Indonesia Essay, Research Paper

Currency is the Indonesian Rupiah. Exchange rate is approximately 1US $ = 8,000 rupiah.

GDP is approximately 960 billion dollars. GDP growth rate is four percent. GDP per capita based on purchasing power parity is $4,600.

Natural resources include petroleum, tin, natural gas, nickel, timber, bauxite, copper, coal, gold and silver. Industries include petroleum and natural gas, textiles, mining, cement, chemical fertilizers, plywood, rubber, foodstuffs and tourism. Agricultural products include rice, cassava (tapioca), peanuts, rubber, cocoa, coffee, palm oil, copra, poultry, beef, pork and eggs.

Major exports are textiles/garments, wood products, electronics and footwear. Major imports are manufactures, raw materials, foodstuffs and fuels.

Economy?overview: The collapse of the rupiah in late 1997 and early 1998 caused GDP to contract by an estimated 13.7% in 1998 because of Indonesian firms’ reliance on short-term dollar-denominated debt and high levels of nonperforming loans in the banking sector. The Indonesian Government initially wavered on meeting the conditions it agreed to in exchange for a $42 billion IMF assistance package, contributing to further loss in investor confidence and outflows of capital. Riots that in many cases targeted ethnic Chinese business owners also set back chances that Indonesia would quickly stabilize its financial crisis and contributed to President SOEHARTO’s resignation on 21 May 1998. His successor, B.J. HABIBIE, improved cooperation with the IMF. The money supply?which expanded rapidly early in the year to prop up banks hit by deposit runs?was tightened within a few months, and by October, inflation?which reached a 77% annual rate?was significantly dampened. The government also announced a bank recapitalization program in late 1998, but by early 1999 the plan faced growing challenges over its reliance on public funds. Doubts about whether the program is adequate underlie forecasts of continued?although much less severe?GDP contraction for 1999. Signs of spreading unrest and sectarian violence and concern that social instability will increase as the 7 June 1999 national election approaches also contribute to pessimism about the economy, particularly because foreign investors remain reluctant to begin to increase capital inflows again. The next government will face the challenge of establishing a macroeconomic policy framework that addresses longstanding grievances and inequities underlying much of the current unrest without hampering an economic recovery.

GDP: purchasing power parity?$602 billion (1998 est.)

GDP?real growth rate: -13.7% (1998 est.)

GDP?per capita: purchasing power parity?$2,830 (1998 est.)

GDP?composition by sector:

agriculture: 18.8%

industry: 40.3%

services: 40.9% (1998 est.)

Population below poverty line: NA%

Household income or consumption by percentage share:

lowest 10%: 3.6%

highest 10%: 28.3% (1995)

Inflation rate (consumer prices): 77% (1998 est.)

Labor force: 87 million (1997 est.)

Labor force?by occupation: agriculture 41%, trade, restaurant, and hotel 19.8%, manufacturing 14%, construction 4.8%, transport and communications 4.75%, other 15.65% (1997)

Unemployment rate: 15%-20% (1998 est.)

Budget:

revenues: $35 billion (of which $15 billion is from international financial institutions)

expenditures: $35 billion, including capital expenditures of $12 billion (FY98/99 est.)

Industries: petroleum and natural gas; textiles, apparel, and footwear; mining, cement, chemical fertilizers, plywood; rubber; food; tourism

Industrial production growth rate: -13.7% (1998 est.)

Electricity?production: 66.8 billion kWh (1996)

Electricity?production by source:

fossil fuel: 82.34%

hydro: 14.97%

nuclear: 0%

other: 2.69% (1996)

Electricity?consumption: 66.8 billion kWh (1996)

Electricity?exports: 0 kWh (1996)

Electricity?imports: 0 kWh (1996)

Agriculture?products: rice, cassava (tapioca), peanuts, rubber, cocoa, coffee, palm oil, copra; poultry, beef, pork, eggs

Exports: $49 billion (f.o.b., 1998 est.)

Exports?commodities: garments 7.9%, textiles 7.3%, gas 6.4%, electrical appliances 5.9%, pulp and paper 5.3%, oil 4.7%, plywood 4.7%

Exports?partners: Japan 18%, EU 15%, US 14%, Singapore 13%, South Korea 5%, Hong Kong 4%, China 3.9%, Taiwan 3.4% (1998 est.)

Imports: $24 billion (f.o.b., 1998 est.)

Imports?commodities: manufactures 75.3%, raw materials 9.0%, foodstuffs 7.8%, fuels 7.7%

Imports?partners: Japan 20%, US 13%, Germany 9%, Singapore 9%, Australia 6.4%, South Korea 5.4%, Taiwan 3.4%, China 3.1% (1998 est.)

Debt?external: $136 billion (yearend 1997 est.)

