Global financial crisis may put Indonesia’s strong economic growth and public investment at risk.
Largest World Bank loan ever granted to Indonesia is uniquely designed as insurance, should global financial crisis worsen.
Ensuring that the Government can continue to invest in public infrastructure projects and social programs is key.
March 11, 2009 – After years of remarkable political reform, strong economic growth and investment in public institutions, Indonesia was well positioned to weather most external shocks. But as the scale of the global financial crisis grew, it became clear that no country was totally sheltered from its impacts, with Indonesia no exception. To support Indonesia in its effort to face the worsening economic turmoil, the World Bank announced last week a $2 billion standby loan for Indonesia.
The financing, called a Public Expenditure Support Facility with a deferred drawdown option (DDO), is meant to act as insurance for the country, rather than simply a cheaper source of financing. The facility, which is the largest loan ever granted to Indonesia by the World Bank, is unique for its precautionary and leveraging features, said Joachim von Amsberg, the Bank’s country director for Indonesia, who was in Washington, D.C. last week for the announcement.
“The key is it is preventive, which means it’s given and made available to a country that is not in crisis. Indonesia is affected by the crisis, but it is not itself in crisis,” von Amsberg said. Preventing a national crisis in Indonesia, he noted, requires far fewer resources than to get a country out of a crisis once it happens. “It comes at a time that I think is early enough to help Indonesia weather this storm.”
The World Bank loan is providing the largest portion of a $5.5 billion contingent financing facility, which is also funded by the governments of Australia and Japan, as well as the Asian Development Bank.
"There was the risk, when market financing is not reasonably accessible, that Indonesia wouldn't be able to finance its requirements and then would have to curtail spending." -Joachim von Amsberg, World Bank country director for Indonesia
Protecting public investments
The primary purpose of the facility is to ensure the Indonesian government can continue on its reform agenda and invest in key infrastructure projects and social programs. As well as maintaining public spending, Indonesia has committed to developing a range of policy reforms to immediately increase the stability of the financial sector, as well as taking steps to improve the investment climate and attract more private investors. These steps make up the Government’s strategy to lessen the impact of the crisis on Indonesia.
“The Bank saw this as a very convincing strategy, so we said we would be very happy to help government pull together this public expenditures support facility,” said von Amsberg. “There was the risk, when market financing is not reasonably accessible, that Indonesia wouldn’t be able to finance its requirements and then would have to curtail spending. Now, the World Bank’s support allows government to continue spending through the crisis.”
Leveraging as a strategy
While the $5.5 billion commitment is substantial, von Amsberg pointed out that the amount is only equal to about 6 percent of Indonesia’s total public spending and 1.5 percent of the country’s gross domestic product (GDP). “If we want to have a significant impact, we have to leverage,” he said. “The World Bank can only do so much in this world, so we need to stretch the resources that we have and one way is by mobilizing partners and the other is by mobilizing markets.”
Indonesia will use the new facility only if market liquidity conditions continue to deteriorate and the Government’s access to financial markets is limited. The Bank supports Indonesia’s preference to meet the bulk of its financing needs from the markets, von Amsberg added. “That’s the real innovation of this operation,” he said.
‘Doing as well as it can’
Indonesia – south-east Asia’s largest economy and a member of the G20 – has made all the right moves. The Government is well-organized and has made important policy and economic decisions to keep it as strong as can be expected in a global economic crisis. Conservative fiscal management has been a key factor. The country also has a strong domestic market, exporting only about 30 percent of its GDP and lessening its reliance on the strength of the international economy. Although its growth rate will decline, Indonesia is one of the few countries in the region that is still expected to grow despite the global turmoil.
The country has significantly brought down its public debt – a key factor for reduced vulnerability – from 100 percent in the year 2000 to about 30 percent of its GDP today.
“Indonesia is doing as well as it can in this situation,” von Amsberg said. “We are, as an institution, happy to put our support behind reform leaders in government who have demonstrated that they can achieve results. That’s clearly the case in Indonesia.”
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