Why There is No Recession in The World’s Leading Muslim Economy

Indonesia – why there is no recession in the world’s leading Muslim economy

By Terry Lacey

 

Following the election of US President-elect Barack Obama there is likely to

be a slow recovery in confidence in the United States financial and banking

system. A recession is unavoidable in the US and EU, but with only a

downturn in developing countries. This crisis of confidence in the Western

banking and financial system comes during the dying days of the most

unpopular American presidency in living memory. Financial mismanagement and

weak regulatory frameworks have devastated the US economy, making the rich

richer and the poor poorer. Two million Americans may lose their homes.

Millions in the US and Europe will lose their jobs.

 

Yet the devastating legacy of the Bush presidency leaves open great

opportunities for Indonesia, the Muslim world and the developing countries

of the South.

 

Indonesia can play a key role in leading the Muslim world toward economic

recovery, and help minimize the impact of global recession.

 

First, by managing its national economy to maintain growth, demand, imports

and exports. The nominal Gross Domestic Product for 2009 is projected at

$547 billion. Indonesia is already in the top 20 economies of the world.

 

Indonesia is currently overtaking Belgium and Sweden. It will soon overtake

Turkey, the Netherlands and Austria as it enormous size, resources and

population come into play. It is a strong candidate to join the top 10

economies in the world within two decades.

 

Second, by mobilizing investment for oil, gas, energy projects, biofuels,

infrastructure (roads, railways, ports), manufacturing and retailing

sectors. It needs over $40 billion for electricity alone, to finance an

additional 40,000 MWe of power by 2025. Indonesia will become a nuclear

power, and plans four power stations. Total foreign investment needed

overall during the next 15 years exceeds $100 billion.

 

Investment is still coming from the US and EU (including Eastern Europe) but

increasingly from the BRICs (Brazil, Russia, India and China), and also from

Asia-Pacific Economic Cooperation countries like Canada, Japan, Korea,

Taiwan, and from Association of Southeast Asian Nations member states

(including Brunei, Malaysia, Philippines, Singapore, Thailand). Investment

is also coming in greater volume from the Gulf Arab states, Israel and South

Africa.

 

Third, Indonesia can help lead Muslim economies by using its economic size

and prestige as a member of the United Nations Security Council to join

Brazil, Russia, India, China and Southern countries to bring about changes

in policies and in the balance of power in world organizations dealing with

trade, finance and development, especially the World Bank, the International

Monetary Fund (IMF) and World Trade Organization (WTO).

 

Indonesia has major reservations about the IMF following its own experience

in 1998. German Finance Minister Peer Steinbrueck said that the world should

not slip into creating a shadow world economic government run by an inner

IMF council. Indonesia is also tired of being kept on the fringes in the

WTO.

 

Asia and Southern countries want a new deal. Muslim countries collectively

represent an increasingly important source of capital, while Western

liquidity has partly dried up. Muslim economies represent important

investment sources as well as investment destinations. The collective size

of Muslim economies represents significant demand for Western goods and

services, relatively unaffected by the recession in the West.

 

Indonesia can still deploy export credits, sovereign funds, Islamic finance

and other non-traditional financial sources, such as environmental funds and

carbon credits. Despite the global downturn Indonesia is still pulling in

some bank finance.

 

A $140 million syndicated loan for Excelcomindo for telecommunications

expansion was announced recently. Low-cost airline Lion Air is buying 12

Boeing 737 planes even though the required local cash contribution for the

last four has risen to 30 percent. Lion Air will use its own cash to carry

on expanding. St. Miguel Corp. of the Philippines is competing with a US-led

consortium to clinch a $1.3 billion coal supply deal, to buy PT Bumi

Resources from Bakri Brothers. There is money here and money coming in.

 

Standard and Poors is holding Indonesian credit ratings stable and its

credit rating may even be raised. Singapore could slip into recession but

Indonesia will not, and the reason is mostly sheer size plus improved

financial and economic management.

 

Indonesia is in a key position as the largest Muslim country in the world

with a population of 230 million and a land area of 1.9 million square

kilometers.

 

The Indonesian Gross Domestic Product was $843.7 billion in terms of

purchasing power and $432.9 billion in terms of official exchange rates in

2007. It has fixed foreign investment of $57.6 billion and holds $9 billion

of investment in other countries. It has more than 3,500 millionaires

holding over $100 million each, of whom 70 percent live in Jakarta.

