Survey of Recent Developments

Following the remarkably successful 2014 parliamentary and presidential elections in Indonesia, attention now turns to the new president and his agenda for the next five years. President Joko Widodo, known as Jokowi, has emphasised the importance of strong economic growth and rising living standards. But he faces significant, broad-ranging economic challenges and, perhaps not surprisingly, serious discussion of these issues did not feature during the election campaigns. In many respects the economy is at a crossroads, facing the choice between a business-asusual scenario of no reform and consequently sluggish economic growth, and a politically difficult reform agenda that would set it on a higher growth path. Economic policymakers regard the events of 2013 as a mini economic crisis, and they feel vindicated in their explicit preference for stability over growth—that is, for slowing the economy through tighter fiscal and monetary policy and letting the currency decline. For now, the economy is slowing but holding up quite well, especially by comparative international norms and considering foreign and domestic headwinds, including possible macroeconomic and financial fragilities. Here we examine these headwinds—from global economic volatility and declining commodity prices, particularly in the wake of the so-called Bernanke shock of May 2013, to the continuing policy drift at home. We investigate whether there is evidence of an emerging adjustment from the commodity-driven growth of the past decade to some of the traditional tradables sectors, especially manufacturing. While the commodity boom is almost certainly a thing of the past—at least at levels witnessed since 2005—the country's political narratives and the government's microeconomic policies appear to be still premised on an era of plenty funded by a disappearing boom. We speculate on likely options and directions for what in all likelihood will be a ‘Jokowi decade’.     

Risks,Resilience, and Reforms: Indonesia’s Financial System in 2019

Indonesia has managed the complex challenges of the global economy well. The country's capital outflows were smaller in 2018 than during the Taper Tantrum in 2013; the rupiah had regained most of its lost ground by January 2019; the Indonesian stock market has outperformed its peers; growth is forecast to remain stable; inflation is low; unemployment remains below its five-year average; consumer and business confidence are robust; and the government budget has improved through a smaller deficit and cheaper borrowing costs. But significant risks remain. This paper assesses these risks and evaluates the adequacy of Indonesia's crisis management framework. It finds that the framework has serious deficiencies that could see liquidity challenges become systemic solvency crises. The framework effectively removes Bank Indonesia as the lender of last resort, risks politicising the process of crisis response, and could mean slower, less effective responses to crises. This paper explores how the framework could be improved and what reforms could be undertaken to deepen Indonesia's financial system, strengthen financial resilience, and boost the long-term growth outlook.     

Indonesia's Crisis: Implications for the Region

What began as a currency crisis in Indonesia in the third quarter of 1997 rapidly turned into a deep financial crisis with wide-ranging economic and social impacts, and finally became a serious political crisis that exploded in May 1998, forcing President Soeharto to resign. Soeharto's departure, however, did not resolve the crisis. He left behind an economy in shambles, a serious political vacuum and a highly polarised society. The issues to be dealt with are wide-ranging, including the loss of Indonesia's position in the international system, the domination of industry by foreign capital and the imposition by the IMF of a certain model of economic development. Regional and international aspects of the crisis have not become an issue in the public debate and policy discourse in Indonesia. This article looks at these implications.     

Competition policy in Indonesia: Conglomerates versus SMEs1

Since the currency crisis, Indonesia has undergone rapid economic and political changes. However, the IMF‐directed recovery program, such as decentralization, does not seem successful. Despite the improvised legal system, the implementation of the recovery program is very poor. Lack of consensus on the role of conglomerates and the direction of competition policy, has prevented Indonesia from recovery. Anti‐conglomerate sentiment of the post‐Suharto times has given rise to unbalanced competition law and inconsistency among related laws. Treatment of the banking sector including ownership is a critical factor in the recapitalization process. Due to the similarity between Indonesia and Korea, Korean experiences would help Indonesia to establish the principles on competition policy. The separation principle is strongly recommended for Indonesia at the current development stage, and it is urgent to establish a rule‐based, not a discretion‐based, economy. The problems of conglomerates should be resolved through comprehensive competition policies.     

Dollarising Indonesia

The rupiah's record of instability, both recently and over the long term, suggests it is worthwhile to investigate options for radical monetary reform. An option currently receiving attention elsewhere is official dollarisation, under which a country ceases to issue a domestic currency and makes a foreign currency its official currency. This paper discusses the costs and benefits of dollarisation in Indonesia, the steps involved in dollarisation, and some economic and political implications of dollarisation.     

