POLICY RESPONSE TO ECONOMIC CRISES: 1998 AND 2008

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Young Leaders Program -National Graduate Institute for Policy Studies …

Young Leaders Program -National Graduate Institute for Policy Studies
Tokyo, Japan 2012

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  • 1. by Ginandjar KartasasmitaNational Graduate Institute for Policy Studies Tokyo, Japan 2012
  • 2. Economic Miss- management • Globalization • Political Stability of Ideas 1965/ Old Political New • Economic • Political 1998 1966 Development Opposition Crisis Reform DemocratizationOrder Instability Order Growth Chaos • Equity • Fragile Economic Communist Vs Structure Non Communist Confrontation Global Financial 2008 International Meltdown Crisis Conflicts Political Economic  Impact  Response Day1_GRIPS 2012 www.ginandjar.com 2
  • 3. “Law & Order” Tight Political Control Support of Western Countries Market Economy Open Capital Success Story Account • Political Stability Trade Deregulation Old 1965/1966 New Financial • High Economic Chaos GrowthOrder Order Deregulation Rice Self • Accelerated Sufficiency Poverty Reduction 6 year Compulsory Education Health; • Family Planning • Public Health • Social Service Infrastructure DevelopmentDay1_GRIPS 2012 www.ginandjar.com 3
  • 4. Internal Dynamics • Fall of Information Barrier • Rise of Middle Class • Social Awareness • Enlightened Public • Political Islam Collapse of the Economy • Overheated Economy • Lack of Banking Oversight Breakdown of • Aggressive Social Compact Foreign (Short Term) Setting 1998 Lending Reform For Crisis Change Movement Disparity : Role of Student • Income • Sectoral Political Elite • Regional Mlitary • Ethnic • Opportunity Abandonment of Closed System International • Cronyism External Forces : Support • Corruption • Nepotism • Fall of Global Communism Dysfunctional • Democratization BureaucracyDay1_GRIPS 2012 • Humanwww.ginandjar.com Rights 4
  • 5. Release of Political Prisoners International Multi Party Acknowledgement Freedom of Speech • Strong Parliament Human Political • Constitutional Rights Court Rule of Law • Robust Civil Habibie Gus Dur Society Good • Free Press Megawati SBY Governance Decentralization Early Stage of EconomicFall of Recovery Reversed New Reform 1999 Constitutional 2004 Democratic EconomicOrder Election Amendments Election Government Return of Downturn Economic Stability Early Stage of Economic Return of Growth Recovery Return of Poverty Foundation for Reduction Sustainable Economic Growth Fight Against Corruption Independence Economic of Monetary Regional Authority Autonomy Dismantling Monopolies Peace in Free and Fair •Aceh Competition •Papua Good Day1_GRIPS 2012 Corporate www.ginandjar.com 5 Governance
  • 6. Active Formal Opposition Externally Induced SBY vs MEGAWATI EconomicDynamic ResponseEconomic & 2008 2009 SBY Political Crisis Election ReelectedCondition Political Response Dissatisfied PublicNostalgia forOriginal 1945Constitution Call for 5thAmendmentDay1_GRIPS 2012 www.ginandjar.com 6
  • 7. CONTENTS  PRELUDE: EAST ASIAN MIRACLE – NEW ORDER DEVELOPMENT STRATEGY – EAST ASIAN MIRACLE – CHARACTERISTICS – INDONESIA’S ECONOMIC LIBERALIZATION – THE OUTCOMES – RISING PER CAPITA INCOME – DECREASING RATE OF INFLATION – INCREASING FOOD SUPPLIES AND THE ATTAINMENT OF RICE SELF-SUFFICIENCY – A RISING SHARE OF MANUFACTURING OUTPUT IN GDP – SHARPLY DECLINING LEVELS OF POVERTY – THE UNEXPECTED THUNDERSTORMDay1_GRIPS 2012 www.ginandjar.com 7
  • 8. CONTENTS  1998 CRISIS – THE INITIAL RESPONSES – CRITICISM AGAINST THE IMF – THE ECONOMIC ABBYSS – INDONESIA: PRE AND DURING CRISIS – THE CONFUSION – REALIZING THE SEVERITY OF THE CRISES – SUHARTO’S RE-ELECTION – EFFORTS AT ECONOMIC RECOVERY – THE FLASH POINT – HABIBIE GOVERNMENT – THE ECONOMIC QUAGMIRE – LAYING THE GROUNDWORK FOR ECONOMIC RECOVERY – RESTRUCTURING OF THE BANKING SECTOR – RESTRUCTURING OF THE CORPORATE SECTOR – HELPING THE POORDay1_GRIPS 2012 www.ginandjar.com 8
  • 9. CONTENTS – ON THE CUSP OF RECOVERY – MONTHLY RATE OF INFLATION (IN PERCENT) – INFLATION HAS BEEN SMOTHERED . . . (12 month percentage change in consumer & food price index) – …AND THE RUPIAH HAS BEEN RELATIVELY STABLE IN RECENT MONTHS DESPITE POLITICAL UPS AND DOWNS (Rupiah per US$, Spot Rate Daily) – INTEREST RATES HAVE DECLINED . . .(One Month Bank Indonesia Certificates And Rupiah Deposit Of Domestic Bank Rate) – GDP HAS STABILIZED AND IS STARTING TO RECOVER...(Index of GDP; 1995 Q1 – 100) – …HELPED, IN PART, BY INDUSTRIAL OUTPUT (Production Index In Selected Real Sectors) – POVERTY RATE TRENDS (February 1996-February 2001)  2008 CRISIS  CRISIS IN THE MAKING – THE UNFOLDING CRISISDay1_GRIPS 2012 www.ginandjar.com 9
  • 10. CONTENTS  IMPACT ON GLOBAL ECONOMY – SLOWING DOWN ECONOMIC GROWTH – REGIONAL ECONOMIC PERFORMANCE – THE US – JAPAN – CHINA – INDIA – EU – GREECE – REGIONAL ECONOMIC PERFORMANCE – EU AREA DEBT – DEBT AND COUPON DUE IN 2012 (US$ BILLION) – GLOBAL ECONOMIC GROWTH PAST AND PROJECTEDDay1_GRIPS 2012 www.ginandjar.com 10
  • 11. CONTENTS  IMPACT ON INDONESIA’S ECONOMY – GDP GROWTH – WHY INDONESIA IS MORE RESILIENT? – EXPORT TO GDP RATIO – EXPORT TO GDP RATIO (COMPARED TO OTHER REGIONAL COUNTRIES) – INDONESIA’S EXPORT DESTINATION – TRADE OPENNESS – DESTINATION OF EXPORT – COMPOSITION OF EXPORT – PORTFOLIO INVESTMENT TO EAST ASIA BY ORIGINDay1_GRIPS 2012 www.ginandjar.com 11
  • 12. CONTENTS  POST CRISIS ECONOMIC PERFORMANCE – EXPORT – GDP GROWTH 1988-2011 – RUPIAH MOVEMENT – COMPARED TO SOME ASIAN COUNTRIES – FISCAL DEFICIT (%) – DEBT PROFILE – DEBT TO GDP RATIO IN SELECTED COUNTRIES (2009) – NATIONAL CURRENCY RESERVE – INFLATION – POVERTY – UNEMPLOYMENT  LESSONS TO BE LEARNEDDay1_GRIPS 2012 www.ginandjar.com 12
  • 13. PRELUDEEAST ASIAN MIRACLE
  • 14. NEW ORDER DEVELOPMENT STRATEGY WITH UNIFORMITY OF PURPOSE AND METHOD THE NEW ORDER EARNESTLY EMBARKED ON ECONOMIC DEVELOPMENT, WHICH WAS WIDELY CONSIDERED AS SUCCESSFUL USING VARIOUS STANDARD OF MEASUREMENTS DEVELOPMENT TRILOGY: STABILITY GROWTH EQUITYDay1_GRIPS 2012 www.ginandjar.com 14
  • 15. EAST ASIAN MIRACLE THE ECONOMIC PERFORMANCE OF PRE-CRISIS INDONESIA COULD BE SEEN AS PART OF A GENERAL PATTERN OF SUCCESSFUL ECONOMIC DEVELOPMENT IN ASIA. HPAES ARE: • JAPAN (THE LEADER) • HONG KONG, THE REP. OF KOREA, SINGAPORE AND TAIWAN (THE FOUR TIGERS ). • INDONESIA, MALAYSIA AND THAILAND (NEWLY INDUSTRIALIZING ECONOMIES OF SOUTHEAST ASIA / NIE).SINCE 1960 THE HPAES HAVE GROWN MORE THAN: • TWICE AS FAST AS THE REST OF EAST ASIA. • THREE TIMES AS FAST AS LATIN AMERICA AND SOUTH ASIA.Day1_GRIPS 2012 www.ginandjar.com 15
  • 16. CHARACTERISTICS HIGH AVERAGE RATE OF ECONOMIC GROWTH DECLINING INCOME INEQUALITY. RAPID PRODUCTIVITY GROWTH. HIGH RATES OF GROWTH OF MANUFACTURED EXPORTS. DECLINES IN FERTILITY. HIGH GROWTH RATES OF PHYSICAL CAPITAL, SUPPORTED BY HIGH RATES OF DOMESTIC SAVINGS AND INVESTMENT. HIGH INITIAL LEVELS AND GROWTH RATES OF HUMAN CAPITAL.Day1_GRIPS 2012 www.ginandjar.com 16
  • 17. INDONESIA’S ECONOMIC LIBERALIZATION IN THE EARLY STAGE OF DEVELOPMENT, INDONESIA DEPENDED ON OIL INCOME AND FOREIGN ASSISTANCE. 1980: INDONESIA EMBARKED ON VARIOUS ECONOMIC REFORMS TO EMBRACE GLOBALIZATION. ELEMENTS OF ECONOMIC LIBERALIZATION PRE-1980. • ADOPTION OF AN OPEN CAPITAL ACCOUNT. • THE BALANCED BUDGET POLICY. • COMPETITIVE REAL EXCHANGE RATE WITH PERIODIC ADJUSTMENTS. ELEMENTS OF ECONOMIC LIBERALIZATION POST-1980: • DEREGULATION OF FOREIGN TRADE. • REDUCTION AND REMOVAL OF RESTRICTIONS ON FOREIGN DIRECT INVESTMENT. • LIBERALIZATION OF FINANCIAL SECTOR. • ADOPTION OF A MODERN, SIMPLIFIED TAX SYSTEM. Day1_GRIPS 2012 www.ginandjar.com 17
  • 18. THE OUTCOMES  RISING PER CAPITA INCOME.  DECREASING RATE OF INFLATION.  INCREASING FOOD SUPPLIES AND THE ATTAINMENT OF RICE SELF-SUFFICIENCY.  A RISING SHARE OF MANUFACTURING OUTPUT IN GDP.  SHARPLY DECLINING LEVELS OF POVERTY.Day1_GRIPS 2012 www.ginandjar.com 18
