Commentary: Distrust among banks the cause of liquidity problem

Vincent Lingga , The Jakarta Post , Jakarta Tue, 11/25/2008 7:14 AM Headlines

Almost one week after Sinar Mas Multi Artha, the financial unit of the powerful Sinar Mas business group, signed a preliminary agreement to acquire 70 percent of Bank Century, this small bank remained in a liquidity crisis, forcing the central bank to put it under the control of the state-owned Deposit Insurance Corporation last Friday.

Sinar Mas’ commitment to take control of Bank Century should have reignited market confidence in this small bank and enable it to get access to interbank loans. But it didn’t.

The big question is then: Is liquidity in the banking industry so tight that this publicly listed bank was unable to secure interbank loans to resolve its illiquidity even with the strong support of the Sinar Mas Group?

The answer is a resounding “No”.

Analysts and bankers estimate that Bank Indonesia’s lowering of the minimum reserve requirement at banks last month from 9.5 percent to 7.5 percent unleashed between Rp 50 trillion (US$4.5 billion) and Rp 70 trillion in new lending resources. Moreover, the pace of bank lending has slowed down from its annualized rate of 35 percent in the first three quarters.

But why are many banks still complaining about tight liquidity and businesses groaning over what they claim to be a tightening of credit?

“The problem is not liquidity because industry-wide the level of liquidity is adequate. But banks awash with liquidity are reluctant to lend to others out of fear their money will not be repaid,” Bank Indonesia’s research and regulatory director Halim Alamsyah said.

He revealed there had been suspicions among money market players, notably between small banks, as one bank did not trust the soundness of another bank, hindering interbank lending.“That is why we (Bank Indonesia) have recommended that the government introduce a blanket guarantee on all liabilities of banks, including interbank loans and letters of credit,” Bank

Indonesia Deputy Governor Hartadi Sarwono said.

There seems to be information asymmetry within the banking industry.

Theoretically, banks that are not under the special surveillance of Bank Indonesia (the central bank) are assumed to be sound.

But the suspicions between banks have spread widely. This condition is, to a limited extent, similar to the environment in the financial market in the United States since September, when the financial crisis turned into a total crash following the bankruptcy of the Lehman Brothers investment bank.

Such mutual distrust should not have hit banks in Indonesia because they do not own, or have not bought, the toxic assets (subprime mortgages and derivatives) that fueled the U.S. financial crisis.

Several bankers said the segmentation within the banking industry has widened to the point where big banks are increasingly uncertain about the quality of small banks’ assets.

Faced with huge difficulties of their own, banks have tightened their purse strings, lending less and driving up the cost of credit to consumers and corporations — thus compounding the already grim outlook for the world economy.

Uncertainty about the depth and length of the global slowdown is making things much murkier. But the combination of a battered banking system and shell-shocked consumers suggests things could get particularly tough for many businesses. So banks prefer to secure as much cash as they can now to make sure they can see their operations through the downturn.

Many bankers also are nervous that borrowers who look solid today may turn out not to be so solid within the next few weeks or months. In the current environment, bankers are nervous that other banks might shut them out, out of fear, and stop extending them short-term credit.

Doesn’t this mean a distrust in the quality of banks under the supervision of the central bank?Certainly a blanket guarantee, as recommended by the central bank and most businesspeople, will with one stroke remove the clog within inter-bank lending.

But this may simply encourage reckless lending practices and bad bank governance practices, further exposing taxpayers to the risk of having to pay for another big bailout.

However, if banks fully trust the integrity and reliability of Bank Indonesia’s bank oversight, it should be possible and easier for them to better identify which banks are reliable.

In normal times, banks have several mechanisms for providing the necessary information, such as accounting disclosures, quarterly balance sheets and credit rating agencies. But the financial situation now is irrational and volatile.

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Special Report: Commodities boom ends as speculative bubbles evaporate

Vincent Lingga , The Jakarta Post , Jakarta Fri, 11/14/2008 11:02 AM Business

Indonesia benefited greatly from the boom in the prices of primary commodities since the middle of last year as palm oil, rubber, coffee and cocoa as well as coal, pushed up the Jakarta stock market index to its peak of over 2,800 in April, 2008, bolstering exports and generating greater purchasing power for millions of smallholders in Sumatra, Kalimantan and Sulawesi.

