Monday, April 07, 2008 Vincent Lingga , The Jakarta Post
Finance Minister Sri Mulyani Indrawati told an emergency news conference after an unscheduled limited Cabinet session on the economy chaired by President Susilo Bambang Yudhoyono last Thursday that the Indonesian economy was under control and that escalating inflationary pressures were manageable despite the soaring food prices and fuel subsidies.
In a stronger bid to reassure the market, Sri Mulyani put the government's money where its mouth is, stating the government would buy back in cash its bonds maturing between 2008 and 2013.
However, the market will remain jittery, nervously waiting for concrete, credible measures to maintain fiscal sustainability and check the runaway inflation, which cumulatively reached 3.41 percent during the first quarter alone, as against the 6.5 percent inflation target for the whole year.
Year-on-year inflation in March surged to 8.2 percent, already higher than Bank Indonesia's benchmark short-term interest rate of 8 percent.
No wonder that investors, already skittish due to the global financial turmoil, became more worried over what they perceive as higher sovereign risks of the government.
This is reflected in the increase in the risk premium on Indonesia's international bonds to 300 basis points (over the U.S. Treasury bonds) last month from 130 bp last year.
The government's domestic borrowing costs also have risen, as shown by the increase in the yield on rupiah bonds to more than 12 percent from around 9 percent last year.
This is truly worrisome because the government plans to raise Rp 117.80 trillion (US$12.8 billion) from rupiah and dollar bonds this year to help plug its budget hole.
The miserable failure to get a single bid for its zero-coupon bonds auctioned late last month showed how widely different were the government and market perceptions of fiscal sustainability and economic outlook.
The government claims the economic situation is generally healthy and that the underlying assumptions in the revised budget are not much different from the reality.
However, the market sees things differently.
Market players believe the state budget will not be sustainable as long as it remains helplessly strapped to the nasty roller coaster of increasingly costly oil. How could the government still claim the budget is anchored on prudent fiscal management when fuel, power and food subsidies will take up more than 23 percent of total spending this year?
How could the budget be seen as politically viable when energy subsidies alone will exceed budgetary appropriations for capital investment and social expenditure?
The state budget is a communication system, conveying signals to the market and the people in general about behavior, prices, priorities, intentions and commitments. Budget reforms therefore should take particular account of these characteristics.
Even without so many inimical external factors, the budget system is already adversely affected by multiple, converging uncertainties, entrenched patterns of expenditure, severe inflation and structural imbalances between expectations and resources.
The budget system must be built to cope with these realities.
Unfortunately, most of the contingency measures pronounced by the government focus on austerity and high budget discipline, which sadly have so far been the main weaknesses of the government.
None of the measures is designed to reduce fuel consumption or slash fuel subsidies, thereby leaving the budget a helpless hostage to the wildly volatile international prices.
Another problem is that the fiscal stimulus -- more than US$17 billion in budgetary allocations for capital spending this year -- may again come in fits and starts, ill-timed and beyond the bureaucratic machinery's digestive powers. Last year, for example, almost 60 percent of the budget appropriations for capital expenditures was spent in the last quarter alone.
Without significant progress in budget execution, the economic growth target of 6.4 percent -- as against 6 percent forecast by the ADB and the World Bank and 6.2 percent by Bank Indonesia -- will not likely be achieved because private and government consumption remains one of the main drivers of economic expansion, besides investment and exports.
How the government maintains its prudent fiscal management and implements more concerted efforts to bolster exports and investment to offset the impact of the weakening global economy will determine the government sovereign risks and investors' risk appetite regarding its bonds, which in turn will influence the costs of its borrowing.
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