• The global economic downturn triggered by the global financial crisis is far from over. After downward revision to 0.5% growth (January 09), the global economy in 2009 is forecasted to contract about -1.0% – -0.5% (March 2009) and only begin mounting a limited recovery in 2010. Developed economies are undergoing steep contraction, while developing nations will chart growth in the range of only 1.5%-2.5%. The deterioration in the global economic outlook is the combined result of the unabated financial market turmoil, battered confidence and the still limited impact of policy responses on the financial system. In 2010, global economic growth is predicted at about 1.5%-2.5%. Crucial to the recovery process will be the successful outcome of policy responses.  

• The worsening of the global economic outlook has impacted global trade.  WEO Jan’09 predicts growth in world trade volume at minus 2.8% (assuming 0.5% global economic growth). World commodity prices are in decline, despite some recent levelling in this trend. In 2009, non-oil and gas commodity prices are forecasted to drop -29.1% from one year before. On the other hand, however, inflationary pressure is predicted to ease in 2009 and 2010. The most important factors in the softening inflationary pressure are falling commodity prices and lower domestic demand. 

• Economies across Asia have weakened with some nations undergoing contraction. Exports have been hit across the region, and contraction has set in for heavily export-dependent economies such as Taiwan, Singapore, Korea, Japan and Malaysia. Indonesia, India, Vietnam and China, however, continue to chart positive growth.

• Indonesia has not escaped the fallout from global economic developments.  Amid the turmoil on the domestic financial market, Indonesia’s economic performance has begun to slow due to shrinking exports. Since the last quarter of 2008, exports have charted negative growth on weakening demand and plunging commodity prices. In 2009, Indonesia’s economic growth is predicted at the lower end of the projected 4%-5% range with gradual recovery commencing only in 2010. 

• Various policy responses have been pursued to mitigate the impact of world recession and financial market uncertainty. These actions span the range of global packages (such as with the G-20), regional policies (e.g. ASEAN) and policies adopted by individual nations. In ASEAN, action to bolster the existing USD90 billion Bilateral Swap Arrangement (between ASEAN-5 and China, Japan and Korea) has been accelerated with the establishment of the regional polling fund. This initiative is named the Chiang Mai Initiative Multilateralisation and involves USD120 billion in funding commitments. Formal agreement on the operationalisation of the CMIM is expected at the upcoming ASEAN+3 Finance Ministers Meeting in Bali, scheduled for May.

• Indonesia is also pursuing various stimulus policies and crisis mitigation actions. The global liquidity crunch, the deleveraging process and heightened caution among global investors have led to excessive fluctuation and depreciation in the rupiah exchange rate. In response to falling inflationary pressure accompanied by risk of economic decline, a more relaxed course has been adopted in monetary and fiscal policy. The current policy rate stands at 7.5%, compared to 9.50% in November 2008. In 2009, the fiscal deficit is forecasted at 2.5% of GDP, with the planned fiscal stimulus at Rp 73.3 trillion (1.4% of GDP). For crisis prevention, Indonesia has raised the value of the BSA with Japan from USD6 billion to USD12 billion (6 April 2009), while also playing an active role in regional and global cooperation.

• Another option is Bilateral Currency Swap Arrangements using the currencies of the nations involved. Weakening external demand and the global liquidity crunch calls for action to sustain trade volume in the region. One means of response is the facilitation of bilateral trade and direct investment between two nations under a BSCA. The availability of a facility using the currencies of two countries involved in bilateral investment and trade is expected to promote economic transactions between those nations with positive benefits for the GDP. Furthermore, this kind of facility reduces the dependence of the nations involved in the USD, currently the leading denomination in international trade although undergoing a liquidity crunch.

• China is one of several nations that maintain close trading links with many countries in the region. In data on ASEAN trade with trading partners in 2005 (ASEAN Trade Database), China is Indonesia’s fifth most important export destination (8.1%) and the third largest source of imports alongside the US (10.6%). Export destinations ranking ahead of China are the intra-ASEAN market (25.3%), the US (14.3%), the EU-25 (12.5%) and Japan (11.2%). Similarly, the leading sources of imports are intra-ASEAN trade (24.5%) and Japan (14.1%). 

• Indonesia-China Trade Relations. In 2008, Indonesian exports to China came to about USD11.63 billion (8.49% of Indonesia’s total exports), while imports from China reached USD15.26 billion (11.86% of Indonesia’s total imports). China is currently Indonesia’s 4th largest destination for non-oil and gas exports with trade valued at USD7.78 billion, or 7.2% of total 2008 non-oil and gas exports. In 2008, China was Indonesia’s second largest source of non-oil and gas imports after the ASEAN region. At USD14.96 billion, these imports represent 14.9% of total non-oil and gas imports in Indonesia.

• Against this background, BI and the PBC have concluded an initial BSCA for Rp 175 trillion/RMB100 billion or about USD15 billion (23 March 2009). This agreement is effective for 3 years with the possibility of amendment with approval from both parties.  In addition to the BSCA with Indonesia, the People’s Bank of China has entered into similar agreements with other central banks. Examples of this include BSCAs with Bank Negara Malaysia (BNM) (RMB80 billion/MYR40 billion), the Bank of Korea (RMB180 billion/KRW 38 trillion), HKMA (RMB200 billion/HKD227 billion) and the National Bank of Belarus (RMB20 billion/BYR8000 billion). Most recently on 2 April 2009, PBC also signed a BSCA with Argentina for RMB70 billion/ARS38 billion. 

Although renmimbi-denominated imports in Indonesia (from Singapore and the PRC) came to no more than USD105.9 million in 2008, there is considerable potential for use of the renmimbi and rupiah in future trade and investment between the two nations.  This assessment is based on the following:

a. Indonesia-China Trade Relations
In 2008, Indonesia’s exports to China totalled USD11.63 billion (8.49% of Indonesia's overall exports), while imports from China came to USD15.26 billion (11.86% of Indonesia’s imports).

b. FDI from China
Although China currently accounts for less than 1% of total foreign direct investment (FDI) in Indonesia, Chinese investment has undergone vigorous expansion in recent years with FDI up from only USD45.1 million in 2005 to USD139.6 million in 2008 (BKPM, January 2009). Investors from China have also begun operating in infrastructure and power plant projects.

c.  External Borrowing
Indonesia’s private sector external borrowing from China stands at USD0.79 billion (source: Bank Indonesia, December 2008).

d. Business Community Response in Indonesia and China
A series of meetings between Indonesian businessmen with economic ties to China and Chinese businessmen doing business in Indonesia have reached conclusions on the necessity of this facility. These business groups represent a diversified range of business concerns, from animal feeds, digital technology (hi-tech), salt chemicals and agribusiness to mining and oil and natural gas, in addition to business associations representing contractors and infrastructure developers. Initial information suggests the need for RMB to pay for imports in Indonesia previously not possible to the absence of transactions in this currency. So far, trade has been conducted in the USD, which is ultimately converted into RMB, or conversely into rupiahs for Indonesian exporters. Accordingly, this facility will eliminate expense incurred from cross-currency charges.

e. China’s Policy concerning RMB Use in International Trade
In December 2008, the State Council of China announced the launching of renmimbi use in trade with Guangdong Province, Yangtze River Delta, Hong Kong and Macao. Under this project, the Guangxi special autonomous zone and Yunnan Province will also be permitted to use renmimbi with ASEAN nations commencing in 2009. Shanghai has plans to launch this policy for trade with ASEAN, Hong Kong, Macao and Russia.  So far, 18 Chinese companies have been selected for pilot testing in this programme.