Tangguh 0706291426 International Relations Studies 1

Faculty of Social and Political Sciences University of Indonesia

Written as requirement for the subject of English of International Relations

The Financial Crisis and Indonesia:

The Impact and the Policy Implications

The present financial crisis had brought many effects on the world economy. The world
economy is facing a deep downturn with global growth in 2009 expected to fall to ½ percent
when measured in terms of purchasing power parity and to turn negative when measured in
terms of market exchange rates,1 its lowest level since World War II. Industrial production is
falling in many countries. Oil price dropped to below US$40 a barrel in January 2009 and
now rests at US$61.07.2 Japan’s exports plunged into its worst slump in 35 years3 whilst
Taiwan’s GDP plunged more than 8%. The world economy is in the worst fall since 1982
with output sinking 6.2% last quarter and the financial crisis is spreading rapidly to the
previously resilient developing world. According to a rapid assessment of the impact of the
financial and economic crisis on Indonesia by Komara Djaja,4 the global financial crisis
transmitted to the Indonesian economy beginning in mid-September 2008 and caused fall in
stock market prices, deep depreciation of Rupiah, and significant increase of government
bond yield. Global investors have been rearranging their portfolio, including those in
Indonesia, pushing capital outflows from emerging markets. Regional stock market prices
had been severely corrected, regional bond markets demanded for higher yield, and huge
capital outflows had put a tremendous pressure to most currencies in the region. Indonesia’s
significant progress on growth performance will be dragged down in the coming years. The
banking sector had put its brake again, with liquidity problem moving upward and stiff
competition of the commercial banks pushing the time deposit rate up. The Jakarta Stock

1
“IMF World Economic Outlook (WEO) Update – Global Economic Slump Challenges
Policies, January 2009”, retrieved from
http://www.imf.org/external/pubs/ft/weo/2009/update/01/index.htm May 26th, 2009 7:47
AM
2
Retrieved from “Commodities & Futures – Markets Data Center – WSJ.com”,
http://online.wsj.com/mdc/public/page/mdc_commodities.html, May 20th, 2009, 10:10 AM
3
Retrieved from “FT.com / Asia-Pacific – Japan growth plunges to a 35-year low”,
http://www.ft.com/cms/s/0/8cb1fbc8-fbc7-11dd-bcad-000077b07658.html, May 26th, 2009
10:15 AM
4
Komara Djaja is the secretary of the Coordinating Ministry for Economic Affairs of
Indonesia. Assessment retrieved from Komara Djaja, “Impact of the Global Financial and
Economic Crisis on Indonesia: A Rapid Assessment”,
http://www.ilo.org/wcmsp5/groups/public/---asia/---ro-
bangkok/documents/meetingdocument/wcms_101594.pdf May 20th, 2009, 6:26 AM
 Tangguh 0706291426 International Relations Studies 2
Faculty of Social and Political Sciences University of Indonesia
Written as requirement for the subject of English of International Relations

Index (JSX) went down,5 pushed by the declining trend in world commodity prices,
especially mining, energy, and agriculture products, such as crude palm oil and others, whilst
some big mining companies has been reported lost its stake significantly. Indonesia’s
exchange rate had lost its value from Rp 9,056 per US dollar in 20076 and now is recorded at
Rp 10,279.8 per US dollar7, due to lost market confidence and relatively limited supply in
foreign exchange markets, forcing the Bank of Indonesia to intervene moderately. Even
though Indonesia’s balance of payment improved significantly in the first quarter of 2009
(Q1/2009) to post a US$4.0 billion surplus on the strength of performance in the current
account and the capital and financial account,8 it had been sustaining considerable deficit
pressure during 2008, with Indonesia’s current account deficit of US$ 0.9 billion in Q3/2008
and US$ 0.2 billion in Q4/2008 whilst foreign exchange reserve decreasing from US$ 57.1
billion at the end of Q3/2008 to US$ 51.6 billion at the end of Q4/2008. 9 Indonesian
economic growth are facing an inevitable economic contraction, clocking its weakest
performance in five years in Q1/2009, slowing to annual growth of 4.4 percent as the global
financial crisis hit exports, compared to 5.2 percent in Q4/2008.10

Indonesia’s economy to cope with the crisis

To face the global crisis, there are some things that the government of Indonesia should
do.11 First, we must consolidate the banking sector, especially the state-owned corporation
banks. The Bank of Indonesia also has to guarantee interbank loans to secure liquidity flows.
Indonesia also has to relieve herself from the dependence on exports, because countries

