How are you? I thought I'd share with you some thoughts that crossed my mind while at an international conference recently. Enjoy!
I am attending a conference on how to cope with the huge amount of foreign capital inflows currently experienced by the Emerging Markets, including Indonesia as one of the recipients of these inflows.
The nature of Capital is such that it is always in search of greater yield and having the desire to grow, and at the moment the developing economies of Asia and Latin America are attractive places to get better returns than their countries of origin such as the US and Europe where interests rates are lower and the economies still recovering from the recent global economic crisis.
Now big amount of Capital inflows is like a case of too much of a good thing, or ‘too much love’ to quote one of the speakers, where, if not carefully manage could end in tears. Previous financial crises - and they are still fresh in our minds, particularly the Asian Financial crisis of 1997 - have shown that too much capital inflows too quickly could easily turn into capital outflows at the slightest sign of upset or if there are better prospects for yield elsewhere, resulting in imbalances in the current account, volatility in the exchange rate and could be detrimental to the country’s overall economic health
Indonesia’s financial crisis in 1998 quickly turned what started as a monetary crisis into a total crisis that brought down the New Order regime overnight and prompted the need for total political, economic and financial reforms.
Conditions are different now of course from over a decade ago. Reforms have been made in the banking sector, the country is enjoying a surplus account with sufficient reserves, with a growth rate and good macroeconomic indicators that should help her weather future shocks should the tide of capital inflows turn into the opposite direction.
Moreover, the Central Bank is prudent enough to manage the liquidity by absorbing the upward pressure on the Rupiah and discouraging very short-term inflows by increasing the statutory reserve requirement. This is also an opportunity for the government to build on the reserves should the capital flow out.
My interest in this is not so much the comings and goings of capital. Capital is fickle in nature and will always go to where it finds the most opportunity to grow. For Indonesia, the challenge is not only how to manage this liquidity but at the same time channel it to good use with long-term benefits: A challenge that the country faces even without the inflow of foreign capital. The shopping wish list is already there. The question is, now that we have money, when are we actually going to spend it.
It is natural of course to still be traumatised by the crisis over a decade ago, the fear of ending up with a lot of foreign debts that upset the balance sheet. But capital by nature is volatile and in an increasingly integrated world, it can move around at great speed all over the world.
What I find more interesting however, is the idea that money, or the bits of paper representing monetary value is at that end all about perception. The last global crisis was the result of behaviour by financiers in the US who continued to seek bigger and bigger gains even when, as it turned out, there was no real underlying basis for their investment. There was the perception of no risk to the credits given, and there was the perception that the borrowers could pay back their debts and there was perception that the bits of paper being transacted in the capital market passed as equities that were kosher.
What started as a subprime mortgage crisis in the US, where people were borrowing money to buy houses they couldn’t afford pay for, turned into global financial and then economic crisis when it transpired that big financial institutions were also caught up in this game of buying and selling papers that went from big value to having no value overnight.
Perception is irrational. The Central Bank’s normal response to the supply of money is to increase or decrease the interest rate depending on whether it wants to attract more money or less.
But at the end of the day, it’s not how much capital or money we have, but what we use it for. I’m reminded of a story of the miser who buries his gold in a hole in the ground and gains pleasure by digging it up everyday and burying it again. Until one day a thief spies on it and steals his gold. He is so upset by this and wails as if it is the end of the world. His neighbours ask him what is the matter and upon being told the problem, ask him what he uses the gold for. So he could bury it and dig it up, is the reply. To which the neighbours tell him, since he had no use of the gold, he could continue digging and burying the hole where the gold was to the same benefit.
It is only his perception that makes him feel rich or poor. Because wealth has no value until it is used for something of lasting benefit. No point for a country in having a surplus account and a healthy balance sheet if most of the people are poor, uneducated and have no access to health care.
(Desi Anwar: First Published in The Jakarta Globe)
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fnyw
said:
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... hi Miss Desi, do you know TED? perhaps you can check it on ted.com, then there's local community for it called TEDxJakarta (tedxjkt.org) maybe you can be one of local speaker? I would like to hear you talk some of you ideas there, thank you. ^^ |
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