However, the boom cycle abruptly ended last August after the United States financial crisis turned into a crash, setting off a global credit crunch and driving the global economy into a recession-led economic downturn, bringing down the Indonesian (IDX) stock index at one point to below 1,100.

The prices of most commodities collapsed to as low as one third of their market quotations only three months before. Crude palm oil tumbled down from its peak of US$1,300/ton to below $400 last month, rubber from $0.33/kilogram to $0.15, coffee from $2.54/kg to $1.5 and cocoa from almost $3/kg to $1.8.


This development validated analysts' views that what had so far been dubbed as speculative bubbles did play a big part in the earlier sky-high prices of commodities.

Growing global demand probably was the reason for the gradual rise in palm oil prices from an average $470/ton in 2006 to $780 in 2007, but speculative bubbles fueled the rise up to the range of $1,000-1,300 between January and July this year.


The fundamentals of the supply and demand equation were also responsible for the gradual rise in crude oil prices from $20 a barrel to US$40 earlier in the 1990s, and even up to US$60 by mid-2005, but speculative sentiments helped fuel the steep increase to as high as $147/barrel last July before falling steeply to below $60 now.


Even such high-growth emerging economies as India and China with a combined population of more than 2.3 billion people could not have all of a sudden gobbled up enough palm oil, rubber, coal and other commodities to generate such steep price rises in the first half of this year.

The problem is that the price elasticity of both demand and supply is low for commodities like palm oil, cocoa, coffee and rubber. Put another way, neither the underlying supply nor the demand for such commodities could have changed so quickly. Consumers will still drink one or two cups of coffee even if its price rises sharply, but will not suddenly take ten cups when its price falls. Likewise, people do not abruptly stop frying food even if the price of palm oil skyrockets.


As debt instruments suddenly became illiquid and risky, investors sought safety in commodities. That surge of cash created a new bubble which has recently burst.

Investors such as hedge funds and even such solid institutions as pension funds made speculative purchases as they diversified into alternative investments away from the uncertainties in the financial market.


The sub-prime mortgage crisis started raising its ugly head in the United States in early 2007.
Analysts observed the flood of money from investors into the commodity futures markets, thereby distorting spot markets for physical commodities.


However, speculation by investors to avoid the uncertainty within the financial market was not the only factor behind the one year boom-cycle.The fundamentals of the supply-demand equation also played a part as the global economy enjoyed one of its high growth periods.


According to the International Monetary Fund, the world economy grew faster, expanding by an average 4.5 percent, 50 basis points higher than most analysts had forecast earlier.

As most analysts have often noted, global economic expansion had been driven mainly by major emerging economies, notably China and India, which grew at an annual average rate of nearly 10
percent for several consecutive years. Given their large populations, this development generated a dramatic rise in demand, particularly for natural commodities.





Government-induced distortions have also blunted price signals. In many emerging economies, including Indonesia, governments control the prices of important fuels such as gasoline and food staples.



Even though several countries have removed such price distortions, many others, notably major producers, kept prices fixed, thereby blocking the transmission of market reactions from higher prices to weaker demand.To reduce carbon emissions, the U.S. government encouraged biofuel production by subsidizing these fuels. Consequently, the demand for biofuel feedstocks such as maize and vegetable oils exploded.


The World Bank estimated biofuel demand was the biggest single reason why food prices soared in the past two years.

Hence, all in all, demand shocks caused by speculative bubbles, higher-than-estimated economic growth and misguided government policies combined together to fuel the commodities boom in the first half of this year.

But now, the world economy is suddenly accelerating into a recession-led downturn and the financial market has crashed, leaving behind a liquidity crunch which has consequently removed the demand shocks caused by previous robust economic growth and speculative bubbles.

The strongest message of this roller-coaster market development is that only the fundamentals of supply and demand are able to generate sustainable price trends in primary commodities.

