Indonesia Leadership in the Midst of World Financial Crisis E-Book

Hutabarat

• Herausgeber: BookRix
• Kategorie: Fachliteratur
• Sprache: Englisch

Veröffentlichungsjahr: 2014

Beschreibung

The world is currently in crisis, a financial crisis of 2008 up to 2012. The phenomena of financial crisis is not new, as the world experienced it on 1930’s Great Depression, not to mention in the late 1980s and the famous 1996-2000 Asian financial crisis that held Indonesia and most countries in Asia in monetary crisis. Is there a way for countries to turn this? International Monetary Fund (IMF) came as a solution to cure those countries in need of fund that includes Indonesia. Indonesia is not cured. However, in 2012 Indonesia declared their pledge to IMF of 1 Billion dollar in terms of bonds and even the Indonesian president by UN Secretary-General is appointed as High-level Panel advisor of Millennium Development Goals beyond 2015. What is the relevancy of Indonesia pledge to IMF of 1 Billion dollar in the midst of world financial crisis? This paper looks at the world financial crisis from Indonesian perspective.

Leseprobe

Francis Hutabarat, PhD

Indonesia Leadership in the Midst of World Financial Crisis

A Look at the Relevancy of Indonesia 2011 Pledge to IMF

To My Father Dr. Reymand Hutabarat and my mother, Mrs. Rawilyne Hutabarat, MALSBookRix GmbH & Co. KG81371 Munich

Abstract

The world is currently in crisis, a financial crisis of 2008 up to 2012. The phenomena of financial crisis is not new, as the world experienced it on 1930’s Great Depression, not to mention in the late 1980s and the famous 1996-2000 Asian financial crisis that held Indonesia and most countries in Asia in monetary crisis. Is there a way for countries to turn this? International Monetary Fund (IMF) came as a solution to cure those countries in need of fund that includes Indonesia. Indonesia is not cured. However, in 2012 Indonesia declared their pledge to IMF of 1 Billion dollar in terms of bonds and even the Indonesian president by UN Secretary-General is appointed as High-level Panel advisor of Millennium Development Goals beyond 2015. What is the relevancy of Indonesia pledge to IMF of 1 Billion dollar in the midst of world financial crisis? This paper looks at the world financial crisis from Indonesian perspective.

About the Author

Francis M. Hutabarat,PhD is Associate Professor in Business Management at the Adventist University of Indonesia (UNAI). He finished his Master of Business Administration (MBA) emphasizing in Business Management from the Adventist International Institute of Advanced Studies (AIIAS) in 2007 and he completed his PhD in Business Management from the Philippine Christian University (PCU) in 2010.

Chapter 1 - Introduction

Indonesia is a developing country in the South-East Asia Region that had its ups-and-downs in terms of economy. The country has suffered economic crisis in 1997 that impacted the Asia region and other countries around the world, and on 2008 the world has suffered another crisis that impacted many countries. In order to resolve the impact of the crisis on 1997, International Monetary Fund (IMF) was asks by the government to help them to cure the Indonesia economy and so the IMF was helping Indonesia with loan funds. However, the help given doesn’t cure Indonesia even years afterwards. Years later, another economic crisis turned the world around.

The financial crisis in mid-2007 on the subprime mortgage lending in the United States has sobering chain-effect all over the world. In early October 2008, the crisis spread and lead to a wider financial crisis include capital markets and banking. Although, the U.S. government has provided bailout funds amounting to 700 billion dollar, the bailout is apparently not considered sufficient by the business world, so the prices of shares on the New Stock Exchange continued to fall. On October 6, the Dow Jones stock index fell to under 10,000 and a domino effect to the entire world. Stock price index in the financial world follows the same rhythm that occurs in the U.S.  Many countries in Europe face financial difficulties and further financial distress, Spain, Italy, German, and more strikingly Greece that can be considered bankrupt since they are low in debt because of the crisis.

These circumstances let people to be discouraged at the time and question if there’s any country is saved from these economy catastrophe. Suddenly the world stops to a glance of a promising new hope, which is Indonesia. By chance, the world witnessed something absolutely shocking. A new-turn appears in the economy of Indonesia. Indonesia immediately showed great potential after becoming known in the international community. First by ending the CGGI in 2007, and then the IMF loan and further that Indonesia was considered saved from the 2008 economic crisis. But the road to established economy is a harsh path. The crisis does not stop but considered continued in 2010 and Indonesia style of open-market would lead to other countries emerge dominating in the import products and thus Indonesia taking remarkable beatings. Not to mention grievous  corruption crimes committed by officials and bribery attempt continuously given to government officials. However, against all odds, Indonesia would rise up and pull-off miraculous comeback in the economy and in 2011 Indonesia declared their pledge to IMF of 1 Billion dollar in terms of bonds and even the Indonesian president by UN Secretary-General is appointed as High-level Panel advisor of Millennium Development Goals beyond 2015. A question then arises on what is the relevancy of Indonesia pledge to IMF of 1 Billion dollar in the midst of world financial crisis?

