Living with inflation, capital inflows, poor infrastructure

Vincent Lingga, The Jakarta Post, Jakarta Tue/12/21/2010 Opinion

The biggest policy challenges for the Indonesian government in the year ahead include how to cope with rising inflationary pressures, ensure less volatile and sustainable capital inflows and accelerate the development of infrastructure.

Certainly, the large role portfolio investment plays in total capital inflows and the ensuing risks of asset price bubbles pose challenges for controlling inflation, especially in case of sudden capital reversals.

The year may end with a cumulative inflation of at least 6.2 percent, much higher than last year’s 2.78 percent. But this would not prompt the central bank to immediately raise its benchmark interest rate, which has remained at 6.5 percent since August 2009, because the rise in food prices, caused by weather anomalies that reduced supplies, was the main driver behind the increase in the consumer price index.
The reluctance to hike interest rates, at least until the end of the first quarter, also stems from great concern that a further widening of interest rate differentials would attract more short-term capital inflows, further complicating the central bank’s liquidity management efforts.
But the risks to the inflation outlook have increased due to the combination of persistently strong domestic demand, supply disruptions caused by weather anomalies and inflationary pressures due to capacity constraints and inefficient logistics.
The government measure to gradually phase out fuel subsidies starting in April will also aggravate inflationary pressures next year.
The growth of gross domestic product in the third quarter surprised on the downside, coming in at 5.8 percent year-on-year, down from 6.2 percent in the second quarter due to the unusually wet weather which adversely affected mining, construction and exports.

But, persistently high domestic consumer confidence will still enable the economy to close this year with a minimum expansion of 6 percent.

Consumer spending will remain the main driver of economic growth, which is estimated at between 6.3 and 6.5 percent next year, due in part to the positive wealth effect from the stock market and rising wages.

“ Since infrastructure development consists mostly of multi-year projects, the highest growth the economy may achieve next year is 6.5 percent. A faster expansion may cause the economy to burst at the seams.”

Bank Indonesia will continue the use of a mix of monetary policy and macro-prudential measures to deal with inflation risk, strong capital inflows and high excess onshore liquidity by setting higher compulsory reserve requirements, including on dollar deposits, and regulating vostro accounts (rupiah demand deposit accounts held by non-residents in domestic banks).

The central bank will use more liquidity management tools rather than the policy rate. Hence, Bank Indonesia’s first line of defense will continue to be liquidity withdrawal by raising the dollar reserve requirement and further lengthening the maturity of the term deposit facility to lock in additional liquidity for longer durations.

The 6.25 percentage point interest rate differential, and substantial improvements in Indonesia’s economic fundamentals, will continue to be magnets of both foreign direct and portfolio investment to the country.

According to the International Monetary Fund in Jakarta, foreign direct investment in the first nine months of 2010 alone totaled US$6.77 billion, compared to a mere $1.92 billion in all of 2009, while portfolio capital reached $14.45 billion against $10.36 billion last year.

Most portfolio capital inflows this year went to buying government bonds ($10 billion), Bank Indonesia’s SBI debt papers ($2.37 billion) and shares ($2.1 billion) as of early October.

Certainly, the best approach to cope with the torrent of short-term capital inflows, and to gain the greatest benefit from them, is to convert the funds into direct investment and initial public offerings (IPO) through the stock exchange and lengthen the maturity of capital inflows, thereby reducing the volatility.

But this requires significant improvement in the overall investment climate, reducing infrastructure bottlenecks and further improving capital market infrastructure to encourage more IPOs and corporate bond issuance.

Inadequate infrastructure has been one of the biggest drags on economic expansion over the past few years. In fact, the country lags behind most major Southeast Asian economies in the adequacy and quality of infrastructure.

Lack of inter-connectivity between major islands has caused wide regional economic disparities.

Infrastructure, such as roads and port facilities, in many provinces has crumbled due to an acute lack of maintenance under severe fiscal restraints. Power shortages and rotating blackouts continue to hit several provinces.

Inadequate infrastructure impairs the competitiveness of the economy because production and distribution costs are made much higher than those in other countries.

Studies by the University of Indonesia School of Economics concluded that inadequate infrastructure and the crumbling condition of existing infrastructure have made the costs of logistics in the country among the highest in Asia, or 14 percent of total production costs, compared to four to five percent in other countries.

The biggest barrier to private investment in infrastructure is land acquisition. The arduous, complex procedures for land acquisition make this component the biggest factor of uncertainty for project cost.

Yet more discouraging is that the government is still drafting a law on land acquisition for infrastructure that should have been completed early this year.

The most optimistic view now is that the bill would be enacted in the first half of 2011, at the soonest. However, because the new law has yet to be supported with government regulations stipulating technical details for its enforcement, more investor-friendly land acquisition legislation can be expected only later next year, or even early 2012.

The government has set up several supporting facilities to help expedite infrastructure financing, such as the infrastructure finance company in a joint venture with the World Bank and Asian Development Bank and an infrastructure fund guarantee.

But don’t expect any substantial improvement in the infrastructure sector unless a strong regulatory framework for a more expeditious land acquisition system is already in place.

The government built only about 120 kilometers of toll roads over the past five years and completed even less than 40 percent of the 10,000 megawatts in new power generation capacity launched under a crash program in early 2006 to cope with the power crisis.

Since infrastructure development consists mostly of multi-year projects, the highest growth the economy may achieve next year is 6.5 percent. A faster expansion may cause the economy to burst at the seams.

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Commentary: Stopping subsidies for private cars could be the best policy of the year

Vincent Lingga, The Jakarta Post, Jakarta | Tue, 12/14/2010 10:47 AM | Headlines

Want to know what an incompetent government looks like?

You’re looking at it.

