2008-2009 DATA CONSULT. All rights reserved.

December 2008



Indonesia, like most countries in the world, could not go unscathed in 2009 under the global financial crisis.  Until the third quarter of 2008, the country's economy still showed healthy growth. The condition changed in the last quarter of 2008. The global crisis began to bite. The economy, therefore, grew only 6.1% in the whole of that year. Indonesia, however, still fared better than other neighboring countries such as Singapore, which was estimated to grow only 2.2%.

A number of industrialized and developing  countries  were already beset  by liquidity problem and rising prices of primary commodities  as a result of the global  financial crisis in the last quarter of 2008.  Indonesia also was hurt by the global economic slowdown but the country   was blessed with sharp increases in the prices of its main export commodities. 

The global financial crisis did not immediately hit the country's financial sector as no Indonesian bank was dragged into the mire of the U.S. sub prime mortgages crisis that triggered the global financial storms.
In 2008, the Indonesian people still enjoyed low interest rate, when Bank Indonesia cut BI Rate to 8%. The benchmark interest rate rose only after the prices of crude oil soared resulting in slowdown in the consumption sector.

The impact of the global financial crisis in the third quarter of 2008 was marked with liquidity problem and an increase in the BI Rate to curb inflation to follow the oil fuel price hikes early 2008.

Economic growth also experienced a reversal when the prices of primary commodities fell to follow the downtrend in the oil prices.  Fear of economic recession resulted in a decline in demand for a number of the country's export commodities. Exports began to lose part of its role as the driving motor for the country's economic growth.

Manufacturing industries especially export oriented ones such as textile, shoes, and electronic industries began to slowdown and cut jobs on falling sales.

In 2009, the country's economy will face heavy challenges. In 2008, the country's economic indicators reflected healthy growth. That year the country's economy grew 6.1%, inflation was well under control at 11.06%, lower than the target of 11.4% set by Bank Indonesia.  Deflation in the last two months of 2008, helped offset high inflation rate in previous months. Deflation in December was noteworthy as normally inflation was higher ahead of yearend.

Almost all observes agree that the country will face heavier challenges in 2009, but the prospects are much better than when the country was hit by the regional crisis a decade ago.

Economic Challenges in 2009

The global financial crisis has hit the country mainly in the financial and export sectors.  The impact on the financial sector began to bite since early in 2008 marked with rupiah fall, shrinking composite price index as a result of withdrawals of foreign investment from share and bond markets resulting in tight liquidity, high inflation and higher business risks and larger cost of money.

Meanwhile, the impact of the global financial crisis on the real sector is marked by falling exports especially to traditional markets including the United States and Japan and he European Union.  Falling exports render a big blow to the manufacturing sector leading to mass lie off.

Worse still is demand on the domestic market also has been sharply weakened   with the decline in  the purchasing power of the people   as a result of growing inflation  and rise in interest rate . Competition on the domestic market is tighter.

The country is still looking for the right panacea to the host of problems in store in 2009.

Overview of Indonesia's economy, 2008

Despite global financial crisis, the country's GDP grew fairly strongly though not as strong as in 2007. Until the third quarter of 2008, the GDP expanded 6.1% year-on-year , down from 6.32% in 2007.

The global economic slowdown as a result of the U.S. sub prime mortgage crisis and the soaring crude oil prices, put a brake in the country's export growth.

Almost all sectors. Notably the government consumption sector that grew 16.87% had a fairly strong contribution to the GDP expansion in 2008. In 2007, the government consumption grew only 3.89%. This reflected the government's determination to speed up the disbursement of state budget fund both for the routine and development spending.

Export growth was relatively high thanks mainly to soaring prices of major export commodities like palm oil, coal, rubber and cacao, tin, nickel, etc.  At least until the third quarter of 2008.

The consumption sector and exports have been the main driving motors of the country's GDP.

The government consumption, which is also a major contributor to the GDP, is expected to decline with the global economic slowdown.

Transport and communications sector major contributor to economic growth

The transport and communication sector is still a major contributor to the country's economic growth. Air transport and telecommunications expanded rapidly in 2008 marked with the growing number of airlines and number of telecommunications subscribers notably cellular phone subscribers.

In the three quarters of 2008, the transport and communication sector grew 17.11% faster than 2007's growth rate of 14.38%.

The agricultural sector began to slow down growing only by 2.43% in 2008 compared to 3.5% in 2007 with him falling prices of major plantation commodities such as palm oil, rubber, and cacao especially in the last quarter of that year.

The manufacturing sector also slowed down  growing only by 4.25%  in 2008  compared to 4.66% in 2007  with  an  increase in production  cost  as a result of the oil fuel price hikes and higher interest rates.

Similarly the mining sector grew sluggishly compared with the previous year.

Exports start declining

The country's exports grew 24.17% in the first 11 months of 2008 as scheduled by the government. Exports in the 11 months period were valued at US$ 128.09 billion and in he whole of that year the export value was estimated to reach US$137 billion.

Monthly exports, however, began to slide in November.  That month exports were valued only at US$9.61 billion down 11.09% from the previous month and smaller 2.36% compared with the same month in the previous year.

Among the non-oil/gas commodities the sharpest fall was recorded in the exports of mineral fuel down US$232.5 million and the steepest rise   of US$50 million was in the exports of non knitted garments.

Exports of non-oil/gas to Japan in November 2008 were valued at US$1.13 billion, to the United States US$935.2 million and Singapore US$726.5 million. The three accounted for 34.12% of the total export value. Exports to the 27 countries European Union were valued only at US$1.24 billion.  Exports are forecast to fall in 2009 with the global recession.

The country's surplus in international trade narrowed sharply in 2008 down to only US$8.28 billion in the first 10 months of that year.