Economic aid?recipient: $43 billion from IMF program and other official external financing (1997-2000)

Currency: Indonesian rupiah (Rp)

Exchange rates: Indonesian rupiahs (Rp) per US$1?8,714.3 (January 1999), 10,013.6 (1998), 2,909.4 (1997), 2,342.3 (1996), 2,248.6 (1995), 2,160.8 (1994)

Fiscal year: 1 April?31 March

There are thousands of ethnic Chinese who bore the brunt of the May rioting and are resented by many Indonesians for their economic success. If rising confidence among them and multinational companies translates into a return of capital and new investment, the economy will begin bouncing back from last year’s horrendous recession. The government estimates about $16 billion–much of it owned by the ethnic-Chinese minority–flowed out of the country in the first half of 1998.

Of course, Indonesia is not yet past the post. The result of the elections isn’t due to be formally announced until June 21 and a new government won’t be formed before November, when legislators select a president. While provisional tallies show Megawati’s party won the most votes, it’s less clear whether she will be able to cobble together a coalition that would ensure her enough seats to gain the presidency.

The mood has shifted,” says Mark Baird, Indonesia director for the World Bank. “Indonesia is not a basket case any more. Now it’s a place that can peacefully manage a democratic transition, with a lot of undervalued assets.” The five major vote winners in the election have also pledged to stick with the terms the $40 billion bailout package for Indonesia led by the International Monetary Fund.

Many of the reasons that made Indonesia an attractive investment location before the crisis remain. There’s vast natural wealth, a market of 200 million people and liberal foreign investment rules. Signs of economic stabilization abound: GDP, which shrank by 14% in 1998, rose 1.4% in the first quarter of this year, compared with the previous quarter; inflation has cooled to 38% from over 70% last year; the rupiah has strengthened and interest rates have fallen. The benchmark Jakarta stock index rose 12% to a 23-month high the day after the vote. It has since slid back, but remains at levels not seen since early 1998. “The momentum of stability is there,” says Kwik Kian Gie, Megawati’s senior economic adviser.

Recovery prospects need to be kept in perspective, however. The 7% annual growth rate Indonesia enjoyed for almost 20 years is a thing of the past. The government is in the middle of a bank recapitalization programme that will cost about $80 billion–the equivalent of 82% of GDP, according to rating agency Standard & Poor’s. “We are going to grow, but much flatter and much slower than in the past,” says Umar Juoro, an economic adviser to Habibie.

Before Indonesia gained independence in 1945, the country’s economy was oriented toward providing raw materials such as sugar and rubber for the Netherlands. To survive, most people relied on subsistence agriculture, primarily the production of rice. After independence, economic mismanagement was prevalent, but beginning in the 1960s economic restructuring became a priority. Since then, agriculture’s part in the economy has shrunk, and services and manufacturing have grown.

Some 17 percent of all land is under cultivation, mostly on Java. Along with rice, sugar, and rubber, important crops are tobacco, cassava, maize, sweet potatoes, coconuts, sugarcane, soybeans, peanuts, tea, and coffee. Indonesia’s manufactures range from traditional crafts to aerospace products. The main products include food and beverages, tobacco products, textiles and garments, motor vehicle parts, and electrical appliances. Services?in restaurants and hotels, insurance, business services, and the like?are an important part of Indonesia’s economy. Tourism is growing.

Mineral products include tin, bauxite, nickel, copper, coal, manganese, and iron ore. Hardwoods make up almost all of the timber harvested in Indonesia; more than four-fifths of this harvest is used for fuel. Industrial woods produced in large quantities include teak, ebony, bamboo, and rattan. Indonesia is also the world’s leading exporter of plywood. In fishing, the chief catches are shrimp and prawns, scad, carp, Indian mackerel, goldstripe sardinella, milkfish, anchovies, and skipjack tuna. The rupiah is the official monetary unit of Indonesia (2342 rupiah equal U.S.$1; 1996).

V The Board of Governors assessed that the monetary up to November 1999 has been relatively in a stable condition as shown by the fact that prices on products and services are in control although there is a slight increase of inflation rate. Monthly inflation rate during November 1999 is relatively in a low level which is 0.25%, thus for the period of January to November 1999 inflation has achieved 0.27%. The price increases are in connection with fewer supplies due to seasonal factor and to increasing demands for the coming Ramadhan. The inflation rate pressure is driven by price increases on the demand side (underlying inflation) from 0.11% to 0.23%. Meanwhile the recent depreciated Rupiah exchange rate has also driven rises in inflation rate in particular via tradable goods. The monetary condition that is relatively stable during 1999 cannot be disconnected from the monetary policy that is tightly implemented by Bank Indonesia.

