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Policy Response to Overcome Crisis: A Lesson from Indonesian Case Hendri Saparini Senior Economist - ECONIT Advisory Group

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Presentation on theme: "Policy Response to Overcome Crisis: A Lesson from Indonesian Case Hendri Saparini Senior Economist - ECONIT Advisory Group"— Presentation transcript:

1 Policy Response to Overcome Crisis: A Lesson from Indonesian Case Hendri Saparini Senior Economist - ECONIT Advisory Group Presentation for IDEAS Conference on Re-regulating Global Finance in the Light of the Global Crisis Tsinghua University, Beijing, China, April 9-12, 2009

2 The 1997/98 Crisis: Pre-crisis Crucial Problems on Financial Sector: Cross-ownership & cross-management in financial sectors Over-valued rupiah Over-leveraged private foreign loan

3 The 1997/98 Crisis: Policy Response Policy blunder under IMF receipt: Super tight money policy To liquidate of 16 banks Take over private sectors debt Budget dicipline, reduce subsidy, raise tax, privatization. Acceleration of liberalization in real sectors (agriculture, industry)

4 1997/98: Supply & Price Hike Energy (Gasoline: 71% Kerosene: 25%) Rice (>100%) 1997/98: Supply & Price Hike Energy (Gasoline: 71% Kerosene: 25%) Rice (>100%) 2008/09: Supply & Price Hike Energy (Oil&Gas) Rice, Wheat, Cereals Sugar Palm Oil Soybean 2008/09: Supply & Price Hike Energy (Oil&Gas) Rice, Wheat, Cereals Sugar Palm Oil Soybean IndonesianSubprimeLoans: Motor Cycles Loans Commercial Property Electronic Loans Credit Cards Political Instability Government Lack of Credibility & Confidence Ineffective Government Structural Problem High Poverty (40 mio) Huge Inequality Unemployment (12%) Structural Problem High Poverty (40 mio) Huge Inequality Unemployment (12%) Capital outflow Sharp Fall of Rupiah Capital outflow Sharp Fall of Rupiah Direct Linkages 1997/98: Violation of Legal Lending Limit OvervaluationRupiah Private debt: Huge & no record Thailand (1997/98) Liquidity crises Depreciation of Overvalued Bath USA (2008/09) Carry-over of Subprimelending Fiscal Deficit (1,2%GDP) Trade Deficit (US$ 850 bio) Current Account Deficit (6%GDP) INTERNATIONAL FACTORS DOMESTIC FACTORS 2007/08: Price driven export growth Inflows of hot money Artificial Growth of Banking sector Stock prices >> fundamentals Linkages: Lags %Coupling Linkages: Lags %Coupling Social & Economic Effects Social & Political Effects ECONIT Economic Outlook 2008: A YEAR OF THE BUBBLES © ECONIT Advisory Group

5 The 2008 Crisis: Pre-Crisis Financial bubbles and deindustrialization Contradiction between improving financial indicators and slowing growth of real sector combining with accelerating deindustrialization

6 The 2008 Crisis: The Financial Bubbles The main reason for the emerging contradiction between the performance of the financial and real sectors is the inflow of hot money into Indonesia. The total value of hot money that has entered Indonesia since 2006 up to December 2008 is thought to exceed Rp 140 trillion. The inflow of hot money has strengthened the rupiah against other currencies and bid up the prices of domestic assets. The Jakarta Stock Exchange Index (IHSG) increased by 57 % in 2007, closing at 2,830 (Jan 9, 2008). The rupiah strengthened to an average rate against the US dollar of Rp 9,142 (2007).

