Liquid Skies

I don’t look at tech stocks and am not the tech analyst, but my take on FB’s IPO is this:

1. FB has a peculiar business model nothing like we’ve seen before.

The users are (largely) not its mainstay revenue centres; the advertisers are (with about 80-90% of share of revenue). Most user-generated revenue come from FB’s gaming credits. Cashflows are dependent on advertisers’ belief that most users, if not everyone, is exposed to their advertisements.

FB’s users willingly submit to the use of FB due to information flow it gives about lives of people in their social network, but may or may not necessarily care about the advertisements. FB is, simply put, a standardised collection of people’s blogs in an ultra-huge server. I wouldn’t go as far to describe it as being “woven into the very fabric of the Internet” like some romantics say.

2. FB, like Man Utd, scribed out an IPO of US$16 billion to end with a market cap of about US$104 billion (Berkshire’s market capitalisation is US$198 billion) that is worth nothing more than the value of layman belief that its market value will rise because there are so many users (millions or billions, who cares) on FB.

AT&T’s IPO was US$10 billion back in 2010, and analysts believed back then, even given its hard assets and plausible cashflows, that it was overvalued (fear of the DotCom bubble).

More than 50% (approx. US$3.7 bn) of its total assets are cash, with only about US$1.9 bn being PP&E – I’m going to guess these are its offices, desks, computers, chairs, and network servers (the 901 million active users, 3.2 billion likes & comments a day, 300 million photos uploaded a day, and 125 billion friendships are not assets).

FB makes no particular mention in its footnotes what its assets are, and describes a lot about revenues and cashflow. Remember, the definition of an asset is correctly something the firm owns that generates future economic benefits.

The users are not its mainstay revenue centres and even if they stand a larger proportion in the years after, they stand for a volatile cashflow. The only category worthy of being called FB’s assets are its advertisers, which are also volatile.

3. FB focuses too much on revenues. In fact it stresses so much on the size of its revenues and business model that it seems they are its only assets (to attract people to buy its stock). Its tax burden (Net Income/EBT) is almost 60%.

4. Market risk. FB is launching an over-valued IPO in a time of global uncertainty.

This is my opinion, after relatively comparing with BERK’s US$198 total market cap; BERK has hard assets, while FB has none that is of particular value to shareholders in the event of bankruptcy or liquidation, and does not make an effort to describe its assets.

Just few days ago Greece failed to form a government, and the next election risks Greece’s self-prescribed exit from the Eurozone or a possible ouster by collective action from the members of the EMU.

The only consolation is that FB has little leverage – is est, if FB doesn’t go around spending all its cash (I still seriously wonder, it’s got so much cash, what is it raising money for?) and all its financials remain the same as of present, shareholders can expect recovery of about 80% (rudimentary calculation) from FB’s cash holdings.

5. FB is not intending to distribute dividends, nor is it intending to do anything with the cash at the moment.

Its intention for raising the cash is for general corporate purposes, and placing the amounts they’re not using in time deposits or US government bonds and other money market funds.

I cannot find the rationale for raising funds logical, nor can I reconcile why it intends to place these amounts as savings.

Does it really need US$16 billion to upgrade its servers?

The money could well be used to donate to Greece and save hundreds of thousands of jobs or to Sudan and save millions of lives.

Hence I’m not too optimistic about the FB IPO.

BTW, about Point #5, what that means is that your ROE is rationally 0%. The only way to profit from being an FB investor is speculating on it.

Today I began my path towards becoming a pilot, fulfilling my personal promise to attain my dreams with my own strength.

Life had been a tough one for me once, but with Darling’s support – something so simple yet so important to me – I am finally mustering enough resources and courage to pick up what I had once been unable to complete. I know I passed the aeromedical tests once before; I know I passed the computerised pilot selection tests once before; I know I am capable of soaring with the eagles. And now I want to show that.

I met with the ground technician, a 45-year old Malay encik after my first sortie, who casually mentioned: “Oh, so this is your first hour!” Hence the name for this post.

For the first 30 hours of my flight training, I will be training on either of FRAS Flying Club’s 2 Aero AT-4′s, either the 9M-EVA or the 9M-EYM. Today I trained on the 9M-EVA.

1st Sortie: EOC

In my first hour, I learnt and completed the Effects of Controls (“EOC”) lesson. I was able to climb, descend, maintain horizontal datum, execute banks and yaws, understand the effects of slippage and skids during turns without rudder control, and adjusted the trim tab to relieve pressure on the control column. Lots of stuff to accomplish within 1 sortie, Captain Saddiq said, but I managed to complete it. His comments: “You seem to already know how to control the aircraft.”

