ECONOMY
Indonesia has a market-based economy that was increasingly dominated by the private sector. The government still
plays a significant role in the economy, however, through state-owned enterprises and administered prices on some
basic goods, including fuel and electricity. In the aftermath of the financial and economic crisis that began in
mid-1997, the government took custody of a significant portion of private sector assets.
In the mid-1980s, the government began eliminating regulatory obstacles to economic activity. The steps were aimed
primarily at the external and financial sectors and were designed to stimulate employment and growth in non-oil
exports and revenues. During the thirty years of Soeharto's "New Order" government, Indonesia's economy
grew from a per capital GDP of $70 to a per capita GDP of over $1,000 by 1996. Annual real GDP growth averaged
close to 7 percent from 1987-97. Indonesia was recognized as a newly industrializing economy and emerging major
market. By employing a restrictive monetary policy and a conservative fiscal stance, inflation was held in the
5 to 10 percent range, the rupiah was stable and predictable, and the government avoided domestic financing of
budget deficits. Much of the development budget was financed by concessional foreign aid.
By the onset of the financial and economic crisis in mid-1997, unfinished deregulation steps included elimination
of non-tariff barriers, privatization of state-owned enterprises, and removal of domestic subsidies, barriers to
domestic trade, and export restrictions. In addition, development of institutions that would guarantee predictable
regulatory behavior and discourage corruption, collusion, and nepotism had been sorely neglected.
In response to the regional financial problems that emerged in July 1997, Indonesia floated the rupiah, raised
key domestic interest rates, and tightened fiscal policy. In October 1997, Indonesia and the IMF reached agreement
on an economic reform program aimed at macroeconomic stabilization and elimination of some of the most egregious
economic policy deviations such as the National Car Program and the clove monopoly, both controlled by Soeharto's
youngest son. The economic reform program was strengthened in January 1998, with additional structural reform measures
the centerpiece of the new measures. Continued uncertainty about President Soeharto's commitment to the program
undercut its effectiveness. Although Government implementation of the program's monetary policy element improved
after March 1998, confidence in Indonesia's willingness and ability to pursue necessary reforms began to recover
only after Soeharto resigned.
As of mid-1999, the economic program had shown encouraging signs of exchange rate and interest rate stabilization.
There were some indicators of renewed growth, especially as weather patterns returned to normal. Indonesia eliminated
the National Car Program, removed important import monopolies, liberalized financial market access, and announced
an expanded privatization program. As the worst of the crisis past, the government in tandem with major donors
began to reform the social safety net programs that had been hastily implemented with an eye to improving targeting
of the poor and reducing leakages. The government had taken major steps on banking sector restructuring, closing
some banks, taking over others, and assisting with the recapitalization of state-owned banks and the strongest
private sector banks. The "Jakarta Initiative" was launched to promote voluntary corporate debt restructuring,
but the process was in its early stages as of mid-1999. The Bankruptcy Law was amended, but early cases provoked
controversy. Some steps were taken toward investigating accusations of corruption by former President Soeharto
and family members and associates.
The effects of the financial and economic crisis were severe. Real GDP contracted by an estimated 13.7 percent
in 1998. Inflation reached 77 percent for the year. The rupiah, which had been in the Rp 2,400/USD1 range in 1997
reached Rp 17,000/USD1 at the height of the 1998 violence, returning to the Rp 6,500-8,000/USD1 range in late 1998.
Export earnings languished for a variety of reasons, including flagging demand in major Asian markets, low commodity
prices, lack of trade finance, and uncertainty about Indonesia's reliability as a supplier. Although the drought
forced Indonesia to import record amounts of rice, overall imports dropped precipitously in response to the unfavorable
exchange rate, reduced domestic demand, and absence of new investment. Although reliable unemployment data are
not available, formal sector employment contracted significantly. The outlook for 1999 indicated that the bottom
may have been reached. Prices rose by less than 2 percent in the first six months of the year, with inflation widely
predicted to be less than 10 percent for the year. The rupiah's stabilization brought relief to the business community
and the government budget.
Indonesia's public sector external debt rose from $54.2 billion in March 1998 to $67.2 billion by mid-1999. This
figure was expected to increase further as funding from the international financial institutions and other donors
helped finance the balance of payments and enabled the government to maintain an expansionary fiscal stance. Private
sector external debt stood at approximately $81.5 billion.
