DESPITE THE GLOOM, THERE ARE STILL NINE PLUS POINTS FOR INDONESIA’S ECONOMY IN 2009, AS DEVI ASMARANI REPORTS

The economic events of recent months suggest that tough times are still ahead for the Indonesian economy. With people tightening their belts, there is an expectation that global demand for goods and services will shrink. Already, businesses are bracing for the impact. Indonesia, barely out of the economic woes that began 11 years ago, will not be spared.

SOUND MACRO-ECONOMIC FUNDAMENTALS

But while the global outlook may be bleak, there are still some very real economic bright spots. For one, Indonesia’s annual growth rate for 2009 is still forecast at, or just under, 6%. Following a decade of reforms, Indonesia’s economy has gotten back on track, as evidenced by a continuous expansion for eight consecutive quarters to late 2008, and a much higher debt-to-GDP ratio.

“Indonesia is deleveraged. The government has a low debt level by international standards,” says Milan Zavadjil, a representative of the International Monetary Fund to Indonesia.

The country’s foreign reserves are almost four times the level of 1997 at US$58 billion. Indonesia has also experienced a trade surplus for the past few years, with the first half of 2008 hitting a US$8 billion surplus. Higher tax receipts from booming prices of natural resources such as palm oil, minerals, rubber and cacao, and a smaller-than-planned budget de? cit, will require the government to acquire less foreign debt. With a budget now more than three times the 1997 level at 300 trillion rupiah, Indonesia is in a much stronger position. And in sharp contrast to a decade ago, the rupiah has so far remained steady against the US dollar.

ROBUST BANKING SYSTEM

One of the most significant differences between the current situation and the 1998 crisis is the state of Indonesia’s banks.

Ten years ago, the banks were poorly capitalized and vulnerable from imprudent lending practices. Since then, consolidation has meant that the top 10 banks now account for 61% of total banking assets. Non-performing loan levels are at a low 3%, and loan portfolios are now less focused on corporate lending.

The banking sector’s capital adequacy ratio of 17% is now much higher than the 8% minimum, indicating that banks have more than sufficient capital reserves. To prevent another crisis of confidence leading to mass bank closures, the government recently increased its guarantee from 100 million rupiah to two billion rupiah’s worth of deposits. This is expected to protect 97% of the country’s depositors.

Says economist Umar Juoro, “We are up against the tsunami of the global financial crisis. But as far as a confidential crisis on the 1998 scale [is concerned], the probability is very low.”

DOMESTIC-DRIVEN CONSUMPTION

Undoubtedly, exports will be the first to suffer the negative impacts of a worldwide slowdown. But the government and analysts believe that the slowdown in exports will be mitigated by higher domestic consumption, given a projected lower interest rate environment and driven by a lower inflation of about 6%. Unlike countries like Korea, whose GDP is heavily export-dependent, exports make up only 30% of Indonesia’s GDP.

COMMODITIES

Commodity prices have been declining due to lower demand, which has seen a drop in prices of crude oil, crude palm oil and coal. But lower oil prices will also ease the government from the burden of high fuel subsidies, freeing it to use the money for projects to stimulate the economy instead.

Furthermore, countries like China and India will still fuel the demand for commodities. “Although China’s growth will slow down because its exports will decline, it will still be around 9%. That means it will still need coal and palm oil,” adds Umar.

SHINING SECTORS

The agriculture and energy sectors – including oil and derivatives – plus the telecommunication sector will likely prop up the economy next year, although they too may see only modest growth.

“Food and energy are the two most important things, and countries like China cannot afford to slow down,” says Michael Steven, chairman of the Indonesia Public Listed Companies Association. “This is actually a good time for them to keep buying because the prices will remain low.”

REGIONAL STABILITY

Asian economies have not only stabilized following the 1998 crisis, but they have since strengthened, giving them a much greater ability to weather a new storm. In addition, the growing economies of China and India will be important in shoring up the world’s economy.

Umar says the foreign exchange reserves of Asian countries – which are at US$3 trillion – are sufficient to dampen the effect of the global economic shock. Of this amount, China has 1.1 trillion, Japan 800 billion, Singapore over 100 and Korea about 150, he adds.

“This capability is expected to prevent the momentum of a recession in Asia, and stimulate the world’s economy while the developed countries are in recession.”

REGIONAL TRAVEL BOOST

There will certainly be a decline in numbers of people traveling to Indonesia from countries badly affected by the crisis. But with the declining trend of oil prices, flying may also become cheaper. And for those who keep traveling, there will very likely be a greater range of good deals, as airline and hotel bookings feel the pinch. “I think there will be more people traveling within Indonesia or within the region,” says Umar.

The latest Visa Travel Intentions survey by Visa International and the Pacific Asia Travel Association (PATA) indicates that for 5,500 consumers from 11 key source markets to Asia-Pacific, 57% of respondents plan to switch to less expensive destinations or itineraries as a result of economic uncertainty.

DEREGULATED AVIATION

Another potential bright spot compared with a decade ago is the ease of domestic travel, which spurs both business and leisure travel across the archipelago. The Visa International survey also found that as a result of the economic uncertainty, 38% of respondents say they will travel domestically instead of taking an international trip.

One major difference in 2008 compared with 1998 is the choice and range of airfares that Indonesians can choose from. The deregulation of aviation has created more choices, while the low-cost booking model and online tools allow airlines to stimulate the domestic market with special fares when there is a fall in demand. If oil prices stay down, this sector should remain relatively healthy.

BETTER PREPARATION

Inconsistent policies and turbulent politics contributed to panicked markets and a plunging rupiah at the height of the 1997 crisis. But lessons have been learned since, and the government has acted more swiftly to prevent this crisis from spreading. Indonesia has also moved quickly to protect local industry from an influx of overseas goods by imposing aggressive non-tariff barriers.

“Overall, I think the government has tackled the crisis early on, and is prepared to do more as the crisis worsens,” says Sofyan Wanandi, chairman of the Indonesian Employers Association.

“The question is, how long and how deep will the crisis go? That remains to be seen.”

Now freelance, Devi Asmarani was a senior correspondent in Indonesia for The Straits Times for eight years.