  • 19. RISING PER CAPITA INCOME OVER THE PERIOD 1965-95 REAL GDP PER CAPITA GREW AT AN ANNUAL AVERAGE RATE OF 6.6%. IN THE MID L960S INDONESIA WAS POORER THAN INDIA. BY MID 1995, INDONESIA’S GDP PER CAPITA EXCEEDED $ 1,000, OVER 3 TIMES INDIA’SDay1_GRIPS 2012 www.ginandjar.com 19
  • 20. COMPARATIVE RATES OF GROWTH FOR SELECTED ASIAN ECONOMIES: 1985 - 1997Note: Derived from semi-log regressions of GNP/capita on time.Source: Data from World Bank, World Development Indicators. Day1_GRIPS 2012 www.ginandjar.com 20
  • 21. DECREASING RATE OF INFLATION THE VERY HIGH LEVELS OF INFLATION SEEN IN THE MID- TO LATE-1960S WERE BROUGHT UNDER CONTROL. IN THE YEARS IMMEDIATELY PRECEDING THE CRISIS, INDONESIA HAD MANAGED TO KEEP INFLATION IN THE SINGLE DIGIT RANGEDay1_GRIPS 2012 www.ginandjar.com 21
  • 22. INCREASING FOOD SUPPLIES AND THE ATTAINMENT OF RICE SELF-SUFFICIENCY SELF- MARKET INTERVENTIONS THAT HELPED REDUCE PRICE INSTABILITY AND INFLATION, COMBINED WITH STRATEGIC INVESTMENTS THAT INCREASED AGRICULTURAL PRODUCTIVITY, RESULTED IN RISING RURAL INCOMES AND WELFARE, AND REASONABLY STABLE RICE PRICES.Day1_GRIPS 2012 www.ginandjar.com 22
  • 23. A RISING SHARE OF MANUFACTURING OUTPUT IN GDP THE SHARE OF THE MANUFACTURING SECTOR IN GDP ROSE FROM 7.6% IN 1973 TO NEARLY 25% IN 1995. THIS WAS DRIVEN BY THE RAPID GROWTH OF MANUFACTURED EXPORTS NON-OIL EXPORTS, WHICH WERE PREDOMINANTLY MANUFACTURED PRODUCTS, GREW BY ROUGHLY 22% PER ANNUM OVER THE DECADE FROM 1985, WHEN TRADE LIBERALIZATION WAS FIRST IMPLEMENTED, TO 1995; A RATE FOUR TIMES FASTER THAN THE GROWTH OF WORLD TRADEDay1_GRIPS 2012 www.ginandjar.com 23
  • 24. SHARPLY DECLINING LEVELS OF POVERTYTHE PROPORTION OF THE POPULATION LIVING BELOW THE NATIONAL POVERTY LINE FELL FROM AROUND 60% IN 1970 TO 40% IN 1976 TO 15% IN 1990 AND TO 11.5% IN 1996Day1_GRIPS 2012 www.ginandjar.com 24
  • 25.  INDONESIA’S BROAD BASED, LABOR-ORIENTED GROWTH STRATEGY, BACKED BY A STRONG RECORD IN HUMAN RESOURCE DEVELOPMENT, BROUGHT ABOUT ONE OF THE SHARPEST REDUCTIONS IN POVERTY IN THE DEVELOPING WORLD.Day1_GRIPS 2012 www.ginandjar.com 25
  • 26.  AT THE SAME TIME, THIS STRATEGY RESULTED IN REAL WAGES RISING ABOUT AS FAST AS PER-CAPITA GDP AND, AMONG OTHERS, BENEFITED WOMEN BY PROVIDING THEM WITH RAPIDLY GROWING PAID EMPLOYMENT IN THE FORMAL SECTOR, THAT ALLOWED THEM TO SWITCH OUT OF UNPAID WORK IN THE RURAL SECTOR.  SOCIAL INDICATORS, SUCH AS INFANT MORTALITY, FERTILITY AND SCHOOL ENROLLMENTS, ALSO SHOWED SIGNIFICANT IMPROVEMENT. World Bank document (l997)Day1_GRIPS 2012 www.ginandjar.com 26
  • 27. THE UNEXPECTED THUNDERSTORM THE DEPTH AND DURATION OF THE ECONOMIC CRISIS IN INDONESIA WERE ARGUABLY UNIQUE FROM 1989 TO 1996, ANNUAL REAL GDP GROWTH AVERAGED 8 PERCENT, SPURRED BY STRONG INVESTMENT BEHAVIOR THE OVERALL FISCAL BALANCE WAS IN SURPLUS AFTER 1992 PUBLIC DEBT FELL AS A SHARE OF GDP, THE GOVERNMENT USED PRIVATIZATION PROCEEDS TO REPAY LARGE AMOUNTS OF FOREIGN DEBT. INFLATION WAS BELOW 10%Day1_GRIPS 2012 www.ginandjar.com 27
  • 28. 1998 CRISISDay1_GRIPS 2012 www.ginandjar.com 28
  • 29.  ON 2 JULY 1997, THE CENTRAL BANK OF THAILAND WAS FORCED TO ABANDON ITS FIXED EXCHANGE RATE REGIME AND THE BAHT IMMEDIATELY DEPRECIATED BY ALMOST 20%. AS QUESTIONS BEGAN TO BE RAISED ABOUT THE STRUCTURAL SOUNDNESS OF THE EAST ASIAN ECONOMIES THERE WAS A SUDDEN AND DRAMATIC REVERSAL OF CAPITAL FLOWS AS INFLOWS TURNED INTO MASSIVE CAPITAL OUTFLOWS AND BANKS THAT WERE ONCE EAGER TO LEND TO NEARLY ANY ASIAN INVESTOR SUDDENLY REFUSED TO RENEW SHORT-TERM CREDIT LINES.Day1_GRIPS 2012 www.ginandjar.com 29
  • 30.  DURING THE THREE MONTHS BETWEEN JULY AND SEPTEMBER 1997, THE ASIAN FINANCIAL CRISIS GATHERED FULL FORCE AND BEGAN TO AFFECT INDONESIA DESPITE CONTINUED EXPRESSIONS OF CONFIDENCE THAT THE SOUNDNESS OF ITS ECONOMIC FUNDAMENTALS AND MANAGEMENT WOULD SEE IT THROUGH WITH LITTLE DAMAGE.Day1_GRIPS 2012 www.ginandjar.com 30
  • 31. THE INITIAL RESPONSES MID JULY 1997 WIDENING THE INTERVENTION MARGINS OF THE CRAWLING PEG REGIME. AUGUST 1997 FREE FLOATING THE RUPIAH. RAISED INTEREST RATES AND TIGHTENED LIQUIDITY BY TRANSFERRING A LARGE AMOUNT OF PUBLIC SECTOR DEPOSITS OUT OF COMMERCIAL BANKS SEPTEMBER 1997, “TEN POLICY-MEASURES” COVERING THE FINANCIAL, MONETARY AND BANKING SECTORS, AS WELL AS THE REAL SECTOR. IN THE BANKING SECTOR TWO IMPORTANT DECISIONS WERE MADE: 1) TO BAIL OUT HEALTHY BANKS FACING TEMPORARY LIQUIDITY DIFFICULTIES AND 2) UNHEALTHY BANKS SHOULD BE MERGED WITH OTHER BANKS OR BE LIQUIDATED.Day1_GRIPS 2012 www.ginandjar.com 31
  • 32.  THE DECISION ALSO INCLUDED THE POSTPONEMENT OF THE IMPLEMENTATION OF LARGE PROJECTS (PROJECTS WITH A TOTAL COST OF $13 BILLION) THAT NEEDED OVERSEAS LOANS. THE GOVERNMENT ANNOUNCED FURTHER ECONOMIC REFORMS AND DEREGULATION MEASURES IN EARLY SEPTEMBER, INCLUDING A COMMITMENT TO RENEWED EFFORTS TOWARD STRENGTHENING AND ENFORCING BANK PRUDENTIAL REGULATIONS. THE INITIAL ANNOUNCEMENT WERE NOT FOLLOWED BY IMPLEMENTATION MEASURES, PROVIDING FURTHER EVIDENCE THAT THE GOVERNMENT WAS NO LONGER UNIFIED ON MEASURES NEEDED TO STEM THE IMPACT OF THE CRISIS.Day1_GRIPS 2012 www.ginandjar.com 32
  • 33.  THE CURRENCY CONTINUED TO DEPRECIATE, AND BY EARLY SEPTEMBER HAD MOVED BEYOND 3000 PER DOLLAR OCTOBER L997 THE INDONESIAN GOVERNMENT TURNED TO THE IMF FOR ASSISTANCE. THE INITIAL IMF PROGRAM WAS BASED ON THE ASSUMPTION THAT THE CRISIS WAS ESSENTIALLY A MODERATE CASE OF CONTAGION—AN OVERSHOOT OF THE EXCHANGE RATE (IMF, 2003: 78)—AND DESIGNED A PROGRAM THAT WAS STANDARD AND CONVENTIONAL FOR SUCH A “MILD” CRISIS.Day1_GRIPS 2012 www.ginandjar.com 33
  • 34.  THE PROGRAM FOCUSED ON (1) TIGHTENING MONEY SUPPLIES IN ORDER TO RAISE INTEREST RATES AND PREVENT CAPITAL FROM FLEEING AND ATTRACTING THE ALREADY FLEEING CAPITAL BACK INTO THE COUNTRY AND; (2) STRUCTURAL REFORM. MISJUDGMENT BY BOTH THE GOVERNMENT AND THE IMF OF THE DEPTH AND NATURE OF THE CRISIS.Day1_GRIPS 2012 www.ginandjar.com 34
  • 35. CRITICISM AGAINST THE IMF PAUL VOLKER CRITICIZED THE IMF IMPOSED STRUCTURAL CONDITIONALITY AS IRRELEVANT TO FINANCIAL STABILIZATION, CYNICALLY CALLING THE CONDITIONS ON MARKET REGULATIONS IN CLOVES, ORANGES AND OTHER FOODSTUFFS AS A “RECIPE”. THERE IS SOME SPECULATION THAT THE NEGATIVE ASSESSMENT ON THE IMF PACKAGE COMING FROM A PERSON WITH SUCH DISTINGUISHED BACKGROUND MAY HAVE INFLUENCED THE MARKET NEGATIVELY.Day1_GRIPS 2012 www.ginandjar.com 35
  • 36.  JOSEPH STIGLITZ CRITICIZED THE IMF FOR APPLYING THE LATIN AMERICAN CASE TO THE ASIAN CRISIS RESULTING IN WRONG DIAGNOSIS WHICH LED TO THE WRONG --- AND IN INDONESIA’S CASE FATAL--- PRESCRIPTION IN THE HANDLING OF THE CRISIS. HE MAINTAINED THAT IN THE HIGHLY INFLATIONARY ENVIRONMENT OF LATIN AMERICA, WHAT WAS NEEDED WAS A DECREASE IN DEMAND; WHILE IN THE CASE OF EAST ASIA, THE PROBLEM WAS NOT EXCESS DEMAND BUT INSUFFICIENT DEMAND.Day1_GRIPS 2012 www.ginandjar.com 36
  • 37. THE ECONOMIC ABBYSS THE EXCHANGE RATE DROPS FROM 2,400 RP/$ (JULY 1997) TO 16,000 RP/$ (JUNE 1998). 1998: • GDP GROWTH: -13.6% • INFLATION: 77.6%. COLLAPSE OF THE BANKING SYSTEM: COST OF RESTRUCTURING THE BANKING SYSTEM: RP. 650 TRILLION (US$65 BILLION) TOTAL EXTERNAL DEBT (1999): • $148 BILLION, OR 104% GDP • HALF OF IT PRIVATE SECTOR’S • + $ 30 BILLION SHORT TERMDay1_GRIPS 2012 www.ginandjar.com 37
  • 38.  NON-OIL EXPORTS GROWTH: • 1998: + 9,9% • 1999: - 7,2%  MILLIONS OF INDIVIDUALS LOST THEIR JOBS  CHILDREN LEFT SCHOOL  POVERTY INCREASED  IN MAY 1998, RIOTS ERUPTED AGAINST THE CHINESE COMMUNITY. THIS LED TO MASSIVE CAPITAL FLIGHT AND THE BREAKDOWN OF THE DISTRIBUTION SYSTEM.Day1_GRIPS 2012 www.ginandjar.com 38
