Tag: Indonesia

Categories
Photography Travels

[2645] Jakarta!

And so, I was in Jakarta in the middle of December, where I began my backpacking trip across Java for three weeks. From Jakarta, I took an overnight train journey to the cheery Yogyakarta, from there on a night in Indonesia’s second largest city, Surabaya and then a more than 12 hours journey to Bali by train, ferry and bus.

In the Indonesian capital, I had free meals twice. Once was the welcome meal paid by a friend, which was also kind enough to pick me up from the airport and send me to my hotel.

And second was within the green compound of the National Monument for my effort to speak Bahasa Indonesia. The last time this happened, I tried to converse in French in Paris. He guy took pity on me and he gave me a free meal. That of course was not the first…

I am that endearing.

Anyway, the National Monument. This is probably one of several landmarks of Jakarta which are known abroad. Or at least, I know it. It is truly big. There is a museum underneath. Full of nationalistic propaganda but a museum nonetheless.

Some rights reserved. Creative Commons 3.0. Hafiz Noor Shams

This structure is sometimes called Sukarno’s last erection. Jakarta has several big sculptures and monuments. They are magnificent but it took a toll on the economy after awhile. The price you have to pay for grandiosity.

But that was in the 1960s. Indonesia is now an emerging economy (again) and all.

Categories
Economics

[2641] Will fewer zeroes do something positive to the rupiah?

I learned a few things in Indonesia. One of them involved the discussion of cutting down the zeroes in the Indonesian bills. Prices of goods and services will be adjusted accordingly as well.

Right now, the Indonesian currency the rupiah is denominated in the thousands and it is quite common to round up any price to the nearest 500 even when there are 200 rupiah coins circulating. And sometimes, even to the nearest thousands. As a foreigner unfamiliar with the rupiah, I almost protested each time that happened to me at the store in the three weeks I was there. Had I protested, I would have looked silly.

But what is the point of cutting down the zeroes?

There are several popular arguments for that and the biggest of among those is inflation. There is a belief that by cutting down the zeroes, inflation will happen at a more comfortable pace.

I do have trouble with that. Yes, I sat down on Kuta beach and thought of the problem, drawing chart in the sand under the Balinese sun. The water was cheery, the wind was nice and the sun was warm. The trees were swaying gently and the sand was fine.

Before I digress too much, the cutting down exercise essentially shifts the price level down. It does not specifically change the factors that cause inflation, like demand and supply. However the currency is denominated, if demand is strong and supply is short, inflation will be there.

A 4% to 5% inflation, the band which the Indonesia inflation has hovered in recent times, will still be 4% to 5% inflation whether the rupiah is denominated in the thousands, millions or tens. The absolute value will be big at the higher level but then again, the right denomination can address that painlessly: it makes inflation independent of the denomination.

Then, I started to think about the possibility of heteroskedasticity. That mouthful word describes a situation where there is more volatility at greater level. For example, at the level of 1, the data may fluctuate by 5% around the number 1. At the level of 1 million, it may fluctuate by 10% of around the number 1 million. This is known to happen with a lot of financial data. I am unsure if it is true for inflation as well and I have not checked it. I did a search on it and… things that came up are not stuff I want to read at the moment. All I want to do right now is blog and not mess up my head by too much.

Theoretically, it is hard for me to see how the level may affect inflation. The empiric may have something else to say.

The theoretically respectable way to have a change in level to affect inflation is to use the expectations channel. Consumers must somehow believe that a change in level affect inflation so that post-change, inflation will be lower. But there is a problem with this: like I said, the factors that affect inflation does not change (given the denomination is optimal, which is easy to achieve) and the issuer of the new money, Bank Indonesia, will still be as credible as the issuer of the old money. So, how exactly will a new denomination affect expectations?

I do not know.

So, the realistic way is to follow the empirical route and see if there is heteroskedasticity. But I am abusing the term a bit here. I am not thinking specifically about heteroskedasticity. I am just thinking that inflationary pressure or expectations might be greater at higher levels.

If that is the case, then the exercise may help fight inflation. If it does not, then I think the exercise is not ideal.

The next big point of it is really cumbersomeness of big bills. But during the weeks I was in Java and Bali, I found that the rupiah was easy to use. Indonesians and others have adapted to the denomination and the price level quite well. I would think given the prevailing price level in Indonesia, everybody would carry big bills around like during the disastrous era of the Weimar Republic or Japanese Malaya. But inflation in Indonesia is respectably okay at the moment. So while Indonesian denomination is big compared to Malaysia, stable prices mean these Indonesian bills will not lose its value quickly. The big numbers on the bills mean something, unlike in the Weimar Republic in the 1930s.