The question is a valid one as people wonder about leadership suggested in managing and leading in the times of chaos and crisis. The country of Indonesia is in the midst of world financial crisis. Indonesia was not cured in the previous crisis handled by the IMF. However, in the year 2011 there is a pledge given to IMF by Indonesia of $1M. More questions arise as how does Indonesia turn from zero to hero? Can there be hope for countries in crisis to overturn their misfortune? Looking on how Indonesia manages its struggle in the midst of world crisis the following question arise too answer it, they are:

What is the economic fundamental of Indonesia in terms of Inflation, Unemployment, and Economic Growth?What are the effects of economic crisis pre-2008 and post 2008 on companies listed on the Indonesian Stock Exchange based on financial statement analysis?What are the relevancy of Indonesia pledge to IMF of 1 Billion dollar in the midst of world financial crisis?

The more questions arise indicate that the wonder is on Indonesian Leadership, the kind of leadership that can bring the nation to go through hardship and world crisis. It is not an easy feat nonetheless Indonesia shows the world how to cope with it and further giving a pledge to International Monetary Fund in the amount of 1 Billion dollar.

The book will further explore the crisis that the world faced and how it impacted the Indonesian companies. Several companies were selected from selected sectors listed in the Indonesian Stock Exchange to see the effect of world financial crisis towards Indonesia companies. Thus, Indonesia leadership and strong resources is introduced in the literature to look at how does it relevant to the pledge given to International Monetary Fund (IMF).

Chapter 2 - Indonesia and Crisis

Financial Crisis

The Asian crisis at the end of the 1990s saw Indonesia’s economy and currency collapse as well as the weakness of the banking system exposed (Tambunan, 2011:83). For the sake of recovery and through close cooperation with the IMF, Indonesia set about reducing its debt burden which stood at 83% of GDP in 2001 down to 26% in 2010 (Ministry of Finance). In comparison with developed and other emerging markets this is a very modest figure and is targeted to reduce further to 25% in 2012 which places the country well below the OECD maximum debt ratio of 30%. Indeed, if anything this figure is actually too low considering the vast sums required for infrastructure development which is a rare position for economies to find themselves in today’s global environment. The budget deficit also offers grounds for optimism standing at 0.6% of GDP at the end of 2010, even lower than the forecasted 2.1%. Spending of up to 1.8% is expected over 2011, having been approved by parliament to cover subsidies in light of higher oil and food prices. The government sales of suckh bonds over the course of 2011 to potentially cover the deficit have also proved very popular among local and international buyers. This combined with the imminent move up to investment grade status by rating agencies and the growing optimism over the country’s sovereign debt provides the scope for increased government borrowing and spending.

Such fundamentals have proven hugely popular among investors as at a time when interest rates around the world remain at record lows. Indonesia raised $3 billion USD in global bonds in 2010 with $2 billion USD of those in US dollar denominated bonds. Dollar denominated debt provided a return of 7.4% in 2010 (HSBC) for investors making it one of the top HSBC tracked indexes for returns in Asia behind India, China and the Philippines. Such investor popularity is not however without its challenges for the economy as sudden inflows of hot cash and the risk of capital flight have generated stock market volatility and currency fluctuations. While this issue has plagued many other Asian and other emerging market economies, solid stewardship from Bank Indonesia has kept the issue in check. As opposed to adjusting interest rates, the bank intervened with liquidity management measures. As of June 2010, Bank Indonesia issued a regulation whereby investors must purchase and hold Sertifikat Bank Indonesia (SBIs) for a minimum of 28 days as opposed to trading on a daily basis, in an effort to curb sudden capital outflows. The central bank has stopped selling three month SBIs and also begun to reduce the amount of six month SBIs debt sold at auctions to direct investors towards longer term money instruments.

