Post on 27-Mar-2015
Policy Response to Overcome Crisis: A Lesson from Indonesian Case
Policy Response to Overcome Crisis: A Lesson from Indonesian Case
Hendri SapariniSenior Economist - ECONIT Advisory Group
saparini@econit.comhendrisaparini@indopolicy.com
Presentation for IDEAS Conference on “Re-regulating Global Finance in the Light of the Global Crisis”
Tsinghua University, Beijing, China, April 9-12, 2009
The 1997/98 Crisis: Pre-crisis
Crucial Problems on Financial Sector:
Cross-ownership & cross-management in financial sectors
Over-valued rupiah Over-leveraged private foreign loan
The 1997/98 Crisis: Policy Response
Policy blunder under IMF receipt:
Super tight money policy To liquidate of 16 banks Take over private sectors debt Budget dicipline, reduce subsidy, raise tax,
privatization. Acceleration of liberalization in real
sectors (agriculture, industry)
1997/98: Supply & Price Hike
• Energy (Gasoline: 71%Kerosene: 25%)
• Rice (>100%)
1997/98: Supply & Price Hike
• Energy (Gasoline: 71%Kerosene: 25%)
• Rice (>100%)
2008/09: Supply & Price Hike
•Energy (Oil&Gas)•Rice, Wheat, Cereals •Sugar•Palm Oil•Soybean
2008/09: Supply & Price Hike
•Energy (Oil&Gas)•Rice, Wheat, Cereals •Sugar•Palm Oil•Soybean
Indonesian Subprime Loans:•Motor Cycles Loans
•Commercial Property•Electronic Loans
•Credit Cards
Political Instability
• Government Lack ofCredibility & Confidence
• Ineffective Government
Structural Problem
• High Poverty (40 mio)• Huge Inequality
• Unemployment (12%)
Structural Problem
• High Poverty (40 mio)• Huge Inequality
• Unemployment (12%)
•Capital outflow•Sharp Fall of Rupiah
•Capital outflow•Sharp Fall of Rupiah
Direct Linkages
1997/98:• Violation of Legal Lending Limit
•Overvaluation Rupiah•Private debt: Huge & no record
Thailand (1997/98)
• Liquidity crises• Depreciation of
Overvalued Bath
USA (2008/09)
•Carry-over of Subprime lending•Fiscal Deficit (1,2%GDP)•Trade Deficit (US$ 850 bio)•Current Account Deficit (6%GDP)
INTERNATIONALFACTORS
DOMESTICFACTORS
2007/08:•Price driven export growth•Inflows of hot money•Artificial Growth of Banking sector•Stock prices >> fundamentals
Linkages:•Lags•% CouplingLinkages:•Lags•% Coupling
Social & Economic Effects
Social & Political Effects
ECONIT Economic Outlook 2008: A YEAR OF THE BUBBLES
© ECONIT Advisory Group
The 2008 Crisis: Pre-Crisis
Financial bubbles and deindustrialization
Contradiction between improving financial indicators and slowing growth of real sector combining with accelerating deindustrialization
The 2008 Crisis:The Financial Bubbles
The main reason for the emerging contradiction between the performance of the financial and real sectors is the inflow of hot money into Indonesia.
The total value of hot money that has entered Indonesia since 2006 up to December 2008 is thought to exceed Rp 140 trillion.
The inflow of hot money has strengthened the rupiah against other currencies and bid up the prices of domestic assets. The Jakarta Stock Exchange Index (IHSG) increased by 57 % in 2007, closing at 2,830 (Jan 9, 2008). The rupiah strengthened to an average rate against the US dollar of Rp 9,142 (2007).
The 2008 Crisis: Reasons For Susceptible to A Shock
1. Price driven export growth
2. Share price increase exceeded the fundamental
3. Artificial growth of banking sector
4. Indonesian subprime loan
Export and foreign exchange reserves have increased only because of rising international commodity prices and inflows of hot money. Throughout 2006 and 2007, Indonesia’s foreign exchange reserves have increased sharply from US$ 35 billion at the end of 2005 to US$ 57 billion at the end of 2007.
But, the rise in reserves was not supported by export competitiveness or an increase in foreign direct investment.
