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Bulletin of Indonesian Economic Studies

ISSN: 0007-4918 (Print) 1472-7234 (Online) Journal homepage: http://www.tandfonline.com/loi/cbie20

SURVEY OF RECENT DEVELOPMENTS
Mari Pangestu & Miranda Swaray Goeltom
To cite this article: Mari Pangestu & Miranda Swaray Goeltom (2001) SURVEY OF
RECENT DEVELOPMENTS, Bulletin of Indonesian Economic Studies, 37:2, 141-171, DOI:
10.1080/00074910152390856
To link to this article: http://dx.doi.org/10.1080/00074910152390856

Published online: 17 Jun 2010.

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Bulletin of Indonesian Economic Studies, Vol. 37, No. 2, 2001: 141–71

SURVEY OF RECENT DEVELOPMENTS
Mari Pangestu
Centre for Strategic and International Studies, Jakarta
Miranda Swaray Goeltom*
Bank Indonesia, Jakarta

SUMMARY
Market confidence has declined further because of increasing politic al
uncertainty and inconsistent implementation of policy. Mistrust between key

institutions such as the IMF and Indonesian policy makers has deepened with
the emergence of problems of governance and transparency, controversial
suggestions for new bond issues, delays
in the divestment of assets controlled by
IBRA (the bank restructuring agency),
and disagreements o ver propos ed
amendments to the central bank law. International support for Indonesia has
waned, and there is a clear tendency on
the part of the IMF to involve itself more
and more in the micro management of
economic policies.
Economic growth has slowed, and a
near-term rebound seems unlikely. The
rupiah depreciated by around 18% in the
first half of 2001; inflation is now of the
order of 11%; and interest rates are again
on the rise. Monetary policy will need
to be tightened, which will result in further increases in interest rates in the
short term. There is much opposition to
such an outcome, but the longer adjustment is postponed the more difficult it

will be later.

Deteriorating economic conditions
have made it necessary to revise the current budget, building in assumptions of
slower gro wth, hig her infla tio n, a
weaker exchange rate and higher interest rates. A number of fiscal reforms,
including tax increases and the implementation of energy price rises originally planned for April, result in the
revised budget deficit being little different from that originally planned, however. Whether the new figure is realistic
depends crucially on progress with privatisation and with asset sales by the
bank restructuring agency.
The bank restructuring program has
resulted in state dominance of the banking sector. Bank lending is still at a low
level, partly because banks are constrained by the requirement to increase
their capital adequacy, and partly because they have been inadequately recapitalised. New measures will need to
be taken soon to increase their capital.
Ideally this will come from the private
sector, but even new injections of government equity might be a cheaper option than closing more banks and paying
off their depositors. Additional mergers
of banks are not likely to be helpful.

ISSN 0007-4918 print/ISSN 1472-7234 online/01/020141-31

© 2001 Indonesia Project ANU

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142

DECLINING CONFIDENCE AND
DEEPENING MISTRUST
Possible Leadership Change
The People’s Representative Council
(DPR) voted for a second time on 30
April to censure President Abdurrahman Wahid for his alleged involvement
in the Brunei and Bulog financial scandals (McLeod 2000: 7–8) and his mismanagement of the country’s affairs.
Following a carefully worded reply in
late April to the DPR’s first censure, the
president continued throughout May to
defy its threat to request a special session of the People’s Consultative Assembly (MPR) to call him to account. He
accused the DPR of acting unconstitutionally and refused to respond to its

second censure, threatening several
times to declare a state of emergency and
then issue a decree to dissolve the DPR.
He warned that his dismissal might lead
to mob violence between his supporters
and opponents, and that six provinces
would secede if he were forced from office. For its part, the armed forces consistently opposed the idea of declaring
a state of emergency.
In th e d ay s le ad i n g u p to th e
crucial DPR vote on 30 May, mobs
claiming to be Wahid’s supporters
demonstrated and caused considerable damage to property in several
East Java centres of Nahdlatul Ulama
(NU), Wahid’s religious support base.
They burned a number of churches
and three offices of the PDI-P (the Indonesian Democracy Party of Struggle, led by Vice President Megawati
Soekarnoputri), pelted stones at the
Muhammadiyah University, and attempted to storm the East Java legislature building. Nevertheless the DPR
voted, by a large majority, to request
the MPR to hold a special session, at

which the agenda would be to review
the mandate it had given the president—even though the Attorney Gen-

Mari Pangestu and Miranda Swaray Goeltom

eral had just announced that there was
not enough evidence to show that he
had a case to answer in the Brunei and
Bulog scandals.
The following day the president reshuffled his cabinet in a desperate
attempt to hold on to power. He dismissed his Coordinating Minister for
Political and Security Affairs, Susilo
Bambang Yudhoyono, and replaced
him with Agum Gumelar, the former
Minister for Transportation, widely
seen as close to the vice president.
Others dismissed were the Attorney
General, Marzuki Darusman, Cacuk
Sudarijanto (Junior Minister for Economic Restructuring), and Sarwono
Kusumaatmadja (Minister of Maritime Resources and Fisheries). Meanw h il e , t h e po l ic e c h i ef , S u ro jo

