Introduction

The financial crisis of 200708, also known as the Global Financial Crisis, is considered by many
economists to have been the worst financial crisis since the Great Depression of the 1930s. It threatened
the collapse of large financial institutions, which was prevented by the bailout of banks by national
governments, but stock markets still dropped worldwide. In many areas, the housing market also suffered,
resulting in evictions, foreclosures and a prolonged unemployment. The crisis played a significant role in
the failure of key businesses, declines in consumer wealth estimated in trillions of U.S. dollars, and a
downturn in economic activity leading to the 20082012 global recession and contributing to the
European sovereign-debt crisis, liquidity crisis and debt crisis.

The main causes of the great recession involve:

1. Credit crunch and fall in bank lending.
2. Fall in confidence resulting from the financial instability.
3. Fall in the export global recession.
4. Collapse in housing markets leading to negative wealth effects.
5. Fiscal austerity compounding the initial fall in GDP.
6. In Europe, the single currency created additional problems because of over-valued exchange rates, and
high bond yields.
Effects of USA:
The first indications of serious crisis occur January 2008. On 15 January, news of a pointed fall in the
profits of the Citigroup banking led to a pointed fall on the New York Stock Exchange. A number of
American and European banks stated huge losses in their 2007 end of the year results. Most of the big
investment bank fallen bankruptcy like as, Lehman Brothers, meerillLynch. At this point the whole
economy was on a downward track.
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1. The 2007-2008 crisis started off in August 2007 as a subprime mortgage crisis primarily
concentrated in the United States but quickly change into a global financial crisis. where financial
institutions waver on the edge of bankruptcy in many countries in addition to the United States.
Residential private investment (mainly housing) fell from its 2006 pre-crisis peak of $800 billion,
to $400 billion by mid-2009 and has remained depressed at that level also effect the
nonresidential investment.

2. The collapse financial market is now become matched by the declined of the real income. Stock
market prices, as measured by the S&P 500 index, fell 57% from their October 2007 peak of
1,565 to a trough of 676 in March 2009.After a financial crisis sharp economic loss.

3. The unemployment rate rose from 5% in 2008 pre-crisis to 10% by late 2009, the number of
unemployed rose from approximately 7 million in 2008 pre-crisis to 15 million by 2009.

4. The United States has seen an increasing concentration of wealth to the loss of the middle class
and the poor with the younger generations being particularly affected. The middle class people
are dropped to 45% to 62%.While total income their decrease 10% to 9%.. The younger
generation, which would be early their wealth buildup, has been the hardest hit.

5. The net worth of U.S. households and non-profit organizations fell from a peak of approximately
$67 trillion in 2007 to a trough of $52 trillion in 2009, a decline of $15 trillion or 22%.

6. Inflation adjusted median household of the united states peaked in 1999 at $53,252, dropped to
$51,174 in 2004, went up to 52,823 in 2007, and has since trended downward to $49,445 in 2010.
The last time median household income was at this level was in 1996 at $49,112, signifying that
the decline of the early 2000s and the 20082012 global recession wiped out all middle class
income gains for the last 15 years.

Effects of Europe:
The ongoing global economic crisis that started in united states in late 2008 and quickly spread to Europe.
The global recession was first seen in Europe, as Ireland was the first country then a two-year-long
recession.
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1. Trade financing dried up and export volumes fell by almost 15 per cent over the subsequent two

quarters, an unprecedented downturn in this region.

2. Consumer confidence fell to record lows in the Euro Zone and households held back on

discretionary spending
3. Purchases of capital goods were postponed and car sales dropped by almost 25 per cent on a

yearly basis.
4. Increase unemployment very quickly previous year proportion.
5. Whole euro zone industrial production fell 19% in May 2008.
6. Germany is the big economy of the euro zone but their export also reduces .Their industrial

