Indonesia faces the fallout of the global financial crisis when the tight financial conditions can possibly starve its economy of investment capital at a time when it needs funds to augment construction of infrastructure like tolled highways and energy generation.
Raising such capital will become harder as interest rates have to be hiked to get foreigners to hold rupiah assets. GDP growth will be limited by the challenges that companies face to get loans for financial expansion and some will have difficulties in paying off overseas debts de to high refinancing costs, resulting in a few high profile corporate failures.
Falling global demand may also slow down its exports and led to unemployment.
Therefore, in Oct 2008. Indonesia began talks with the World Bank and other lenders to get US$5 billion in standing loans.
Indonesia’s rupiah-denominated debt has also handed investors a loss of 8.2% in 2008, the worst performance of 10 Asian local-currency bond indexes compiled by HSBC Holdings. Pressured by outflow of capital, the rupiah had lost more than a fifth of its value against the US dollar in 2008.
There are some hopes for optimism in the Indonesian economy. In 1997, Indonesia’s short term loans to foreign reserves ratio stood at 175% but now it stands at 34.5% - indicating no problem with short term obligations.
Bank Indonesia figures for August 2008 also places the capital adequacy ratio of local banks at 16% above the 8% international benchmark set under the Basel Accord. By mid-October 2008 Indonesia’s fiscal deficit is currently equal to 1.7% of GDP, releasing some room for prime pumping efforts to cope with the crisis if necessary.
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Bloomberg, “Indonesian bonds and Rupiah Plunge in Trading” dated 17 Oct 2008 in The Nation (Thailand: The Nation), 2008, p. 11A.
Gale, Bruce, “Two reasons for hope” dated 11 October 2008 in the Straits Times (Singapore: Straits Times), 2008, p. A24.
Lee, Kuan Yew, “China can make a big difference” dated 4 December 2008 in the Straits Times (Singapore: Singapore Press Holdings), 2008, p. A22.
Reuters, “Jakarta in action mode as rupiah plunges” dated 22 November 2008 in the Straits Times (Singapore: Singapore Press Holdings), 2008, p. C21.
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