Despite prior understanding of the controls via games, I wasn’t prepared for the Johor air conditions. There was some turbulence on my first sortie, forcing me to maintain a tight grip; it was my first time handling a Light Sport Aircraft, after all. Anyway, I could see why its classification has a “Sport” in it. Instead of a gradual turn (with wide turning radius), I banked the plane and pulled on the control column, swinging the plane at a tight angle. The AT-4 was able to handle my 2- to 3-G turn! Impressive!

2nd Sortie: S&L I

On my second sortie, I learnt and completed the Straight & Level I (“S&L I”) lesson. Captain Saddiq let me do the radio calls throughout the way, albeit with the training manual in front of me. Here is where I become unable to fare well – despite having a Lightspeed Sierra headset with ANR technology, I somehow am not able to clearly hear and retain information. Especially the longer ones.

Anyway, in the S&L I lesson I was taught to target a visible object, keep the heading, maintain the altitude, maintain the attitude, and maintain the airspeed – all at the same time. I am very sure it would be daunting to many, because I was a little nervous keeping an eye on the horizon and looking at all the instruments – yes, all 10 of them – at the same time!

There was heavy turbulence throughout my 2nd sortie. Got me a little dizzy and slightly nauseous, but hell, I could do with it. I was a kayaker before, I could deal with imbalance. And I completed the ride fine.

Well, that was how I ended my first day flying! I initially prepared for 4 sorties, but the jam in Singapore on the PIE at 8am killed half an hour of my time, and pre-flight briefings are not exactly very short. I remember beginning my pre-flight briefing for my 1st sortie at 10:15hrs, finishing with a total pilot time of 1.3hrs, taking a 15-20 minute break, finishing my 2nd sortie at 14:30hrs with a total pilot time of 1.1hrs. I had a quick KFC lunch at the Senai Airport before re-entering Singapore on the airport limousine for RM165.00 – yes, I was lazy to go home from Queen Street by MRT; paying S$20+ more after a tiring day felt worth the money, anyway. Leaving Senai Airport at 15:45hrs was a good timing, I suppose – I met with no jam in Johor, no jam on the Causeway, and no jam on the way home.

No idea why I chose a Monday to review my week, but I guess I like to write when I think about something. Yes I admit I run out of literary techniques when I write too much, because after a while I would not care too much on grammar or any other descriptives and just want to get the point over and done with.

Today I wrote to the admissions administrator at SMU (see logo on left) to ask about the status of my application to its MSc programme in Applied Economics. Just 10 years ago, I never thought I would want to think about studying after I graduated, but this day I just feel like a kid all over again, gleaming with happiness when I received the following reply just 26 minutes after I sent the enquiry:

And there I was.. Happy to look into my Blackberry’s screen: “I am pleased to inform you that…” <– The last time I saw such a phrase was approximately 2 years ago for accepting a lower-paying job; it feels ironic that I’m going to be paying a mountain (comparatively, against my current income) and I’m happy about it.

Then I realised the main reason for my elation – I’m being accepted into an on-campus, full-fledged university. Local or overseas doesn’t matter to me; the fact that I’m going to be studying at a proper university just excites me – what do you call this, bloodlust?

I stare at happiness knowing that I’m finally going to break out of the vicious cycle that encapsulates students who study an external degree (a.k.a. correspondence programs) and graduate thousands of miles away from the awarding university. I spent 3 lonely years reading the BSc external degree in Banking & Finance from the University of London, with exams administered by the London School of Economics & Political Science, at SIM. The fact that I didn’t make it into the local universities trapped me in the lower echelons of society ever since I graduated, and I vowed to myself never to stay in the sewers.

This day – of course it remains to be seen how I may be able to cope with studying a post-graduate degree on a part-time basis – I feel like I have fulfilled my vow. I feel like I’m on the way to attaining something higher, something closer to my dreams. It may still take some time, but I’m still young – and I haven’t forgotten that I’m the youngest Singaporean analyst around who’s got 3 years of working experience under his belt!

Technically, PT Pertamina (Persero) isn’t my second recommendation. It is my 28th recommendation, out of 30 recommendations I have made so far in my 1 year and 9 months in ST Asset Management. But it is the second recommendation that got accepted and invested in. The first was PLN (Perusahaan Listrik Negara), which I exited with an IRR of 56.52% (gross yield was 9.87%).

The low hit-rate of 6.7% I have thus far is by no means any accurate representation of my presentation skills or analysis skills. I am adamantly and continuously supportive of the securities which I have put up for review, and rightly so because prices are soaring sky-high now (that it is such a good time to sell off and earn profits should we have invested in them). Anyway, to cut things short, I am happily invested in Pertamina’s new 10-year bond, the PERTIJ 4.875% 5/3/2022.

