2008-2009 DATA CONSULT. All rights reserved.
2008-2009 DATA CONSULT. All rights reserved.
INDONESIAN COMMERCIAL NEWSLETTER
March 2011

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INDONESIAN ECONOMIC RESILIENCE AGAINST GLOBAL FINANCIAL CRISIS


Indonesia has continued to grow steadily amid the threat of global financial crisis, which already rocked major economies the United States and Europe. Indonesia has succeeded in averting the impact of global financial woes as reflected by an annual economic growth of more than 6% in the past three consecutive years after the 2008 crisis.

However, there are questions as to the ability of the country to weather the impact of another wave of global crisis now faced by major economies.

The rapid growth recorded by Indonesia has placed the country among the G20 grouping 20 countries with GDP of at least US$ 713 billion. The country's GDP on current prices has increased strongly from only US$ 544 billion in 2009, partly driven by rising value of the country's currency the rupiah against the US dollar with inflation kept under control around 5%.

Indonesia's exports also have leapfrogged since 2006 despite a sluggish growth in 2009 as a result of the global crisis that weakened demand in international market.

In 2006, the country's exports of goods and services were valued at US$ 122.5 billion, up to US$ 184.3 billion in 2010. In 2011, the exports earning is forecast to rise further to US$ 195.6 billion.

Encouraging growth has also been recorded in other indicators such as foreign exchange reserves. The country's foreign exchange reserves exceeded the psychological level of US$100 billion in March 2011 driven by surging exports and strong inflows of foreign funds. Foreign funds have continued to flow into the country since 2008. In 2011, the country's foreign exchange reserves are predicted to continue to climb in the rest of the year. Investors began to turn to Indonesia that they see as an attractive emerging market when investment risks are growing in many other countries beset by financial problems. The world's largest economy, the United States is facing financial turmoil after an international rating agency downgraded its debt rating.

Structure of foreign debts

Indonesia has succeeded in averting the impact of the global financial crisis partly thanks to secured structure of foreign debts.

High foreign debt ratios, especially public debts to GDP have contributed to the crisis that shook advanced economies including the United States and Europe. There are fears of default on maturing debts.

The state budget deficits of advanced economies have continued to swell and at the same time in the private sector large loans in the property sector create economic bubble. The condition weakens the banking sectors and as a result the countries face difficulty in settling maturing debts. Large injections will be needed from donor countries or the IMF to prevent from defaulting. Indonesia faced such condition in 1998, when the regional crisis hit.

Currently Indonesia and a number of other Asian countries which have experienced such crisis, have strong economic resilience partly because of safe structure of public debts.

In general, Indonesia has shown significant improvement in foreign debt management allowing it to weather the impact of the present crisis. The country reduced its foreign debt ratio to GDP from 150% in 1998 to 54.9% in 2004 and to only 28% in 2010.

In the 2006-2010 periods, the country's foreign debts grew 48.7% in absolute term from US$ 132.6 billion to US$ 202.4 billion. Increases were recorded both in government and private sector debt; however, a higher growth was recorded in GDP from US$ 369.3 billion in 2006 to US$ 713.7 billion in 2010 resulting in lower debt ratio to GDP.

The country's debt ratio to exports also declined significantly from 179.7% in 2004 to 108.5% in 2010. In the same period the debt service ratio (DSR)   fluctuated peaking at 25% in 2006 before declining in the following years to a safer level of 21.5% in 2010.  DSR is a ratio of debt service to exports.

The country's foreign debts totaled US$ 210.09 billion by the end of the second quarter of 2011 and the government and Bank Indonesia accounted for the largest part or US$ 124.6 trillion with the private sector accounting for the rest or US$ 85.47 billion.

Indonesia's debt ratio relatively safe

The debts of the government, both foreign and domestic debts, have continued to increase since 2006 but not as fast as the economic growth, therefore, the debt ratio  to the country's GDP  has been declining  -  to 26% by the end of 2006  from 47% a year before  and  89%  in  2000.

The country's debt ratio was much lower than those of two European countries Greece and Italy which are reeling under debt crisis.  The result is a reflection of prudent and efficient fiscal policy adopted by the government so far.


No cause for much concern with financial crisis

There have been fears of the impact of the financial crisis faced by the United States and Europe. The crisis that jolted the world largest economies showed that the world is not yet fully safe. The impact also poses a threat to Indonesia. However with the country's strong economic fundamentals, there is no cause for too many fears. Indonesia fares much better than it was in 1997 when the regional monetary crisis that began in Thailand badly hit the country.

Unhealthy foreign debt structure was one of the causes sending the country to the brink of bankruptcy. Before that crisis, loans were easily secured by the private sector and local banks from foreign financers without sufficient control of the use of the loan funds. Most of the funds were not properly used to finance the production sector.

In addition, the country had weak economic fundamentals with low foreign exchange reserves and exports.

After struggling for more than a decade to lift itself from the crisis the government and the bankers are more prudent in using debts. With healthier structure of foreign debts and growing foreign exchange reserves and exports, there is little possibility of Indonesia falling into another debt crisis.

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