SBY's first term saved the economy from rough waters (Part 1 of 2)

It was a rough ride for the Indonesian economy during President Susilo Bambang Yudhoyono's first term. During the five years of his presidency, the economy had to face two major crises; first, the spike in energy and food prices, and then the global financial crisis.
Swift policy responses by the government, painful and unpopular, minimized the impact of those crises, and avoided a steep economic downturn. Slowly, the Indonesian economy is starting to pick up and is now heading into recovery.


In 2005, a couple of months after SBY was inaugurated as the sixth president, Indonesia was faced with higher oil prices that threatened the sustainability of the government budget. The government responded by raising domestic fuel prices by an average 114 percent, and increasing the base interest rate by 400 basis points.
These measures dampened growth in the first half of 2006. But growth recovered as market confidence returned and brought in higher investment. Similar determination was shown by the government when it faced the global financial crisis in late 2008. Bank Indonesia responded by pouring liquidity into the market and by cutting benchmark rates several times.
To counter an economic slowdown the government introduced fiscal stimulus programs aimed at boosting consumer spending. The combination of bold policies and good luck has shielded the economy from the disastrous impact of the crisis.
During Yudhoyono's first term, the economy's growth gained momentum, reaching 6.2 percent in 2007, the highest since the crisis in the 1990s. The main drivers of this growth were initially investment and net exports, while consumer spending took a more significant role in the later part of the period. Stability in monetary conditions could be maintained despite turmoil in the global economy.
Inflation, after being kept at single digits for several years, rose to 18 percent in 2006, but has now been contained at 5-6 percent. High economic growth has provided a larger fiscal space for the government. Government external debt has declined substantially from 80 percent GDP in 2000 to 30 percent GDP this year. Export values doubled during Yudhoyono's first term and, coupled with large capital inflows, the balance of payments experienced continuing surpluses, resulting in a record level of foreign exchange reserves.
The banking system was in a good shape in terms of capital, loan-to-deposit ratio, nonperforming loans and net interest margins. The performance of the Jakarta Stock Index as well as the rupiah was among the best in the world.
The Indonesian economy faced a global financial crisis in the fourth quarter of 2008 with strong macro economic fundamentals. This explains why the impact of the financial crisis was limited.
Foreign trade and the balance of payments grew strongly during the President's first term. Pushed by steep increases in commodity prices, Indonesian exports reached a record level of US$139 billion in 2008, nearly double that of 2004. Robust growth in exports provided surpluses in current accounts. Foreign exchange reserves reached its peak of $57 billion in 2007, from $35 billion in 2005. Reflecting the impact of the global financial crisis, reserves fell to $52 billion in 2008.
Strong macro economic fundamentals have attracted capital inflow to the country, in the form of direct investment and portfolio investment. During the last four years, the total flow of portfolio investment was more than $15 billion, compared with $11 billion for direct investment.
The presence of large foreign funds in the stock exchange and government bonds, pose a significant risk, because these funds are so sensitive to slight economic turmoil. In an open economy like Indonesia, sudden capital flight could wreak havoc on exchange rates and confidence in the economy.

The writer is an economist.
Winarno Zain
Opinion The Jakarta Post 20 oct 2009