Steep declines in the rupiah (it briefly passed 11,000 on Friday) stock index and overall confidence-echoing earlier drops-finally sent enough shivers within the government for the President and his economic team to say “enough is enough”.  Bank Indonesia probably knew its interventions could not last for long against strong headwinds.  After a hastily organized meeting of his key economic ministers on August 23, 4 stimulus “packages” were announced by President Yudhoyono. (see accompanying article)  Although short on details, they indicate a welcome course correction.  Far from comprehensive, they at least set the country back on the path towards a more open regime.

  Key items announced are:

  • Relaxation of export ban of raw minerals and simplified procedures for mining investment. The quotas will likely be lifted but the 20% export tax will remain.
  • Adjustment of the negative investment list
  • Restricting costly import of diesel fuel and promotion of locally sourced biodiesel (slated to cut $3 billion from current account deficit)
  • Use of tax holidays and allowances to promote investment in agriculture, crude palm oil, rattan and minerals, including bauxite, nickel and copper.
  • Tax deductions and other incentives for export-oriented, labor-intensive industries (companies that export 30% of production).
  • Higher import tax on fully built luxury vehicles
  • Removal of import quotas on beef, some horticultural products; reduction of soybean import tax
  • Easing of share buy back provisions-up to 20% without shareholder approval
  • Central bank measures to inject liquidity and broaden tenor of interbank foreign exchange products

A fair number of Indonesians were surprised by the rupiah’s decline and are bewildered by a spreading panic mentality, wondering what went wrong, given the relatively rosy picture of the last 5 years.  It may be that not enough has gone right, or in other words, the government sat back for too long resting on the laurels of  6% growth and not paying close enough attention to gathering structural problems.  Yes, China’s slowing economy and the de-leveraging of emerging market investors in anticipation of tapering of the US Fed easing policies has affected Indonesia.  But, Indonesia must also know that its costly energy subsidies, import quotas and unrealistically nationalist policy of legislating the processing of commodities within the country would eventually prove troublesome.  Finance Minister Chatib Basri announced:  “We certainly cannot control the external situation, but we can fix our domestic problems, thereby sending a signal to investors that the government is aware and serious in addressing the issues. Delivering this signal is what’s important.”

So far Bank Indonesia has kept its prime rate at 6.5% (having only recently raising it 50 basis points).  Having lost its appetite for intervening, (foreign exchange reserves still declined 20% over the past few months) BI may have no choice but to raise its rate again.

One can only think that Indonesia has wasted several years tinkering with unrealistic policies that had a laudable goal, more value added manufacturing, but lacked enough prerequisites (skilled labor, infrastructure).   Rather than be forced to unwind them in the face of strong economic headwinds, the country should have been expanding and improving its antiquated infrastructure, removed rather than created barriers to oil/gas and mining investment, and gone further with bureaucratic and judicial reforms and the removal of patronage behaviors. But, Indonesia will learn from its mistakes, and hopefully, be better off for it. 

There is no need to panic, Indonesia’s economic fundamentals remains strong.  The balance sheet of its banks and composition of its debt are stronger than in 2008 and it has competent people at the helm of its key financial institutions.   The government also has access to low interest standby loans through the Chiang Mai initiative as well as other facilities that provide protections in the face of high bond payments.

The stimulus measures announced may seem too little too late, but at least they are a start.  Perhaps there will be more moves to be made down the road, especially in the energy and extractive sector where drilling rates and exploration have been down. 

The stimulus measures will take time and how they are implemented will be key to Indonesia’s future growth and financial stability.  Deputy Finance Minister Mahendra Siregar said it well: “Are we late? Yes, we are a bit late, but not too late,”  “The point is let’s not debate about lateness, but focus on the delivery [of policy]. If the delivery is slow, then we will be too late.”   One hopes that this crisis enables the Finance Ministry to reestablish its traditional role of managing reforms that focus less on rewarding connected players and more on creating conditions that are optimal for all.