output was down 2.4 % in May, 2008. Increase their unemployment and their retail sell fell down
1.4% June, 2008.German economy decline 0.5% in the second quarter.
Effects in Asia:
The global financial crisis had hit in Asia with unexpected speed. The crisis throws up important features
linkages between Asia and world, and within Asia. This effectively put to rest earlier nations Asia had
become decoupled from improvement. From peak to through ,Asia exports tumbled by over 30%, average
sovereign CDs spreads increased more than threefold for five Asian economics and emerging Asia stock
prices fell by more than 60%. Exchange rate also came under pressure in a number of countries in the
region. Asia economics, excluding China and Japan, contracted by an average 6.2% for speak to during in
the current downturn. This is not far from the 8.3% GDP contraction during the Asia financial crisis,
although Asia was not at the center of the present crisis.
The global economy hit Indonesian economy through the trade channel as export-oriented industries
slight sharply, with unfavorable effects on employment.
Explaining the collapse in Asian export:
The recent collapse in export in Asia has three notable features .First, the fall in exports across Asia, from
Japan to Indonesia beginning from July2008 to the trough around February 2009, was highly synchronize.
Second, the export contraction was swift and sharp exports tumbled by about 35% from peak to trough
(July 2008 to February 2009). This was far sharper than the 18% drop during the 2001 it downturn.
Finally, intra-Asian contracted by even more than shipments to the advanced economics. Intra-Asian
export falls in 48% peak to trough, against a 29% decline in exports to the US and EU-15 over the same
period.
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Others some effects:

1. After fall of Lehman Brothers, East Asian economies all confronted by acceleration in financial
turbulence that had started in mid-2007.
2. Fortunately, Indonesia, like the other Southeast Asian countries (Malaysia, Thailand, and the
Philippines) withstood the financial turbulence well, because they were better prepared for this shock
after their experience with the Asian Financial Crisis (AFC) of 1997/98
3. Almost 6, 70,000 small median enterprise have been close in china effects their export because their
bid market in USA and Europe.
4. Japans economy declined by 0.6 percent in the second quarter of 2008.Export to the USA fell down
21.8 percent, the biggest decline on record and export to Europe 3.5 percent. Two japans bank appeared
on the list of major Lehman creditors. The Figure: GDP growth rates in Asia, is given below:

Nature of Financial System: Indonesia

Indonesian financial sectors and overall economy:
Basically an economy consists of two components, one is financial sectors and other is real sectors.
Financial sectors deal with intermediation of financial services; it does not mean it is unreal. Both are
very important for an economy. These two sectors are attached with each other. The role of Indonesian
financial sectors in Asia and Southeast Asia is very crucial. It is the 27th biggest exporting countries in the
world. In 2012 Indonesia replaced India as the second-fastest-growing G-20 economy, behind China.

Indonesian financial sectors

Banks
(98% of total banking sectors its
economy)

Regulators: Bank
Indonesia (Central
Bank)

Multi finance
Capital market
Insurance market
Pension funds

Regulators: BapepamLk (now Otoritas Jasa

Keuangan or OJK)

Bank is the most important factors to keep the economy stable. In 2007-2008 in world financial crisis, the
Indonesia was affected much but they succeed to overcome its problem because of banking sectors
stability. Bank Indonesia (Central Bank) role was very effective and efficient to overcome the big
financial crisis. As a member of the G-20 and a driving force within the Association of Southeast Asian
Nations, Indonesia plays a growing role at the multilateral level. Its increasingly modern and diversified
economy has recovered from 2009 global recession
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Indonesian Real sectors:

Indonesia has the largest economy in Southeast Asia and is one of the emerging market economies of the
world. The country is also a member of G-20 major economies and classified as a newly industrialized
country. Indonesia still depends on domestic market, and government budget spending and its ownership
of state-owned enterprises (the central government owns 141 enterprises) and the administration of prices
of a range of basic goods including fuel, rice, and electricity plays a significant role in Indonesia market
economy.
In February, 2015 population of Indonesia passed 248.00 million and the population growth is 1.66%.
This made it the worlds fourth most populous country. Indonesias overall land area is 1919317 (km2)
and there are over 13000 islands are inhabited. Indonesia is divided into 28 provinces, which vary greatly
in such characteristics as population, income level, rate of economic development and industry structure.
Main industries: (47%): Petroleum and natural gas , textiles, apparel, footwear, mining, cement,
chemical fertilizers, machinery, electronics, hardware, software, telecommunications, plywood, rubber,
tourism.