As early as December 2007 then chief economics minister Boediono, who is now the Vice President, announced after a Cabinet meeting that the government was preparing a program that would restrict the sales of subsidized gasoline only to public transport vehicles and motorbikes, thereby forcing private cars to use fuel sold at international prices.

But the program, which would be phased in initially in Jakarta, West Java and Banten provinces, was eventually buried under the indecisiveness of the government and opposition from the House of Representatives.

Tens of billions of dollars in taxpayers’ money continued to be burned annually into carbon-based emissions by private-car owners.

The government revived the same idea in June but the plan was again shelved due to the acute leadership of the government and resistance from politicians in parliament.

The same song played again in October when fuel subsidies became an increasingly heavy burden on the state budget.

But two weeks before the program was supposed to be initiated in Jakarta and its surrounding towns on Jan. 1, the pathetic government had not shown the House technical details on how the policy measure, which would affect tens of millions of people, would be implemented.

Even state owned oil company Pertamina, which controls more than 95 percent of the distribution of subsidized fuels, has not started logistics preparations.

The question then is how will the government be able to gain a national political consensus for a policy measure that is so strategically important to the nation?

The House would surely not want to be made the culprit for approving a policy that could potentially cause chaos in fuel distribution due to a lack of infrastructure and the inadequate institutional capacity of both Pertamina and gasoline stations.

Having said all that, I don’t mean to say the energy policy is not good.

Instead, I think the move to stop subsidizing fuel to private cars could become one of the best economic policies of the Yudhoyono government.

Technically, socially, economically and politically, the measure is the best option available.

Technically, the measure is not completely new because fuel for industrial users has long been floated on international market prices. Hence, the move will only extend the enforcement of the same fuel-pricing policy to private-car owners.

Since the restriction will start only in Jakarta and its surrounding towns, the program will not likely cause major supply disruptions to private-car owners because most of the gasoline stations in these areas have been selling unsubsidized, high-octane gasoline from Pertamina, Shell, Petronas and Total.

A one-year transition before the policy becomes effective in the rest of Java and Bali and other major islands of Sumatra, Kalimantan and Sulawesi seems adequate for Pertamina and gasoline stations to make adjustments to their storage facilities and logistics arrangements.

Economically, the measure is also the most feasible and one that poses the least risks, yet immediately with the greatest impact, because Jakarta and surrounding towns account for almost 20 percent of subsidized fuel consumption, Java and Bali 40 percent, Sumatra 18 percent and the other islands the remaining 22 percent.

The move also is socially and politically acceptable because it will affect mostly better well-off households or families who own cars.

Hence, the new fuel policy, if approved, will by one stroke generate multiple great benefits to the nation because energy subsidies actually have been a missed opportunity for investment in health and education, reducing poverty and building up infrastructure.

Since almost 55 percent of fuel subsidies have been enjoyed by private-car owners, this budget spending is simply a gross misallocation of scarce resources and a future tax and burden on the economy.

It has been too long for the government’s fiscal management to be held hostage by fuel subsidies. The policy will give investors certainty as to the future direction of the energy policy. Such a long-term perspective and policy guidance is key to wooing investment in alternative, renewable energy such as biofuel and in energy conservation and efficiency programs.

Moreover, as long as the differences between domestic gasoline prices and those in our neighboring countries such as Singapore remain large, it is rather impossible to prevent export smuggling from Indonesia, the vast archipelago country with such long porous coastal lines.

If the House members use their intelligence and reasoning properly, they should approve the new fuel policy, though under a more flexible implementation schedule — say starting next July, instead of next month as originally planned — to allow more time for infrastructure development and logistics preparations.

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RI coal export prospects still bright

Vincent Lingga, The Jakarta Post, Singapore Fri, 11/05/2010 10:50 AM Business

Indonesia, already the world’s largest exporter of seaborne thermal coal since 2005, will continue to be a major supplier to the Asian market even though the quality of its coal reserves has declined to sub-bituminous and even liqnite or lower-rank coal, Garibaldi Thohir, the chief executive officer of publicly listed PT Adaro Energy, said here Wednesday.

“First of all, the biggest international market for coal now is Asia, notably China and India, which are practically on our doorstep,” said Thohir who was here to receive several awards for Adaro Energy at the 2010 Platts Top 250 Global Energy Company Rankings on Tuesday evening.

The ninth annual Platts 250 Global Energy Company Rankings measures companies’ financial performance using four key metrics: asset worth, revenues, profits, and return on invested capital. And to be ranked, companies must have assets greater than US$3 billion.

Thohir said the high economic growth in China and India, which made these countries hungry for natural-resource commodities, notably energy, had drastically changed the international coal market.

Asia now accounts for more than 65 percent of global coal consumption.

Platts analyst James 0’Connell quoted The Australian Bureau of Agricultural and Resource Economics (Abare), a government research agency, as saying recently that India, the fastest growing importer of thermal coal, will import almost 70 million tons this year.

“Indian imports will expand to more than 77 million tons next year as 18.8 GW in additional capacity of power generation is expected to be completed next March,” Abare estimated in a report in June.O’Connell said China, with an annual production already exceeding 3 billion tons, will still import almost 100 million tons this year and 103 million tons next year to fire its huge power generation industry.

Another Indonesian competitive advantage, according to Thohir, is that Indonesia has very low production costs as most of its 95 billion tons of reserves allow for open-cast mining, he added.Yet most important, he added, “our coals produce very low emissions of sulphur, nitrogen oxides and wastes. The benefits of all this for users is that our coal would reduce the costs of their equipment maintenance and ash disposal”.

Indonesian coal exports are estimated by the coal miners association at about 200 million tons this year, much lower than the original projection due to the unusually heavy rainfalls that have affected mining operations.Andre Mamuaya, Adaro Director and Corporate Secretary, said Indonesian domestic coal consumption would also increase steadily as the country is expanding the capacity of its coal-fired power generation to reduce dependence on oil.