Oil and Minerals Sector
In the 1998 calendar year the oil and gas sector, including refining, contributed approximately 9% to GDP and is
expected to provide 14.8% to domestic revenues in FY1999/00. Although the sector's share of export earnings and
government revenue has since dropped to about 10%, it remains an important part of the economy in which many U.S.
companies have heavily invested. Crude and condensate output will average 1.0 million barrels per day (bpd) in
FY 1999/00. With domestic demand for petroleum fuels expanding, Indonesia will become a net importer of oil by
the next decade unless new reserves are found. In 1998, Indonesian imports of crude oil and petroleum products
totaled $2.7 billion dollars while Indonesian exports of crude oil and oil products totaled $7.9 billion dollars.
The Asian financial crisis has taken a tremendous toll on the Indonesian economy's terms of trade. Not only have
Indonesia's oil prices tumbled by 30%, but its markets in East Asia are themselves experiencing a sharp slowdown,
affecting demand.
The state owns all oil and mineral rights. Foreign firms participate through production sharing and work contracts.
Contractors are required to finance all exploration, production, and development costs in their contract areas;
they are entitled to recover operating, exploration, and development costs out of the oil and gas produced.
Although production traditionally centered on bauxite, silver, and tin production, Indonesia is expanding its copper,
nickel, gold, and coal output for export markets. Total coal production reached 41 million tons in 1996, including
exports of 27 million tons. In mid-1993, the Department of Mines and Energy reopened the coal sector to foreign
investment. Indonesian coal production in the range of 70-80 million tons by the end of the decade is possible.
Investment
Indonesia made numerous changes to its regulatory framework to encourage economic growth. This growth was financed
largely from private investment, both foreign and domestic. U.S. investors dominated the oil and gas sector and
undertook some of Indonesia's largest mining projects. In addition, the presence of U.S. banks, manufacturers,
and service providers expanded, especially after the industrial and financial sector reforms of the 1980's. Other
major foreign investors included Japan, the United Kingdom, Singapore, the Netherlands, Hong Kong, Taiwan, and
South Korea.
The economic crisis made continued private financing imperative and highlighted areas where additional reform was
needed. Frequently cited areas for improving the investment climate were establishment of a well functioning legal
and judicial system, adherence to competitive processes, and adoption of internationally acceptable accounting
and disclosure standards. Despite improvements in the laws in recent years, Indonesia's intellectual property rights
regime required additional amendment; enforcement was the key IPR concern. Under Soeharto, Indonesia had moved
toward private provision of public infrastructure, including electric power, tollroads, and telecommunications.
The financial crisis made resolution of private infrastructure project problems a major issue.
Although Indonesia continued to possess the attributes of a large labor force, potential for domestic market growth,
abundant natural resources, and modern infrastructure, private investment in new projects largely ceased during
the crisis. Portfolio investment continued to offer opportunities. The possibility opened up to invest in the banking
sector as it restructured. The government's stated intention of accelerating the privatization of state-owned enterprises
to increase efficiency and raise budgetary revenues attracted investor attention. The transfer of assets and non-performing
loans to the Indonesian Bank Restructuring Agency was expected to generate opportunities to invest in existing
companies.
Economy
GDP: (est.) $90 billion; 1997 $211 billion.
Annual growth rate: -13.7% (1998 preliminary); 1997 5%.
Per capita income: (est.): $448; 1997 $1,070.
Natural resources (8.4% of GDP): Oil and gas, bauxite, silver, tin, copper, gold, coal.
Agriculture (17.2% of GDP): Products--timber, rubber, rice, palm oil, coffee.
Land--17% cultivated.
Manufacturing (25.3% of GDP): Garments, footwear, electronic goods, furniture, paper products.
Trade: Exports--(1998) $48.8 billion including oil, natural gas, plywood, manufactured goods; 1998 (est.): $12.5
billion. Major markets--Japan, Singapore, Taiwan. Korea, EU, U.S. Imports: (1998) $27.3 billion including food,
chemicals, capital goods, consumer goods; 1998 (est.): $7.2 billion. Major suppliers--Japan, U.S., Thailand.
Source: Economic
Trends Report, US Embassy Jakarta |
