The week in review: Grim economy clouds campaign

More bad economic news has clouded the campaign for the July 9 presidential election, two weeks before the campaign period ends. 

That is not because of the shocking statement by presidential candidate Prabowo Subianto last Sunday that the state had lost Rp 7.2 quadrillion due to corruption and inefficiency. 

Almost all analysts, ministers and former ministers immediately rejected Prabowo’s figures as simply groundless, irrational and completely wrong even though he claimed that the number originated from an official statement by Corruption Eradication Commission (KPK) chairman Abraham Samad.

Samad himself denied Prabowo’s statement, asserting that the presidential candidate grossly misquoted him out of context and not from the right perspective.

Prabowo highlighted the huge state losses during a televised debate between him and rival Joko “Jokowi” Widodo on Sunday night, which focused on economic issues. Prabowo said it would be quite easy for him, if elected president, to implement all the grand development programs he had promised because he would simply focus on slashing state budget losses to secure more funds.

But then again, even though the alleged state losses were not as huge as Prabowo asserted in his campaign rhetoric, many things seemed to worsen in the economic sector, especially in the monetary and fiscal outlook.

The latest data shows that Indonesia’s debt service ratio (against export revenues) increased to 46.3 percent in the first quarter from 36.8 percent in the same period last year, much higher than the 30 percent deemed the maximum for a safe level.

Meanwhile, selling pressure pushed down the rupiah exchange rate to as low as Rp 12,027 per US dollar at one time on Wednesday, amid concerns over the country’s trade balance and current-account deficit due to the sharp upward trend in international oil prices caused by escalating tension in Iraq. 

Concerns have also been growing over the significant increase in the private sector’s foreign debts as a default could adversely affect the financial sector’s stability. Bank Indonesia (BI) data as of Tuesday revealed that the private sector’s foreign debts rose by almost 13 percent year-on-year to $145.63 billion as of April.

Even though the latest private sector debt position is not yet dangerous, BI will soon issue new regulations to check foreign borrowing by the private sector. According to the central bank, non-bank companies accounted for 82 percent of the total private sector’s foreign debts. National enterprises accounted for $38.05 billion and Indonesia-foreign joint ventures for $42.76 billion. 

Further bad news from the fiscal sector should worry the new government that will take over in October after the government and House of Representatives agreed on Wednesday to carry over Rp 50 trillion in energy subsidies this year to the 2015 state budget.

The government-House agreement on passing over the fiscal burden to the new government was reached at a plenary session that approved amendments to the 2014 state budget, made necessary by the lower economic growth estimate and consequently smaller tax revenues.

The energy (fuel, gas and electricity) subsidies for the current fiscal year are estimated to increase by 24 percent to 

Rp 350.3 trillion due to rising oil prices, higher consumption and rupiah depreciation. But Rp 50 trillion of this subsidy will be carried over to the next state budget.

The rupiah rate heavily influences the costs of fuel because Indonesia now depends on imports for almost 60 percent of its demand of about 1.5 million barrels a day.

The amended budget for 2014 cut down spending by Rp 43 trillion, derived mostly from capital expenditures. Despite this cut, total spending will still increase from the Rp 1.842 quadrillion set in the original budget to Rp 1.876 quadrillion or 2.4 percent of gross domestic product (GDP) due to the 24 percent rise in energy subsidies.

The budget amendments also slightly changed macro assumptions for the current year, with gross domestic growth set at 5.5 percent, inflation at 5.3 percent, the average rupiah rate at Rp 11,600 to the dollar, the short-term interest rate at 6 percent and the average oil price at $105/barrel.

Finance Minister Chatib Basri therefore warned that whoever won the upcoming presidential election would not have many policy options, unless he slashed energy subsidies.

*****

In a shocking revelation of more details on the dismissal of Prabowo Subianto from the military in 1998, former military commander Wiranto asserted Thursday that Prabowo had been discharged for ordering the abduction of pro-democracy activists between late 1997 and March 1998.

The confirmation could scupper Prabowo’s presidential hopes as many did not question the credibility of the information even though Wiranto is a member of the campaign team for Prabowo’s rival, Joko “Jokowi” Widodo.

Wiranto, who was Prabowo’s superior at that time, said military leaders had not ordered the abductions, emphasizing that the abductions were an initiative taken by officers under the command of Prabowo, then head of the Army’s Strategic Reserve commander (Pangkostrad).