Bimantoro, refused to step down; in
this he retains the support of the police force and the military. Further
cabinet changes were implemented in
mid June. The finance minister, Prijadi
Praptosuhardjo, was replaced by the
former economics coordinating minister, Rizal Ramli. In turn, Ramli’s job
was taken by a deputy governor of
Bank Indonesia, Burhanuddin Abdullah. Finally, Anwar Supriyadi, a career
bureaucrat from the transport ministry, was appoin ted as M inister for
Administrative Reform.
At the time of writing the situation
remains flu id. The MPR is making
preparations for the special session,
scheduled for 1 August. The president
continues to signal that he has no intention of resigning. Despite acts of
violence in East Java following the second censure motion in April, threats
of mob violence if the DPR voted to
send the matter to the MPR did not
eventuate; instead, around 100,000
Wahid supporters attended a prayer

rally in Jakarta. Although widespread
violence was avoided in Jakarta and

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Survey of Recent Developments

elsewhere, there is still concern that it
could escalate as the MPR special session draws near. On the other hand,
the key elders of NU have warned
against involving the organisation too
deeply in politics. The struggle among
the pol itic a l elite is likely to las t
through until the special session. The
uncertainty and consequent lack of direction, as well as the preoccupation
of cabinet ministers and members of
the DPR with this process, will seriously affect policy making. For the
time being there is unlikely to be any
restoration of confidence in the government and its leadership.
The special session and the replacement of the president are not by any

means a foregone conclusion. A compromise with a new power sharing formula,
or the worst case scenario of a constitutional crisis should the president refuse
to accept the MPR’s decision, are also
possible outcomes. But whoever is president will face a formidable task in dealing with mounting economic problems,
restoring security and law and order,
acting decisively and consistently in order to revive confidence, and exercising
the leadership of policy making that has
long been absent. Already there is speculation on the possible outcomes of a
Megawati presidency. Based on her
statements and actions to date, one scenario is that there will be slower reforms
and a tendency to be more nationalistic;
a preference for greater government control and less enthusiasm for decentralisation; and a larger role for military. This
could mean that progress will be slow
in the privatisation of the state-owned
enterprises (SOEs) and the divestment
of assets now controlled by IBRA, and
that much needed capital inflows will
be further delayed. Another, more positive, scenario is that Megawati will
select the right combination of professio nals for her cabin et, and that a

143

stronger and more cohesive economic
policy team will be able to push on with
the task of economic restructuring and
recovery in a consistent manner.
Waning International Support and
Delays in Agreeing on a New LOI
The review of the most recent LOI (letter of intent) to the IMF has been delayed
for six months, and with it the disbursement of the next $400 million tranche of
financial assistance. The last LOI was
signed in September 2000, and the next
should have been signed at the end of
2000. There have been several delays in
the review, as one difficult issue after
another has emerged.
Governance and Transparency. Towards
the end of 2000 the important issue was
governance and transparency, in the
light of intervention by the president in

the debt restructuring of some of the
large obligors to IBRA, in particular,
Texmaco, Gadjah Tunggal and the Barito
Group. 1 The IMF requested an independent review of debt restructuring
arrangements for the main obligors. The
guidelines for debt restructuring were
eventually approved; the IMF now requires the recently established IBRA
oversight body to review all debt restructuring arrangements, and to announce its opinion on them.
Bond Issues. The next issue to emerge
was fiscal decentralisation, and whether
or not districts and provinces would be
permitted to issue bonds. The IMF argued strongly against this because of the
contingent liability that might be incurred by the central government, and
it was eventually decided not to allow
such bond issues. Next came a proposal
by the then Coordinating Minister for
Economics, Rizal Ramli, for the central
government to issue securities amounting to $500 million, backed by revenue
from gas exports to Singapore, to help
fund the budget deficit. There was

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144

strong disapproval of the proposal from
the multilateral agencies, the Paris Club
and the Consultative Group on Indonesia (CGI), which argued that this would
contravene the government’s loan agreements with the multilateral agencies, in
which the lender has first claim over the
government’s revenues. The minister
eventually backed down, although as a
reflection of deepening mistrust, the IMF
required the government to reject the
idea formally and in writing.
Delays in IBRA Divestments. Then
came a delay in the divestments by IBRA
of Bank Niaga and Bank Central Asia
(BCA), originally set for the first quarter of 2001. There has been much resistance from the DPR over divestment
since last year, and it was only in March
that it approved arrangements for the divestment of both banks. In the case of
BCA, 22.5% of the shares had already
been issued to the public (McLeod 2000:
24), and the DPR decided that a further
40% of the government’s shares could
be divested—20% to ‘strategic investors’
and 20% to the general public. Strategic
investors have to be approved financial
institutions, and previous owners are
excluded. The DPR was not in favour of
a strategic investor taking a majority
stake, and was concerned about divestment in weak market conditions resulting in a low sale price. Accordingly, it
recommended a delay until the political situation was more stable, or at least
until the leadership issue had been resolved (Bisnis Indonesia, 22/3/01). In the
case of Bank Niaga, the DPR has given
its approval for 51% of the shares to be
sold to a strategic investor.
There is actually no regulation requiring IBRA to get DPR approval on specific technical issues such as these. IBRA
has indicated that the percentage of the
government’s shares to be sold to strategic investors relative to the general
public would be determined in consul-

