Policy Response to Overcome Crisis:
A Lesson from Indonesian Case
Hendri Saparini
Senior Economist - ECONIT Advisory Group
saparini@econit.com
hendrisaparini@indopolicy.com
Presentation for IDEAS Conference on
“Re-regulating Global Finance in the Light of the Global Crisis”
Tsinghua University, Beijing, China, April 9-12, 2009
The 1997/98 Crisis:
Pre-crisis
Crucial Problems on Financial Sector:



Cross-ownership & cross-management in
financial sectors
Over-valued rupiah
Over-leveraged private foreign loan
The 1997/98 Crisis:
Policy Response
Policy blunder under IMF receipt:





Super tight money policy
To liquidate of 16 banks
Take over private sectors debt
Budget dicipline, reduce subsidy, raise tax,
privatization.
Acceleration of liberalization in real
sectors (agriculture, industry)
ECONIT Economic Outlook 2008: A YEAR OF THE BUBBLES
USA (2008/09)
Thailand (1997/98)
•Carry-over of Subprime lending
•Fiscal Deficit (1,2%GDP)
•Trade Deficit (US$ 850 bio)
•Current Account Deficit (6%GDP)
• Liquidity crises
• Depreciation of
Overvalued Bath
Direct Linkages
Linkages:
•Capital outflow
•Sharp Fall of Rupiah
•Lags
•% Coupling
DOMESTIC
FACTORS
1997/98:
Political Instability
• Violation of Legal Lending Limit
•Overvaluation Rupiah
•Private debt: Huge & no record
• Government Lack of
Credibility & Confidence
• Ineffective Government
2007/08:
1997/98: Supply & Price Hike
• Energy (Gasoline: 71%
Kerosene: 25%)
• Rice (>100%)
2008/09: Supply & Price Hike
•Energy (Oil&Gas)
•Rice, Wheat, Cereals
•Sugar
•Palm Oil
•Soybean
INTERNATIONAL
FACTORS
•Price driven export growth
•Inflows of hot money
•Artificial Growth of Banking sector
•Stock prices >> fundamentals
Social & Political Effects
Indonesian Subprime Loans:
•Motor Cycles Loans
•Commercial Property
•Electronic Loans
•Credit Cards
Structural Problem
• High Poverty (40 mio)
• Huge Inequality
• Unemployment (12%)
Social & Economic Effects
©
ECONIT Advisory Group
The 2008 Crisis:
Pre-Crisis
Financial bubbles and deindustrialization
Contradiction between improving financial
indicators and slowing growth of real sector
combining with accelerating
deindustrialization
The 2008 Crisis:
The Financial Bubbles

The main reason for the emerging contradiction between
the performance of the financial and real sectors is the
inflow of hot money into Indonesia.

The total value of hot money that has entered Indonesia
since 2006 up to December 2008 is thought to exceed Rp
140 trillion.