Prabowo’s supporters have long tried to play down his dismissal from the military, calling it a past incident that has no bearing on his suitability as a presidential candidate.

— Vincent Lingga

The Jakarta Post | Editorial | Sun, June 22 2014, 11:40 AM

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How Salim Group reemerged from near bankruptcy to vast conglomerate

When autocratic president Soeharto fell in May 1998 after almost 32 years of rule with steady, robust economic growth, he left behind an economy in shambles floating on a corrupt bureaucratic system polluted by business cronyism and nepotism.

So fragile was the foundation of the economy that the crisis caused one of the most substantial wealth destructions in modern history. The rupiah melted from Rp 2,500 to the dollar in mid-1997 to as low as Rp 17,500 and pushed an estimated 30 million people into dire poverty as the economy contracted by 14 percent in 1998.

Soeharto’s fall certainly set off a devastating backlash against Liem Sioe Liong (aka Sudono Salim), who had been the leader of Soeharto’s business cronies and had owned the largest conglomerate in Indonesia and controlled the country’s largest private bank; vast oil palm plantations; flour milling, cement, noodle and cooking oil businesses; and hundreds of other companies.

Most analysts and politicians then predicted that the tornado of anti-crony backlash would wrench away all Liem’s assets and crushed the Salim Group as political pressure and demonstrations virtually demanded “blood” in revenge.

 Liem did lose most of his business assets, including Bank Central Asia (BCA), almost 300,000 hectares of oil palm estate, automobile and cooking oil companies and cement industries, as he had to pledge hundreds of companies, worth more than US$5.5 billion, to the government as security to cover debts incurred during the economic crisis.

But less than 15 years later, the Salim Group has not only survived but has grown to become one of the largest conglomerates in Southeast Asia.

Forbes magazine last year put Anthony Salim, Liem’s youngest son, who replaced his father as the CEO of the Salim Group, at number three on its list of the 50 richest Indonesians, with an estimated $6.3 billion in assets spread out across Indonesia, Singapore, China, Australia, the Middle East and Africa.

The latest book on Liem and his business group by husband-wife authors Richard Borsuk and Nancy Chng, Liem Sioe Liong’s Salim Group: The Business Pillar of Suharto’s Indonesia, documents how Liem had gained Soeharto’s trust since the 1950s and eventually became his most trusted business crony and financier for more than three decades.

Many books and articles have been written about Liem and other Chinese Indonesian businessmen who thrived during Soeharto’s rule, but this book is quite special because it includes the results of many hours of interviews with Liem and Anthony between 2006 and 2007.

These interviews were the first time Liem, who died on June 10, 2012, and Anthony had talked to writers on a wide range of topics because the Salim Group had always been averse to publicity.

It is to the credit of Borsuk, who had more than 40 years of journalistic experiences in Asia, including in Indonesia as the Asian Wall Street Journal’s correspondent from 1987 to 1998, and Nancy, a scholar and business analyst with experiences in Thailand and Indonesia, that their perseverance and good reputation enabled them to gain Liem and Anthony’s trust.

Another factor that made the 573-page book rather outstanding and credible is that it is not an autobiography. The writing was, from the outset, undertaken as an independent venture. It was neither authorized nor financed by the Salim Group or the Liem family, the authors assert.

Further contributing to the book’s empirical richness and analytical depth, is that the authors also conducted research in Jakarta, Singapore, Hong Kong, Fuqing — Liem’s hometown in China; Kudus — his hometown in Indonesia; and Semarang, as well as interviewing Liem’s business partners and rivals.

The authors also interviewed executives from the Indonesian Bank Restructuring Agency which, on behalf of the government, took over Liem’s assets during the height of the economic crisis, business and political analysts and the executives of the International Monetary Fund (IMF), which gave bailout funds to the government and actively took part in supervising Indonesia’s economic management from 1997 to the early 2000s.

The most interesting parts of the book, which reveals many new facts, are the last seven of the 22 chapters as they show blow-by-blow how Anthony’s strategic business vision and acumen brought the group through the hostile political atmosphere and adverse business climate.

Describing how difficult and dilemmatic the problem he encountered in mid-1998 soon after B.J. Habibie replaced Soeharto, Anthony told the authors “he [Habibie] hated me like hell” because the Salim Group CEO had urged Soeharto in early 1997 to give then vice president Try Sutrisno a second term.

