Global Financial Crisis: Indonesia

7/23/2019 Global Financial Crisis: Indonesia

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Introduction

The financial crisis of 200708, also known as the Global Financial Crisis, is considered by many

economists to have been the worstfinancial crisis since theGreat Depression of the 1930s. It threatened

the collapse of large financial institutions, which was prevented by thebailout of banks by national

governments, but stock markets still dropped worldwide. In many areas, the housing market also suffered,

resulting inevictions,foreclosures and a prolonged unemployment. The crisis played a significant role in

the failure of key businesses, declines in consumer wealth estimated in trillions of U.S. dollars, and a

downturn in economic activity leading to the20082012 global recession and contributing to the

European sovereign-debt crisis,liquidity crisis and debt crisis.

The main causes of the great recession involve:

1. Credit crunch and fall in bank lending.

2. Fall in confidence resulting from the financial instability.

3. Fall in the export global recession.

4. Collapse in housing markets leading to negative wealth effects.

5. Fiscal austerity compounding the initial fall in GDP.

6. In Europe, the single currency created additional problems because of over-valued exchange rates, and

high bond yields.

Effects of USA:

The first indications of serious crisis occur January 2008. On 15 January, news of a pointed fall in the

profits of the Citigroup banking led to a pointed fall on the New York Stock Exchange. A number of

American and European banks stated huge losses in their 2007 end of the year results. Most of the big

investment bank fallen bankruptcy like as, Lehman Brothers, meerillLynch. At this point the whole

economy was on a downward track.
https://en.wikipedia.org/wiki/Financial_crisishttps://en.wikipedia.org/wiki/Great_Depressionhttps://en.wikipedia.org/wiki/Bailouthttps://en.wikipedia.org/wiki/Evictionhttps://en.wikipedia.org/wiki/Foreclosurehttps://en.wikipedia.org/wiki/Great_Recessionhttps://en.wikipedia.org/wiki/Great_Recessionhttps://en.wikipedia.org/wiki/Great_Recessionhttps://en.wikipedia.org/wiki/European_sovereign-debt_crisishttps://en.wikipedia.org/wiki/European_sovereign-debt_crisishttps://en.wikipedia.org/wiki/Great_Recessionhttps://en.wikipedia.org/wiki/Foreclosurehttps://en.wikipedia.org/wiki/Evictionhttps://en.wikipedia.org/wiki/Bailouthttps://en.wikipedia.org/wiki/Great_Depressionhttps://en.wikipedia.org/wiki/Financial_crisis


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1. The 2007-2008 crisis started off in August 2007 as a subprime mortgage crisis primarily

concentrated in the United States but quickly change into a global financial crisis. where financial

institutions waver on the edge of bankruptcy in many countries in addition to the United States.Residential private investment (mainly housing) fell from its 2006 pre-crisis peak of $800 billion,

to $400 billion by mid-2009 and has remained depressed at that level also effect the

nonresidential investment.

2. The collapse financial market is now become matched by the declined of the real income. Stock

market prices, as measured by the S&P 500 index, fell 57% from their October 2007 peak of

1,565 to a trough of 676 in March 2009.After a financial crisis sharp economic loss.

3. The unemployment rate rose from 5% in 2008 pre-crisis to 10% by late 2009, the number of

unemployed rose from approximately 7 million in 2008 pre-crisis to 15 million by 2009.

4. The United States has seen an increasing concentration of wealth to the loss of the middle class

and the poor with the younger generations being particularly affected. The middle class people

are dropped to 45% to 62%.While total income their decrease 10% to 9%.. The younger

generation, which would be early their wealth buildup, has been the hardest hit.

5. The net worth of U.S. households and non-profit organizations fell from a peak of approximately

$67 trillion in 2007 to a trough of $52 trillion in 2009, a decline of $15 trillion or 22%.

6. Inflation adjusted median household of the united statespeaked in 1999 at $53,252, dropped to

$51,174 in 2004, went up to 52,823 in 2007, and has since trended downward to $49,445 in 2010.

The last time median household income was at this level was in 1996 at $49,112, signifying that

the decline of the early 2000s and the 20082012 global recession wiped out all middle class

income gains for the last 15 years.

Effects of Europe:

The ongoing global economic crisis that started in united states in late 2008 and quickly spread to Europe.

