PUBLICATIONS & REPORTS

PUBLICATIONS & REPORTS

The Impact of the Balance of Payments and Financial Crises on Indonesia’s Foreign Trade and Economic Performance

Author William E. James
Date of Publication 1999. 8
No. 1999-16
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Contents Introduction

Indonesia, Korea and Thailand were the Asian countries most seriously affected by the financial and balance of payments crises that began in Thailand in July 1997. This study examines the impact of the “twin crises” on international trade and trade-related economic activity with a focus on non-oil/gas imports and exports in the case of Indonesia in the period of 1997 to mid-year 1999. The severe currency depreciation did result in a real depreciation and a change in relative prices of tradable to non-tradable goods and services in the case of Indonesia. The resulting rise in net exports in the current account (measured in US dollars) was mainly the result of import compression not export expansion. The volume of exports expanded, however, weak international prices in US dollar terms meant that the value of merchandise exports declined. The evidence suggests that export recovery could occur if prices rebound. Imports of food for household consumption actually increased in 1998 compared with 1997. Moreover, import compression did not affect all sectors equally. Textiles and apparel were able to maintain imports and exports at close to pre-crisis levels. Electrical machinery exports also fell by a smaller amount than one would have expected, given the dependence on imported components. Changes in the direction of trade were also fairly significant and will require future research to understand fully.