“The State Electricity Company [PLN] now uses only about 40 million to 42 million tons of coal per year. But this volume could double within the next five years as several new coal-fired power stations come on stream”, Mamuaya added.The Ministry of Mines and Energy recently revealed the government program to convert diesel-fired power plants with a combined capacity of around 8,000 MW into coal-fired plants.Most of the additional 10,000 MW new capacity being built under the first crash power program which was launched in 2006 is also based on coal.Based on the government’s energy plan, the state electricity company (PLN) will generate more than 50 percent of its output with coal.

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Analysts foresee imminent correction in roaring stock market

Vincent Lingga, The Jakarta Post, Medan | Mon, 10/25/2010 10:33AM

The debt crisis in Greece last April triggered market panic across Europe and set off a free fall in global stocks in May and created a bearish sentiment in the Asian markets. The Indonesian Stock Exchange (IDX) composite index fell to 2,514.11 on May 25, the lowest level since last December, after more than US$5.5 billion in foreign were pulled out.

What a contrast to the mood at the IDX now.

The market has been roaring since early July, hitting all-time highs as the combination of near zero interest rates in the developed countries and bullish sentiment in the largest Southeast Asian economy has made Indonesia a top destination for foreign investors.

More than $13 billion (net) worth of portfolio capital flowed into the financial market through stocks, government and corporate bonds and Bank Indonesia debt papers (SBI) in the first 10 months of the year alone, raising the total value of the financial market to Rp 287 trillion ($32 billion) as of last week.

When the stocks index rose to the highest-ever recorded level of at 3,013.40 on July 21, or up 19 percent from early January, many analysts thought the year’s peak had been reached. But the index continued toward the stars, setting a new all-time record of more than 3,600 recently before dropping off slightly to below 3,600 last week.

Several analysts, however, have raised concerns that stock prices may no longer be sustainable and could enter a roller-coaster cycle because the price earnings ratio (the ratio of share prices against expected income) has exceeded 30 to one — the highest level in Asia.

“I think a significant market correction is in the offing,” said Haryajid Ramelan, an analyst at PT Capital Bridge Indonesia, at an investor gathering in Medan, North Sumatra, last week.

Ramelan said 3,200- 3,300 would be a more sustainable range for the IDX index for the next few months.

Handrata Sadeli, president of PT Panin Sekuritas, said he also forecast a market correction but not as big as last May’s because Indonesia still offered a promising growth opportunity with an increasing number of new shares issues.

The first nine months of the year saw 12 initial public offerings, and 13 more, including one for state company PT Krakatau Steel, are in the pipeline.

Only one of the 12 new share issues declined on the secondary market, while the others gained in price by 12 to 677 percent.

Surya Maulana of PT Dongsuh Securities agreed there would be fairly serious risks of choppiness in equity markets if capital continued to pour into Indonesia as foreign investors could suddenly decide to withdraw their money, as they did in 2008.

“As long as transactions on the IDX are still controlled by foreign investors our market will remain prone to a boom-and-bust cycle,” Maulana added.

“As long as transactions on the IDX are still controlled by foreign investors our market will remain prone to a boom-and-bust cycle.”

However, several other analysts who attended the investor gathering remained confident that foreign investors would continue rushing into the market in part to take advantage of the growing gap between near-zero interest rates in the United States and Japan and the 6.5 percent rate in Indonesia.

As the difference between the rates grows, traders can make more money by borrowing dollars and yen for cheap and investing those funds in higher yielding stocks and bonds in Indonesia.

Several other analysts here are concerned about the torrent of funds flowing from developed countries as they have been pressuring the rupiah to strengthen, risking a bubble in the stock market.

They see the dizzying heights of the stocks as unjustified even in light of the country’s high growth rate, which is estimated at slightly more than 6 percent this year, up significantly from 4.5 percent last year.

The big concern is that the bulk of the foreign money flooding into Indonesia is going into equities and debt instruments, rather than into green-field (new) projects and start-up businesses.

But Maulana said he was confident the IDX would remain bullish at least until the end of the year because investors were unlikely to find better opportunities elsewhere in the world.

IDX director Eddy Sugito has said he is confident that the IDX’s sterling performance will continue because the positive sentiment there is based on a bright outlook on economic fundamentals and the corporate sector supported by strong domestic consumption and high commodity prices.

Many analysts here shared Sugito’s bullish sentiment, noting that the strong demand for commodities in other Asian countries would continue to be the main driver of the IDX’s growth, given Indonesia’s important role in such minerals as gas, coal, nickel, copper and agricultural commodities including palm oil, rubber, cocoa and wood-based products such as pulp and plywood.

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Singapore’s DBS aiming to become leading bank in Asia

Vincent Lingga, The Jakarta Post, Singapore | Tue, 09/28/2010 9:08 AM | Business

DBSg, Southeast Asia’s largest bank by assets (totaling about US$215 billion as of last June), inauurated with great fanfare the Asia Hub of its key operations in a 3.1-hectare building near Changi Airport in Singapore on Monday.

Capitalizing on its deep understanding of the region and appreciation of local cultures, DBS has set its eyes on becoming a leading Asian bank with a strong presence in three key growth areas — South East Asia, South Asia and Greater China (Hong Kong, mainland China and Taiwan).DBS chief executive officer Piyush Gupta pointed out confidently that DBS was well positioned to play a leading role in Asia because it was already strongly entrenched in Singapore (its headquarters) and Hong Kong, the largest hubs of the Asian financial service industry.