The global recession was first seen in Europe, as Ireland was the first country then a two-year-long

recession.


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1. Trade financing dried up and export volumes fell by almost 15 per cent over the subsequent two

quarters, an unprecedented downturn in this region.

2.Consumer confidence fell to record lows in the Euro Zone and households held back ondiscretionary spending

3. Purchases of capital goods were postponed and car sales dropped by almost 25 per cent on a

yearly basis.

4. Increase unemployment very quickly previous year proportion.

5. Whole euro zone industrial production fell 19% in May 2008.

6. Germany is the big economy of the euro zone but their export also reduces .Their industrial

output was down 2.4 % in May, 2008. Increase their unemployment and their retail sell fell down

1.4% June, 2008.German economy decline 0.5% in the second quarter.

Effects in Asia:

The global financial crisis had hit in Asia with unexpected speed. The crisis throws up important features

linkages between Asia and world, and within Asia. This effectively put to rest earlier nations Asia had

become decoupled from improvement. From peak to through ,Asia exports tumbled by over 30%, average

sovereign CDs spreads increased more than threefold for five Asian economics and emerging Asia stock

prices fell by more than 60%. Exchange rate also came under pressure in a number of countries in the

region. Asia economics, excluding China and Japan, contracted by an average 6.2% for speak to during in

the current downturn. This is not far from the 8.3% GDP contraction during the Asia financial crisis,

although Asia was not at the center of the present crisis.

The global economy hit Indonesian economy through the trade channel as export-oriented industries

slight sharply, with unfavorable effects on employment.

Explaining the collapse in Asian export:

The recent collapse in export in Asia has three notable features.First,the fall in exports across Asia, from

Japan to Indonesia beginning from July2008 to the trough around February 2009, was highly synchronize.

Second,the export contraction was swift and sharpexports tumbled by about 35% from peak to trough

(July 2008 to February 2009). This was far sharper than the 18% drop during the 2001 it downturn.

Finally, intra-Asian contracted by even more than shipments to the advanced economics. Intra-Asian

export falls in 48% peak to trough, against a 29% decline in exports to the US and EU-15 over the same

period.


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Others some effects:

1. After fall of Lehman Brothers, East Asian economies all confronted by acceleration in financial

turbulence that had started in mid-2007.

2. Fortunately, Indonesia, like the other Southeast Asian countries (Malaysia, Thailand, and the

Philippines) withstood the financial turbulence well, because they were better prepared for this shock

after their experience with the Asian Financial Crisis (AFC) of 1997/98

3. Almost 6, 70,000 small median enterprise have been close in china effects their export because their

bid market in USA and Europe.

4. Japans economy declined by 0.6 percent in the second quarter of 2008.Export to the USA fell down

21.8 percent, the biggest decline on record and export to Europe 3.5 percent. Two japans bank appeared

on the list of major Lehman creditors. The Figure: GDP growth rates in Asia, is given below:


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Nature of Financial System: Indonesia

Indonesian financial sectors and overall economy:

Basically an economy consists of two components, one is financial sectors and other is real sectors.

Financial sectors deal with intermediation of financial services; it does not mean it is unreal. Both are

very important for an economy. These two sectors are attached with each other. The role of Indonesian

financial sectors in Asia and Southeast Asia is very crucial. It is the 27 thbiggest exporting countries in the

world. In 2012 Indonesia replaced India as the second-fastest-growing G-20 economy, behind China.

Bank is the most important factors to keep the economy stable. In 2007-2008 in world financial crisis, theIndonesia was affected much but they succeed to overcome its problem because of banking sectors

stability. Bank Indonesia (Central Bank) role was very effective and efficient to overcome the big

financial crisis. As a member of the G-20 and a driving force within the Association of Southeast Asian

Nations, Indonesia plays a growing role at the multilateral level. Its increasingly modern and diversified

economy has recovered from 2009 global recession

Indonesian financial sectors

Banks

(98% of total banking sectors its

economy)

Multi finance

Capital market

Insurance market

Pension funds

Regulators: Bank

Indonesia (Central

Bank)

Regulators: Bapepam-

Lk (now Otoritas Jasa

Keuanganor OJK)


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Indonesian Real sectors:

Indonesia has the largest economy in Southeast Asia and is one of the emerging market economies of the

world. The country is also a member of G-20 major economies and classified as a newly industrialized

country. Indonesia still depends on domestic market, and government budget spending and its ownership

of state-owned enterprises (the central government owns 141 enterprises) and the administration of prices

of a range of basic goods including fuel, rice, and electricity plays a significant role in Indonesia market

economy.

