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