[17] The Bank for International Settlements has recently written about how, at the global level, foreign capital flows into local currency bond markets in emerging economies have been highly procyclical, including during the current crisis: Boris Hofmann, Ilhyock Shim and Hyun Song Shin, “Emerging Market Economy Exchange Rates and Local Currency bond markets Amid the Covid-10 Pandemic”, BIS Bulletin, No 5, 7 April 2020, https://www.bis.org/publ/bisbull05.htm. Non-tariff barriers, rent-seeking by state-owned enterprises, domestic subsidies, barriers to domestic trade and export restrictions all created economic distortions. Want to start buying property in Asia? [22] E.g. However, the rupiah began devaluing past 11,000 in 2013, and as of November 2016 is around 13,000 USD. Quite frankly, Indonesia must to step up its game if it wants to become a winner in the ASEAN Economic Community (AEC 2015). Diminishing investment returns and an expanding workforce that is increasingly underutilised means even the ‘new normal’ of slower growth will not last long in the absence of adequate reform. A range of economic reforms was introduced in the late 1980s, including a managed devaluation of the rupiah to improve export competitiveness, and de-regulation of the financial sector. [120], According to Asia Wealth Report, Indonesia has the highest growth rate of high-net-worth individuals (HNWI) predicted among the 10 most Asian economies. [114] It was the country's first "fiscal space" since the revenue windfall during the 1970s oil boom. [19] Foreign direct investment (FDI) accounts for a small share of total investment, averaging 2 per cent of GDP over the past decade and lower than most Asian peers, including Vietnam with 6.6 per cent of GDP, Malaysia with 3.5 per cent, and Thailand with 2.5 per cent. [49] IMF, “Indonesia: Staff Report for the 2017 Article IV Consultation”, IMF Country Report No 18/32, February 2018, https://www.imf.org/en/Publications/CR/Issues/2018/02/06/Indonesia-2017-Article-IV-Consultation-Press-Release-Staff-Report-and-Statement-by-the-45614. A wide range of economic indicators confirms the bleak picture across the economy.[7]. For one, Indonesia’s fiscal response looks too small compared to the scale of the virus shock. Instead, it has access to a central bank repo facility that does little more than provide Bank Indonesia with marginal assistance to turn its own holdings of US treasuries into liquid dollars. President Joko Widodo’s commendable pro-growth efforts have so far only stabilised Indonesia’s trajectory rather than boost it. The budget therefore has little space to manage potential negative shocks, including risks of revenue shortfalls, higher debt-servicing costs, or if stimulus was needed to support the economy. Figure 6: Low-quality structural transformation. Some of this will need to be restructured. The advantage of targeting the yield curve, rather than the amount of bond purchases (as in QE), is that it provides a clearer signal to the market, thereby likely reducing the volume of bonds that need to be bought by the central bank in the first place. In addition, Indonesia's government is unable to borrow more money from international investors unless it pays impossibly high interest rates, added Ms Bain. [42] High levels of economic growth masked several structural weaknesses in the economy. Under Suharto, Indonesia had moved towards the private provision of public infrastructure, including electric power, toll roads, and telecommunications. Indonesia is widely seen as a future economic giant. All views are those of the authors. Adopting yield curve stabilisation would give Bank Indonesia a clear and consistent policy framework for responsibly providing a scalable amount of budget deficit financing. Geographically, the poorest fifth regions account for just 8% of consumption, while the wealthiest fifth account for 45%. One common concern is that Jokowi’s infrastructure drive has been occurring within a poor institutional framework including longstanding weaknesses in planning, budgeting, implementation, and operations and maintenance. Instead, Indonesia could turn to some of its key bilateral partners, such as Australia, for additional assistance. In 2012, Indonesia realised total investments of $32.5 billion, surpassing its annual target $25 billion, as reported by Investment Coordinating Board (BKPM) on 22 January. Investment growth has been notably weaker since the end of the commodity boom. Meanwhile, the global economic environment looks set to become more challenging. [83] Since 2011, some local carmakers have introduced some Indonesian national cars which can be categorised as Low-Cost Green Car (LCGC). That’s normally something which would be favorable for any nation’s current account. Indonesia has room to forge its own path in a way befitting its circumstances and policy objectives. From peak (February 2011) to trough (June 2015), the total fall was 76 per cent. [24] Indonesia