The inflow of hot money has strengthened the rupiah
against other currencies and bid up the prices of domestic
assets. The Jakarta Stock Exchange Index (IHSG) increased
by 57 % in 2007, closing at 2,830 (Jan 9, 2008). The rupiah
strengthened to an average rate against the US dollar of Rp
9,142 (2007).
The 2008 Crisis:
Reasons For Susceptible to A Shock
1.
Price driven export growth
2.
Share price increase exceeded the
fundamental
3.
Artificial growth of banking sector
4.
Indonesian subprime loan
1. Price Driven Export Growth
Export and foreign exchange reserves have
increased only because of rising international
commodity prices and inflows of hot money.
Throughout 2006 and 2007, Indonesia’s
foreign exchange reserves have increased
sharply from US$ 35 billion at the end of 2005
to US$ 57 billion at the end of 2007.
But, the rise in reserves was not supported by
export competitiveness or an increase in
foreign direct investment.
Export: Dominating by Commodities (2007)
Commodities
Contribution Share to
To growth
Export of
Non-OilGas
Growth
1
Nickel
16.3%
3.8%
159.5%
2
Copper
14.4%
8.5%
31.5%
3
Machinery and equipment
14.0%
7.4%
36.6%
4
CPO
10.8%
6.7%
29.8%
5
Chemical Product
9.6%
7.0%
24.3%
6
Coal
6.7%
7.6%
14.5%
7
Textile
3.4%
11.1%
4.5%
8
Paper
2.6%
4.6%
8.6%
9
Rubber
2.3%
5.3%
6.6%
10 Metal goods
2.0%
1.1%
32.3%
82.1%
63.1%
22.6%
100.0%
100.0%
16.5%
Total 10 commodites
Total Non-Oil Gas
ECONIT Advisory Group
Sources: BI
Mining Comodities:
Price Index
700
600
Iron Ore
500
400
300
Copper
200
Nickel
Alumunium
100
0
Dec-08
Jul-08
Feb-08
Sep-07
Apr-07
Nov-06
Jun-06
Jan-06
Aug-05
Mar-05
Oct-04
May-04
Dec-03
Jul-03
Feb-03
Sep-02
Apr-02
Nov-01
Jun-01
Jan-01
Aug-00
Mar-00
Sumber: IMF, diolah
ECONIT Advisory Group
The Sharp Declining of Mining Product
-37.01%
Zinc
Uranium
-18.34%
Nickel
-46.40%
-55.64%
Copper
-39.46%
ECONIT Advisory Group
Alumunium
Sorce: IMF
Agriculture Commodities:
Price Index
450
400
350
300
Rice
Wheat
250
200
Soybeans
Maize
150
Palm oil
100
50
0
Jan00
Jun00
Nov00
Apr01
Sep01
Feb02
ECONIT Advisory Group
Jul02
Dec02
May03
Oct03
Mar04
Aug04
Jan05
Jun05
Nov05
Apr06
Sep06
Feb07
Jul07
Dec07
May08
Oct08
Sumber: IMF, diolah
The Decline in International Price Didn’t
Follow by Domestic Price:
Oil & Gazoline
1.0
US$/liter
Harga Minyak Dunia
0.9
0.8
0.7
0.6
0.5
Harga BBM Premium
0.4
0.3
0.2
0.1
Jan-05
Jul-05
ECONIT Advisory Group
Jan-06
Jul-06
Jan-07
Jul-07
Jan-08
Jul-08
Jan-09
Sumber: Berbagai Sumber
The Decline in International Price Didn’t
Follow by Domestic Price:
Rice
1,200
US$/metric ton
Rp/Kg
5,600
5,500
1,000
5,400
Harga Beras Nasional
(Skala Kanan)
800
5,300
5,200
600
5,100
5,000
400
200
4,900
Harga Beras Internasional
(Skala Kiri)
4,800
4,700
0
4,600
Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08
ECONIT Advisory Group
Sumber: Depdag, Berbagai Sumber
The Decline in International Price Didn’t
Follow by Domestic Price:
Cooking Oil
1,400
Rp/liter
US$/ton
14,000
Harga Minyak Curah Nasional (Skala Kanan)
1,200
12,000
1,000
10,000
800
600
8,000
Palm Oil (Skala Kiri)
6,000
400
4,000
200
2,000
0
0
Sumber: Depdag, Berbagai Sumber
ECONIT Advisory Group
2. Share Price Increase Exceed
The Fundamental

Early January 2008, fifty-one companies listed on
the exchange recorded price-earnings ratios in
excess of fifty, and 26 of these posted ratios greater
than 100. Remarkably, the prices of eleven stocks
on that day were more than 300 times of earnings.

Soaring stock prices not supported by economic
performance reflects the formation of a financial
bubble.
Hot Money Inflow
Foreign Ownership (Rp trillion)
Surat Berharga
Dec-06
Dec-07
Share (%)
Dec-08
Share (%)
Stock
522.3
804.5
61.96%
452.2
59.7%
Government
Obligation
54.9
78.16
16.36%
87.6**
16.7%
Bank of
Indonesia
Certificate
18.1
42.7*
15.80%
6.7
3.8%
*) November
** end of Agust 08 =106.7 (19.8%)
ECONIT Advisory Group
Jakarta Stock Exchange
IHSG Growth at Highest Pace
260
Indeks (Jan-2006 = 100)
240
IHSG
Indonesia
220
HANGSENG
200
Hongkong
180
KLSE,Malaysia
160
STI, Singapore
140
KOSPI, Korea
DJI, US
120
100
Nikkei Jepang
80
Jan-06
Jun-06
ECONIT Advisory Group
Nov-06
Apr-07
Sep-07
Sumber: Yahoo Finance
Jakarta Stock Exchange
Fell the Lowest after 2008 Crisis
110
IHSG
NIKKEI
100
KOSPI
STI
KLSE
90
DJI
HIS
80
70
Index Jan
2008=100
60
50
40
ECONIT Advisory Group
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8
ct
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O
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Se
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08
Au
g-
Ju
n08
Ju
l-0
8
08
ay
M
Ap
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8
8
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-0
M
Ja
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Fe
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30
3. Artificial Growth of Banking
Growth of the banking sector was largely an illusion.
On 2007 the banking industry recorded sharply
higher profits. The Net Interest Margin (NIM) for
2007 was 5.7% The wide gap between interest rates
on loans and savings generated profits, which
attracted investors into the banking industry.
The banks’ share prices skyrocketed as a result. Yet
profitability in the banking sector was not supported
by strong fundamentals, for example credit growth. In
2006, bank credit by only 14%, followed y 25% in
2007. But consumer credit was the fasting growing
sector. We expect credit growth of about 20% in
2008.
4. Indonesia Subprime Loan