Main Agriculture :( 14.4%): Rice, cassava, rubber, tea, and palm oil
Main Services: (38.6%): Tourism, hotels, others

Macro-economic trend:
This is a chart of trend of gross domestic product of Indonesia at market prices by the IMF with figures in
millions of rupiah.

Year GDP

USD exchange Inflation index Nominal Per Capita GDP PPP Per Capita GDP
(rupiah)

(2007=100)

(as % of USA)

(as % of USA)

1980 60,143.191

627

10

5.25

5.93

1985 112,969.792

1,111

11

3.47

5.98
5

1990 233,013.290

1,843

16

3.01

6.63

1995 502,249.558

2,249

24

4.11

8.14

2000 1,389,769.700 8,396

53

2.32

6.92

2005 2,678,664.096 9,705

83

3.10

7.51

2010 6,422,918.230 8,555

121

6.38

9.05

For purchasing power parity comparisons, the US dollar is exchanged at 3,094.57 rupiah only.

Inflation:
In 2010, the inflation rate was approximately7%, when its economic growth was 6%. To date, inflation is
affecting Indonesia lower middle class, especially those who cant afford food after price hikes.
In 2011, Indonesias inflation rate was 3.79 percent, below the government-set target of 5.65 percent. It
was the lowest inflation rate since 1998.
At present in 2015 the inflation (CPI) rate is 6.4%

GDP (PPP):
As of 2008, Indonesias growth was approximately 6.1% and target was 6.3%
As of 2010, Indonesias economic growth was 6%
At present scenario of Indonesian economic growths are given below:

$1.3 trillion

5.8% growth

5.9% 5-year compound annual growth

$5,214 per capita

GDP by sector is agriculture 14.4%, industry 47% , services 38.6%

Main Export partners:

Indonesian main export goods are oil and gas, Cement, Food, Electrical appliances, Constructions,
plywood, textiles, rubber. These goods are mainly exported below the countries.
(2012 given data):

Japan
14.8%
China
12.4%
Singapore
9.1%
United States 8.6%
India

7.1%

South Korea 6.3%

Malaysia
5.8%

Main Imports partners:

Indonesian main import goods are Machinery and equipment, Chemicals, Fuels, and foodstuffs. These
goods are mainly imported from below the countries.
(2013 given data)
Japan
10.3%
China
16%
Singapore
13.7%
United States 4.9%
South Korea 6.2%
Malaysia
7.1%
Thailand

5.7%

Transmission Channels and Reasons for the Financial Crisis

The 2008/2009 crisis has been called by many economists as the most serious economic or financial crisis
since the great depression in the 1930s. The crisis impacted many countries through various channels, i.e.
exports, investment (including foreign direct investment/ FDI), and remittances. However, for Indonesia
and many other developing countries, the most important channel was export.
Like other developing countries Indonesia faced tremendous economic crisis in 2008/09. There are
numerous factors like massive private sectors debt, poor financial regulation, and state banks pervasive
performance lead toward bad debt ratios. Corruption and absence of good corporate governance resulted
shutting down of some private organization and banks. Therefore political instability discouraged
domestic and foreign investors. Indonesia now is much more vulnerable to any economic shocks than, for
many reasons. First, since economic reforms started in the 1980s toward trade, banking, investment, and
capital account liberalizations, for which Indonesian economy has become more integrated with the world
economy.Second, decreasing export growth. Indonesia depended on exports of many primary
commodities, i.e. mining and agriculture. This indicated economy was sensitive to any worldprice/demand instability for those commodities.Third, Indonesia increasingly depended on imports of a
number of food items such as rice, food grains, cereals, wheat, corn, meat, dairy, vegetables and fruits, or
even oil. Any instability or increases of world prices or the world production failures of these
commodities made big effects on domestic consumption and food security in Indonesia.Fourth, more
Indonesian working population, including women, went abroad as migrant workers, and hence livelihoods
in many villages in Indonesia increasingly depended on remittances from abroad. As a result economic
crisis hit the host countries (such as happened in Dubai during its financial crisis in 2009) made a great
cost for Indonesian economy too.Finally, as a huge populated country with increasing income per capita,
domestic food consumption was not only high but also kept increasing. Accelerating output growth in
agriculture is therefore a must for Indonesia, and this depends on various factors, including climate, which
is an exogenous factor.
As export was the most important transmission channel in 2008/09 crisis for Indonesia and most other
affected countries was considered primarily as a world demand/export market crisis.