In February, 2015 population of Indonesia passed 248.00 million and the population growth is 1.66%.

This made it the worlds fourth most populous country. Indonesias overall land area is 1919317 (km2)

and there are over 13000 islands are inhabited. Indonesia is divided into 28 provinces, which vary greatly

in such characteristics as population, income level, rate of economic development and industry structure.

Main industries: (47%): Petroleum and natural gas , textiles, apparel, footwear, mining, cement,

chemical fertilizers, machinery, electronics, hardware, software, telecommunications, plywood, rubber,

tourism.

Main Agriculture :( 14.4%): Rice, cassava, rubber, tea, and palm oil

Main Services:(38.6%): Tourism, hotels, others

Macro-economic trend:

This is a chart of trend of gross domestic product of Indonesia at market prices by the IMF with figures in

millions of rupiah.

Year GDPUSD exchange

(rupiah)

Inflation index

(2007=100)

Nominal Per Capita GDP

(as % of USA)

PPP Per Capita GDP

(as % of USA)

1980 60,143.191 627 10 5.25 5.93

1985 112,969.792 1,111 11 3.47 5.98


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1990 233,013.290 1,843 16 3.01 6.63

1995 502,249.558 2,249 24 4.11 8.14

2000 1,389,769.700 8,396 53 2.32 6.92

2005 2,678,664.096 9,705 83 3.10 7.51

2010 6,422,918.230 8,555 121 6.38 9.05

For purchasing power parity comparisons, the US dollar is exchanged at 3,094.57 rupiah only.

Inflation:

In 2010, the inflation rate was approximately7%, when its economic growth was 6%. To date, inflation is

affecting Indonesia lower middle class, especially those who cant afford food after price hikes.

In 2011, Indonesias inflation rate was 3.79percent, below the government-set target of 5.65percent. It

was the lowest inflation rate since 1998.

At present in 2015 the inflation (CPI) rate is 6.4%

GDP (PPP):

As of 2008, Indonesias growth was approximately 6.1% and target was 6.3%

As of 2010, Indonesias economic growth was 6%

At present scenario of Indonesian economic growths are given below:

$1.3 trillion

5.8% growth 5.9% 5-year compound annual growth

$5,214 per capita

GDP by sector is agriculture 14.4%, industry 47% , services 38.6%


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Main Export partners:

Indonesian main export goods are oil and gas, Cement, Food, Electrical appliances, Constructions,

plywood, textiles, rubber. These goods are mainly exported below the countries.

(2012 given data):

Japan 14.8%China 12.4%Singapore 9.1%United States 8.6%

India 7.1%

South Korea 6.3%Malaysia 5.8%

Main Imports partners:

Indonesian main import goods are Machinery and equipment, Chemicals, Fuels, and foodstuffs. These

goods are mainly imported from below the countries.

(2013 given data)

Japan 10.3%

China 16%

Singapore 13.7%

United States 4.9%

South Korea 6.2%

Malaysia 7.1%

Thailand 5.7%


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Transmission Channels and Reasons for the Financial Crisis

The 2008/2009 crisis has been called by many economists as the most serious economic or financial crisis

since the great depression in the 1930s. The crisis impacted many countries through various channels, i.e.

exports, investment (including foreign direct investment/ FDI), and remittances. However, for Indonesia

and many other developing countries, the most important channel was export.