The mood at the inauguration was overtly bullish for a bank that has just emerged from three bouts of turbulence.DBS had spent the two years prior to last November in relative leadership limbo and suffered a major fallout as thousands of its clients in Singapore and Hong Kong were burnt in the doomed Lehman Brothers structured products in late 2008.In a bid to maintain its customer loyalty and trust, DBS decided in July to reimburse $84 million to more than 2,150 of its customers in Hong Kong who through DBS bought structured notes from the now defunct Lehman Brothers.

Now with all those problems resolved, DBS seemed poised to expand at a faster pace to broaden its footprint across Asia.“We are strongly committed to growing in and with Asia,” said Gupta, who took over the DBS leadership last November after the sudden death of Richard Stanley who had been at the helm only around one year.Gupta, who has spent two-thirds of his 28-year career in Southeast Asia and Hong Kong with responsibilities encompassing all of Citi’s businesses including financial markets, corporate and investment banking, transaction services, credit cards, retail and wealth management, seems well fit to lead DBS in its expansionary mood in Asia.

Indian-born Gupta’s experience will certainly be a strong asset to help DBS expand in India, where the Singaporean bank already has more than 10 branches and is seeking permission to open eight more. While as of last year Singapore contributed 57 percent to DBS’ total income and Hong Kong 22 percent, the bank aims to achieve a 40:30:30 revenue balance between Singapore, Greater China, South and Southeast Asia, within the next decade.“If we are serious about playing a leading role in Asia we should have a strong presence in China, India and Indonesia,” he said.

The bank already has more than 240 branches across six key markets — Singapore Hong Kong, China, India, Indonesia and Taiwan — and dozens in nine other foreign markets.In Indonesia, where DBS operates through a 99 percent owned subsidiary, PT Bank DBS Indonesia, the 42-year-old bank has dramatically expanded its operational network from three branches in 2004 to more than 40 now in a dozen cities.“We have an aggressive strategy in Indonesia, Southeast Asia’s largest economy, to expand steadily through an organic growth,” he said.DBS Indonesia has set itself an ambitious target to upgrade it self from its current position among the 20 largest banks in Indonesia to being in the top 10 in the next few years.

In another move to strengthen and expand its footprint in the region, DBS early this month shook up its management in Hong Kong by appointing Sebastian Paredes as the new CEO if its Hong Kong unit.Paredes, who has been working in banking for more than 25 years, including 20 years at Citibank, retired early this year as the CEO of Bank Danamon, Indonesia’s fifth-largest bank.

Another DBS senior executive, Andrew Ng, said the bank would invest $192 million within the next five years, to expand its treasury and money market operations, notably in Greater China, India and Indonesia, designed to be the main engine of its financial service growth in the future.

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Julius Baer private bank expands to net Indonesian rich

Vincent Lingga, The Jakarta Post, Singapore Wed, 09/08/2010 10:23 AM Business

The largest Swiss private banking group Julius Baer strengthened its commitment to making Asia its second home market by convening its board of directors meeting here last week, the first outside its Zurich headquarters, and announcing a faster pace of expansion in the region, including Indonesia, Southeast Asia’s largest economy.Julius Baer chairman Raymond J. Baer told a roundtable discussion meeting with financial editors on Monday that his bank would upgrade its Hong Kong office to a booking center, open an office in Shanghai and a trust company in Singapore, in addition to the branch office it set up in the city state in 2006.

The editor forum capped a series of meetings and gala events organized by Julius Baer in Singapore to launch its big bang expansion programs in the region. “Wealth creation in Asia has now outpaced that in the older, developed world and we are expanding our global wealth management, deepening and broadening our market penetration in Asia,” Raymond Baer noted.

A recent survey report by the Merrill and Capgemini consulting company projected that the assets of Asian millionaires will exceed those of their North American counterparts by 2013. In sharp contrast to its rival institutions in Asia, the 120-year old boutique Swiss wealth manager has been in an expansionary mode over the past few years, opening an office in Singapore in 2006 and another one in Jakarta in early November, 2008, during the height of the global financial crisis.

“We started with a staff of only 30 in Asia four years ago but now we have more than 400 with a target of double digits in net new money growth,” added Thomas Meier, chief executive for Julius Baer’s operations in Asia and Mid-East.Julius Baer globally booked US$165 billion in assets under its management as of last June.Julius Baer, however, will not compete head on with commercial banks in Jakarta because as a private bank it focuses and services only so-designated high net-worth individuals (HNWI) with at least $3 million in net financial assets for investment.Its services include asset and wealth management and tax planning, investment consultation and investment funds for both private and institutional investors and securities, as well as foreign exchange trading.

“We focus on the total integration of products and services, with emphasis on wealth protection and creation services, financial planning for short- or long-term goals,” deputy chief investment officer Lee Boon Keng said”

We are able to provide investment advisory services tailored specifically to the needs of our clients because we thoroughly analyze their risk profile, financial needs and review their investment perspective every six months,” Lee added. Julius Baer seemed to have also been benefitting from larger asset inflows because of its lack of exposure to the 2008 American sub-prime mortgage meltdown, which had damaged the reputation of several larger international banks.Clients used to look at the largest banks as the safest but as it turned out after the 2008 financial crisis, it was the big ones that had been most exposed.

“We will act as the catalyst to bring European know-how and investment expertise to Asia and bring Asian investment opportunities to Europe,” Julius Baer Group’s chief executive officer Boris Collardi said. None of the Julius Baer executives was willing to elaborate on the potential market and characteristics of the top rich in Indonesia because of confidentiality, but they all agreed the potential is very big, given the size and growth prospects for the country’s economy.

Raymond Baer asserted that the perception of the infamous Swiss reputation as a tax haven for ill-gotten wealth is now a thing of the past after the Swiss government enforced the Article 26 of the OECD Model Tax Convention which binds member countries to share information in cases of suspected tax evasion and other forms of tax crimes.