World Demand Decreased in 2008/09

Indonesia
Other Countries

Export
Export
Production
Production

Production Decreases in
other sectors

Employment/Income
Level
Household income

Employment /Income
Level
Remittances

Poverty

Regional Income

National Income

Figure*: Transmission Channels of the Effects of the 2008/09 Crisis on the Indonesian Economy.

Theoretically, as illustrated in Figure, this kind of shock affected the economy of these countries at the
first stage through its effects on domestic export-oriented firms. It led further to less production and
employment of firms and in other related firms. The employment reduction causes declined in incomes of
many households and resulted further in lower market demands for goods and services and hence
production decreases in many industries/sectors. Finally, unemployment and poverty increased. This
unemployment differed across economic sectors. The worst affected sectors included manufacturing,
construction, commerce, hotels and restaurants, transportation, communication, finance, rent and
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company services. On the other hand, several economic sectors accommodated more workers, including
agriculture, animal husbandry, forestry, fishery, electricity, gas, and drinking water. In large countries like
Indonesia which consists of many islands or regions (i.e. provinces, districts and sub districts), the
consequences varied by the regions. For instance, if the decline in average household income in Java
Island (where most export-oriented manufacturing industries are located) is higher than in the rest of the
country and the proportion of the affected households in Java is significantly larger than total income of
rest of the country.
In other words, if only one region in Indonesia was affected by the crisis and the regions economy is not
significant important for the national economy based on gross domestic products (GDP) distribution by
region, the effect at the national level my insignificant, even if the impact for that particular region is
significant.
Before the year 2008 during the crisis, continued to put a drag on growth include low foreign investment
levels, bureaucratic red tape, and very widespread corruption which causes 51.43 trillion Rupiah or
5.6573 billion US Dollar or approximately 1.4% of GDP to be lost on a yearly basis.
The unemployment rate (in February 2007) was 9.75% and the year 2008 ended inflation rate was
10.23%. Despite a slowing global economy, Indonesias economic growth accelerated to a ten-year high
of 6.3% in 2007. This growth rate was sufficient to reduce poverty from 17.8% to 16.6% based on the
Governments poverty line and the recent trend towards jobless growth, with unemployment falling to
8.46% in February 2008.
The economic crisis made continued private financing imperative but problematic. Indonesia's fuel
production has declined significantly over the years, owing to ageing oil fields and lack of investment in
new equipment. As a result, despite being an exporter of crude oil, Indonesia is now a net importer of oil
products. It had previously subsidized fuel prices to keep prices low, costing US$7 billion in 2004. The
current president has mandated a significant reduction of government subsidy of fuel prices in several
stages that cuts in subsidies, aimed at reducing the budget deficit to 1% of gross domestic product (GDP)
this year, down from around 1.6% last year.

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Impact and Effects of the Financial Crisis

We will describe the impact of global financial crisis in Indonesia economy in different sectors.
In this report we will be discussing 4 sectors.
1.
2.
3.
4.

Impact on trade
Impact on capital flow
Impact on remittance
Impact on growth and unemployment

Impact on trade
Due to drop in commodity price and decline external demand the export dropped. From figure1
we can see the decline affected both in weight and value. In Indonesia only 20% (approximately)
of its export is oil and gas. Although the price of oil was high but low demand caused low
export. As a result the overall export did not improve.

If
we
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consider top 10 commodities, we will see considerable decline in tin and articles and thereof
(87%) and animals or vegetable fats and oil (52.7%).

Another notable product that we have to mention is electronics. Indonesia has become a very
crucial electronics exporter and countries like Malaysia, Singapore and Japan. In 2008 it showed
both weight and value increase but went down due to weak demand.

