Current affairs

Indonesia's history of recession


The direct cause of every recession in Indonesia is different every time.

Since I came to Indonesia, I have seen the economic recession several times, but because of the spread of the new coronavirus this time, the economy will definitely go into recession, and in a few years' time it may be called corona shock or corona recession.

Indonesia goes into recession periodically, but the factors are different each time, such as politics in Krismon (1998), religion in the bombings (2002-2004), finance in the Lehman shock (2008), and disease in this time's Corona.

Since the factors of recessions are complex, we have only roughly categorized them. However, if the factors are different, the scope of impact and how to deal with them will differ, so we may be able to predict the impact of corona pandemic that should come from past recessions.

The Currency Crisis 1998-(Political Factors)

Before I first came to Indonesia in October 1997, there was a lot of talk in Japan about the financial crisis at Yamaichi Securities and Hokkaido Takushoku Bank, and it was a time when there were rumors of a chain of bank failures and mergers and acquisitions between banks due to the problem of collecting nonperforming loans, which not only made it impossible for banks to recover funds due to the business failure of the companies they had lent to during the bubble economy, but also caused the price of real estate collateral to fall.

The offensive by hedge funds led by George Soros to short the currency (putting in a sell contract with no position) led to a series of declines in the currencies of Southeast Asia, where the volume of foreign currency trading is low by global standards, and the Indonesian rupiah continued to fall against the dollar, resulting in the Indonesian currency crisis (Krismon for short) as the interest rate and principal repayments of Indonesian domestic companies that had borrowed in dollars from abroad became stagnant.

As the cost of crude oil imports rose, the price of domestic fuel BBM (Bahan Bakar Minyak) soared and the price of the nine necessities of life Sembilan Bahan Pokok (Sembilan Bahan Pokok) rose in a chain reaction, the livelihoods of the squeezed public began to openly criticize the 32-year-long KKN (Korupsi Corruption, Kolusi Collusion, Nepotisme Nepotisme) of the Suharto regime, with demonstrations, mainly students, intensifying in front of the National Council MPR (Majelis Permusyawaratan Rakyat) in Sunayan and in front of the campuses of Atmajaya University in Sumangi and Trisakti University in Glogor.

The common perception that the Suharto dictatorship was the main cause of the economic turmoil, and as calls for reformasi (reform) heated up, jealousy over the gap between rich and poor turned into anger and incited Chinese Indonesians to turn to it, leading to the Jakarta riots (Kerusuhan Mei 1998), in which more than 1,000 people were killed by looting, beating, and burning.

On that day, it took me four hours to get from Sumit Masbir to my house in Kuningan, avoiding the rioters and making a detour to South Jakarta, and on the way, I felt chills as people happily pulled up piles of looted goods from the Soeharto family supermarket GORO on their shopping carts.

While the foreign exchange reserves ran out of money to prevent the rupiah from plummeting, interest rates continued to rise in order to collect liquid cash in the country, small and medium-sized banks went bankrupt one after another, and mergers and acquisitions between banks led to the birth of Mandiri Bank (Bank Exim, Bank Dagang Negara, Bank Bumi Daya, Bank Pembangunan Indonesia) and Permata Bank (Bank Bali, Bank Universal, Bank Prima Express, Bank Artamedia, and Bank Patriot).

The economic exhaustion caused by the currency crisis in Indonesia was the trigger for the collapse of the political system. The highest authority of the state (wewenang) was transferred from the MPR to the DPR, and a three-pronged legislature was established, with the president as the chief executive, the Supreme Court MA (Mahkamah Agung) as the judiciary, and the National Assembly DPR as the legislature.

Bomb attack, 2002-2004 (religious factors)

At that time, I moved from Jakarta to Bali in June 2001, rented a house and an office in Denpasar, and had just started my own business as a furniture and sundries export company.

The first time I was familiar with terrorism by Islamic extremists in Indonesia was the bombing in 2000 in front of the Philippine ambassador's office on Imam Bonjol Street. I was surprised to hear the sound of explosions that shook the windows of my company's office on Thamrin Street at that time.