Mari Pangestu and Miranda Swaray Goeltom

tation with its financial advisers, following their discussions with potential investors (Tempo, 14/5/01). Its plans for
divestment of the two banks will be
completed by July or August of 2001
(Bisnis Indonesia, 26/4/01); three investment banks (from Australia, Malaysia
and Taiwan) have indicated an interest
(Bisnis Indonesia, 12/5/01). There can be
no guarantee that the sale price will improve over time, of course. Moreover,
constraining the percentage of ownership will discourage potential strategic
investors, for whom majority ownership
would be far more valuable than a small
stake. IBRA’s cash recovery target of
Rp 27 trillion for 2001 is ambitious, because the best and largest assets have
already been sold. It will be more difficult to generate as many sales from now
on, especially if there is continuing interference from the DPR and elsewhere.
Proposed Amendments to the Central
Bank Law. The next contentious policy
issue was the decision by the DPR to
recommend amendments to the central
bank law enacted in 1999. By mid January the government and the DPR between them had proposed some 403
amendments to the law. The IMF objected to these proposals on the grounds
that they would compromise the autonomy of Bank Indonesia (BI), and that
making frequent changes to the law
would set a bad precedent. To overcome
the impasse, a ‘neutral’ expert panel of
two Indonesians and two foreigners was
formed to review the proposed amendments. The panel’s report has been delivered (Boediono et al. 2001), but no
decisions on the proposed amendments
had been taken at the time of writing.
Among other things, the panel recommended that the existing general insistence on BI being independent be made
more specific as to what is meant by
outside ‘interference’. Panel members
were also concerned at a proposal to

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Survey of Recent Developments

widen BI’s brief—from its current sole
objective of maintaining the value of the
rupiah, to include a concern with the impact of monetary policy on national economic development—believing it might
jeopardise the maintenance of macroeconomic stability. In addition, the panel felt
that the existing definition of rupiah stability, referring to both the domestic
price level and the exchange rate, was
confusing, since monetary policy cannot
achieve both targets simultaneously.
While the panel saw a need for clearer
specification of the conditions under
which members of the board of governors may be removed from office, the
current proposals were seen as being
blatantly intended to facilitate the removal of current members without
proper regard for due process.
Nevertheless, bearing in mind that accountability goes hand in hand with independence, senior managers of the
central bank need to be held accountable
for BI’s performance in meeting its statutory objective of maintaining price stability. The panel regarded the present
system as lacking an effective mechanism for regular monitoring of BI’s
performance. It also highlighted as another weakness in the governance of BI
the great power of the governor in being entitled to appoint seven of the nine
members of the board of governors.
It therefore recommended the establishment of a seven member supervisory
board for BI, like those of various other
central banks, whose role would be: to
make recommendations to the president
on persons suitable for appointment to
the board of governors; to review their
performance on a monthly basis; to recommend the dismissal of members of
the board if necessary; to approve the
operational budget and remuneration of
members of the board; and to prepare
annual reports for the DPR. Members of
the supervisory board would be ap-

145

pointed by the president subject to approval of the DPR.
Waning International Support. After
unsuccessful talks between the IMF and
government representatives in Washington in February, a high level IMF mission was sent to Jakarta on 24 April to
review progress in implementing the
September LOI. This mission was also
unsuccessful in completing its review or
making any recommendation. The IMF
insisted that the 2001 budget be revised
to reflect worsened macroeconomic conditions. As a further reflection of the
level of mistrust, it requested that it be
permitted to review the revised budget
before it was submitted to the DPR for
approval. The DPR finally approved the
revised budget in mid June, leaving a
single issue to be resolved before the
IMF completes its review prior to preparation of a new LOI—namely, agreement
on a set of acceptable amendments to the
central bank law.
As discussed in the previous Survey
(M. Sadli, ‘Hardening Attitudes of the
IMF and the World Bank’, box 1 in Dick
2001: 11), in February the World Bank,
purportedly at the request of the government, reduced its lending from $1.3
billion to $400 million annually. Later, it
cancelled the disbursement of $300 million pledged previously as part of the
second phase of the social safety net program. The Bank cancelled the loan because in its view the program was no
longer effective, and because the government had failed to meet the prerequisites
for additional disbursements, e.g. by not
fulfilling its contracts with some NGOs.
This was followed by similar moves by
Japan and the Asian Development Bank
(ADB). At the time the World Bank also
warned of a worst case scenario for Indonesia, at which point it would probably suspend lending.
Negotiations for debt rescheduling
under the Paris Club have also been af-

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146

fected by the delay in settling on a new
LOI. They concern a repayment of $2.8
billion that was to have been made by 1
April. These negotiations should have
begun prior to April; since they did not,
Indonesia is now technically in default.
There is therefore a real danger that if
rescheduling negotiations fail, Indonesia will have to repay the $2.8 billion
over a period of nine months. This is
certainly not good news at a time when
the budget is so precariously balanced.
The Paris Club gave an extension until
the end of May to allow completion of
the bilateral negotiations with the different creditors to be completed. At the
time of writing, all bilateral negotiations
except those with Australia, Canada and
France had been completed successfully.
However, the Paris Club has made it
clear that, even if all bilateral negotiations are completed, rescheduling will
proceed only once the LOI has been approved.
The CGI meeting held in Jakarta on
23–24 April offered lukewarm support
to the government, but it was clear that
donors would link the provision of additiona l funds to pro gre ss on key
reforms, especially in relation to governance. On the other hand, there was also
strong support for development of strategies on poverty reduction and forestry
management.2 The CGI is to reconvene
in November to review its commitments
for 2002, and these also will be conditional upon a new LOI being agreed
with the IMF.
The deepening of the level of mistrust is leading to even more ‘micro
management’ by the IMF and other
donors. The IMF not only determines
the reforms to be undertaken and the
target deadlines, but in a number of
instances has had to prescribe also
how the reforms should be implemented: for example, determining
guidelines for debt restructuring and

