Indonesia’s Prospect in 2009 Hurt by Falling Exports and Commodity Prices

ESCAP’s annual survey analyses region’s challenges, proposes solutions

Bangkok (UN Information Services) – Thanks to record high commodity prices during 2008, Indonesia managed to keep economic growth at a similar level to the year before, despite the deepening global economic crisis towards the end of the year. However, the prospect for 2009 is less promising, with GDP growth rate expected to drop to 3.5 per cent as a result of falling commodity prices and exports, according to the Untied Nations’ Economic and Social Survey of Asia and the Pacific 2009.

Indonesia’s gross domestic product (GDP) grew by 6.1 per cent in 2008, only slightly down from 6.3 per cent in 2007. However, in the fourth quarter of the year, commodity prices dropped substantially and in December, as a result of the global recession, manufacturing exports contracted 20.6 per cent compared to the same time in 2007. Exports declined further, by 36.1 per cent, in January 2009.

This year’s edition of the flagship publication of the United Nations’ regional arm – the Economic and Social Commission for Asia and the Pacific (ESCAP) – is entitled "Addressing Triple Threats to Development”. It analyzes the three global crises which have converged to threaten development in the Asia-Pacific region: the economic crisis, fuel and food price volatility, and climate change. The Survey provides a regional perspective as well as country-specific analyses, outlining ways in which economies in the region can move forward in unison towards a more inclusive and sustainable development path.

While less than in other countries in South East Asia, the increase in crude oil and food commodity prices had an impact on Indonesia’s inflation rate, increasing from an average of 6.4 per cent in 2007 to up to 13.4 per cent in the third quarter of 2008. But with sharply lower commodity prices towards the end of the year, inflation eased to 8.6 per cent in February 2009.

To support the economy in the face of the deepening crisis, Indonesia’s central bank cut its policy rate on four occasions between December 2008 and mid-March 2009, from 9.5 per cent to 7.75 per cent. Although the rupiah depreciated 15.5 per cent in the fourth quarter of 2008, and another 7.4 per cent in February, the central bank has managed to keep exchange rate volatility under control.

In January 2009, the government announced a fiscal stimulus package of Rp71.3 trillion (US $6.1 billion, or 1.4 per cent of the GDP) which, among other measures, will provide tax breaks for individuals and companies and boost infrastructure investment.

The Survey emphasizes that, in regards to fiscal stimulus packages such as Indonesia’s, fiscal resources are limited and today’s increases in budget deficits will eventually need to be cut. It is thus critical to be selective in the use of public funds. In particular, spending on policies that promote the long-term sustainability of energy and food markets as well as spending that addresses the deficiencies of current social protection systems are a valuable investment for the future while helping to support domestic demand in the short-term.

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The Economic and Social Survey of Asia and the Pacific 2009 is available online from 0500 GMT/1200 Bangkok on 26 March at: http://www.unescap.org/survey2009/index.asp

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