Economic ramifications of the Aceh disaster<\/p>\n
David E. Sumual, Jakarta<\/p>\n
Aceh has again become the center of global attention in recent
\ndays. Yet this time, the province has not grabbed the headlines
\nbecause of the separatist rebellion. The strife-torn province is
\nnow in crisis due to another catastrophe, resulting from the
\ntsunami triggered by a 9.0-magnitude earthquake off Sumatra
\nIsland.<\/p>\n
In Indonesia alone, according to the latest data of the
\nMinistry of Health, the death toll from last week's earthquake
\nand tsunami reached 94,100. As a result, Aceh is the worst hit
\nregion in terms of human losses compared to the total number of
\npeople reported killed in 12 countries in the Indian Ocean basin
\nthat has reached 150,000.<\/p>\n
Given the poverty of the affected communities in Aceh, the
\nhuman toll obviously is the greatest loss of this disaster,
\noutweighing its economic impact. In addition to the death toll,
\ngovernment authorities estimate that 500,000 people or roughly 12
\npercent of the population have been displaced by the disaster. In
\ncontrast, the disaster is expected to have little impact on the
\ncountry's economic growth in 2005, and be far less significant
\nthan the Bali bombing in 2002.<\/p>\n
As Aceh contributes only 2.1 percent of Indonesia's gross
\ndomestic product (2003 data), Indonesia's economy is unlikely to
\nsuffer much. Moreover, Aceh's most lucrative industries, -- oil
\nand gas production facilities -- remain in place. Shipments of
\nliquefied natural gas have reportedly not been disrupted. As
\nsuch, the oil and gas production sector that contributed 51.3
\npercent of Aceh's economy in 2003 will not be hampered. It is
\nalso a relief to know that some seaport facilities and airports
\nwere not damaged, increasing confidence that the economic impact
\nwill be short term.<\/p>\n
Drawing a parallel with Kobe's quick recovery from the 1995
\nearthquake indicates that economic growth will be boosted in the
\nmedium term (beyond the second quarter of 2005). Some studies
\neven suggest that national growth and growth in the affected
\nregion picks up in the years after a natural disaster. Despite
\nthe short-term negative impacts, such as slower consumer spending
\nwith the infrastructure and trading sectors hit hardest by the
\nquake, the medium-term growth should be stimulated by increases
\nin spending on infrastructure and construction.<\/p>\n
And the construction, transportation and communications
\nsector, as well as steel and cement industries are set to benefit
\nfrom these reconstruction efforts. This belief is supported by
\nsome academic papers that provide empirical evidence of higher
\nmultiplier economic growth from infrastructure development
\n(Aschaeur, 1995).<\/p>\n
The impact on Indonesian insurance firms was also tempered as
\nmost affected businesses and individuals in Aceh do not have
\ninsurance coverage for that kind of disaster. According to the
\nIndonesian insurance association, the total insurance claim will
\nbe no more than US$1.9 billion. The greater damage in terms of
\ninsurance losses will be from tourist resorts and properties in
\nThailand that according to Munich Re could reach more than $13
\nbillion.<\/p>\n
In fact, unlike Aceh, which does not have a developed tourism
\nindustry, Thailand will suffer more potential losses from
\ntourism, which is one of its important sources of foreign
\nexchange earnings. Foreign tourists in turn may instead travel to
\nunaffected areas such as Bali or Lombok in the near future.<\/p>\n
While it is difficult to find close parallels to the Aceh
\ncalamity, the direct damage on fundamentals is actually much
\nsmaller than that resulting from the Bali bombing in October,
\n2002. Unlike the Bali bombing that affected systematic risk,
\nIndonesia's business sentiment has not been affected. There is
\nalso no panic in the financial market. The rupiah did not move
\nsignificantly, hovering at around Rp 9,300 to the dollar so far.<\/p>\n
Even the Jakarta Composite Index breached the psychological
\nlevel of 1,000 at the beginning of this week. And the higher than
\nexpected inflation of 6.4 percent in December is due to higher
\nexpected inflation resulting from the government's plan to raise
\nfuel prices and has nothing to do with the tsunami.<\/p>\n
The Aceh disaster may also have only a minor fiscal impact in
\n2005 or even be positive for the mid-term fiscal outlook. The
\ngovernment, in our view should be able to collect around $145
\nmillion that according to Vice President Jusuf Kalla is needed
\nfor the immediate relief to supply materials for shelter, food,
\nand medical treatment. Half of that amount may already be covered
\nby fund raising efforts from Indonesian civil society, which from
\nthe media alone so far has reached nearly $25 million.<\/p>\n
Another factor preventing the budget deficit (estimated
\nearlier at Rp 30 trillion or about 1 percent of GDP in 2005) from
\nincreasing is the news of massive international humanitarian
\nassistance and reconstruction aid for Aceh. Assuming that 5
\npercent of the world's total contributions, which according to
\nthe United Nations have amounted to $2.1 billion, go to Indonesia
\n(around $105 million), the funds for immediate relief efforts
\nshould be covered.<\/p>\n
At the same time, the around $3 billion in loan commitments
\nfrom the World Bank and the ADB that have not yet been disbursed
\ncould be partly used for Aceh's reconstruction program. It will
\nbe a major help to finance the $1.1 billion infrastructure
\nspending that according to the coordinating minister for the
\neconomy, Aburizal Bakrie is needed to reconstruct the tsunami-
\nshattered province of Aceh.<\/p>\n
As such, there is no urgency to divert the planned
\ninfrastructure-spending program to the Aceh reconstruction
\nprogram. Given these encouraging developments, it is not
\nsurprising that Standard & Poor's sees no reason to downgrade
\nIndonesia's rating.<\/p>\n
A rosy fiscal outlook can also be expected in the medium term
\nwith the recent debt moratorium proposal from Japanese Prime
\nMinister Junichiro Koizumi, German Chancellor Gerhard Schoeder
\nand British Prime Minister Tony Blair. And Italian Prime Minister
\nSilvio Berlusconi has an even more elaborate scheme in offering
\ndebt relief for Indonesia. This debt moratorium or debt relief
\nwill of course greatly help in reconstructing Aceh as well as
\nhelp ease the pressure on the country's balance of payments and
\naccordingly the rupiah.<\/p>\n
In fact, the government should pursue this debt moratorium or
\ndebt scheme more vigorously rather than the additional aid as it
\nis actually unclear which part of the aid is purely a grant and
\nwhich part is a loan. Moreover, Indonesia still has problems with
\nlaw enforcement and good corporate governance. For sure, without
\nclear coordination and transparency, this aid is susceptible to
\nabuse.<\/p>\n
The writer is an analyst of Danareksa Research Institute. This
\narticle represents his personal views.<\/p>",
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