INDONESIA ECONOMIC TRENDS 1999
-- SIGNS OF LIFE

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Overview of the Numbers -- Partial Improvement

7. In terms of several key financial and price variables, what a difference a year made.

Exchange rate
8. At end-June 1998, one month after President Soeharto resigned in the face of student protests and after rioting shook the capital -- the volatile rupiah stood at 14,900/US$ (compared to 2,450/US$ in June 1997). The rupiah stabilized by fourth quarter 1998, weakened somewhat in early 1999 amidst concerns about the political season, but strengthened in second quarter 1999 (see Table 1). By end-June 1999, it had strengthened to 6,700/US$ where it remained as of mid-July.

Table 1. Exchange Rate: Signs of Strength

* Nominal and real depreciation are compared to July 1997. As defined here, real depreciation takes into account Indonesia CPI inflation, and assumes zero U.S. inflation during the period..

Inflation
9. The consumer price index was increasing at 80 percent annually as of mid-1998 (5 percent per month for March-June) and calendar 1998 inflation was 78 percent. In contrast, prices increased only 2.7 percent for January-June 1999 (see Table 2). In light of recent signs of zero and even negative inflation, the GOI forecast in early July that inflation would be less than 10 percent for 1999. The low inflation figure testified to the tight money policy that the GOI introduced in mid-1998 (after several months of huge money supply expansion primarily through liquidity credits to banks), but was also seen as the result of depressed domestic demand for goods that had lowered inflation in the entire region.

Table 2. Inflation Negligible

Source: Central Bureau of Statistics

Interest rates
10. The benchmark Bank Indonesia Certificate (SBI) annual interest rate soared to 70 percent for one-month certificates in August 1998 when a market-determined auction system was first introduced. Bank deposit rates followed suit. Both sets of rates had declined to the 20-percent level by end-June 1999, and declined again -- helped by the apparent absence of inflation -- to the 15-percent range by mid-July. This meant that bank deposit rates were again close to their June 1997 levels (see Table3).

Table 3. Interest Rates Down Sharply

SBI* 3-month deposits

* Average annual interest rate for all SBIs, except May-Jul figures, which are for 1-month SBIs. Source: Bank Indonesia

Stock Market
11. The Jakarta Stock Exchange composite index sank to 276 in September 1998. In second quarter 1999, the stock market rallied, reaching 662 at end-June, within striking distance of June 1997 high of 724 (see Table 4). One brokerage firm's June report described the Jakarta Stock Exchange (JSX) as the best performing market in the world, up almost 70 percent in USD terms since the beginning of the year. Analysts described the JSX rally in part as a self-fulfilling process that began in first quarter 1999 when favorable news about other stock markets in the region prompted investment fund managers to look for the next recovery target. Relatively small amounts of offshore funding coming in were enough to push prices up: June 1999 daily trading value at the JSX was typically Rp 1 trillion (about US$ 150 million), or about one-half of one percent of the New York Stock Exchange's 1998 daily trading value. Domestic factors driving the index higher were signs of a recovery of consumer spending, and the perceived attractiveness of some listed banks that the government was helping recapitalize.

Table 4. JSX Composite Index on the Rise

Oil Prices
12. The price of oil, a key Indonesian export, declined to US$ 12/barrel in mid-1998, declining further to US$ 10/barrel by end-December 1998. By end-June 1999, prices were back to US$ 16/barrel.

Investment figures
13. Portfolio investment figures were increasing, as reflected by rising stock prices, but there was negligible new foreign direct investment coming into Indonesia as of mid-1999. The exceptions were funds targeted at taking over troubled banks or other indebted firms -- not new ventures. Bank Indonesia figures showed that Indonesia underwent a stark shift in the composition of incoming capital after the onset of the crisis. Official capital flows such as IMF loans increased, but private capital flows reversed (see Table 5). A lingering question, despite the improvement in confidence in mid-1999, was when the private capital inflows (loans and foreign direct investment) that had fueled Indonesia's earlier growth would resume.

