INDONESIAON THE ALERT OVER DEBT SERVICE RATIO

Beside deficit in current transaction and inflation, the Government also had to watch on the position of Indonesia’s Debt Service Ratio [DSR] to keep it from widening.

DSR is the total payment of interest plus installment of overseas debt of the long run divided by total export income. The bigger the DSR, the heavier the overseas debt. However, the formulas was not absolutely so because there were countries whose DSR was 40% but did not have any difficulty in their national economy.

On the contrary, it could also happen that a nation had DSR of less than 10% but had to face serious problem in their economy. As long as there was assurance of creditor countries that there was positive economic development in the debitor country, repayment of debt could be predicted to be well fulfilled by the debitor countries.

Indonesia’s debt against GDP had been constantly reduced time after time. In 1998 DSR was posted at 150%, then lowered to 46.5% and o to 30.1% in 2008 although once posting upturn to 31.7% in 2009.

Thankfully again in 2010 posting significant lessening to 28.7%, drifting to the range of 23% in GDP was a reflection of fiscal policy which was efficient and prudent. Normally creditors and rating agencies would appreciate prudent fiscal and monetary policy as it tend to strengthen economic foundation.

Debt-to-export ratio also posted significant downturn from 124.3% in 2015 to 93.5% in 2008 but further up again in 2009 to 121.4% and in 2010 down again to 112.6%. Over the same period, Indonesia’s DSR was seen to fluctuate. In 2005 DSR was posted at 17.3%, further in the following year up to become 25% and down again to 23.1% and by end of 2010 the level was 20.6%.

So far Indonesia’s Debt-to-GDP ratio was still low compared to other ASEAN countries and developing countries. Singapore in 2012 had GDP of 100%, Malaysia 52.5% and Thailand 41.6%.

Furthermore some emerging market countries like Brazil had DSR of 68%, South Africa 38% and India 68%. In Indonesi, all parties must observe growing private debt which drove DSR 2013 to 30.24%.

Although Indonesia’s DSR was considerably safe, all parties must watch on increasing private debt. As long as the debt were used for productive purposes within the debitors’ repaying capacity, and be invested in prospective and profitable projects, then the borrowing would be justifiable.

Expansion of the private sector in Indonesia was understandable as Indonesia was in need of investment in the real sector and infra-structure. This was in tandem with industrialization and industrial downstreaming plans. The two factors encouraged the private sector to make business expansion and the consequences was enormous investment fund needed.

However, the Government and BI should manage Indonesia’s overseas debt to keep it within safe limit, whereas not to endanger the nation’s fundamental economy which had been built up strong. One thing to be watched on was increase of DSR from 34.95% in 2012 to 42.73% in end of 2013.

Weakening of world’s export market through 2013 had caused DSR to grow. In 2014 in line with economic recovery in some European countries, Japan and the USA, the Government of RI was optimistic that national export would post upturn and keep DSR be well maintained at safe level through 2014.

As known, last Thursday [20/2] BI mentioned that Government’s overseas debt dropped from the position of USD 116.1 billion in 2012 to USD 114.2 billion in 2013. Meanwhile the position of non-bank private debt was showing significant upturn from USD 103.2 billion to USD 116.4 billion by end of 2013.

BI’s debt also posted downturn from USD 9.9 billion by end of 2012 to USD 9.2 billion by end of 2013. Increase of debt happened in non-bank private group which increased by USD 23 billion in 2012 to become USD 24 billion by end of 2013.

Although BI rated by percentage ratio of private foreign debt against GDP was still at safe level, essentially it had triggered currency mismatch which endangered national economy. Even today increased private overseas debt was rated as potentially dangerous to national economy. Increase of private overseas debt from 2012 to 2013 was steep, so DSR increased to 54% due to high private overseas debt. The problem was that there was currency mismatch in the private debts.

The currency mismatch today was because the private sector who borrowed money in foreign currency invest in business with rupiah transaction. Today many activities of private business was not export oriented. The forex borrowed did not return in forex.

What was actually happening today in the use of overseas foreign debt was more borrowed money invested in the domestic property and service sector. Investment in property business was a dangerous thing because property credit was on short term basis while overseas debt was on long terms basis. A condition as such might cause maturity mismatch because short term investment was financed by money from long term investment.

Data of BI had it that in quarter 4 of 2013, Indonesia’s DSR had reached 52.7%, consisting of Government’s DSR 4.1% and private DSR 48.6% from payment of overseas debt worth USD 27.9 billion. Investment in the property and service sector was rated as not contributing significantly to national production. So the two sectors having injection of foreign loan did not create any notable added value to economic growth.

Low DSR percentage was no guarantee that the condition of overseas debt was at safe level. In fact DSR never really mattered when the borrowed money was productive. Japan had DSR of 230% but their economy remained steady.

On the other hand, America’s DSR was at safe level, but their economy was trouble by financial crisis due to NPL in subprime mortgage. The problem was that most of US overseas debt was invested in the property sector. In Europe, most of debt was used for subsidy the way the Government of RI did.

