The Impact of Global Financial Crisis on Indonesia

WorkshoptoLaunchUNDPsRegionalSynthesisReportonGlobalFinancialCrisisandAsia

PacificRegionISEASSingapore,30November2009

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OverviewofPresentation

OVERVIEWOFMACROECONOMICIMPACT SOCIALIMPACTOFCRISIS RESPONDINGTOTHECRISIS

FiscalStimulus SocialProtection

WAYFORWARD TrackingVulnerabilitiesandEarlyWarningSystem

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MacroeconomicOverview

Whentheinternationalcrisishittheworld,Indonesiasoveralleconomicsituationwaspromising.

Priortothecrisis,thecountrywitnessedstronggrowth,peakinginmid2008with6.4%growth.

Theexportsectorboomedduetotheworldcommodityboom. Budgetdeficitsremainedlowandexternaldebtratiosdeclinedfrom

almost90%in2000toabout33%attheendof2008. Sincethelastcrisis,Indonesiahasalsointroducedseveralsocialprotection

mechanisms. Thisallassistedthecountryindealingwiththecrisisandinmitigatingits

impactontheeconomyasthenextfewslidewillshow.

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MacroeconomicOverview

GDP Growth (%)

4.7

-13.1

0.8

5.43.8 4.4

4.7 55.7 5.5 6.3 6.1

-17

-12

-7

-2

3

8

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

(y-o

-y, %

)

Precrisis:strongeconomicgrowthandperformance

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MacroeconomicImpactofCrisis

DeclinefromQ42008onwardsbutstillpositivewithgrowth(yoy)2009:4.0%inQII,4.2%inQIII

Modestimpactonremittances InSept.2008StockExchangeIndexdroppedbutsinceQIforeign

capitalinflowsresumed Sincebeginning2009mosteconomicindicatorsstrengthened

again Strongdomestic(privateandpublic)consumptionmain

driverofgrowth Consumerconfidencehigh Recoveryofindustrialactivity

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MacroeconomicImpactBAPPENAS

As you can see from the graph, prior to the crisis Indonesias export performance has been strong due to the world commodity boom.

Export growth declined from QIII onwards, followed by falling imports in QI 2009.

However, export growth resumed already in May 2009.


MacroeconomicImpact

Export and Import Growth, 2008-2009 (y-o-y, %)

-60

-40

-20

0

20

40

60

80

100

120

Jan,

2008

Feb,

2008

Mar, 2

008

Apr, 2

008

May,

2008

Jun,

2008

Jul, 2

008

Aug,

2008

Sep,

2008

Oct, 2

008

Nov,

2008

Dec,

2008

Jan,

2009

Feb,

2009

Mar, 2

009

Apr, 2

009

May,

2009

Jun,

2009

Jul, 2

009

Aug,

2009

Sept,

2009

(y-o

-y, %

)

Export Grow th Import Grow th

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MainTransmissionChannel:ExportandImports


AReflectionofImpactof1997/98AsianFinancialCrisis

Before going into detail about the social impact of the current crisis, it is useful to go back to the impact of the 1997/1998 crisis.

In the 1997/98 crisis Indonesias economy contracted by nearly 14%. The impact of the crisis was compounded by the El Nino phenomenon

leading to drought and a shortfall in rice production, while the instable political climate in the wake of the fall of the Suharto regime complicated the formulation and implementation of mitigation policies.

As you can see from the graph, poverty increased rapidly, reaching 33.2% in late 1998 and then gradually falling again. Common coping strategies included cutting down on food consumption, moving into informality and agriculture, reducing spending on health care and education. As a result school attendance rates dropped, particularly at the secondary level and many people stopped attending health care centres.

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AReflectionofImpactof1997/98AsianFinancialCrisis

18.7 15.3 15.4 17.4

24.1

28.0

33.2

27.1

22.3

18.718.1

14.2

15.5

10.313.1

22.9

0

5

10

15

20

25

30

35

PovertyRatesbetweenFeb.1996andFeb.2002

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PovertyandVulnerabilityBAPPENAS

While poverty rates since then have been falling to pre-crisis levels, there is a very high clustering around the poverty line as you can see from the graph. More than half of the population in Indonesia lives below US$2/day.

These households are facing a very high probability of becoming tomorrows poor during an economic crisis or as a result of an exogenous shock.