The launch price was 99.414, and due to heavy over-subscription (USD 7 billion book versus USD 2.5 billion issue), out of the USD 21 million we bid for we only received allocation of USD 8 million (38%, how small!). Interestingly, I managed to build up our exposure to USD 23 million (after an additional USD 2 million increase from the original order) and average down our entry price to 99.39. This was done by engaging in a series of small trades (Rule of Trading: Put in too big an order and you’ll tend to move market prices; I experienced that first-hand last Friday (27 April 2012) when I tried putting a slightly larger order.).

Here are the trades I made (including the allocation received at launch):

1. 26 April 2012: USD 8 million nominal @ 99.414
2. 27 April 2012: USD 2 million nominal @ 99.375
3. 27 April 2012: USD 4 million nominal @ 99.400
4. 27 April 2012: USD 4 million nominal @ 99.375
5. 27 April 2012: USD 2 million nominal @ 99.375
6. 27 April 2012: USD 1 million nominal @ 99.400
7. 27 April 2012: USD 2 million nominal @ 99.375

These work out to be total cash outflow of US$22,860,620 for a total nominal amount of US$23,000,000, registering an average price of 99.39 (ignore time value of money; 1 day makes not much of a difference anyway). The yield on average is about 4.95%, compared to the initial final guidance of 5.125%.

By the way, these 7 trades were done for 3 portfolios, and after splitting the trade tickets, they work to an effective 13 trades for a single issue – I beat the company’s record for the greatest number of purchase transactions for a single name in a single day!

Since I’ve got a little time to spare, I would like to make some slight comparisons between Pertamina and PLN (my first successful bond purchase).

Industry: Quasi-Sovereign	Industry: Quasi-Sovereign
Business: Vertically-integrated oil & natural gas company	Business: National utilities company
Issue: PERTIJ 4.875% 5/3/2022	Issue: PLNIJ 5.5% 11/22/2021
YTM @ Entry: 4.95%	YTM @ Entry: 5.82%

Well, the PLNIJ 21s was issued before Fitch and Moody’s upgraded Indonesia to investment grade, whereas the PERTIJ 22s book was closed just days ago – official issue date on 3 May 2012. Hence the 87 bps spread between the 2 papers (of course, I’m a little lazy to check on the differences in the 10-year US Treasury rates to make a fairer comparison using Z-spreads, but in any case the PERTIJ is tighter than the PLNIJ, and the reason is as described in this paragraph.

I don’t think this is going to make much of a difference in getting myself recognised as someone looking at trades that make money for the firm – hell, if I were a trader, I think trading Indon bonds is a fool-proof plan for me to making big bucks! Adios!

Maintaining a website with a domain name is always non-profitable, at least for me. I don’t really capitalise on it as an asset to earn advertising revenues or make e-Commerce sales. Since 1997 (when I began making my first website) I have been using my online presence to share my knowledge and opinions with anybody and everybody who has ever been interested in learning what they missed out on as a child. Yes, I was the half-geek type that knew how to play but spent 75% of my time reading all about the world. Recounting the websites that I created (now defunct) before:

1. Samuel’s Page – Can’t recall the URL, but it was likely somewhere in the directory TimesSquare of GeoCities. For a while Yahoo! took over GeoCities’ operations, and then closed it down. It’s still hot in Japan, though. I picked up web-scripting with HTML using bits and pieces of knowledge gleaned from magazines, books, and the Singapore Science Centre (when IT was once magic; you don’t see any of that anymore).

2. Samuel Ling’s Homepage – The webhost was SingaporeOne, where I briefly toyed with online WYSIWYG editors, MS FrontPage Express (this is the free version that came with most computers of that era; I later got certified as a MS FrontPage 2000 developer on BrainBench.Com), Macromedia Dreamweaver, Adobe Pagemaker (it was bloody expensive so I, as a poor student in search of knowledge and skills, became a pirate back then), and a little bit of animation with Macromedia Flash and graphics with EZgraphics. Other free tools I used included TheFreeSite.Com, BeSeen.Com, Freedback.Com, CuteFTP (not free anymore), CoffeeCup FTP (not free anymore), etc.

3. In the interim period (between 1997 and 1999), I experimented with several free webhosts like WebJump (now defunct), Angelfire (took over by Lycos), Tripod (took over by Lycos), HotBot (no more webhosting), DreamHost and a couple of others I don’t remember anymore. I used them to toy around the specifications, such as different features, self-advertising on/off, host-specified advertising on/off, sub-domain URLs vs. trailing URLs, etc.

