Indonesia has a history as a fragmented nation with significant structure risk due to its inherent cultural mix of 250 ethnic groups, geography of 17,500 islands of which only 6,000 are inhabited, separatist conflicts, religious unrest (Muslim vs. Christian), wealth distribution and a history of previous corrupt political leadership for decades. At present, Indonesia is the world’s third largest democracy of which 90 percent of the 245 million citizens are Muslim making Indonesia the world’s most populous Muslim nation and the fourth largest in population. Of importance, approximately 80 million Indonesians live in poverty.
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ECONOMY:rising credit ratings. Indonesia is recovering economically from previous terror attacks such as the Bali attack in 2002 and the December 2004 tsunami that impacted tourism visits thereafter. Tourism accounts for 5 percent of GDP accounting for $11 billion USD in foreign exchange, the country’s third largest industry. During the 1997 Asian Financial Crisis: Indonesia was the worst hit country. The collapse of the rupiah since 1997 alone has resulted in a 35 percent drop in the standard of living for the average Indonesian citizen, however it is the poor who are most affected. Indonesia is home to a large domestic economy with huge market potential with a cheap young labor force. The country is truly rich in natural resources including gold, copper, oil, natural gas, rubber, rice, sugar, agriculture - fertile lands, etc. Agriculture accounts for 20 percent of GDP and 50 percent of the labor force. The economy is heavily dependent upon high-technology exports. Over the last 6 years, the economy overall has been performing reasonably well driven by domestic demand, however, Indonesia requires at least $20 billion USD/year in FDI to grow the economy, Japan is the largest for FDI, United States is number two.
Economic Statistics
Total GDP as measured by purchasing power parity stands at $935 billion USD (2006) with corresponding GDP/Capita at $3,800 USD. GDP as looked at by market prices stands at $281 billion USD (2006) with GDP/Capita at $1290 USD. GDP growth rates include year 2004 at 5.13 percent of GDP, 2006 GDP growth at 5.2 percent and 2007 estimated at 6 percent. The 1997 Asian Financial currency crisis of 1997-98 had 1998 real GDP growth falling by 14.2 percent in 1998, however, rebounded to 3.3 percent in 1999, year 2000 at 4 percent. CPI inflation in 1998 was at 65 percent, 1999 at 8.5 percent, year 2000 at 5.4 percent, 2001 at 12 percent, year 2002 at 11 percent, October 2005 at 18 percent, year 2006 at 13.2 percent, inflation projected within the central bank’s band of 7 to 9 percent. Current account is in surplus at 4.6 percent of GDP for 1998, 1999 at 6.6 percent, 2006 surplus at 1 percent of GDP. The trade component showed a surplus of $24.5 billion USD (2005). External debt in 1998 stood at 150 percent of GDP, it has since declined to a much improved level of 53 percent (2005), it currently stands at $130 billion USD. Public debt stands at 54 percent of GDP (2005). Budget deficit for 2006 came in at 1.2 percent of GDP. Unemployment is high at 40 percent, the official rate is much lower at 12.5 percent (2006).
OIL & NATURAL GAS: major supplier to China. Indonesia is Asia’s only OPEC member, Indonesia is the world’s largest provider of liquefied natural gas. Indonesia is home to huge energy resources particularly in natural gas. There are presently 4.3 billion barrels of proven oil reserves, 2.7 trillion cubic feet of natural gas. Energy output is falling with present production in the vicinity of 1.06 million bpd. The authorities have recently announced a strategic plan to increase natural gas production and exploration via promoting foreign investment into the sector which is a change of policy. In 2004, Indonesia became a net oil importer.
STOCKMARKET: the JKSE has been performing very well over the last year, the index recently closed at 1765 on January 19, 2007. The year high is 1843 (November 2006) and the low at 1212. The Indonesian stockmarket has been following recent advancements in regional Southeast Asian markets. There is a risk for a significant market sell-off.
POSITIVES: economic reforms from banking to telecoms, renewed political stability with most Indonesians favoring the current secular state rather than a radical Islamic framework, rich in metals & minerals during a time of a global commodity boom, lower interest rates, current account is in surplus for 2006 and 2007 estimated. CONCERN: now a net importer of oil, infrastructure deficiencies, pirates out of Indonesia creating difficulties in the major oil shipping lanes of the Straits of Malacca, global warming - rising sea level may submerge upwards of 2000 Indonesian islands, too low level of foreign direct investment.
BANKING SYSTEM: recovered from the 1997-98 banking/currency crisis as the government set out with an updated bank recapitalization program in December of 1998. Non performing loans have been since declining. Bank mergers and industry consolidation have helped to strengthen the banking system. International reserves with the central bank, Bank Indonesia stand at $43 billion USD (2004) equivalent to 4.4 months of import coverage.