Above all, there was a strong support base of PDI-P led by Mr. Megawati in Bali at that time, and there was a security myth that only Bali was safe and there was no terrorist attack even in Indonesia where the political situation was unstable.

The myth of safety was broken in 2002, and I fell asleep without worrying so much because the window panes shook greatly with the earth-shaking with the earth-shaking at 11 o'clock on October 12, 2002.

  • October 2002 : Kuta's Restaurant RAJA, in front of Sari club on Legian Street, Bali in
  • August 2003 : JW Marriott Hotel in Kuningan, Jakarta; second bomb attack in July 2009.
  • September 2004 : Australian Embassy in Kuningan, Jakarta

I felt the fear of terrorism was getting closer and closer to me, and I could feel the exclusive feeling for non-Balinese among Balinese who believed the safety myth more than ever.

The sales of my boutique on Danau Tamblingan Street in Sanur, which was called "calm atmosphere" as a compliment, had decreased drastically and I was able to survive by relying on the shopping of western aunties who came like Garuda to save my business.

At the time, we never imagined that the time would come when terrorism by Islamic extremists around the world would bring international politics into turmoil, but even though there was a temporary social upheaval, the Indonesian economy itself, reborn as a democratic nation, grew steadily.

Lehman Shock 2008 - (financial factors)

Until around 2008, there was a surge in high-interest subprime loans in the U.S. targeting individuals with poor credit and low incomes who were repeatedly delinquent on credit cards, but as the housing boom subsided and repayment arrears occurred, the prices of securitized products associated with the loans plummeted, and in September of the same year, the collapse of Lehman Brothers Securities triggered a global financial crisis.

I took advantage of the online trading boom before the Lehman shock and put a lot of money into Indonesian stocks and mutual funds (Raksa Dana), but my main trading brokerage, Sarijaya Securities, went bankrupt and the amount of money in my account went flying and I joined a class-action lawsuit, and I melted down my money as much as one MPV car by day trading.

Even in Indonesia, where the impact of the Lehman shock was small, the aftermath was felt for more than a year, and now it is on a global scale. At the moment, the stock price is only 50% of what it was at the time, so we don't hear as many cries as we did back then. I also had my account blown up in a securities company insolvency, got sued by the organisers of a class action lawsuit, and lost money as much as one Kijang Inova from individual stocks. Let's get the economy going.

However, with democratization, Indonesia's domestic economic activity became more active and a domestic demand-driven economy supported by individual consumers was being formed.

Subsequently, in 2016, the obligation to denominate domestic transactions in rupiahs and the obligation to hedge foreign currency borrowings with derivative assets was regulated, effectively limiting foreign currency borrowings by private companies from abroad.

Indonesia's shift to a technology-intensive economy after democratization has not been successful, and industrialization in Indonesia has stagnated, with the manufacturing sector's GDP contribution rate, which accounted for 20% under the Suharto dictatorship, dropping to 16%.

Towards a corona shock 2020-(epidemic factors)

I think the economic depression that could occur with the spread of the new coronavirus is closer to a natural disaster like the Great East Japan Earthquake because it was not a problem with the fundamentals (the basic conditions of the economy) but was caused by a sudden event called an epidemic that suddenly come up.

The Indonesian government is already considering measures to protect personal consumption, which supports the Indonesian economy, such as the exemption of personal income tax PPH21 for six months from April to September, a 100% exemption from income tax for workers with annual incomes up to 200 juta in manufacturing, and a one-year grace of interest and instalments on the purchase of motorbikes and boats for micro-enterprises, small businesses, ojek drivers, taxi drivers, and fishermen.

In the meantime, it will become clear whether the government will guarantee interest rates for the banks and what the financial resources will be for this and other issues, but since the country's politics tend to be populist, it is fortunate that it is in a position to use the successes and failures of other countries' economic policies as a late comer, at a time when the majority of the population is becoming increasingly concerned about the new coronavirus.