Since 2007 the financial bubble has grown quickly and
consistently, extending in early 2008 to the property, consumer
credit such as motorbike loans and credit cards.

The boom in commercial property investment has not been met by
an accompanying increase in demand. Occupancy rates have
fallen as result of the slow growth of investment. In 2007, gross
investment increased by only 8 percent from the low levels of the
year before.

Another model of subprime loan is the huge of motor cycle loan.
Poor public transportation has caused high cost transportation. As
a result, motor cycle loan was booming. Until 2007 at least there
were 5 millions motor cycles in Indonesia, of which three fourth
were sold through leasing companies.
Acceleration of Deindustrialization
Real GDP vs. Manufacture Production Index
Real GDP Index
155.0
151.8
150.0
143.0
145.0
140.0
132.9
135.0
130.0
126.0
125.0
120.0
113.5
115.0
108.3
110.0
105.0
127.0
119.2
123.4
121.9
118.9
116.9
Manufactur Production
Index
114.6
103.6
108.8
100.0
100.0
103.3
2000
2001
ECONIT Advisory Group
2002
2003
2004
2005
2006
2007
QIII-2008
Growth of GDP and Manufacturing Sector
The Gap Become Wider
30%
PDB Growth
5.7%
29%
5.0%
29.1%
6.3%
7%
6.1%
6%
5.5%
4.9%
5%
28.7%
4.3%
28%
3.8%
28.3%
4%
28.1%
27.9%
27.4%
27%
27.5%
3%
27.0%
Manufacture Share to GDP
2%
26%
1%
25%
0%
2001
2002
ECONIT Advisory Group
2003
2004
2005
2006
2007
2008
Comparison of Crisis 1997/98 and 2008
Crisis 1997-1998
Origin
Thailand
Crisis 2008
US
Foreign exchange reserves
US$ 24 billion
US$ 51 billion
Import
US$ 3.8 billion
billion
US$ 11 billion
4.6 X
Ratio Forex Reserve/Import
Resv/Impor
Hot Money (5
5 year
yearsbefore
beforecrises
crises)
Ratio Debt/GDP
Debt/GDP
Ratio
Foreign Debt
debt Stock
World demand
Int'l trade Policy
International
Trade Policy
6.3 X
billion
US$ 14.8 billion US$ 24.5 billion
50.0%
37.3%
US$ 129 billion
Stable
billion
US$ 146 billion
Decline
Normal
Protective
Int’l Commodity Prices in Rp
Increase
Exchange rate of Rp
Weaken
ConsumptionLevel
Level
Consumption
ECONIT Advisory Group
Decline
Weaken
Rp 900 trillion Rp 5.100 trillion
The 2008 Crisis:
Policy Response
Repeating the same blunder and
disengaging real sectorSuper tight money
policy:
 Increase the interest rate

The buy back policy

Fiscal stimulus
Indonesia Policy Responses
The Monetary Policy

The decision of Bank Indonesia and the
government to impose a tight money policy
demonstrates that the government has learned
nothing from the 1998 crisis.

Since January 2009, Bank of Indonesia have
been reducing interest rate. The effectivity of
monetary policy alone will be a limition. Loose
in liquidity and interest rate policy 
speculation and depreciation of exchange rate
Indonesia Policy Responses
The buy back policy

The government has prepared Rp. 4 trillion in government funds
and has encourages State Owned Enterprises (SOES) to buy back
shares to lift stock prices.

It was not an effective action to cure the economy turmoil, even
for only in the capital market. To push SOEs to buy back stocks
up to 50% without general share holder meeting shows
imprudent action in decision making.