When I was there, I typically brought along 50,000 bills mostly because that is the lowest denomination the ATM spits out. Apparently, the optimal bills to carry around are 5,000 and 10,000. And it is not really cumbersome. I had 2 million rupiah in the wallet and the wallet looked thin.

Given the price level, the denomination of the Indonesian currency and the current inflation rate, the society is adapting extremely well to the situation. So, there is no need to cut down the zero. It is, after all, just zeroes on pieces of papers that appears to exact negligible cost to economic activities. Things are going fine as it is. So, I do not think the one-off adjustment cost associated with the cutting exercise is worth the effort, if cumbersomeness is the concern.

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved
p/s – in fact, Bank Indonesia plans to re-denominate the rupiah beginning from 2014. The exercise may be completed by 2016. The current denomination will be slashed by the thousands i.e. 1,000,000 will become be 1,000 once the exercise is complete.

Categories
Economics

[2638] The market will see through the undisclosed, differentiated Indonesian capital adequacy ratio

Bank Indonesia, the central bank of Indonesia, has been introducing several new institutional frameworks and rulings in the Indonesian economy. I suppose, that signifies that rate of reform in Indonesia.

One is the introduction of a trust fund. It is established to encourage Indonesian firms with earnings from abroad to keep it in Indonesia, at least for a bit longer than what typically happens now. The ultimate goal is to prevent the rupiah from depreciating further.[1] I do not understand how that will keep the money in. That is a polite way of saying, I do not think it will work too well.

Maybe the Indonesian central bankers know more than me about their economy and I am missing a piece of the jigsaw puzzle.

Another is the introduction of a new differentiated capital adequacy ratio ruling. Soon, different bank will face different ratio requirement based on their risks as determined by the central bank. But according to a report in the Jakarta Globe:

Under the new regulation, Bank Indonesia requires a minimum 8 percent capital adequacy ratio — which measures the lender’s financial strength — for banks with the soundest risk profile but it set a higher ratio for the riskiest. In the previous regulation, the ratio was set at 8 percent, regardless of the risk profile.

Bank Indonesia groups the country’s 120 commercial banks into five risk profiles. It usually updates a bank’s risk profile every 6 months but does not make the rankings or their specifications public to avoid a run on deposits at lower-ranked banks. [Dion Bisara. Bank Indonesia Sets New Rule to Strengthen System. Jakarta Globe. December 5 2012]

Bank Indonesia does not make the rankings or the specification public to avoid a run.

That is tough because as long as one can have access to the accounts of a particular bank, one can try to figure out the ratio faced (or really, ratio maintained) by the bank. From there on, the market can imply the imposed ratio.

In other words, the public can find out exactly what Bank Indonesia tries to not divulge. So, here is a ruling that I think is good but as far as risks, bank run and the differentiated capital adequacy ratio are concerned, I am quite certain that it cannot work. Bank Indonesia is revealing the very information it wants to hide.

To come to think of it, in times of banking crisis, it appears that banks with the highest ratio may face the highest likelihood of experiencing a run (ceteris paribus… and knock on wood).

The simplest and the most effective way to have a good ratio and not tell the market anything about individual banks is to impose a more or less uniform requirement across the board. There are issues with uniform requirement but it will address the problem of information superbly.

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved
[1] — The central bank on Friday took another step to retain foreign earnings by setting up a trustee fund that will ensure steady and sustainable flow of overseas earnings that will be repatriated into the country. The move might also help to stem the rupiah’s depreciation against the dollar by holding income earned from abroad over a period of time rather than being withdrawn quickly. [Francezka Nangoy. Dion Bisara. Central Bank Sets Rule to Keep Foreign Earnings. Jakarta Globe. November 24 2012]

Categories
ASEAN Conflict & disaster Politics & government

[2220] Of Jose Ramos Horta and Indonesia

Some rights reserved. By Mohd Hafiz Noor Shams.

The University hosted President Jose Ramos Horta of East Timor recently and I was lucky enough to get a seat for his speech. After Joseph Stiglitz, the President is the second ever Nobel Prize winner that I have had the opportunity to listen to first hand.

The speech was interesting, but it was not a memorable one. I am unable to recall too many points of the speech.

What I do remember the most is East Timor’s ties with Indonesia.