  • 39. INDONESIA: PRE AND DURING CRISIS Indicator Pre Crisis CrisisIncome (US$ Billion) 218 (1996) 120 (2000)Income/Capita (US$) 1,110 (1996) 570 (2000)GDP Growth (%) 6.6 (1965-1995) -13.6 (1998)GDP (% Manu- 25 (1995) -14.2 (1998)facturing Share)Inflation (%) Single digit 78 (1998)Day1_GRIPS 2012 www.ginandjar.com 39
  • 40. Indonesia: Pre and During Crisis Indicator Pre Crisis Crisis Exchange Rate Rp. 2,400 16,000 (1998); 10,200 (2002) Non Oil Export (%) 9.9 (1998) -7.2% (1999) Total Ext. Debt 113 billion (1996) 150 billion (104% GDP, 1999) Poverty Line 11.9% (1996) 18.2% (1999)Day1_GRIPS 2012 www.ginandjar.com 40
  • 41. THE CONFUSION NOVEMBER 1997, THE GOVERNMENT CLOSED 16 BANKS FACING SERIOUS LIQUIDITY PROBLEMS, ONE OWNED BY SUHARTO’S SON ALLOWED TO RESURFACE UNDER A DIFFERENT NAME. SUHARTO ENDORSE EXCEPTIONAL TREATMENT OF HIS FAMILY ASSETS. JANUARY 1998, AN UNREALISTIC OVERALL BUDGET SURPLUS OF 1.3% OF GDP WAS TARGETED FOR FISCAL YEAR 1998/99.Day1_GRIPS 2012 www.ginandjar.com 41
  • 42.  THE CONFUSION OF PROJECTIONS ON GROWTH: • THE NOVEMBER IMF PROGRAM PROJECTED GROWTH OF 5% FOR 1997/98 AND 3% FOR 1998/99. • IN THE JANUARY PROGRAM THE 1998/99- GROWTH PROJECTION WAS REVISED AND REDUCED TO ZERO, WHILE IN REALITY THE 1998/1999 GDP ACTUALLY DECLINED BY 13%  THE RUPIAH CONTINUED TO DEPRECIATE DESPITE ALL THE EFFORTS AND SUPPORT FROM THE IMF AND DONOR COUNTRIES.Day1_GRIPS 2012 www.ginandjar.com 42
  • 43. REALIZING THE SEVERITY OF THE CRISES  IN LATE JANUARY 1998, PRESIDENT SUHARTO ESTABLISHED: • COUNCIL FOR THE STABILIZATION OF ECONOMIC AND FINANCIAL RESILIENCE (DPKEKKU) • INDONESIAN BANK RESTRUCTURING AGENCY (IBRA/BPPN) TO TAKE OVER BANKS FACING LIQUIDITY PROBLEMSDay1_GRIPS 2012 www.ginandjar.com 43
  • 44.  THE JANUARY 1998 LOI CONTAINED THE 50-POINT PLAN INCLUDED: • GREATER CENTRAL BANK INDEPENDENCE, • WITHDRAWAL OF TAX PRIVILEGES FOR THE NATIONAL CAR PROJECT, • THE ELIMINATION OF CEMENT, PAPER, AND PLYWOOD CARTELS, • THE WITHDRAWAL OF SUPPORT FOR THE AIRCRAFT INDUSTRY, AND • OTHER GOVERNANCE AND STRUCTURAL REFORMS.  SUHARTO’S “CONFLICT” WITH THE IMF DOMINATED THE HEADLINES .Day1_GRIPS 2012 www.ginandjar.com 44
  • 45.  THERE WAS A STRONG INDICATION THAT THE PRESIDENT HAD NO INTENTIONS TO FOLLOW THROUGH THE REFORM PROGRAM AGREED ON WITH THE IMF THE GOVERNMENT SERIOUSLY CONSIDERED ADOPTING A CURRENCY BOARD SYSTEM (CBS) THE PRESIDENT AND THE IMF RELATIONSHIP HAD COME TO A NEW LOW, HE DREW AN ANALOGY OF HIS DEALING WITH IMF WITH A “GUERRILLA WAR” MARCH 6TH1998, FRUSTRATED BY THE LACK OF PROGRESS ON THE JANUARY PROGRAM, THE IMF ANNOUNCED THAT IT WAS DELAYING A $3BILLION INFUSION SCHEDULED TO BE DISBURSED ON MARCH 15THDay1_GRIPS 2012 www.ginandjar.com 45
  • 46. SUHARTO’S RE-ELECTION RE-  REFLECTED IN THE GENERAL ELECTION OF 1997, SUHARTO STILL HELD A STRONG GRIP ON THE POLITICAL SYSTEM.  MARCH 11TH, 1998 SUHARTO WAS INDEED RE- ELECTED FOR ANOTHER FIVE-YEAR TERM BY THE MPR.  A NEW CABINET ESTABLISHED MARKING THE DEMISE OF THE ECONOMIC TECHNOCRATS.Day1_GRIPS 2012 www.ginandjar.com 46
  • 47. EFFORTS AT ECONOMIC RECOVERY DISREGARDING THE POLITICAL CONTROVERSIES THE NEW ECONOMIC TEAM SET OUT TO GET THE ECONOMY MOVING AGAIN. MAJOR POLICY INITIATIVES: • REPAIRING THE RELATIONS WITH THE INTERNATIONAL COMMUNITY, AND; • RESTORING MARKET CONFIDENCE. ALL THE MAJOR CREDITOR COUNTRIES WERE READY TO GIVE SUPPORT TO INDONESIA’S EFFORTS AT RECOVERY, THROUGH OR IN COOPERATION WITH THE IMF.Day1_GRIPS 2012 www.ginandjar.com 47
  • 48.  THE FIRST PRIORITIES WERE DIRECTED AT BOTH THE RESTRUCTURING OF THE FINANCIAL AND BANKING SYSTEM AND RESOLVING THE CORPORATE DEBT PROBLEM THE GOVERNMENT ECONOMIC TEAM IMMEDIATELY RE- ESTABLISHED DIALOGUE WITH THE IMF TO WORK ON A RENEWED PROGRAM STRUCTURAL REFORMS WERE EMBRACED BY THE ECONOMIC TEAM AS THEIR OWN THE NEED TO PROTECT THE POOR FROM THE WORST OF THE CRISIS CLOSING INSOLVENT BANKS TO STOP THE BLEEDING OF THE FINANCIAL SYSTEMDay1_GRIPS 2012 www.ginandjar.com 48
  • 49.  STRENGTHENED THE EFFORTS TO DEAL WITH CORPORATE DEBT PROBLEM WHICH HAD ACTUALLY BEGAN IN 1997 RESULT: ALTHOUGH INFLATION WAS STILL HIGH, THE RUPIAH EXCHANGE RATE WAS STRENGTHENED FROM 10,000 AT THE START OF THE NEW CABINET TO 7,500 BY MID APRIL AND REMAINED BELOW 8,000 UNTIL THE MAY TROUBLES OCCURREDDay1_GRIPS 2012 www.ginandjar.com 49
  • 50. THE FLASH POINT WHILE THE ECONOMY SHOWED SAME IMPROVEMENT, IN THE POLITICAL FRONT, THE SITUATION DETERIORATED SUHARTO HAD NO INTENTION TO UNDERTAKE REFORMS AS THE POLITICAL AND ECONOMIC SITUATION DEMANDED HOWEVER, THE ELITES AND LEADERS OF THE VARIOUS REFORM MOVEMENTS WERE STILL WARY OF SUHARTO’S POWER THE HIKE IN FUEL PRICES CHANGED EVERYTHINGDay1_GRIPS 2012 www.ginandjar.com 50
  • 51.  IT SET THE STAGE FOR THE ENDGAME OF THE POLITICAL DRAMA THE CULMINATION OF POLITICAL CONFRONTATION WAS REACHED WHEN IN EARLY MAY 1998 THE GOVERNMENT ANNOUNCED A RISE IN FUEL PRICES, WITH THE ACCOMPANYING CONSEQUENCES OF A RISE IN PUBLIC TRANSPORTATION FARES SUHARTO RESIGNED 21 MAY 1998.Day1_GRIPS 2012 www.ginandjar.com 51
  • 52. HABIBIE GOVERNMENT  A NEW GOVERNMENT ESTABLISHED.  THE ECONOMIC SITUATION AT THE TIME HABIBIE CAME TO POWER HAD GROWN MUCH WORSE LESS THAN A YEAR AFTER THE FINANCIAL CRISIS HIT THE ECONOMY.Day1_GRIPS 2012 www.ginandjar.com 52
  • 53. THE ECONOMIC QUAGMIRE DUE TO THE UPHEAVALS IN MAY, THE DISTRIBUTION NETWORKS HAD BEEN SERIOUSLY DAMAGED. BASIC SUPPLIES WERE DISRUPTED. RICE, COOKING OIL, SUGAR AND OTHER ESSENTIAL ITEMS BECAME SCARCE AND PRICES WERE RISING. RICE IMPORTS HAD TO BE INCREASED BECAUSE OF THE PROLONGED DROUGHT. DUE TO THE SUDDEN SURGE OF IMPORTS—AMOUNTING TO 4.1 MILLION TONS FOR FISCAL YEAR 1998/99— PRICES IN THE INTERNATIONAL MARKETS SOARED.Day1_GRIPS 2012 www.ginandjar.com 53
  • 54.  THE INCREASED COST FOR IMPORT MEANT MORE PRESSURE ON THE COUNTRY’S DEPLETED FOREIGN EXCHANGE RESERVE. TO MAKE MATTERS WORSE, OVERSEAS BANKS CONTINUED TO REFUSE TO HONOR INDONESIA’S LETTERS OF CREDIT, MEANING THAT ALL IMPORTS HAD TO BE PAID FOR BY CASH. PUBLIC TRANSPORTATION WAS ALSO DISRUPTED BECAUSE OF THE LACK OF SPARE PARTS, A SUBSTANTIAL NUMBER OF WHICH HAD TO BE IMPORTED. AS A RESULT, EXPORTATION OF MANUFACTURED GOODS WAS DISRUPTED AT THE TIME WHEN INDONESIA’S EXPORTS SHOULD HAVE ACTUALLY ENJOYED AN ADVANTAGE BECAUSE OF THE HUGE DEPRECIATION OF THE CURRENCY.Day1_GRIPS 2012 www.ginandjar.com 54
  • 55.  THE HEAT GENERATED FROM POLITICAL TENSION DID NOT HELP THE ECONOMY. FOREIGN INVESTORS STAYED AWAY, AND INSTEAD OF INCOMING CAPITAL, RAMPANT CAPITAL FLIGHT TOOK PLACE. BY THE TIME HABIBIE’S GOVERNMENT TOOK OFFICE THE ECONOMY WAS OUT OF FOREIGN CURRENCY.Day1_GRIPS 2012 www.ginandjar.com 55
  • 56.  DOMESTIC COMPANIES WERE STRUGGLING FOR SURVIVAL. MANY HAD SIMPLY STOPPED PAYING THEIR DEBT, DOMESTIC AS WELL FOREIGN. THE DEFAULT MADE THE CONDITION OF THE ALREADY BATTERED BANKING SECTOR EVEN WORSE AS THE VOLUME OF THEIR NON-PERFORMING LOANS SUDDENLY JUMPED. THE INDONESIAN BANKING AND CORPORATE SECTORS WERE BOTH IN A DOWNWARD TAILSPIN, EACH PULLING THE OTHER FURTHER DOWN. THE AMOUNT OF FOREIGN DEBT OWED BY INDONESIAN COMPANIES WAS STAGGERING. BY MARCH 1998 THE TOTAL AMOUNT OF PRIVATE FOREIGN DEBT HAD REACHED $84 BILLION, AROUND $30 BILLION DUE IN 1998.Day1_GRIPS 2012 www.ginandjar.com 56
  • 57.  WITHOUT A WAY OUT OF THE DEBT BURDEN INDONESIAN DOMESTIC COMPANIES WOULD REMAIN PARALYSED. WITH THE STEEP DEPRECIATION OF THE RUPIAH, THE RISE IN FOOD, FUEL AND OTHER COMMODITIES, INFLATION SURGED. BETWEEN JANUARY AND MAY 1998 INFLATION HAD REACHED 40%. DURING THE SAME PERIOD THE YEAR BEFORE IT HAD BEEN LESS THAN 3%. BY THE END OF AUGUST INFLATION HAD REACHED 70%. BECAUSE OF THE COLLAPSE OF MANY INDUSTRIES AND BUSINESSES, UNEMPLOYMENT INCREASED, AND WITH THE HIGH LEVEL OF INFLATION, THE NUMBER OF POOR FAMILIES ALSO INCREASED SUBSTANTIALLY.Day1_GRIPS 2012 www.ginandjar.com 57
