In essence, growth in 2007 was driven by strong domestic consumption and external demand, which resulted in a current account surplus. The diversion of assets into emerging market assets contributed to the positive appreciation of the currency in the region. To manage the volatility of the rupiah, Bank Indonesia has made limited interventions in the foreign exchange market.
Pressure on global liquidity had led to a massive short-term capital outflow from the portfolio, followed by a deterioration in the performance of Indonesian financial markets. The global financial crisis also weakened Indonesia's current account performance in the second quarter to the fourth quarter of 2008 (Figure 4). This escalation in the current account deficit was mainly due to declining exports due to the contraction of the global economy and declining export prices of raw materials.
The decline in the balance of payments then triggered a sharp depreciation of the exchange rate, accompanied by high volatility. Investors' behavior to pull their funds out of emerging countries during the global crisis has caused a drop in the stock index of emerging markets, including Indonesia. Global financial pressures also caused a lack of liquidity in the domestic money market, which was reflected in the slower growth of narrow money (M1) and broad money (M2) (Figure 8).
However, the tight liquidity in the money market made it difficult for banks to manage their fund.
Second Round Effects of Global Financial Crisis .1 Impact on Exports
Even though there has been a shift in the main destination of Indonesia's exports to China since 5 years ago, but the Japan and the US markets still become the most destinations of Indonesian exports. The implication of this concentration is that any slowdown in economic growth in the main export destinations as experienced in the global crisis will have an adverse impact on Indonesian exports. The effects in the export-dependent sectors of the global financial crisis appear to be putting significant pressure on wealth levels.
In addition, farmers' income in the real estate sector began to suffer in October 2008 following the collapse in commodity prices. Government programs designed to combat unemployment, such as the National Community Empowerment Program (PNPM) for block grants, disbursement of Grassroots Business Credit (KUR), the unemployment reduction movement and distribution of direct cash transfers, also seem to have some positive impact in improving welfare indicators. The decline in exports, the deterioration of production and lower incomes were simultaneously reflected in the decline in Indonesia's economic growth from 6.3% in 2007 to 6.0 in 2008 and 4.55% in 2009.
Compared to other countries in the world, Indonesia's GDP performance during the crisis has been relatively remarkable. Growth in the electricity, gas and water sectors reached 13.78% and growth in the transport and communication sectors reached 15.53% respectively (Table 2).
Comparison between 1997/1998 Crisis and 2007/2008 Crisis
This performance was supported by the results of some sectors unrelated to external development, such as electricity, gas and water supplies, construction, transport and communication, and the service sector. In the financial market, although it seems that the impact of the latest crisis was greater, because the stock market index fell by 1390 points, in relative terms (percentage change) it was lower (50.6%) than the crisis of 1997 (61.9%).
METHODOLOGY
ECM = residuals of long-term association between variable n = number of explanatory variables in the model. There are several variables that could be used as proxies for economic activity, fiscal policy, monetary policy, and control variables, as shown in the table below.
RESULT AND ANALYSIS 4.1. Empirical Result
Analysis
In the empirical model above, we use M1 as an indicator of monetary policy and real public expenditure as an indicator of fiscal policy. At the operational level in the ITF, the monetary policy stance is reflected in the setting of the policy rate (BI rate) with the expectation of influencing money market rates and again. At an early stage of the implementation of the BI rate, the BI rate was intended to be reflected only in the discount rate of Bank Indonesia one-month paper (known as 1-month SBI).
In general, monetary policy actions are decided taking into account considerations, economic circumstances and macroeconomic characteristics. As shown in the figure below, Bank Indonesia raised the interest rate from 8% to 9.50% in the period from January 2008 to November 2008 in order to limit the pressure of hiking CPI. In addition, in response to the global financial crisis, Bank Indonesia has taken some measures to address liquidity problems in the financial sector. The main objective of the unconventional policy, as shown in Table 4, was to align the interbank rate with the interest rate and the feasibility of its convergence with the interest rate.
In order to reduce excessive volatility in the interbank money market, the interest rate corridor was narrowed on 4 September 2008 and 16 September 2008. The description of Bank Indonesia's policy during the global crisis can be found in the appendix. During both crisis periods, the magnitude of the decline in the average lending rate in the banking sector was much smaller than the fall in the BI rate, reflected in the larger difference between the borrowing rate and the policy rate.