Like other developing countries Indonesia faced tremendous economic crisis in 2008/09. There are

numerous factors like massive private sectors debt, poor financial regulation, and state banks pervasive

performance lead toward bad debt ratios. Corruption and absence of good corporate governance resulted

shutting down of some private organization and banks. Therefore political instability discouraged

domestic and foreign investors. Indonesia now is much more vulnerable to any economic shocks than, for

many reasons. First, since economic reforms started in the 1980s toward trade, banking, investment, and

capital account liberalizations, for which Indonesian economy has become more integrated with the world

economy.Second, decreasing export growth. Indonesia depended on exports of many primary

commodities, i.e. mining and agriculture. This indicated economy was sensitive to any world-

price/demand instability for those commodities.Third, Indonesia increasingly depended on imports of a

number of food items such as rice, food grains, cereals, wheat, corn, meat, dairy, vegetables and fruits, or

even oil. Any instability or increases of world prices or the world production failures of these

commodities made big effects on domestic consumption and food security in Indonesia.Fourth, more

Indonesian working population, including women, went abroad as migrant workers, and hence livelihoods

in many villages in Indonesia increasingly depended on remittances from abroad. As a result economic

crisis hit the host countries (such as happened in Dubai during its financial crisis in 2009) made a great

cost for Indonesian economy too.Finally, as a huge populated country with increasing income per capita,

domestic food consumption was not only high but also kept increasing. Accelerating output growth in

agriculture is therefore a must for Indonesia, and this depends on various factors, including climate, which

is an exogenous factor.

As export was the most important transmission channel in 2008/09 crisis for Indonesia and most other

affected countries was considered primarily as a world demand/export market crisis.


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World Demand Decreased in 2008/09

IndonesiaOther Countries

Export

Production

Employment/IncomeLevel

Household income

Poverty

Regional Income

National Income

Figure*: Transmission Channels of the Effects of the 2008/09 Crisis on the Indonesian Economy.

Theoretically, as illustrated in Figure,this kind of shock affected the economy of these countries at the

first stage through its effects on domestic export-oriented firms. It led further to less production and

employment of firms and in other related firms. The employment reduction causes declined in incomes of

many households and resulted further in lower market demands for goods and services and hence

production decreases in many industries/sectors. Finally, unemployment and poverty increased. This

unemployment differed across economic sectors. The worst affected sectors included manufacturing,

construction, commerce, hotels and restaurants, transportation, communication, finance, rent and

Export

Production Production Decreases inother sectors

Employment /IncomeLevel

Remittances


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company services. On the other hand, several economic sectors accommodated more workers, including

agriculture, animal husbandry, forestry, fishery, electricity, gas, and drinking water. In large countries like

Indonesia which consists of many islands or regions (i.e.

provinces, districts and sub districts), theconsequences varied by the regions. For instance, if the decline in average household income in Java

Island (where most export-oriented manufacturing industries are located) is higher than in the rest of the

country and the proportion of the affected households in Java is significantly larger than total income of

rest of the country.

In other words, if only one region in Indonesia was affected by the crisis and the regions economy is not

significant important for the national economy based on gross domestic products (GDP) distribution by

region, the effect at the national level my insignificant, even if the impact for that particular region is

significant.

Before the year 2008 during the crisis, continued to put a drag on growth include low foreign investment

levels, bureaucratic red tape, and very widespread corruption which causes 51.43 trillion Rupiah or

5.6573 billion US Dollar or approximately 1.4% of GDP to be lost on a yearly basis.

The unemployment rate (in February 2007) was 9.75% and the year 2008 ended inflation rate was

10.23%. Despite a slowing global economy, Indonesias economic growth accelerated to a ten -year high

of 6.3% in 2007. This growth rate was sufficient to reduce poverty from 17.8% to 16.6% based on the

Governments poverty line and the recent trend towards jobless growth,with unemployment falling to

8.46% in February 2008.

The economic crisis made continued private financing imperative but problematic. Indonesia's fuel

production has declined significantly over the years, owing to ageing oil fields and lack of investment in

new equipment. As a result, despite being an exporter of crude oil, Indonesia is now a net importer of oil

products. It had previously subsidized fuel prices to keep prices low, costing US$7 billion in 2004. The

current president has mandated a significant reduction of government subsidy of fuel prices in several

stages that cuts in subsidies, aimed at reducing the budget deficit to 1% of gross domestic product (GDP)

this year, down from around 1.6% last year.


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Impact and Effects of the Financial Crisis

We will describe the impact of global financial crisis in Indonesia economy in different sectors.

In this report we will be discussing 4 sectors.

1. Impact on trade

2. Impact on capital flow

3. Impact on remittance

4. Impact on growth and unemployment

Impact on trade

Due to drop in commodity price and decline external demand the export dropped. From figure1

we can see the decline affected both in weight and value. In Indonesia only 20% (approximately)

of its export is oil and gas. Although the price of oil was high but low demand caused low

export. As a result the overall export did not improve.