  • 58.  THE PROGRESSIVE REDUCTION OF POVERTY, ONE OF THE MOST SIGNIFICANT ACHIEVEMENTS OF THE NEW ORDER, HAD BEEN SET BACK. POVERTY LEVELS WENT FROM 11% IN 1996 POVERTY TO 24.2% OF THE POPULATION OR 49.5 MILLION BY THE END OF 1998 IN YEAR 1997-1998 THE NUMBER OF WAGE EARNERS DECLINE BY 5.1%, WHILE AT THE SAME TIME REAL WAGES DECLINED SHARPLY BY 35%. ILLUSTRATING THE RESULTING RE-MIGRATION FROM THE CITY BACK TO THE RURAL AREAS IS THE DROP IN THE EMPLOYMENT OF THE MANUFACTURING SECTOR BY 9.8%, WHILE IN THE AGRICULTURAL SECTOR, EMPLOYMENT ACTUALLY INCREASED BY 13.3%.Day1_GRIPS 2012 www.ginandjar.com 58
  • 59.  INDICATING THE PRESSURE EXERTED ON THE MEAGER ECONOMY IN THE RURAL AREAS AS URBAN EMPLOYMENT WAS SHRINKING THE IMPACT ON SOCIAL AND HEALTH SECTORS WAS DEVASTATING. THERE WERE MEDICINES SHORTAGES BECAUSE OF THE DIFFICULTY OF IMPORTING THE RAW MATERIALS. THOSE MEDICATIONS THAT WERE AVAILABLE HAD GONE UP IN PRICE. INFANT MORTALITY WAS RISING. ACCORDING TO A REPORT OF THE MINISTER OF HEALTH, IN MARCH 1999, TWO MILLION CHILDREN UNDER FIVE YEARS OLD SUFFERED FROM SEVERE MALNUTRITION. THERE WERE REPORTS FROM VARIOUS REGIONS THAT CHILDREN WERE DYING FROM MALNUTRITION.Day1_GRIPS 2012 www.ginandjar.com 59
  • 60.  THERE WERE TALKS ABOUT A LOST GENERATION AS A RESULT OF MILLIONS OF CHILDREN GROWING UP UNDERNOURISHED, THUS RETARDING THEIR MENTAL AND PHYSICAL DEVELOPMENT FOR YEARS TO COME. MANY SCHOOL CHILDREN HAD TO LEAVE SCHOOL BECAUSE THEIR FAMILIES COULD NOT AFFORD THE COST. MANY WERE FORCED TO FIND WORK OR OTHER WAYS TO HELP THEIR FAMILIES, INCLUDING FLEEING TO THE CITIES TO BECOME STREET URCHINS. THE INCREASING UNEMPLOYMENT AND POVERTY CAUSED A STEEP RISE IN CRIME.Day1_GRIPS 2012 www.ginandjar.com 60
  • 61.  ESPECIALLY DISTURBING—NOT LEAST FROM THE ENVIRONMENTAL PROTECTION POINT OF VIEW—WAS ILLEGAL LOGGING, INCLUDING IN PROTECTED FORESTS. THE CRISIS HAD BY NOW BECOME COUNTYWIDE. THIS CREATED AN ENVIRONMENTAL AND HEALTH HAZARD THAT ADDED ANOTHER DIMENSION TO THE PROBLEMS ALREADY FACED BY THE COUNTRY.Day1_GRIPS 2012 www.ginandjar.com 61
  • 62. LAYING THE GROUNDWORK FOR ECONOMIC RECOVERY  UNDAUNTED BY THE SURROUNDING POLITICAL CONTROVERSY, THE NEW GOVERNMENT’S ECONOMIC TEAM IMMEDIATELY EMBARKED ON A SERIES OF MEASURES TO HALT THE DETERIORATION AND RESTART THE RECOVERY OF THE ECONOMY.Day1_GRIPS 2012 www.ginandjar.com 62
  • 63.  THE ECONOMIC RECOVERY AGENDA CONSISTED OF FIVE MAIN PROGRAMS: 1) RESTORING MACROECONOMIC STABILITY; 2) RESTRUCTURING OF THE BANKING SYSTEM; 3) RESOLUTION OF CORPORATE DEBT; 4) CONTINUING WITH STRUCTURAL REFORM; 5) STIMULATING DEMAND AND REDUCING THE IMPACT OF THE CRISIS ON THE POOR THROUGH THE SOCIAL SAFETY NETDay1_GRIPS 2012 www.ginandjar.com 63
  • 64.  INTERNATIONAL COOPERATION SUPPORTING INDONESIA’S EFFORTS AT RECOVERY WAS CHANNELED THROUGH MULTILATERAL VENUES: IMF, CGI, AND THE PARIS CLUB THE IMF PROGRAM STARTED WITH THE FIRST AGREEMENT IN NOVEMBER 1997 AND WOULD TERMINATE AT THE END OF 2000. THE FINANCIAL SUPPORT ORIGINALLY PROVIDED INDONESIA WITH ACCESS TO FUNDS UNDER A STAND-BY ARRANGEMENT (SBA) AMOUNTING TO SDR 8.3 BILLION OR THE EQUIVALENT OF US $11.4 BILLION. IN AUGUST 1998 THE SBA WAS REPLACED BY A MORE CONCESSIONARY EXTENDED FUND FACILITY (EEF) TO THE AMOUNT OF SDR 5.4 BILLION, EQUIVALENT TO US $7.2 BILLION.Day1_GRIPS 2012 www.ginandjar.com 64
  • 65.  THE FIRST IMF LOI UNDER THE HABIBIE’S GOVERNMENT WAS AGREED ON JUNE 24, 1998. DUE TO THE SEVERITY OF THE CRISIS, THE AGREEMENT WAS REVIEWED ALMOST EVERY MONTH DURING 1998, RESULTING IN RENEWED LOI.Day1_GRIPS 2012 www.ginandjar.com 65
  • 66.  THE CGI MEETING WAS CO-HOSTED BY THE INDONESIAN GOVERNMENT AND THE WORLD BANK. DURING HABIBIES PRESIDENCY THE CONSORTIUM MET TWICE IN PARIS, ON 29-30 JULY 1998 AND 27-28 JULY1999. MEMBERS OF THE CGI WERE INDONESIA’S DONOR COUNTRIES AND INTERNATIONAL ORGANIZATIONS SUCH AS THE WORLD BANK, THE ASIAN DEVELOPMENT BANK, THE ISLAMIC DEVELOPMENT AND THE EUROPEAN UNION.Day1_GRIPS 2012 www.ginandjar.com 66
  • 67.  TWO OF THE BIGGEST DONORS WERE JAPAN AND THE WORLD BANK. JAPAN USUALLY PROVIDED ONE THIRD OF THE PLEDGE COMING OUT OF THE CGI MEETING. IN THE 1998 CGI MEETING THE DONORS PLEDGED $ 7.9 BILLION—THE HIGHEST EVER FIGURE—TO BE DISBURSED IN FISCAL YEAR 1998-99, AND IN JULY 1999 MEETING THE PLEDGE WAS $5.9 BILLON FOR FISCAL YEAR 1999- 2000.Day1_GRIPS 2012 www.ginandjar.com 67
  • 68.  ANOTHER MEETING ALSO HELD IN PARIS WAS TO RESCHEDULE INDONESIA’S SOVEREIGN DEBT UNDER THE AEGIS OF THE “PARIS CLUB.” THE RESCHEDULING OF DEBTS WAS ESSENTIAL IN VIEW OF THE FISCAL BURDEN THAT INDONESIA WAS FACING. THERE IS BUT ONE CAVEAT FOR A PARIS CLUB DEBT RESCHEDULING: THE COUNTRY CONCERNED NEEDS TO BE UNDER AN IMF PROGRAM. ON SEPTEMBER 23, INDONESIA SUCCESSFULLY NEGOTIATED THE RESCHEDULING OF ITS DEBT DUE TO FALL IN THE 1998-99 AND 1999-2000 TO THE AMOUNT OF $4.2 BILLION. IT WAS A MUCH-NEEDED RELIEF TO THE SEVERE FISCAL SITUATION.Day1_GRIPS 2012 www.ginandjar.com 68
  • 69. RESTRUCTURING OF THE BANKING SECTOR THE ECONOMIC TEAM RECOGNIZED THAT IMPLEMENTING A COMPREHENSIVE SOLUTION FOR THE BANKING SYSTEM SHOULD BE GIVEN A HIGH PRIORITY. IT WAS AN ESSENTIAL CONDITION FOR THE RECOVERY OF THE CORPORATE SECTOR AND TO GET THE ECONOMY MOVING AGAIN. THE OBJECTIVE WAS TO RESOLVE THE FINANCIAL DIFFICULTIES OF THE WEAKENED BANKS AND ESTABLISH A SOUND FUNCTIONING BANKING SYSTEM AS QUICKLY AS POSSIBLE.Day1_GRIPS 2012 www.ginandjar.com 69
  • 70.  KEY ELEMENTS IN THE STRATEGY INVOLVED: A.MEASURES TO STRENGTHEN RELATIVELY SOUND BANKS, B. WITH REGARD TO WEAK BANKS TO SWIFTLY RECAPITALIZE, MERGE OR EFFECTIVELY CLOSE THEM, WHILE AT THE SAME TIME C. MAINTAINING THE COMMITMENT TO SAFEGUARD THE INTEREST OF DEPOSITORS AND CREDITORS.Day1_GRIPS 2012 www.ginandjar.com 70
  • 71.  THE ECONOMIC TEAM ESTABLISHED THAT DECISIONS REGARDING INDIVIDUAL BANKS HAD TO BE BASED ON UNIFORM, TRANSPARENT AND PUBLICLY KNOWN CRITERIA, DRAWING FROM THE RESULTS OF PORTFOLIO REVIEWS DONE BY INTERNATIONAL ACCOUNTING FIRMS. THE REMAINING 211 BANKS WERE SUBJECTED TO AUDIT, OF WHICH ALL THE 67 BANKS THAT WERE LICENSED TO CONDUCT FOREIGN EXCHANGE TRADING WERE AUDITED BY THE “BIG SIX” INTERNATIONAL AUDITING FIRMS, AND THE REST WERE AUDITED BY BANK INDONESIA.Day1_GRIPS 2012 www.ginandjar.com 71
  • 72.  OWNERS AND MANAGEMENT OF THE BANK ALSO HAD TO GO THROUGH A CERTAIN FIT AND PROPER TEST. IN MARCH 1999 THE GOVERNMENT ANNOUNCED THAT SEVENTY-THREE BANKS, COMPRISING 5 PERCENT OF BANKING SECTOR ASSETS, WERE STRONG ENOUGH TO CONTINUE WITHOUT GOVERNMENT SUPPORT. NINE BANKS COMPRISING 10 PERCENT OF BANKING SECTOR ASSETS WERE ELIGIBLE FOR JOINT RECAPITALIZATION SCHEME WITH THE GOVERNMENT.Day1_GRIPS 2012 www.ginandjar.com 72
  • 73.  SEVEN BANKS COMPRISING 3 PERCENT OF BANKING SECTOR ASSETS HAD FAILED THE CRITERIA FOR JOINT RECAPITALIZATION, BUT DUE TO THEIR SIZE —HAVING MORE THAN 80.000 DEPOSITORS —THEY WERE TAKEN OVER BY IBRA; AND THIRTY EIGHT BANKS COMPRISING 5 PERCENT OF THE BANKING SECTOR WITH BELOW THE MINIMUM CAPITAL ADEQUACY RATION (CAR), WERE CLOSED. THE EFFORTS TO ESTABLISH A HEALTHY BANKING SYSTEM WAS NOT ONLY LIMITED TO BANK RESTRUCTURING. A STRONG FOUNDATION WAS NEEDED TO PREVENT SIMILAR CRISIS IN THE FUTURE AND TO PROVIDE FOR SOUND GOVERNANCE IN THE BANKING SECTOR.Day1_GRIPS 2012 www.ginandjar.com 73
  • 74.  STRENGTHENING REGULATORY AND PRUDENTIAL FRAMEWORK FOR A SOUND BANKING SYSTEM CONSTITUTED ANOTHER IMPORTANT ELEMENT OF THE STRATEGY TO REFORM THE BANKING SECTOR. IN OCTOBER 1998, THE PARLIAMENT PASSED THE AMENDMENT TO THE BANKING LAW (LAW NO10/1998), ALLOWING FOR MAJOR IMPROVEMENTS IN AREAS OF BANK LICENSING AND OWNERSHIP, OPENNESS TO FOREIGN DIRECT INVESTMENT, BANK SECRECY AND EMPOWERMENT OF IBRA. THE MOST FAR REACHING WAS THE NEW LAW ON CENTRAL BANK PROVIDING FOR INDEPENDENCE OF BANK INDONESIA PASSED IN MAY 1999 (LAW NO 23/1999).Day1_GRIPS 2012 www.ginandjar.com 74
