NEWS WIRE: Indonesia: Global Inflation Should Be “Wake-up Call” to Microfinance

Source: Jakarta Post.

Original article available here.

JAKARTA, July 7 – The issue of price increases of all commodities, spurred by the fuel price hike, is becoming our daily food for thought. The result is obvious – cost-pushed inflation.

There is nowhere to hide from inflation. Prices in one in four countries, many of them in emerging markets including Indonesia, are accelerating at a double-digit pace according to new research from Morgan Stanley.

That should be a wake-up call for anyone counting on investments abroad, including the microfinance sector that has been largely viewed as having high resilience towards external shocks.

The reason is very clear: Microfinance clients mostly sell and consume basic commodities whose prices have been skyrocketing for the past few months.

We also know very well that inflation tends to reduce the value of productive assets, which in turn degrades the institutions’ earning capacity.

The threat of people falling again into poverty and stagnant loan portfolio expansion for microfinanciers, therefore, might be something we all should be carefully watching in the coming months.

The world’s biggest economy, the United States, has slowed to nearly a standstill in the last year because of mounting inflation and the collapse of the housing and mortgage markets. Other industrialized countries have seen about a 2 percent average rate of growth while emerging economies have topped 7 percent.

Indonesia enjoys 6 percent growth at the most. That growth is now being threatened by inflation. And remember, in the developing world, a larger portion of household expenditures tends to go to the most inflationary items – food and fuel (including kerosene that is widely used by the Indonesian poor).

Worldwide, food prices have jumped 39 percent from February 2007 to 2008, led by wheat, soybeans, corn and edible oils, according to the International Monetary Fund.

That hits residents in emerging markets much harder than those living in more advanced economies. People in countries like Indonesia, Vietnam, Russia, Egypt and India put at least 30 to 50 percent of their total spending toward food.

It is the first time I have seen at least 50 countries have double-digit inflation rates at almost the same time. On that list were six of the 10 most populous countries in the world, including India, Indonesia, Pakistan, Bangladesh, Nigeria and Russia.

In total, those facing such pricing pressures accounted for 42 percent of the world’s population. And guess who these 42 percent are? They are mostly the low-income and the poorest of the world’s population.

In other words, close to three billion consumers are currently experiencing double-digit rates of price increases and a depleting propensity to spend and save.

Soaring inflation is not easy to tame. Some countries, such as Indonesia where inflation is running at around 11 percent, may have no choice but to boost interest rates.

And when the benchmark rate goes up, we know for sure that sooner or later the lending rate of the banking sector will also move up, further deteriorating the attractiveness of borrowing money and reducing the output of any economic activity. The longer inflation remains elevated, the more damage it will do to long-term economic growth.

Surprisingly, the already-deteriorating economic environment has been made even worse as the Indonesian government is now acting as if it is another big microfinancier, distributing cash to the poor with no clear mechanism on how to measure the effectiveness of such a policy.

Rural banks, as well as other MFIs, have now seen the negative impact of the huge amount of cash distributed freely and carelessly by the government, to clients at their doors. No doubt this will eventually distort the microcredit market and threaten the performance of their portfolio.

I am continuously puzzled with this popularist government aim to be seen as the savior of its people, who are suffering because of the many problems their own government systematically created for a long period of time.

Certainly, this is not the ideal demonstration of the principles of subsidiarity and solidarity by the government. It appears more to me as if a medical doctor is trying to cure a patient’s long-standing sickness with a generic medicine with a short-term cure.

There are plenty of reasons to worry about the focus on stories about the Indonesian market, which has seen a sharp acceleration in inflation – that it is unable or unwilling to tighten policy sufficiently and is more a commodity consumer than producer.

We know very well that these are some of the characteristics of the Indonesian economy today. But even as prices surge, the good news is that earnings forecasts are not coming down in some leading sectors of the Indonesian economy.

That may give us false hope that Indonesia will bypass the inflation storm. Although our economy is currently outperforming in terms of economic growth, the inflationary environment is not far short of disastrous.

Clearly, the inflation bogeyman is haunting all corners of the world, including Indonesia. So, be watchful of your wallet!

By Stefan S. Handoyo, senior economist at the Microfinance Innovation Center for Resources and Alternatives (MICRA).

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