Municipal bonds: A feasible strategy?<\/p>\n
By Achmad Mukhtar<\/p>\n
JAKARTA (JP): When the laws on regional autonomy and fiscal
\nbalance were announced, two new catchwords become popular --
\nautonomy and municipal bonds. What do they really mean, and are
\nthey workable in the domestic bonds market?<\/p>\n
Income per capita has fallen sharply, unemployment has risen
\nsteadily, and political dilemmas loom -- all this seems to
\ncontradict the promotion of municipal bonds, which has
\nincreasingly worried the International Monetary Fund.<\/p>\n
There are a number of reasons why the issuance of municipal
\nbonds needs much better preparation and time before being put
\ninto action. Firstly, our domestic financial market is declining.<\/p>\n
The market for domestic bonds had not functioned well even
\nprior to the crisis, and with a falling income per capita, bonds
\nare unlikely to attract investors. Demand has declined
\nsignificantly and the new issue of bonds has had to offer higher
\ninterest rates, and implicitly higher risks too.<\/p>\n
Consequently, domestic interest rates will rise, and when
\nlocal governments issue their municipal bonds, known as munis in
\nthe market, there will be fierce competition in the bonds market
\namong local governments, as well as between the government and
\nthe private sector.<\/p>\n
As a result, there will be a crowding-out effect in domestic
\ninvestment in the sense that some private companies cannot
\ncompete, and will delay or even cancel their planned investment.<\/p>\n
Other factors that are worth considering include the fear of
\nthe impact of municipal bonds, alongside the unstoppable increase
\nin the domestic minimum wage and poor domestic labor management,
\nwhich has aggravated some companies in the manufacturing sector
\nof shoes, toys and garments. They have now relocated factories to
\nother countries such as Cambodia, Vietnam, or China.<\/p>\n
In addition, the independence of the central bank is still a
\nquestion mark among investors. \"Independence\" (kemandirian) could
\nmean a \"semi independent\" central bank -- a signal for higher
\ninflation, for the simple reason that the central government has
\nits own budget constraints.<\/p>\n
Given the government's tough burden in keeping to the budget,
\nand given a budget deficit, along with restricted sources of
\nincome from printing money and issuing new bonds, a non-
\nindependent central bank could easily finance the deficit.<\/p>\n
This is a real threat to economic stability as domestic
\ninterest rates will rise further, to keep the real interest rate
\nacceptable to investors.<\/p>\n
On the other hand, a policy of rigid capital movement will
\nonly stimulate currency counterfeiting and substitution,
\ndiminishing hope for a full recovery.<\/p>\n
A further reason is that if we look carefully at the laws on
\nregional autonomy and fiscal balance, it seems there is no
\nautonomy at the regional level except autonomy in issuing
\nmunicipal bonds.<\/p>\n
Local government autonomy means freedom for local governments
\nto utilize their economic resources to maximize productivity
\nthrough sound economic management.<\/p>\n
When freedom to utilize economic resources is still unclear,
\nissuing municipal bonds becomes a boomerang for the whole
\neconomy. It is not a self-fulfilling prophecy that we will have
\nanother economic and political disaster, though it is likely to
\noccur from a misconception in economic policy.<\/p>\n
Finally, foreign capital is still the prime engine of the
\neconomy whether we like it or not, and most foreign investors are
\nworried about the rule of law in this country.<\/p>\n
Uncertainty will continue to keep foreign investors away as
\nany research will prove a waste of time, be it for direct
\ninvestment in the real sector or a portfolio investment in the
\ncapital market.<\/p>\n
As one struggling in the private sector, I really wonder what
\nthe government is doing to crank up the engine of the economy, to
\nget back on track to compete with the reviving economies of
\nregional competitors, notably Thailand and South Korea.<\/p>\n
It seems that we are wasting valuable time.<\/p>\n
The writer is an investment strategist at Evergreen Capital,
\nJakarta.<\/p>",
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