Oil and export earning increased sharply but a sharper fall was recorded in imports of the commodities widening deficit in the oil and gas sector to US$1.89 billion in the first 10 months of 2008. 

Inflation in 2008 put under control

The country recorded a deflation  in December  at 0.04%  after a  cut in the prices of oil fuels in the previous month bringing the country's inflation to 11.06% in the whole of 2008 just below the target of 11.4% set earlier by the government.

A decline in prices as indicated by the smaller price index in the sector of transport, communication and financial service by 2.74% contributed to the deflation. Meanwhile, increases were recorded in the price index by 0.57% in the food sector, 0.52% in the manufactured food, beverages, cigarette and tobacco; by 0.52% in the housing, drinking water, electricity and gas and fuel sector, by 1.13% in the clothing sector, by 0.212% in the health sector and 0.16% in the education, recreation and sport sector.

After peaking in June, 2008 inflation began to slide and in he last three months of that year monthly inflation rates were below those in 2007.

Meanwhile, Bank Indonesia began to cut its benchmark interest rate (BI Rate)  from 9.5% in November to 9.25% early December and to 8.75% early January, 2009. 

World Economic Outlook 2009

The World Bank predicted that the prospects remain bleak for the global economy in 2009. The economy would grow at a snail's pace. And trade will fall for the first time in 26 years.

In a report titled "Global Economic Prospects" issued  early December, 2008, the World Bank revised down its world economic growth target to only 0.9%  in 2009  and the global trade will decline 2.1% , or the first contraction  since 1982..

Credit crunch will hit rich and poor countries in the world that developing economies would expand only by 4.5% and rich countries will suffer a contraction of 0.1% in 2009, the bank predicted.   Before the crisis hit in June, the World Bank predicted rich countries would grow 3% and developing nation 6.4%.

In the first week of Nov. 2008, three different institutions IMF, The director general of economic and financial affairs of the European Commission, and the Fitch Ratings, issued more or less the same predictions that the world economy would shrink in 2009.
The European Commission predicted the world economy would decline from 3.75% in 2008 to 2.25% in 2009 - or a sharp fall from average growth rate of 5% in 2004-2007.  IMF predicted the world economy would expand 2.2% in 2009 or 0.7 percentage point lower than its previous prediction mentioned in its report titled World Economic Outlook in October 2008.

Meanwhile, Fitch Ratings was more conservative predicting a growth rate of only 0.9% or the lowest since early the 1990s, and far below the average growth rate of 3.5% annually in the past five years.
Based on the World Bank prediction, Indonesia's economy will grow only by 4.4% in 2009 and would recover with an annual growth 6% in 2010. Thailand is predicted to chalk up a growth of 3.6% in 2009.

Many observers predicted the condition would be normal in 2010.

Indonesia's economic prospects 2009

The country's economy suffered a setback in 2008 especially in the last quarter of that year marked by a low growth recorded for its export.  However, the country's economy has good foundation to face worse condition in 2009.

Unlike other major economies in Asian like Malaysia and Singapore, Indonesia's GDP does not rely as much as the neighboring countries do on exports. Singapore almost entirely relies on exports for growth. A decline in exports would not cause the death to the country's manufacturing sector. The country still have large market   that producers would be allowed time to adjust to he change. 

Indonesia's economic growth still relies much on household consumption for growth. The purchasing power of the people has declined but in the past two months the prices began to decline to follow a cut in the fuel prices. Meanwhile, Bank Indonesia has cut its BI Rate from 9.5% in November to 8.75% early January. The central bank hinted that the rate would be slashed further. Analysts said the BI Rate would be cut to 8.5% in the next monthly meeting of the central bank leaders.

Foreign capital has also begun to flow allowing the rupiah to regain some of its loss in value. The local currency is now stable at 10,500 - 11,000 per U.S. dollar. The stability will allow the market players to make preparation in facing the challenges in 2009.

Fiscal stimulus

The country's inflation has been put under control and the BI Rate has been cut to near pre crisis level of 8.75%, but the economic development would still face stumbling block with tight liquidity. Banks still are not easily to give loans. Large banks especially state banks hold large excess liquidity. Fear of worse economic condition and the trauma of devastating non performing credits make large banks more cautious in extending loans including to small banks facing liquidity problem. As a result small banks raised their interest rates on deposit to attract public funds.  Therefore, banks would not be expected to immediately follow the lead taken by the central bank.

In order to improve the banking liquidity, a fiscal stimulus would be needed from the government. Toward the end of 2008, President Susilo Bambang Yudhoyono said the government was preparing a fiscal stimulus package on top of the 2009 state budget with fund partly to derive from unspent budget in 2008.

Finance Minister Sri Mulyani Indrawati said the government would announce the sectors to be entitled to fiscal incentives which will be in the form of exemption of value added tax and import duties. The priority sector would be given to those that would create new jobs. The government has announced that the economic stimulus would be increased from Rp12.5 trillion set earlier to Rp50.5 trillion with additional fund from unspent budget in 2008.

President Susilo Bambang Yudhoyono  said in a bid to create new jobs, the government will boost development of infrastructure projects of the public works ministry, communications ministry , public housing ministry , energy and mineral resource ministry  and the agriculture ministry.

The fiscal stimulus is expected to improve liquidity in the financial sector to help the business sector in facing the challenges in 2009.  The government has to take over the leading role of driving the economic growth toward recovery. Earlier the business sector with strong export growth and domestic consumption was able to maintain the role. Now the two sectors have weakened and out of steam that the economy has to rely more on the government sector. If the government could play its role effectively the country's economy is expected to expand by more than 4.4% as predicted by the World Bank.

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