Causes of the Indonesian Financial Crisis
When the financial crisis hit Asian countries in mid-1997, Indonesia did not escape the impact. It became one of the worst hit countries during the crisis. The question to be answered is what really caused Indonesia, which at the time had a magnificent economic growth to collapse along with most of Asian countries. This paper studies the factors that may be causing the crisis and how the combination of them could lead to such crisis.
Indonesia’s Economy before the Crisis * Indonesia under the governance of President Suharto was considered a growing and vastly developing country, with a 7.9% growth in GDP in 1996. GDP per capita first surpassed $1000 in 1995, growing significantly from mere $70 thirty years ago. Total GDP was US$227 billion in 1996. (exhibit 1) * Surplus on merchandise trade through the 1980s and 1990s. Manufactured exports grew from less than US$1 billion in 1980 to more than US$9 billion in 1990. In 1996 total exports was US$49.8 billion, with a growth of 9.7% from the previous year. 76.5% are from non-oil and gas exports. Main destinations were Japan followed by USA and Singapore. * In 1996, imports totaled US$42.9 billion, grew 5.7% from the previous year. * Indonesia was the third-largest FDI recipient in the Asia Pacific, averaging over US$31 billion per year from 1994 to 1996. In 1997 before the crisis, FDI was US$16 billion. * In 1991, foreign debt increased 66% from 1988. In 1992, the total was US$80 billion, 30% was private commercial loans. (exhibit 2) * Low inflation and stable currency. Relatively low unemployment of 4% out of 85 million workforces.
Contributing Factors * Companies and financial institutions borrowed in foreign currencies mainly US dollars and Japanese yen since interest rates were low compared to rupiah. These loans were obtained without hedging the