depends on domestic market and government budget spending and its ownership of state-owned enterprises (the central government owns 141 enterprises). [5] International benchmark prices for these key commodities are down 35 per cent compared to their 2011 level on a net trade-weighted basis. His focus on infrastructure, fiscal reform, and improving the business climate are broadly what the economy needs to stimulate growth. Inadequate infrastructure is the most widely cited constraint to faster economic growth. Indonesia was until recently Southeast Asia's only member of OPEC, and the 1970s oil price rise provided an export revenue windfall that contributed to sustained high economic growth rates, averaging over 7% from 1968 to 1981. Funds from the facility could be drawn down in tandem with any financing from Bank Indonesia, perhaps once a certain threshold was reached in central bank bond purchases within a specific period. All Rights Reserved. [16] For example, Jakarta’s international airport has benefitted from the completion of a new modern terminal and rail link to the city and initial expansions to Tanjung Priok, Indonesia’s most important seaport, have been completed. The COVID-19 pandemic is expected to deliver the biggest contraction in global economic activity since the Great Depression. [9], These latest developments reinforce that Indonesia faces a ‘new normal’ of slower growth. When it rains in Indonesia, it pours in true tropical fashion. [90] According to Deloitte in 2011, Internet-related activities have generated 1.6% of the GDP. Deeper tax reform is thus even more central than commonly thought. The currency exchange rate reached Rp 12,000/USD1 before stabilising. [127], Inflation has long been a problem in Indonesia. [32] This has the potential to increase future tax collections, although capitalising on this will take time and remains contingent on a deeper modernisation of the tax system. Overpopulation. Indonesia cannot ignore the trade-off between growth and stability, but it needs to make it less binding, especially with the global economic backdrop becoming more difficult as liquidity tightens and protectionism potentially escalates. Note: Bubble size represents the share of the workforce in each sector following the nine industry classifications used by the Indonesian Central Statistics Agency. Other major foreign investors included India, Japan, the UK, Singapore, the Netherlands, Qatar, Hong Kong, Taiwan and South Korea. The most significant difference in approach is in how Indonesia sets its yield targets. [31] Aided by lower world oil prices, the total energy subsidy bill has shrunk from a fifth of the budget in 2014 to one-twentieth today. It indicates a substantial decline from the 1990s, due primarily to ageing oil fields and a lack of investment in oil production equipment. That period saw the introduction of protectionist laws governing mining, agriculture, trade, and industry, leading to numerous market interventions including a ban on raw mineral exports, divestiture requirements for foreign mining companies, tighter restrictions on imported food, and local content requirements for electronic products. However, this should be a second-order priority compared to focusing directly on supporting the budget deficit. 51.4 trillion (US$5.6 billion) or approximately 1.4% of GDP annually. The rupiah, which had been in the Rp 2,600/USD1 range at the start of August 1997 fell to 11,000/USD1 by January 1998, with spot rates around 15,000 for brief periods during the first half of 1998. Meanwhile, Jokowi is beginning his bid for re-election in 2019. The inflation peaked in 1998 during the 1997 crisis, with over 58%, causing poverty to raise to the levels in the 1960s. The principal economic problem facing Indonesia amid COVID-19 is financing the budget deficit needed to respond to a once-in-a-lifetime shock. The 1997 crisis brought to light a severe weakness in the process of dispute resolution, however, particularly in the area of private infrastructure projects. [6], Even these projections could prove too optimistic, especially if there is insufficient support from fiscal policy. Figure 5: Indonesian economic growth is capital-intensive, Increase in labour productivity by source, 2003-2015 (%), Source: Author’s calculations based on growth accounting estimates by Asian Productivity Organization: http://www.apo-tokyo.org/wedo/measurement. Growth declined to 3 per cent in the March quarter compared to the same period last year. The IMF's Mr Shastry declined to comment on the loss of $80bn, but he emphasised that "strengthening governance is an important element of the Fund-supported programme for Indonesia". Yet, this might only offer limited economic relief as consumers and businesses remain cautious, while the very real risk of a surge in infections could mean a more drawn out recovery and even a return to public lockdowns.

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