Mari Pangestu and Miranda Swaray Goeltom

selecting individual banks for divestment. It has also recommended the establishment of supervisory bodies to
monitor policy implementation by
IBRA and the central bank. This is motivated by frustration with the lack of
progress, and concern about inadequate transparency an d unequal
treatment of defaulters. The relationship between the IMF and the former
economics coordinating minister had
also worsened. In a recent statement
the then minister accused the IMF of
‘blackmail’ with regard to proposed
amendments to the central bank law.
The dilemma of the donors and multilateral agencies is how to balance the
desire for such a hands-on approach,
given the level of mistrust and the extent of delays, against the risk that such
an approach is unlikely to be effective,
given the resentment that excessive intervention creates among Indonesian
policy makers. Presumably the IMF and
other donors would change their approach if trust could be rebuilt, but this
is likely to happen only with a new set
of key players. The challenge then will
be to encourage great government involvement in reform, and enable the IMF
to move away from the micro management approach to a less intrusive one
based on a more trusting relationship.
Foreign Investors:
Continued Decline in Confidence
Foreign investor confidence in Indonesia has been in steep decline during
the last 12 months as a result of unfortunate developments such as the
Manulife case (Dick 2001: 30), security
issues affecting mining and oil and gas
companies such as ExxonMobil, and
political interference in IBRA’s asset
sales process (box 1). The Standard
and Poors long-term foreign currency
rating for Indonesia’s sovereign debt
was revised down a notch, from B– in

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Survey of Recent Developments

147

B OX 1 UNCERTAINTIES FACING FOREIGN INVESTORS: T WO EXAMPLES
ExxonMobil
On March 1, ExxonMobil, which feeds natural gas to the Arun liquefied natural
gas (LNG) plant, was forced to close operations in three of its five gas fields
in Aceh because of worsening security problems, including hijackings, arson
and kidnap threats, allegedly by separatist rebels. The shutdown affects Indonesia’s exports of LNG to Japan and South Korea. Attacks have continued,
including one on the helicopter of the visiting Minister of Mines and Energy.
On 9 May one of the company’s condensate lines was dug up and set alight,
causing it to burn for days. This has led ExxonMobil to delay sending a security mission to investigate reopening the three gas fields. Despite pressure on
it from Pertamina, the state oil enterprise, to resume operations, the company says it does not know when it can do so. Pertamina has indicated that it
will take over production if ExxonMobil does not resume operations, although
it is not clear that it has the technical capacity to do so.
The loss of export revenue from Arun amounts to around $100 million a
month. For now the contracts for Arun are being fulfilled using excess capacity from PT Badak NGL Company in Bontang and an LNG plant owned by
Malaysia’s Petronas. This is thought to be possible only through June, however, because from July onwards demand will increase, especially in the northern winter months later in the year, and Badak will have to use its current
excess capacity to meet its own commitments. Even though there are indications that ExxonMobil may resume production in July, the damage to investor confidence in security is substantial.
Guthrie
Last November, Kumpulan Guthrie Berhad, a Malaysian company, won a
bid to buy 25 oil palm plantations belonging to the holding company that
owns Salim group plantations. These had been pledged to IBRA in lieu of
repayment of loans made by BI in support of the group’s Bank Central Asia
early in the crisis. IBRA argued that Guthrie’s bid was 70% above other bids—
although the previous owners were prevented from bidding. Major factions
in the DPR, along with local businesspeople, leaders of farm associations and
NGOs, opposed the sale, however, on grounds such as preventing Malaysia
from monopolising the industry. The vice president also argued for a review.
Although IBRA appears to be going ahead with the sale, the DPR is still requesting a review; the funds are being held in an escrow account for the time
being.

March 2001 to CCC+, in the third week
of May. This rating was already below
the BBB investment grade, and the
new rating is not far from the lowest,
CCC, or ‘very weak’, junk bond level.
Moody’s Investor Service currently

rates all Indonesian corporates below
B-3; more importantly, its rating of
bank deposits is C-AA1, which indicates its belief that transactions with
banks in Indonesia pose a very significant risk (Channel News Asia, 6/6/01).

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148

These rating downgrades reflect revision of the sovereign debt outlook
from stable to negative (with little
chance of an immediate upgrade), and
the increased risk premium due to
continuin g ethnic violence and the
president’s faltering grip on power.
While foreign direct investment (FDI)
approvals by the Board of Investment
still appear robust at $3.4 billion for the
first four months of 2001, they will probably end up lower than last year’s level
of $15.4 billion, and closer to the average of $12 billion during the 1998–99
period.3 Levels of foreign investment approvals lower than before the crisis can
be attributed to the decline in confidence
and sluggish growth, resulting in fewer
and smaller projects. The average foreign investment proposal has declined
from close to $50 million during 1994–97
to around $9 million during 1998–2001.4
In part this reflects greater uncertainty
in large resource-based projects. Domestic investment approvals have fallen
even more sharply, reaching just Rp 11.1
trillion for the first four months of the
year, compared to pre-crisis levels of
over Rp 100 trillion.
The decline in investor confidence is
more clearly evident from continued net
private capital outflows, especially portfolio flows. Net private capital outflows
remained at around $10 billion in 1999
and 2000, with net portfolio outflows
accounting for $7 billion in 1999 and $5
billion in 2000. Preliminary figures for
the first quarter of 2001 indicate that net
private capital outflow amounted to $1.8
billion, of which around $1 billion is accounted for by net portfolio flows. The
net outflow of portfolio investment consists partly of debt repayments and
partly of outflows resulting from declining co nfidence in the rupiah. The
remainder reflects foreign direct investment net outflows, which increased in
2000 compared with 1999.