Inflation as a result of high food and oil prices has been a key area of concern for investors and observers of Indonesia at the beginning of 2011. A gradual decline in the headline inflation rate from 7.02% in January to 6.65% in March 2011 and 5.54% in June 2011 (Statistics Indonesia) has been encouraging and reduced pressure to raise interest rates. However, the core inflation rate which discounts volatile food and fuel prices but includes commodities such as gold has continued to rise from 4.18% in January 2011 to 4.62% in April 2011 (Statistics Indonesia). In spite of the speculation, Bank Indonesia has kept interest rates steady since the 25 point hike to 6.75% in February 2011, the first change since 2009. Rather, the central bank is utilizing the flexibility in the rupiah exchange mechanism to allow the currency to appreciate and thus act as a vanguard against inflation by reducing the threat of imports. The Rupiah, which has been considered undervalued for some months, has been rising against a weak dollar and due to capital inflows. It reached 8,489 RP to the dollar at the end of July 2011 according to Bank Indonesia spot rates from the Bank Indonesia mean rate of 9,250 RP. A strengthening currency is currently to Indonesia’s advantage; however it is placing pressure on export orientated businesses and may not be a long term solution to controlling inflation. A hike in benchmark interest rates over the second half of 2011 may well be on the cards for Bank Indonesia.

Economic Crisis

Tambunan (2011:69) describe that changes in the economy can turn into an economic crisis. The financial crisis is often the case in many parts of the world that led experts to try to determine the cause, the general pattern are expected to develop a method to detect the financial crisis (Changyong et al, 2012). Radelet and Sachs in Imansyah (2009) give 5 causes of the financial crisis, they are: inconsistent economic policies, the panic in the money market, the outbreak of the financial bubble, the absence of standard rules and moral hazard. Nevertheless, the financial crisis may occur not only from one single cause of these factors, but it could be a combination of various factors which work in synergy (Lam, 2012). In terms of theory, analysis of the financial crisis can be divided into four parts: the first generation theory of the financial crisis, the second generation and third generation and beyond systems theory generation (Dragun, 2012; Grissom et al, 2012; Chowdhury et al, 2013).

The financial crisis in the Asian region on 1997 has its climax in 1998. This situation was started when investor turn their money from certain country. It was started in Thailand, and it got the exchange rate between Baht and dollar to be depreciated in large sum of amount. Not long, it affected Indonesia (Tambunan, 2011:83).

Capital Market

Tandelilin (2010:26) in his book on Portfolio Theory sees capital markets as a market that sells securities that generally have the age of more than one year, like stock and obligation. Another authors, Pandji and Piji (2003:6), Boyd and Boyd (2012) as well as Ohman et al (2013) describe capital markets as a trading venture that is dealing in securities such as stocks, stock certificates and bonds. Capital markets provide services that bridge the relationship between the owners of this thing called capital also known as an investor, with loan funds in this case is called by the name of the issuer which is the company that went public. The investor requested the capital market instruments for the purpose of investment and eventually portfolio to maximize their income. Capital market also can serve as intermediaries. This function shows the importance of capital market in boosting the nation economy since capital market act as intermediaries of those people who needs capital funds and those who have excess of funds (Tandelilin, 2010:26). Financial analysts play an important role  in the capital market. Data gathering are derived using technical and qualitative method based on financial statement and others economic intelligence (Halabi et al, 2010; Byard & Cebenoyan, 2007).  Using this financial data, an analysis can gauge a company’s credibility and measure its performance and know which part to improve or develop.

Financial Ratios

Financial statement can be used to see the condition of a company. In the financial statement analysis, financial ratio is used to describe various aspect of a company’s condition. Investor can also use financial ratio analysis to predict the stock price fluctuation. There are many different financial ratios that can be used to analyze a company’s performance (Capece et al, 2013; Hofmann & Lampe, 2013). Nevertheless, though each ratio has their own interpretation, the focus of this study is on the following financial ratios, namely: current ratio, debt to asset ratio, debt to equity ratio, return on asset, return on equity and net profit margin. Some scholars (Weston and Brigham, 1995; Byard and Cabenoyan, 2007; Sevin et al, 2007; Stent et al, 2010; Katchova and Enlow, 2013) describe that financial performance of a company to have significant meaning in deciding whether to invest and look on the overall condition of the company and its management.

Current Ratio is a financial ratio that can be used to see or analyze the liquidity position of the company. Garrison and Noreen (2003:778) in their book describe that, “A company’s current assets divided by its current liabilities is known as the current ratio.” Current ratio shows the ability of the company to pay its due on its short time obligation. Current assets normally include cash, marketable securities, accounts receivable, and inventories. Current liabilities consist of accounts payable, short-term notes payable, current maturities of long-term debt, accrued taxes and other accrued expenses. The analysis on current ratio is in order to see the how liquid the company is to meet its short term obligation and also known as part of the liquidity ratio.