  • 75.  THE NEW LAW ON THE CENTRAL BANK WAS INTENDED TO REDUCE THE DANGER OF MORAL HAZARD AND PROHIBIT GOVERNMENT INTERFERENCE IN THE BANKING AND MONETARY POLICIES. ACCOMPANYING THE LAW ON THE INDEPENDENCE OF THE CENTRAL BANK ANOTHER LAW WAS PASSED TO AUGMENT THE AUTHORITY OF THE CENTRAL BANK TO MONITOR THE TRAFFIC OF FOREIGN CURRENCY AND CORPORATE EXTERNAL DEBT (LAW NO 24/1999).Day1_GRIPS 2012 www.ginandjar.com 75
  • 76. RESTRUCTURING OF THE CORPORATE SECTOR THE FINANCIAL RESTRUCTURING OF THE PRIVATE SECTOR WAS CRUCIAL TO THE ECONOMY, AND AN ESSENTIAL COUNTERPART TO THE BANKING SYSTEM RESTRUCTURING, AS A SOUND CORPORATE SECTOR IS NECESSARY FOR A SOUND BANKING SYSTEM AND VICE VERSA. THE ECONOMIC TEAM PRESSED AHEAD WITH A COMPREHENSIVE PROGRAM OF MEASURES TO ADDRESS THE PERVASIVE DEBT PROBLEMS OF THE PRIVATE SECTOR.Day1_GRIPS 2012 www.ginandjar.com 76
  • 77.  THE PRIVATE EXTERNAL DEBT TEAM, SUPPORTED BY THE GOVERNMENT HAD COLLECTED DATA FROM CORPORATIONS ON THEIR EXTERNAL OBLIGATIONS, AND HAD TAKEN THE INITIATIVES TO HOLD TALKS WITH REPRESENTATIVES OF THE CREDITORS.  AN AGREEMENT BETWEEN REPRESENTATIVE OF INTERNATIONAL LENDERS AND INDONESIAN COMPANIES ON A FRAMEWORK FOR CORPORATE DEBT RESCHEDULING WAS REACHED IN FRANKFURT ON JUNE 4, 1998.Day1_GRIPS 2012 www.ginandjar.com 77
  • 78.  KNOWN AS THE “FRANKFURT AGREEMENT” THE SCHEME THROUGH THE INDONESIAN DEBT RESTRUCTURING AGENCY (INDRA)—UNDER BANK INDONESIA—PROVIDED FOR THE VOLUNTARY RESTRUCTURING OF THE DEBT OF CORPORATIONS TO FOREIGN BANKS ON TERMS THAT WERE CONSISTENT WITH INDONESIAN’S OVERALL EXTERNAL PAYMENT CAPACITY, AND THUS GAVE CASH FLOW RELIEF TO DOMESTIC CORPORATIONS. THE SCHEME WAS SIMILAR TO THAT USED IN MEXICO DURING ITS FINANCIAL CRISIS, CALLED THE FICORCA SCHEME. ONE IMPORTANT ASPECT OF THE SCHEME WAS TO RESOLVE THE PROBLEM IN THE PROVISION OF TRADE FINANCING WHICH HAD BEEN SEVERELY DISRUPTED.Day1_GRIPS 2012 www.ginandjar.com 78
  • 79.  TO COMPLEMENT THE NEWLY AMENDED LAW AND INDRA SCHEME A NEW INITIATIVE WAS LAUNCHED IN SEPTEMBER 1998, CALLED THE “JAKARTA INITIATIVE”. THE OBJECTIVE WAS TO PROMOTE VOLUNTARY RESTRUCTURING OF CORPORATE DEBT BETWEEN THE CREDITOR AND THE DEBTOR, ESTABLISHING GUIDELINES FOR OUT-OF-COURT CORPORATE RESTRUCTURING. UNDER THE “JAKARTA INITIATIVE” VARIOUS MEASURES WERE ALSO UNDERTAKEN TO IMPROVE CORPORATE GOVERNANCE.Day1_GRIPS 2012 www.ginandjar.com 79
  • 80.  ANOTHER ESSENTIAL PART OF THE CORPORATE DEBT RESTRUCTURING STRATEGY WAS TO THE ESTABLISHMENT OF AN EFFECTIVE BANKRUPTCY SYSTEM. THE EXISTING LAW ON BANKRUPTCY WAS CENTURY OLD HAVING BEEN INHERITED FROM THE COLONIAL ERA, AND COULD NO LONGER COPE WITH THE COMPLEXITY OF MODERN COMMERCE. IN JULY THE PARLIAMENT RATIFIED THE REVISED BANKRUPTCY LAW (LAW NO 4/1998).Day1_GRIPS 2012 www.ginandjar.com 80
  • 81.  IN FURTHER EFFORTS TO IMPROVE GOVERNANCE, IN EARLY 1999 THE PARLIAMENT PASSED THE LAW ON THE PROHIBITION OF MONOPOLY PRACTICES AND UNFAIR COMPETITION (LAW NO 5/1999). THE LAW PROVIDES LEGAL GUIDELINES FOR THE PREVENTION OF CORRUPT PRACTICES THROUGH THE GRANTING OF LICENSES, SPECIAL TREATMENT AND MONOPOLIES TO CERTAIN GROUP OF PEOPLE. A LAW ON CONSUMER PROTECTION WAS ALSO PROMULGATED (LAW NO 8/1999). THE ROLE OF CIVIL SOCIETY IN CONSUMER PROTECTION WAS CONSTITUTED IN THE LAW.Day1_GRIPS 2012 www.ginandjar.com 81
  • 82.  THE PARLIAMENT ALSO PASSED A NEW LAW ON ENVIRONMENT PROTECTION PROVIDING FOR A STRONGER ROLE OF THE COMMUNITY AND CIVIL SOCIETY ON MATTERS RELATED TO ENVIRONMENT (LAW NUMBER 23/1999). THE 1967 LAW ON FORESTRY WAS REVISED ESTABLISHING THE PRINCIPLES OF ENVIRONMENTAL PROTECTION, EQUITY, JUSTICE AND TRANSPARENCY IN THE FORESTRY MANAGEMENT AND EXPLOITATION (LAW NO 41/1999).Day1_GRIPS 2012 www.ginandjar.com 82
  • 83.  THE ECONOMIC TEAM GAVE PARTICULAR ATTENTION TO PUBLIC ENTERPRISES THAT STILL PLAYED AN IMPORTANT ROLE IN THE ECONOMY. TO IMPROVE THEIR EFFICIENCY AND GOVERNANCE INTERNATIONAL AUDITORS SUBJECTED KEY PUBLIC COMPANIES TO SPECIAL AUDIT. INTERNATIONAL AUDITING COMPANIES WERE ASSIGNED TO AUDIT THE FINANCIAL ACCOUNT OF PERTAMINA (STATE OIL COMPANY), PLN (THE STATE ELECTRICITY COMPANY), BULOG (THE LOGISTICS AGENCY) AND THE REFORESTATION FUND.Day1_GRIPS 2012 www.ginandjar.com 83
  • 84.  THE SECOND ROUND OF SPECIAL AUDIT INCLUDED THE PRINCIPAL NATIONAL AIRLINE, THE PORT CORPORATIONS, THE DOMESTIC TELECOMMUNICATION COMPANY, AND THE TOLL ROAD OPERATORS. A MASTER PLAN ON THE REFORM OF STATE ENTERPRISES HAD BEEN DEVISED INCLUDING THE RESTRUCTURING AND PRIVATIZATION OF STATE ENTERPRISES TO IMPROVE EFFICIENCY, PROFITABILITY, AND SERVICE-DELIVERY AND THEREFORE LAY THE FOUNDATION FOR FUTURE GROWTH.Day1_GRIPS 2012 www.ginandjar.com 84
  • 85.  TO PROVIDE FOR A STRONGER LEGAL BASIS TO DEFINE AND CRIMINALIZE CORRUPT PRACTICES, IN MAY 1999, THE PARLIAMENT PASSED THE LAW ON CLEAN GOVERNMENT (LAW NO 28/999). THIS LAW INCLUDES PROVISIONS REQUIRING FAIR AND EQUAL TREATMENT FROM GOVERNMENT OFFICIALS FOR ALL PEOPLE, AS WELL AS THE RIGHT OF THE PUBLIC TO SEEK INFORMATION ABOUT POLICY-RELATED MATTERS AND TO EXPRESS VIEWS ON THOSE ISSUES IN A RESPONSIBLE MANNER.Day1_GRIPS 2012 www.ginandjar.com 85
  • 86.  ANOTHER PROVISION OF THIS LAW REQUIRES THAT PUBLIC OFFICIALS —ELECTED AS WELL APPOINTED— SHOULD REPORT THEIR WEALTH BEFORE AND AFTER TAKING OFFICE, SUBJECT TO INVESTIGATION BY A SPECIAL COMMISSION TO ENSURE THAT GOVERNMENT OFFICIALS DO NOT ENRICH THEMSELVES IMPROPERLY. IT WAS FOLLOWED BY ANOTHER LAW ON THE ERADICATION OF CORRUPT PRACTICES (LAW NO 31/1999). THIS LAW PROVIDES STRONGER GUIDELINES ON INVESTIGATION AND PROSECUTION OF CORRUPT PRACTICES. THE NEW LAW ALSO PROVIDES FOR THE ESTABLISHMENT OF AN INDEPENDENT COMMITTEE TO ERADICATE CORRUPTION.Day1_GRIPS 2012 www.ginandjar.com 86
  • 87. HELPING THE POOR HIGH PRIORITY WAS GIVEN ON MEASURES TO PROTECT THE POOR FROM THE WORST IMPACT OF THE CRISIS. THE STRATEGY CONSISTED OF TWO ELEMENTS: A) GENERAL ECONOMIC POLICIES THAT WOULD HAVE IMPACT ON THE POOR, AND B) TARGETED POLICIES FOR THE BENEFIT OF THE POOR. FOREMOST IN THE FIRST PRONG OF THE STRATEGY WAS RESTORING MACROECONOMIC STABILITY.Day1_GRIPS 2012 www.ginandjar.com 87
  • 88.  IMPROVEMENT OF THE VALUE OF THE CURRENCY AND ARRESTING INFLATION WOULD SUBSTANTIALLY IMPROVE THE ECONOMIC CONDITION OF THE POOR, DIRECTLY AND INDIRECTLY AS THE ECONOMY BEGAN TO RECOVER. ADEQUATE SUPPLY OF FOOD AND OTHER BASIC NECESSITIES WOULD REDUCE THE COST OF THOSE ITEMS. AS AN EMERGENCY MEASURE, THE GOVERNMENT HAD IMPOSED A TEMPORARY BAN ON EXPORTS OF RICE, WHEAT AND WHEAT FLOUR, SOYBEANS, SUGAR, KEROSENE, AND FISHMEAL.Day1_GRIPS 2012 www.ginandjar.com 88
  • 89.  TO THE SEVERITY AND COMPLEX ITY OF THE CRISIS THE GENERAL ECONOMIC POLICIES ALONE WERE NOT ENOUGH TO PROTECT THE POOR FROM THE WORST IMPACT OF THE CRISIS WITHOUT A SPECIFICALLY TARGETED POLICY FOR THE POOR. THE TARGETED POLICIES FOR THE POOR, OR THE SOCIAL SAFETY NET ENCOMPASSED THREE BROAD AREAS OF ACTION: I) MAINTAINING THE AVAILABILITY AND AFFORDABILITY OF KEY COMMODITIES IMPORTANT TO THE POOR; II) GENERATING EMPLOYMENT AND MAINTAINING INCOMES; III) PRESERVING KEY SOCIAL SERVICES.Day1_GRIPS 2012 www.ginandjar.com 89
  • 90.  THE MOST IMPORTANT BASIC COMMODITY WAS RICE. A PROGRAM WAS INITIATED IN JULY 1998 TO PROVIDE 10 KG OF RICE AT ABOUT ONE-HALF OF THE MARKET PRICE TO LOW-INCOME FAMILIES FIRST IN THE JAKARTA AREA AND IN SEPTEMBER EXTENDED TO COVER 7½ MILLION VERY POOR FAMILIES THROUGHOUT THE COUNTRY. IN DECEMBER THE MONTHLY ALLOCATIONS UNDER THE SCHEME WAS INCREASED FROM 10 KILOGRAMS TO 20 KILOGRAMS PER FAMILY COVERING 17 MILLION POOR FAMILIESDay1_GRIPS 2012 www.ginandjar.com 90
  • 91.  TO IMPROVE PURCHASING POWER IN RURAL AND URBAN AREAS, THE GOVERNMENT HAD SET UP PUBLIC WORKS PROJECTS THROUGHOUT THE COUNTRY TO BOOST INCOMES OF THE POOR, THE UNEMPLOYED AND THE UNDEREMPLOYED. TO SUPPLEMENT THESE EFFORTS, CASH-FOR-WORK PROGRAMS ARE BEING IMPLEMENTED IN DROUGHT- STRICKEN AREAS OF THE COUNTRY.Day1_GRIPS 2012 www.ginandjar.com 91
