Indonesia – no recession in world’s leading Muslim economy [Archives:2008/1209/Business & Economy]

November 20 2008

By: Dr. Terry Lacy
For the Yemen Times

Following the election of President Obama there is likely to be a slow recovery in confidence in the United States financial and banking system. A recession is unavoidable in the US and EU, but with only a downturn in developing countries.

This crisis of confidence in the Western banking and financial system comes during the dying days of the most unpopular American Presidency in living memory. Financial mismanagement and weak regulatory frameworks have devastated the US economy making the rich richer and the poor poorer. Two million Americans may lose their homes. Millions in the US and Europe will lose their jobs.

Yet the devastating legacy of the Bush Presidency leaves open great opportunities for Indonesia, the Muslim world and the developing countries of the South.

Indonesia can play a key role in leading the Muslim world towards economic recovery, and help minimize the impact of global recession.

First by managing its national economy to maintain growth, demand, imports and exports. The nominal Gross Domestic Product for 2009 is projected at $547 billion. Indonesia is already in the top 20 economies of the world.

Indonesia is currently overtaking Belgium and Sweden. It will soon overtake Turkey, the Netherlands and Austria as it enormous size, resources and population come into play. It is a strong candidate to join the top ten economies in the world within two decades.

Second, by mobilizing investment for oil, gas, energy projects, bio-fuels, infrastructure (roads, railways, ports), manufacturing and retailing sectors. It needs over $40 billion for electricity alone, to finance an additional 40,000 Mwe of power by 2025. Indonesia will become a nuclear power, and plans four power stations. Total foreign investment needed overall during the next 15 years exceeds $100 billion.

Investment is still coming from the US and EU (including Eastern European) but increasingly from the BRICs (Brazil, Russia, India and China). Also from APEC countries like Canada, Japan, Korea, Taiwan and from ASEAN Member States (Brunei, Malaysia, Philippines, Singapore, Thailand). Investment is also coming in greater volume from the Gulf States, Saudi Arabia, Israel and South Africa.

Third Indonesia can help lead Muslim economies by using its economic size and prestige as a member of the U.N. Security Council to join Brazil, Russia, India, China and southern countries to bring about changes in policies and in the balance of power in world organizations dealing with trade, finance and development, especially the World Bank, the International Monetary Fund (IMF) and World Trade Organization WTO).

Indonesia has major reservations about the IMF following its own experience in 1998. German Finance Minister Peer Steinbrueck said that the world should not slip into creating a shadow world economic government run by an inner IMF council. Indonesia is also tired of being kept on the fringes in the WTO.

Asia and Southern Countries want a new deal. Muslim countries collectively represent an increasingly important source of capital, while Western liquidity has partly dried up. Muslim economies represent important investment sources as well as investment destinations. The collective size of Muslim economies represents significant demand for Western goods and services, relatively unaffected by the recession in the West.

Indonesia can still deploy export credits, sovereign funds, Islamic finance and other non-traditional financial sources, such as environmental funds and carbon credits. Despite the global downturn Indonesia is still pulling in some bank finance. A $140m syndicated loan for Excelcomindo for telecommunications expansion was announced recently. Low cost airline Lion Air are buying 12 Boeing 737 planes even though the required local cash contribution for the last four has risen to 30%. Lion Air will use its own cash to carry on expanding. St Miguel Corp of the Philippines is competing with a US led consortium to clinch a $1.3 billion coal supply deal, to buy PT Bumi Resources from Bakri Brothers. There is money here and money coming in. Standard and Poors are holding Indonesian credit ratings stable and its credit rating may even be raised. Singapore could slip into recession but Indonesia will not, and the reason is mostly sheer size plus improved financial and economic management.

Indonesia is in a key position as the largest Muslim country in the world with a population of 230 million and a land area of 1.9 million kilometers.

