Economic Crises Case Study

Indonesia ---- Heading for Another Crisis?

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Abstract:
When the Thai currency baht was floated against the US dollar in July 1997 the currency depreciated drastically. This sudden devaluation was an indication of the weak financial system of the country and it prompted investors to be sceptical about East Asian markets. All other East Asian currencies also fell drastically in the face of mounting hesitation from international investors. A series of asset value deceleration, bankruptcy and stock market failure followed across East Asia. The widespread collapse was referred to as the East Asian Crisis in the economic history of the world. Indonesia was the hardest hit and most devastated country after the East Asian Crisis. The Indonesian currency, rupiah, depreciated the most among all East Asian currencies. However the prolonged reform process helped the country to overcome the aftermath of the crisis and rejuvenate the economy once again from 2004. The GDP had been rising, inflation was tamed and the deficit had narrowed. With the improvement of the economy, foreign investors were again routing their investment back to Indonesia. However, most of the foreign investments were institutional investments for the country. The issue fuelled great debate amongst economists. Foreign institutional investment (FII) made an economy vulnerable to external shocks. The uncertainty on the part of FII made a country highly sensitive to external problems. The threat posed by the huge stock of FII was most of the time ignored by the Indonesian government. But economists wondered whether the country could face another crisis as the cost resulting would be too high for the hard-earned economic recovery.

Pedagogical Objectives:

• To conceptualise the underlying reason and consequence of the East Asian Crisis.
• To understand the impact of foreign institutional investment in a country.
• To analyse the intrinsic risks of Indonesia and the probability of another crisis in the country.

Keywords :  East Asian Crisis, Foreign institutional investment, Currency basket, Export competitiveness, Current account deficit, Sterilisation policy, Non-performing loan, Social safety network, International Monetary Fund, Bank of Indonesia, Political instability, Bad debt, Inflation, Indonesian exchange rate, Capital inflow, Fiscal and monetary policies