Indonesia heading for economic disaster – analyst

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Despite making progress over the past years with annual GDP growth of 6 to 8 per cent, the Indonesian economy has lately been experiencing diminishing returns. The country has been experiencing a slowdown due to external factors such as a slowing down of the global economy that is also affecting its major trading partners; Malaysian analyst Sam Chee Kong wrote in a recent study.

indonesia-economic-tableInternal factors such as flip-flopping public policies, rise in corruption and policy failures in achieving its social objective such as the reduction in income disparity between the rich and poor, raising the wage level to compensate spiraling inflation and price stabilisation.

In addition, recent large government budget deficits has led it to implement protectionism policy such as requiring foreign investors to sell down their stakes in mining operations within a 10 year time frame and also the capping on foreign ownership in financial institutions also contributed to the recent economic rout.

A good example is the collapsed of the recent takeover bid by Singapore’s DBS for Indonesia’s Danamon Bank. New rules are implemented recently such as delaying and complicating the process for foreign banks acquiring Indonesian bank up to 18 months. Foreign banks are only allowed to take up to 40 per cent stake in any Indonesian banks in their initial bid. Thus, this is sending out mixed signals to foreign investors who are willing to invest into the Indonesian financial sector.

As of late, the Indonesian economy has been exhibiting various negative developments in many of its economic indicators. Some of them include a balance of payment crisis such as a depreciating currency, negative current account and high external debt.

The exchange rate between the US dollar and the rupiah has declined to a new 5-year low. The devaluation of Indonesia’s currency has not been engineered deliberately but due to deteriorating economic conditions such as the current account deficit, outflow of foreign funds from the equity and debt markets. The rupiah has depreciated about 20 per cent since the beginning of 2013.

Indonesia has been plagued by high inflation since the beginning of 2013. The main culprit is the depreciation of the rupiah, contributing to the increased cost in subsidised fuel.

Capital flight from Asia has been heightened during the second half of 2013. Countries like India, Indonesia and Malaysia are particularly badly hit. To prevent further deterioration of the rupiah, the Indonesian government hiked its interest rate to 7.5 per cent from 5.75 per cent earlier in 2013.

Total external debt in Indonesia increased to $ 254 billion in 2012 from $ 224 billion in 2011, made worse by the rupiah depreciating further.

Aggregating all the negative economic indicators,¬†Sam Chee Kong reckons there is a “good chance” in 2014 that the Indonesian economy might be “heading for a perfect storm”. What is feared is that the crisis might spread to other countries in the region that are vulnerable especially Malaysia, Thailand, Philippines and even India whose economies also display imbalances in both the internal and external sectors, he said.

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Reading Time: 2 minutes

Despite making progress over the past years with annual GDP growth of 6 to 8 per cent, the Indonesian economy has lately been experiencing diminishing returns. The country has been experiencing a slowdown due to external factors such as a slowing down of the global economy that is also affecting its major trading partners; Malaysian analyst Sam Chee Kong wrote in a recent study.

Reading Time: 2 minutes

Despite making progress over the past years with annual GDP growth of 6 to 8 per cent, the Indonesian economy has lately been experiencing diminishing returns. The country has been experiencing a slowdown due to external factors such as a slowing down of the global economy that is also affecting its major trading partners; Malaysian analyst Sam Chee Kong wrote in a recent study.

indonesia-economic-tableInternal factors such as flip-flopping public policies, rise in corruption and policy failures in achieving its social objective such as the reduction in income disparity between the rich and poor, raising the wage level to compensate spiraling inflation and price stabilisation.

In addition, recent large government budget deficits has led it to implement protectionism policy such as requiring foreign investors to sell down their stakes in mining operations within a 10 year time frame and also the capping on foreign ownership in financial institutions also contributed to the recent economic rout.

A good example is the collapsed of the recent takeover bid by Singapore’s DBS for Indonesia’s Danamon Bank. New rules are implemented recently such as delaying and complicating the process for foreign banks acquiring Indonesian bank up to 18 months. Foreign banks are only allowed to take up to 40 per cent stake in any Indonesian banks in their initial bid. Thus, this is sending out mixed signals to foreign investors who are willing to invest into the Indonesian financial sector.

As of late, the Indonesian economy has been exhibiting various negative developments in many of its economic indicators. Some of them include a balance of payment crisis such as a depreciating currency, negative current account and high external debt.

The exchange rate between the US dollar and the rupiah has declined to a new 5-year low. The devaluation of Indonesia’s currency has not been engineered deliberately but due to deteriorating economic conditions such as the current account deficit, outflow of foreign funds from the equity and debt markets. The rupiah has depreciated about 20 per cent since the beginning of 2013.

Indonesia has been plagued by high inflation since the beginning of 2013. The main culprit is the depreciation of the rupiah, contributing to the increased cost in subsidised fuel.

Capital flight from Asia has been heightened during the second half of 2013. Countries like India, Indonesia and Malaysia are particularly badly hit. To prevent further deterioration of the rupiah, the Indonesian government hiked its interest rate to 7.5 per cent from 5.75 per cent earlier in 2013.

Total external debt in Indonesia increased to $ 254 billion in 2012 from $ 224 billion in 2011, made worse by the rupiah depreciating further.

Aggregating all the negative economic indicators,¬†Sam Chee Kong reckons there is a “good chance” in 2014 that the Indonesian economy might be “heading for a perfect storm”. What is feared is that the crisis might spread to other countries in the region that are vulnerable especially Malaysia, Thailand, Philippines and even India whose economies also display imbalances in both the internal and external sectors, he said.

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