Jakarta – An economic think tank has warned the government of a possible sudden reversal in short-term capital inflows, which it says could destabilize the economy and cause even more chaos than the 1997 meltdown.
The Institute for the Development of Economics and Finance (Indef) told a media briefing Thursday that the government had to be aware of the "easy-come-easy-go" nature of hot money.
"We don't mean to frighten the government, but to warn them about the possibility of a crisis similar to the one in 1997," said Indef director Iman Sugema.
Iman said that the country was seeing massive inflows of hot money in circumstances that were remarkably similar to the conditions prevailing before the previous crisis some ten years ago.
At the end of the first quarter, the country had received Rp 45 trillion in capital inflows, which had been invested mostly in stocks, financial assets such as central bank certificates (SBI), and government bonds.
If a second crisis materialized, its impact would be more severe than that of the first crisis, according to Indef's economist Aviliani as some of the country's economic indicators were actually in worse shape now than they were in 1997.
"Even though GDP is now higher than in 1997, the figures show that the number of poor and jobless people is higher now than ten years ago," said Aviliani.
According to official statistics, before the 1997 crisis the country had 34 million poor people, while the number of poor currently stands at around 39 million.
"The unemployment rate is currently 10.54 percent, double the 1997 unemployment rate, which stood at 4.86 percent," she added.
"The government also has a higher debt burden now, which amounts to Rp 5.3 million per person, an increase of more than 600 percent compared to ten years ago."
Iman said that another factor that could contribute to a second economic crisis was the "disconnection" between the financial sector and real sector.
"Investors prefer to invest their money in the financial markets than the real sector as they offer higher returns in a shorter time. As a result, the unemployment and poverty rates remain high despite the liquidity of the capital markets," said Iman.
"Currently, banking sector funds parked in SBIs amount to Rp 238 trillion, and are predicted to reach Rp 300 trillion by the end of this year, while lending to the real sector has yet to improve,' said Iman.
Indef suggested that in order to avoid such a crisis, the government would need to control capital inflows and encourage the growth of the real sector so as to strengthen the economy's fundamentals.