Wednesday, August 16, 2006

On country risk?

Who's afraid of country risk? Apparently, the newest UI econ Ph.D, Ferry Irawan is not one. I asked Irawan the following:

So Bank Indonesia has just [the exam was on Aug 11] lowered again its policy rate to 11.75 percent. Given the current Fed rate of 5.25 percent, there is a 650 basis points differential. If, the current "rule of thumb" holds, i.e. Bank Indonesia should maintain at least 600 bps above the Fed rate, then we still have a room of 50 bps. That means, we're fine if BI again cuts the rate to 11.25, provided that Mr. Bernanke keeps his words. Bank Indonesia officials yesterday have indicated their intention to make further cut, since the inflation rate is increasingly manageable. You agree?

Capital flies to wherever it can get the highest returns. High interest rate is of course more attractive than the lower ones. Theoretically, dictated by the law of one price, interest rates between two countries equilibrate. But the prices should take into account all other differences between the two countries, most of which is attributed to "country risk premium". I don't have scholarly references right now, but it seems that some BI officials still assign a 600 bps (6 percent) rule. That means, all else constant, the Indonesian country risk is somewhere near 6 percent equivalent of interest rate.

But, as Irawan rightly responded, we should not be too religious on the so-called "600 bps"-rule of thumb. The "all other differences" is a dynamic concept. It can not be always 6 percent. Improvement in investment climate contributes to a reduction in the differential. Price stability is another factor, as pointed out in Irawan's dissertation.

As an afterthought, however, I would ask: why bother too much with all this "country risk"? After all, as finance people like to say, "the riskier the crispier". In fact, Cornell's Assaf Razin has shown that the share of FDI in total inflows is higher in riskier countries since "the micro-management superiority of FDI investors over their domestic counterparts is more pronounced when the corporate governance in the host country is weak and financial institutions are not well developed."

That is, riskier countries are sexier to exploit. You agree?

Tuesday, August 15, 2006

Not good enough, Sir! It's still illogical

So, apparently the government listens. But the response is far from good. Again, we can't rely on The Jakarta Post web technology, so let me sum up:

Says The Jakarta Post:
The government is unlikely to press ahead with a proposal to force TV
stations with national coverage to merge as there are signs that some of them
are already on the verge of merging to boost efficiency.... [T]he government would not issue any directive requiring TV firms to merge in the foreseeable future

Right on. Even though, you don't even need the qualifier that some TV stations do want to merge. It's not your business. And what's with that "in the foreseeable future"? You still want to do it, don't you? My goodness.

And here goes the best part:

Because of the tight competition, [Minister Djalil] added, most of the stations were being forced to produce cheap, low-quality programs, such as soap operas, supernatural shows, gossip shows and crime programs... If there were fewer TV stations, each of them would be able to secure better advertising revenue. This would eventually enable them to improve their programs...

Alright now I'm confused. Crappy programs are reflection of lack of competition, Sir. You need to open up. Let Discovery Channel, National Geographic, Animal Planet and others reach the general public.1 Translate if you like. That, trust me, will make all those craps, including the stupid-but-addictive infotainments, on TV driven out. We don't even need a fatwa, yes?

And you say fewer TV stations would enable programs improvement? Oh, I wonder why can't we just go back to the monopoly, TVRI then? Or, why in the world in countries with good programs there are 50 channels, including education programs?

1 OK, some people start screaming at me. Am I saying we should let any station accessible by everybody -- kids? Well, let the family decide.

Monday, August 14, 2006

Dumping, anyone?

So, the United States Department of Commerce is going to impose a 118.63% antidumping duty to Indonesian's paper producer, PT Tjiwi Kimia, along with another 40.55% duty due to subsidy enjoyed by the company. Sounds typical.

If I were to draft a response letter, this is what I would send to DC:

Dear Sir,

It is saddening to see how you sacrifice economic efficiency just to please some lousy producers in your country. Americans have been enjoying cheap papers from Indonesia. But because some American producers can not compete with us, you are going to make the paper price higher there. You are going to force your people to buy expensive paper from inefficient producers. How thoughtful. Let us tell you, Sir. You should thank us for dumping cheap papers to your country.

Of course you complain about subsidy we give to our paper producers. Yes, you are right on this one. Subsidy is evil. Just like your subsidy to your farmers. Let's stop all subsidy, would you?

Dumping is good. Antidumping policy is ridiculous. Subsidy is bad.

Monday, August 07, 2006

Biofuel, anyone?

I can understand SBY's interest in developing biofuel. In the time of rising oil price (which is natural by itself), it is not surprising that people turn to, or look for, substitutes. Biodiesel and ethanol are logical solutions to the increasingly thinly supplied fossil fuel.

But, let's not be too excited as to exploiting the resources in the wrong time. (By "wrong" I mean, the price hasn't told us yet that it is time to switch).

One thing that people tend to overlook when talking about biofuel is the production costs of it. And that includes using fossil fuel to turn jathropa into biodiesel or sugarcane into ethanol. (Hey, you can't put sugarcane or jathropa or palm oil into your car tank!).

So yes, we need to compare how much fossil fuel we have to use to produce biofuel and how much fossil fuel we save by consuming the biofuel instead.

I might sound pessimistic. But I'm not alone.

Of course there are other considerations, such as employment creation. I have an impression that SBY wants to promote the jathropa planting at the same time as an employment creating project. It might be true. But that reminds me of the "to dig holes in the ground" solution. It might be effective in creating employment, but it's an illusion as far as economic development is considered.

Friday, August 04, 2006

Taking back Cepu

So, the ultranationalists think taking the Cepu to court is the way to go. They even have a spooky name: "Tambang Negara" (state mining), an acronym of "Tim Advokasi untuk Merebut Kembali Blok Cepu demi Bangsa dan Negara" (a legal team to confiscate Cepu block for the sake of the country).

The team is suing 1) Indonesian Government, 2) Pertamina, 3) ExxonMobil Indonesia, 4) BP Migas, 5) Ministry of State-Owned Enterprises.

Tambang Negara argues that the Cepu agreement has caused "the loss of opportunity to gain the maximum welfare from (exploiting the) oil and gas contained in Cepu Block". Heroic.

Well. Good luck with that.

Then please also, for the sake of the country, confiscate Freeport's Timika, Newmont's Nusa Tenggara and Minahasa, Inco's Soroako, and so forth. Because we had the opportunity! But it was stolen by the damn foreigners!