5
By May 25th, 2009, 4:00 the JSX was recorded at 1,890.97, still very low. Retrieved from
http://www.idx.co.id/, May 26th, 2009 6:22 AM
6
Retrieved from “Indonesia Economy 2008, CIA World Factbook”,
http://www.theodora.com/wfbcurrent/indonesia/indonesia_economy.html, May 26th, 2009
6:29 AM.
7
Retrieved from RatesFX, http://www.ratesfx.com/rates/rate-idr.html, May 26th, 2009 6:32
AM
8
Retrieved from http://www.bi.go.id/web/en/Ruang+Media/Siaran+Pers/sp_111609.htm,
May 26th, 2009 7:15 AM
9
Laporan Neraca Pembayaran Indonesia Triwulan IV 2008 (Edisi Publikasi – Februari
2009), retrieved from
http://www.bi.go.id/web/id/Publikasi/Neraca+Pembayaran+Indonesia/npi_trw408.htm,
May 26th, 2009 6:58 AM
10
“Indonesia's economic growth slows in 1st quarter - BusinessWeek”, retrieved from http://
www.businessweek.com/ap/financialnews/D986IKN80.htm May 26th, 2009 7:29 AM.
11
Inspired by the lecture by Faisal Basri, “Indonesia di Tengah Gelombang Krisis
Finansial Global”, March 25th, 2009 at the Department of International Relations, Faculty
of Social and Political Studies, University of Indonesia
 Tangguh 0706291426 International Relations Studies 3
Faculty of Social and Political Sciences University of Indonesia
Written as requirement for the subject of English of International Relations

more dependent on exports will be more vulnerable to the slowdown. East Asian economies
had experienced exports decline due to the crisis, resulting in devastated economic growth. In
January 2009, Japan’s exports fell by an estimated 45.7% from a year earlier. China’s exports
account for approximately 40 percent of its GDP, and its January exports fell by 17.5% year-
over-year. Taiwan, which is hypersensitive to fluctuations in high-value-added global trade,
has seen its exports contract every month since September 2008, and it suffered a staggering
export loss of 44.1% in January from a year earlier. South Korea’s exports have crashed since
November 2008. Singapore’s exports fell 37.8% year-on-year in January 2009, and its total
trade fell 35.7 percent. Malaysian exports in December 2008 saw a decrease of 14.9%
compared to the previous year, and numbers from January 2009 are likely to show an even
steeper slide. Also, Indonesia’s exports fell by 36% year-over-year in January. 12 Indonesia’s
export volumes for non-oil and gas are predicted to fall 20-30% this year from 2008 as global
trade slows.13 To counter the export decline in Indonesia, the government needs to accelerate
spending and the Bank of Indonesia needs to cut interest rates again despite a weaker
Rupiah.14
The bursary effect also must be freed from Bakrie Group’s stocks. Stocks belonging to
Bakrie Group’s emitter have been dominating the transactions in the bursary effect,
contributing to 40-60% of total daily transaction in the Indonesia’s Bursary Effect (BEI), at
May 21st 2009 reaching Rp 5 trillion out of Rp 9 trillion bursary transactions. This is whilst
the Bakrie’s emitter’s stock movements are fluctuating sharply, reaching to 4-5% in a few
minutes.15 The result could be seen when their stock price declined by 38.42% in October
2008.16 Other policy implications related to the bursary effect are that the government needs
to maintain the transparency and credibility of the bursary effect, protect the minority

12
“East Asia: Exports in Decline | STRATFOR”, retrieved from
http://www.stratfor.com/memberships/133081/analysis/20090302_east_asia_effects_global
_financial_crisis, May 26th, 2009 9:41 AM
13
“Indonesia: Non-oil exports likely to decline 20-30%”, retrieved from
http://www.aseanaffairs.com/indonesia_non_oil_exports_likely_to_decline_20_30 May 26th,
2009 9:28 AM
14
“UPDATE 2-Indonesia export plunge may force further govt measures | Reuters”,
retrieved from
http://in.reuters.com/article/asiaCompanyAndMarkets/idINJAK19853820090302, May
26th, 2009 9:49 AM
15
“KOMPAS.com – Harga Melesat, BEI Pelototi Saham Bakrie”, retrieved from
http://bisniskeuangan.kompas.com/read/xml/2009/05/22/1056516/harga.melesat.bei.peloto
ti.saham.bakrie, May 26th, 2009 10:28 AM
16
“berita-aktual.com - 6 Saham Bakrie Group di Suspensi”, retrieved from
 Tangguh 0706291426 International Relations Studies 4
Faculty of Social and Political Sciences University of Indonesia
Written as requirement for the subject of English of International Relations

