History of the economic crisis in Indonesia

the threat of inflation and economic recession are haunting the economy of Indonesia and the world. war in eastern europe as well as high inflation and interest rates in the United States. and the case of COVID-19 that has not fully improved This led many to predict that the Indonesian economy would be “gloomy” next year.

Indonesia itself is not a country without crisis. Its status as a country more or less open to international trade makes it more or less threatened by communicable diseases (results of contamination) crises from other countries

Indonesia is at least three affected. world economic crisisnamely the Great Depression (1929), when the Dutch East Indies were Asian financial crisis (1998) and Great Recession (2008). Check out the history below.

background

In the mid-1990s, Indonesia, South Korea, and Thailand adhered to a fixed exchange rate system.fixed exchange rate). This means that Indonesians and the rest of the world can trade rupiah and dollars freely without affecting the exchange rate.

meanwhile The difference between the value of Indonesia’s exports and imports. (current balance or current account) All three countries remained in deficits. This makes all three economies more vulnerable to changes in exchange rates.

The difference between the value of exports and imports is one of the reasons for the increase. Fed interest rate In the mid 90’s this caused several things:

1. Investing in the dollar looks attractive to investors. As a result, many investors who used to hold rupiah, won and baht exchanged all three currencies for dollars.
2. Converting currency to dollars raises the exchange rate with the system. fixed exchange rate, State-owned foreign exchange reserves must be able to cover this increase in exchange rates. so that the increase in exchange rates does not affect exports and imports The problem is that these three countries do not have enough foreign exchange reserves.
3. The Fed’s interest rate increase also forced the domestic benchmark interest rate to increase in order to once again attract foreign investors to the rupiah. On the one hand, domestic credit was expensive. causing many customers to be unable to pay their debts
4. The increase in the exchange rate of the dollar against each currency makes the goods exported by these countries feel expensive. And importing goods feels expensive too.
5. An increase in the dollar exchange rate also results in an increase in foreign debt owed by governments and private sectors.

Many experts agree that In addition to the problems arising from the above international trade Crises are also caused by social, economic and political problems in the country, namely:

1. High short-term corporate debt (both financial and non-financial) according to Lepi T. TarmidiBetween 1992 and 1997, 95% of Indonesia’s external debt was private debt. Most of them have a maturity of only 18 months.
2. The weaknesses of the banking system in Indonesia both in terms of regulation and supervision.
3. Governments’ ability to deal with crises has weakened the confidence of public and international donors.
4. Domestic politics are unstable ahead of the elections. These include President Soeharto’s deteriorating health at the time and student protests.

critical stage

The crisis began in mid-1997 in Thailand, at that time due to a shortage of foreign exchange reserves. (The second point above) The Thai monetary authority has changed the exchange rate system from fixed exchange rate become flexible exchange rate. which means Every sale and purchase of dollars and baht affects the exchange rate of these currencies. As a result, the Thai currency exchange rate dropped.

just a few weeks The crisis spread to Indonesia, Malaysia and the Philippines. therefore implementing the same policy As a result, the rupiah dropped from 2,500 rupiah per dollar in June 1997 to 14,900 rupiah per dollar in June 1998 as mentioned above. This increased the price of imported goods. Including imported goods for basic needs .

in the banking and finance sector High lending rates and high dollar exchange rates have caused banks, especially small banks, to suffer liquidity problems. To solve this problem, one of the “recipes” implemented by the Indonesian government and Indonesian Bank With the closure of 16 banks which “only” controlled a 4% market share of the Indonesian banking industry at that time.

This policy caused people to panic and flock to withdraw money at the bank unexpectedly (Bank work) because he was afraid that the bank where he kept his money would also be liquidated. As a result, the crisis situation at that time became more severe.

crisis impact

It is undeniable that the financial crisis of 1998, or the Year of Reform, had a huge impact on the economy and socio-politics of this country. from a social point of view The crisis led to President Soharto’s abdication after 32 years in office. and human rights issues that remain a mystery and many other social problems

from an economic point of view This crisis resulted in:

1. inflation In 1998 it was 77%, compared to 11.6% the year before.
2. The rupiah to dollar exchange rate dropped from 2,500 to 15,000 in just one year.
3. Minus economic growth to -13.13%. Despite being negative because of COVID-19, the figure of 13.13% has not been corrected.
4. Bank Indonesia has done so far. flexible exchange rate Of course, with some degree of intervention.
5. Implementation of the Comprehensive Guarantee or 100% Bank Deposit Guarantee policy, which is currently being undertaken by the Deposit Guarantee Corporation.
6. Improving the banking system both in terms of regulation and supervision in Indonesia.

crisis solution

to deal with this crisis The International Monetary Fund (IMF) has provided a short-term $118 billion loan to Thailand, Indonesia and South Korea. The condition is that the governments of these countries must reduce spending, increase taxes and reduce subsidies. Simply put, the IMF asks all three countries to save money.

Although the good intention is to make investors believe again. But the IMF’s terms have been widely publicly opposed. The reason is in a crisis. Increasing government spending in the form of subsidies and lowering interest rates are often necessary to turn the economy around again.

in Indonesia itself The government has established the Indonesian Bank Restructuring Agency (IBRA) whose task is to improve the health of banks. overcome problem assets and other bank restructuring projects One of the outcomes of this restructuring was the establishment of Mandiri Bank, which was the merger of five other banks.

The 1998 crisis was one of the valuable lessons this country had to face. From now on, Indonesia learned the importance of proper debt and loan control. especially in foreign currency The importance of maintaining stability of the banking and financial system through proper regulation and supervision. And equally important is the importance of purchasing the product locally.