REGIONAL ANALYSIS: Iraq, Islamic Axis, China, Shipping Lanes, Japan, Middle East
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KNOWLEDGE: contact BankINTRO.com for details on the Islamic element, fragmented identity and an overview of the religious conflicts that presently exist within Indonesia. Please click the currency consulting banner below.
CURRENCY: ISO Symbol ‘IDR’, Indonesian rupiah. At time of review on February 10, 2007, the rupiah had an exchange valuation of 9,052.5 IDR to the US-dollar (USD) and/or 11,775 to the Euroland euro (EUR). The exchange rate regime follows that of a free float. As measured by purchasing power parity, the rupiah is approximately 40 to 50 percent undervalued to the USD.
CURRENCY HISTORY: during the 1997 Asian financial crisis, the rupiah collapsed by 80 percent in value, 35 percent overnight in one trading day alone. By April 1998 the rupiah was valued at 8,000 IDR to 1 USD compared to an average exchange during 1997 at 2,909 IDR before the currency crisis. During this Asian currency crisis, the rupiah hit a low of 16,800 IDR to the USD in June 1998. In 1995, the exchange was at 2,250 IDR to 1 USD. It soon stabilized at one quarter its pre 1997 crash level in relation to the USD. The collapse of Indonesia’s currency was much more severe and drawn out when compared to other Asian currencies. Fairly recent valuations include January 1996 at 2306 IDR to the USD, January 1997 at 2367, January 1998 at 9743, January 1999 at 8372, January 2000 at 7230, January 2001 at 9435, May 2001 at 11269, August 2001 at 8926, January 2002 at 10400, September 2002 at 8961. Shortly after the Bali terrorist attacks, the rupiah fell to the 9350 level in October 2002. Recent currency quotes include year 2006 at 9207, 2005 at 9704, August 30, 2005 at 11,600 (low), January 27, 2005 at 9133, year 2004 at 8938, 2003 at 8577 and year 2002 at 9311.
Volatility is par for the course for the rupiah. On July 14, 1999 the rupiah was at 9,435 to 1 USD and by September 10, 1999 the rupiah was at 8,260. By November 2, 1999, the rupiah appreciated to 6,685 IDR to 1 USD shortly after President Wahid came to power. However, by July 2000, it plummeted in value to 9,500 to 1 USD. By July 2001 when Wahid was forced from power, the rupiah fell to 11,440 IDR to the USD. Soon after Megawati took power, by August 14, 2001 the rupiah quickly appreciated by 30 percent to 8,250 to the USD. The “volatile rupiah” from 1999 - 2000 has fluctuated in a trading range of 40 percent.
Since Indonesia declared independence in 1949, the initial exchange rate was 3.8 to the USD in 1949. In 1966, the new rupiah was issued with a value of equal to 1,000 old rupiah. With an exchange in the area of 9,500 IDR to the USD (2002), one rupiah is now worth almost 10 million of the 1949 original rupiah or equivalent to depreciation of approximately 2.5 million times against the USD. If compared to gold, the rupiah has performed even worse. Historically, there have been national currency confiscations which accordingly reduced the value of the notes and deposits, this has taken place in year 1950, 1959 and 1965. Incidences of high or hyper-inflation have occurred in every decade since 1949.
CURRENCY FORECAST: the Indonesian rupiah is considered to be one of the world’s weaker currencies and has historically been a very dangerous place to park your money. Extreme volatility is noticed with catastrophic currency crashes, huge one-day sell off’s and dramatic rises.
Islamic domestic terrorism remains a constant threat with the end goal for the Muslim terrorist group Jemaah Islamiyah to make Indonesia an Islamic state. The likelihood of Indonesia disintegrating into 4 or 5 regional currencies as what happened with East Timor is lower now in risk than it was at the time of last currency review five years ago. Indonesian sovereign stability appears to be stronger and the country more unified.
Currency risk includes now being that of a net oil importer. The IDR rupiah is still highly depended upon the United States export markets, foreign aid from the U.S. and other Western countries and lobbying support from the IMF. Inflation is a continued risk although trending down, the rupiah is vulnerable to climbing world crude oil prices and higher global interest rates.
The threat of another regional currency crisis is less likely than it was 10 years ago, many of the Asian countries are booming with large foreign exchange reserves to mitigate any capital flow shortfall. The rupiah’s current value remains highly dependent upon the level of domestic sovereign stability.
Outright dollarization might be an option for Indonesia perhaps with the USD (United States is a major trading partner) providing that Indonesia follows a 100 percent reserve banking system. A sound currency will help restore peace and may prevent the further break-up of Indonesia. Due to the country’s fragmented make-up, the rupiah warrants to be in lower currency safeness ranking reflecting the inherent currency risk and volatility as shown. Historically, the rupiah has been a dangerous currency to park your wealth for the long term.
