House of Cards

For the first time in a long, long, time , President Bush will have quite a few people to agree with him. Quite. I am of course referring to last night's congressional rejection of the USD 700 bn package. He had said that rejection is a doomsday scenario. At this moment, not too many writings have been devoted to the (potential) side effect to our economy, so allow me to sketch a few broadbrush ideas.

It is commonly known that despite talk of a "decoupling", the fact of the matter is that Asian economies are growing less than predicted. There is therefore a strong base to believe that our economy will be quite affected by this latest development.

Our exports to the U.S. would most likely be slowing down , impacting our trade balance. Remember that as late as August of this year, our own president had tabled a budget of Rp. 1,000 trillion. This reduction in export receipts will impact the government's spending plans, of which the main feature was the already earmarked 20 % for education. This maybe one of the first to be impacted.

Speaking about budget, it is useful to speak about the middle class' budget. Jakartans will notice the web of sky rise office buildings and apartments currently blanketing Jakarta's skies. As the economy slows down, money becomes scarce and banks , real estate companies are relying ever more on the monthly mortgage payments. So long as the people still have jobs, this is not an issue. However the moment unemployment picks up, the probability of failure to keep up with the mortgage payment becomes higher. Assuming the houses/apartments were reposessed and offload into the market, such act will depress the property markt and may result in a negative valuation for the remaining owners. Banks become even more depressed, funds to invest or to cover liabilities become even scarcer. Overnight rates shot up, the central bank might have to step in. Sound familiar so far ?

The major difference (I think) between our economy and those of Uncle Sam's is that our mortgage market aren't as influential. Quite a few couples still live with their parents. Irrational exuberance did not have too many card-carrying members. The other - potentially more lethal- difference is quite a few property investments are speculative in nature. Either it is not being occupied or it is leased. The jury is still out on the strength of the buy-to-lease market but employment of young professionals would be a key factor.

As can be ascertained , thus far, the silver lining has not appeared in the horizon. However, as one former Ambassador of the Court of St. James to the country memorably said, "Indonesia is a country for the optimistic pessimist". This pessimist would more than prefer to be proven wrong.