A previous study has shown that the decline in the fund's total bank charges in 2009 tended to be slower than the decline in the BI rate. In addition, the risk premium in the economy was still perceived as high and there was evidence that the banking industry preferred to maintain its profit margin. The reserve requirement policy was changed to provide more liquidity in rupiah to the banking system to achieve liquidity constraints and reduce volatility in the interbank market.
Its impact can be seen in the interest rate of the interbank market, which has fallen since the announcement of the policy. One of the reasons for lower interbank market transaction growth may be the expansion of the Central Bank's fine-tuning operations at that time, which increased access to liquidity by the Central Bank and thus reduced the need for borrowing from the interbank market. The increase in the supply of rupiah has led to an increase in money in circulation in the market (M0), and this may cause a depreciation of the rupiah.
This policy aimed to reduce excessive volatility in the interbank money market and increase the credibility of Bank Indonesia. However, in the Indonesian case, the problem in the fiscal stimulus package was that the regional government has a limited ability to complete their budgets on time.
CONCLUSION
From the domestic side, challenges are related to several conditions that can disrupt the effectiveness of monetary policy, such as excess bank liquidity, the dominance of short-term inflows in the structure of capital inflows, the potential asset price bubble, a shallow financial market and numerous structural problems in the real sector. The cooperation and coordination between the political decision-makers and the timely responses are very important to tackle the crisis. In order to deal with the crisis, monetary policy could not stand alone, but requires coordination with fiscal policy and other sectoral policies.
An effective conventional monetary policy in normal times can become less effective in a crisis due to the high degree of uncertainty, especially with pressure from external circumstances. In terms of fiscal policy, more timely disbursement of government expenditure is important to increase the effectiveness of this policy in stimulating economic output. Arifin, Syamsul, (1998), ≈Effectiveness of Interest Rate Policy for Rupiah Stability During Crisis, Bank Indonesia Buletin Ekonomi Moneter dan Perbankan, December 1998.
Kurniati Y, et al., (2008), ≈Sensitivity of Major Export Commodities to Trading Partner Growth Slowdowns and International Price Changes∆, Bank Indonesia Research Notes: October. Kurniati Y and Meily Ika Permata, (2009), ≈Transmission of External Shock to Indonesian Economy∆. Bank Indonesia Working Paper. (Available in Bahasa). Simorangkir, Iskandar and JustinaAdamanti, (2010), ≈The Role of Fiscal Stimulus and Monetary Easing in the Indonesian Economy During the Global Financial Crisis: A Financially Computable General Equilibrium Approach∆, Presented at Call for Papers - EcoMod2010, Istanbul, 7-10 July 2010.
APPENDIX
Both crises were the result of the global economy, because of the economic and financial interdependence between countries. The impact of the crisis led to a falling value of the rupiah against foreign currencies. The impact of the crisis will affect economic sectors, leading to losses for the community.
The 1998 crisis began with the currency crisis in Bath, Thailand, while the global crisis began with the subprime mortgage meltdown in the United States;. To contain, prevent inflationary pressure, such as the secondary effect of rising fuel and food prices on other goods. To reduce excessive pressures on the interbank money market and to a sufficient extent to maintain sufficient liquidity in banking.
To provide wider access to banks by offering funding with a longer time horizon than the inter-day funding facility. To allow banks suffering from insufficient liquidity to remain solvent and avoid systemic impacts To ease the long-term bank liquidity requirement To provide equal opportunity to rural banks to avail of this funding facility if a short-term liquidity deficit is experienced. To reduce the high risk perception in the Indonesian financial portfolio, which may distort the monetary policy transmission mechanism, the finance minister has bought back IDR41 billion (US$3.89 million) worth of government bonds using the government fund in the central bank account.
To ensure market confidence in government bonds, especially when there are no prices available in the market. To support the rupiah and focused more on preventing the very volatile movement of the rupiah. Agreement (BCSA) between Bank Indonesia and the People's Bank of China (March 23, 2009) - Signing of agreement for an increase in.
To reduce pressure in USD purchases due to transfer from rupiah account to foreign currency account by foreign customers. To meet the temporary demand for USD currency and to provide sufficient adjustment time for banks/market players before their portfolio composition is actually adjusted. To support the balance of demand and supply condition of foreign currency in the local market.
