From its rise to prominence on the international market, to its dramatic economic downturn in 1998, followed by political upheaval and separatist movements, Indonesia has remained in the spotlight.

Recent events, including the September 13, 2000 bombing of the Jakarta Stock Exchange, have further shaken confidence in Indonesia’s political and economic system. As a result, it’s necessary to proceed with much caution in this country of 200 million people, which is comprised of 300 different ethnic groups living on 13,500 islands.

Severe Economic Crisis

Indonesia’s crisis of 1998 was precipitated by the rapid devaluation of currencies throughout Southeast Asia. Massive numbers of Indonesian companies faced bankruptcy, and a sharp rise in inflation occurred, followed by the collapse of the banking sector.

In early 1998, the value of the Indonesian rupiah fell considerably. Thus, on June 1, 1997, 1998, 1999, and September 21, 2000, one dollar equalled 2430, 11350, 8090, and 8820 rupiahs, respectively.

According to the U.S. Trade Representative’s office (USTR), Indonesia’s gross domestic product (GDP) dropped precipitously from 1998 to 1999. Widespread government corruption under President Suharto’s regime was revealed, followed by protests and violence that led to Suharto’s resignation.

Economic Recovery Followed by Instability

Aid from the International Monetary Fund, the World Bank, and the Asian Development Bank appears to have helped. The rupiah stabilized and interest rates and inflation decreased. Importantly, the country’s GDP in 1999 ticked into the positive, with a rise of 0.1%. However, growth prospects for this year are difficult to estimate.

Newly elected President Wahid has attempted to implement structural reforms and liberalization measures initiated by former interim President Habibie and several international financial institutions. However, Wahid’s effectiveness and ability to monitor his appointees’ actions is questionable. Also, the banking sector continues to face stiff problems while massive corporate debt hangs overhead.

Sustaining economic recovery has been challenging. Recent violence in East and West Timor, in Aceh, a region fighting for political autonomy, and in Hebrides, where Islamic groups are pitted against Christians and ethnic Chinese, has shaken confidence in the government.

Trade and Investment

Investors who have not pulled out of Indonesia during the turmoil have incurred much risk. However, with this risk have come opportunities with low price tags. According to the USTR, the stock of U.S. foreign direct investment in Indonesia reached approximately $6.9 billion in 1999, an increase of 4% over 1998. This is concentrated in the petroleum, manufacturing, and financial sectors.

U.S. exports to Indonesia rose to $8.3 billion in 1996, but declined to $2 billion in 1999. Prior to the instability, sectors predicted to expand included information technologies, security and safety industries, and industrial chemicals.

Also significant were food processing, paper and paperboard, telecommunications, medical equipment, mining, oil and gas equipment, and education and training services.

Follow the Market Closely

Indonesia offers a wealth of natural resources, a modern telecommunications sector, and plenty of opportunity — with risks. Currently, predicting this level of risk is challenging.

This article appeared in October 2000. (CB)
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John Manzella
About The Author John Manzella [Full Bio]
John Manzella is a world-recognized author and speaker on global business, competitive strategies and the latest economic trends. He also is CEO of World Trade Center BN, chair of the Upstate New York District Export Council, and founder of The Manzella Report and Manzella Trade Communications Inc. His latest book is Global America: Understanding Global and Economic Trends and How To Ensure Competitiveness.




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