Policy Support Given to Indonesian Industries in the Wake of Financial Crisis

2008, unlike other countries, turns out to be an eventfulyear for the Indonesian economy. The rise in international oil prices thereforeput an unbearable burden on the budget and forced the Government to raise fuelprices for consumers. To mitigate the impact of the rise in fuel prices, theIndonesian Government paid direct cash handouts to the poor - a programme thatwas well implemented and received.

The global economic and financialcrisis impacted on Indonesia in a number of ways:-

• On October 6, 2008, Indonesia's key stock market index declined by 10% -its biggest one day percentage fall since 1998. Indonesian sovereign bonds declined in value pushing up yields.
• By mid-October, Indonesian stock index had declined to a level 40% below that in September 2008.
• The decline in the stock market index was due to a self-off by foreign investors who owned over 60% of the stocks in the Indonesian market and a sharp decline in the stock prices of the Bakrie group of companies and particularly its flagship company PT.
• The Bakrie group shares were suspended from trading on the Indonesian Stock Exchange while the company restructured its debt over the last quarter of the year.
• Indonesia's annual price inflation also reached its highest level reaching 12.14% compared to a year earlier.
• Simultaneously, the Rupiah slumped to a 10-year low against the US Dollar.

The immediate impact of these developments was an officialdowngrading of the export target and the GDP growth rate anticipated for 2009.

 
The decline in commodity prices adversely affected prospects for exportearnings in the last quarter of 2008 and the calendar year 2009. Palm oil, amajor export commodity, declined from over US$ 1,200 per ton to US$ 350 per ton-it has since recovered to US$ 550 per ton. In addition to oil prices, thesoftening of rubber prices added to Indonesia's export woes.

The Indonesian Government made determined efforts tostabilize the Rupiah and soothe market fears. Indonesia is the biggest economyin the ASEAN and its banking sector is well-capitalized, having recovered fullyfrom the contagion of the Asian Financial Crisis. The problem area is that ofstock and debt markets which are thin and prone to fluctuations on account ofthe actions of foreign investors.

The elbow room of the Central Bank was reduced by the highinflation rate (12%) and the Indonesian Central Bank was forced to raise itsbenchmark rate in mid-October from 9.25% to 9.5% amidst fears of inflation andglobal economic concerns. The Bank Indonesia's action was also intended tostrengthen the Rupiah which had slid from 9,300 to 11,000 Rupiah per.

The Indonesian business sector was worried because economicgrowth was slowing down; banks were not granting new loans and had increasedinterest rates. The external and domestic markets were shrinking and this wasaffecting the employment numbers in the economy. The Manpower andTransmigration Ministry announced on December 3 that 63,000 workers had beenlaid off by factories in Indonesia. Jakarta had suffered the largest number oflay offs with 14,200 people losing their jobs. It was estimated that industryhad grown by 4.8% in 2008 and would grow by 3.6% in 2009.

Strategy adopted by Indonesian Government to cope up with the situation, thisinvolved:

1. boosting real sector growth through infrastructure development;
2. creating new working opportunities, and
3. building a social safety net.

With affect to this

• On December 16 Parliament passed a bill paving the way for the Government to set up a new "Export Financing Agency" -the Indonesian EXIM Bank.
• The new EXIM Bank would have more leeway in raising funds including selling sovereign bonds and seeking loans from foreign governments to finance exports.
• The Finance Ministry announced in 2009 that it planned to raise funding on infrastructure to Rupiah 100 trillion (US$ 9.2 billion) from US$ 5.5 billion in the previous year.
• The Public Works Ministry is to allocate US$ 1.54 billion to make new roads, improve existing roads and facilities.
• Infrastructure spending in the 2009 State Budget for public works, transportation, energy and mineral resources, information and communication and public housing will total Rupiah 61.67 trillion.

Conclusion

• The Indonesian economy had recovered well from the economic and financial crisis and a sense of complacency had set in prior to October last year and it was felt that Indonesia may not be adversely affected by the crisis in US and Europe.
• The Indonesian foreign exchange reserves stood at US$ 57 billion in September 2008 and external debt as a percentage of GDP was 30.7% in 2008.
• The current account balance as a percentage of GDP was a comfortable 0.8% in 2008. Indonesia's export to GDP ratio at 27.7% in 2007 was considerably lower than the ASEAN levels which went as high as 40.2% for the Philippines to 205.3% for Singapore.
• At the G-20 Summit, Indonesia argued strongly for global action to restore market confidence through the provision of liquidity, a new architecture of the international financial system with appropriate participation for developing countries in the decision-making process, an effort to maintain the ODA flows and international financing to developing countries and the establishment of an international fund or pool of funds to support budget financing for developing countries.
• 2009 is election year in Indonesia. The full impact of the global financial crisis is likely to be felt here in March this year on the eve of the elections.
• There are two key prices, which continue to worry Indonesian policy- makers. The first is the price of oil. It is difficult to predict when and at what level oil prices will stabilize. The trade impact on Indonesia is limited because Indonesia is not a major oil importer.
• The second is the price of rice, which is affected by domestic production and supply and by the steps taken by other Asian countries to restrict the exports of rice.
• India's trade with Indonesia continues to grow at a healthy rate. From a trade volume of US$ 6.5 billion in 2007, trade grew by US$ 5.8 billion in the first half of 2008.
• Indian companies have significant investments in the textiles, banking, steel, automotive and resources sectors.
• Indonesia therefore should continue to be an attractive location for Indian companies seeking to leverage the largest market in the ASEAN and its abundant natural resources.
• More than 15 Indian companies are currently mining coal in Indonesia with major investments from the Tatas and Reliance Power. NALCO has also announced a major investment of US$ 4 billion in an aluminium smelter and power plant in South Sumatra. Investment activities in resources would continue to be attractive from a strategic perspective, not taking into account short-term cyclical movements in commodity prices.

Table: Measures taken by the Indonesian Government & Central Bank to counter the global financial and economic crisis

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