Golden Web Awards 1999

Critical Mass Award

4. Interlink Blitz Network – Freely hosted on LinkOpp.Com beginning 1999, this was my first complete website that made use of frames (I often use frames to organise my website ever since, because I no longer need to use the same links on different webpages, and it was easier to organise and navigate; somewhat like having a content page that comes with each webpage.

Won several awards for that, including the Year 2000 Golden Web Awards, and other privately-created awards, including Critical Mass. I will not be likely to win these awards anymore, especially with Liquid Skies, because there is no originality here. I’m simply using a WordPress theme with a WYSIWYG editor because I’ve got no time to do everything on my own all over again.

5. Realm Icy – Freely hosted on Atspace.Com beginning 2004 and later moved to a domain name RealmIcy.Com as I gained some savings from NS allowances, I used 1 main index page with an internal frame that changed with every click. Built a photo gallery of my own, uploaded the video I directed and produced in 2002, inclusive of a library of historical stories that I began building (I gave up on this as studies built up and work set in).

6. Icy Aviators – Basically a re-creation of my old website Realm Icy, I recreated it using PHP (a new language I learnt and largely forgotten now because as I learn new things, old stuff gets crowded out).

Everytime I emerge from an operation and spend some time at home alone, I have time to think and recollect.

Today I discovered that the notion of “I” has in fact been defined by others.

That is new, for I always defined myself the way I am.

For every minuscule to Herculian task,
ranging from vetting grammar to designing multiple massive hundred-slide presentations;
from writing economic reports to recommending investments, dozens of sorts;
from creating models to base my economic reports on and then regressing them to make statistical inferences,
arduously and meticulously I toiled.
Without technical tutelage I stumbled through,
extremely proficient I may not have been;
fully understood at first I may not have been;
but completely resolved each task on my own I did.

And yet left out I was.

Likely invisible were my efforts, but visible were the results, were they not?
Increased compensation was likely an explanation,
but stalled my future the outcome has.

Time and again I initiated to help out in Structured and deal with more quantitative jobs,
but provide oversight with a management perspective, the reply was.
How to gauge, when it seems so far away now?

I will not forget the humiliating wall I banged into today.

Remember 26 December 2004, some say. But for many, it is such a difficult day to WANT to remember – the day not when a 1,600km-long earthquake shook the magnitude scales to register 9.2 on the Richter, but the day when tsunamis (津波) were tracked speeding across the Indian Ocean hour-by-hour at speeds of 500 – 1,000km/h at heights of 0.6m on Boxing Day only to slow to mere tens of kilometres per hour as it came ashore at heights of over 2 m in Aceh, Indonesia, and reaching 30m in some areas as the wall of water travelled further, and slower, inland.

This day, 230,000 people were killed in 14 countries.

Although the earthquake happened off the Indonesian coast – I remember the tremors whilst sitting in the second floor of my old house in Siglap, Singapore – places as far as Somalia on the African continent was struck by the tsunami.

Yesterday, 11 April 2012, 2 earthquakes measuring 8.6 and 8.2 on the Richter scale struck in to the same area at relatively shallow depths – 14 miles and 10 miles, respectively. Tsunami warnings and alerts were raised around the Indian Ocean with fears that a tsunami similar to the ones that were 2004 Indian Ocean earthquake may arise; the people had to be given ample time to prepare this time round, if necessary.

I have to admit, I was anxious, even till this morning after understanding that there was no news of a tsunami. I remember reading on Google and Facebook and Twitter and many other sites the comments of Singaporeans and others around the region: “Oh no, not again!”, “God bless the Indonesians”, and “Run from the coasts, those who know!”

In Indonesia, sirens blared alongside Koran recitals. It feels eerie to even be reading when you’re placing yourself in the eyes of the reporters and the commonfolk who report what they see and hear right at ground zero, especially when there’s a storm brewing outside.

I’m glad nothing extremely bad happened, and I hope damage from the earthquake was not too serious…

4th April to 8th April – This has been the longest weekend I’ve spent since I began working. I will give a daily account of my awesome life as best as I can, and I will include 9th April (Monday) as well, because that rounds up my first set of aviation gear.

4th April

Darling and I visited Great World City on our first leave day to have lunch at Crystal Jade restaurant in Great World City.

We contemplated watching Hunger Games since Jiamin wanted to watch The Vow with Darling et al, but the timing wasn’t right, and we went back to the hotel to watch Naruto instead. But who knew, we grew so tired and fell asleep until 8pm before I mustered enough strength to wake both of us up!

We ordered MacDonald’s – haven’t done that in a long time! – I ate a Double Cheeseburger meal whilst Darling had mere nuggets (she said she wasn’t hungry – I didn’t bully her!). And we continued watching Naruto before falling asleep again!

