BPS Recalls 4-Month Deflation Has Occurred in the 1998 and 2008 Crises

TEMPO.CO, Jakarta - Statistics Indonesia (BPS) reported deflation of 0.03 percent for August 2024 on a monthly basis. Deputy for Distribution and Services Statistics, Pudji Ismartini, stated that the Consumer Price Index (CPI) decreased from 106.09 in July 2024 to 106.06 in August 2024.

“This month's deflation is lower than July 2024 and marks the fourth consecutive month of deflation this year,” Pudji said in an online presentation on Monday, September 2, 2024.

The sectors that contributed most significantly to this deflation were food, beverages, and tobacco, with a decrease of 0.52 percent, leading to a deflationary contribution of 0.15 percent.

“It's important to reiterate that the four-month deflation phenomenon seems to be more driven by supply-side factors. Whether this causes a decline in people's income requires further study to confirm this assumption,” Pudji explained.

Pudji added that experiencing deflation for four consecutive months is not unprecedented in Indonesia.

The 1998 Monetary Crisis

Following the 1997 Asian financial crisis, Indonesia witnessed deflation for seven consecutive months, from March to September 1998. The primary drivers of deflation during this period were the depreciation of the rupiah exchange rate and the decline in prices for several types of goods.

The year 1997 marked the beginning of the 1998 monetary crisis, also known as "krismon". Starting in August, the value of the Indonesian rupiah began a sharp decline, reaching its lowest point the following month in September. Within a year, the rupiah, initially valued at around Rp2,380 per US dollar, experienced a staggering 600% depreciation.

The peak of the crisis occurred in July 1998, when the exchange rate reached Rp16,650 per US dollar. Although the rupiah began to recover by December 31, 1998, reaching Rp8,000 per dollar, the damage to the Indonesian economy was already significant because the people's economy had already slumped.

In addition to the currency depreciation, another key factor contributing to the monetary crisis was the surge in private-sector foreign debt. By March 1998, out of a total debt of US$138 billion, US$72.5 billion was private debt, with two-thirds being short-term debt maturing within the same year.

Indonesia's foreign exchange reserves of only US$14.44 billion were insufficient to cover the debt, let alone the interest payments. This massive foreign debt burden placed immense pressure on the Indonesian economy.

The 2008 Economic Crisis

As reported by ocbc.id, the 2008 economic crisis, often referred to as the worst economic downturn since the Great Depression, had a global impact. The US stock market experienced a sharp decline, with losses reaching US$8 trillion between 2007 and 2009. The crisis also led to a surge in unemployment, reaching 10% in the US by October 2009.

The 2008 crisis also weakened the performance of the bond market, with average price declines peaking at 27.4% in October. Indonesian bonds were not spared either, experiencing a price plunge and a jump in yields from around 10% to 17%.

To mitigate the crisis, the Indonesian government issued three Government Regulations in Lieu of Law (Perppu) in October 2008. Perppu 2/2008 expanded the types of assets that banks could use as collateral to obtain loans from Bank Indonesia, effectively strengthening the central bank's role as a lender of last resort. 

Perppu 3/2008 aimed to bolster the role of the Deposit Insurance Agency (LPS) during a crisis, while Perppu 4/2008 on the Financial System Safety Net (JPSK) established mechanisms and coordination procedures between institutions to prevent and resolve financial system crises.

SUKMA KANTHI NURANI I HENDRIK KHOIRUL MUHID  I ILONA ESTHERINA

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