Although Indonesia’s overseas debt was at safe level, close collaboration was still needed between the Ministry of Finance, BI and OJK to mitigate problems. The DSR position in quarter IV-2013 at 52.7% was something not to worry about. What must be done was to manage private money to prevent default which would increase Indonesia’s risk.

In the future DSR must serve as reference to evaluate the composition of Government and private debt. The Government debt was clear enough, because it had the reprofiling mechanism and buyback as well as payment schedule. In case of private debt, a deeper insight was necessary to what extent overseas debt would be invested in their business.

Collaboration between the Ministry of Finance, BI and OJK was necessary as many companies that go public needed overseas loan. OJK would be in a position to mitigate effect of company’s debt as they were in possession of company’ data. OJK had date of industry and companies who go public.

Generally speaking, there were some ways to suppress DSR. Firstly, to pay off debt at due date and not to extend it. Secondly, borrowing to be take from domestic creditors, no need to borrow from foreign creditors. Thirdly, even if it was necessary to borrow from abroad, the fund should be invested in productive business yielding forex, because the production was forex oriented and natural hedging would be happening.

Fourthly exporter borrowers who were export oriented must actively make market penetration to overseas markets in order to collect revenues in forex whereby to make payments on time. In this case export must be re-orientated to non-traditional markets like the Middle East, Africa and East Asia. With massive export income, DSR would improve and fundamental economy would be well guarded. (SS)

Business New - March 5, 2014

CPO STOCK ABUNDANCE STARTED TO HAVE IMPACT ON PRICE PRESSURES

During January 2014, prices of all vegetables oils were depressed because of the abundance of vegetable oil stocks in various producing countries. CPO stocks of Indonesia and Malaysia are still abundant due to increase of production at the end of last year. The rain that occurred recently has ended the dry season in Brazil and Paraguay. It is very beneficial to both countries so that soybean crop recorded an increase as expected.

According to FAO report, rapeseed stocks in Canada are also abundant due to slowing exports, followed by sunflower seed stocks in the Black Sea region which are also abundant. Stock abundance causes negative sentiment that led to world vegetable oil prices to weaken and depressed explained Executive Director of the Indonesian Palm oil Association (GAPKI), Fadhil Hasan.

Abundant vegetable oil stocks in the world have an impact on the decline in exports of CPO and its derivative products from Indonesia. In January 2014, total exports of CPO and its derivative products reached 1.57 million tons, down by 454.6 thousand tons or 22.5% from December 2013 at 2.02 million tons. The fall of exports of CPO and its derivative products from Indonesia was due to decrease of demand from major export destination countries, except the United States. Exports to India declined sharply by 54% from 568.3 thousand tons in December 2013 to 261.4 thousand tons, and the decrease occurred in CPO derivative products. The decline of exports to India is because the Indian government has implemented import tax hike for refined oil from 7.5% to 10%.

This is done protect the refinery industry in the country whose utility is currently below 40% of the total installed capacity. The significant decline in exports also happened in Pakistan. The decrease was recorded at approximately 41.6% of 116.2 thousand tons in December 2013 to 67.9 thousand tons in January 2013. The decline also happened in the European Union (EU) and China at 17% and 2%, respectively. The decline in exports was also affected by the enactment of anti-dumping duties by EU on biodiesel from Indonesia and Argentina. In Indonesia alone, mandatory biofuel has provided a good opportunity for the Indonesian CPO-based biodiesel industry to divert the biodiesel market to the domestic market.

When some major destination countries of Indonesian CPO exports reduce demand, the United States recorded an increase of demand for CPO and its derivative products by 6.7 thousand tons (22.5%) from 29.9 thousand tons in December 2013 to 36.6 thousand tons in January 2014.

Prices Started to be Depressed

In terms of price, the average price of CPO in January 2014 was under pressure and decreased approximately 5% from USD 909.6 per MT last December to USD 865 per MT. CPO prices did not all sharply due to the government’s mandatory program of biofuel (B-10) that has been effective since September last year so that CPO absorption as a mixing ingredient for diesel duel increases.

This February prices are expected to improve with CPO stocks in Malaysia and Indonesia that will begin to decrease. Until mid-February prices is recorded to move in the range of USD 860-925 per MT. CPO export duty in February is set by the government at 10.5% with an average reference price of CPO at USD 880.42 and export reference price (HPE) at USD 809 per MT. (E)

Business News - February 28, 2014

PURSUIT OF MILLENIUM DEVELOPMENT GOALS RELY STUDENT’S ROLE AND SOCIAL MEDIA

The Office for President’s Special Representation of Millenium Development Goals [MDGs] saw that the role of students and social media was significant for target attainment in 2015 next. To tertiary students, the educated group, it was obligatory to publicise various programs and development activities of nation and character building in Indonesia. “The role of social media like twitter could be helpful. Just twit all the good things until the echo reverberates, because there is only one year left” The President’s special envoy for MDGs Nila Djuwita F. Moeloek disclosed to Business News sometime ago.

Millenim Development Goals to Indonesia who ratifies the document was a commitment to promote people’s welfare and to contribute to welfare of the world’s population. The birth of MDG in September 2000 made development more focused, dynamic and measurable in poverty eradication. “But MDGs especially point seven which is environment namely water supply is still not attained.”