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Falling demand has clearly taken troll on Indonesian export performance. If we look at table 2,
we could see how different countries decline their demand in 2008. ASIEN is Indonesias most
valuable partner followed by EU. This table shows s that USA and Japan had biggest share of

Indonesias export market.

13

As export performance worsened, import numbers began to show signs of slowdown; after
flowing significantly up to the third quarter of 2008, imports started to fall. The biggest drop was
for imports of raw materials/auxiliary goods, which declined 38%. Coupling this drop with the
drop in capital goods imports (-17%), these numbers could be reflecting worsening conditions in
real/manufacturing industry activities. Consumption goods imports slowed by 26.3% compared
with January 2008.

Export and import of Indonesia had suffered greatly due to financial crisis although it was not far
worse than some EU and North American countries.

Impact of Capital Flow

Indonesia began to rely for development financing on debt securities and private sector financing
after the 1997-1998 crisis, is now vulnerable to external shocks that result in disruption of
foreign capital flows. Most foreign investments are short term and it is very easy to change

14

course. Foreign direct investment (FDI) has increased since 2005; portfolio investment still takes
up a great portion of foreign investment flows to the country.

According to the latest data from Bank Indonesia, FDI was still increasing in the quarter to
December 2008, whereas portfolio investment had continued its declining trend since the
previous quarter.
Figure 6 shows that most foreign capital flow went to government securities, reaching a peak in
the second quarter of 2008. During the last three months of 2008, a massive sell-off of
government bonds and Bank Indonesia certificates by foreign investors put the capital and
financial account of the balance of payments in deficit.
According to figure 7, the stock index fell 51.17%. Market capitalization for equity at the end of
the year fell by 46.42%. The top 10 companies with the biggest market capitalization on the
stock exchange for 2008 are dominated by banking, mining, plantation and telecommunication
companies.

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According to data from Bank Indonesia and the MoF, total government external debt to be paid
this year (2009) will reach IDR73.28 trillion, while repayment of domestic debt will reach 38.91
trillion. The volume of foreign exchange reserves is perceived to be very thin owing to a
significant drop in export revenues starting in October 2008. The rupiah was under pressure
widening from 539 to 643.

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Impact of worker Remittance

Worker remittance also showed resilience during the time of crisis. Net workers remittance was
$1.4 billion in the end of September 2008.

The
remittance
flow was increasing because increasing number of Indonesian worker to overseas destination
(54%). Around 4.4 million workers were working abroad including Malaysia, Saudi Arabia and
Taiwan. Table 4 will be describing the remittance situation of Indonesia.

But at the end of 2009, many workers had to return Indonesia due to crisis in Malaysia.

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Impact on growth and unemployment

During 2008 the GDP was 6.0% and it declined to 4.5%. Although according to Economist the
rate was 3.3%. Table 5 will give more details along with sectorial contribution of GDP which
reveals that manufacturing sector still leads (26.9%).

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Some poverty reduction programs helped Indonesia to reduce poverty despite of financial crisis.
Table 6 shows how Indonesia dropped the unemployment rate from 2005-2008. The rate
decreased from 11.24% to 8.46%. Another problem rose while declining unemployment,
underemployment and informalisation of labor market. About 70% of the workforce in Indonesia
is made up of informal workers with characteristics such as young, educated and dependent on
their parents.

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Government Initiatives to Mitigate the Financial Crisis

The government and the central bank have made joint efforts to maintain financial market
stability and to provide a fiscal stimulus in order to keep domestic demand growth at its usual
annual rate.
1. Maintained financial market stability:
Some policies were taken to address liquidity issues were as follows:
Lowering the overnight repurchase rate by 200 basis points from 12.25% to 10.25% at the end
of September 2008 and at the same time increasing the overnight Bank Indonesia rate paid on
funds that commercial banks deposit from 7.25% to 8.25%. In December, the overnight
repurchase rate was again lowered from 10.25% to 9.75%, and the overnight Bank Indonesia rate
was raised from 8.25% to 8.75%.
Increased the tenor of foreign exchange swaps from seven days to one month.
Cut the minimum reserve requirement for rupiah deposits from 9.08% to 7.5% and for foreign
exchange deposits by commercial banks at Bank Indonesia from 3% to 1%.
Introduced new regulations to allow commercial banks to use government bonds and/or SBIs
worth 2.5% of their total rupiah deposits as secondary reserves. Big banks with large holdings of
SUNs and/or SBIs will have more funds to channel loans since they are now allowed to do this
(up to one year).
Postponed implementation of accounting regulations with regard to fair valuation of assets,
particularly the marking-to-market rules on banks SUN holdings.
Loosen limits on daily balance of short-term foreign loans; previously, commercial banks were
required to limit the daily balance to no more than 30% of their capital.
Required state-owned enterprises to place foreign exchange reserves in domestic banks.