Mari Pangestu and Miranda Swaray Goeltom

At first glance the net outflow numbers seem to indicate that there was a
massive divestment—amounting to $2.7
billion in 1999 and $4.5 billion in 2000.
Much was made of this in UNCTAD’s
World Investment Report 2000 (UNCTAD
2000), since the other East Asian crisis
economies were receiving large net inflows in 1999: $10 billion in Korea, $6.5
billion in Thailand and $3.5 billion in
Malaysia. A more careful interpretation
of data from the balance of payments is
needed, however.5 FDI inflows dipped
in 1998 to $1.8 billion, but rebounded to
close to pre-crisis levels of $3.7 billion
and $3.0 billion respectively in 1999 and
2000.6 Net FDI outflows were large in
1997 and 1998, at $6.7 and $11.2 billion,
respectively, and averaged around $6.9
billio n annually during 1999–2000.
These outflows consist mainly of debt
repayments rather than divestments or
companies pulling out of Indonesia.
Note also that the observed rise in debt
repayments and other outflows has increased because of better data collection
efforts since 1998.
The available data indicate that, while
there has not been net divestment, and
in fact FDI inflows remain rather stable,
the confidence factor has affected new
FDI inflows and also led to net portfolio
capital outflow. The net capital outflows
put pressure on the exchange rate, and
will continue to do so, given the outlook
of persistent uncertainty. In contrast, net
capital inflows have contributed considerably to recovery in Thailand and Korea.
Decline in Consumer Confidence
and Business Sentiment
The Danareksa Research Institute (DRI)
Consumer Confidence Index peaked at
122 in November 1999 after the election
of President Abdurrahman Wahid, and
fluctuated until April 2000 (DRI, Consumer Confidence Survey and Monthly

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Survey of Recent Developments

Report, various issues). Since April 2000
it has been declining, however, hitting a
low of 98 in March 2001 (an index below 100 means that pessimists outnumber optimists). Pessimism on the part of
consumers reflects increasing doubts
about economic recovery, with the
weakenin g of the rupia h below
Rp 10,000/$ and rising inflation. Consumers are expecting further price hikes
and interest rate increases, and some are
spending on durable goods as a hedge
against inflation, despite pessimism
about the sustainability of recovery
(DRI, Consumer Confidence Survey, April
2001). The Expectations Index has also
declined, because of growing political
uncertainty and perceived risk of physical clashes. Likewise, BI’s latest survey
of consumer expectations (Consumer
Expectations Survey, April 2001) indicates
a fall in consumption spending plans
because of declining purchasing power,
which has affected intended consumption in all groups of goods surveyed. BI’s
survey of retail sales (Retail Sales Survey,
March 2001) also indicates declining
sales growth for almost all groups of
goods.
Similarly, DRI’s index of business confidence in government has declined
since April 2000, falling to 99.4 in March
2001. Businesses were surveyed on five
factors considered indicative of the government’s capacity to provide an environment conducive to business. First,
they were concerned about the scope for
expanding their markets, as confidence
in the prospect of economic recovery has
dwindled and purchase orders from
abroad have fallen. Plans for new capital expenditure have been cut back accordingly, resulting in a decline in capital
equipment imports. Second, the sharp
depreciation of the rupiah, rising interest rates and inflationary pressures have
cut into profit margins and raised doubts
about the ability of the government to

149

stabilise the economy. Third, pressures
on the budget and political uncertainty
have led to concern about the outlook
for quality of public services, lack of clarity in procedures for fulfilling bureaucratic requirements, delays in crucial
decisions, the emergence of new costs,
and the potential for deterioration of
services provided by public utilities.
Fourth, recent bomb blasts, the ExxonMobil experience in Aceh (box 1) and
various other cases have heightened
concern about basic law and order and
security. Finally, businesses are increasingly pessimistic about their ability to
have contracts properly enforced, so as
to ensure a fair business environment
(DRI, Business Sentiment Survey, May
2001).
RECENT ECONOMIC
DEVELOPMENTS
First Quarter Growth
and Outlook for 2001
The year-on-year growth rate of 5.0%
achieved in the last quarter of 1999 was
maintained, broadly speaking, throughout 2000. Real GDP in the first quarter
of 2001 was 2.6% higher than in the previous quarter, and 4.0% higher than in
the same quarter of 2000 (table 1). Given
the less than conducive external environment and domestic political uncertainty, the official growth projections for
2001 have been lowered from 4.5–5.5%
to 3.5%. Notwithstanding a recent statement by the former economics coordinating minister that he still expected
growth to be 4% in 2001 (JP, 30/5/01: 13),
the outlook is for continued slowdown
for the rest of the year, because of likely
slowing in both external and domestic
demand.
There was a slowing of growth in all
components of expenditure except exports and inventories. The decline in the
growth rate for private consumption
seems remarkably small, given that the

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150

Mari Pangestu and Miranda Swaray Goeltom
TABLE 1 GDP Growth by Expenditure Category
(1993 prices; %)