1. Price Driven Export Growth
Export: Dominating by Commodities (2007)
CommoditiesContribution To growth
Share to Export of
Non-OilGas Growth
1 Nickel 16.3% 3.8% 159.5%2 Copper 14.4% 8.5% 31.5%
3 Machinery and equipment 14.0% 7.4% 36.6%
4 CPO 10.8% 6.7% 29.8%
5 Chemical Product 9.6% 7.0% 24.3%
6 Coal 6.7% 7.6% 14.5%
7 Textile 3.4% 11.1% 4.5%
8 Paper 2.6% 4.6% 8.6%
9 Rubber 2.3% 5.3% 6.6%
10 Metal goods 2.0% 1.1% 32.3%
Total 10 commodites 82.1% 63.1% 22.6%
Total Non-Oil Gas 100.0% 100.0% 16.5%Sources: BIECONIT Advisory Group
0
100
200
300
400
500
600
700
Mar-00
Aug-00
Jan-01
Jun-01
Nov-01
Apr-02
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Jan-06
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Feb-08
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Dec-08
AlumuniumNickel
Iron Ore
Copper
Sumber: IMF, diolah
Mining Comodities: Price Index
ECONIT Advisory Group
The Sharp Declining of Mining Product
-39.46%
-55.64%
-46.40%
-18.34%
-37.01% Zinc
Uranium
Nickel
Copper
Alumunium
Sorce: IMFECONIT Advisory Group
Agriculture Commodities: Price Index
0
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May-08
Oct-08
Palm oil
Rice
MaizeSoybeansWheat
Sumber: IMF, diolahECONIT Advisory Group
The Decline in International Price Didn’t Follow by Domestic Price:
Oil & Gazoline
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0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09
US$/liter
Harga Minyak Dunia
Harga BBM Premium
Sumber: Berbagai SumberECONIT Advisory Group
4,600
4,700
4,800
4,900
5,000
5,100
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5,300
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5,500
5,600
0
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Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08
Harga Beras Internasional (Skala Kiri)
Harga Beras Nasional(Skala Kanan)
US$/metric ton Rp/Kg
Sumber: Depdag, Berbagai Sumber
The Decline in International Price Didn’t Follow by Domestic Price:
Rice
ECONIT Advisory Group
0
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4,000
6,000
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14,000
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Palm Oil (Skala Kiri)
Harga Minyak Curah Nasional (Skala Kanan)
US$/ton Rp/liter
Sumber: Depdag, Berbagai Sumber
The Decline in International Price Didn’t Follow by Domestic Price:
Cooking Oil
ECONIT Advisory Group
Early January 2008, fifty-one companies listed on the exchange recorded price-earnings ratios in excess of fifty, and 26 of these posted ratios greater than 100. Remarkably, the prices of eleven stocks on that day were more than 300 times of earnings.
Soaring stock prices not supported by economic performance reflects the formation of a financial bubble.
2. Share Price Increase Exceed The Fundamental
Hot Money Inflow
Surat Berharga
Foreign Ownership (Rp trillion)
Dec-06 Dec-07 Share (%) Dec-08 Share (%)
Stock 522.3 804.5 61.96% 452.2 59.7%
Government Obligation 54.9 78.16 16.36% 87.6** 16.7%
Bank of Indonesia Certificate
18.1 42.7* 15.80% 6.7 3.8%
*) November
** end of Agust 08 =106.7 (19.8%) ECONIT Advisory Group
Jakarta Stock ExchangeIHSG Growth at Highest Pace
80
100
120
140
160
180
200
220
240
260
Jan-06 Jun-06 Nov-06 Apr-07 Sep-07Sumber: Yahoo Finance
IHSGIndonesia
Indeks (Jan-2006 = 100)
HANGSENGHongkong
KLSE,Malaysia
KOSPI, Korea
STI, Singapore
DJI, US
Nikkei Jepang
ECONIT Advisory Group
Jakarta Stock Exchange Fell the Lowest after 2008 Crisis
30
40
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110
Jan-
08
Feb-0
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Jun-
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8
Aug-0
8
Sep-0
8
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Nov-0
8
Index Jan 2008=100
IHSG
NIKKEI
KOSPI
STI
KLSE
DJI
HIS
ECONIT Advisory Group
Growth of the banking sector was largely an illusion. On 2007 the banking industry recorded sharply higher profits. The Net Interest Margin (NIM) for 2007 was 5.7% The wide gap between interest rates on loans and savings generated profits, which attracted investors into the banking industry.