Analyzing and managing exchange-rate crises

This paper reviews theoretical work on exchange-rate crises and discusses recent attempts to reduce the risk of crises and manage them more effectively. Models usually used to explain crises—those in which they are due to bad policies and those in which they are due to self-fulfilling speculative attacks—do not often explain the timing of crises. Bad policies often play a role, but the onset of a crisis is frequently due to a political shock that leads market participants to revise their views about a government's ability to improve its policies. For this reason, efforts of the IMF to promote the publication of more economic data may not be very helpful in preventing crises. Turning to crisis management, the paper criticizes plans like those of Jeffrey Sachs, which would give soveregn debtors protection resembling that afforded by bankruptcy law. It favors instead the pragmatic approach developed in the report recently endorsed by the major industrial countries.     

The Asian crisis: what did we learn and when did we learn it?

This paper steps back from the detail of the Asian crisis, to ask whether the 1997 crisis advanced our broad understanding of the age‐old problem of economic crises. Some immediate lessons were learned from the failures of the crisis‐response in Indonesia, which was the worst‐affected economy. It is notable, however, how little changed to address the ongoing systemic weaknesses. Three areas of unresolved vulnerability can be identified. First, the sudden stops and reversals of international capital flows. Second, the intrinsic fragility of a financial system that borrows short and lends long. Third, unanchored exchange rates, where the market's price‐discovery can take the rate to levels far from equilibrium, for sustained periods. For more than a decade after the Asian crisis, international capital flows continued to be seen as unambiguously beneficial, with any attempts at capital flow management rejected. At a global level, it was not until the 2008 financial crisis that widespread financial fragility was addressed through tighter regulation and higher capital requirements. On exchange rates, misleading advocacy of corner solutions—either pure floating exchange rates or immutable fixed rates—continued in the face of the real‐world experience that sometimes intervention is needed to maintain an exchange rate close to equilibrium.     

ASIAN DEVELOPMENT STRATEGIES: CHINA AND INDONESIA COMPARED

China's and Indonesia's development strategies have been compared with others, but rarely with each other. Radically different political contexts have produced both similar and distinctly different development patterns. Each using formal planning, Indonesia spurred radical reforms to promote growth, whereas China opted for incremental reforms to ‘grow out of the Plan’, as a political device and to discover what policies and institutions worked. Both strategies produced environments largely conducive to rapid development. Indonesia relied on a few economic technocrats to oversee development; China used decentralisation and party reforms to create a credible environment for non-state investment. Both shared concern for agricultural reform and food security; both opted to open up for trade—China gradually, Indonesia radically. Both did well in growth and poverty reduction following reform. China's growth performance is in a league of its own, especially since Indonesia's Asian crisis setback, but Indonesia had more equitable growth and survived a difficult political transition with, in hindsight, modest costs.     

Intraregional Cross-holding of Reserve Currencies： A Proposal for Asia to Deal with the Global Reserve Risks

Economists have put forward various proposals to deal with the growing risks of the global reserve currency system. In this paper we recommend that Asian economies hold each other＇s currencies as part of their foreign reserves. Different from crisis-fighting currency swap arrangements or crisis-rescuing fund mechanisms, this mechanism means that reserves wouM be held, with a regular arrangement in place and on an ongoing basis. We propose that the global reserve system shouM be pushed in the direction of diversification, which could be a transitional step toward a new single reserve system. This mechanism would not necessitate any currency being a globally accepted reserve currency but would mean that every currency carried some weight in the reserve system. Establishment of such a system would require significant development of regional bond markets and facilitation of macroeconomic surveillance among the economies.     