  • 92.  PRESERVING ACCESS TO CRITICAL SOCIAL SERVICES FOR THE POOR CONSTITUTED AN IMPORTANT ASPECT OF THE SOCIAL SAFETY NET. IN WHAT WAS CONSIDERED BY THE WORLD BANK AS THE MOST SUCCESSFUL INTERVENTION, AMONG THE SOCIAL SAFETY NETS HAD BEEN THE SCHOLARSHIP AND GRANT PROGRAM DESIGNED TO MAINTAIN ENROLMENTS AND QUALITY OF SCHOOLING AT PRE-CRISIS LEVEL.Day1_GRIPS 2012 www.ginandjar.com 92
  • 93.  THE PROGRAM EXTENDED TO THE POOREST 6 PERCENT OF STUDENTS ENROLLED IN PRIMARY SCHOOLS, 17 PERCENT IN JUNIOR SECONDARY AND 10 PERCENT IN SENIOR SECONDARY SCHOOLS. IT ALSO PROVIDED GRANTS TO THE 60 PERCENT OF THE POOREST IN EACH CATEGORY (SEE WORLD BANK, 1999). THE PROGRAM HAD REACHED 4 MILLION STUDENTS.Day1_GRIPS 2012 www.ginandjar.com 93
  • 94.  IN HEALTH SERVICES, THE PRIORITY WAS GIVEN TO THE POOR TO HAVE ACCESS TO BASIC HEALTH SERVICES AND ESSENTIAL MEDICINES, AND PREVENTED MALNUTRITION AND MICRONUTRIENT DEFICIENCIES. THE GOVERNMENT MADE AVAILABLE SUPPLEMENTARY FOOD FOR YOUNG CHILDREN THROUGH THE SCHOOL SYSTEM AND PREGNANT AND LACTATING WOMEN IN POOR VILLAGES. THIS PROGRAM HAD REACHED 8.1 MILLION PUPILS IN 52.5 THOUSAND SCHOOLS NATIONWIDE.Day1_GRIPS 2012 www.ginandjar.com 94
  • 95. ON THE CUSP OF RECOVERY BY THE END OF HABIBIE’S PRESIDENCY, INDONESIA WAS EMERGING FROM THE CRISIS THE EXCHANGE RATE, INFLATION AND INTEREST RATE HAD RESPONDED WELL TO THE GOVERNMENTS ECONOMIC RECOVERY POLICIES THE GRADUAL RETURN OF MARKET AND INVESTOR CONFIDENCE, REVITALIZING THE STOCK MARKET AND RESTARTED EXPORTSDay1_GRIPS 2012 www.ginandjar.com 95
  • 96.  SPECIAL ATTENTION WAS GIVEN TO EMPOWER THE SMALL BUSINESS THE NUMBERS IN POVERTY HAD ALSO STOPPED RISING THE PROGRESS TOWARD RECOVERY HAD REACHED THE STAGE WHERE IN FISCAL POLICY THE GOVERNMENT HAD SHIFTED ITS FOCUS FROM FISCAL STIMULUS TO FISCAL SUSTAINABILITYDay1_GRIPS 2012 www.ginandjar.com 96
  • 97. MONTHLY RATE OF INFLATION (IN PERCENT) Month Year 1 2 3 4 5 6 7 8 9 10 11 121998 7.2 12.7 5.3 4.7 5.2 4.6 8.6 6.3 3.8 -0.3 0.1 1.41999 3 1.3 -0.2 -0.7 -0.3 -0.3 -1.1 -0.9 -0.7Source: President’s Accountability Speech to the People’s Consultative Assembly of the Republic of Indonesia in October 1999.Day1_GRIPS 2012 www.ginandjar.com 97
  • 98. INFLATION HAS BEEN SMOTHERED . . . (12 month percentage change in consumer & food price index)Day1_GRIPS 2012 www.ginandjar.com 98
  • 99. …AND THE RUPIAH HAS BEEN RELATIVELY STABLE INRECENT MONTHS DESPITE POLITICAL UPS AND DOWNS (RUPIAH PER US$, SPOT RATE DAILY) Day1_GRIPS 2012 www.ginandjar.com 99
  • 100. INTEREST RATES HAVE DECLINED . . .(ONE MONTH BANK INDONESIA CERTIFICATES AND RUPIAH DEPOSIT OF DOMESTIC BANK RATE) Day1_GRIPS 2012 www.ginandjar.com 100
  • 101. GDP HAS STABILIZED AND IS STARTING TO RECOVER... (Index of GDP; 1995 Q1 – 100)Day1_GRIPS 2012 www.ginandjar.com 101
  • 102. …HELPED, IN PART, BY INDUSTRIAL OUTPUT (PRODUCTION INDEX IN SELECTED REAL SECTORS)Day1_GRIPS 2012 www.ginandjar.com 102
  • 103. POVERTY RATE TRENDS (FEBRUARY 1996-FEBRUARY 2001) 1996-Day1_GRIPS 2012 www.ginandjar.com 103
  • 104.  PUTTING FIREWALLS AROUND THE FINANCIAL SYSTEM THROUGH VARIOUS MECHANISMS, TO PREVENT ECONOMIC COLLAPSE CAUSED BY FITURE EXTERNAL SHOCKS. A DECADE AFTER THE 1998 CRISIS INDONESIA’S ECONOMY NOT ONLY HAD RECOVERED BUT WAS WELL ON ITS WAY TO BECOME ONE OF THE MOST DYNAMIC EMERGING ECONOMIES. INDONESIA NOW BELONGS TO THE G-20, THE 20 LARGEST ECONOMIES IN THE WORLD.Day1_GRIPS 2012 www.ginandjar.com 104
  • 105. 2008 CRISISDay1_GRIPS 2012 www.ginandjar.com 105
  • 106. CRISIS IN THE MAKING
  • 107.  AFTER THE FINANCIAL CRISES OF 1997 AND 1998, THE GOVERNMENTS OF THE AFFECTED COUNTRIES TRIED TO PROTECT THEMSELVES AGAINST A REPEAT PERFORMANCE. THEY AVOIDED THE SHORT TERM FOREIGN BORROWING THAT HAD MADE THEM VULNERABLE TO A CUTOFF OF OVERSEAS FUNDING. THE IDEA WAS TO "DECOUPLED" FROM THE UNITED STATES.Day1_GRIPS 2012 www.ginandjar.com 107
  • 108.  HOWEVER THERE WAS ANOTHER TRANSFORMATION IN THE CHARACTER OF THE FINANCIAL SYSTEM OVER THE PAST FIFTEEN YEARS, WITH MUCH OF IT TAKING PLACE AFTER THE ASIAN CRISIS-NAMELY, THE RISE OF FINANCIAL GLOBALIZATION, WITH INVESTORS IN EACH COUNTRY HOLDING LARGE STAKES IN OTHER COUNTRIES.Day1_GRIPS 2012 www.ginandjar.com 108
  • 109.  IN 1996, ON THE EVE OF THE ASIAN CRISIS, THE UNITED STATES HAD ASSETS OVERSEAS EQUAL TO 52 PERCENT OF GDP, AND LIABILITIES EQUAL TO 57 PERCENT OF GDP. BY 2007, THESE NUMBERS WERE UP TO 128 PERCENT AND 145 PERCENT, RESPECTIVELY. THE UNITED STATES HAD MOVED DEEPER INTO NET DEBTOR STATUS; BUT THE NET IS LESS IMPRESSIVE THAN THE VAST INCREASE IN CROSS-HOLDINGS.Day1_GRIPS 2012 www.ginandjar.com 109
  • 110.  LIKE MUCH OF WHAT HAPPENED TO THE FINANCIAL SYSTEM OVER THE PAST DECADE OR TWO, THIS CHANGE WAS SUPPOSED TO REDUCE RISK: BECAUSE U.S. INVESTORS HELD MUCH OF THEIR WEALTH ABROAD, THEY WERE LESS EXPOSED TO A SLUMP IN AMERICA, AND BECAUSE FOREIGN INVESTORS HELD MUCH OF THEIR WEALTH IN THE UNITED STATES, THEY WERE LESS EXPOSED TO A SLUMP OVERSEAS.Day1_GRIPS 2012 www.ginandjar.com 110
  • 111.  BUT A LARGE PART OF THE INCREASE IN FINANCIAL GLOBALIZATION ACTUALLY CAME FROM THE INVESTMENTS OF HIGHLY LEVERAGED FINANCIAL INSTITUTIONS, WHICH WERE MAKING VARIOUS SORTS OF RISKY CROSS-BORDER BETS. AND WHEN THINGS WENT WRONG IN THE UNITED STATES, THESE CROSS-BORDER INVESTMENTS ACTED AS WHAT ECONOMISTS CALL A "TRANSMISSION MECHANISM," ALLOWING A CRISIS THAT STARTED WITH THE U.S. HOUSING MARKET TO DRIVE FRESH ROUNDS OF CRISES OVERSEAS.Day1_GRIPS 2012 www.ginandjar.com 111
  • 112.  THE FAILURE OF HEDGE FUNDS ASSOCIATED WITH A FRENCH BANK IS GENERALLY CONSIDERED TO HAVE MARKED THE BEGINNING OF THE CRISIS; BY THE FALL OF 2008, THE TROUBLES OF HOUSING LOANS IN PLACES LIKE FLORIDA HAD DESTROYED THE BANKING SYSTEM OF ICELAND.Day1_GRIPS 2012 www.ginandjar.com 112
  • 113.  IN THE CASE OF THE EMERGING MARKETS, THERE WAS A SPECIAL POINT OF VULNERABILITY, THE SO-CALLED CARRY TRADE. THIS TRADE INVOLVES BORROWING IN COUNTRIES WITH LOW INTEREST RATES, ESPECIALLY BUT NOT ONLY JAPAN, AND LENDING IN PLACES WITH HIGH INTEREST RATES. IT WAS A HIGHLY PROFITABLE TRADE AS LONG AS NOTHING WENT WRONG; BUT EVENTUALLY SOMETHING DID.Day1_GRIPS 2012 www.ginandjar.com 113
  • 114. THE UNFOLDING CRISIS THE ONLY SURPRISE ABOUT THE ECONOMIC CRISIS OF 2008 WAS THAT IT CAME AS A SURPRISE TO SO MANY. A DEREGULATED MARKET AWASH IN LIQUIDITY AND LOW INTEREST RATES, A GLOBAL REAL ESTATE BUBBLE, AND SKYROCKETING SUBPRIME LENDING WERE A TOXIC COMBINATION. ADD IN THE U.S. FISCAL AND TRADE DEFICIT AND THE CORRESPONDING ACCUMULATION IN CHINA OF HUGE RESERVES OF DOLLARS-AN UNBALANCED GLOBAL ECONOMY-AND IT WAS CLEAR THAT THINGS WERE HORRIBLY AWRY.Day1_GRIPS 2012 www.ginandjar.com 114
  • 115.  TO OBSERVERS IN THE UNITED STATES AND EUROPE, THE EAST ASIAN BAILOUTS IN 1997 WERE A SUCCESS BECAUSE THE UNITED STATES AND EUROPE HAD NOT BEEN HARMED. WHAT WAS DIFFERENT ABOUT THE 2008 CRISIS FROM THE MULTITUDE THAT HAD PRECEEDED IT DURING THE PAST QUARTER CENTURY WAS THAT THIS CRISIS BORE A "MADE IN THE USA" LABEL. AND WHILE PREVIOUS CRISES HAD BEEN CONTAINED, THIS "MADE IN THE USA" CRISIS SPREAD QUICKLY AROUND THE WORLD.Day1_GRIPS 2012 www.ginandjar.com 115
  • 116.  THE UNITED STATES HAD A HOUSING BUBBLE. WHEN THAT BUBBLE BROKE AND HOUSING PRICES FELL FROM THEIR STRATOSPHERIC LEVELS, MORE AND MORE HOMEOWNERS FOUND THEMSELVES "UNDERWATER.” THEY OWED MORE ON THEIR MORTGAGES THAN WHAT THEIR HOMES WERE VALUED. AS THEY LOST THEIR HOMES, MANY ALSO LOST THEIR LIFE SAVINGS AND THEIR DREAMS FOR A FUTURE-A COLLEGE EDUCATION FOR THEIR CHILDREN, A RETIREMENT IN COMFORT.Day1_GRIPS 2012 www.ginandjar.com 116
