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Indonesia faces an overhang of Crisis “Syndrom”

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Indonesia faces an overhang of Crisis “Syndrom”
By: Prof. Tri Widodo, Ph.D

Are  there any reasons for anybody to countenance the possibility of a new chapter of  the economic crisis in Indonesia? Three macroeconomic issues that are worth serious attention in relation to latest developments in Indonesia economy. The list includes economic growth,  unemployment and stabilization.

Economic growth that has weakened 
Economic growth registered in the last three quarters attest to a weakening economy. The target set for economic growth in the revised annual budget 2013 was  6.3% , which in all likelihood will be difficult to achieve.  Bank Indonesia (2013) and  BPS (2013) indicate that conditions over the last two quarters pointed to economic growth of 5.8%. The implication of that is clear, for according to Okun’s law,  low economic growth means that the  economy has limited capacity to absorb employees. Apparently, the  trickle-down effect from macroeconomy that posts growth of  5.8% , does not have ample capacity to absorb employment, “the state of microeconomy does not have as much  spackle as the macroeconomy” due to structural weaknesses,  such as competitiveness of manpower, infrastructure and so on.

Success achieved on the performance of macroeconomic indicators has become political commodity which the government exploits to get as much political capital from it as possible. Yet, the performance of microeconomy such unemployment and poverty continues to be serious cause for concern. Based on BPS statistics, the level of unemployment in February 2013  was 7.17 million  (5.92%)  of total work force in Indonesia which hovers around  121.2 million.  Meanwhile, poverty incidence  in March 2013  was  11.37%, which implies that the target set in the revised annual budget of reducing poverty to 10.5% will not be easy to achieve. Moreover, such pessimism is compounded by rising inflation which in July 2013 reached 3.29% (mtm).   Rising inflation is a consequence of  a series of factors that include the policy that raised prices of subsidized fuels,  fasting month, and holiday season.

 Industry and investment, domestic and foreign alike, is biased in favour of capital intensive mode of production over labor intensive production. Low competitiveness of domestic labor force, and uncertainty that surrounds labor laws and regulations have done little to growing pessimism among businessmen.   In an interview  with  business associations , it came to light that businessmen who  initially  had manufacturing concerns that used labor intensive production processes such as textiles, electronics and so on were forced to alter their businesses toward economic activities that had little interaction with labor, which includes property and real estates, where most of manpower is procured through outsourcing. Many businessmen,  no longer produce goods but opt to deal in trading or importing businesses. Importing is more interesting  and lucrative compared with getting involved in domestic production.  Such condition is aggravated by the rising trade deficit. In July  2013, Indonesia registered trade deficit of  USD 2.3 billion. To make matters worse, Indonesian imports do not only consist of  capital goods, raw materials and supporting goods, but also consumption goods. This attests to an economy that is facing  the structural problem  of competitiveness. 

Capital and financial account has weakened in quarter I-2013. Capital and financial account decreased significantly, posted a deficit of USD 0.3 billion in quarter I-2013, eventhough in quarter IV-2012 registered surplus of USD 12.08 billion. Deficit in current account as well as capital and financial have caused a deficit in trade balance, amounted of USD 6.6 billion in quarter II-2013 whereas in quarter IV-2012 posted a surplus of USD 3.2 billion. Deficit of trade balance is similar to the conditon during crisis in 1998, which trade balance posted deficit of USD 9.3 billion.

Rising Instability
Inflation in July 2013 was 3.29% (mtm), which though represents a divergence from the target set by the government, is not as bad as it may seem. In comparison with the crisis   year,  Indonesian inflation in  August 2013 was  8.79% (yoy), ich is better than the condition in   1998  when the country registered  inflation of 54.54% (yoy)  and  2008 which posted 11.06% inflation (yoy).  With respect to foreign exchange reserves, the year 2013 is still far better than the condition during the  previous crisis. In 1998 Indonesia  had  USD 14.44 billion as foreign exchange reserves and in  2008 , it had  USD 57,108  billion.
 