In relation with the Rupiah exchange rate development, the Board of Governors is of the opinion that weaken exchange rate lately is a result of market reaction towards Aceh and Y2K matters. During November Rupiah exchange rate has weaken as shown by the increasing Indonesia’s SWAP and risk premium abroad. Meanwhile, Rupiah liquidity in the market is relax as shown by the fact that one and three month SBI (Bank Indonesia Certificate) interest rate on the latest action were respectively 12.95% and 13.05%.

Furthermore the Board of Governors predicts that the real PDB (Gross Domestic Products) (year on year) during 1999 fourth quarter rises around 3.2% to 5.1%, an increase of 0.54% from that of 1999 third quarter. From the demand side, the real PDB growth was mainly due to expansion of government and private consumption while from the sectoral side due to reasons on trade, hotel, restaurant, transportation, communication, and services sector. Growth can be faster when banking intermediary function recovers, which very much depends on banks and companies restructuring as well as settlement of private foreign loans. Thus the Board of Governors predicts the real PDB growth during 1999 will be around -0.5% to 0%, slightly better than last month prediction.

The evaluation of Board of Governors, though there will be price increases related to the coming Ramadhan, Christmas, New Year and Idul Fitri, predicts that 1999 inflation rate will be around 2%. Furthemore, the Board of Governors, in consideration of condition on market liquidity and base money target, predicts that one month SBI interest rate will be around 10%-12%. Bank Indonesia will keep monitor interest rate development in line with price and exchange rate development.

Over the past few years, Indonesia went through essential reforms leading to a prospective recovery. Prior to 1997, slowing economic growth in Indonesia heightened political unrest. This lead to growing tensions and popular disaffection with the status quo. These tensions in short term attributed to a more difficult and aggravated economy. The economy suffered with falling investment, collapsing private consumption and lower government spending. In addition to a heated crisis state, the rupiah was rising and falling. As the rupiah collapsed , inflation rose, to about 28%. The rate would even be worse if the government imposes a currency board, which would lead to further speculative pressure on the rupiah.

The economy contracted over the next 2 years against a background of hyperinflation and growing poverty. President BJ Habibie found it increasingly difficult to please all the different constituencies whose support was important to his political survival. As for GDP, in the first quarter of 1999 there was a decline in output of 6.2% compared to 1998. Reports suggest that these figures underestimated this decline since they included a barely credible 5% growth rate for agricultural output, hit by economic crisis (which made imported inputs more expensive and credit hard to come by) as well as by an El-Nino induced drought. Declines were forcasted at 17.1% and 17.9% for industry and services respectively, compared with a relatively small contraction of 0.5% for agriculture. Real GDP was expected to fall by 15% in 1998 and fall sharply in 1999.

By May, 1998, inflation had reached a year in year rate of 52% and officials were predicting it to be 80% by the end of the year. Inflation was impacted by the sharp depreciation of the rupiah on the prices of imported goods, the affect of the drought on food production and the appearance of production and distribution bottlenecks. This combination ultimately affected prices.

The budget for 1998-99 was revised in January,1999 but not formally revised since. Although the IMF conceded in April that the deficit would reach 3% of GDP and by mid-June it?s Asia director admitted that the deficit would be well above 4%. The most important component of refenue, non-oil domestic receipts, which had been budgetted to account for nearly 70% of the total, is collapsing across the board as a result of the severe recession. Some savings will be made through cutbacks in spending on infrastructure, but a deficit of at least 6% of GDP is still in prospect for the 1998-99 year, which would require only a slightly larger amount of foreign funding than the $6.45bn projected in the first budget revision.

Political reform was inevitable with an approaching election shadowed by such an unstable economy. The armed forces supported Presidential efforts recognizing the economic crisis must take priority and that political differences must be put aside. The counter argument is that the confidence required to handle the economic crisis will only come once the issue of political legitimacy has been settled.

Abdurrahman Wahid and Megawati Soekarnoputri were elected President and Vice president respectively in October, 1999. This is the political transition economists predicted would begin economic recovery and build a new foundation for growth in Indonesia. Indonesia has given up control over East Timor following a referendum for independence in the territory and a violent backlash by pro-integration militas supported by Indonesian forces. Recovery will be slow although the ecomomy will return to growth in 2000.

Based on data showing that GDP rose in the 3rd quarter of 1999 by 0.5%, the government forcasts a full growth in 1999 by 0.1%. However, this would only be possible if several sectors, including manufacturing, construction and financial services record strong growth in the 4th quarter. The EIU considers this unlikely and is therefore forcasting GDP to contract by 0.7%. However, on the assumption that both political and the policy enviroment will stabilize, there will be a return to growth for 2000, where GDP will expand by 4.3%.

No loss of momentum is envisaged during the transition to a new government and bank and corporate restructuring policies have been further strengthened, due to implementation of new economic and financial policies.