If

we


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consider top 10 commodities, we will see considerable decline in tin and articles and thereof

(87%) and animals or vegetable fats and oil (52.7%).

Another notable product that we have to mention is electronics. Indonesia has become a very

crucial electronics exporter and countries like Malaysia, Singapore and Japan. In 2008 it showed

both weight and value increase but went down due to weak demand.


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Falling demand has clearly taken troll on Indonesian export performance. If we look at table 2,

we could see how different countries decline their demand in 2008. ASIEN is Indonesias most

valuable partner followed by EU. This table shows s that USA and Japan had biggest share of

Indonesias export market.


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As export performance worsened, import numbers began to show signs of slowdown; after

flowing significantly up to the third quarter of 2008, imports started to fall. The biggest drop was

for imports of raw materials/auxiliary goods, which declined 38%. Coupling this drop with the

drop in capital goods imports (-17%), these numbers could be reflecting worsening conditions in

real/manufacturing industry activities. Consumption goods imports slowed by 26.3% compared

with January 2008.

Export and import of Indonesia had suffered greatly due to financial crisis although it was not far

worse than some EU and North American countries.

Impact of Capital Flow

Indonesia began to rely for development financing on debt securities and private sector financingafter the 1997-1998 crisis, is now vulnerable to external shocks that result in disruption of

foreign capital flows. Most foreign investments are short term and it is very easy to change


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course. Foreign direct investment (FDI) has increased since 2005; portfolio investment still takes

up a great portion of foreign investment flows to the country.

According to the latest data from Bank Indonesia, FDI was still increasing in the quarter to

December 2008, whereas portfolio investment had continued its declining trend since the

previous quarter.

Figure 6 shows that most foreign capital flow went to government securities, reaching a peak inthe second quarter of 2008. During the last three months of 2008, a massive sell-off of

government bonds and Bank Indonesia certificates by foreign investors put the capital and

financial account of the balance of payments in deficit.

According to figure 7, the stock index fell 51.17%. Market capitalization for equity at the end of

the year fell by 46.42%. The top 10 companies with the biggest market capitalization on the

stock exchange for 2008 are dominated by banking, mining, plantation and telecommunication

companies.


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According to data from Bank Indonesia and the MoF, total government external debt to be paid

this year (2009) will reach IDR73.28 trillion, while repayment of domestic debt will reach 38.91

trillion. The volume of foreign exchange reserves is perceived to be very thin owing to a

significant drop in export revenues starting in October 2008. The rupiah was under pressure

widening from 539 to 643.


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Impact of worker Remittance

Worker remittance also showed resilience during the time of crisis. Net workers remittance was

$1.4 billion in the end of September 2008.

The

remittance

flow was increasing because increasing number of Indonesian worker to overseas destination(54%). Around 4.4 million workers were working abroad including Malaysia, Saudi Arabia and

Taiwan. Table 4 will be describing the remittance situation of Indonesia.

But at the end of 2009, many workers had to return Indonesia due to crisis in Malaysia.


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Impact on growth and unemployment

During 2008 the GDP was 6.0% and it declined to 4.5%. Although according to Economist therate was 3.3%. Table 5 will give more details along with sectorial contribution of GDP which

reveals that manufacturing sector still leads (26.9%).


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Some poverty reduction programs helped Indonesia to reduce poverty despite of financial crisis.

Table 6 shows how Indonesia dropped the unemployment rate from 2005-2008. The rate

decreased from 11.24% to 8.46%. Another problem rose while declining unemployment,

underemployment and informalisation of labor market. About 70% of the workforce in Indonesia

is made up of informal workers with characteristics such as young, educated and dependent on

their parents.


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Government Initiatives to Mitigate the Financial Crisis

The government and the central bank have made joint efforts to maintain financial market

stability and to provide a fiscal stimulus in order to keep domestic demand growth at its usualannual rate.

1. Maintained financial market stability:

Some policies were taken to address liquidity issues were as follows:

Lowering the overnight repurchase rate by 200 basis points from 12.25% to 10.25% at the end

of September 2008 and at the same time increasing the overnight Bank Indonesia rate paid on

funds that commercial banks deposit from 7.25% to 8.25%. In December, the overnight

repurchase rate was again lowered from 10.25% to 9.75%, and the overnight Bank Indonesia rate

was raised from 8.25% to 8.75%.