In the year 2013, the position of foreign exchange reserve was USD 92.997 billion in August 2013. However, the level of foreign exchange reserve was not accumulated through a surplus such as the case with  China. On the contrary,   the level of foreign reserves  was accumulated from hot money which in very short time reverse course for instance securities, with the implication if market  conditions in US and Europe show marked improvement, Indonesia shold be prepared to suffer from high capital outflow.  With respect to debt service ratio (DSR), the year 2013 is far worse than 1998 and 2008 crisis years. The debt service ratio too  high above the normal ratio of 20%.    In 1998  and  2008, Indonesian  DSR  was still normal at 12.84%  and  15.3%.  In 2013, DSR of 41.4%  is far higher than the acceptable normal limit.   Moreover, the exchange of Rupiah against US dollar has experienced deep depreciation during this year, 2013.  In  1998, Rupiah plummeted to the lowest level of  Rp17 000.00/USD. This is understandable as the Indonesian currency was trying to establish new equilibrium after its movement  was no longer constrained by the policy of managed exchange rate regime. In 2008 and 2013, fluctuation of Rupiah, attests to the full play of market forces, as the exchange rate of  Rp11 711.00/USD  and  Rp11 200.00/USD  reflects the interplay of real market forces. 

Conclusion
Based on the above remarks, there is no way one can deny the reality that Indonesian today faces an overhang of crisis “syndrome”.  Weakening economic growth  and rising instability attest to this, if nothing else does.  If the economy plunges into a fully fledged crisis, rising again will be even harder given the fact that the crisis if and when it occurs, will be caused by fundamental factors if compared with previous crises: accumulation of gross mismanagement,   which has plunged the economy into low competitiveness.  Moreover,  the domestic policy, which  relatively shows signs of frailty when the domestic market  faces open competition. In 2015, ASEAN economic community will open up domestic market to free competition.   Is Indonesia ready?  Unless  quick, accurate, and appropriate  handling of Indonesia economy takes course,  there is little doubt that it is  a matter  of time before Indonesia plunges back into another crisis.

Indonesia faces an overhang of Crisis “Syndrom”

By: Prof. Tri Widodo, Ph.D

 

Are  there any reasons for anybody to countenance the possibility of a new chapter of  the economic crisis in Indonesia? Three macroeconomic issues that are worth serious attention in relation to latest developments in Indonesia economy. The list includes economic growth,  unemployment and stabilization.

 

Economic growth that has weakened  

Economic growth registered in the last three quarters attest to a weakening economy. The target set for economic growth in the revised annual budget 2013 was  6.3% , which in all likelihood will be difficult to achieve.  Bank Indonesia (2013) and  BPS (2013) indicate that conditions over the last two quarters pointed to economic growth of 5.8%. The implication of that is clear, for according to Okun’s law,  low economic growth means that the  economy has limited capacity to absorb employees. Apparently, the  trickle-down effect from macroeconomy that posts growth of  5.8% , does not have ample capacity to absorb employment, “the state of microeconomy does not have as much  spackle as the macroeconomy” due to structural weaknesses,  such as competitiveness of manpower, infrastructure and so on.

 

Success achieved on the performance of macroeconomic indicators has become political commodity which the government exploits to get as much political capital from it as possible. Yet, the performance of microeconomy such unemployment and poverty continues to be serious cause for concern. Based on BPS statistics, the level of unemployment in February 2013  was 7.17 million  (5.92%)  of total work force in Indonesia which hovers around  121.2 million.  Meanwhile, poverty incidence  in March 2013  was  11.37%, which implies that the target set in the revised annual budget of reducing poverty to 10.5% will not be easy to achieve. Moreover, such pessimism is compounded by rising inflation which in July 2013 reached 3.29% (mtm).   Rising inflation is a consequence of  a series of factors that include the policy that raised prices of subsidized fuels,  fasting month, and holiday season.