Dec-99

Mar-00

Jun-00

Sep-00

Dec-00

Mar-01

Year-on-year
GDP
Private consumption
Government consumption
Investment
Change in stocks
Exports
Imports

5.7
4.6
–2.8
3.7
368.0
12.4
–12.8

4.2
2.5
2.9
13.1
161.2
15.1
5.0

5.2
3.3
0.3
20.7
384.3
21.2
3.9

4.4
4.0
11.7
22.3
402.8
14.1
20.1

5.2
4.7
12.1
15.8
–60.1
14.2
44.2

4.0
4.8
6.0
10.2
–41.6
11.7
34.1

Quarter-on-quarter
GDP
Private consumption
Government consumption
Investment
Change in stocks
Exports
Imports

–1.5
0.6
7.9
8.3
621.0
–1.0
–2.9

3.8
1.0
5.3
5.0
–8.4
7.2
2.9

–0.1
1.2
4.1
4.0
41.2
5.0
7.5

2.2
1.2
–5.5
3.4
–46.1
2.3
11.8

–0.7
1.2
8.2
2.6
–42.7
–0.9
16.6

2.6
1.1
–0.4
–0.1
34.0
4.9
–4.3

Source: BPS (Statistics Indonesia), Economic Indicators and press release.

last quarter of 2000 was marked by the
celebration of Idul Fitri, Christmas and
the New Year. Government consumption spending declined from the previous quarter, but was 6% higher than a
year ago. The rise in inventories gives
some cause for concern if interpreted to
mean that demand has turned out to be
less than producers expected.
Investment was 10.2% higher in the
first quarter than a year earlier, but the
quarter-on-quarter figure s show a
steady decline since a peak towards the
end of 1999; growth was actually slightly
negative in the first quarter of 2001.
Given the decline in confidence and the
resulting ‘wait-and-see’ attitude adopted by businesses, investment is expected
to remain sluggish for the rest of this
year. Stagnant investment is in line with
the above discussion and with the results of BI’s business activity survey,
which shows a slight decrease in the

number of businesses planning to undertake new investment in the next 6–12
months, from the already low level of
45% down to 42%.
On the external side, exports have
performed unexpectedly well, while import growth turned suddenly negative
in the March quarter of 2001, after
being positive in the preceding four
quarters; as with the sudden rise in production for inventories, this reflection of
declining demand does not augur well
for a continuation of growth. The strong
contribution from exports is not expected to be maintained in the rest of
2 00 1. The do wnturn in the world
economy should have less impact on
Indonesia than on neighbouring countries, which are more highly dependent
on electronics exports; nevertheless, the
likely downturn in the region will also
indirectly affect the demand for Indonesian exports. Furthermore, oil prices are

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Survey of Recent Developments

151

TABLE 2 GDP Growth by Sector
(1993 prices; %)

Dec-99

Year-on-year
GDP
Agriculture, livestock, forestry
& fisheries
Mining & quarrying
Manufacturing
Electricity, gas & water supply
Construction
Trade, hotels & restaurants
Transport & communications
Finance, rental & business
services
Services
Quarter-on-quarter
GDP
Agriculture, livestock, forestry
& fisheries
Mining & quarrying
Manufacturing
Electricity, gas & water supply
Construction
Trade, hotels & restaurants
Transport & communications
Finance, rental & business
services
Services

Mar-00

Jun-00

Sep-00

Dec-00

Mar-01

5.7

4.2

5.2

4.4

5.2

4.0

–2.6
–5.9
10.2
9.0
13.0
11.7
11.8

–5.5
1.5
8.1
11.8
12.1
5.7
11.1

1.0
2.1
7.3
8.0
9.2
6.4
10.0

3.4
1.3
5.1
8.0
5.1
5.0
8.7

9.9
4.4
4.5
7.7
1.3
5.7
7.8

2.3
3.0
5.9
7.0
1.2
5.0
6.9

6.3
1.4

5.6
2.7

5.4
1.9

5.0
2.0

2.9
2.3

2.9
1.2

–1.5

3.8

–0.1

2.2

–0.7

2.6

–17.7
–0.9
3.2
2.7
4.4
0.8
4.0

24.0
1.5
–0.8
–2.2
0.5
0.7
1.8

–4.3
–1.3
0.9
4.0
0.0
1.5
0.6

5.9
2.0
1.8
3.3
0.1
1.9
2.1

–12.5
2.2
2.5
2.5
0.7
1.5
3.2

15.4
0.1
0.6
–2.8
0.4
0.0
0.9

2.9
–0.4

0.2
1.1

1.1
1.1

0.7
0.2

0.8
–0.1

0.3
0.1

Source: As for table 1.

not expected to rise as they did during
late 1999 and 2000.
On the production side, the main
source of growth in the first quarter (Q1)
was agriculture, which grew by 15.4%
compared with the fourth quarter of
2000 owing to the seasonal impact of the
harvest. Most other sectors experienced
modest growth, although there was a
significant contraction in the utilities sector (table 2). With agriculture excluded,
GDP grew by only 0.3% in Q1.
Figure 1 presents further evidence of
a general decline in growth perform-

ance. Although motor cycle production
has been growing very rapidly, much of
the dramatic surge in production of cars
that occurred in 2000 was lost in the six
months through April. The same can be
said of cement production, while electricity sales have been largely stagnant
over the same period. Thus the strong
trend of quarterly increases in manufacturing output witnessed throughout
2000 was reversed in the first quarter of
2001.
All in all, a growth rate of below 3.5%
in 2001 should not be ruled out.