Increased the tenor of foreign exchange swaps from seven days to one month.

Cut the minimum reserve requirement for rupiah deposits from 9.08% to 7.5% and for foreign

exchange deposits by commercial banks at Bank Indonesia from 3% to 1%.

Introduced new regulations to allow commercial banks to use government bonds and/or SBIs

worth 2.5% of their total rupiah deposits as secondary reserves. Big banks with large holdings of

SUNs and/or SBIs will have more funds to channel loans since they are now allowed to do this

(up to one year).

Postponed implementation of accounting regulations with regard to fair valuation of assets,

particularly the marking-to-market rules on banks SUN holdings.

Loosen limits on daily balance of short-term foreign loans; previously, commercial banks were

required to limit the daily balance to no more than 30% of their capital.

Required state-owned enterprises to place foreign exchange reserves in domestic banks.

Other measures were taken to address confidence issues by both government and the central

bank. These measures were:

Increased the amount of deposits in the banking system guaranteed by the government from

IDR 100 million to 2.00 billion.


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Executing SUN buyback and preparing a state-owned enterprise equity buyback program. The

MoF has bought back IDR41 billion (US$3.89 million) worth of SUNs. State-owned enterprise

shares buyback at the Indonesian Stock Exchange was undertaken through the Government

Investment Centre (PIP) with available funds of IDR4 trillion (2.5 trillion was managed by PIP

as reserve funds for infrastructure development and the remaining 1.5 trillion was managed by

state-owned asset management company (PPA)).

Maintained a sufficient level of foreign reserves (end of December 2008 showed foreign

reserves at US$51.6 billion down from $60.6 billion at end-July 2008). The central bank has

receded from its intervention in the foreign exchange market to support the rupiah and focused

more on preventing too volatile movement of the rupiah.

Put some restrictions on short-selling on the capital market.

Limit the purchases of foreign currency without underlying transactions to US$100,000 to curb

speculation. For Indonesians, the limits affect all transactions in spot, forward and derivative

markets. They also have to produce their taxpayer registration number for banks when

purchasing foreign currency. For foreigners, this applies to purchases on the spot market.

Banning trading on banks structured products/derivative products that provide chances for

bank customers to purchase foreign currencies including dual currency deposits that are callable

forward.

Issuing a government Regulation in lieu of law on Financial System Safety Net (FSSN).

Another regulation was issued on 5 January 2009 by the Ministry of Trade to support the rupiah

(and the balance of payments), mandating export payments for certain products to use letters of

credit (L/Cs) in domestic banks. Products with L/C requirements include coffee, crude palm oil,

cocoa, rubber, mining products and tin.

Part of Bank Indonesias efforts to stabilize the financial market condition, worsening fromSeptember-October 2008, were in keeping inflationary pressures at bay while supporting the

rupiah from depreciating too much. The inflation rate mounting from mid-2008, because of

increased basic commodity pricesreached 12.14% (year-on-year) in September 2008, and may

have taken down domestic purchasing power. Under the circumstances, the central bank

increased its interest rate benchmark to 9.5%. This was contrary to what other central banks in


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the region and across the world decided with the threat of global crisis looming they lowered

their interest rate. However, pressure has eased since then23 and the bank has lowered its interest

rate to the current level of 7.75% (4 March 2009). Bank Indonesia started a lower interest rate

benchmark on December 2008 (currently, the interest rate is set at 7.75%) so the banking sector

would be able to cut lending rates.

At the same time, the government proposed two other Regulations in lieu of law, on

Amendment of Central Bank Law (allowing the central bank to provide a short-term liquidity

facility for banks encountering liquidity problems with collateral) and on Deposit Insurance

Corporation (increasing the amount of deposits insured to IDR 2 billion). These two were

approved by Parliament. The inflation rate was 11.06% in December 2008.