  • 117.  THE COLLAPSE OF THE BUBBLE AND THE TIGHTENING OF CREDIT HAD INEVITABLE CONSEQUENCES. THE ECONOMY SLOWED. AS THE ECONOMY SLOWED, THE NUMBER OF FORECLOSURES MOUNTED. THE PROBLEMS IN REAL ESTATE FIRST SURFACED IN THE SUBPRIME MARKET BUT SOON BECAME MANIFEST IN OTHER AREAS.Day1_GRIPS 2012 www.ginandjar.com 117
  • 118.  IF PEOPLE COULDNT MAKE THEIR HOUSE PAYMENTS, THEY WOULD ALSO HAVE TROUBLE MAKING THEIR OTHER—INCLUDING CARD—CREDIT PAYMENTS. WITH REAL ESTATE PRICES PLUNGING, IT WAS ONLY A MATTER OF TIME BEFORE PROBLEMS IN PRIME RESIDENTIAL AND COMMERCIAL REAL ESTATE APPEARED. AS CONSUMER SPENDING DRIED UP, IT WAS INEVITABLE THAT MANY BUSINESSES WOULD GO BANKRUPT-AND THAT MEANT THE DEFAULT RATE ON COMMERCIAL LOANS WOULD ALSO RISE.Day1_GRIPS 2012 www.ginandjar.com 118
  • 119.  TWO-THIRDS TO THREE-QUARTERS OF THE ECONOMY (OF GDP) WAS HOUSING RELATED: CONSTRUCTING NEW HOUSES OR BUYING CONTENTS TO FILL THEM, OR BORROWING AGAINST OLD HOUSES TO FINANCE CONSUMPTION. IT WAS UNSUSTAINABLE-AND IT WASNT SUSTAINED.Day1_GRIPS 2012 www.ginandjar.com 119
  • 120.  FALLING HOME PRICES HAVE A DIRECT NEGATIVE EFFECT ON EMPLOYMENT THROUGH THE DECLINE IN CONSTRUCTION. THEY TEND TO LEAD TO REDUCED CONSUMER SPENDING BECAUSE CONSUMERS FEEL POORER AND LOSE ACCESS TO HOME EQUITY LOANS; THESE NEGATIVES HAVE A MULTIPLIER EFFECT AS FALLING EMPLOYMENT LEADS TO FURTHER DECLINES IN SPENDING.Day1_GRIPS 2012 www.ginandjar.com 120
  • 121.  WHEN THE BUBBLE POPPED, THE EFFECTS WERE AMPLIFIED BECAUSE BANKS HAD CREATED COMPLEX PRODUCTS RESTING ON TOP OF THE MORTGAGES. WORSE STILL, THEY HAD ENGAGED IN MULTIBILLION- DOLLAR BETS WITH EACH OTHER AND WITH OTHERS AROUND THE WORLD. THIS COMPLEXITY, COMBINED WITH THE RAPIDITY WITH WHICH THE SITUATION WAS DETERIORATING AND THE BANKS HIGH LEVERAGE, MEANT THAT THE BANKS DIDNT KNOW WHETHER WHAT THEY OWED TO THEIR DEPOSITORS AND BONDHOLDERS EXCEEDED THE VALUE OF THEIR ASSETS.Day1_GRIPS 2012 www.ginandjar.com 121
  • 122.  AND THEY REALIZED ACCORDINGLY THAT THEY COULDNT KNOW THE POSITION OF ANY OTHER BANK. THE TRUST AND CONFIDENCE THAT UNDERLIE THE BANKING SYSTEM EVAPORATED. BANKS REFUSED TO LEND TO EACH OTHER-OR DEMANDED HIGH INTEREST RATES TO COMPENSATE FOR BEARING THE RISK. GLOBAL CREDIT MARKETS BEGAN TO MELT DOWN. THIS CRISIS QUICKLY BECAME GLOBAL-AND NOT SURPRISINGLY, AS NEARLY A QUARTER OF U.S. MORTGAGES HAD GONE ABROAD.Day1_GRIPS 2012 www.ginandjar.com 122
  • 123.  THE INTENSIFICATION OF THE CREDIT CRISIS AFTER THE FALL OF LEHMAN BROTHERS, THE SUDDEN CRISIS IN EMERGING MARKETS, A COLLAPSE IN CONSUMER CONFIDENCE, ALL POINT TO THE WORST RECESSION IN THE UNITED STATES, AND IN THE WORLD AS A WHOLE, SINCE THE EARLY 1980s. AFTER ALL THE U.S. ECONOMY IS STILL THE LARGEST, AND IT IS HARD FOR A DOWNTURN OF THIS MAGNITUDE NOT TO HAVE A GLOBAL IMPACT. MOREOVER, GLOBAL FINANCIAL MARKETS HAVE BECOME CLOSELY INTERLINKED.Day1_GRIPS 2012 www.ginandjar.com 123
  • 124.  IN THE BEGINNING, MANY IN EUROPE TALKED OF DECOUPLING, THAT THEY WOULD BE ABLE TO MAINTAIN GROWTH IN THEIR ECONOMIES EVEN AS AMERICA WENT INTO A DOWNTURN. THE GROWTH IN ASIA WOULD SAVE THEM FROM A RECESSION. BUT ASIAS ECONOMIES ARE STILL TOO SMALL (THE ENTIRE CONSUMPTION OF ASIA IS JUST 40 PERCENT OF THAT OF THE UNITED STATES). THEIR GROWTH RELIES HEAVILY ON EXPORTS TO THE UNITED STATES. EVEN AFTER A MASSIVE STIMULUS, CHINAS GROWTH IN 2009 WAS SOME 3 TO 4 PERCENT BELOW WHAT IT HAD BEEN BEFORE THE CRISIS.Day1_GRIPS 2012 www.ginandjar.com 124
  • 125.  WHILE EUROPES FINANCIAL INSTITUTIONS SUFFERED FROM BUYING TOXIC MORTGAGES AND THE RISKY GAMBLES THEY HAD MADE WITH AMERICAN BANKS, A NUMBER OF EUROPEAN COUNTRIES GRAPPLED WITH PROBLEMS OF THEIR OWN DESIGN. THE WELFARE STATE SYSTEM AND THE MONETARY UNIFICATION OF EUROPE (EURO) HAD AMPLIFIED THE FINANCIAL CRISES AFFECTING MANY EUROPEAN COUNTRIES, NOT ONLY ECONOMICALLY BUT ALSO POLITICALLY.Day1_GRIPS 2012 www.ginandjar.com 125
  • 126. IMPACT ONGLOBAL ECONOMY
  • 127. SLOWING DOWN ECONOMIC GROWTH 14,0 % yoy 9,0 12,4 4,5 3,0 4,0 8,2 6,7 4,1 5,0 4,2 3,1 4,3 4,5 -1,0 2,9 2008 2009 2010 2011* 2012* 2,7 -0,5 -6,0 GDP -11,0 Inflation Trade Volume -10,9 *Projection Source: WEO, IMF Juni 2011Day1_GRIPS 2012 www.ginandjar.com 127
  • 128. REGIONAL ECONOMIC PERFORMANCE MAJOR REGIONS (yoy,%) ASEAN (yoy,%) 4,04,0 2,92,52,7 2,9 % yoy 16 %, yoy 1,82,01,72,0 14 2009 2010 12 2011* 2012*0,0 10 -0,7-2,0 8 -2,6-4,0 6 -4,1 4-6,0 2 -6,3-8,0 0 Indonesia Singapore Malaysia Thailand Phillipina US Europe Japan -2 -4*Projection 2009 2010 2011* 2012* *ProjectionSource: WEO, IMF Juni 2011 Source: WEO, IMF Juni 2011 Day1_GRIPS 2012 www.ginandjar.com 128
  • 129. THE USDay1_GRIPS 2012 www.ginandjar.com 129
  • 130. JAPANDay1_GRIPS 2012 www.ginandjar.com 130
  • 131. CHINADay1_GRIPS 2012 www.ginandjar.com 131
  • 132. INDIADay1_GRIPS 2012 www.ginandjar.com 132
  • 133. EUDay1_GRIPS 2012 www.ginandjar.com 133
  • 134. GREECEDay1_GRIPS 2012 www.ginandjar.com 134
  • 135. EU AREA DEBTDay1_GRIPS 2012 www.ginandjar.com 135
  • 136. EU AREA FISCAL DEFICITDay1_GRIPS 2012 www.ginandjar.com 136
  • 137. DEBT AND COUPON DUE IN 2012 (US$ BILLION)Day1_GRIPS 2012 www.ginandjar.com 137
  • 138. GLOBAL ECONOMIC GROWTH PAST AND PROJECTED COUNTRY 2007 2008 2009 2010 2011F 2012F* 2011F 2012F 2011F 2012F Bloomberg* IMF World Bank US 1.9 -0.3 -3.5 3.0 1.7 2.1 1.5 1.8 2.6 2.9 JAPAN 2.4 -1.2 -6.3 4.0 -0.4 2.5 -0.5 2.3 0.1 2.6 EUROPE 2.8 0.4 -4.2 1.8 1.6 0.7 1.6 1.1 1.7 1.8 CHINA 14.2 9.6 9.2 10.4 9.2 8.6 9.5 9.0 9.3 8.7 INDIA 9.5 7.5 7.0 9.0 7.5 7.9 7.8 7.5 8.0 8.4 SINGAPORE 8.0 1.9 -0.8 14.6 5.5 4.9 5.3 4.3 5.0 6.0 MALAYSIA 6.5 4.8 -1.6 7.2 5.0 5.4 5.2 5.1 4.8 5.0 THAILAND 5.0 2.5 -2.3 7.8 4.1 4.7 3.5 4.8 3.7 4.2 PHILIPPINES 7.1 3.9 1.1 7.7 5.0 5.7 4.7 4.9 5.0 5.4 SOUTH KOREA 5.1 2.3 0.3 6.2 3.6 3.8 3.9 4.4 4.8 4.6 INDONESIA 6.3 6.0 4.6 6.1 6.5 6.6 6.4 6.3 6.3 6.5 * Bloomberg & Asia Pacific Consensus Forecasts, November 2011.Day1_GRIPS 2012 www.ginandjar.com 138
  • 139. – = unavailable, e = ADB estimates, FY = fiscal year, GDP = gross domestic product, Lao PDR = Lao People’s Democratic Republic, US = United States, and y-o-y= year-on-year.1Aggregates are weighted according to gross national income levels (atlas method, current $) from the World Bank’s World Development Indicators.2Excludes Myanmar for all years as weights are unavailable. Quarterly figures exclude Brunei Darussalam, Cambodia, Lao PDR, and Myanmar for which quarterly data is notavailable.3Includes Brunei Darussalam, Cambodia, Indonesia, Lao PDR, Malaysia, Philippines, Singapore, Thailand, and Viet Nam.4Figures from Asian Development Outlook 2011 Update, Asian Development Bank, published in September.5Seasonally adjusted.6Flash estimate, seasonally adjusted for 2011Q3. Source: Asian, 2011 Day1_GRIPS 2012 www.ginandjar.com 139
  • 140. IMPACT ONINDONESIA’S ECONOMY
  • 141. GDP GROWTHDay1_GRIPS 2012 www.ginandjar.com 141
  • 142. WHY INDONESIA IS MORE RESILIENT? MEASURES TAKEN IN 1998/1999 NOT ONLY TO OVERCOME THE CRISES BUT ALSO TO BETTER PREPARE THE ECONOMY AGAINST FUTURE (EXTERNAL) ECONOMIC SHOCKS, ESTABLISHING SAFETY MECHANISM AND CRISIS PROTOCOL. LESSER DEGREE OF INTEGRATION INTO THE GLOBAL FINANCE (COMPARED TO REGIONAL AND PEER COUNTRIES).Day1_GRIPS 2012 www.ginandjar.com 142
  • 143.  INDONESIA DEPENDS MORE IN ITS DOMESTIC THAN EXPORT MARKET. ITS EXPORT IS ALSO MORE DIVERSIFIED. AND NATURAL RESOURCED BASED SUCH AS ENERGY, FOOD AND MINERALS THAT THE WORLD HUMAN POPULATION WILL ALWAYS NEED, CRISIS OR NO CRISIS.Day1_GRIPS 2012 www.ginandjar.com 143
  • 144. EXPORT TO GDP RATIO 45 40.8 40 39.1 34.0 35 32.7 31.0 29.4 30 32.1 29.9 30.5 25 26.4 24.6 24.1 20 15 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011Day1_GRIPS 2012 www.ginandjar.com 144