5th April

I’ve always loved to make my own gifts for Darling, but I didn’t expect her to come up with her own version of “handmade”! Knowing that I needed a pencil-box/pencil-case (whichever, just something to store my stationery), she got a frosted plastic pencil box for me from MUJI (无印良品), put a panda-butter-biscuit/butter-panda-biscuit/butter-biscuit-panda in it, and bound it with a silver ribbon.

And the wrapper for the biscuit had her birthday wish in her lovely handwriting for me! Happy! Too bad I only remembered to take a photograph of it after I downed the biscuit.. Greedy me..

6th April

One of my best friends, Chia Heng, dropped me a birthday message via SMS in the middle of the night. And the rest of my friends and colleagues began flooding my Facebook wall. Somehow, I feel, Facebook has removed some of the sincerity in keeping watch on friends’ birthdays. You don’t really need to know your friends’ birthdays until their names pop up on the right side of your homepage; or if you don’t notice, the “Happy birthday, bro!” messages posted by other common friends would help you to remember.

Something Darling said also struck me – those that choose to leave longer messages tend to be those that were closer to me. Don’t know how true is that, but for now it seems so. And it seems this year there were more people wishing me a happy birthday. I feel happy, but at the same time wondering whether there is a need to be happy. But who cares, it’s my birthday, right? Reason to be happy? Me!

This is one of the minor reasons I’m choosing to move away gradually from Facebook – a seemingly commonplace for everyone to publish what they want people to see, regardless of people’s responses. I’ve decided to make this site a personal expression of myself – something more private, something more personal, something more original.

We checked out in the afternoon and went to get Darling’s car so we could go out for a meal and spend the rest of the day together. Rain fell freely, and it didn’t seem possible for us to get anywhere proper, so we had a simple lunch and headed over to Upper Seletar Reservoir to spend quality time together.

I love Darling for this – she would spend time with me in my favourite places, Seletar being one of them because behind stands the Seletar Airport, to which I had binded my heart to so many years ago when I sought to become a pilot. Thank you, baby. I love you!

7th April

Met Benedict at his place in the morning 0825 hrs and we went together to Marina Country Club (“MCC”) in Punggol Seventeenth Avenue. The road names in Punggol – 变 (read that in Japanese – it means weird).

Arrived at MCC at 5 to 9 – can’t believe I took half an hour to reach there, but in any case perhaps I was just having a Saturday-driving style. First thing that the instructor said spoilt my day – the course that we each paid S$170 for was to obtain a certificate necessary to attending the theory and practical exams that would grant us the license. I had thought the 2-day course would license us to drive a power-boat!

It wasn’t that bad after all, though, when it was further mentioned that the Powered Pleasure Craft Driving License (“PPCDL”) would allow us to drive any “pleasure craft” that measured up to 24 metres in length. It seems like there are no limits to tonnage, which is a good thing!

8th April

Drove my orange Chery QQ to pick Ben and headed down to MCC again. I received my Certificate of Attendance for the course that would prepare me to go for the PPCDL theory and practical exams.

After bathing, Ben and I went to Bedok Point to have lunch. We were considering between Ayam Penyet (on the first floor) and Chicken Hot Pot (on the second floor), but ended up with the latter, since Ayam Penyet was considered something I would find at a coffeeshop rather than in a shopping centre. The want-to-surprise personality in me got me right opposite the eatery to Gong Cha (贡茶, I still don’t understand why majority of people I know don’t know how to pronounce the first character properly – it’s something we learnt in Secondary One, no?) to grab an Alisan Tea with Pearls and Jelly (阿里山茶加珍珠和爱玉), sugar level 30% for Darling!

I picked up Darling at her place at around 1500 hrs, and we headed back to the hotel to grab my white earphones and Schweser Q-Bank CD – I left it in the safe and forgot to take it out on check-out. It was good that the hotel’s housekeeping kept it for me for 2 days.

Then we headed to Great World City to catch a movie – Mirror, Mirror. It was interesting; I seldom get to enjoy cute movies like that, not least with my favourite girl lying on my shoulders!

One of the cuter points about the movie was that the director actually made the actors and actresses mimick Bollywood-style partying at the end of the show. You can’t really help it but stay on till the lights popped on!

Since the movie began at 1835 hours, we went for a quick bite at Yoshinoya in the basement, where I fell asleep – it was a really warm and tiring day after having done practicals in the blazing morning heat at Punggol, after all!

9th April

Who says you can’t be happy on a Monday?