2. Fiscal stimulus package

Having assessed the latest data for the last three months of 2008, the government prepared for

the worst in 2009. With a downward revision of the countrys economic growth to 4%-4.7% at

the most (previously 4%-5% maximum), the government expected investment growth would

slow down to 5.9% and export growth would be stagnant (0% or even a decline at the rate of

3.0%). The state budget 2009 was revised to include an additional fiscal stimulus package to

counter the impacts of the global crisis on unemployment levels and poverty reduction. On 24

February 2009, Parliament decided to approve

the package, adding IDR 2 trillion to the original package proposed by the government,

amounting to 73.3 trillion (2.6% of GDP). The fiscal stimulus package aims at:

Maintaining/increasing household purchasing power to keep consumption growth above 4%

(targeted consumption growth was set at 4.7%). Measures included: i) keeping supply-sideinflation relatively stable (at 6-7% per year) by lowering energy and basic commodity prices

through improvement of distribution channels; ii) providing tax saving to households through

reduction of the personal income tax rate, raising the limit of non-taxable income to IDR15.8

million/year (previously 13.2 million/year); iii) introducing government-borne sales tax on

cooking oil and non-fossil fuel/biofuels; iv) providing a direct subsidy for cooking oil and


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generic medicines. For measures ii)-iv) to stimulate household purchasing power, the

government prepared a budget of IDR25.91 trillion. In addition, it will increase salaries of civil

servants (including retired civil servants) and members of the military and the police by as much

as 15% and offer a one-month bonus as well as distribute direct cash transfers in the amount of

100,000 (US$8)/month to 18.2 million targeted households for two months.

Improving real sector resilience and competitiveness to prevent more workers layoffs. These

measures included: i) relaxing the tariff for business income tax; ii) waiving duties on imported

raw materials and capital goods for certain industries; iii) subsidizing value-added tax on oil/gas

exploration activities; iv) reducing the income tax tariff on geothermal companies; v) granting

government-borne income tax for workers with a maximum monthly salary of IDR5 million for a

one-year period; vi) cutting the diesel fuel price (used widely by industries) by 300/liter; vii)

discounting the industrial electricity tariff; and viii) subsidizing an interest payment scheme for

water supply companies loan disbursement. Government also arranged equity financing for

AsuransiEkspor Indonesia to support funding for an export guarantee scheme (after approval

from Parliament, the original funds amounting to 1 trillion were cut to 250 billion). Government

also arranged for equity financing for Askrindo and Jamkrindo, companies responsible for

disbursing smallholders credit programmes for the development of primary sectors. Funding for

these measures was prepared to reach 35.43 trillion.24

In addition, the government issued some trade-related policies. In November 2008, the Ministry

of Trade announced that five categories of goods (food and beverages, garments, electronic

goods, shoes and toys) can be imported only through five major seaports: Jakarta, Medan,

Semarang, Surabaya and Makasar.

After several delays, the regulation became effective on 1 January, but pre-shipment inspection

was to take place on 1 February, except for garments, whose inspection has been in place since

2005. This policy aims to prevent illegal import activities that have flooded domestic marketswith very cheap products. The government also strengthened enforcement of the Indonesian

National Standard (SNI) 25on steel, tires and packaged goods. On tariff policies, the government

postponed implementation of the 2009 tariff harmonization program for 324 tariff lines the

same tariff as for 2008 applies. There were some temporary tariff increases owing to declining

competitiveness; at the same time, the government reduced the tariff on some other imported


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primary and intermediary import products not produced domestically. In December 2008, the

government and Bank Indonesia jointly announced a trade financing facilityexport draft re-

discount with recourse that will help banks to secure cash from L/Cs that have been issued.

Related to export activities, Bank Indonesia also issued a new regulation allowing exporters to

receive faster payments by permitting commercial banks to sell export receivables to the central

bank in order to obtain fresh cash. The new regulation will also help in reducing demand for

foreign exchange in order to manage depreciation pressures of the rupiah.

Creating job opportunities for unemployed/laid-off workers by launching labor-intensive

infrastructure projects. The government allocated IDR12.2 trillion for infrastructure spending.

Previously, the government had set IDR1 trillion each for the export guarantee scheme (through

ASEI) and expansion of credit program (through Askrindo and Jamkrindo). However, Parliament

approved only IDR250 billion for each as they considered the schemes would not contribute

much to job creation.

Including requirements to use Indonesian language labeling on the product manuals to describe

ingredients used in the products and to explain the working of electronic devices such as mobile

phones and radios. Sectoral allocation of infrastructure development will focus on projects able

to create more jobs, such as transportation (railways, airports, etc.), public housing, traditional

markets and power generation.