  • 145. EXPORT TO GDP RATIO COMPARED TO OTHER REGIONAL COUNTRIES Asian Countries Malaysia Philippines Singapore Thailand Korea Taiwan Hong Kong 2000 119.8 55.2 192.4 66.7 38.6 52.9 143.0 2001 110.5 49.4 188.1 65.9 35.8 50.0 138.6 2002 108.4 50.4 189.0 64.2 33.1 52.2 149.1 2003 106.8 49.7 207.7 65.7 35.3 55.4 170.7 2004 115.3 51.0 219.6 70.7 40.9 61.4 189.9 2005 117.5 47.7 230.0 73.5 39.3 62.4 198.4Day1_GRIPS 2012 www.ginandjar.com 145
  • 146. EXPORT TO GDP RATIO COMPARED TO OTHER REGIONAL COUNTRIES Asian Countries Malaysia Philippines Singapore Thailand Korea Taiwan Hong Kong 2006 116.5 47.5 234.4 73.7 39.7 68.0 205.2 2007 110.1 42.9 218.9 73.3 41.9 72.0 207.9 2008 103.0 37.2 233.4 76.4 53.0 73.0 212.4 2009 96.2 32.4 199.9 68.3 49.8 62.3 194.5 2010 97.4 35.0 211.1 71.3 52.4 73.6 222.9Day1_GRIPS 2012 www.ginandjar.com 146
  • 147. INDONESIA’S EXPORT DESTINATION *January – July 2011Day1_GRIPS 2012 www.ginandjar.com 147
  • 148. NIE = newly industrialized economy.1Refers to merchandise exports in US dollars as percent of nominal gross domestic product.2Includes emerging East Asia plus Japan.3Includes ASEAN, NIEs, and People’s Republic of China.4Excludes Singapore.Source: ADB, 2011Day1_GRIPS 2012 www.ginandjar.com 148
  • 149. GDP = gross domestic product; NIE = newly industrialized economy.na = not applicable.1Includes emerging East Asia plus Japan.2Includes ASEAN-10 (Brunei Darussalam, Cambodia, Indonesia, Lao PDR, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Viet Nam); People’sRepublic of China; Hong Kong,China; Republic of Korea; and Taipei,China.Source: ADB, 2011Day1_GRIPS 2012 www.ginandjar.com 149
  • 150. NIE = newly industrialized economy. 1Based on first-digit level Standard International Trade Classification, Revision 3. 2Refers to the sum of chemicals and related products, manufactured goods classified chiefly by material, machinery and transport equipment, and miscellaneous manufactured articles. 3Includes emerging East Asia plus Japan. 4Includes ASEAN-4 plus Viet Nam, NIEs, and People’s Republic of China. Source: ADB, 2011Day1_GRIPS 2012 www.ginandjar.com 150
  • 151. GDP = gross domestic product, na = not applicable, NIE = newly industrialized economy. 1Selected emerging East Asia includes Hong Kong, China; Indonesia; Republic of Korea; Malaysia; Philippines; Singapore; and Thailand where portfolio investment data are available. Emerging East Asia includes People’s Republic of China; ASEAN-4 plus Viet Nam and NIEs. East Asia includes emerging East Asia plus Japan. Source: ADB, 2011Day1_GRIPS 2012 www.ginandjar.com 151
  • 152. POST CRISIS ECONOMIC PERFORMANCE Page 152
  • 153. EXPORTDay1_GRIPS 2012 www.ginandjar.com 153
  • 154. GDP GROWTH 1988-2011 1988- 7.24% 7.82% 6.50% 6.06% 6.10% 7% 5.50% 5.78% 6.46% 4.92% 4.78% 6.50% 4.70% 3.64% 4% 4.30% 0.79% 1% 1998 2000 1999 2001 1988 1989 1990 2002 -2% 2003 2004 1991 1992 1993 1994 1996 1997 2005 2006 2007 2008 2009 2010 2011 -5% -8% -11% -13.13% -14%Day1_GRIPS 2012 www.ginandjar.com 154
  • 155. RUPIAH MOVEMENTDay1_GRIPS 2012 www.ginandjar.com 155
  • 156. COMPARED TO SOME ASIAN COUNTRIESDay1_GRIPS 2012 www.ginandjar.com 156
  • 157. FISCAL DEFICIT (%)Day1_GRIPS 2012 www.ginandjar.com 157
  • 158. DEBT PROFILE PRINSIP KEHATI-HATIAN FISKAL TETAP TERJAGA (Trillion Rp) (% GDP) 4,000 47% 50% 3,500 45% 39% 40% 3,000 35% 33% 35% 2,500 28% 26% 30% 25% 24% 2,000 22% 25% 20% 824 807 808 20% 1,500 779 853 754 774 15% 1,000 655 609 652 10% 500 836 902 1,034 1,134 1,205 1,221 5% 659 693 737 784 0 0% 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Domestic Foreign % GDP (right) 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 GDP 2,774 3,339 3,957 4,954 5,613 6,423 7,227 8,120 9,123 10,278 Total Debt 1,313 1,302 1,389 1,637 1,590 1,677 1,813 1,958 2,012 2,029Day1_GRIPS 2012 www.ginandjar.com 158
  • 159. DEBT TO GDP RATIO IN SELECTED COUNTRIES (2009)Day1_GRIPS 2012 www.ginandjar.com 159 159
  • 160. Day1_GRIPS 2012 www.ginandjar.com 160
  • 161. e = estimate, GDP = gross domestic product, p = projection. 1Central government debt. 2Federal government debt. 3National government debt. Source: Article IV Consultations, International Monetary Fund; CEIC (Public Debt); and Joint External Debt Hub database (External Debt).Day1_GRIPS 2012 www.ginandjar.com 161
  • 162. GDP = gross domestic product. 1Fiscal year. 22011 figures are ADB forecasts, budget estimates and government targets of respective economies. Figures as of 25 Nov 2011. Source: Asian Development Outlook, 2011Day1_GRIPS 2012 www.ginandjar.com 162
  • 163. PRC = People’s Republic of China, UK = United Kingdom, US = United States. 1Daily stock price indexes of combined Shanghai and Shenzhen composites, weighted by respective market capitalizations Source: ADB, 2011Day1_GRIPS 2012 www.ginandjar.com 163
  • 164. NATIONAL CURRENCY RESERVE Billion US$ Month 130 10 124.6 NIR Month import Bulan Impor 114.0 111.0 110 9 90 8 70 7 50 6 30 5 200 201 201 9 0 1Day1_GRIPS 2012 www.ginandjar.com 164
  • 165. INFLATION (%) Total Umum Inflasi Inflasi Makanan Food Non-Food % yoy Non-makanan1412108 4.156420 A A A A A A S N D S N D S N D M M O M M O M M O J 2009 J J J 2010 J J J 2011 J J F F F Source: BPS Day1_GRIPS 2012 www.ginandjar.com 165
  • 166. POVERTYDay1_GRIPS 2012 www.ginandjar.com 166
  • 167. UNEMPLOYMENTDay1_GRIPS 2012 www.ginandjar.com 167
  • 168. LESSONS TO BE LEARNED
  • 169. Loss of confidence Financial problems for Pluging currency, rising companies, banks, interest rates, slumping households economy (PAUL KRUGMAN, 2009)Day1_GRIPS 2012 www.ginandjar.com 169
  • 170.  THE GLOBAL ECONOMIC SYSTEM HAS NOT WORKED AS MANY HAD HOPED. GLOBALIZATION HAS LED TO UNPRECEDENTED PROSPERITY FOR MANY, BUT IN 2008 IT HELPED TRANSMIT THE U.S. RECESSION TO COUNTRIES AROUND THE WORLD—TO THOSE THAT HAD MANAGED WELL THEIR FINANCIAL SYSTEMS (FAR BETTER THAN THE UNITED STATES) AND TO THOSE THAT HAD NOT, TO THOSE THAT HAD GAINED ENORMOUSLY BY GLOBALIZATION AND TO THOSE THAT HAD BENEFITED LESS. (JOSEPH E. STIGLITZ, 2010)Day1_GRIPS 2012 www.ginandjar.com 170
  • 171.  THOSE COUNTRIES THAT WERE MOST OPEN, MOST GLOBALIZED, WERE HIT THE WORST. FREE MARKET IDEOLOGY UNDERPINNED THE CAPITAL AND FINANCIAL MARKET LIBERALIZATION THAT PLAYED SUCH A BIG ROLE IN THE RAPID SPREAD OF THE CRISIS AROUND THE WORLD.Day1_GRIPS 2012 www.ginandjar.com 171
  • 172.  THE RULES OF THE GAME HAVE CHANGED GLOBALLY. THE WASHINGTON CONSENSUS POLICIES AND THE UNDERLYING IDEOLOGY OF MARKET FUNDAMENTALISM ARE DEAD. IN THE PAST, THERE MIGHT HAVE BEEN A DEBATE OVER WHETHER THERE WAS A LEVEL PLAYING FIELD BETWEEN DEVELOPED AND LESS DEVELOPED COUNTRIES; NOW THERE CAN BE NO DEBATE. THE POOR COUNTRIES SIMPLY CANT BACK UP THEIR ENTERPRISES IN THE WAY THAT THE RICH DO, AND THIS ALTERS THE RISKS THAT THEY CAN UNDERTAKE.Day1_GRIPS 2012 www.ginandjar.com 172
  • 173.  THEY HAVE SEEN THE RISKS OF GLOBALIZATION BADLY MANAGED. BUT THE HOPED-FOR REFORMS IN HOW GLOBALIZATION IS MANAGED STILL SEEM ON THE DISTANT HORIZON. THE QUESTION IS: WILL WE SEIZE THE OPPORTUNITY TO RESTORE OUR SENSE OF BALANCE BETWEEN THE MARKET AND THE STATE, BETWEEN INDIVIDUALISM AND THE COMMUNITY, BETWEEN MAN AND NATURE, BETWEEN MEANS AND ENDS.Day1_GRIPS 2012 www.ginandjar.com 173
  • 174.  WE NOW HAVE THE OPPORTUNITY TO CREATE A NEW FINANCIAL SYSTEM THAT WILL DO WHAT HUMAN BEINGS NEED A FINANCIAL SYSTEM TO DO; TO CREATE A NEW ECONOMIC SYSTEM THAT WILL CREATE MEANINGFUL JOBS, DECENT WORK FOR ALL THOSE WHO WANT IT, ONE IN WHICH THE DIVIDE BETWEEN THE HAVES AND HAVE-NOTS IS NARROWING, RATHER THAN WIDENING. AND, MOST IMPORTANTLY OF ALL, TO CREATE A NEW SOCIETY IN WHICH EACH INDIVIDUAL IS ABLE TO FULFILL HIS ASPIRATIONS AND LIVE UP TO HIS POTENTIAL, IN WHICH WE HAVE CREATED CITIZENS WHO LIVE UP TO SHARED IDEALS AND VALUES, IN WHICH WE HAVE CREATED A COMMUNITY THAT TREATS OUR PLANET WITH THE RESPECT THAT IN THE LONG RUN IT WILL SURELY DEMAND. (JOSEPH E. STIGLITZ, 2011)Day1_GRIPS 2012 www.ginandjar.com 174