non-building investment and private consumption. As a whole, BI estimated economic growth 2013 would descend to 5.8% - 6.2%.

Liquidity in the money market or in the bank-ing sector remained protected. Development of PUAB overnight interest remained stable at round 4.8% without significant posted increase in lending transaction at the money market. The well maintained banking liquidity was reflected in liquidity instrument ratio against third party fund which was safeguarded.

Bank’s resilience remained strong, among others as seen in high capital ratio and low cases of Non Performing Loan. Meanwhile growth of bank’s credit was still on the level of 19.6% [y o y] in mid August 2013, following the slowdown trend at home.

As a whole, BI rated the process of national economic adaptation to economic slowdown was apparently happening. This was strongly related to monetary policy mix and macro-prudential policy adopted by BI or coordinative steps with the Government or activities at the Financial System Stability Coordination Forum [FKSSK].

BI’s statement to constantly evaluate global economic development and its impact on national economic performance and readiness to take follow up measures to support the policy mix, comforted the market. Moreover on August 15, 2013 BI had schemed up follow up policy.

Firstly, BI expanded time frame for Forex Term Deposit which was today 7,14, end 30 days to 1 day to 12 months. The policy was designed to diversify tenure of forex placement by banks at Bank Indonesia.

Secondly, BI was relaxing stipulations for forex buying for exporters who had made sales of Export-based Forex [DHE]. The objective was to allow convenience for exporters to make forex buying by using forex sales as under laying document.

Thirdly, Bank Indonesia was synchronizing stipulations of Forex Swap between BI and banks treated as pas-on transaction by bank with related agencies. The objective of this policy was to deepen derivative transactions.

Fourthly, BI was relaxing stipulations on overseas debt [ULN] by adding more exception types of bank’s short term foreign debt in the form of Rupiah Giro [Vosto] belonging to citizens who accommodated devastation fund from direct inclusion, buying of shares and/or Indonesian corporate bonds and State’s Promissory Notes [SBN]. The objective of this policy was to manage forex demand by non-residents without disregarding bank’s prudence in making overseas borrowings.

Fifthly, BI issued Certificate of Deposito Bank Indonesia [SDBI]. The objective of the policy was to allow broader rooms for banks to manage Rupiah liquidity through tradable instruments, which would in turn encourage to deepen the money market.

BI’s next policy of August 15 and 29, 2013 was expected to synergize with the Policy Package run by the Government on August 23, 2013. Somehow the market was still waiting for follow up of Government’s policy which was more operational. If all go well, we might expect Rupiah to again strengthen in the range of Rp 10,750 – Rp 10,850 last weekend [30/8] in the range of Rp 10,500 – Rp 10,700 over the week. The point was that the market would respond positively to seriousness of BI and the Government in responding to external threat.

The Capital Market

Just like Rupiah waking up, index of IHSG was also rising by 38 points thanks to investor’s buying spree. Foreign investors who previously released their shares were now seeking for cheap shares. Starting the session last weekend [30/8], IHSG was opened to slump by 6.123 points [0.15%] to the level of 4,097.470.

Negative sentiment from the region generated pressures to index movement. Index tend to move flat in narrow range. Market players were still hesitant to make transactions as the global economic situation was not contusive to business transaction. Not too long there after acts of buying mounted, bringing index back to the green zone. Index managed to climb up to its highest position at 4,159.127.

During closing session of Session I Last weekend [30/8], IHSG rose by 38.321 points [0.93%] to the level of 4,141.914. Meanwhile index of LQ 45 strengthened by 6.438 points [.95%] to the level of 686.451. Looks like foreign investors were tired of selling shares and started to seek for cheap shares. The buying spree might make index to be buoyed high. Eight out of ten industrial sectors at the stock hall managed to strengthen by more than 2% on the average.

Today’s transaction was quite merry with frequency of 122,024 transactions at the volume of 2,664 million shares worth shares worth Rp 3,084 trillion. 150 shares rose, the remaining 87 shares dropped and 73 shares remained stagnant.