7 The 2008 Crisis: Reasons For Susceptible to A Shock 1. Price driven export growth 2. Share price increase exceeded the fundamental 3. Artificial growth of banking sector 4. Indonesian subprime loan

8 Export and foreign exchange reserves have increased only because of rising international commodity prices and inflows of hot money. Throughout 2006 and 2007, Indonesias foreign exchange reserves have increased sharply from US$ 35 billion at the end of 2005 to US$ 57 billion at the end of But, the rise in reserves was not supported by export competitiveness or an increase in foreign direct investment. 1. Price Driven Export Growth

9 Export: Dominating by Commodities (2007) Commodities Contribution To growth Share to Export of Non-OilGas Growth 1Nickel16.3%3.8%159.5% 2Copper14.4%8.5%31.5% 3Machinery and equipment14.0%7.4%36.6% 4CPO10.8%6.7%29.8% 5Chemical Product9.6%7.0%24.3% 6Coal6.7%7.6%14.5% 7Textile3.4%11.1%4.5% 8Paper2.6%4.6%8.6% 9Rubber2.3%5.3%6.6% 10Metal goods2.0%1.1%32.3% Total 10 commodites82.1%63.1%22.6% Total Non-Oil Gas100.0% 16.5% Sources: BI ECONIT Advisory Group

10 Alumunium Nickel Iron Ore Copper Sumber: IMF, diolah Mining Comodities: Price Index ECONIT Advisory Group

11 The Sharp Declining of Mining Product Zinc Uranium Nickel Copper Alumunium Sorce: IMF ECONIT Advisory Group

12 Agriculture Commodities: Price Index Palm oil Rice Maize Soybeans Wheat Sumber: IMF, diolah ECONIT Advisory Group

13 The Decline in International Price Didnt Follow by Domestic Price: Oil & Gazoline ECONIT Advisory Group

14 The Decline in International Price Didnt Follow by Domestic Price: Rice ECONIT Advisory Group

15 The Decline in International Price Didnt Follow by Domestic Price: Cooking Oil ECONIT Advisory Group

16 Early January 2008, fifty-one companies listed on the exchange recorded price-earnings ratios in excess of fifty, and 26 of these posted ratios greater than 100. Remarkably, the prices of eleven stocks on that day were more than 300 times of earnings. Soaring stock prices not supported by economic performance reflects the formation of a financial bubble. 2. Share Price Increase Exceed The Fundamental

17 Hot Money Inflow Surat Berharga Foreign Ownership (Rp trillion) Dec-06Dec-07Share (%)Dec-08Share (%) Stock % % Government Obligation %87.6**16.7% Bank of Indonesia Certificate *15.80%6.73.8% *) November ** end of Agust 08 =106.7 (19.8%) ECONIT Advisory Group

18 Jakarta Stock Exchange IHSG Growth at Highest Pace ECONIT Advisory Group

19 Jakarta Stock Exchange Fell the Lowest after 2008 Crisis ECONIT Advisory Group

20 Growth of the banking sector was largely an illusion. On 2007 the banking industry recorded sharply higher profits. The Net Interest Margin (NIM) for 2007 was 5.7% The wide gap between interest rates on loans and savings generated profits, which attracted investors into the banking industry. The banks share prices skyrocketed as a result. Yet profitability in the banking sector was not supported by strong fundamentals, for example credit growth. In 2006, bank credit by only 14%, followed y 25% in But consumer credit was the fasting growing sector. We expect credit growth of about 20% in Artificial Growth of Banking

21 Since 2007 the financial bubble has grown quickly and consistently, extending in early 2008 to the property, consumer credit such as motorbike loans and credit cards. The boom in commercial property investment has not been met by an accompanying increase in demand. Occupancy rates have fallen as result of the slow growth of investment. In 2007, gross investment increased by only 8 percent from the low levels of the year before. Another model of subprime loan is the huge of motor cycle loan. Poor public transportation has caused high cost transportation. As a result, motor cycle loan was booming. Until 2007 at least there were 5 millions motor cycles in Indonesia, of which three fourth were sold through leasing companies. 4. Indonesia Subprime Loan

22 Acceleration of Deindustrialization Real GDP vs. Manufacture Production Index Real GDP Index Manufactur Production Index ECONIT Advisory Group

