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