 The book provides insight into how Antony demonstrated his business skills and prowess in negotiating the settlement of the Salim Group’s huge debts, incurred mostly through the failure of Bank BCA, with IBRA while many politicians, including several Cabinet ministers, simply demanded the dismantling or confiscation of the Salim Group’s assets.

He showed his strategic business vision by striving hard to maintain Indofood (flour milling and noodle) as the only major enterprise within the Salim Group after pledging more than 105 companies to IBRA for its debt settlement.

The flour and noodle business turned out to become his main cash cow which greatly aided in the reacquisition of most the business assets he lost in 1998, and even aggressively expanding businesses in dozens of other countries.

The authors tell in a journalistic style the dominant role Liem’s businesses played in the economy and on to describe how an emotional-based nationalization of the Salim conglomerate not only would wipe out any chance of the government to recoup the billions of dollars in central bank credits to BCA but also would cause severe economic disruptions.

Then president Habibie did face a delicate balancing act as he underwent tremendous time pressures to complete debt settlements with the Salim Group and hundreds of other big debtors, many of whom were the business cronies of Soeharto and his children or his relatives, before they tried to strip their assets.

The high-quality analysis and the depth of the material presented in the book rightly commend Liem’s business acumen, skill, instinct, serendipity and networking skills, high talent in choosing the right business partners and ability to win the trust of people, including Soeharto’s generals.

Liem, as Soeharto’s most-trusted business crony, did receive favors and preferential treatment such as monopoly rights in many commodities and businesses, but all this also was related to Soeharto’s mission to develop the economy out of the shambles left behind by Sukarno.

Liem and Soeharto, thus, were simply tied in mutually beneficial relationships. Soeharto needed seed money for economic development as the government was strapped in a liquidity crisis in the mid-1960s and for keeping the military loyal. Liem with his sharp business acumen and access to funds from overseas was well fitted to become Soeharto’s best business crony who, being of Chinese descent, did not pose any political threat to Soeharto.

After the crisis, Liem and his successor Anthony have proven their business group can thrive without patronage. As Anthony once said he and his father did had good access to capital in the early days, but credit should not be given only to capital formation. The important thing is what happens after that.

True, during the Soeharto era, there were many people who had the same access to capital but they did not manage it properly.

Liem himself once told the authors that he was successful because things had fallen into place for him. He had been at the right location, at the right time and had the right connections.

In another quotation summing up the role of Liem, the book cites excerpts from an obituary article by Endy Bayuni, former chief editor of The Jakarta Post, on Jan. 12, 2012: “For good or for bad, Liem is very much part of Indonesian history, just as Soeharto is. He just happened to be the right man at the right place and at the right time and used this historical destiny well in building his business empire.”

Liem Sioe Liong’s Salim Group: The Business Pillar of Suharto’s Indonesia
Richard Borsuk and Nancy Chng
ISEAS Publishing, 2014
573 pages

Vincent Lingga, The Jakarta Post, Jakarta | Feature | Mon, June 09 2014, 11:36 AM

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Ali Wardhana, the architect
of economic development 

Vincent Lingga, The Jakarta Post, Jakarta | Opinion | Mon, June 09 2014, 9:20 AM

Professor Ali Wardhana, who was dean of the Jakarta School of Economics at the University of Indonesia (UI) from 1967 to 1978; the nation’s finance minister from 1968 to 1983; and chief economics minister from 1983 to 1988, was, along with the late Widjojo Nitisastro, one of the most distinguished architects of the Indonesian economy.

No wonder, then, that a gathering at the Niaga Financial Center to celebrate his 86th birthday was packed to capacity with scholars, business leaders, and former and current ministers.

Further contributing to the air of significance was the oration made by Anwar Nasution, formerly one of Wardhana’s students and later his teaching assistant. Nasution himself was the dean of the Jakarta School of Economics from 1998 to 2001; senior deputy governor of Bank Indonesia (BI) in 1999-2004; and chief of the Supreme Audit Agency (BPK) in 2004-2009.

Nasution noted in his speech that it was to the great credit of Wardhana, who mastered macroeconomic and monetary theories that he, as finance minister, was able to tame the hyperinflation of the mid-1960s — bringing it down from almost 660 percent in 1966 to 85 percent in 1968, and then reducing it to 10 percent in 1969.