 

Its current economic growth is 6.5 percent and may fall below 6 percent in

2009 due to reduced exports. Government will stimulate growth using the

national budget which already reached $100 billion in 2008. Government is

confident it can hold growth at 6 percent. The World Bank has set aside a $2

billion standby loan for 2009 only to be triggered if growth falls below 5.8

percent.

 

In 2007 Indonesian exports were $118 billion and imports $86 billion, a

trade surplus of $32 billion, and foreign exchange reserves as of this month

were $50 billion.

 

Indonesia has already lost some jobs in sectors like textiles. Some exports

to the US and Europe fell in the fourth quarter. The stock market,

government bonds and the national currency also fell in value during the

global financial crash in the first week of October.

 

The government launched a securities buy-back program spearheaded by

state-owned enterprises and defended the rupiah currency by intervening in

the currency market via the Bank of Indonesia. The government also took

steps to increase liquidity and focused on getting inflation under control

and on maintaining growth.

 

The government has increased guarantees on personal deposits to 2 billion

rupiahs ($190,000), which covers 100 percent of deposits for over 99.7

percent of 81 million bank accounts.

 

Indonesian banks are strong, with adequate reserves, low non-performing

loans and almost no exposure to subprime losses. Only a small group of

investors lost money on Lehman-related instruments purchased via

international banks.

 

The Indonesian inflation rate is declining from a high of 12 percent to

maybe 9 percent by January with reductions planned to between 9 percent and

7 percent for the rest of 2009. The bank rate is being stabilized at 9.5

percent after six months of consecutive rises. It will be held for a while

and then reduced to 7.5 percent in 2009.

 

Indonesian bonds are recovering from their recent nose-dive and the stock

market is stabilizing. Local economists say the stock market was over-valued

and more normal values and returns will be restored as part of the local

share trading cycle.

 

The government is now focusing on trying to mobilize its massive $115

billion dollar national budget for 2009, up from $100 billion in 2008, to

push projects and overall spending forward and help substitute local demand

for declines in exports, with every hope of keeping economic growth for 2009

at between 5.5 and 6.0 percent.

 

Despite the collapse of the Bank of Indonesia subsidiary Indover Bank in the

Netherlands, there is no sovereign default. Indonesian Finance Minister Sri

Mulyani Indrawati and the new central bank governor, Boediono, have taken a

stand against previous mismanagement.

 

In contrast to the kid-glove treatment of failed bankers and financial

managers in the West, who took imprudent and possibly illegal risks, the

Indonesian government is directing the work of its Corruption Eradication

Commission and Corruption Court against corrupt central bankers and

parliamentarians who took bribes.

 

The Indonesian government also says it will pursue legally those who misused

its name and dragged it into the Indover collapse, by implying there were

sovereign guarantees backing Indover borrowing when there were none. It also

intends to pursue allegations of short trading and fraudulent practices in

the stock exchange.

 

Indonesia lost 10 years as a result of the 1998 banking crash when it put

its fate in the hands of the IMF, which initially failed to understand local

strengths and exaggerated local weaknesses. An historical photo shows

President Suharto sitting at his desk, signing his own political

death-warrant while the IMF representative stood over him, as he signed the

IMF agreement.

 

A lot has changed between the Asian banking crash of 1998 and the Wall

Street crash of 2008. The economic balance of power in the world has changed

and the balance of global power has shifted to the South and East. British

Prime Minister Gordon Brown recognized this when he urged the Gulf states

and the G20 to help stabilize the world economy.

 

In the 1998 bank crash Indonesia had no freedom and no choice. This time in

2008 Indonesia has freedom and is stronger, and can chose to tread its own

path. Hopefully its greater strength and determination will inspire Muslim

and Southern countries not to panic in the face of recession in the West,

but to work together to avoid the spread of recession to the South and to

build and strengthen a new world economic order.

 

Terry Lacey is a development economist who writes from Jakarta, Indonesia,

on modernization in the Muslim world, investment and trade relations with

the European Union and Islamic banking. This article is published with

permission from the author.

Source:
http://www.dailysta r.com.lb/ article.asp? edition_id= 1&categ_id= 2&article_ id=9

Advertisements
Leave a comment

1 Comment

  1. is this just flattering or fact?

    Reply

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: