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

Sep-02

Feb-03

Jul-03

Dec-03

May-04

Oct-04

Mar-05

Aug-05

Jan-06

Jun-06

Nov-06

Apr-07

Sep-07

Feb-08

Jul-08

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

50

100

150

200

250

300

350

400

450

Jan-00

Jun-00

Nov-00

Apr-01

Sep-01

Feb-02

Jul-02

Dec-02

May-03

Oct-03

Mar-04

Aug-04

Jan-05

Jun-05

Nov-05

Apr-06

Sep-06

Feb-07

Jul-07

Dec-07

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

-

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

5,200

5,300

5,400

5,500

5,600

0

200

400

600

800

1,000

1,200

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

2,000

4,000

6,000

8,000

10,000

12,000

14,000

0

200

400

600

800

1,000

1,200

1,400

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

50

60

70

80

90

100

110

Jan-

08

Feb-0

8

Mar

-08

Apr-0

8

May

-08

Jun-

08

Jul-0

8

Aug-0

8

Sep-0

8

Oct-

08

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

0

200

400

600

800

1000

1200

1400

1600

1800

2001 2002 2003 2004 2005 2006 2007 2008 Jan-09

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

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

2001 2002 2003 2004 2005 2006 2007 2008

-

200

400

600

800

1,000

1,200

1,400

1,600

1,800

Rasio utang terhadap PDB

Nilai utang pemerintah (Rp triliun)

Sumber: Depkeu, BPS, diolah

Debt Stock

Debt/GDP Ratio

ECONIT Advisory Group