The banks’ share prices skyrocketed as a result. Yet profitability in the banking sector was not supported by strong fundamentals, for example credit growth. In 2006, bank credit by only 14%, followed y 25% in 2007. But consumer credit was the fasting growing sector. We expect credit growth of about 20% in 2008.
3. Artificial Growth of Banking
Since 2007 the financial bubble has grown quickly and consistently, extending in early 2008 to the property, consumer credit such as motorbike loans and credit cards.
The boom in commercial property investment has not been met by
an accompanying increase in demand. Occupancy rates have fallen as result of the slow growth of investment. In 2007, gross investment increased by only 8 percent from the low levels of the year before.
Another model of subprime loan is the huge of motor cycle loan. Poor public transportation has caused high cost transportation. As a result, motor cycle loan was booming. Until 2007 at least there were 5 millions motor cycles in Indonesia, of which three fourth were sold through leasing companies.
4. Indonesia Subprime Loan
Acceleration of Deindustrialization Real GDP vs. Manufacture Production Index
100.0
103.6
108.3
113.5
119.2
126.0
132.9
143.0
151.8
103.3
108.8
114.6
121.9118.9
116.9
123.4
127.0
100.0
105.0
110.0
115.0
120.0
125.0
130.0
135.0
140.0
145.0
150.0
155.0
2000 2001 2002 2003 2004 2005 2006 2007 QIII-2008
Real GDP Index
Manufactur ProductionIndex
ECONIT Advisory Group
Growth of GDP and Manufacturing SectorThe Gap Become Wider
29.1%28.7%
28.3%28.1%
27.4% 27.5%
27.0%
27.9%
3.8%4.3%
5.0% 4.9%
5.7% 5.5%
6.3%6.1%
25%
26%
27%
28%
29%
30%
2001 2002 2003 2004 2005 2006 2007 20080%
1%
2%
3%
4%
5%
6%
7%
Manufacture Share to GDP
PDB Growth
ECONIT Advisory Group
Comparison of Crisis 1997/98 and 2008
Crisis 1997-1998 Crisis 2008
Origin Thailand US
Foreign exchange reserves US$ 24 billion US$ 51 billion
Import US$ 3.8 billion US$ 11 billion
Ratio Forex Resv/Impor 6.3 X 4.6 X
Hot Money 5 year before crises US$ 14.8 billion US$ 24.5 billion
Ratio Debt/GDP 50.0% 37.3%
Foreign debt Stock US$ 129 billion US$ 146 billion
World demand Stable Decline
Int'l trade Policy Normal Protective
Int’l Commodity Prices in Rp Increase Decline
Exchange rate of Rp Weaken Weaken
Consumption Level Rp 900 trillion Rp 5.100 trillion
Crisis 1997-1998 Crisis 2008
Origin Thailand US
Foreign exchange reserves US$ 24 billion US$ 51 billion
Import US$ 3.8 billion US$ 11 billion
Ratio Forex Reserve/Import 6.3 X 4.6 X
Hot Money (5 years before crises) US$ 14.8 billion US$ 24.5 billion
Debt/GDP Ratio 50.0% 37.3%
Foreign Debt Stock US$ 129 billion US$ 146 billion
World demand Stable Decline
International Trade Policy Normal Protective
Int’l Commodity Prices in Rp Increase Decline
Exchange rate of Rp Weaken Weaken
Consumption Level Rp 900 trillion Rp 5.100 trillion
ECONIT Advisory Group
The 2008 Crisis: Policy Response
Repeating the same blunder and disengaging real sectorSuper tight money policy: Increase the interest rate
The buy back policy
Fiscal stimulus
Indonesia Policy ResponsesThe Monetary Policy
The decision of Bank Indonesia and the government to impose a tight money policy demonstrates that the government has learned nothing from the 1998 crisis.
Since January 2009, Bank of Indonesia have been reducing interest rate. The effectivity of monetary policy alone will be a limition. Loose in liquidity and interest rate policy speculation and depreciation of exchange rate
Indonesia Policy Responses The buy back policy
The government has prepared Rp. 4 trillion in government funds and has encourages State Owned Enterprises (SOES) to buy back shares to lift stock prices.
