Economic ramifications of the Aceh disaster

David E. Sumual, Jakarta

Aceh has again become the center of global attention in recent days. Yet this time, the province has not grabbed the headlines because of the separatist rebellion. The strife-torn province is now in crisis due to another catastrophe, resulting from the tsunami triggered by a 9.0-magnitude earthquake off Sumatra Island.

In Indonesia alone, according to the latest data of the Ministry of Health, the death toll from last week's earthquake and tsunami reached 94,100. As a result, Aceh is the worst hit region in terms of human losses compared to the total number of people reported killed in 12 countries in the Indian Ocean basin that has reached 150,000.

Given the poverty of the affected communities in Aceh, the human toll obviously is the greatest loss of this disaster, outweighing its economic impact. In addition to the death toll, government authorities estimate that 500,000 people or roughly 12 percent of the population have been displaced by the disaster. In contrast, the disaster is expected to have little impact on the country's economic growth in 2005, and be far less significant than the Bali bombing in 2002.

As Aceh contributes only 2.1 percent of Indonesia's gross domestic product (2003 data), Indonesia's economy is unlikely to suffer much. Moreover, Aceh's most lucrative industries, -- oil and gas production facilities -- remain in place. Shipments of liquefied natural gas have reportedly not been disrupted. As such, the oil and gas production sector that contributed 51.3 percent of Aceh's economy in 2003 will not be hampered. It is also a relief to know that some seaport facilities and airports were not damaged, increasing confidence that the economic impact will be short term.

Drawing a parallel with Kobe's quick recovery from the 1995 earthquake indicates that economic growth will be boosted in the medium term (beyond the second quarter of 2005). Some studies even suggest that national growth and growth in the affected region picks up in the years after a natural disaster. Despite the short-term negative impacts, such as slower consumer spending with the infrastructure and trading sectors hit hardest by the quake, the medium-term growth should be stimulated by increases in spending on infrastructure and construction.

And the construction, transportation and communications sector, as well as steel and cement industries are set to benefit from these reconstruction efforts. This belief is supported by some academic papers that provide empirical evidence of higher multiplier economic growth from infrastructure development (Aschaeur, 1995).

The impact on Indonesian insurance firms was also tempered as most affected businesses and individuals in Aceh do not have insurance coverage for that kind of disaster. According to the Indonesian insurance association, the total insurance claim will be no more than US$1.9 billion. The greater damage in terms of insurance losses will be from tourist resorts and properties in Thailand that according to Munich Re could reach more than $13 billion.

In fact, unlike Aceh, which does not have a developed tourism industry, Thailand will suffer more potential losses from tourism, which is one of its important sources of foreign exchange earnings. Foreign tourists in turn may instead travel to unaffected areas such as Bali or Lombok in the near future.

While it is difficult to find close parallels to the Aceh calamity, the direct damage on fundamentals is actually much smaller than that resulting from the Bali bombing in October, 2002. Unlike the Bali bombing that affected systematic risk, Indonesia's business sentiment has not been affected. There is also no panic in the financial market. The rupiah did not move significantly, hovering at around Rp 9,300 to the dollar so far.

Even the Jakarta Composite Index breached the psychological level of 1,000 at the beginning of this week. And the higher than expected inflation of 6.4 percent in December is due to higher expected inflation resulting from the government's plan to raise fuel prices and has nothing to do with the tsunami.

The Aceh disaster may also have only a minor fiscal impact in 2005 or even be positive for the mid-term fiscal outlook. The government, in our view should be able to collect around $145 million that according to Vice President Jusuf Kalla is needed for the immediate relief to supply materials for shelter, food, and medical treatment. Half of that amount may already be covered by fund raising efforts from Indonesian civil society, which from the media alone so far has reached nearly $25 million.

Another factor preventing the budget deficit (estimated earlier at Rp 30 trillion or about 1 percent of GDP in 2005) from increasing is the news of massive international humanitarian assistance and reconstruction aid for Aceh. Assuming that 5 percent of the world's total contributions, which according to the United Nations have amounted to $2.1 billion, go to Indonesia (around $105 million), the funds for immediate relief efforts should be covered.

At the same time, the around $3 billion in loan commitments from the World Bank and the ADB that have not yet been disbursed could be partly used for Aceh's reconstruction program. It will be a major help to finance the $1.1 billion infrastructure spending that according to the coordinating minister for the economy, Aburizal Bakrie is needed to reconstruct the tsunami- shattered province of Aceh.

As such, there is no urgency to divert the planned infrastructure-spending program to the Aceh reconstruction program. Given these encouraging developments, it is not surprising that Standard & Poor's sees no reason to downgrade Indonesia's rating.

A rosy fiscal outlook can also be expected in the medium term with the recent debt moratorium proposal from Japanese Prime Minister Junichiro Koizumi, German Chancellor Gerhard Schoeder and British Prime Minister Tony Blair. And Italian Prime Minister Silvio Berlusconi has an even more elaborate scheme in offering debt relief for Indonesia. This debt moratorium or debt relief will of course greatly help in reconstructing Aceh as well as help ease the pressure on the country's balance of payments and accordingly the rupiah.

In fact, the government should pursue this debt moratorium or debt scheme more vigorously rather than the additional aid as it is actually unclear which part of the aid is purely a grant and which part is a loan. Moreover, Indonesia still has problems with law enforcement and good corporate governance. For sure, without clear coordination and transparency, this aid is susceptible to abuse.

The writer is an analyst of Danareksa Research Institute. This article represents his personal views.