PovertyandVulnerability

US$2/day(PPP)

US$1/day(PPP)

59.3%belowUS$2/day

10.4%belowUS$1/day

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LargeNumberofIndonesiansVulnerabletoPoverty


PercentageofPoorPeopleBAPPENAS


There are wide disparities in Indonesia with poverty rates particularly alarming in the East of the country and Aceh.

However, in terms of absolute numbers, most of the poor are concentrated in Java and Sumatra.

CurrentCrisis ImpactonPoorPreliminaryFindings

Preliminaryfindingsshowthatoverallsocialimpactofcrisislimited

Workersinexportorientedmanufacturingmostaffectedbutoverallemploymentinmanufacturinggrew

Unemploymentratescontinuetodecline Foodinsecuritylevels,however,remainhighandmake

manysusceptibletoincreasesinfoodprices

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GovernmentResponse

FiscalStimulusPackage Tostrengthenandmaintainstabilityofdomesticfinancial

sector Tostabilizeandstimulatedomesticeconomybyfiscal

expansionin2009

SocialProtectionMechanisms Riceforthepoor(RASKIN) CommunityEmpowermentProgramme (PNPM) Cashtransfers(BLT,etc.)

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GovernmentResponseFiscalStimulus

Stimulus Package 2009 (In IDR Trillion)IDR Trillion

1 4332

Lower Corporate Tax Rate 18.5Lower Personal Income Tax rate 13.5

112 13.3

VAT on oil/gas exploration, cooking oil 3.5Import duties on raw materials and capital goods 2.5Payroll tax 6.5Geothermal tax 0.8

3 15Reduced price for automotive diesel 2.8Discounted electricity billing rates for industrial users 1.4Additional infrastructure expenditures + subsidies + government 12.2equity injectionUpscaling of Community Block Grants (PNPM) 0.6

73.3Source: Coordinating Ministry of Economic Affairs, 2008

Tax /Import Duty Subsidies for Business/Targeted Households

Pro-business/Jobs subsidies + budget expenditures

Total Stimulus

DescriptionTax SavingsReductions in Income Tax Rates:

Income tax-free band raised to IDR 15.8 million

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EstablishingaCrisisMonitoringSystem

Establishmentofcrisismonitoringandresponsesystem Tounderstandtheimpactofcrisisonvulnerable Toundertakeappropriate,targetedandeffectivepolicy

response Ongoingdatacollectionactivitiesinclude

Crisisimpacthouseholdsurvey(WorldBank/BPS) Pilotfoodsecurityandnutritionmonitoringsurvey

(WFP/UNICEF/ILO) Qualitativestudies Regionalassessments

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Impactofglobalcrisislessseverethananticipated Currenteconomiccrisisintersectswithfoodpricecrisis,

followsfuelpricecrisis Differentcrisesshowthatpolicymakerslackdatatodesign

andtargetresponseintimelymanner Settingupacrisisimpactandvulnerabilitymonitoringand

responsesystem Preparingforfuturecrises/exogenousshocks earlywarning

system Buildingasustainablesystem Linkingmonitoringwithresponse

BeyondtheCrisisBAPPENAS


MonitoringVulnerabilitiesBAPPENAS


The system seeks to track vulnerabilities across multiple dimensions of distress and will focus on vulnerabilities caused or exacerbated by external shocks.

A simple, manageable indicator framework is being developed with both, lower frequency, contextual indicators drawn from existing data bases and higher frequency, pulse indicators drawn from ongoing qualitative and quantitative assessments.

As you may know, on the global level the UN, on request of the G20, is setting up a Global Impact and Vulnerability System (GIVAS) which envisions to include similar data and analysis on the global level.

For those interested, we have provided the web addresses of our evolving website as well as the one of GIVAS.

MonitoringVulnerabilities

MDGs/Human Development

Indicators(DevInfo, BPS,

UNDP)

Monitoring Response/ Social Protection

SchemesPNPM, etc.

Crisis Impact Indicators

Food Insecurity(BPS/WB survey;

UNICEF/WFP/ILO; JICA))

Disaster Risk

Vulnerability Indicators

(DESINVENTAR)

MacroIndicators(earlywarning/transmission

channels)BankofIndonesia,IMF,BPS,

MoF

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VULNERABILITYINDICATORS


ThankYouforfurtherinformationonIndonesia:www.vulnerabilitywatch.web.id/v1/

forfurtherinformationonGlobalImpactandVulnerabilityAlertSystem(GIVAS):

www.voicesofthevulnerable.net

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TentangNarasumber


Education

The Impact of Global Financial Crisis on Indonesia