In 2009, a little over ten years on from the 1997/98 Asian financial crisis, Indonesia is watching another crisis unfold, this time on a global scale, but, thus far, it has seen few echoes of its grim past. The rupiah is still seen as a risky currency to hold, and has already fallen by 25% since mid-2008. There is also still a reliance among the business community on foreign capital, which funded 50% of all investment in 2007, according to the IMF. Nonetheless, over the last decade the country has gone through an important transition that has left it stronger in terms of its economic fundamentals and its political system, which should reduce its vulnerability to a repeat of the turmoil of 1997/98.
Macroeconomic fundamentals
Indonesia’s main exposure to the current crisis lies in its exposure to changes in capital flows, much like it did in 1997/98. International reserves once again look small, covering around 150% of the country’s short-term debt, well below the ASEAN median of almost 600%, and putting it on a par with countries in the ailing Eastern Europe region. Now is a particularly worrying time for this ratio to be low, given the difficulty of rolling over debt in international capital markets. If debt cannot be rolled over and other sources of capital are not available a country will be reliant on its international reserves to avoid a capital account crisis.
However, unlike ten years ago, and unlike most countries in Eastern Europe, Indonesia is set to run a current account surplus in 2009, just as it has done in every year since 1998. This current account surplus will be an important source of capital inflows, and it means that despite its piles of short-term debt, Indonesia should has more than enough reserves to cover its expected external financing requirements in 2009.
The state of the banking sector is also a cause for encouragement. The Asian financial crisis exposed deep governance problems in Indonesia’s banks, including connected lending, rife corruption, and a general lack of transparency. Efforts have been made to clean up the banks, and although the non-performing loan ratio, which stood at 4% in 2008, is expected to rise in 2009 as firms are hit by falling revenues, it is unlikely to hit anything like the devastating height of 60% reached in 1999. Furthermore, the loan to deposit ratio of Indonesian banks is just 43%, meaning they have funded their lending out of their own deposits, rather than through borrowing.
The government’s finances also look strong. Public debt fell to just 30% of GDP in 2008, from a peak of 100% in 1999. Furthermore, the fuel price subsidy bill has been slashed by a big fall in global oil prices. This has freed up funds for more productive spending in areas such as infrastructure and education. In 2009 the government is planning to deliver a large fiscal stimulus, which will see the budget deficit rise to 2.5% of GDP, from 1.1% in 2008. The main goal of this stimulus is to support economic growth in the short term, but with Indonesia’s road and ports ranked among the worst in the world by the World Economic Forum’s Global Competitiveness Report, extra spending on infrastructure could also improve the country’ long term growth prospects.
One less favourable contrast between now and the Asian financial crisis, is that the developed world is currently going through a deep recession, meaning export demand is extremely weak. The crisis has so far hit the Asian region primarily through this channel. Japan saw its exports fall by 50% year on year in December, Singapore has seen a 35% fall, and Taiwan 42. Indonesia has not escaped, with its own exports falling by 36 in January 2009. Japan, its largest trade partner, is expected to experience an economic contraction of 5.5% in 2009, suggesting the export picture is set to remain extremely bleak. Importantly though, Indonesia is one of the least trade-exposed countries in Asia, with just 33% of its GDP accounted for by exports in 2008. This will not be enough to help it avoid an economic recession in 2009, but its economic contraction is likely to be smaller than that experienced by many of its neighbours.
Democratic transition
Indonesia’s political landscape has been through a dramatic alteration over the past decade. Following Soeharto’s fall in 1998 the country began a transition towards democracy. Its first free and fair parliamentary elections since 1955 were held in 1999, and in 2004 Susilo Bambang Yudhoyono became the country’s first directly elected president. A democratic spirit has taken hold quickly. Almost 125m people, around 84% of registered voters, took part in the 2004 parliamentary elections, which proceeded without vioelce. Moreover, around 400 local elections have taken place since direct election of local leaders began in 2005. Most of these have proceeded without incident, and of more than 150 where the results were contested in the courts, most were peacefully resolved. Importantly, direct election of local leaders appears to be improving their accountability, with many having been ousted by their disgruntled electorates, while at the national level the election of Mr Yudhoyono illustrated the electorate’s willingness to elect a leader based on their performance and policy platform, rather than their party affiliations or political heritage. Mr Yudhoyono’s closest rival in 2004 was the incumbent Megawati Soekarnoputri, the daughter of Indonesia’s popular first president, Soakarno. Her poor performance in office, led the electorate to turn against her in favour of Mr Yudhoyono’s, whose strong reformist platform resonated more than Ms Megawati political heritage.
Indonesia’s new democratic system will receive its strongest test in 2009. Even in the best case scenario the parliamentary and presidential elections that are due in April and June, respectively, will be held against a backdrop of economic recession and rising unemployment. In 1998, the last time Indonesia suffered a serious economic downturn, Indonesians expressed their anger against the ruling elite through violence, most notably in Jakarta in May 1998, where riots left 1,200 people dead. Such a backlash against a democratic leader, who up to now has remained very popular, seems unlikely, but in a country where ethnic and religious tensions can erupt, and where the political elite has a history of kindling violence to suit their own ends, a totally peaceful 2009 is far from assured.