His accomplishments set the macroeconomic foundations for the launching of Indonesia’s first Five-Year Development Plan under Soeharto.

 Wardhana was also lauded as the first Indonesian finance minister to introduce a balanced budget, using development assistance or “soft loans” from developed countries and multilateral development banks to manage the fiscal deficit.

Certainly, Wardhana’s fiscal management achievements from 1968 to 1983 and his deft handling of macroeconomic policy in 1983-1988 should also be attributed to his being a part of Soeharto’s strong economic team.

Soeharto’s economic team, at least during the first two decades of his authoritarian rule, was effective because its core members consisted of like-minded professionals — individuals like Mohammad Sadli, Soebroto, Emil Salim and JB Sumarlin — who had built trust through long personal association. And just as importantly, because the team had a clearly recognized intellectual leader in Widjojo.

Like Widjojo and Salim, Wardhana received his PhD in economics at the University of California at Berkeley.

With the trust and backing of president Soeharto, the close-knit team designed the economic platforms of Soeharto’s first Cabinet, and later oversaw the implementation of the whole sequence of economic policies — from the stabilization stage, through the rehabilitation stage and into the period of development — allowing for a guarantee of coherence and consistency.

But it was no easy task for Wardhana and the other members of the economic team to sell economic policies to Soeharto; they had to compete for trust and attention with Soeharto’s business cronies like Sudono Salim, who often acted as “personal economic advisers”.

Liem Sioe Liong’s Salim Group: The Business Pillar of Suharto’s Indonesia, a book coauthored by husband and wife Richard Borsuk and Nancy Chng, illustrates the rivalry between the people fighting for Soeharto’s attention.

In a series of interviews with the authors of the book, Anthony Salim, Sudono’s youngest son and current chair of the Salim Business Group, recalled multiple occasions when he and his father would bump into Widjojo coming out of meetings with Soeharto.

“He didn’t like us very much,” Anthony said of Widjojo.

Considering the complex decision-making process at the top, Wardhana’s achievements are a credit to his perseverance and patience in convincing Soeharto of the merits of the economic policies he and his team championed, as well as of the appropriate sequence by which they should be implemented.

Wardhana’s forward-looking policy of liberalizing Indonesia’s capital accounts in the early 1970s, though not without risks, flew in the face of conventional economic theories.

But it was the open capital regime and the 1967 Foreign Investment Law that regained market and investor confidence in Indonesia, triggering substantial injections of foreign aid as well as huge inflows of private capital into an economy left in virtual shambles by then president Sukarno in late 1965.

Besides the loyalty of the armed forces and the foreign direct investment (FDI) and business development that was backed by Soeharto’s business cronies, foreign development assistance with soft terms and more than 30-year-long rates of maturity became a pillar of Soeharto’s rule.

Also of strategic importance, according to Nasution, was the internationally celebrated fiscal and monetary management Wardhana implemented during Indonesia’s more than 10-year-long oil boom.

Indeed, during Soeharto’s rule, fiscal and monetary management was judiciously coordinated; Bank Indonesia, the nation’s central bank, was not politically independent, but was included in the presidential Cabinet. That decision was what protected the economy from what economists have referred to as the “Dutch disease”, or curse, of natural resources.

The government wisely made use of the windfall stemming from oil profits to develop basic infrastructure, including irrigation networks (enabling the country to achieve rice self-sufficiency in 1984), small plantations, rural health service centers and thousands of elementary and secondary schools.

Countries in the Middle East, Africa and Latin America that are rich in natural resources like oil and diamonds are often plagued with persistently poor economic growth when compared to neighbors with comparatively less bounty.

The Dutch disease strikes when windfall profits from natural resources cause domestic currency to appreciate. Currency appreciation, in turn, makes agricultural and manufacturing products less competitive on the world market. In addition, a government flush with revenue has less incentive to promote economic diversification.

The writer is senior editor at The Jakarta Post.

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View Point: Presidential
candidates promise, but
where will all the money
come from?

Vincent Lingga, The Jakarta Post, Jakarta | Opinion | Sun, June 08 2014, 1:07 PM

The two presidential-candidate pairs, Joko “Jokowi” Widodo-Jusuf Kalla and Prabowo Subianto-Hatta Rajasa, have revealed their economic platforms, showing the grand designs of their economic management for 2014-2019.