Besides fiscal stimulus measures, the government has included social protection and poverty

alleviation in the state budget for 2009. The budget allocated to education is as much as IDR207

4 trillion, to include improvement of education access and quality, such as school operational

assistance, school building rehabilitation and teacher salary increases. In the health sector, the

government has provided a free medical service at public health centers and third-class hospitals

(allocation: 7.2 trillion). The government has also increased agricultural subsidies from 27.9

trillion in 2008 to 33.4 trillion, to support food security programming (12.9 trillion) andsubsidize fertilizer (17.1 trillion) and seed procurement (1.4 trillion). The government has also

proposed continuing its rice-for-the-poor program in 2009 and directly selling subsidized

cooking oil and soybeans in traditional markets in order to maintain reasonably steady prices in

these basic commodities.


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The fiscal stimulus package will decrease government revenue to US$77.6 billion and

government expenditure will rise to $89.6 billion. Budget deficits will be around $11.8 billion

(2.5% of GDP). This will be financed from a rollover of the unspent 2008 budget ($4.7 billion)

and additional debt financing in the amount of $3.4 billion (from a standby loan from bilateral

and multilateral sources). Government plans to maintain a net redemption of government

securities in the amount of $4.9 billion. Given that the government debt ratio to GDP was 37% in

2008 and projected to be even lower in 2009 (33%), the financing scheme for the stimulus

package looks secured. At the end of January 2009, government issued medium-term notes

(global bonds) worth $3 billion as part of a deficit financing scheme. The MoF also issued new

government retail Islamic bonds, and managed to collect IDR5.56 trillion (US$496.4 million). So

far from these bond issuances, government has gathered IDR56 trillion. On 5 March 2009, the

MoF announced that Indonesia had officially agreed on US$5.5 billion of loans from Australia

($1 billion), World Bank ($2 billion), ADB ($1 billion) and Japan (available as $1.5 billion-

worth of guarantee on the yen-denominated bonds the government plans to sell Samurai

bonds). These loans will be used only if government fails to raise funds from bond issuance and

other borrowing.


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Response of International Organizations during Crisis

1. Bailout package: The emergency economy stabilizing act of 2008 commonly referred to as

bailout of USA financial system is a law enacted in response to the subprime mortgage crisis to

spend $700 billion to purchase distress especially mortgage-backed securities and supply cash

directly to bank.

2. G-20 meeting: It is mainly focus global governance of systematic financial crisis, significant

loses of confident, liquidity and solvency in private financial institution; financial market

government or national governments are unable to control.

3. US Federal Reserve Bank to inject US $ 1 Trillion (March 2009)

4. Financial Stability Board: Financial stability risk that have materialized since October,2008

global financial stability report. Then, it examinee deleveragingprocess and its on effect realeconomy. The following section assesses the vulnerability emerging market to global stress,

especially focusing on refinancing risk facing corporate. The outlook for global credit market is

then evaluating, along with IMF staff estimate of potential global financial write-down.


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Concluding Remarks

Development in the global financial crisis have clouded Indonesias economic outlook. A

combination of drops in commodity prices, slower global growth and tighter liquidity in financial

markets across emerging economies has dragged down exports and investments. Both are keys to

Indonesias economic growth. So far, the impacts of the current global crisis have been severing

to externally oriented sectors such as manufacture industry, with the number of layoffs

increasing since October-November 2008. Sharp rupiah depreciation and volatile capital

outflows have added more pressure to the domestic economy. Though there were a lot of internal

and political problems but the country realized to combat against global crisis effectively.

Equipped with important lessons from the previous crisis (1997-1998), the government of

Indonesia was quick to respond by combining both monetary and fiscal policy instruments in

order to at least minimize global crisis impacts in Indonesias election year of 2009. Bank

Indonesia (Central Bank) role was very effective and efficient to overcome the big financial

crisis. Finally, The government initiative and Central Bank policies was very crucial to compete

the financial crisis and those bravo steps gave Indonesia to overcome global crisis. Its

increasingly modern and diversified economy has recovered from 2009 global recession.


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Abimanyu, A. (2009) Government Policy Actions to Cope with Global Crisis.Presentation by Head of Fiscal Policy Office. 22 January.

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