 

 Industry and investment, domestic and foreign alike, is biased in favour of capital intensive mode of production over labor intensive production. Low competitiveness of domestic labor force, and uncertainty that surrounds labor laws and regulations have done little to growing pessimism among businessmen.   In an interview  with  business associations , it came to light that businessmen who  initially  had manufacturing concerns that used labor intensive production processes such as textiles, electronics and so on were forced to alter their businesses toward economic activities that had little interaction with labor, which includes property and real estates, where most of manpower is procured through outsourcing. Many businessmen,  no longer produce goods but opt to deal in trading or importing businesses. Importing is more interesting  and lucrative compared with getting involved in domestic production.  Such condition is aggravated by the rising trade deficit. In July  2013, Indonesia registered trade deficit of  USD 2.3 billion. To make matters worse, Indonesian imports do not only consist of  capital goods, raw materials and supporting goods, but also consumption goods. This attests to an economy that is facing  the structural problem  of competitiveness.  

 

Capital and financial account has weakened in quarter I-2013. Capital and financial account decreased significantly, posted a deficit of USD 0.3 billion in quarter I-2013, eventhough in quarter IV-2012 registered surplus of USD 12.08 billion. Deficit in current account as well as capital and financial have caused a deficit in trade balance, amounted of USD 6.6 billion in quarter II-2013 whereas in quarter IV-2012 posted a surplus of USD 3.2 billion. Deficit of trade balance is similar to the conditon during crisis in 1998, which trade balance posted deficit of USD 9.3 billion.

 

Rising Instability

Inflation in July 2013 was 3.29% (mtm), which though represents a divergence from the target set by the government, is not as bad as it may seem. In comparison with the crisis   year,  Indonesian inflation in  August 2013 was  8.79% (yoy), ich is better than the condition in   1998  when the country registered  inflation of 54.54% (yoy)  and  2008 which posted 11.06% inflation (yoy).  With respect to foreign exchange reserves, the year 2013 is still far better than the condition during the  previous crisis. In 1998 Indonesia  had  USD 14.44 billion as foreign exchange reserves and in  2008 , it had  USD 57,108  billion.

 

In the year 2013, the position of foreign exchange reserve was USD 92.997 billion in August 2013. However, the level of foreign exchange reserve was not accumulated through a surplus such as the case with  China. On the contrary,   the level of foreign reserves  was accumulated from hot money which in very short time reverse course for instance securities, with the implication if market  conditions in US and Europe show marked improvement, Indonesia shold be prepared to suffer from high capital outflow.  With respect to debt service ratio (DSR), the year 2013 is far worse than 1998 and 2008 crisis years. The debt service ratio too  high above the normal ratio of 20%.    In 1998  and  2008, Indonesian  DSR  was still normal at 12.84%  and  15.3%.  In 2013, DSR of 41.4%  is far higher than the acceptable normal limit.   Moreover, the exchange of Rupiah against US dollar has experienced deep depreciation during this year, 2013.  In  1998, Rupiah plummeted to the lowest level of  Rp17 000.00/USD. This is understandable as the Indonesian currency was trying to establish new equilibrium after its movement  was no longer constrained by the policy of managed exchange rate regime.   In 2008 and 2013, fluctuation of Rupiah, attests to the full play of market forces, as the exchange rate of  Rp11 711.00/USD  and  Rp11 200.00/USD  reflects the interplay of real market forces. 

 

Conclusion

Based on the above remarks, there is no way one can deny the reality that Indonesian today faces an overhang of crisis “syndrome”.  Weakening economic growth  and rising instability attest to this, if nothing else does.  If the economy plunges into a fully fledged crisis, rising again will be even harder given the fact that the crisis if and when it occurs, will be caused by fundamental factors if compared with previous crises: accumulation of gross mismanagement,   which has plunged the economy into low competitiveness.  Moreover,  the domestic policy, which  relatively shows signs of frailty when the domestic market  faces open competition. In 2015, ASEAN economic community will open up domestic market to free competition.   Is Indonesia ready?  Unless  quick, accurate, and appropriate  handling of Indonesia economy takes course,  there is little doubt that it is  a matter  of time before Indonesia plunges back into another crisis.

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