I received my parcel some time in the afternoon – around 1500 hrs – and was surprised at the light-weight of the cardboard box. Or had I just grown stronger? Well, technically I am, because I strive everyday to grow stronger. But that’s beside the point. I’m trying to justify why I made a great purchase! At first look (refer to picture below), here are all the functions of the bag – I’m practical, go for value, size, quality, and cheapness of the deal.

I will update more original photographs of my complete flight gear once everything falls into place. As you can see, updating this blog is a means for me to indulge in the satisfactions I get from being able to do things on my own. And this is all with Darling’s support! Again, thank you so much for being here for me, Darling! I love you!

For 1 year and 8 months I have been placed in charge of covering Indonesia, among other sectors; and I have come to appreciate and even love the country, especially the relative peace and stability brought about by the current President, Dr. Susilo Bambang Yudhoyono.

Map of Indonesia

There are many reasons why Indonesia has been successful in its entry into the 21st Century, and just as I have presented to my management, I would like to share them here – an entirely new set of analysis, without the constraints of formats, layouts, and other proprietary methodologies of presentation.

This is the first in my intended series of analyses, and in my writings, I will use many financial and economic terms which some readers may or may not be familiar with. I will briefly explain terms which have not been introduced before, to the best I can, but I am sure there will be others that I miss out on, so if you have any questions, please feel free to leave a comment!

The Indonesian Story

Indonesia, whose exchange rate – and subsequently its economy – took a great fall during the Asian Financial Crisis of 1997, propelled strongly onto global investors’ world maps especially after it tided through the Great Financial Crisis of 2008-2009 almost unscathed.

Indonesia Real GDP & Sovereign Debt Ratings; Source: Bloomberg

To illustrate, take a look at the chart on the left, representing real economic growth amongst 3 ASEAN countries – Indonesia, the Philippines, and Thailand.

The Philippines’ economic growth suffered a year-on-year deceleration from 7.6% in 2Q 2007 to 0.5% by 3Q 2009. More drastically, Thailand’s economy spiralled from a growth of 6.3% year-on-year in 1Q 2008 to a recession of 7.0% in 1Q 2009. Thailand’s economic fortunes stalled as the floods of 2011 tanked the economy to a negative growth of 9.0% in 4Q 2011.

Indonesia’s economic growth (the blue line), however, remained fairly stable, as we can see here. The economy only decelerated by 2.03 percentage points from 6.30% year-on-year growth in 2Q 2008 to 4.14% in 2Q 2009, and although the resumption of acceleration was not as spectacular as the Philippines and Thailand, its slow and steady wins the race pace seems to have paid off over the first decade of 2012.

Economic growth, also known as the growth in real GDP (Gross Domestic Product), is measured mainly in 2 ways: income approach and expenditure approach. There are others, but they are seldom used, so I shall stick with explaining these 2.

In the income approach, economic growth is the sum of these factors:

• Employee compensation (Wage)
• Net interest received (Interest)
• Net rental & royalty income (Rent)
• Business profits (Profit)

In the expenditure approach, economic growth is the sum of these factors:

• Consumption (C)
• Business fixed investments (I)
• Government Expenditures (G)
• Net Exports (NX)

The difference between these 2 approaches are best described by the following illustration. Generally as an investment analyst (who uses economic analyses to see if there is any money to be made), a simple observation of the GDP using the expenditure approach would suffice. However, economists interested in studying income received by individuals (and thus a fairer way of viewing GDP per capita) would likely also study the income approach, which leaves out 2 factors which are included in the expenditure approach but do not provide income to the economy – depreciation and indirect business taxes.

GDP Expenditure Approach vs. Income Approach

Propulsion of Sovereign Debt Ratings into Investment Grade territory

Those who watched fixed income markets regularly in the past couple of years (I have, because it is my job to do that) are probably familiar with the frequency with which Indonesia’s sovereign debt ratings were being upgraded. Previously a B3 (at the end of the highly speculative grade spectrum) country, the creditworthiness of the Indonesian government became increasingly revised towards its rating ceiling - the credit ratings agencies (Moody’s Investor Services, Standard & Poor’s, and Fitch Ratings) had previously put a rating ceiling of Ba1, BB+, and BB+, respectively, on Indonesia. What this means is that unless there were any spectacular circumstances, Indonesia would have always remained a speculative grade (junk grade, in layman terms) country.

And come, spectacular circumstances did.

On 15 December 2011, Fitch upgraded Indonesia’s sovereign debt rating to investment grade (BBB-), reflecting the country’s strong and resilient economic growth, low and declining public debt ratios, strengthened external liquidity and a prudent overall macro policy framework.