Shown unsupportive policy to samall investor as 60 % of
Indonesia money market was controlled by hedge fund and
foreign investor.
Indonesia Policy Responses
The Fiscal Stimulus
This counter-cyclical policy will not effective




The effectiveness of fiscal stimulus will be very low; in
the last 4 years the government performed weak fiscal
management
80% of the fiscal policy was allocated as tax saving,
not for direct spending.
Increase budget deficit, from 1% (Rp 51 trillion) to
2,6% to the GDP (Rp 137 trillion)
Financed by foreign loan and domestic loan
(government obligation).
Fiscal Stimulus
81% are Tax Saving, Tax Subsidy, Import Duty
Tax Saving (PPh, PPN, BM)
Rp 43 trillion
Tax Subsidy borne by the government
(Pajak DTP) and Import Duty by the
government (BM DTP)
Rp 17,3 trillion
Subsidy to business sector (fuel subsidy
and discount on peak hour tariff for
industry)
Rp 4,2 trillion
State expenditure for job creation
Rp 10,8 trillion
ECONIT Advisory Group
81%
19%
Indonesia Policy Responses
Policy on Trade and Industry




The government will to continue Washington
Concensus (cut subsidy for food, education, oil,
increase loan, etc.)
Governemnt officially stated ‘IMF and World World
Bank are the umbrella to overcome the crisis’
Officially stated to continue liberalization and against
potection
Continue create new FTA without industrial policy
and stategy
Indonesia Crisis:
The Proposal for Policy Responses

Re-orienting policy in the financial sector (strictly managing the
hot money and capital control/capital regulation must be one of
the priority to support the real sector)

To change the hands-of policy to hand-on policy on real sector.
o
o

To create value added (develop/restructure the manufacturing
industry) and increase the productivity for better fundamental
economy and stronger economic structure.
To solve the high poverty rate and huge unemployment.
The government should minimize the amount of debt, but reorienting and re-alocating budget to give fiscal stimulus
World’s Tin Production (2007)
Others, 5%
Vietnam, 2%
Congo, 4%
Brazil, 4%
Bolivia, 5%
China, 45%
Peru, 13%
Indonesia, 22%
ECONIT Advisory Group
Source: World Mineral Production, 2003-2007, diolah
World’s Tin Demand,
Based on Use (2005)
Other, 10.40%
Glass, 1.80%
Brass & Bronze,
5.60%
Solders, 49.70%
Chemicals,
14.10%
Tinplate, 18.30%
ECONIT Advisory Group
Source: PT Timah Tbk, 2007
Indonesian Imports of
Tin Based Products (US$ juta)
Commodities
2003
2004
2005
2006
2007
Flat-rolled iron or nonalloy steel
products, >600 mm , plated or coated
with tin, > 0.5 mm thick
1.79
1.16
26.67
19.17
20.35
Flat-rolled iron or nonalloy steel
products, > 600 mm wide, plated or
coated with tin, < 0.5 mm thick
42.20
98.69
92.90
67.48
73.48
Flat-rolled iron or nonalloy steel
products, <600 mm wide, plated or
coated with tin
0.31
1.90
0.15
1.45
0.54
10.61
24.16
19.46
6.94
169.85
Radiotelephony, radiotelegraphy,
radiobroadcasting or television
Source: Ministry of Trade
Indonesian Public Debt
Increase by 31% in Four Years
1800
Foreign Debt
1600
Triliun Rupiah
1400
1,263
1,249
Domestic Debt
1,240
1,275
Total
1,268
1,310
748
801
612
562
586
2005
2006
2007
661
655
649
662
656
602
594
591
613
2001
2002
2003
2004
1,666
906
920
717
746
2008
Jan-09
1,387
1200
1000
1,623
800
600
400
200
0
ECONIT Advisory Group
Source: Ministry of Finance
Indonesian Public Debt
Decrease In Ratio Increase in Stock
90%
80%
77%
Debt Stock
69%
70%
60%
Nilai utang pemerintah (Rp triliun)
62%
1,263
1,249
1,240
50%
1,275
1,268 1,310
1,623
1,387
1,400
1,000
46%
40%
800
39%
30%
Rasio utang terhadap PDB
35%
33%
600
400
Debt/GDP Ratio
10%
1,600
1,200
56%
20%
1,800
200
0%
2001
2002
2003
2004
2005
2006
2007
2008
Sumber: Depkeu, BPS, diolah
ECONIT Advisory Group