Stimulating the Economy

Indonesia

Economic News

22 Jul 2010
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Though Indonesia has a large domestic market and a relatively low dependency on exports and foreign direct investment, the country is by no means immune to the deepening global economic slowdown. This has led the Indonesian government to revise its growth forecast for 2009, and to launch a domestic stimulus package to mitigate the economic slowdown effects.



Throughout January the government has been unveiling the terms of a stimulus package that stands to inject $6.31bn into the economy in order to reverse the decline. This represents a substantial sum, amounting to 1.4% of GDP, making it in relative terms larger than the $819bn US stimulus package, which amounts to 1.2% of its GDP. The Indonesian government hopes the rescue package will help stimulate economic growth in 2009, putting it in the range of 4.5% to 5.5%- close to the 6% achieved in 2008.



Analysts welcome the move and are also praising the Indonesian government for having demonstrated the fiscal sobriety in recent years which has created the financial flexibility for a stimulus package. Even with the additional spending, the government's revised budget deficit of 2.5% (compared to 1% for 2008) and debt-to-GDP ratio (forecast by Fitch ratings agency at 30.3%) will remain at respectable and manageable levels. Accordingly, even with these new expectations being taken into account, Fitch has retained the country's overall sovereign rating at BB.



Finance Minister, Sri Mulyani Indrawati, has indicated that the package will be partly financed from unspent funds of $4.6bn left over from the 2008 state budget. Furthermore, greater budget flexibility has arisen from the fall in the global price of oil, as the amount the Indonesian government will be required to allocate towards its petrol subsidies in 2009 will decrease significantly.



While the global crisis has thus far not hit the domestic job market as hard as Indonesia's more export-oriented neighbours, the consensus is that unemployment is set to rise in the coming months. According to The Indonesian Employers Association, the country's manufacturing sector will see layoffs in the region of 500,000 jobs by the middle of the year.



Further pressure will also be placed on the job market as thousands of Indonesians working abroad in slowing economies such as Hong Kong, Singapore, Malaysia, and the Middle East return home. According to the National Agency for the Placement and Protection of Indonesian Workers, some 5m Indonesians working overseas sent US$6bn home in 2007. Indonesian remittances are predicted to decline to $3bn in 2009.



The official unemployment rate in Indonesia at the end of 2008 stood at 8.4% of the eligible workforce, amounting to 9.43m people. According to the Central Bureau of Statistics (BPS), Indonesia sees 2.5m new entrants to the workforce every year. Based on the BPS's assumption that every 1% GDP growth absorbs 400,000 workers, combined with the anticipated layoffs in the manufacturing sector, the revised GDP growth of 4.5% appears insufficient to sustain the current employment rate. According to the government, the rescue package will help bridge the gap, with the creation of between 700,000 to 1m additional jobs in 2009.



With a population of 230m, analysts believe that sustaining confidence and preventing a collapse of demand will be key to Indonesia's resilience. Despite a weakening Rupiah, as a result of the falling price of oil and commodities, the purchasing power of Indonesians has remained relatively healthy. In addition, Indonesia is for the most part a cash-based society, and as such, the average Indonesian is neither feeling the pinch of the tumbling stock market fall or the increased cost of borrowing. Therefore, it is giving a short-term lift to employment that most believe is the key to sustaining domestic demand and confidence.



While the local business community is in favour of the stimulus spending, it has indicated that it would like to be consulted with regards to how this pay-off will be shared.



Kadin, the Indonesian Chamber of Commerce, as well as The Indonesian Employers Association, have both reiterated the need for prioritising industries that employ large numbers of people as well as those that are export-oriented.



Maintaining employment levels in check may prove critical in weathering the crisis economically as well as politically. Unemployment has long been a sensitive political issue in the country, and the last time Indonesia faced massive job losses was during the 1997/98 Asian Financial crisis. At the time, social unrest led to the resignation of then President Suharto, who had been in power since 1967.



Of the $6.5bn in funds being allocated, it has been announced that $1.02bn will go directly towards spending on infrastructure (roads, schools, hospitals) mainly though local authorities. Many feel that this as an area which has been neglected in recent years, and at a time when private companies, which are faced with high borrowing costs and divestment pressures, can no longer be relied upon solely for infrastructure expansion.



Gita Wirjawan, CEO of private equity firm Ancora International, told OBG, "Infrastructure creation is a true proxy for economic growth. In 1995, China and Indonesia both had 500km of roads. Today, China has 55,00km of roads, while Indonesia only has 700km. If you look at China's substantial economic growth and development versus Indonesia's over that same period, you can see that infrastructure capacity played a crucial part in this difference".



Overall, while full details of the package are still being worked out, most are in agreement that significantly raising government spending for 2009 will help to mitigate the impact of a global slowdown on the domestic economy. As Indonesia has in the past been accused of being slow to implement and execute its announcements, both analysts and the private sector are reserving full judgement until they see the package result in tangible actions.

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