IMO’s article: RI finance and the European debt crisis

While the European Union suffered a severe debt crisis, 2011 was a glorious year for Indonesia’s economy. Our country was the “only emerging stock market to have achieved real gains in 2011” and for the first time since the 1997 financial crisis, Indonesia recovered its coveted investment grade (Reuters).

Despite the financial successes we have achieved in the past year, however, there is no reason for us to disregard the European debt crisis’ future impact on Indonesia.

According to World Bank Managing Director Sri Mulyani: “The top three aspects of the Indonesian economy that would be most affected by the European debt crisis are our rates of trade, capital flows, and remittances.”

What exactly should we do in order to prevent the European debt crisis from stagnating our exports and investments? The answer is through the implementation of these three policies:

Aggressively promote foreign, private and government investments through multiple measures to increase capital flows, liberalize trade through increasing exports and multilateral trade cooperation, and boost economic growth through lowering interest rates

Due to recent economic downturns including the Euro debt crisis, it is expected by AT Kearney that the rate of Foreign Direct Investment (FDI) by private firms will continue to grow at a significantly low rate globally (Gott). Indonesia, however, can prevent the significant reduction of FDI inflow through providing financial incentives such as altering its taxation measures.

In order to be more attractive to foreign investors, China reduced tax rates for Foreign Investment Enterprises from 33 percent to 24 percent and India attempted to lower it’s corporate tax rate as well.  

Bank Indonesia has lowered its 2012 economic growth forecast to 6.5 percent from a previous estimate of 6.7 percent due to the slowing global economy’s possible impact on our rate of exports. In 2011, our exports to the ASEAN region (our number one exporting region) dropped by 2 percent due to Singapore’s weak economic growth and natural disasters in Thailand.

What is more concerning, however, is the fact that between August and September, our exports to the EU and the US fell by 28 percent and 15 percent, respectively. We can see clearly through these statistics that the most significant drop of exports is to the European Union.

Recommending the central bank to lower interest rates would be another policy option that would be especially ideal for the purpose of increasing exports.  

As part of the world’s economy, Indonesia can solve the global financial crisis through trade liberalization by working along other governments, private firms and international organizations such as the WTO, the World Bank and the IMF.

Marsha Sugana
Tennessee, United States