Following Fitch’s lead (and confirming Indonesia’s financial strength by being the second major ratings agency to upgrade Indonesia’s ratings), Moody’s upgraded Indonesia to Baa3 on 18 January 2012, citing its key drivers:

1. Moody’s anticipation that government financial metrics will remain in line with Baa peers.
2. The demonstrated resilience of Indonesia’s economic growth to large external shocks.
3. The presence of policy buffers and tools that address financial vulnerabilities.
4. A healthier banking system capable of withstanding stress.

Indonesia Budget Balance, Govt. Gross Debt, and Policy Rate

The credit rating spectrum, managed by the 3 credit ratings agencies, range from Aaa/AAA/AAA (Moody’s/S&P/Fitch) to C/D/DDD. The “midway line” which separates investment grade ratings from speculative grade ratings falls between Baa3/BBB-/BBB- and Ba1/BB+/BB+.

The reasons cited by Fitch and Moody’s are illustrated in the charts to the right. You may want to open them up in a new window for improved reading.

In the top chart, we notice that although the government budget balance of Indonesia had historically not been the best – remaining at a deficit of between 2 – 4 % of GDP – it had been the most stable. The budget balances of the Philippines and Thailand, on the other hand, had been fluctuating almost in tandem with their economic cycles, i.e. spending more when they’re in trouble, and spending less when they’re doing better.

A government budget balance is colloquial with a government’s bank account. Cash inflows come from 3 sources:

1. Taxes (income taxes, goods & services taxes, value-added taxes, ERP, etc.)
2. Public borrowing (issuing government bonds)
3. Borrowing from the Central Bank

In the lower chart, we observe the rapid improvement in the gross debt owed by the Indonesian government from 80.16% of GDP in 2001 to 25.24% in 2011. The proportion of debt owed by a government (or any other corporate, for that matters) is called leverage. Generally, the lower a government’s leverage, the more likely it is able to pay off its debts – and hence better creditworthiness and subsequently better credit ratings.

By the way, if you notice, the words credit and debt are being used interchangeably here. Financial analysts aren’t English experts (although I profess myself to be good in the language, I will follow norms in the industry), and it should be seen as the same, because the only difference in understanding these 2 words are the perspectives from which they are being read.

A security is recognised as a credit when seen from the perspective of the investor, because he lends money to the issuer of the security.

That same security is recognised as a debt when seen from the perspective of the issuer, because he owes money to the investor of his security.

The policy rate is the interest rate set by the Central Bank of the country, which is payment made by banks who borrow from it (banks do so in order to fulfill their cash requirements at the end of each day). In Indonesia, the central bank is Bank Indonesia. In Singapore, the central bank is the Monetary Authority of Singapore.

The Indonesian policy rate is the highest amongst its peers at 5.75% (although this has already been the result of a recent 25-basis-point cut) because Bank Indonesia feels it is the appropriate rate to set in order to rein in inflation. Inflation refers to growth in consumer prices – the price that consumers pay for goods – and if inflation rates are too high, the value of money and hence purchasing power, will be corroded. In general terms, it can simply be observed that your S$0.60 Kopi-O now costs S$0.90; your S$0.60 5 years ago can no longer purchase the same Kopi-O because its price has inflated.

How does setting a high policy rate rein in inflation? When interest rates are increased, it becomes costlier to borrow but more attractive to save. Hence, according to normal human behaviour, consumers (us) are expected to save more money, and borrow less (especially on credit cards and on bigger ticket items like home loans) to spend. Since price growth is a result of higher demand for goods & services, if it becomes too expensive to borrow and spend, demand for goods & services declines, and price growth decelerates.

Strengthening Labour Market

Indonesia Unemployment Rate

It is quite difficult to see accuracy in the Indonesian unemployment rate, because there are so many inhabited islands, rural areas, and lack of accessibility, that it is almost impossible to get a proper census of everyone in the country.

However, with the majority of the population under surveillance, majorly in the larger islands of Sumatra, Java-Bali, Kalimantan, Sulawesi, Nusa Tenggara, Maluku, West Irian Jaya, and Papua, the Badan Pusat Statistik (Statistical Office) of Indonesia publishes unemployment data irregularly (usually on the February and August of each year).

As we can see from the chart on the left, Indonesian unemployment has been perennially high, but has fallen by quite a substantial size. This figure is not subject to the intricacies of the way the US measures its unemployment figure (e.g., taking into account people who have left the work force and increase/decrease in population), and is hence taken at face value.

The improvement in the labour market lends strength to expectations of an even stronger economy, as people who have attained a certain level of wealth are more inclined (higher propensity) to spend, and thus stimulate, the economy.

This is my introductory take on Indonesia, along with some economic/financial terms which some of my readers are not yet familiar with. Hope it lends some useful knowledge to people who are willing to learn!

A video for a music project I made in Secondary 3 (2002).

