Regions and Countries

	Table of Contents
p. 8 of 15 BACK | NEXT Map Executive Summary I. Recent Economic Developments A. Growth, Employment, Savings, and Investment B. Fiscal Developments C. Monetary Developments and Prices D. Financial Sector Development E. External Trade and Balance of Payments II. Short and Medium-Term Economic Prospects and Policy Issues III. Corruption as a Challenge to Development Appendix

Country Economic Review - Indonesia : I. Recent Economic Developments

---

E. External Trade and Balance of Payments

1. Trade and Current Accounts

34. Although national accounts data show a small growth in both exports and imports, with falling prices for many commodities, on a balance- of- payments (dollar) basis, trade flows show declinesd. Exports fell 9.8 percent% in 2001, while imports dropped 8.1 percent% (Table ). Even with the decline, the merchandise trade surplus at $25.2 billion is larger than in any year except with the exception of 2000. The merchandise trade surplus is several times larger than the relatively small surpluses run immediately before the financial Ccrisis and provides considerablye cushions the impact of for the country in supporting external debt servicing. The important oil and gas trade moved with other merchandise flows, and the share of total exports of accounted for by oil and gas sales has stayed roughly constant at 22 percent%. In first quarter 2002, on a quarterly basis there is some rebound apparent for both exports and imports, suggesting that purchasing is picking up from overseas.

35. The pattern of trade in 2001 for Indonesia is similar to that of regional its neighbors. Export sales first reflected the weakness in the US United States that emerged in high- technology products in early 2001. Subsequently eExports slowed after the 11 September terrorist attacks. The US United States is a large market for Indonesian exports, accounting for over 16 percent% of total foreign sales in 2000 and 2001. The US market may be even more important than statistics indicate as re--export sites such as Singapore attract a considerable share of Indonesia's foreign sales. Some Indonesian export sectors were hit particularly hard after 11 September 2001, when foreign buyers refused to travel as a result of safety concerns. There were reports that pPurchase agreements at Indonesia's annual trade fair were reportedly about one -half what was expected because foreign buyers failed to show- up.⁷ Industry sources are express concerned that some traditional orders have shifted to competitor nationscountries and may signal future problems for Indonesian producers.

36. The terrorist attacks in the United States also slowed affected service flows, particularly those from tourism. In early 2001, expectations were that tourism was expected to would finally recover strongly from the financial Ccrisis. However, the post- 11 September 2001 protests against and threats to foreigners by fringe extremist groups were widely reported in the global media and discouraged travel to Indonesia. Preliminary estimates suggest that tourist arrivals rose less than 1 percent% in 2001. Heightened concerns over travel safety have also raised insurance costs for insurance. Overall, Indonesia's net service account fell an estimated 8 percent%, bringing the for a deficit of to $18.4 billion. As a result of the changes in both the merchandise and service trade, the current account surplus in 2001, at $5.1 billion, was down $2.8 billion from the peak achieved in the 2000.

2. Capital Account Developments

37. Reflecting the longer-term concerns over business prospects, Indonesia continues to experience private capital outflows. The capital account as a whole was in deficit for the first three quarters of 2001, by $8.6 billion, compared to $6.8 billion for the entire 2000. The deficit was mainly driven by net private capital outflows, amounting to around $8 billion in the first three quarters. In this period, Indonesia suffered from a net outflow in of foreign direct investment (FDI) was of $5.2 billion, against an outflow of $4.6 billion for 2000 as a whole. In comparison, Malaysia, the Philippines, and Thailand are estimated to have received estimated net positive inflows of more than $1 billion each in 2001. Net outflows of portfolio investments in Indonesia were also substantial in 2001, but may have been be running at a lower rate than in 2000. In the first three quarters of 2001, portfolio investment was a negative $2.8 billion, compared to a deficit of $5.4 billion in calendar year 2000., which Again this compares unfavorably with the smaller outflows in the country's regional neighbors. Official flows were also diminished during the first three quarters of 2001, partly due to a decline in the disbursement of program or policy-based loans.

3. Nominal and Real Effective Exchange Rates

38. The rupiah continued to weaken against the U.S. dollar during the first half of 2001, reflecting market anxiety over the pace of structural reforms and political developments, as well as the regional trend (Figure ). Alongside asset markets, in August 2001 the currency rebounded strongly following the smooth political transition of the Ppresidency. The rebound was short-lived, as the events of 11 September 2001 brought renewed weakness to weakened the rupiah. In early 2002, the currency strengthened again, from about Rp 10,400: = $1 to Rp 9,500 = :$1, as a result of the same factors that have led to the rebound in asset markets: the general political stabilization of political conditions and some sound economic policy actions.

39. The rupiah's movement in nominal terms was more or less in line with those that of the currencies of Indonesia's neighborsing countries. However, the its real exchange rate has been appreciating as a result of higher inflation in Indonesia relative to comparator economies. From January 2001 to April 2002, the real effective exchange rate of the rupiah appreciated by 24 percent%, compared to 8.4 percent% for the Philippine peso, 8 percent% for Malaysian ringgit, and 5.2 percent% for the Thai baht. This could imply that tThe significant competitive advantage in exports that the Indonesian exports Indonesia enjoyed over its the country's principal regional competitors during recent years, therefore, could be is diminishing.

____________________

⁷Staff, Department of Economics, Centre for Strategic and International Studies. 2001. Indonesia, Sinking at a Standstill. The Indonesian Quarterly. XXIX/4 (Fourth Quarter): 343

Back D. Financial Sector Development	Next II. Short and Medium-Term Economic Prospects and Policy Issues