Indonesian Economy in the Global Crisis

Indonesian Economy in the Global Crisis

Global financial sector is shaken again when the giant American finance company Lehman Brothers bankrupt, followed with another bubbling companies such as Merrill Lynch, Goldman Sachs, Northern Rocks, UBS and Mitsubishi UFJ. The shakes will determine the endurance and survival of Indonesian economy in the near future.

Is the national economy—financial and real sector, suffer from the global crisis worse than the one that hit the Asian countries at the last decade? Some experts predict that the national economic survival depends on the domestic economic system. If the national economy persists, the possibility of the Indonesian economic survival will be greater and the impact of the global crisis will be less serious.


Financial Sector

There are some reasons affecting the early financial shakes will be followed by some further affects to Indonesian economy.

First factor is existence or non existence of direct linkage between international finance companies now suffering from crisis with the domestic companies. The linkage can be in the forms of placement or loan disbursed significantly from Indonesian companies to global investment banks.

Second factor is liquidity domestic banks and finance companies. Domestic bank condition and finance companies are still have abundant liquidity. This is indicated by low ratio of Loan to Deposit Ratio (LDR) below 50% at the end of the year 2008. Third factor is high investment to the real sector that related with increasing the national production capacity, after suppressed from condition before full recovery or normal demand.

From the above reasons, impacts of the global crisis might be isolated to second round effect which is slowing down on exports and limited capital-outflow, which is not causing to the slow down of the economic growth. Indonesia has an amazing economic growth in 2007 of 6,33%. Up to the third quarter of 2008 the national growth rate was still around 6% which will be slightly lower in the forth quarter. This economic growth was the highest after the economic crisis of the1998.

But further effects of global crisis require serious attention to policy makers. Some domestic indicators might be affecting more serious to the national economy. Extra ordinary pressure on domestic money market is now occurring, both on stock market and bonds.

Up to the last October, Average Stock Price Index (Indeks Harga Saham Gabungan/ IHSG) continuously fall down, national currency exchange rate to US Dollar is also falling down. Strong pressure is also occurred in the State Promissory Note market, seen in the rise of yield over 50 basis points from all kind of bond. At the same time, yield curve constantly rising, expressing the expectation on tight monetary policy at the short and medium term.

Foreign transaction was the main reason for the falling down of the domestic money market and bond. Many global investors take safety measures through capital flight to assets with lower risks, including Indonesian market. In another words, there is flow of liquidity to foreign market which in turn harden national economy as a result of tight money policy.

The situation stimulates the increase of interest rate for credit which is the key to relate between financial sector and real sector. The high interest rate will lead into mobilization of fund from investment to saving. In turn, investment rate will slow down and real sector suffer from high interest rate. High interest rate will also trigger non-performing loan/NPL and burden household from increasing installment for housing finance or another consumption credit.

There is no formal report on increasing non-performing loan of credit from finance companies, either bank or non banks. Early warning comes from non bank finance companies reporting that their credit expansion has slowed down. This is the direct effect from the increased interest rate and price of consumption goods. Negative or positive impacts of the quantity and quality of credits will be seen in the mid of 2009.


Real Sector: People’s Economy

How serious is the global crisis affecting people’s economy in Indonesia?
Global financial crisis in the US and European countries will directly affect in decreasing consumption from that countries.

At national level, net export of Indonesia is 10% from the total GDP. The export is composed of 20% oil and gas products and 80% non oil and gas. The destination of the non oil and gas export products is 12% to US and European countries, other destinations are to Japan, Singapore and Middle East countries. Industries such as textiles, automotive and others based on export to the above countries will directly be affected by the global crisis.

Non oil and gas export to US was valued of 1 Billion US $ and European countries 990 Million US $ in 2007. These values of exports are now collapsed. Demand of the main export to those countries from textiles in 2008 now remains 30% only. Thousands of textile workers have been laid off in Central Java and West Java. Up to the end of 2008 and early 2009 there will be another lay off of workers in formal and informal sectors as much as 350.000 skilled labor and up to 3.5 million unskilled labors. Reports from the North Sumatra Micro Small and Medium Enterprise Service, mentions a decline of even domestic demands of ceramics and crafts products. Ceramics are sold to Nangroe Aceh Darussalam Special Province and North Sumatra, meanwhile from Samosir leather shoe and wallet are for export market. The decline of the demand is almost the same with the national export decline, which is close to only 30% of the 2007 export volume. This situation is hardly influencing Indonesian people’s economy.

Meanwhile, export from agricultural products has no sign of declining yet from coffee and tea products. National export of coffee which mostly come from people’s plantations, are reportedly increasing of the target. In 2007, coffee export of Indonesia reached 300,000 MT and in 2008 it is estimated to reach 325.000 MT or an increase of 8%. This is because of the remained stable European market for coffee especially to Germany, which is the biggest consumer. Aside from that there also an increasing demand from country that benefited more from foreign exchange and oil price hike like Russia. . Nevertheless, tea commodity of Indonesia tends to decrease in production. In 2007 the national production reaches 149,000 tons and in 2008 it is predicted to reach 145,000 tons. Export of tea is also declining since 2006 with 95,000 tons, in 2007 reaching 83,000 tons and in 2008 is expected to reach back to 95,000 tons. This situation was caused by decline in maintenance and plantation culture.

Agriculture and food products from imports with import contents are surely influenced. Tofu and tempe the most people’s favorite food made of soybean from import, from its country origin have to compete with another uses such as for bio-energy or animal feeding. Scarcity of this product will surely be increasing the market price. Meanwhile, national rice production from the prediction of 3 million tons target had been achieved 2.85 million tons at the third quarter. Agricultural product like rice will be sufficiently supplied by domestic products and import will not be required. This situation will in turn reducing national expenses.

In tourism sector, it is reportedly no declining foreign tourist visits yet until the end of 2008. This might be because of holidays have been planned long time beforehand and culturally cannot easily postponed or cancelled. Tourist visits can be declining if the crisis goes worse further.

Momentum that must be maintained by the Indonesian government is to increase the domestic products for domestic markets, as Indonesia is a large market with its huge population. In this sense industrial products of Indonesia cannot be let unsold because of loosing competition with China or Vietnam products that enter the Indonesian market illegally and with very low price. Indonesian Customs as part of the Department of Finance and Department of Trade and Industry as well should look carefully into the increase of 10-15% import for oil, electronics and iron products from China.

In this global crisis, aside from appropriate trade policy, monetary policy through Central Bank decision on BI rate to respond, Indonesia should optimize national production based on the domestic resources and sell it to the domestic market. Principle of self-reliance in economy practiced by similarly large populated country like India, might be good example.