23 Growth of GDP and Manufacturing Sector The Gap Become Wider ECONIT Advisory Group

24 Comparison of Crisis 1997/98 and 2008 ECONIT Advisory Group

25 The 2008 Crisis: Policy Response Repeating the same blunder and disengaging real sectorSuper tight money policy: Increase the interest rate The buy back policy Fiscal stimulus

26 Indonesia Policy Responses The Monetary Policy The decision of Bank Indonesia and the government to impose a tight money policy demonstrates that the government has learned nothing from the 1998 crisis. Since January 2009, Bank of Indonesia have been reducing interest rate. The effectivity of monetary policy alone will be a limition. Loose in liquidity and interest rate policy speculation and depreciation of exchange rate

27 Indonesia Policy Responses The buy back policy The government has prepared Rp. 4 trillion in government funds and has encourages State Owned Enterprises (SOES) to buy back shares to lift stock prices. It was not an effective action to cure the economy turmoil, even for only in the capital market. To push SOEs to buy back stocks up to 50% without general share holder meeting shows imprudent action in decision making. Shown unsupportive policy to samall investor as 60 % of Indonesia money market was controlled by hedge fund and foreign investor.

28 Indonesia Policy Responses The Fiscal Stimulus This counter-cyclical policy will not effective The effectiveness of fiscal stimulus will be very low; in the last 4 years the government performed weak fiscal management 80% of the fiscal policy was allocated as tax saving, not for direct spending. Increase budget deficit, from 1% (Rp 51 trillion) to 2,6% to the GDP (Rp 137 trillion) Financed by foreign loan and domestic loan (government obligation).

29 Fiscal Stimulus 81% are Tax Saving, Tax Subsidy, Import Duty Tax Saving (PPh, PPN, BM) Rp 43 trillion 81% Tax Subsidy borne by the government (Pajak DTP) and Import Duty by the government (BM DTP) Rp 17,3 trillion Subsidy to business sector (fuel subsidy and discount on peak hour tariff for industry) Rp 4,2 trillion State expenditure for job creation Rp 10,8 trillion 19% ECONIT Advisory Group

30 Indonesia Policy Responses Policy on Trade and Industry The government will to continue Washington Concensus (cut subsidy for food, education, oil, increase loan, etc.) Governemnt officially stated IMF and World World Bank are the umbrella to overcome the crisis Officially stated to continue liberalization and against potection Continue create new FTA without industrial policy and stategy

31 Indonesia Crisis: The Proposal for Policy Responses Re-orienting policy in the financial sector (strictly managing the hot money and capital control/capital regulation must be one of the priority to support the real sector) To change the hands-of policy to hand-on policy on real sector. o To create value added (develop/restructure the manufacturing industry) and increase the productivity for better fundamental economy and stronger economic structure. o To solve the high poverty rate and huge unemployment. The government should minimize the amount of debt, but re- orienting and re-alocating budget to give fiscal stimulus

32 Worlds Tin Production (2007) Source: World Mineral Production, , diolah ECONIT Advisory Group

33 Worlds Tin Demand, Based on Use (2005) Source: PT Timah Tbk, 2007 ECONIT Advisory Group

34 Indonesian Imports of Tin Based Products (US$ juta) Commodities Flat-rolled iron or nonalloy steel products, >600 mm, plated or coated with tin, > 0.5 mm thick Flat-rolled iron or nonalloy steel products, > 600 mm wide, plated or coated with tin, < 0.5 mm thick Flat-rolled iron or nonalloy steel products, <600 mm wide, plated or coated with tin Radiotelephony, radiotelegraphy, radiobroadcasting or television Source: Ministry of Trade

35 Indonesian Public Debt Increase by 31% in Four Years ECONIT Advisory Group Source: Ministry of Finance

36 Indonesian Public Debt Decrease In Ratio Increase in Stock Debt Stock Debt/GDP Ratio ECONIT Advisory Group

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