Story depicts the Mongolian invasion of Song (宋) China wherein 2 sworn brothers, Yang Jing Guo (杨敬国, whose name means to respect the country) and Zhu Jian (朱剑, fictionally portrayed as an ancestor to Zhu Yuanzhang 朱元章, the first Emperor – Hung Wu 洪武 – of the Ming Dynasty 明朝) vowed to protect their homeland.

The short movie begins with the re-enactment of the invasion of the Song Dynasty’s capital city of Lin An (临安, present-day Hangzhou 杭州), and the brave defense of the city walls by the Grand Marshal, who fought till his last breath.

In a borrowed concept from the Tales of Wesley (卫斯理传奇), the story was forwarded to another point in time – 65 million years later – in another parallel universe.

Donning modern clothes and gathering the harvest, 2 neighbouring farmers, Yang (杨) and Zhu (朱) have a casual conversation about the plight of the country, which was falling into enemy hands by large swathes each day. Yang’s attitude and ambition to protect the country led Zhu to abandon his crops, swear an oath of brotherhood with Yang, and right the order of all under heavens (共闯天下).

Entering the battle at Lin An, Yang and Zhu went to the rescue of the Grand Marshal at the final battlefield, only to realise that the Grand Marshal had been stabbed and was gasping for his last breaths. The Grand Marshal muttered with grief: “The Heavens has damned our Great Song Dynasty!” (天亡我大宋也!)

With anger building in him, Zhu jumped right back into battle, facing elite troops and Commander Kublai 忽必烈 (later Kublai Ikh Khan 忽必烈大汗, who conquered all of southern Song Dynasty (南宋) himself. Yang fought deeper into the enemy ranks and found himself surrounded and captured by the Mongolian elite troops. Zhu, unable to outdo the elite Mongol troops, fled, promising Yang that he would come back for him.

At the court of the newly established Mongol Yuan Dynasty (元朝), Kublai Khan personally ordered the execution of army officers who refused to submit. Yang was brought before Kublai as an army officer, and was immediately sentenced to the guillotine. However, Yang, trembling profusely, begged the Emperor for his life, arguing that he had been trained in martial arts and Sun Tzu’s Art of War in the Shaolin Temple (少林寺), had deep knowledge of the rebel situation, and would be of great use to Kublai. Recognising the Mongol Empire’s need for a military strategist, Kublai Khan pardoned Yang, and 10 years later promoted him to become the Grand Commander of the Flying Cavalry (飘骑大将军) – the second highest position in the Chinese Imperial Army under the Mongol Yuan Dynasty.

The rebels, after the fall of Lin An, fled to the Cross-Mountain region of Fuzhou (福州穿山区). Zhu picked up the soft martial art of Tai Ji Quan (太极拳), also known as the Supreme Ultimate Fist. 10 years later, Zhu gathered 100,000 rebel troops from the southern provinces of Fujian 福建, Taiwan 台湾, and Guangzhou 广州, and began his assault on the Yuan Dynasty – a fictional precursor of the Red Turbans (红巾军), the rebel army that toppled the Yuan Dynasty and later on established the Ming Dynasty.

It was not too long before Zhu and Yang finally met each other again on opposite sides of the battlefield. Yang tried to persuade Zhu to join him on the Mongol side, drawing on their old feelings of brotherhood and betting that the more powerful Yuan Dynasty had already conquered much of China and there wasn’t much the rebels could do. After all, why stay and be the underdog when you’re already offered riches to serve the mighty Empire, right? Zhu, putting country before friendship, questioned Yang: “Have you forgotten what your name means? Your name means to respect the nation!” The underlying meaning was that the Mongols were fearsome oppressors and to assist them to oppress your own nation was to disrespect your nation. Yang did not waver, and barked: “Those who do not submit will have to die!” and began the battle.

After a few crosses of their swords, Zhu disarmed Yang and pinned him to the ground. The cowardly Yang again begged for his life, and Zhu, cut off his ties with Yang by letting him go and warning him never again to set foot upon the Central Plains 中原. Yang picked up his sword to strike Zhu from behind as Zhu walked away, but Zhu, knowing everything his brother is, took the painful but necessary step of killing Yang in a backward stab of his sword.

The movie then fast-forwards 90 years to a fictional event, in which Zhu Yuanzhang – portrayed as the grandson of Zhu Jian – commander of the Red Turbans, leapt into the Mongol court and assassinated the last Yuan Emperor and his bodyguards.

The movie ends with the last Yuan Emperor, portrayed as a fat man obsessed with his throne, crawling in pain towards his throne, crying: “My throne! My throne!” (“我的皇位!我的皇位!”)