ECONOMIC TRENDS AND OUTLOOK:
INDONESIA 1998

Download the complete report:
Adobe Acrobat version
zipped Microsoft Word version

Food Security and Distribution

Following 1997’s El Nino induced drought, there was growing concern in 1998 that Indonesia’s financial and economic crisis had the potential to become a humanitarian crisis if adequate food supplies were not made available at affordable prices. The significant price increases of essential commodities (see Table 8) occurred during a period when wages were generally flat and unemployment was increasing, making them especially burdensome for lower income groups. With the approval of the IMF, the government began subsidizing imports of rice and other essential commodities in early 1998. Bulog, whose role was supposed to be cut sharply as part of the liberalization of the real economy, instead expanded its role as food wholesaler for rice, soybeans, wheat, sugar and other commodities. The government provided exchange rate and consumer subsidies for basic commodities, incurring significant costs as the exchange rate continued to deteriorate. Apart from their burden on the budget, subsidies introduced other complications. In July 1998, the government imposed a temporary export ban on several subsidized goods in the wake of reports that large quantities of these goods were being shipped to neighboring countries. The export ban was scheduled to be replaced by export taxes in August 1998. Efforts were also underway to target the subsidies at lower income groups rather than across-the-board.

Table 8. Price Increases Of The Nine Essential Commodities, July 1997-April 1998

Source: Central Bureau Of Statistics

After riots in May 1998 that targeted ethnic-Chinese businesses in Jakarta and other cities, concerns arose that the Indonesian retail distribution system, operated in large part by ethnic-Chinese traders, might not function properly. As of July, however, most observers agreed that the distribution system was still operating, although it was hobbled by lack of credit, decreased demand and security concerns. The affordability of basic goods, rather than their availability, was the problem. In late July, the government offered rebuilding assistance to businesses that were destroyed in may, and offered assurances that businesses, warehouses, and trucks would be protected.

Negative Outlook for Major Sectors

In the sweeping economic crisis of 1997-98, contraction, rather than growth, was the order of the day. Preliminary figures for the first half of 1998 indicated that real GDP had declined 12 percent compared to the first half of 1997. As Table 9 indicates, the Indonesian Central Bureau of Statistics projected that real GDP would decline by 13 percent for the year, in marked contrast to real GDP growth of recent years (1993: 6.5 %, 1994: 7.5 %, 1995: 8.2 %, 1996: 8.0 %, 1997: 4.6 %). Private analysts and securities firms expected a real GDP decline as large as 25 percent. The domestic and regional economic uncertainties combined with political change made it difficult to predict when growth would resume.

The government expected a contraction in all major sectors, with the exception of negligible growth in agricultural output. The comparatively positive outlook for agriculture was significant because it was the largest employment sector, accounting for 41 percent of workers in 1997. Sectors with a significant export component (agriculture, mining) or receiving large subsidies (public utilities) were projected to do relatively better than others. At the opposite extreme was the construction sector, which was projected to contract 35 percent for the year.

Manufacturers faced a declining domestic market, mounting debts, difficulty obtaining trade credit or working capital, and, in some cases, labor unrest. Auto assembly and manufacturing, previously a rapidly growing area, suffered an 82 percent decline in sales during the first half of 1998, compared with the same period in 1997. Where possible, a shift toward exports was underway. An East Java lighting firm reported that it was exporting 75 percent of its output as of mid-1998, compared to 40 percent a year earlier.

In the trade sector, which includes hotels and restaurants, it was easy to find evidence of distress. Most four- and five-star hotels in Jakarta had percentage occupancy rates in the teens or low 20’s as of mid-1998, down from the 70-percent range a year earlier.

In property and finance, the slowdown in overall activity led to declines in property prices and occupancy rates. Rental prices in Jakarta’s prime shopping malls, traditionally priced in U.S. dollars, fell from US$ 80/m2/month in June 1997 to US$ 10 in June 1998. Jakarta office occupancy rates, already down to 87 percent in late 1997, reportedly dropped to 70 percent by June 1998. The banking sector was expected to continue to contract.

Table 9. Real GDP (1993 Prices) Rupiah Trillions

*Preliminary Projection, Based On Jan-Jun 1998 Data
Source: Central Bureau Of Statistics

Appendix A: Country Data

Population in 1997: 201 Million (Projection based on 1990 Census)
Population Growth Rate: 1.68 %/Year (avg. for 1990-97)
Religions: Islam, Hinduism, Buddhism, Christianity, Animism
Government System: Authoritarian/Transitional
Languages: Indonesian, English, and Regional Languages
Work Week: Monday - Friday

Appendix B: Domestic Economy

Appendix C: Trade (USD Billions)

Note 1: Pledged at Annual Consultative Group on Indonesia (CGI) Meeting
Note 2: 1998 Figure is Jan-Mar
Note 3: 1998 Figure is Jan-May

Sources: Bank Indonesia, Ministry of Finance, U.S. Commerce Dept.

Table of Contents

Download the complete report:
Adobe Acrobat version | zipped Microsoft Word version

Trends | Reports | Energy | Petroleum | Investment