Monday, October 6, 2008

It's now an Economic Crisis!

Indonesia's president has called an emergency meeting on measures to to tackle the impact of the global credit crisis amid growing investor nerves and fears of surging unemployment.

Susilo Bambang Yudhoyono was expected to meet ministers, central bank officials, economic analysts and business leaders on Monday to work out how to contain the looming crisis.

The meeting was overshadowed though by a day of plummeting share values, with Jakarta's benchmark JSX index diving 10.03 per cent to end the day on its steepest one day fall ever.

The Indonesian market had been closed last week for a four-day break marking the end of Ramadan, and the government had urged investors not to panic when trading resumed following a turbulent few days on global financial markets.

Indonesia is South-East Asia's largest economy, but with widespread poverty and unemployment it is also one of the most fragile. It was hit particularly hard by the Asian financial crisis in 1997.

Indonesia's main worry from the current crisis is not the security of the banking sector, but rather that falling global demand for exports could have a massive impact on jobs.

Around 40 per cent of Indonesians live around the poverty line of about $2 a day and do not have savings in banks.

In an effort to make the economy less vulnerable, the government has said it will try to increase export markets for Indonesian products and decrease imports of unessential items.

Indonesia's economy grew 6.3 per cent last year - the fastest pace since it was ravaged by the 1997 Asia financial crisis - pushed by strong exports of commodities including palm oil, rubber, gas and a steady drop in interest rates.

However, analysts expect global demand for the country's commodities and mining products, which account for a major share of its exports, to weaken as a result of the current global financial turmoil.

On Monday Indonesia is also due to release inflation data for the month of September, which is expected to show a rise to a two-year high of 12 per cent, enough to persuade the central bank to raise interest rates despite the threat of the credit crisis.

Indonesia's central bank predicted the financial crisis that is rippling out from the United States to the rest of the world would shackle Indonesia's economic growth and cause a credit shortage for local business players, media reports said Monday.

'The shortage of global liquidity will be felt as a result of this crisis,' said .Boediono, governor of Bank Indonesia.

'We must be prepared to face this over the next six months to one year,' The Jakarta Post quoted Boediono as saying.

Boediono, who like many Indonesians uses only one name, made the remarks after attending a meeting with economic officials Sunday to discuss measures on how to deal with the negative impact of the global liquidity crisis.

He forecast that the global liquidity shortage would only stabilize once developed economies were on a safer footing.

Another development needed to bring the liquidity crisis to an end, Boediono said, is the recapitalization of assets that have been abandoned by investors.

'We will strengthen the banking sector,' the governor said. 'Our target is to maintain sustainable lending growth that can support acceptable economic growth and controllable inflation.'

Meanwhile, Vice President Jusuf Kalla said the impact of the crisis would certainly not be as substantial on Indonesia as on countries such as China and India, which are large exporters to the United States.

'All countries would be affected, so the question is to what extent,' Kalla was quoted as saying by the state-run Antara news agency. 'The impact varies with each affected country, and I believe the impact on Indonesia will not be as strong as that on other countries.'