This regulation obliges the Swiss government to provide administrative assistance — not only in the form of information about document forgery, but also about tax fraud — to the authorities of requesting countries.“Our government has toughened its laws, requiring Swiss banks to know their clients [know-your-customer code of conduct] and sources of funds they intend to deposit. Would be depositors are required to divulge detailed information, which must be verified,” Baer added

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IMF warns of threat of capital outflow

Vincent Lingga, The Jakarta Post, Jakarta Fri, 06/11/2010 9:56 AM Headlines

The International Monetary Fund (IMF) charted out Thursday a rosy outlook for Indonesia’s economy for the rest of this year with an estimated growth of 6 percent, but warned the government that a volatile global environment could heighten risk aversion and sharply reverse capital flow.

An IMF mission said at the end of its annual assessment of Indonesian’s economy that volatile capital flow complicated the country’s policy strategy, but it urged the government to maintain its policy of exchange-rate flexibility in responding to changing global conditions.

“Globally, there is a lot of liquidity, but the global environment is still volatile even though the financial situation in Europe has stabilized. If the European situation worsens, then heightened risk aversion could trigger a reversal of capital flow,” Thomas R. Rumbaugh, chief of the mission, told a news conference.

Bank Indonesia (BI)’s Senior Deputy Governor Darmin Nasution revealed last week that more than US$2 billion flew out of the country during the height of the recent Greek debt crisis.
Rumbaugh praised the country’s economic resilience in weathering the 2008-2009 global financial crisis and recent turbulence in Europe and attributed the macroeconomic stability to prudent policies the government has pursued in coping with the recent dramatic shifts in the global economy.

The IMF saw BI’s current monetary stance as appropriate but cautioned that as credit growth recovers, the central bank should act firmly to anchor inflation expectations within the target range of 4-6 percent.

Rumbaugh observed the fiscal outlook this year is also supportive of economic stability and consistent with plans to further reduce public debts relative to gross domestic product, which is currently less than 30 percent.

But he urged the government to focus its fiscal policy on structural reforms.
“The tax ratio is simply too low, the government investment spending is too low due to slow budget execution, and spending on subsidies is too much,” added Rumbaugh, division chief at the Asia and Pacific Department.

Energy subsidies alone accounted for $14.5 billion or almost 13 percent of total government spending this year, while tax revenue as a percentage of GDP is less than 13 percent, the lowest in ASEAN.

He said the IMF’s projection of a 6 percent economic growth this year was based on a strong investment recovery as private consumption growth was estimated to remain at 4 percent.
“If investments, which were rather flat last year, do not recover strongly this year, the growth could be less than 6 percent,” he said.

During its 10-day visit in light of the IMF surveillance mechanism, the mission also discussed with economy ministers about the findings of the financial sector assessment program (FSAP) on Indonesia conducted recently by the IMF and the World Bank.

“The FSAP concluded the financial system has made remarkable progress over the last decade, with most major banks reporting high capital standards, comfortable levels of liquidity and solid profitability,” said Herve Ferhani, deputy director for monetary and capital market department, which co-led the assessment.

However, he warned that the government should promulgate clear-cut, precise legal guidelines for dealing with problem banks because the legal framework currently in place was not adequate. The government is in the process of proposing to the parliament a bill on a financial system safety net.

Ferhani also stressed the need for deepening the capital market with new instruments to provide investors with a wider choice of vehicles and reducing corporate reliance on bank funding as well as strengthening the law-enforcement authority of the Capital Market Supervisory and Financial Institutions Supervisory Agency.

“A capital market with a broader variety of instruments could help stem a sudden threat of a reversal of capital flow during times of market turbulence,” he added.

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Don’t cry for me, Indonesia; I go for the good of all

Vincent Lingga, The Jakarta Post, Jakarta Mon, 05/10/2010 10:38 AM Commentary

The headline may fit the farewell message that Finance Minister Sri Mulyani Indrawati is likely to make when she leaves for Washington within the next week or so to take up one of the second-highest positions at the World Bank.

Although Mulyani’s circumstances are very different from those of Evita Peron, as depicted in the famous musical Evita, the emotion evoked by the tear-jerking lyrics of Don’t Cry for Me, Argentina is also befitting of Mulyani’s departure.

The World Bank’s selection of Mulyani to become one of its three managing directors simply highlights her superb qualifications as a technocrat and acknowledges her unique experience derived during her tenures as former executive director at the International Monetary Fund and minister of development planning and then finance in an emerging economy like Indonesia.

Although Mulyani’s decision to join the World Bank constitutes a really a big loss both to the government and the nation, which badly needs her skills, international experience, credibility and impeccable integrity to continue bureaucratic reform, her move is perhaps the best option for all, at least for now.

Mulyani has been in the proverbial hot seat ever since the parliamentary special inquiry commission voted in early March to fault her decision to rescue Bank Century in November 2008, and ask for criminal investigations to be leveled at her and Vice President Boediono, who was then central bank governor.

We still strongly believe that law enforcers will never find any evidence to implicate either of them in corruption or other crimes related to the bank rescue, which succeeded to prevent the country from suffering potentially far worse effects from fallout from the global financial crisis.

But instead of allowing the law enforcers adequate time to investigate the case, which would have required months of investigations into complex financial transactions dating back to 2004, the rowdy politicians from opposition parties have continued to attempt to harass Mulyani and destroy her reputation with slander.

Under such pressure, it was difficult for her to focus on properly performing her task as she was constantly hounded by power- and publicity-hungry politicians backed by the partisan mass media. Meanwhile, the indecisive President Susilo Bambang Yudhoyono seemed to behave like an innocent bystander unable to provide her with strong political protection.

However, her decision to join the World Bank will not only benefit the quality of her life and improve her earnings, which will rise from US$24,000 a year now to more than $480,000 per year, but will eventually benefit the nation too.