The Indonesian Gross Domestic Product was $843.7 billion in terms of purchasing power and $432.9 billion in terms of official exchange rates in 2007. It has fixed foreign investment of $57.6 billion and holds $9 billion of investment in other countries. It has over 3,500 millionaires holding over $100 million each, of whom 70% live in Jakarta.

Its current economic growth is 6.5% and its feared may fall below 6% in 2009 due to reduced exports. Government will stimulate growth using the national budget which already reached $100 billion in 2008. Government is confident it can hold growth at 6%. The World Bank has set aside a $2 billion standby loan for 2009 only to be triggered if growth falls below 5.8%. In 2007 Indonesian exports were $118 billion and imports $86 billion, a trade surplus of $32 billion, and foreign exchange reserves by November 2008 were $50 billions.

Indonesia has already lost some jobs in sectors like textiles. Some exports to the US and Europe fell by Quarter 4. The stock market, government bonds and the national currency also fell in value in the financial crash in the first week of October.

The government launched a securities buy back program spearheaded by State Owned Enterprises (SOEs) and defended the rupiah by intervening in the currency market via the Bank of Indonesia (BI). The Government also took steps to increase liquidity and focused on getting inflation under control and on maintaining growth. The Government has increased guarantees on personal deposits to Rp 2 billion ($190,000) which covers 100% of deposits for over 99.7% of 81 million bank accounts.

Indonesian banks are strong with adequate reserves, low non performing loans and almost no exposure to sub prime losses. Only a small group of investors lost money on Lehman-related instruments purchased via international banks.

The Indonesian inflation rate is declining from a high of 12% to maybe 9% by January with reductions planned to between 9% and 7% for the rest of 2009. The bank rate is being stabilized at 9.5% after 6 months of consecutive rises. It will be held for a while and then reduced to 7.5% in 2009.

Indonesian bonds are recovering from their recent nose-dive and the stock market is stabilizing. Local economists say the stock market was over-valued and more normal values and returns will be restored as part of the local share trading cycle.

The Government is now focusing on trying to mobilize its massive $115 billion dollar national budget for 2009, up from $100 billion in 2008, to push projects and overall spending forward and help substitute local demand for declines in exports, with every hope of keeping economic growth for 2009 at between 5.5 and 6.0 %.

Despite the collapse of the BI subsidiary Indover bank in the Netherlands, there is no sovereign default. Indonesian Finance Minister Sri Mulyani Indrawati and the new Central Bank Governor Boediono have taken a stand against previous mismanagement.

In contrast to the kid-glove treatment of failed bankers and financial managers in the West, who took imprudent and possibly illegal risks, the Indonesian Government is directing the work of its Corruption Eradication Commission and Corruption Court against corrupt central bankers and parliamentarians who took bribes.

The Indonesian Government also says it will pursue legally those who misused its name and dragged it into the Netherlands Indover bank collapse, by implying there were sovereign guarantees backing Indover borrowing when there were none. It also intends to pursue allegations of short trading and fraudulent practices in the Stock Exchange.

Indonesia lost 10 years as a result of the 1998 banking crash when it put its fate in the hands of the IMF, which initially failed to understand local strengths and exaggerated local weaknesses. An historical photo shows President Suharto sitting at his desk, signing his own political death-warrant while the IMF Representative stood over him, as he signed the IMF agreement.

A lot has changed between the Asian banking crash of 1998 and the Wall Street crash of 2008. The economic balance of power in the world has changed and the balance of global power has shifted to the South and East. British Prime Minister Gordon Brown recognized this when he urged the Gulf States and G20 to help stabilize the world economy.

In the 1998 bank crash Indonesia had no freedom and no choice. This time in 2008 Indonesia has freedom and is stronger, and can chose to tread its own path. Hopefully its greater strength and determination will inspire Muslim and southern countries not to panic in the face of recession in the West, but to work together to avoid the spread of recession to the South and to build and strengthen a new world economic order.

Dr Terry Lacey is a development economist who writes from Jakarta, Indonesia, on modernization in the Muslim world, investment and trade relations with the EU and Islamic banking.