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Commentary: Sri Mulyani, the bedrock of SBY’s economic management

Vincent Lingga , The Jakarta Post , Jakarta Tue, 11/11/2008 7:13 AM Headlines

President Susilo Bambang Yudhoyono’s political debts from his 2004 presidential election campaign seem to be haunting him still, even to the point of occasionally impairing his economic judgment. Yudhoyono was warned of the big risk of conflicts of interest within his Cabinet when he appointed Aburizal Bakrie, then chairman of the Bakrie conglomerate, as the chief economic minister at the outset of his administration in October 2004.


Aburizal remains in the Cabinet, although now with largely diluted power as the coordinating minister for the public welfare. However, his presence in the executive power center continues to cast a shadow over the credibility of the government’s policymaking.

The government’s flip-flop handling of the trading suspension on the Bakrie Group’s Bumi Resources coal mining company since early last month is only the latest example of how the integrity of the government’s economic management has sometimes been compromised to protect the Bakrie interests.


Given the legislative and presidential elections next year, there are now increasing concerns not only about who is really managing the economy with Yudhoyono and Vice President Jusuf Kalla both gearing up for their campaigning. There are also major concerns over the integrity of the economic management itself.

Fortunately, as with the situation in the 2004 election year, when we had Boediono as the finance minister and the vanguard of economic management under then president Megawati Soekarnoputri’s administration, now we have the “iron lady” Sri Mulyani Indrawati as both the finance minister since late 2005 and the acting chief economic minister since June.

Boediono, who is highly respected in both international and domestic circles, was then more than any other person responsible for restoring and maintaining our macroeconomic stability between 2001 and 2004.


Likewise, Mulyani’s integrity, competence and courage to stand up to pressure from vested interests, even from such a politically well-connected conglomerate as the Bakrie Group, serve as the bedrock of the credibility of the government’s economic management.

At a time when Yudhoyono, Kalla and several other Cabinet members from various political parties are busy with their political posturing for next year’s elections, Mulyani and Boediono, currently the governor of Bank Indonesia, make up the automatic pilot of the country’s economic management. 


The rumors last week that Mulyani and her core team at the Finance Ministry threatened to resign over the powerful political pressure on her to compromise economic policies simply revealed her true character, her courage to stand up even against her boss when it came to the principle of sound economic management.

Earlier rumors of a strong conspiracy and various forms of subterfuge to oust her from the Cabinet further reflected the determination of the award-winning finance minister in fighting corruption.

Soon after her appointment to the Finance Ministry, the former executive director of the International Monetary Fund acted immediately, against strong opposition from vested interest groups, to clean up Jakarta’s main tax and customs offices from corrupt officials.

Mulyani also dealt firmly with the largest coal and palm oil producers over underpaid royalties and taxes and imposed travel bans on businesspeople who owed the government overdue taxes.

No wonder, then, that for two years in a row she has been named Finance Minister of the Year by specialist magazines Euromoney (2006) and The Banker (2007). Forbes magazine last August honored Mulyani as the 23rd Most Influential Woman in the World, a position that also put her at number three on the list of Asia’s most powerful woman.

At a time when we are highly vulnerable to the fallout from the global financial crisis and economic recession and when market confidence, rather economic fundamentals, is the main issue, Mulyani’s competence and courage, consistency and impeccable integrity in treading the messy politics of policymaking are both the anchor and the lightning rod of the government’s economic management.


Yudhoyono’s alleged tussle with Mulyani over the covert attempt to bail out the Bakrie business group should be the last spat over policymaking — otherwise he may lose her altogether at the risk of devastating damage to his government’s credibility. The President should see to it that Mulyani, as the acting chief economic minister and finance minister, is really and fully in charge of making and directing economic policies based on the strategy set by the government and the parliament.


Having said all that we don’t mean to say that Mulyani can perform miracles. She can’t, given the uphill challenges ahead with the global financial crisis and economic recession.

But her impeccable integrity, credibility and competence will help strengthen the credibility and consistency of the government’s economic policymaking, especially in view of the legislative and presidential elections next year.

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