As a World Bank managing director for around 75 emerging and developing economies in Latin America, the Caribbean, the Middle East, North Africa, Asia and the Pacific, Mulyani will have three years to broaden her knowledge and experience of economic development and reform in strikingly different economic and political environments.

Despite the World Bank’s shortcomings, and groundless allegations that it has largely been the purveyor of the policies of developed countries, especially the United States, the multilateral development bank, which controls more than $55 billion in annual lending, has a huge trove of experts from all aspects of development.

Employing more than 10,000 well-paid professionals, the World Bank commands a huge analytical machine encompassing a broad-range of knowledge and experience on technical, sectoral and economic development issues.

The World Bank’s experts possess the wealth of real-life development experience that its lending operations around the world have generated, especially because the bank has decentralized its decision-making apparatus by appointing country directors with the power to determine budgets and initiate projects.

The bank’s operations thus not only refer to loans, grants and technical assistance but, often more importantly, to vigorous policy dialogues and advice.

All of this makes up a huge reservoir of knowledge and experience (of failures and successes) in a complex development process that Mulyani will be able to tap into during her stint at the World Bank.

At the end of her three-year term, the body of her knowledge and experiences, combined with the expertise she previously gained as an executive director at the IMF in the early 2000s, would make her a well rounded development economist and leader.

Hopefully the 47-year-old Mulyani will return to Indonesia so that her nation will be able to benefit from her great talent and experiences.

We could even dare to hope that one of the major political parties, preferably the Democratic Party, might nominate her as a presidential or vice presidential candidate for the 2014 presidential election.

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Mulyani needs whistle-blower hotlines for early warning

Vincent Lingga , The Jakarta Post , Jakarta Tue, 04/06/2010 9:28 AM Commentary

Had it not been for a whistle-blower, former National Police chief detective Comr.Gen Susno Duadji, junior tax auditor Gayus Tambunan, several police officers, state attorneys and judges would today be relishing their shares of the US$2.8 million that they allegedly stole from taxpayers.

The public, and notably Finance Minister Sri Mulyani Indrawati, was certainly burned by the painful fact that the sweeping reform at the Directorate General of Taxation, which has cost taxpayers hundreds of millions of dollars, seemed to have failed to set up an early warning system against corrupt officials.

Mulyani, who is locked in a battle against time to regain the public’s confidence in the reform she has led since mid-2007, has moved fast to replace all staff members in Gayus’ department and has ordered a re-examination of the annual tax returns of 15,000 tax officials for the past three years and a probe into their bank accounts.

The problem is simply this - how could Gayus, a junior tax official with a monthly paycheck of just Rp 12 million ($1,200), have had $2.8 million in his bank accounts and lived so ostentatiously — owning hundreds of thousands of dollars worth of property and cars — without raising any eyebrows among his supervisors and colleagues?

Worse, Gayus had never experienced any problems with his annual tax returns. So we must assume he always understated his true income.

Learning a lesson from the actions of “renegade” police general Susno, we think Mulyani should strengthen the internal control mechanism at the Directorate General of Taxation by setting up hotlines for whistle-blowers and members of the general public to report on suspicious behavior of public officials such as tax officers.

Most multinational companies or organizations with worldwide operations, despite operating independent internal control units, set up whistle-blower hotlines as part of an early warning system to keep tabs on their employees’ compliance with laws and ethical standards.

For example, one of the world’s largest oil companies, Royal Dutch Shell, established what it calls the Shell Global Helpline and included on its website manuals that inform stakeholders (suppliers, officials of host government, employees, shareholders and the general public) around the world how to file anonymous reports on the conduct of Shell employees.

Mulyani herself has often complained about the extreme difficulty in finding tax officials with completely clean records or without skeletons in their closets for supervisory roles because of the extreme tolerance for corruption prevalent during the pre-reform era.

But again, as Gayus’ case clearly shows, even in this reform era tax officials remain hesitant to report colleagues either because they too are involved in corruption or they have no faith in their senior officials to follow up on the report.

The most important thing that must be done to ensure the effectiveness of whistle-blower lines is to protect the identity of the tipsters and to act quickly and firmly to follow up on reports of wrongdoing, unethical behavior or the excessively luxurious lifestyles of tax officials.

These factors were outstandingly absent in similar hotlines introduced by several ministries in the past, even under Soeharto’s authoritarian rule that ended in 1998.

Tipsters should be protected from retaliation and any legal consequences even if their reports are not accurate or false as long as they have made their report in good faith and without malicious intent.

A whistle-blower system could consist of a telephone line or a secure website. Obviously, state-owned telecommunications company PT Telkom could easily come up with such IT solutions.

Of course, for the sake of credibility, a whistle-blower hotline should be operated by an independent party, although follow-ups would necessitate an inquiry or investigation carried out in cooperation with tax officials. And even in such investigations, the identity of the whistle-blower should be shared strictly on a need-to-know basis.

Shell, for example, outsourced the creation and maintenance of its global whistle-blower helpline to Global Compliance.

“I think for Indonesia, the President’s Judicial Anti-Corruption Taskforce could be the most qualified to operate such a whistle-blower line, given the integrity of its personnel [leaders],” PT Shell Indonesia’s chief executive officer Darwin Silalahi said.

Such hotlines, Darwin advised, should not be restricted to issues concerning the Directorate General of Taxation but should also envelope corruption in customs and excise tax and land-title registration as well as law enforcement, involving police, prosecutors and judges.

There is certainly a risk that such a hotline would initially be flooded by false reports or information called in to maliciously attack particular officials, but such a risk is still worth taking because the future of the drive to reform the country’s bureaucracy is now at stake.

Besides, the whistle-blower taskforce surely would not be so easily fooled by such false reports or slander.

