Linda Yulisman, Jakarta – Despite exchange rate depreciation, high inflation and slower growth, the country is not likely to slip into another 1997-1998 crisis, says the International Monetary Fund (IMF).
The statement refutes concerns expressed recently by foreign banks such as Singapore-based DBS Bank and Bank of America Merrill Lynch, who reminded Indonesia of its vulnerability to return to the financial crisis of almost two decades ago.
IMF Deputy Managing Director Naoyuki Shinohara said that one of the indicators was the low proportion of debt – both government and private – to the gross domestic product (GDP), while the dependency on short-term private borrowing was also moderate.
Apart from this, external factors, such as the policy taken by authorities in Asian countries that allowed for the flexible movement of their currencies, also contributed to a more positive outlook, Shinohara added.
"Looking at the situation, we are not worried about an Asian crisis-type problem appearing in the future," Shinohara told The Jakarta Post in a recent interview.
"We don't think it's a likely event at the moment, but that doesn't mean Indonesia doesn't have to do anything," he went on, referring to structural reforms needed to strengthen the capacity of the public sector outside of maintaining macroeconomic prudence.
Indonesia's debt-to-GDP ratio at present has settled at around 24 percent, which is one of the lowest in the world, and also quite lower compared to its Southeast Asian neighbors such as Malaysia, the Philippines and Thailand, which range between 30 percent and 60 percent.
The rupiah has depreciated against the US dollar considerably in the past few months due to external developments as well as shrinking market confidence triggered by record trade and current-account deficits.
The currency declined 1.6 percent last week to 11,538 per US dollar as of 4:05 p.m. on Friday in Jakarta, the biggest drop after Malaysia's ringgit among the 10 most-traded Asian currencies, according to prices from local banks compiled by Bloomberg. It has tumbled 14 percent this quarter, the most since the final three months of 2008.
During the 1997-1998 Asian financial crisis, the rupiah drastically slumped from around 2,000 per dollar to more than 16,000 per dollar, which prompted corporate debt defaults, resulting in extra burdens on the state budget as government debt repayments were highly impacted.
Shinohara further said that Indonesia should remain flexible to be able to respond to external developments, particularly the planned US monetary policy, which might cause a lot of movement in financial markets, especially in emerging economies.
"The right set of macroeconomic policies as well as the right messages to the market are important and will continue to be important to the country," he said.
In the past four years, emerging economies have enjoyed strong growth, in part driven by large-scale monetary easing in advanced economies. The measure has allowed, among others things, faster foreign capital inflows, higher commodity prices and lower interest rates.
However, the situation has changed and these economies should now accept new norms – lower economic growth, declining equity prices, lower exchange rates and higher interest rates, according to the IMF.
The new norms will also apply to Indonesia, according to Shinohara. In its recent economic outlook, the IMF cut its growth projection for Indonesia this year to 5.3 percent from the 6.3 percent estimated earlier. The Inflation rate is expected to rise to 9.5 percent and current account deficit to reach 3.5 percent of the GDP, it says.
IMF senior resident representative for Indonesia, Benedict Bingham, said that Indonesia's growth next year would be strongly helped by improvements in the global economy, which could increase net exports – the value of total exports minus the value of overall imports. From January to July, Indonesia booked a trade gap of US$5.65 billion, particularly due to ballooning fuel imports.
In addition to this, domestic consumption would continue to boost growth, picking up on the back of potential higher spending ahead of the general election next year.
"Consumption and net exports will make positive contributions to Indonesia's growth," he said.