货币错配与经济金融稳定:来自亚太地区的经验

中国的汇率制度改革使得在钉住汇率制度下积聚的巨大货币错配风险逐渐暴露出来。货币错配是否会影响经济金融稳定,通过对亚洲金融危机、日本经济衰退以及本世纪以来亚洲新兴市场国家累积的新风险进行梳理、比较与分析,认为净外币负债型货币错配与净外币资产型货币错配在一定条件下都会影响经济金融稳定。     

Indonesia's Non-Oil Export Performance During the Economic Crisis: Distinguishing Price Trends from Quantity Trends

Despite an enormous currency depreciation, the growth rate of Indonesia's non-oil exports, measured in dollars, did not accelerate during the first two years of the Asian crisis. In fact, during the second year of the crisis non-oil export value dropped sharply. This paper demonstrates that the main reason for the decline in the dollar value of non-oil exports was a collapse of export prices. Non-oil export dollar prices fell 26% between the second quarter of 1997 and the second quarter of 1999. Measured at constant prices, non-oil exports grew 24% and manufactured exports 31% during this period. Non-oil import prices fell by roughly the same amount as non-oil export prices during the crisis, with little change in the non-oil terms of trade. The decline in the price of traded goods significantly reduced the magnitude of the real exchange rate depreciation experienced by Indonesia.     

The Yen,the US dollar,and the trade weighted basket of currencies: Does the choice of anchor currencies matter in identifying incidences of speculative attacks?

Early constructions of a single crisis index known as the exchange market pressure (EMP) index have largely been based on the fluctuations of the real or nominal exchange rate of a currency against the US dollar—the most commonly accepted anchor currency in the global market. Hardly any studies have however tested the sensitivity of this crisis index to the choice of different “anchor” currencies. To address this pertinent issue, our study considers the EMP indices of the Indonesian rupiah, Malaysian ringgit and Thailand baht constructed by adopting three different exchange rates—the real effective rate, the local currency against the US dollar, and the local currency against the Japanese yen for the period of 1985–2003. The test results indicate that the reported incidences of speculative attacks are highly sensitive to the choice of anchor currencies.     

Why are currency crises contagious? A comparison of the Latin American Crisis of 1994–1995 and the Asian Crisis of 1997–1998

Why Are Currency Crises Contagious? A Comparison of the Latin American Crisis of 1994–1995 and the Asian Crisis of 1997–1998.—This paper analyzes three channels through which currency crises are transmitted between countries: contagion based on unsustainable economic fundamentals; contagion resulting from herding behaviour in financial markets; contagion induced by close trade integration. The presented model that links currency crises with these three types of contagion is employed to analyze the transmission of the Mexican crisis in 1994–1995 and the Thai crisis in 1997 to other emerging economies. The empirical results show that, first, the most important contagion channels were based on close financial and trade integration rather than on the weakness of macroeconomic fundamentals. Second, the vulnerability to capital flow reversals and weak financial sectors made countries particularly prone to a currency crisis, while external imbalances and currency misalignments were much less important. JEL no. F30, E60, E65, E44     

INDONESIA'S ECONOMIC CRISIS: CONTAGION AND FUNDAMENTALS

The severe and unanticipated economic downturn in Indonesia mirrored the regional economic fallout following the 1997 financial crisis. Although it is likely that the crisis in neighboring countries had an adverse impact on Indonesia, the issue has so far received little attention. This paper examines whether contagion from the economic crisis in Thailand triggered the crisis in Indonesia. Evidence of such a contagion is revealed, and the contagion was possibly exacerbated by increasing imbalances in the Indonesian economy. The paper also examines the channels through which the economic difficulties of Thailand might have been transmitted to Indonesia. Investors’behavior, rather than real links, is identified as one important channel for the contagion.     

The rise of Renminbi in Asia: Evidence from Network Analysis and SWIFT dataset

The rise of Renminbi (RMB) is one of the significant changes of the international monetary system since the 2008 global financial crisis. Through its economic influence in trade and direct investment, China has promoted the international use of RMB in both the global market and the regional market of East Asia. This paper documents the progress of RMB internationalization with the settlement currency information from the SWIFT dataset. Specifically, we conduct a network analysis to study the spillover effects among USD, EUR, GBP, JPY and RMB. From October 2010 to February 2018, the influence of RMB is found to be minimal in the global market, but dominant within ASEAN+3, especially for transactions related with real economy. These results indicate that RMB has become an influential regional currency, but it remains far from a truly international currency with global prominence.     

TOWARDS IMPLEMENTATION OF INFLATION TARGETING IN INDONESIA

The experience of high inflation accompanying the economic crisis in 1998 has brought back painful memories of hyperinflation in the 1960s. Success with inflation targeting (IT) in other countries has prompted Indonesia to consider this framework as the basis for monetary policy,a response that seems justified on at least two grounds. First, monetary policy needs a new anchor after the abandonment in 1997 of the previous regime of managed floating. Second, the central bank law enacted in 1999 prescribes stability of the value of the rupiah as Bank Indonesia's sole objective. This paper explores the future framework of monetary policy under a formal IT approach and highlights the constraints Bank Indonesia faces in implementing such an approach. It discusses the monetary policy framework before and during the crisis, and in the post-crisis period. It then goes on to outline a preliminary design for a suitable IT framework for Indonesia.     