Look at how even the Corruption Eradication Commission owes many of its high-profile catches to tips from members of the general public.

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Big infrastructure deficit the highest barrier to investment

Vincent Lingga , The Jakarta Post , Jakarta Tue, 03/30/2010 9:00 AM News Analysis

President Susilo Bambang Yudhoyono made the right decision in going ahead with convening an infrastructure summit in mid-January 2005, less than three months after being sworn in, despite suggestions of postponing the meeting due to the devastating earthquake and tsunami that devastated Aceh and Nias, North Sumatra, on Dec. 26, 2004.

Roads and port infrastructure in most provinces had by then begun to crumble due to an acute lack of maintenance funds under severe fiscal restraints caused by the 1998 economic crisis.

Power shortages and rotating blackouts then began to hit many provinces in Java, Sumatra, Sulawesi and Kalimantan and several outer islands.

Five years on and after the second infrastructutre summit in 2006, investors still see infrastructure as one of the biggest hurdles when investing in Indonesia and a primary cause of economic inefficiency and uncompetitiveness.

Business leaders attending the Indonesia Summit here Thursday, which was organized by the London-based Economist media group, publisher of The Economist weekly, even ranked the country’s poor infrastructure as the biggest barrier to new investment.

The rationale is that investors favor to plow their capital in countries that have become an effective and efficient part of the global supply chain. The problem, though, is that an acute lack of electricity, poor and inadequate road networks, grossly inefficient seaports and airports have made the costs of logistics in Indonesia among the highest in Asia.

Panelists and business leaders at the conference blamed the snail-paced development of infrastructure on the government’s inability to take bold reform measures to make the investment climate in that sector conducive for private investors.

Tanri Abeng, one of the panelists at the meeting, put the blame squarely on the government’s inability to reform state companies, pointing out how almost all basic infrastructure, such as power, roads, seaports, airports and telecommunications are controlled by state companies.

“But most of the 158 state firms are quite inefficient. Their combined profits last year were only US$7 billion. In Malaysia, state-owned oil company Petronas alone booked an income of $20 billion,” added Tanri, who in 1998 became the first state-owned-enterprises minister.

Inadequate infrastructure not only impairs the economy’s competitiveness, as production and distribution costs are made much higher than those in other countries, it also hinders access to public services such as health, education and market facilities, thereby hampering poverty alleviation.

President of heavy equipment company Caterpillar Asia Kevin Thieneman agreed, pointing out that the biggest barrier to private investment in infrastructure was land acquisition.
“The problem is land and land,” Thieneman said, adding that the arduous, complex procedures for land acquisition make it the biggest factor of uncertainty regarding project costs.

Yet more discouraging is that the government is still in the process of drafting a law on land acquisition for public interests, such as infrastructure, which, given the current adverse relationship between the government and parliament, may only be completed later this year.

As the new law has to be supported with a series of government regulations stipulating the technical details for their enforcement, we can expect a more investor-friendly land acquisition legislation only next year.

The government has set up several supporting facilities to help expedite infrastructure financing such as an infrastructure finance company in a joint venture with the World Bank and Asian Development Bank and a land revolving fund and a land price-capping instrument.

However, their financing capability is quite small, compared to the hundreds of billions of dollars needed for infrastructure spending within the next five to 10 years. They will serve more as a catalyst for project creditworthiness.

So pessimistic were many businesspeople about the policy direction in infrastructure that they dismissed an announcement of $140 billion in infrastructure spending over the next five years made by Gita Wirjawan, chief of the Investment Coordinating Board, as wishful thinking.

Being a “salesman,” Gita, also speaking at The Economist conference, tried to hype the outlook of Indonesia’s economic prospects by pointing to the programs of building tens of thousands of kilometers of toll roads, and tens of thousands of megawatts of power generation within the next few years.

However, most business leaders at the conference seemed skeptical, taking into account the poor record over the last five years.

The government built only about 120 kilometers of toll roads over the past five years and completed less than 50 percent of the 10,000 megawatts in new power generation capacity launched under a crash program to cope with the power crisis in early 2006.

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Commentary: All the ‘low-hanging fruit’ programs in the first 100 days

Vincent Lingga , The Jakarta Post , Jakarta Thu, 01/28/2010 9:37 AM Headlines

Had President Susilo Bambang Yudhoyono (SBY) anticipated the thundering political noise he would encounter at the outset of his second term, he might not have trapped himself in the euphoria of the first 100-day theatre.

But then there was no reason at all why, after being re-elected with almost 61 percent of the votes, he should have such foreboding. What an unfortunate development it turned out.

was really a rough ride during the first 100 days of the SBY administration, with most of the public trust he gained in the July 2009 election wasted on adversary relations between his administration and the parliament.

The first 45 days saw the government besieged and the national mass media dominated by the tussle between the police and the Corruption Eradication Commission (KPK).
Then over the last six weeks, the public’s attention and the national mass media have been consumed by the parliamentary investigation of the controversial bailout of Bank Century in 2008, which has sapped the energy of the finance minister, the acting central bank governor, deputy governors and directors.

We didn’t actually expect that much from the Yudhoyono government during its first 100 days insofar as real programs of action that would have had a significant impact on the economy.
Because of the some 50 economic programs proposed during that “political spring”, they were all low-hanging fruits that did not require painstaking effort.

Quite a number of the programs consisted simply of making blueprints, plans of action or guidelines for various operations, such as mass rapid transport systems in urban areas, sea transport, inter-modal transportation and ports, food estate and self-sufficiency in corn, soybean sugar and beef.

These could be what Coordinating Economic Minister Hatta Rajasa dubbed “quick win” programs.

Also included in this category was the promulgation or amendments of regulations on the pricing of natural gas for domestic market obligation, tax incentives for renewable energy and domestic market obligation for coal producers, which were certainly achieved.