Table 5. Net Capital Flow Reversal

Source: Bank Indonesia. 1999/00 figure is forecast.

14. There were preliminary signs of improvement in the real sector.

GDP
15. In 1998, real GDP declined for four consecutive quarters for an overall decline of 13.7 percent (see Tables 6-7). In 1999, in contrast, preliminary data showed GDP increasing slightly during real GDP was said to have increased 1.3 percent in the first quarter of 1999, compared to fourth quarter 1998, and by a further 0.5 percent in second quarter 1999, compared to first quarter 1999. However, analysts here cautioned against relying too strongly on these estimates because of their preliminary nature (the second quarter estimate was released the day the quarter ended).

Table 6. 1998 Real GDP: Decline in all but Agriculture and Utilities

Source: Central Bureau of Statistics, preliminary 1998 data

Table 7. GDP by Expenditure: Investment Slashed

Source: Central Bureau of Statistics, preliminary 1998 data

Exports
16. Non-oil exports were disappointing in 1998, given the large depreciation that should have led to export growth, all other things being equal. Instead, average monthly 1998 export earnings denominated in U.S. dollars were 9 percent below the 1997 value (although export values increased in rupiah terms), and non-oil exports were down 2 percent. Early 1999 figures showed further declines. However, preliminary figures showed exports recovering somewhat in April and May 1999, when they were 4 percent above the same months in 1998 (see table 8).

Table 8. Exports Moving Toward Recovery

*Jan-May
Source: Central Bureau of Statistics, "Economic Indicators," March 1999, and July 1 press release.

17. There were several theories for the lackluster export showing, but no clear explanation. Analysts cited exporters, difficulty getting trade credit (despite a number of government programs designed to address that problem), slowdowns in traditional Asian markets, order cancellations due to concern about unreliability of Indonesian suppliers, shortage of key imports used in production, and underreporting by exporters. In mid-1999, an added concern was that the strengthening exchange rate would erode exporters' competitiveness.

Imports
18. Also on the trade side, another symptom of the economic contraction, and of the difficulties facing exporters targeting the Indonesian market, was the collapse of imports in 1998 after years of strong growth (see Table 9). Anecdotal information suggested that imports were beginning to recover as of mid-1999.

Table 9. Leading Non-oil Imports Down One-third in 1998

* average annual percentage change, 1994-1997.
Source: BPS

Rice Harvest
19. The 1997-98 drought caused Indonesia to become the world's largest rice importer. In 1999, in contrast, abundant rains led to a recovery in production, and imports were expected to decline to normal levels.

Poverty
20. In addition, there was new information indicating the extent of the increase in poverty.

21. A range of studies conducted during 1998 estimated variously that poverty had increased from about 11 percent of the population before the crisis, using Indonesian poverty-line measures (per person expenditures of about Rp 50,000 per month as of mid-1998, deemed sufficient to cover 2,100 calories of food per day and other basic necessities) to between 18 and 24 percent of the population in 1998.

22. The broad range of estimates resulted largely from different methods of handling price increases during a turbulent period in which both prices and most incomes increased in nominal terms. Studies that used the increase in the general consumer price index (up 78 percent in 1998) concluded that poverty increased to the low end of the range, close to 18 percent (meaning from about 22 million before the crisis to about 36 million persons in 1998, out of a population of 200 million). However, studies that focused on the increase in food prices (up 118 percent in 1998), which account for a large share of purchases for low-income households, concluded that the increase in poverty was larger.

23. While the studies indicated that poverty had not increased to 40 percent of the population, as the GOI's Central Bureau of Statistics had estimated in mid-1998, analysts emphasized that there were also millions of "near poor" Indonesians. The studies showed that urban Java was hardest hit, but that the effects of the crisis on lower-income groups varied greatly within and across provinces.

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