Most people will agree that last year was a very good one for Bali. Tourist arrivals were up, export businesses and freight forwarding companies thrived as they fed the hungry demand from the West. Villa sales boomed as more and more foreigners decided they would like to have a permanent or holiday home in Bali. And Bali’s status as an international convention centre received a massive boost by the holding of the Climate Change Conference in Nusa Dua in December.
A good year too for most financial markets
Those who are fortunate enough to be building up wealth in the financial markets also saw good returns overall. Although the US and other major markets produced only modest single digit returns, emerging markets such as India, China and Indonesia returned over 50% in 2007. Anyone investing in energy or gold would have enjoyed high returns as a result of growing demand for the commodities and the falling US Dollar. In fact the only relative losers during the year would have been those holding large amounts of dollars in cash, and perhaps Rupiah due to its staying close to the dollar while other currencies rose.
So what’s all this talk of recession?
The turning point came in August last year although its impact was confined initially to the lower end of the residential property market in the US. The issue revolved around a word few people were likely to have heard before, namely ‘sub-prime’. This referred to a class of loans that aggressive mortgage sellers had granted to people who could not afford them. In many cases, applicants didn’t even have a job. The rationale was that it did not really matter since house prices would keep going up for ever, wouldn’t they? But of course when midnight comes, Cinderella’s coach and horses turn into a pumpkin. And midnight has come for the mortgage industry. House prices are tumbling in the US and thousands of people who cannot maintain their mortgage payments are losing their homes.
Why should this affect the general public?
When large numbers of people lose their jobs or houses it tends to have a sobering affect on people who would otherwise be unaffected. Consumer confidence falls and people cut back their spending on large items. Business profits then fall, more people lose their jobs and homes and the malaise keeps spiralling downwards until a recovery takes hold. The sub-prime situation was made worse by the fact that the defaulting mortgages were not simply left high and dry with the original issuers. They had long packaged them off as ‘unitised securities’ and sold them to major banks and institutions. It soon became clear that the highly paid whiz kids working at the big banks had little idea what they were buying and as a result have been left with billions of dollars of worthless assets they have been forced to write off. This in turn has led to a squeeze on credit. The heads of some of these banks have already rolled but the damage remains and it is still unclear how many skeletons are still lurking in the cupboards.
Is this just an American problem?
It would have been if the mortgages had remained with the original issuers but thanks to the global nature of business today the damage has spread to banks and hedge funds across Europe and as far as Australia. Also, the US was not the only country to grant mortgages with abandon. The British government had to come to the rescue of Northern Rock, a bank specialising in mortgages. Property prices are now falling in the UK. On a recent visit there I noticed that guide prices at auctions were half of the general asking prices so the real picture may be worse than is apparent on the surface. As in the US, debt levels are running at record highs. The binge of easy credit is now becoming a nasty hangover.
What about Indonesia, including Bali?
Reliable statistics are not so easily available here. What is clear though is that thousands of people have been sucked into the world of easy credit via credit cards. This has long been an issue in the West where credit card debts are running at record highs. Those who are unable to pay off their debt monthly are faced with interest rates as high as 20% per annum. In Indonesia they can run to a horrendous 40% per annum. Many people are stuck in a situation where they are struggling to pay the interest. Some will never get out of debt and any recession will hit them even more severely.
So are we in recession?
Technically a recession occurs when there have been two quarters of negative growth, so we do not know officially if we are in a recession until after the event. Many observers believe the US is already in recession. The big question is, will it spread around the world and affect us here? Much will depend on the depth and duration of a US recession.
But there are also other factors of an international nature that could affect us. The price of a number of basic food commodities is escalating rapidly. Recently there was a shortage of tofu due to the high price of soybeans. This is not just a local issue that can be solved by street protests. International prices of everything from corn and wheat to palm oil are rocketing due to increased demand, the conversion of crops to fuel and the effects of climate change. Fuel is now being heavily subsidised by the government again and this comes at a price. It is hard to see how a sharp rise in inflation is to be avoided other than via a drop in consumption brought about by a recession.
Let us see if we have a clearer picture in four weeks’ time when this column appears again. We will then review to what extent it could affect Bali and what can be done to counter its effects. At the moment all is still relatively well and may continue to be so. But while Bali is an island it is now part of the global village and we cannot afford to ignore what is happening on the other side of the village!
Colin Bloodworth
colin.bloodworth@financial-partners.biz
021 520 8099