Both the platforms are similar, designed to develop a strong economy based on developing agriculture and manufacturing with a narrowing degree of inequality in income and asset ownership.

Naturally, food, energy, physical infrastructure and education (human capital) are central to their working programs.

But neither pair of candidates has stopped at simply showing their grand designs; they have also stipulated in the documents filed with the General Elections Commission (KPU) a series of concrete steps and measures to implement their programs.

As the designs are similar, so are the action programs, as illustrated by the following examples. Jokowi-Kalla: Improve irrigation networks for 3 million hectares (ha) of rice fields, opening 1 million ha of new rice fields outside Java; build 10 new airports, 10 seaports and 10 industrial estates, as well as 2,000 kilometers of road and 5,000 traditional markets, and offer 12 years of compulsory education. 

Prabowo-Hatta: Increase per capita income from the current Rp 35 million (US$2,951) to Rp 60 million in 2019 with annual economic growth of between 7 and 10 percent; create 2 million jobs annually; open 2 million ha of new farmland mainly for food crops; build 3,000 km of new road and 4,000 km of new railway, and replant 77 million ha of damaged forests.

While these action programs are badly needed to improve the economy and set it on a faster growth path, there is still a big question as to where all the money to finance these programs will come from.

The problem is that over the past four years and, most likely, through the next five years, the fixed components of central government spending — personnel expenditure, debt servicing and amortization, energy (fuel and electricity) and fertilizer subsidies and transfers to regional administrations — already use more than 85 percent of the annual state budget.

Hence, only about 10 to 15 percent of the state budget will be available for government investment in infrastructure if the huge amount spent on energy subsidies is not cut down and budget losses due to inefficiency and corruption are not decreased.

Neither candidate said anything meaningful regarding the budgetary system or fiscal management; nor did they refer to the format or structure of the budget they plan to implement if elected.

Jokowi and Kalla, like Prabowo and Hatta, set a target to increase the tax ratio — tax receipts as a percentage of gross domestic product (GDP) — from 12 percent to 16 percent in 2019, but they did not elaborate on how they would achieve it. They also committed themselves to phasing out the fuel subsidies.

 However, without any realistic course of action, these programs are little more than wishful thinking or dreams.

The Prabowo-Hatta pair did stipulate in its platform several measures related to the budgetary system, but again they were mostly statements in normative terms, such as a commitment to reform budget management and increase budget spending to Rp 3,400 trillion per year from the current Rp 1,600 trillion.

Doing nothing substantial about the hugely wasteful spending on fuel subsidies would threaten fiscal sustainability and, consequently, increase sovereign risk and government borrowing costs.

Within the coming few weeks before the July 9 election, in order to lend credibility to their promises, both presidential candidates should be more forthcoming about the fiscal management and budgetary system they plan to implement to inform voters of what they can expect.

This is because the state budget process is the only mechanism available for disciplined decision-making. The budget must encompass all the fiscal operations of government and must also force policy decisions with financial implications to be made against a background of hard budgetary constraints and in competition with other demands.

A budgetary system is a communication mechanism, conveying signals about behavior, prices, priorities, intentions and commitments. Budget reforms should take particular account of this characteristic, as effective communication would carry all stakeholders through the reform process. 

Fiscal policy must take account of the need to ensure the timely flow of funds to programs and projects. This requires a medium-term approach to the adjustment of budgetary imbalances, program development and evaluation.

In other words, the total amount of money a government spends should be closely aligned with what is affordable over the medium term and, in turn, with the annual budget; such spending should be appropriately allocated to match policy priorities, and spending should produce its intended results at the least expense.

A budgetary system, however good, is not self-contained. In particular, the system is adversely affected by multiple elements, converging uncertainties, entrenched patterns of expenditure, inflation and structural imbalances between expectations and resources.

The system must be built to cope with these realities, while being aware of self-inflicted uncertainties or rigidities.

But, whatever reforms the candidates commit to, they must realize that reform needs a broad-based sentiment that things have to be changed, and it needs leadership that is able to translate that massive dissatisfaction into concrete programs. 

That is why bold reforms often require, as a necessary condition, a perception of crisis, or at least a sense of chronic deterioration. The challenge for the candidates, however, is to find a way to convey such a message to voters without sowing the seeds for exaggerated pessimism.

The writer is a senior editor at The Jakarta Post.

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