High‐Frequency Contagion of Currency Crises in Asia*

Using daily data from the Asian currency crisis, the present paper examines high‐frequency contagion effects among six Asian countries. The ‘origin’ (of exchange rate depreciation, or decline in stock prices) and the ‘affected’ (currencies, or stock prices) in the daily spillover relationship were defined and identified. Indonesia is found to be the main origin country, affecting exchange rates of other countries. Contrary to conventional wisdom, evidence of high‐frequency crisis spillover from the Thai exchange rate to other currencies was weak at best. There exists a high‐frequency contagion in stock markets among East Asian countries. Contagion coefficients are positively correlated with trade indices, indicating that investors lower their financial assessment of a country that has trade linkage to a crisis origin country within days, if not hours, of a shock.     

SURVEY OF RECENT DEVELOPMENTS

The second half of 2008 is proving to be a time of unprecedented global volatility, and the sound performance of the Indonesian economy over the first half will be difficult to maintain. With growth for the year projected to remain around 6%, Indonesia is relatively well placed to face the challenges of the unfolding global financial crisis, but the risks to the outlook are increasing. The crisis has begun to impact directly, with trading on the Indonesian stock market suspended on 8 October after an alarming one-day fall of 10% in share prices. Sustained pressure on the currency since mid-August has also seen Bank Indonesia running down its sizable foreign exchange reserves in attempting to support the rupiah. The authorities are taking steps to relieve liquidity pressures in the financial system, but will also need to address medium-term issues of stability, especially in relation to inflation; interest rate increases have so far done little to contain prices. Although exports have remained surprisingly strong, rapid import growth has resulted in a small current account deficit. Growth of exports is likely to decelerate as demand in developed economies slows, putting further pressure on the balance of payments and the currency.

The 2009 budget reflects the government's positive outlook, but the underlying assumptions about growth, inflation and interest rates seem rather optimistic. Tax revenue has been increasing strongly, allowing the government to allocate significant new spending to education, in particular; however the budget remains hostage to global oil prices, with energy subsidies still very large despite the unpopular recent increases in domestic fuel prices. Other issues likely to affect voting in the 2009 elections include scheduled electricity blackouts in Jakarta in response to demand continuing to outstrip supply; the government's apparent indifference to the fate of the victims of the Sidoarjo mud disaster; and its failure to make much impact on the level of poverty.

Despite asking major donors for additional loans for budget support, the government has unveiled a new strategy for managing development partnerships. This will encourage smaller donors to operate through multi-donor arrangements and larger donors to use government systems for more of their programs—a signal that the government intends to shape its relationships with donors despite the global crisis.     

国际资本流动对我国货币政策有效性的影响

随着我国金融市场的对外开放,资本自由流动是大势所趋。目前,在我国实施有管理的浮动汇率制度前提下,在应对美国次贷危机不断蔓延的经济形势下,研究国际资本流动对我国货币政策有效性的影响,具有非常重要的意义。这里在界定国际资本流动定义、介绍其分类的基础上,分析了我国国际资本流动的现状,从对我国货币供给量的影响、对我国货币币值稳定的影响、对我国央行货币政策的影响三方面探讨了国际资本流动对我国货币政策有效性的影响,得出了六点结论。     

Towards improved monetary policy in Indonesia

Indonesia's depreciation vastly exceeded that of all other countries hit by the Asian crisis. Indonesia also experienced far higher inflation. This paper argues that there is a close medium to long-term relationship between money growth and inflation in Indonesia, and that this has not been greatly disturbed by the crisis. It argues that the country's disappointing performance in relation to maintaining the value of the rupiah can be explained by the central bank's failure to sterilise the monetary impact on base money of its last-resort lending to the banks. The fundamental lesson is that Bank Indonesia would be well advised to adopt slow and steady growth of base money as the nominal anchor for monetary policy, now that the pre-crisis policy of slow and steady depreciation of the rupiah has been abandoned.