There was the ceremonial announcement of plans to develop clusters of agriculture-based (mostly palm oil) industries in North Sumatra, Riau and E. Kalimantan and natural gas-based industries in E. Java and E. Kalimantan.

These actions obviously do not immediately produce any significant impact on the economy, let alone make things easier for doing business, as from the outset they had been designed to be implementation over the next five years.

, the catalog of regulations, operational directives, blueprints and plans produced over the past 100 days would not do much in the way of convincing the public the government is really serious about implementing reforms.
But we should still give credit where it is due.

The government also implemented several measures to remove bottlenecks (“de-bottlenecking” as Hatta described it) in business/investment licensing, port-handling, infrastructure funds and customs service operations for 24 hours seven days a week at the four largest ports: Jakarta’s Tanjung Priok, Surabaya’s Tanjung Perak, S. Sulawesi’s Makassar and North Sumatra Belawan.

The ministers of trade, home affairs, justice and human rights, transmigration and manpower, and the chief of the Investment Coordinating Board issued a joint decree designed to expedite all licensing procedures to start up businesses that at present take about 60 days to complete, to only 17, by introducing a one-stop administration center for all kinds of licenses and abolishing 70 kinds of redundant permits.

Yet more significant was the launch of electronic one-stop processing for business/investment licenses starting on Batam Island, near Singapore, in mid-January. This bold measure will make the process much more expedient and transparent.

The 24/7 customs service operations and the application of a national single-window system in the processing of all documents needed to clear goods out of the port area are the first big steps in improving the efficiency of logistical systems that also involves many other government agencies and service companies.

Capping the achievements in the first 100 days was the government establishment Tuesday of PT Indonesia Infrastructure Finance with an equity capital of US$450 million in a joint venture with the Asian Development Bank, the International Finance Corporation (a World Bank subsidiary) and the German development bank DEG as shareholders. This new facility could be a financing breakthrough in accelerating the implementation of long delayed infrastructure projects in the country.

So all in all, taking into account its strong political mandate, we give the government performance in its first 100 days a score of 4 on a scale from 0 to 10.

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Commentary: Beleaguered government throws out sound energy policy

Vincent Lingga , The Jakarta Post , Jakarta Fri, 01/15/2010 9:20 AM Headlines

By deciding to increase budget allocations for energy subsidies by 50 percent to Rp 150 trillion (US$15 billion) this year, the government threw out a sound fuel policy launched early last year to gradually reduce dependence on fossil fuels.

That was strangely a very bad move from a government which just got a strong mandate from the people and whose coalition is supposed to control more than 70 percent of the parliament.
The government launched a strategic energy policy last January by floating domestic fuel prices on international market quotations after crude oil prices fell steeply from their peak of US$147 a barrel in July 2008 to as low as $40.

That was the right momentum for the wise policy because domestic fuel prices at that time — Rp 4,500 a liter (45 US cents) after three successive price cuts in six weeks — were only slightly lower than international prices in Singapore.

The January 2009 fuel-price floatation also was then seen as realistic because the government, in order to prevent a sudden shock to the economy, decided to anchor the floatation initially on fixed-price bands which capped gasoline prices at a maximum of Rp 6,000 per liter and automotive diesel oil at Rp 5,500.

The wise policy that allowed monthly adjustments for fuel prices would provide policy predictability for businesses and investors in energy development, protect the economy from shocking inflationary pressures and spare the government the wasteful political bickering with the parliament any time international oil prices fluctuated widely.

That measure also was rightly designed to free the government from being hostage to the wildly volatile oil market and to remove the fuel-subsidy “time bomb” from fiscal management.
Past experience showed any time the government moved to raise fuel prices, irrespective of its size, there was always political turbulence with the House of Representatives, not to mention street demonstrations and a shocking impact on general price levels.

But President Susilo Bambang Yudhoyono, fresh from a landslide victory in the July 2009 presidential election after winning almost 61 percent of the votes, simply abandoned that sound energy policy at the expense of the long-term good of the economy.

The Cabinet decided Tuesday to increase budget appropriations for energy subsidies to Rp 150 trillion ($15 billion) for this year as international oil prices have now risen to around $80, higher than the average $65 assumed for the 2010 fiscal year.

Had the government consistently implemented the fuel-price floatation policy last year with gradual monthly price adjustments, the government should not have to resort to such a policy flip-flop that is inimical not only to the credibility of the government’s policy-execution ability but also to future investment in energy conservation and diversification programs.
The government should have been fully aware that fuel subsidies do by no means benefit the poor segment of the population but mostly motor vehicle owners.

Subsidies for the poor are better distributed through specifically targeted programs.
And, given our vast, porous coastal areas, the wide fuel-price differences with our neighboring countries such as Singapore and Malaysia, which are only 30 minutes away by boat, are highly vulnerable to abuse by smugglers.

Yet more damaging is that the generous subsidy policy will deepen our dependence on fossil fuels, adversely affect the energy diversification program to promote renewable energy such as biofuel and discourages energy conservation and efficiency.

If the government does have such financial resources to spare, it would have been better to allocate much larger subsidies for micro-credits or biofuel, a wholly local product. Subsidies for biofuel will at least stay in the domestic economy, but those for fossil fuels will flow out of the country as we import more than one third of our consumption.

Also saddening to note, most of the appropriations for the energy subsidies, which are tragically larger than the combined budget allocations for education and health sectors, will be burnt by motorists into carbon dioxide.

Given the strong political mandate the Yudhoyono government just received from the people, we cannot help but get the impression that such a strangely bad policy could have been made only by a beleaguered administration with a weak leadership.

As the current parliamentary inquiry into the controversial bailout of Bank Century in November, 2008, is moving like a loose cannon that could hit the political and economic stability, the government should indeed feel embattled.

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