stockholders and restore the bursary effect as an alternative investment. This way can reduce
the pressure to Rupiah’s exchange rate.
Another implication concerns the Rp 73.3 trillion fiscal stimulus package. It needs to be
targeted appropriately. According to Mudrajad Kuncoro, tax and customs stimulus gives little
impact to the real sector and increases little to the industry competence because, theoretically,
tax cut gives less multiplier effect than government’s spending. Tax cut will only be effective
as long as many corporations in Indonesia survive and operate well—in fact, more than 460
textile and textile product (TPT) corporations have closed down. Reduce in customs will only
be beneficial when the development of national industry based on local raw materials still
runs well—in fact, businessmen in electronic and TPT industries had long been complaining
not to be able to compete with smuggled things from China and India, whilst the upper
industries in both industries aren’t well developed, resulting in high number of imported
contents in electronics and TPTs made in Indonesia. Kuncoro also questioned why it was that
only 11 industrial sectors got the customs stimulus. Kuncoro pressed that to make it effective,
the realization of fiscal stimulus needed to be really smooth by an acceleration of liquidation
of the stimulus package by distributing it to sectors and regions in the first semester of 2009.17

Other policy recommendations

We can also look at the policy implications and recommendations made by Komara
Djaja. Djaja suggested that Indonesia’s economy should lean upon the strength of the
domestic demand. Some of his policy alternatives are as follow.18
1. The government budget for 2009 should be designed a type of countercyclical in
nature. Among the policy instruments are; Scale up the PNPM program, enhance the
microfinance credit (KUR), maintain the basic public services such as health and
education, increase expenditure for infrastructure, urban and rural, etc. This including
the Rp 12.5 trillion for fiscal incentive to industries facing problems.
2. To keep maintain the strong domestic demand, the growth of consumption
expenditures, both private and government, should not lower than 5 percent. In the
previous crisis the consumption expenditures proven to be the main source of growth,
in this respect, to keep inflation under control will keep maintain the consumers’

17
Mudrajad Kuncoro, “Stimulus, Kebijakan yang Harus Mulus”, retrieved from
http://www.mudrajad.com/upload/Stimulus-Kebijakan%20Yang%20HArus%20Mulus
%2010%20March%2009.pdf May 26th, 2009 8:57 AM
18
Komara Djaja, op cit.
 Tangguh 0706291426 International Relations Studies 5
Faculty of Social and Political Sciences University of Indonesia
Written as requirement for the subject of English of International Relations

purchasing power.
3. Keep the policy environment friendly to small and medium enterprises and informal
sector. This proven to be the savior in such a difficult time as we face now.
4. Establish a strong monitoring system, especially on the number of lay-off, by type of
industry, occupation, reasoning for lay-off, by province and districts. The information
is very important for formulating the correct policy action according to priority while
achieving the desired goal.
5. Design the training program for post lay-off workers. In this respect, The Worker
Training Institute managed by the Department of Manpower and Transmigration
could play a key role.
6. Establish a conducive and win-win industrial relation environment. This is a real
challenge in the coming election year. The recently labor union reactions to joint
decree of four minister on capping the minimum wage is a worth to learn, so a better
approach can be found.
7. An informal donor coordination meeting could be worth considered, so that the best
practice solution could be share.
8. The International Labor Organization can play a strategic role in facilitating policy
environment of (3) through (7)

Start now
The financial crisis and the global economic slowdown had affected the Indonesian
economy. The impact isn’t so deep because Indonesia’s economy and her financial sector
aren’t related too close with the United States’ financial sector. Her current account still
recorded a surplus, despite so little. It was also because Indonesia is the least dependent on
exports of any East Asian country except Japan. And Indonesia’s export portion to the US and
Japan had shown reduce from shift to ASEAN. The banking sector had been consolidated
with bank health indicator higher than neighboring countries, except for some state-owned
banks. Still, Indonesia has much homework to do, as some experts’ policy recommendations
suggest. Now, it depends on the next government elected to implement what needs to be
done.