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How Badly is Indonesia’s Economy Really Doing?

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How Badly is Indonesia’s Economy Really Doing?

September 15, 2018
in Economy, Featured, Indonesia
0
Home Economy
Post Views: 582

 

Over the past few weeks, concerns have surfaced over the weakening of Indonesia’s currency, the rupiah, with its value approaching the lowest point seen since the 1998 Asian Financial Crisis. Indeed, Indonesia has even been mentioned in the same breadth of other emerging markets like Argentina and Turkey, where high debt and a lack of confidence among international investors is threatening an economic bust.

Given its status as the biggest economy in ASEAN and its previous record in contributing to the type of contagion that brought the region to its knees over two decades ago, Indonesia is always a major concern in this respect. But analysts, government officials and Bank Indonesia (BI) aren’t hitting the alarm bells just yet.

All are taking great pains to emphasize the Indonesian economy is in much better shape than it was during the Asian Financial Crisis, triggering widespread economic disruption in Southeast Asia and led to wider political and even social unrest in Indonesia, including anti-Chinese race riots.

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There is no doubt evidence for this line of thinking. To take just one example, then, Indonesia’s debt-to-equity ratio ballooned to above 100 percent, and now it’s just 29 percent, which compares favorably with Thailand at 42 percent and Malaysia on 54 percent. On other indicators, such as credit ratings and reserves, Indonesia is in a far healthier position than it had been in the late 1990s as well.

However, at the same time, there are reasons to worry. For example, public debt has risen sharply under President Joko Widodo, up 40 percent at $295 billion from $210 billion when he took office four years ago. Managing that is more challenging than it appears: the drivers of this include his plans to spend $350 billion on much needed infrastructure projects, which he had made a signature initiative of his presidency.

An appreciating greenback, well-flagged interest rate hikes by the U.S. Federal Reserve, and the depreciating rupiah won’t help those numbers. Neither will the U.S.-China trade war, and incoherent policies from U.S. President Donald Trump who is antagonizing the situation at a global level with investors shunning emerging markets.

But, unlike two decades ago, when the rupiah plummeted to an all time low, BI has not been caught flat-footed. With the rupiah down eight percent for the year, the central bank has upped its policy rates by 1.25 percentage points in the last five months.

“Bank Indonesia’s (BI) commitment to maintain economic stability, especially the rupiah, is very firm. Therefore, we have stepped up the intensity of our intervention,” Governor Perry Warjiyo recently told reporters, in regards to market intervention.

While this may be sufficient for now, the key question is how the situation plays out in the next few months if some of the external and internal drivers intensify. It is also worth noting that this is no ordinary period: it is an intense time in Indonesian politics, with the country gearing up for what is expected to be a hotly contested presidential election next year which will put Jokowi to the test.

So while it may be too premature or alarmist to return to comparisons with the Asian Financial Crisis, there are reasons to be worried about the situation the Indonesian economy now finds itself in.

Source :
TheDiplomat
Tags: Asian financial crisisDepreciating RupiahIndonesia Economic PolicyIndonesia Foreign Debtsrupiah exchange rate
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