It was not an effective action to cure the economy turmoil, even
for only in the capital market. To push SOEs to buy back stocks up to 50% without general share holder meeting shows imprudent action in decision making.
Shown unsupportive policy to samall investor as 60 % of Indonesia money market was controlled by hedge fund and foreign investor.
Indonesia Policy Responses The Fiscal Stimulus
This counter-cyclical policy will not effective
The effectiveness of fiscal stimulus will be very low; in the last 4 years the government performed weak fiscal management
80% of the fiscal policy was allocated as tax saving, not for direct spending.
Increase budget deficit, from 1% (Rp 51 trillion) to 2,6% to the GDP (Rp 137 trillion)
Financed by foreign loan and domestic loan (government obligation).
Fiscal Stimulus 81% are Tax Saving, Tax Subsidy, Import Duty
Tax Saving (PPh, PPN, BM) Rp 43 trillion
81%Tax Subsidy borne by the government (Pajak DTP) and Import Duty by the government (BM DTP)
Rp 17,3 trillion
Subsidy to business sector (fuel subsidy and discount on peak hour tariff for industry)
Rp 4,2 trillion
State expenditure for job creation Rp 10,8 trillion 19%
ECONIT Advisory Group
Indonesia Policy Responses Policy on Trade and Industry
The government will to continue Washington Concensus (cut subsidy for food, education, oil, increase loan, etc.)
Governemnt officially stated ‘IMF and World World Bank are the umbrella to overcome the crisis’
Officially stated to continue liberalization and against potection
Continue create new FTA without industrial policy and stategy
Indonesia Crisis:The Proposal for Policy Responses
Re-orienting policy in the financial sector (strictly managing the hot money and capital control/capital regulation must be one of the priority to support the real sector)
To change the hands-of policy to hand-on policy on real sector. o To create value added (develop/restructure the manufacturing
industry) and increase the productivity for better fundamental economy and stronger economic structure.
o To solve the high poverty rate and huge unemployment.
The government should minimize the amount of debt, but re-orienting and re-alocating budget to give fiscal stimulus
World’s Tin Production (2007)
China, 45%
Indonesia, 22%
Peru, 13%
Bolivia, 5%
Brazil, 4%Congo, 4%Vietnam, 2%
Others, 5%
Source: World Mineral Production, 2003-2007, diolahECONIT Advisory Group
World’s Tin Demand, Based on Use (2005)
Source: PT Timah Tbk, 2007
Solders, 49.70%
Tinplate, 18.30%
Chemicals, 14.10%
Brass & Bronze, 5.60%
Glass, 1.80%
Other, 10.40%
ECONIT Advisory Group
Indonesian Imports ofTin Based Products (US$ juta)
Commodities 2003 2004 2005 2006 2007
Flat-rolled iron or nonalloy steel products, >600 mm , plated or coated with tin, > 0.5 mm thick
1.79 1.16 26.67 19.17 20.35
Flat-rolled iron or nonalloy steel products, > 600 mm wide, plated or coated with tin, < 0.5 mm thick
42.20 98.69 92.90 67.48 73.48
Flat-rolled iron or nonalloy steel products, <600 mm wide, plated or coated with tin
0.31 1.90 0.15 1.45 0.54
Radiotelephony, radiotelegraphy, radiobroadcasting or television 10.61 24.16 19.46 6.94 169.85
Source: Ministry of Trade
602 594 591 613 612 562 586717 746
661 655 649 662 656 748 801
906 920
1,263 1,249 1,240 1,275 1,268 1,3101,387
1,623 1,666
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Trili
un R
upia
h
Foreign Debt Domestic Debt Total
Indonesian Public DebtIncrease by 31% in Four Years
ECONIT Advisory Group Source: Ministry of Finance
Indonesian Public DebtDecrease In Ratio Increase in Stock
77%
69%62%
56%
39%46%
35% 33%
1,263 1,249 1,240 1,275 1,3101,387
1,623
1,268
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2001 2002 2003 2004 2005 2006 2007 2008
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Rasio utang terhadap PDB
Nilai utang pemerintah (Rp triliun)
Sumber: Depkeu, BPS, diolah
Debt Stock
Debt/GDP Ratio
ECONIT Advisory Group