In general IHSG strengthened after BI announced increase of BI rate by 50 basic points to 7%. Evidently during session on Thursday [29/8] IHSG strengthened by 77.12 points or increasing by 1.92% to become 4,103.59. As recorded there were 199 shares which rose, 67 shares went down and 83 shares stood still. All sectors were in the green zone, including the financial sector which was previously in the red zone. Buying spree by domestic investors had jacked up IHSG as positive response to BI’ policy to increase BI rate.

Meeting of BI’s Board which was suddenly conducted decided to increase BI rate by 50 bps to become 7%. While setting BI rate, BI also increased interest of Lending Facility [LF] by 25 bps to become 7%. All sectoral indices at the stock hall finally stocked together to strengthen. Domestic investors again prevailed in buying spree amidst act of selling by foreign investors.

Meanwhile Asian stock markets tend to move the mixed way. Regional market players were still cautions due to conflict in Syria, Index of Composite Shanghai rose by 5.15 points [0.25%] to the level of 2,102.38. Index of Hang Seng thinned out by 13.68 points. [0.06%] to the level of 21,691.10. index of Nikkei inched down by 63.14 points [0.47%] to the level of 13,396.57. Index of Straits Times inched up by 1.23 points [0.04%] to the level of 3,039.26.

The good news was that stock markets in the USA were also rushing to the green zone during closing session on Thursday [29/8]. Dow Jones Industrial average [DJIA] moved up by 16.44 points or 0.11% to the level of 14,840.95. Index of S&P 500 inched up by 3.21 points or 0.2% top 1,638.17 and Nasdaq in the technology sector moved positively by 26.95 points or 0.75% to 3,620.3

Wall street was moving with the war in Syria as catalysts. Last week the US Government and their allies were ready to attack Syria in response to the issue that the Syrian Government was using poisoned gas to attack civilians. The White House made a statement that  America was considering a decisive policy against Syria if the use of poisoned gas were proven. Vagueness of the power of the West generated anxiety among market players which made investors take act of profit taking.

The US Commercial Dept stated that economic growth in the USA in quarter II of this year was posted at 2.5% or higher than the earlier estimate of 1.7%. The strengthening domestic consumption and high export were the underlying factors of economic growth, which in quarter I was below that level. Some analysts stated the market was still confused about President Barrack Obama’s plan to attack Syria.

Positive sentiment also come from Regulators of Financial Service Authority [OJK] which insisted 3 State Owned Companies [BUMN] to buy back shares. Today price of eminent  shares tend to weaken, but fundamentally still showing positive performance.

Players of the stock market rated the new OJK regulations on buying back shares as positive to hold back IHSG pressures and the Security Exchange [BEI]. Shares index already stepped down since mid My last. Buy back of shares was expected to be welcomed by market players; falling if indices must not continue.

Word was out that that three MNC Group Subsidiary companies would buy back shares. Liquidity condition of companies under MNC Group were safe so the plan should pose as no problem. The three companies doing buy back were PT Global Mediacom Tbk [BMTR], PT MTR Investama Tbk [BHIT] and PT Media Nusantara Citra Tbk [MNCN]. The reason for doing buy back was because they believed it would bring added value to MNC Group.

Word was out that PT Bank Mandiri Tbk [BMRI] was still considering and observing investors’ preference at the stock market before doing buy back. The bank’s management would calculate the advantages and disadvantages of buy back. By theory, buy back would have positive impact if price of company’s shares [BMRI] was below book value. Last Thursday [29/8] price of BMRI shares was closed to strengthen by 50 points to become Rp6,950 per share. Previously, the plan to buy back shares was dominated by BUMN eminent like PT Semen Indonesia Tbk [SMGR], PT Tambang Batubara Bukit Asam Tbk [PTBA]and PT Telekomunikasi Indonesia Tbk [TLKM]. However, since the regulation of buy back without Extraordinary Meeting of Shareholders [RUPS] was only effective per August 26 2013, many private emitents were attracted.

From the above picture it was clear that IHSG by end of session last week [30/8] should have been closed at 4,200-4,250 and by this week in the range of 4,250-4,300 relying on the buy back of BUMN shares and private cooperative societies.

Business News - September 4, 2013