Other measures were taken to address confidence issues by both government and the central
bank. These measures were:
Increased the amount of deposits in the banking system guaranteed by the government from
IDR 100 million to 2.00 billion.

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 Executing SUN buyback and preparing a state-owned enterprise equity buyback program. The
MoF has bought back IDR41 billion (US$3.89 million) worth of SUNs. State-owned enterprise
shares buyback at the Indonesian Stock Exchange was undertaken through the Government
Investment Centre (PIP) with available funds of IDR4 trillion (2.5 trillion was managed by PIP
as reserve funds for infrastructure development and the remaining 1.5 trillion was managed by
state-owned asset management company (PPA)).
Maintained a sufficient level of foreign reserves (end of December 2008 showed foreign
reserves at US$51.6 billion down from $60.6 billion at end-July 2008). The central bank has
receded from its intervention in the foreign exchange market to support the rupiah and focused
more on preventing too volatile movement of the rupiah.
Put some restrictions on short-selling on the capital market.
Limit the purchases of foreign currency without underlying transactions to US$100,000 to curb
speculation. For Indonesians, the limits affect all transactions in spot, forward and derivative
markets. They also have to produce their taxpayer registration number for banks when
purchasing foreign currency. For foreigners, this applies to purchases on the spot market.
Banning trading on banks structured products/derivative products that provide chances for
bank customers to purchase foreign currencies including dual currency deposits that are callable
forward.
Issuing a government Regulation in lieu of law on Financial System Safety Net (FSSN).
Another regulation was issued on 5 January 2009 by the Ministry of Trade to support the rupiah
(and the balance of payments), mandating export payments for certain products to use letters of
credit (L/Cs) in domestic banks. Products with L/C requirements include coffee, crude palm oil,
cocoa, rubber, mining products and tin.
Part of Bank Indonesias efforts to stabilize the financial market condition, worsening from
September-October 2008, were in keeping inflationary pressures at bay while supporting the
rupiah from depreciating too much. The inflation rate mounting from mid-2008, because of
increased basic commodity prices reached 12.14% (year-on-year) in September 2008, and may
have taken down domestic purchasing power. Under the circumstances, the central bank
increased its interest rate benchmark to 9.5%. This was contrary to what other central banks in
21

the region and across the world decided with the threat of global crisis looming they lowered
their interest rate. However, pressure has eased since then23 and the bank has lowered its interest
rate to the current level of 7.75% (4 March 2009). Bank Indonesia started a lower interest rate
benchmark on December 2008 (currently, the interest rate is set at 7.75%) so the banking sector
would be able to cut lending rates.
At the same time, the government proposed two other Regulations in lieu of law, on
Amendment of Central Bank Law (allowing the central bank to provide a short-term liquidity
facility for banks encountering liquidity problems with collateral) and on Deposit Insurance
Corporation (increasing the amount of deposits insured to IDR 2 billion). These two were
approved by Parliament. The inflation rate was 11.06% in December 2008.