The eight objectives of MDGS were among others poverty eradication, starvation, basic education, equality of gender, women’s empowerment, betterment of children’s mortality, betterment of mother’s health, eradication of HIV/AIDS, malaria and other diseases and fostering partnership for development. “Our report card is still red, not just water but mark for mother’s helath is still low. The reason, among others was fish consumption which was only 2.4%”

KUKPRI did not only deny that fishermen’s catch is still a problem. At sea, foul weather was an obstacle for fishermen to catch fish. “But we have abundant plain water fish” So KUKPRI saw that one of the effort to attain MDGs target, particularly point 5 was to increase fish consumption. Besides, so far East Java was known as center of Lele Earl cultivation. Even other fish like patin, Gurame etc could be cultivated in some areas in East Java. “We can set up a fish cannery industry. In a condition as today, when mount Kelud erupted, Lele Eel cab be canned for practical reason.”

KUKKRPI was in fact in fact disheartened by conversion of agricultural land for commercial sector like trading, so 11 thousand hectares of land in java tend to be degraded, especially in areas used for agriculture and fish cultivation. Besides there was also other multiplier effect, i.e. urbanization. Many villagers migrated to Jakarta which was overcrowded. Industrial activities and wastage disposal resulted in climate irregulatity. “Solution for Jakarta, extreme as it may sound, 40 percent of the population must leave.”

The rainy season caused annual problem in Jakarta: flood. Flood kept storming, happening everywhere as routine disaster. Realize it or not, flood was the outcome of Man’s misbehavior. When flood came, people cursed around around but during the dry season they suffer from drought and water shortage. “Flood is caused by Man’s carelessness who destructed the waterway system. So we have to conserve good quality water. We drink water of the best quality. For ricefield watering, low quality water can be used. We all need water starting from packaged water, reservoir water etc. there are many categories of water but we cannot process and use them properly. So in the attainment of MDGs in terms of environment, our report card is still red”

Packaged water had become a trend for urban people especially in Jakarta. The problem was that very often users did not finish the water they drank from the plastic bottle. When accumulated, each day hundreds or perhaps thousands of litres of clean water were wasted. The condition was contradictory to that in NTT, Central Kalimantan etc where people took water from rivers.

The same was with people of NTT who obtained water by collecting rain water. People’s life was hard, especially in NTT and Central Kalimantan when they needed water. Everyone needed water, even their blood was made of water. The philosophy : man could not produce water buy time after time they consume water. “Awareness must be built that water is most vital. People of the big cities especially Jakarta very often fail to realize how water shortage might come anytime.” (SS)

Business News - February 28, 2014

F & B INSUTRY EXPECT WINDFALL FROM POLITICAL YEAR

The Ministry of Industry set target growth of 8% for F & B industry this year, uplifted by public consumption related to General Election 2014. Data of the Ministry had it that production capacity of F & B industry in 2012 was posted at 63 million tons. Today there were 1,952 companies being active in that sector. Total production of 2012 was posted at Rp 712 trillion, up by 8% compared to previous year at Rp 60 trillion.

The Secretary General of the Association of Indonesian F & B Producers [GAPMI] Franky Subarani stated in Jakarta on Monday [24/2] that he agreed on Government’s target. Franky was expecting that money circulation during General Election might come to Rp44 trillion and could be benefited by F&B traders. By year end, Franky was optimistic return of F&B industry could break through Rp789 trillion or increasing by 6% against returns of 2013 at Rp745 trillion.

GAPPMI estimated that F&B consumption would be much absorbed by events run by the political parties. The activities were expected to help to increase sales of F&B products. However, Franky said that many challenges had to be faced by the F&B industry this year. He showed as an example increase of Basic Electricity Tariff of I.3 category which came to 38.9%. Price of gas would increase too while Dollar was still strong. “This is a challenge we all have to face. How to keep all obstacles from lowering performance of the F & B industry” he said.

Therefore Franky said, players of the F & B industry might increase their product price by 10% - 15% due to increased production cost. Franky said that the challenge of election year was increase of production cost, which was on account of several factors like increased BI’s benchmatk rate which had come to 7.5%. Increase of production cost might jack up selling price of the F & B products would think twice before reducing the content of product.

The same was disclosed by Tryono Priyosoesilo, Chairman of the Association of Light Drink Producers [ASRIM]. He believed that the 2014 political year would jack up demand of fast food products by up 9% against 2013. Producer of light drink products estimated consumption of fast food products in Indonesia might come to 24 billion litres due to demand for fast food products.

Drinks for fast food restaurant included among others packaged tea, carbonated or soda drinks, packaged drinking water in the form of juice, coffee, milk and isotonics. Triyono estimated the projected profit from F & B industry was too measly. Electricity tariff increase and depreciation of Rupiah had their impact on the industry. He was expecting that the Government realized that the condition of domestic was unfavorable due to many factors. The recommended step to be taken, Triyono said was to suspend increase of electricity tariff which would be in effect gradually per May 2014. (SS)

Business News - February 28, 2014