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152

Mari Pangestu and Miranda Swaray Goeltom
FIGURE 1 Industrial Output
(October 1999 = 100)

250

200

150

100

50

0
Oct-99

Jan-00

Apr-00
Cement

Jul-00
Cars

Oct-00
Motor cycles

Jan-01

Apr-01

Electricity

Source: www.worldbank.or.id: follow links to Country Data and Publications, Selected Real
Sector Indicators.

Trends in the Main
Macroeconomic Indicators
Exchange Rate. D urin g the second
quarter of 2001 the rupiah was constantly under pressure, weakening
from Rp 10,425/$ at the end of March
to Rp 11,427/$ at the end of May (figure 2). This represents a depreciation
of 9.1% sin ce the end of 2000. Th e
strong demand for foreign exchange
ref lec ts th e m a r ke t p erc eptio n o f
heig htened po litica l risk, which is
likely to remain at least until August,
or until there is a turning point in the
political situation. This increase in the
market perception of risk is also reflected in the increase in the swap premium from near 7% p.a. to around
13% p.a. in the four months to early
June.7
The increased demand for dollars
mainly affected the spot market, as the
availability of hedging instruments

was very limited. Heightened expectations of depreciation led to a sharp
increase in the demand for foreign
exc hange fro m Februa ry, both for
servicing external debt and to provide
for further repaym ents in c om in g
months. But while the weakening of
the rupiah may have been mainly the
result of increasing political uncertainty, loose monetary policy throughout 2000 and negative perceptions of
current economic policies have also
contributed (Dick 2001: 17; McLeod
2001).
Inflation. Inflationary pressures have
been evident in the first five months of
2001, with inflation reaching 10.8%,
year-on-year, in May (figure 3). Underlying, or core, inflation continued to be
high, and exceeded CPI (consumer price
index) inflation for most of the first four
months of 2001.8 The dominant factor
behind increasing inflation is the pass-

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Survey of Recent Developments

Rp/$
12,000

153

FIGURE 2 Exchange Rate and Swap Premium
(Rp/$; % p.a.)

% p.a.
18

15

8,000

Gus Dur‘s
answer to 1st
Memorandum,
28 March

ExxonMobil
halts
operations, Mass rally
against
11 March
Gus Dur,
12 March

4,000

0
3-Jan

12

IMF team
visits
Jakarta,
20 April

9

DPR‘s 2nd
Memorandum
censuring
Gus Dur,
30 April

6

3

0
2-Feb

4-Mar

3-Apr

Exchange rate (left axis)

3-May

Swap premium (right axis)

Sources: Exchange rate: Pacific Exchange Rate Service, University of British Columbia: http:/
/pacific.commerce.ubc.ca/xr; swap premium: unpublished BI data.
FIGURE 3 Money Growth and Inflation
(% p.a.; year-on-year)
30

20

10

0

-10
Jan-00

Apr-00

Jul-00
M0

Oct-00
M1

Jan-01

Apr-01

Inflation

Sources: Money growth: BI: www.bi.go.id/bank_indonesia_english/main/statistics. Inflation: BPS, Economic Indicators; www.bps.go.id/releases/eng-inflasi-01jun01.pdf.

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154

Mari Pangestu and Miranda Swaray Goeltom
FIGURE 4 Base Money Targets and Outcomes
(Rp trillion)

125

100

75

50

25

0
Dec-99

Mar-00

Jun-00
Actual

Sep-00
Original target

Dec-00

Mar-01

Revised target

Sources: Base money: BI: www.bi.go.id/bank_indonesia_english/main/statistics. Original
target: Government of Indonesia, Letter of Intent to the IMF, 7/9/00; revised target: BI
(unpublished).

through effect of the depreciation of
the rupiah—that is, increases in the
prices of tradable goods and services.
In turn, the increase in liquidity that
resulted from loose monetary policy
in 2000 encouraged the purchase of
dollars and the consequent weakening
of the rupiah.
Inflation has also resulted from increases in some administered prices and
from growing inflationary expectations
triggered by the prior announcement of
intended tax increases and elimination
of fuel subsidies. On the other hand,
with the economy operating well below
full capacity, there is little evidence of
demand pressures contributing to inflation. Inflation pressure from the supply
side is also presumed not to be important, since there are currently no indications of disruption to production or
distribution.

Money Supply. The last LOI was
signed as long ago as September 2000,
a n d th ere h av e n o t been a n y a n nouncements of base money targets
for 2001. If the original targets from
this most recent LOI are extrapolated
to April 2001, this would suggest that
the supply of base money should then
have been Rp 92 trillion, far below the
actual level of Rp 106 trillion . What
has been happening behind the scenes
is that BI and the IMF have been seeking to formulate a monetary policy
able to contain inflationary pressures
without jeopardising the recovery of
the economy and the banking sector.
In thinking about base money in particular, both organisations agree on
the need to strike a careful balance between containing inflationary pressures and accommodating an increase
in demand for currency to support

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Survey of Recent Developments

