Managing Economic Crisis in Southeast Asia

8. The Impact of Global Financial Crisis on the Indonesian Economy

292 Muhammad Chatib Basri 8 The Impact of Global Financial Crisis on the Indonesian Economy Muhammad Chatib Basri Introduction After more than four years of economic boom, global growth was slowing markedly in the second half of 2008. Economic growth in emerging and developing economies was also slowing down as global trade slows and financial conditions tighten. The contraction occurred in major developed economies, with the United States and Europe projected to plunge into negative growths around –2.9 per cent and –4.3 per cent respectively in 2009. Initially there was an ongoing prevailing presumption about “decoupling” wherein the Asian economic growth is considered relatively detached or not fully connected to the economic growth of developed countries like the United States and Europe. Thus, the impact of the global slowdown was considered limited to the Asian economies. Nevertheless, we are one of those who are doubtful as regards this decoupling argument. The data shows that similar Impact of Global Financial Crisis in Indonesia 293 downturns took place in emerging markets, in which the economic growth of this group of countries is forecasted to fall from 6 per cent in 2008 to 1.5 per cent in 2009. We argue that the Asian economies have actually been able to grow because the existing integration among production networks in Asian countries is extremely strong. Intra-industrial trade in East Asia has made the effects on Asia still relatively limited. Many countries in Southeast Asia, including Indonesia for example, are exporting raw materials and intermediary goods to China, Korea and Japan, which are the production network centres. Therefore, the effects on the Indonesian economy, at least up until the second quarter of 2008, were relatively limited. However, it should not be forgotten that the end-buyers of goods coming from production countries inAsian countries are the developed countries, including the United States and Europe. Because of this, if the United States and Europe weaken, then it is unavoidable that the effects will be transmitted to Asian countries. Furthermore, because Asian countries are integrated in terms of production networks, these effects occurred even more quickly than before. The impact on Indonesian economic growth had occurred through the trade channel. The signs began to appear as early as the fourth quarter of 2008. The downturn of export growth was reflected in the sluggish growth of the Indonesian economy. Even so, the Indonesian economic growth as a whole still managed to reach 6.1 per cent, and this growth was considered the highest in Asia, following China and India. The reason behind Indonesia’s relatively good performance was due to the fact Indonesia’s economy is relatively insulated from the weakening global economic 294 Muhammad Chatib Basri situation. Indonesia’s total export share of the GDPamounted to 29 per cent. This figure was much smaller compared to other countries such as Singapore (234 per cent), Taiwan (74 per cent), Korea (45 per cent). Nevertheless, faring well with the improvement of the global economics, the Indonesian economic growth of the third quarter of 2009 reached 3.9 per cent (q-o-q) compared to the second quarter of 2009 which grew by 2.3 per cent. This indicates that the economic growth begun to accelerate in the third quarter of 2009. Cumulatively, Indonesia’s economic growth for the first nine months of 2009, compared to the same period of 2008 showed an increase of 4.2 per cent. These figures are higher compared to the estimates made by a number of research institutes and observers. The relatively good performances of the Indonesian economy lead us to the question of why the impact of the global crisis on the Indonesian economy was relatively limited so far. Was it because of the structure of its trade? How effective were the fiscal and monetary policies in mitigating the impact on the Indonesian economy? This chapter will try to eludicate these questions. In addition, it will also discuss the policies that have been issued by the government and Bank Indonesia in terms of anticipating the global financial crisis. Impact on the Indonesian Economy Financial Sector The financial crisis initially begun in the U.S. sub-prime mortgage markets, however, it has precipitated a wider global Impact of Global Financial Crisis in Indonesia 295 repricing of risk that was exacerbated by the disclosure of higher than expected losses suffered by financial institutions. The large need of the U.S...