2. Fiscal stimulus package

Having assessed the latest data for the last three months of 2008, the government prepared for
the worst in 2009. With a downward revision of the countrys economic growth to 4%-4.7% at
the most (previously 4%-5% maximum), the government expected investment growth would
slow down to 5.9% and export growth would be stagnant (0% or even a decline at the rate of
3.0%). The state budget 2009 was revised to include an additional fiscal stimulus package to
counter the impacts of the global crisis on unemployment levels and poverty reduction. On 24
February 2009, Parliament decided to approve
the package, adding IDR 2 trillion to the original package proposed by the government,
amounting to 73.3 trillion (2.6% of GDP). The fiscal stimulus package aims at:
Maintaining/increasing household purchasing power to keep consumption growth above 4%
(targeted consumption growth was set at 4.7%). Measures included: i) keeping supply-side
inflation relatively stable (at 6-7% per year) by lowering energy and basic commodity prices
through improvement of distribution channels; ii) providing tax saving to households through
reduction of the personal income tax rate, raising the limit of non-taxable income to IDR15.8
million/year (previously 13.2 million/year); iii) introducing government-borne sales tax on
cooking oil and non-fossil fuel/biofuels; iv) providing a direct subsidy for cooking oil and
22

generic medicines. For measures ii)-iv) to stimulate household purchasing power, the
government prepared a budget of IDR25.91 trillion. In addition, it will increase salaries of civil
servants (including retired civil servants) and members of the military and the police by as much
as 15% and offer a one-month bonus as well as distribute direct cash transfers in the amount of
100,000 (US$8)/month to 18.2 million targeted households for two months.
Improving real sector resilience and competitiveness to prevent more workers layoffs. These
measures included: i) relaxing the tariff for business income tax; ii) waiving duties on imported
raw materials and capital goods for certain industries; iii) subsidizing value-added tax on oil/gas
exploration activities; iv) reducing the income tax tariff on geothermal companies; v) granting
government-borne income tax for workers with a maximum monthly salary of IDR5 million for a
one-year period; vi) cutting the diesel fuel price (used widely by industries) by 300/liter; vii)
discounting the industrial electricity tariff; and viii) subsidizing an interest payment scheme for
water supply companies loan disbursement. Government also arranged equity financing for
AsuransiEkspor Indonesia to support funding for an export guarantee scheme (after approval
from Parliament, the original funds amounting to 1 trillion were cut to 250 billion). Government
also arranged for equity financing for Askrindo and Jamkrindo, companies responsible for
disbursing smallholders credit programmes for the development of primary sectors. Funding for
these measures was prepared to reach 35.43 trillion.24
In addition, the government issued some trade-related policies. In November 2008, the Ministry
of Trade announced that five categories of goods (food and beverages, garments, electronic
goods, shoes and toys) can be imported only through five major seaports: Jakarta, Medan,
Semarang, Surabaya and Makasar.
After several delays, the regulation became effective on 1 January, but pre-shipment inspection
was to take place on 1 February, except for garments, whose inspection has been in place since
2005. This policy aims to prevent illegal import activities that have flooded domestic markets
with very cheap products. The government also strengthened enforcement of the Indonesian
National Standard (SNI) 25on steel, tires and packaged goods. On tariff policies, the government
postponed implementation of the 2009 tariff harmonization program for 324 tariff lines the
same tariff as for 2008 applies. There were some temporary tariff increases owing to declining
competitiveness; at the same time, the government reduced the tariff on some other imported
23

primary and intermediary import products not produced domestically. In December 2008, the
government and Bank Indonesia jointly announced a trade financing facilityexport draft rediscount with recourse that will help banks to secure cash from L/Cs that have been issued.
Related to export activities, Bank Indonesia also issued a new regulation allowing exporters to
receive faster payments by permitting commercial banks to sell export receivables to the central
bank in order to obtain fresh cash. The new regulation will also help in reducing demand for
foreign exchange in order to manage depreciation pressures of the rupiah.
Creating job opportunities for unemployed/laid-off workers by launching labor-intensive
infrastructure projects. The government allocated IDR12.2 trillion for infrastructure spending.
Previously, the government had set IDR1 trillion each for the export guarantee scheme (through
ASEI) and expansion of credit program (through Askrindo and Jamkrindo). However, Parliament
approved only IDR250 billion for each as they considered the schemes would not contribute
much to job creation.
Including requirements to use Indonesian language labeling on the product manuals to describe
ingredients used in the products and to explain the working of electronic devices such as mobile
phones and radios. Sectoral allocation of infrastructure development will focus on projects able
to create more jobs, such as transportation (railways, airports, etc.), public housing, traditional
markets and power generation.
Besides fiscal stimulus measures, the government has included social protection and poverty
alleviation in the state budget for 2009. The budget allocated to education is as much as IDR207
4 trillion, to include improvement of education access and quality, such as school operational
assistance, school building rehabilitation and teacher salary increases. In the health sector, the
government has provided a free medical service at public health centers and third-class hospitals
(allocation: 7.2 trillion). The government has also increased agricultural subsidies from 27.9
trillion in 2008 to 33.4 trillion, to support food security programming (12.9 trillion) and
subsidize fertilizer (17.1 trillion) and seed procurement (1.4 trillion). The government has also
proposed continuing its rice-for-the-poor program in 2009 and directly selling subsidized
cooking oil and soybeans in traditional markets in order to maintain reasonably steady prices in
these basic commodities.