The appointment of Kwik Kian Gie as coordinating minister for economic affairs is expected to encourage members of Indonesia?s ethnic Chinese business community to repatriate the vast sums of captial they are believed to have moved offshore during the height of financial crisis. One of the first steps taken by Kwik was to relese the audit report of Pricewaterhouse Coopers into the Bank Bali scandal, which the IMF had made as a condition for the resumption of loans suspended in Septemeber. Improved relations with the IMF should also enable the new government to negotiate some changes to the program to include its own policy priorities. These include the provision of increased state support for the agricultural sector and other social programs.

Indonesia is South-East Asia?s starkest example of the effects of depressed consumer spending, resulting from huge reductions in disposable income and tremendous price inflation. To counteract these effects,k the IMF recently inspired a deregulation package. It included the following key factors:

1. tariff reductions on fish, chemical and metal products

2. distribution and wholesale trade opened to foreign-invested companies engaged in production, but only the sale of their own products. 2003 foreign companies will be permitted to sell direct to consumers

3. value-added tax (VAT) exemptions on exports expaned, from 10 to 18 strategic product groups ?the new groups included are iron & steel, automotive components, machinery & components, jewelry, chemicals, rubber, mineral products and sheet plastic

4. domestic sales permitted for companiews producing compnents in banded zones of domestic sales do not exceed 50% of realized export value

5. duty-free imports of machinery, equipment, and related goods and materials for a period of 2 yearsfor all newly established industrial plants

6. export taxes removed from Rattan, raw hide leather, mineral ores, cork and aluminum scrap

7. importation of wheat, wheat flour, soy beans, and garlic are permitted. Previously these commodities could only be imported by the National Logistics Agency.

Another current key factor leading to the recovery of Indonesia?s economy are the retail curbs set by the government. The government tightened restrictions on retailers, with foreign owned fast-food franchises hit the hardest. Because foreign-owned retailing is forbidden, franchising has been the side door for retailers. This year, regulations circumbscribed foreign-owned franchise ability to expand. These restrictions can only last about 5 years if Indonesia is serious about free trade. When retailers on any Asian country are expected to have unfettered access to the market of any other member.

The out-look for Indonesia?s economy is guardedly optimistic. The second half of 1999 has shown signs of recovery from the economic down turn that began with the crisis of 1997-1998. Inflation has been reduced to manageable levels of 8-9%, after an annual rate of 64.7% in late 1998 and early 1999. It is expected that inflation will be a moderate 4-5% over the next two years. Gross Domestic Product growth is expected to be 1.8% in the year ending March 2000, with growth of 4-6% over each of the next two years. Interest rates are also expected to decline over this period. Debt re-structuring is expected to continue as bank reforms are implemented. Exports should be strong, lead by the favorable oil market. These factors have resulted from a cooperative effort with the International Monetary Fund to provide the necessary infusion of foreign capital and the government of Indonesia to support the necessary market reforms to foster growth.

In contrast with these positive signs are several potential problems that have slowed recovery and threaten its continuation. The banking crisis caused by the Bank of Bali?s payments to members of a leading political party has undermined confidence in the banking reforms undertaken as part of the recovery process. An immediate and transparent resolution of this controversy is necessary to prevent any disruption to the banking recovery necessary for successful completion of the recovery plan. An investigation by Pricewaterhouse Coopers has been conducted as a first step in the resolution of the controversy. The IMF will await the published results of that investigation before deciding on additional action it will take. At stake is the next installment of an IMF line of credit approved to assist with the recovery.

The political situation in Indonesia also remains tenuous. While the successful completion of the first free election in the past 30 years has been a source of hope and helped to bolster the international support to the Indonesian economy, there remain many questions about the stability of the government. The newly elected president, Abduhrhman Wahid is of infirm health and may not be able to serve out his full five year term. The role of the military is also a question. Traditionally an active player in Indonesian politics, the military has apparently taken a back seat in the current electoral process. However, the fact that there are still factions that support the policies of ousted dictator Suharto contributes to instability in the political arena. There are also questions about what role the Islamic parties that contributed to Mr. Wahid?s victory will play in future policy-making decisions. While both Mr. Wahid and his popular vice president Megawati Sukarnaputri are strong proponents of the separation of state and religion, the impact of such a strong special interest group cannot be ignored. East Timor remains a potentially volatile situation. After a violent confrontation with the government, concessions were made that will lead to an independent government in that province. All of the details have not been completed, leaving the potential for a renewed crisis in the region. Instability exists in other regions of the country, which will need to be resolved by the new government if the economic recovery is to continue unabated.

The basic ground-work for recovery of the Indonesian economy has been completed. Continued political stability, successful completion of banking reforms and continued effective use of monetary and fiscal policy will be essential for full recovery to be realized. It is early in the process, but preliminary signs are encouraging.