Economic Stability in Indonesia
October 20th 2008 07:44
Since I have focused all of my uni assignments on the financial crisis, I figure, why stop now.
Just how safe is Indonesia?
Now, after 1997 we all know that Indonesia isn't the most financially stable place in the world. I was there when the currency crash, and subsequently when Suharto got kicked out in 97 & 98 respectively. Now, it appears, the specter of widespread financial chaos is haunting Indonesia once again. But will this time be any different?
In a nutshell, the answer is yes. In 97, Indonesia was a much different place to what it is now. Under Suharto's Orde Baru (New Order), the country had seen substantial economic growth, but at the cost of an oppressive political regime. I'm not going to go too much into the causes of the 97 crash, that's a story for another time, but in a nutshell it was caused (at least in Indonesia) by a huge lack of confidence, resulting in currency flight, etc.
Anyhoo, some researchers (namely Chowdhury and Sugema, 2005) have called into question Indonesia's ability to cope with a financial crisis, and their hypothesis goes a little something like this. Indonesia has been a recipient of a fair (read: large) amount of foreign aid, and as a result this has resulted in the govt becoming lazy, at least in terms of domestic resource mobilization. Now, they have a point. Indonesia is not exactly world famous for it's domestic taxes. As a developing country, most of Indonesia's economic activity occurs at the 'cottage' level, and this stuff is tax-free (source). Because they got bailouts from foreign aid when the times got tough (post 97, post tsunami aceh, to name a couple), they didn't need to straighten out domestic taxation to the greatest theoretically possible degree. Well, according to the researchers, as soon as another economic crisis comes along, Indonesia would once again be reliant on foreign aid to get through it.
Is this the case? No. Like I said, Indonesia today is a lot different to the Indonesia of 97. Hell, it's a different Indonesia to the Indo of 2005, when the article was written. The country is flourishing under a (pretty fair) democratic system, corruption is having its ass kicked left right and centre by the KPK, there has been sustained economic growth.
Now, how will the crisis affect Indonesia? First up, they saw a huge drop in the share market, and suspended trading after losing over 20% in 3 days. However, this drop is mainly due to wories over the Bakrie group, which accounts for over 1/3 of daily trading. The head of it is (not officially, but everyone knows it) corrupt as hell, and has held a couple of (interest conflicting) government positions. His family seems magically immune from corruption investigations, surprise surprise. Their group took on $1.25 billion in debt due to the crisis, which is what triggered the share market collapse. However, they are selling off a number of shares in a number of their businesses, already including a Rp 1 Trillion share sale to Avenue Capital group from their real estate wing.
So really, Indonesia seems to be weathering this storm pretty well. The share market will rally when the Bakrie woes are eased, which shouldn't take too long. The govt increased bank deposit guarantees by 20 fold, in a move to ease confidence worries and prevent a run on the banks. They saw enough of bank stampedes in 97, they don't want them again.
But is it enough? Several other South East Asian nations have guaranteed all loans (such as Malaysia and Singapore, to name a couple). Will we see large bank deposits flood out of Indonesia and into these banking safehavens? Again, it's all about confidence. While $200k may be alot to average joe, it's peanuts to a big company, and as soon as confidence in that financial security is questioned then they are going to run for the hills (of singapore and malaysia).
Furthermore, the Indonesian government has eased accounting rules in order to stimulate business growth. Now, while I can see the logic for this in the short run, is this really such a wise move? If memory serves, it was lax accounting standards and a lack of regulation that got the world economy into such a state in the first place. Indonesia is going to have to be very careful to avoid similar consequences 10 or more years down the track.
Anyway, just a bit of food for thought. The stability of the entire SEA region hinges on their economies and how well they are going to weather this financial storm, but if their largest economy is any indication then the outlook might not be so bad.
Just how safe is Indonesia?
Now, after 1997 we all know that Indonesia isn't the most financially stable place in the world. I was there when the currency crash, and subsequently when Suharto got kicked out in 97 & 98 respectively. Now, it appears, the specter of widespread financial chaos is haunting Indonesia once again. But will this time be any different?
In a nutshell, the answer is yes. In 97, Indonesia was a much different place to what it is now. Under Suharto's Orde Baru (New Order), the country had seen substantial economic growth, but at the cost of an oppressive political regime. I'm not going to go too much into the causes of the 97 crash, that's a story for another time, but in a nutshell it was caused (at least in Indonesia) by a huge lack of confidence, resulting in currency flight, etc.
Anyhoo, some researchers (namely Chowdhury and Sugema, 2005) have called into question Indonesia's ability to cope with a financial crisis, and their hypothesis goes a little something like this. Indonesia has been a recipient of a fair (read: large) amount of foreign aid, and as a result this has resulted in the govt becoming lazy, at least in terms of domestic resource mobilization. Now, they have a point. Indonesia is not exactly world famous for it's domestic taxes. As a developing country, most of Indonesia's economic activity occurs at the 'cottage' level, and this stuff is tax-free (source). Because they got bailouts from foreign aid when the times got tough (post 97, post tsunami aceh, to name a couple), they didn't need to straighten out domestic taxation to the greatest theoretically possible degree. Well, according to the researchers, as soon as another economic crisis comes along, Indonesia would once again be reliant on foreign aid to get through it.
Is this the case? No. Like I said, Indonesia today is a lot different to the Indonesia of 97. Hell, it's a different Indonesia to the Indo of 2005, when the article was written. The country is flourishing under a (pretty fair) democratic system, corruption is having its ass kicked left right and centre by the KPK, there has been sustained economic growth.
Now, how will the crisis affect Indonesia? First up, they saw a huge drop in the share market, and suspended trading after losing over 20% in 3 days. However, this drop is mainly due to wories over the Bakrie group, which accounts for over 1/3 of daily trading. The head of it is (not officially, but everyone knows it) corrupt as hell, and has held a couple of (interest conflicting) government positions. His family seems magically immune from corruption investigations, surprise surprise. Their group took on $1.25 billion in debt due to the crisis, which is what triggered the share market collapse. However, they are selling off a number of shares in a number of their businesses, already including a Rp 1 Trillion share sale to Avenue Capital group from their real estate wing.
So really, Indonesia seems to be weathering this storm pretty well. The share market will rally when the Bakrie woes are eased, which shouldn't take too long. The govt increased bank deposit guarantees by 20 fold, in a move to ease confidence worries and prevent a run on the banks. They saw enough of bank stampedes in 97, they don't want them again.
But is it enough? Several other South East Asian nations have guaranteed all loans (such as Malaysia and Singapore, to name a couple). Will we see large bank deposits flood out of Indonesia and into these banking safehavens? Again, it's all about confidence. While $200k may be alot to average joe, it's peanuts to a big company, and as soon as confidence in that financial security is questioned then they are going to run for the hills (of singapore and malaysia).
Furthermore, the Indonesian government has eased accounting rules in order to stimulate business growth. Now, while I can see the logic for this in the short run, is this really such a wise move? If memory serves, it was lax accounting standards and a lack of regulation that got the world economy into such a state in the first place. Indonesia is going to have to be very careful to avoid similar consequences 10 or more years down the track.
Anyway, just a bit of food for thought. The stability of the entire SEA region hinges on their economies and how well they are going to weather this financial storm, but if their largest economy is any indication then the outlook might not be so bad.
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