155

FIGURE 5 Bank Indonesia’s and Market Interest Ratesa
(% p.a.)
20

15

10

5

0
Jun-00

Aug-00
JIBOR

Oct-00
SBI

Dec-00
Inter

Feb-01
State

Apr-01
Priv

a

JIBOR: Jakarta Interbank Offered Rate; SBI: 1-month SBI rate; Inter: overnight intervention
rate; State: state bank average 1-month time deposit rate; Priv: private bank average 1-month
time deposit rate.
Sources: BI, Indonesian Financial Statistics, various issues; www.bi.go.id: press releases.

economic growth. This has resulted in
the deter m inatio n o f b as e m o ney
growth targets for 2001 that have not
been announced formally because of
the delay in the signing of a new LOI.
The same was true of the base money
targets for the last quarter of 2000,
which were revised upward so as to
reach around Rp 101 trillion by the
end of the year—an increase of some
Rp 8 trillion, or 9.7%. Base money remained close to the adjusted target
during the first quarter of 2001, but in
April and May once again began to
surp ass the targets (fig ure 4). The
stock of base money for M ay 2001
reached Rp 107.7 trillion, well above
the target of Rp 104.5 trillion. Although the year-on-year base money

growth rate has declined from the
high of 23% at the end of 2000, it was
still as high as 20% in May, far higher
than BI’s 11–12% target (BI 2001).
Interest Rates. BI has increased the
overnight intervention rate (the rate at
which it intervenes in the interbank
money market) five times since January
through May 2001, from 11.6% to 13.4%
p.a. Increases in the BI certificate (SBI)
interest rate and the rupiah intervention
rate were immediately followed by rises
in the Jakarta Interbank Offered Rate
(JIBOR), indicating that the market responds well to BI’s tightening signals
(figure 5); deposit rates also responded
to these signals.
Balance of Payments. Table 3 shows the
balance of payments through 2000,

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156

along with BI’s projections for 2001. Export growth was close to 30% last year,
with higher oil prices generating an almost 50% increase in oil exports. Growth
in non-oil exports was also robust at
23%, with favourable external markets,
a low valued rupiah, and plenty of unused capacity. Import growth too was
high at 32%, but imports still remain
below pre-crisis levels. In 2000, net official capital inflows declined by $2 billion and net private capital outflows
remained at $10 billion. The upshot was
that net foreign exchange reserves increased somewhat.
Oil exports are expected to decline by
10% in 2001, however, because of lower
oil prices, and the growth of non-oil exports is also expected to fall to around
8%. Exports have indeed contracted in
most months since October 2000. In
April, month-on-month export growth
was again negative. Annualised growth
for the calendar year to April was only
13.5% p.a. for non-oil exports and 27%
p.a. for oil exports, compared with 23%
and 45% p.a. respectively during 2000.
While imports have also contracted, the
export decline has been much larger, so
that the merchandise trade surplus for
January–April 2001 was only $7.6 billion, compared with $10.2 billion in the
same period last year.
Constraints on further export growth
are likely to be felt in the remainder of
2001 because of reduced unused capacity, delays in new investment, cancellations or cutbacks in orders if external
demand declines or the political and security situation worsens, and lack of
bank credit for exporters. The outlook
for capital inflows also remains bleak.
Net official capital inflow is expected to
fall by $2 billion as donors reduce their
lending to Indonesia. Net private capital outflows are projected to decline by
half, to $5 billion, with a major slow-

Mari Pangestu and Miranda Swaray Goeltom

down in the net outflow of other private
capital, while net FDI flows are expected
to remain stable. Private capital outflows
could of course prove to be much larger,
given the uncertain and deteriorating
situation, and with the trade surplus
projected to be far lower than last year,
net international reserves can be expected to decline.
MANAGING
MACROECONOMIC STABILITY
The above analysis of current developments and the short-term outlook points
to continuing pressures on the rupiah,
at least until August. There is a strong
demand for foreign exchange to finance
debt repayments and imports, and to
hedge exchange rate risks of firms and
individuals. Moreover, holding rupiah
is currently unattractive, since the covered interest rate differential is negative:
that is, the swap premium is so high as
to more than offset the differential between rupiah and foreign currency interest rates. On the supply side this is
evident also in a reluctance on the part
of exporters to convert their revenues to
rupiah.
The current situation involves difficult m acro eco no mic m anagement
choices as to the optimal mix of monetary and fiscal policy to achieve macroeconomic stability subject to various
constraints, including the need to minimise any negative impact of policy on
the still fragile banking and corporate
sectors, and on the revised budget. The
importance of these issues is suggested
by the IMF indicating that, in contrast
with its previous insistence on progress
on a wide range of reforms, it has limited goals for this difficult period for
Indonesia—namely to ensure fiscal sustainability and to contain the risk of inflation by bringing base money growth
under control (Singh 2001).

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Survey of Recent Developments

157

TABLE 3 Balance of Payments
($ billion)

1999

2000

Growth
(%)

2001a

Growth
(%)

51.2
10.3
41.0
–30.3
20.9
–14.9

65.4
15.1
50.3
–40.1
25.3
–17.0

27.6
46.9
22.8
32.3
20.9
14.7

67.9
13.6
54.4
–42.1
25.9
–18.5

3.9
–9.9
8.0
4.8
2.4
8.7

6.0

8.2

36.1

7.4

–10.5

5 Official capital (net)
Inflows
Amortisation
Exceptional financing

5.4
6.6
–4.1
2.9

3.2
3.9
–4.3
3.6

–39.9
–41.1
5.0
26.7

1.2
3.6
–5.3
2.9

–61.7
–5.7
24.6
–19.6

6 Private