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The fiscal stimulus package will decrease government revenue to US$77.6 billion and
government expenditure will rise to $89.6 billion. Budget deficits will be around $11.8 billion
(2.5% of GDP). This will be financed from a rollover of the unspent 2008 budget ($4.7 billion)
and additional debt financing in the amount of $3.4 billion (from a standby loan from bilateral
and multilateral sources). Government plans to maintain a net redemption of government
securities in the amount of $4.9 billion. Given that the government debt ratio to GDP was 37% in
2008 and projected to be even lower in 2009 (33%), the financing scheme for the stimulus
package looks secured. At the end of January 2009, government issued medium-term notes
(global bonds) worth $3 billion as part of a deficit financing scheme. The MoF also issued new
government retail Islamic bonds, and managed to collect IDR5.56 trillion (US$496.4 million). So
far from these bond issuances, government has gathered IDR56 trillion. On 5 March 2009, the
MoF announced that Indonesia had officially agreed on US$5.5 billion of loans from Australia
($1 billion), World Bank ($2 billion), ADB ($1 billion) and Japan (available as $1.5 billionworth of guarantee on the yen-denominated bonds the government plans to sell Samurai
bonds). These loans will be used only if government fails to raise funds from bond issuance and
other borrowing.

25

Response of International Organizations during Crisis

1. Bailout package: The emergency economy stabilizing act of 2008 commonly referred to as
bailout of USA financial system is a law enacted in response to the subprime mortgage crisis to
spend $700 billion to purchase distress especially mortgage-backed securities and supply cash
directly to bank.
2. G-20 meeting: It is mainly focus global governance of systematic financial crisis, significant
loses of confident, liquidity and solvency in private financial institution; financial market
government or national governments are unable to control.
3. US Federal Reserve Bank to inject US $ 1 Trillion (March 2009)
4. Financial Stability Board: Financial stability risk that have materialized since October,2008
global financial stability report. Then, it examinee deleveraging process and its on effect real
economy. The following section assesses the vulnerability emerging market to global stress,
especially focusing on refinancing risk facing corporate. The outlook for global credit market is
then evaluating, along with IMF staff estimate of potential global financial write-down.

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Concluding Remarks
Development in the global financial crisis have clouded Indonesias economic outlook. A
combination of drops in commodity prices, slower global growth and tighter liquidity in financial
markets across emerging economies has dragged down exports and investments. Both are keys to
Indonesias economic growth. So far, the impacts of the current global crisis have been severing
to externally oriented sectors such as manufacture industry, with the number of layoffs
increasing since October-November 2008. Sharp rupiah depreciation and volatile capital
outflows have added more pressure to the domestic economy. Though there were a lot of internal
and political problems but the country realized to combat against global crisis effectively.
Equipped with important lessons from the previous crisis (1997-1998), the government of
Indonesia was quick to respond by combining both monetary and fiscal policy instruments in
order to at least minimize global crisis impacts in Indonesias election year of 2009. Bank
Indonesia (Central Bank) role was very effective and efficient to overcome the big financial
crisis. Finally, The government initiative and Central Bank policies was very crucial to compete
the financial crisis and those bravo steps gave Indonesia to overcome global crisis. Its
increasingly modern and diversified economy has recovered from 2009 global recession.

27

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