Monday, October 17, 2005 Vincent Lingga, Jakarta
Judged against the strong political mandate Susilo Bambang Yudhoyono obtained in last September's presidential election, Indonesia's economic performance during the first year of his administration has been quite disappointing.
His government failed to make best use of its significant political capital to quickly regain investor confidence in Indonesia's economy through bold reforms in priority areas of greatest concern to businesspeople.
Early on during his first week in office last October, Susilo made the right remarks. He signaled quick action in the top priority areas of his programs by making working visits to the Attorney General's Office, and the directorate generals of taxation and customs.
He demonstrated his understanding of the formidable economic challenges the nation is facing by immediately holding meetings with Bank Indonesia's board of governors and with business leaders.
The market initially gave the benefit of the doubt to the uncomfortable mix of technocrats and politically-connected businessmen in Susilo's Cabinet.
He promised to resolve high-profile disputes with foreign investors -- the Cemex company of Mexico, Karaha Bodas, Exxon Mobil and Newmont of the United States. None of them has been settled, further validating the notion that Indonesia is an unpredictable place to do business.
Susilo made a strategic decision to proceed with the plan to hold an infrastructure summit in January, less than three weeks after the devastating earthquake and tsunami in Aceh province and Nias island, North Sumatra.
Infrastructure deficit has indeed become one of the biggest hurdles to investment in Indonesia as poor infrastructure impairs the competitiveness of the economy as production and distribution costs are made much higher than those in other countries. The prospect of imminent power shortages hangs over many provinces.
Economic performance during the first six months (October, 2004 to March, 2005) was fairly impressive with gross domestic product growing by 6.65 percent on a yearly basis in the fourth quarter of last year and 6.35 percent in the first quarter of this year.
The quality of growth also increased significantly with a much stronger foundation as the prime movers shifted more to investment and export. Investments (mostly domestic) grew by 15 percent, as evidenced by a 40 percent robust increase in capital goods imports, and exports expanded by 13 percent.
However, promises and symbolic moves, though needed, are not enough to maintain the momentum of market confidence. Investors require concrete, consistent measures because only consistent and effective implementation can give credibility to government policies. Unfortunately, it is these two factors that are acutely lacking in the Susilo government.
Most foreign investors remained on the sidelines, waiting for consistent policies and strong evidence of credible decision-making. Some foreign investment did flow back into the country but mostly in portfolio capital, which is skittish and can fly out any time at the slightest sign of problems.
Only about five of the around 90 infrastructure projects offered during the summit were eventually taken up by private investors because the government failed to enact more than a dozen rulings badly needed to strengthen legal certainty, straighten out taxation issues, improve the commercial viability of investment in infrastructure and set up a viable tariff system.
Economic growth slowed down to 5.54 percent in the second quarter, the balance of payments prospects worsened amid the steady decrease in foreign reserves caused by the huge need for oil imports and the lack of political courage to reduce the fuel subsidy.
Most analysts now foresee a growth of 5.5 percent to 5.7 percent this year, still respectably higher than last year's 5.1 percent.But this year's economic expansion could have been much faster.
When the government finally decided to bite the bullet in March, it seemed too little, too late. The 29 percent price hikes were rather meaningless in controlling fiscal deficit and fuel export smuggling and the market became increasingly jittery about fiscal sustainability.
The worsening economic conditions forced the government to amend the 2005 budget twice, while most of the reform agenda Susilo promised in such important areas to investors as customs, taxation, logistical arrangements and other basic infrastructure remained mere declarations of intent.
The entirely unrealistic budget for 2006 that Susilo proposed to the House of Representatives in mid-August was the last straw. Even though the draft budget was immediately revised, the damage had been done as the market lost trust in the government's ability to meet economic challenges.
The market immediately and severely punished the government, attacking the rupiah and pushing it down at one time to a five-year low of Rp 12,000 to the dollar in early September, thereby unleashing enormous inflationary pressures from imports. This forced Bank Indonesia to raise interest rates to as high as 11 percent now.
Worse still, only about 18 percent of the 2005 development (investment) budget had been spent as of last month due to bureaucratic inertia, thereby further tightening the contractive impact of the already austere budget.
The market hailed the bold Oct. 1 decision to double fuel prices in order to bring them closer to their economic costs. However, this long-delayed measure could be too bitter for the economy to swallow if the government is not able to cushion the shock impact of the inflationary pressures within the next few weeks.
One may argue that it is not fair to judge the Susilo government by ordinary yardsticks, given the devastating natural disasters in northern part of Sumatra late last year that preoccupied the government for almost two months early this year.
The steady rise in international prices to historical highs is also completely beyond his control.
Investors, however, don't expect instant results in all areas. What they really want to see is a steady progress in the right path of a consistent reform process. Everything does not have to be fixed at once.
It is also well advised for the government to realize that an economic policy cannot be sold in a vacuum. The environment should support the credibility of the policy and the government, notably its economic team.
No one doubts Susilo's integrity. But the market now has low trust in his economic team and several economics ministers have perceived conflicts of interest.
The first anniversary of his administration seems to be opportune for a reshuffle of his Cabinet.
The writer is a Senior Editor at The Jakarta Post.
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