Economic Crisis in Indonesia: A Deep Dive into 1997-1998 Analysis

This homework assignment analyzes the 1997-1998 Indonesian economic crisis, examining the country's economic state before, during, and after the crisis. It explores the exchange rate systems, detailing the devaluation of the rupiah and the shift to an external anchor. The paper investigates the role of short-term interest rates, short-term debt build-up, and the decline in foreign exchange reserves. The assignment also assesses the impact on Indonesia's GDP, the banking crisis, inflation rates, and the role of corporate debt. Additionally, it clarifies whether Indonesia received an international bailout program. The analysis references IMF data and publications, offering a comprehensive overview of the crisis's causes and consequences.

assignment
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Indonesia- 1997-1998
ANSWER 1: Before the crisis, the system of the exchange rate was described as the free
foreign exchange system. But there were some restrictions on the currency’s free movement like
forward sales to non-residents for foreign exchange to minimise the volatility of the exchange
rate. During the time of crisis, the rupiah was devalued by 50 percent against the US dollar, and
it further replaced it as the external anchor along with the basket of currencies which are not
disclosed. After the crisis, the rupiah was devalued by 40 % then 31 % and the nominal
depreciation was targeted against the US dollar ranges from 3 to 5 %.
ANSWER 2: The short-run interest was not a predicator of approaching crisis as the country
was not suffering from the great withdrawals of credit. The stock which was available was not
low as compared to the burden of services of external debt ("IMF -- International Monetary Fund
Home Page", 2016). Further, there was no shortfall of liquidity, and it can be clearly said that the
rate of short-run interest was not a predicator in order to approach the crisis.
ANSWER 3: During the time of crisis there was a build-up of short-term debt, and there was a
sudden stop at US$34.7 billion and the reserves of foreign exchange at US$19.9 billion. Further
as a result there was a weakness in the corporate industry and was unable to achieve access to the
liquidity in order to conduct trade internationally and nationally and further contributed to the
decrease in output ("IMF -- International Monetary Fund", 2016).
ANSWER 4: The GDP of Indonesia was declined by 14.8 percent during the time of crisis.
After the crisis, it also declined by 2 percent before returning to the same position as it was
before the crisis. Further, with the good of amount of rain and the bushfires, the output was
recovered and improved in the terns of trade which were being created by the decline in the

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rupiah. In June 1999, the situation of Indonesia was brought to pre-crisis level ("IMF --
Indonesia", 2016).
ANSWER 5: There was banking crisis during the crisis of Indonesia. Moreover, there was
simply bankruptcy due to the base of the capital of the commercial banks which are inadequate
in order to recover the huge proportion of loans that are partly innate from the financial
repression. During the time of crisis, the capital base was very low. Further, the bad debt
maximized after the reform.
ANSWER 6: During the time of crisis the inflation rate was low, and the huge number of
corporations of Indonesia were borrowing the US dollar. And as a result, the companies which
borrowed the money faced the huge cost which was imposed on them by the decline in rupiah.
Before the crisis, Indonesia had a great deficit of current account and the maintenance of the rate
of fixed exchange enhanced by the external borrowing and further led to great exposure to the
risk of foreign exchange ("IMF -- Asian Crisis", 2016).
ANSWER 7: No, there was no program of the international bailout for Indonesia. This is a
package for rescue for the most impacted economies in order to allow the impacted nations to
escape default. And this package is for financial, banking and currency system reforms.
Therefore, the economy of Indonesia was not affected at that level.

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REFERENCES
IMF -- Asian Crisis. (2016). Imf.org. Retrieved 28 November 2016, from https://www.imf.org
IMF -- Indonesia. (2016). Imf.org. Retrieved 28 November 2016, from http://www.imf.org/
IMF -- International Monetary Fund Home Page. (2016). Imf.org. Retrieved 28 November 2016,
from https://www.imf.org
IMF -- International Monetary Fund. (2016). Imf.org. Retrieved 28 November 2016, from
https://www.imf.org