He is concerned with attempts at punishing Indonesia for past violence in East Timor. He said Indonesia should be given the room to face its own history. The context that Indonesia finds itself in should be understood and taken into account: it at one point came close to repeating the history of the Balkans. That is a painful part of modern Indonesian history. Raising it up would cause old woulds to reopen and ignite an unproductive and divisive debate.

Furthermore, this is not the best time to demand for justice. Such demand at this juncture or in the near future may risk whatever progress, which is a lot, Indonesia is making. He said, such demand would sap energy away from development. President Susilo Bambang Yudhoyono of Indonesia should not be burdened with an international controversy. The fire of nationalism should not be lighted up.

He believes that as Indonesia matures as a democracy, its society will address it eventually. I definitely think that such approach is better at attaining sustainable peace and good diplomatic relations. Although an exaggerated example, the problem of post-World War I Germany comes to mind with respect to effort to punish Indonesia. Keynes was right about Germany and the current President of East Timor may be right about Indonesia.

In other words, it is in East Timor’s interest to have Indonesia focused on its developmental agenda.

He also made it clear that any attempt to set up a tribunal to punish Indonesia would not get the support of East Timor.

And I thought, those were wise words. And I am on board.

Categories
ASEAN

[2093] Of a chance to demonstrate Malaysian goodwill

The very silly spat between Malaysia and Indonesia is a huge disappointment for regionalists who dream to repeat the European experiment of closer integration in Southeast Asia. It may be silly but it has dire ramifications to regionalism in the region. Even if one is not a regionalist but simply a citizen of either country who wishes for his or her own country to take its rightful place in the world, it is in his or her interest to see relationships between both countries blooms. It must flourish for both countries are dependent on each other.

The point on dependency is by no means a mere rhetoric. In 2008, Indonesia was the seventh most important trading partner of Malaysia in terms of total trade. In the same year, Malaysia was among the top five most important trading partners to Indonesia. If hostility hurts trade, clearly both have something to lose from hostility. In times when the world economy is struggling to find its way towards sustained recovery, Malaysia and Indonesia do not have the luxury to let trade between them flounder.

The importance of trade impresses upon the urgency on both sides to find for ways to douse the fire that threatens to burn the ties that bind the two together. Multiple issues ranging from culture, territorial demarcation in eastern Borneo, treatment of Indonesian workers as well as open burning in both countries must be addressed to improve relationship between the two Southeast Asian countries, and more importantly, eventually, people-to-people relations.

Alas, these issues are complex enough that individuals on the street may not be able to appreciate the difficulties faced by both sides. Those complexities demand for both sides to take time in finding solutions that will satisfy all. It cannot be rushed lest it becomes seeds for future discord. Therefore, the same issues cannot be relied upon to immediately improve relationship between the two neighbors.

In the short run, both have to rely on something else.

In this sense, the earthquake that devastated Padang and its surrounding in western Sumatra offers Malaysia an opportunity to improve its relationship with Indonesia. To use a jargon, which is regretfully so popular in the circle of management consultancy in Malaysia, this is a quick win.

Malaysia must quickly mobilize its resources to dispense humanitarian aid to victims of the earthquake in Indonesia. In fact, it is imperative for the Jalur Gemilang to be the first national flag to fly alongside the Sang Saka Merah Putih in Padang if Malaysia is to capitalize on the whole episode. The short distance between the two countries further add weight to the importance of Malaysian presence.

Failure to be the first country to reach Padang could only be seen as incompetence of the Malaysian government. Failure to be the first is a failure of Malaysia as a neighbor and a key member of ASEAN. It is most unacceptable, if Malaysia wishes to have better ties with Indonesia.

Not only that, Malaysia must donate generously. The state government of Selangor for one has allocated half a million ringgit towards relief effort in Padang. This action deserves the highest commendation.

One cannot be deluded in thinking that money can buy good relations however, especially at people-to-people level. One also cannot be deluded in thinking that a one-time event like this — if the Malaysian government as well as other Malaysian organizations played an effective role in the relief effort in Padang — can permanently improve relations with Indonesia.

Good long-term relations depend on how issues between the two countries are resolved.

Nevertheless, the disaster is a stepping-stone towards better long-term relations. It is a chance for Malaysia to demonstrate its goodwill to Indonesians and effectively undermine Indonesian jingoists who seek to disrupt Malaysia-Indonesia ties that in effect jeopardizes regionalist agenda for Southeast Asia, though it may not be those nationalists’ intention.

Malaysia has a chance to set everything on the right track here. It is a chance to show that Malaysians care for Indonesians. One would pray for Malaysia to not blow this golden opportunity in diplomacy.

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved

First published in The Malaysian Insider on October 2 2009.