00074918.2010.486107
Bulletin of Indonesian Economic Studies
ISSN: 0007-4918 (Print) 1472-7234 (Online) Journal homepage: http://www.tandfonline.com/loi/cbie20
Survey of recent developments
Mark Baird & Maria Monica Wihardja
To cite this article: Mark Baird & Maria Monica Wihardja (2010) Survey of recent
developments, Bulletin of Indonesian Economic Studies, 46:2, 143-170, DOI:
10.1080/00074918.2010.486107
To link to this article: http://dx.doi.org/10.1080/00074918.2010.486107
Published online: 27 Jul 2010.
Submit your article to this journal
Article views: 191
View related articles
Citing articles: 13 View citing articles
Full Terms & Conditions of access and use can be found at
http://www.tandfonline.com/action/journalInformation?journalCode=cbie20
Download by: [Universitas Maritim Raja Ali Haji]
Date: 18 January 2016, At: 19:27
Bulletin of Indonesian Economic Studies, Vol. 46, No. 2, 2010: 143–70
SURVEY OF RECENT DEVELOPMENTS
Downloaded by [Universitas Maritim Raja Ali Haji] at 19:27 18 January 2016
Mark Baird
Bay of Islands, New Zealand
Maria Monica Wihardja
Centre for Strategic and International Studies, Jakarta
SUMMARY
Sri Mulyani’s resignation as inance minister in May disturbed markets and
aroused concern about the government’s commitment to reform. This concern
was partly alleviated by the appointment of two well-respected individuals as
inance minister and deputy inance minister. Further progress with reform will
depend heavily on this new team and other key oficials. Strong presidential support will also be needed to resist attempts by parliament to interfere excessively
with the inance ministry’s work.
The economy continued its steady recovery from the impact of the global inancial crisis (GFC), but the recovery could still be jeopardised if sovereign debt concerns in Europe persist and block the rebound in global trade and commodity
prices. Inlation continues to accelerate, suggesting little room for complacency
on monetary policy. Fiscal policy, on the other hand, remains conservative. The
higher deicit in the revised 2010 budget is not excessive, and is unlikely to be
realised in any case. The real budget challenge is to spend budgeted amounts
fully and well. The new ive-year plan is also conservative and does little to clarify
spending priorities, including for the president’s ‘connectivity’ agenda.
Despite the GFC, poverty continued to decline, thanks largely to the uninterrupted expansion of GDP and to cash transfers to the poor. Unemployment also
continued to fall, although particular groups suffered slight increases in unemployment (young workers 15–25 years old) and somewhat larger reductions in
working hours (urban, non-poor, and male-headed households). Nevertheless the
large and sustained deceleration of manufacturing growth and the closely related
dramatic shift of employment from the formal to the informal sector provide
cause for concern. Distortionary labour market policies may help to explain both.
A new mining law signiicantly alters the legal environment for irms in this
industry, and also introduces long discredited policies intended to ‘increase value
added’ by requiring the domestic processing of minerals. A new law on local government taxes attempts to reduce uncertainty for citizens and investors, but the
nature of overall spending by local governments is of much greater importance
for the investment climate. The central government has recently been seeking to
restore the role of the ‘missing intermediate’ level of government and to boost the
centre’s indirect control over local governments through provincial governments
and governors. This strategy is unlikely to succeed, but it highlights the conlicting requirements for provincial governors to act as agents of the central government while also being accountable to their provincial electorates.
ISSN 0007-4918 print/ISSN 1472-7234 online/10/020143-28
DOI: 10.1080/00074918.2010.486107
© 2010 Indonesia Project ANU
Downloaded by [Universitas Maritim Raja Ali Haji] at 19:27 18 January 2016
144
Mark Baird and Maria Monica Wihardja
POLITICAL DEVELOPMENTS1
On 4 May 2010 the president of the World Bank, Robert Zoellick, announced the
appointment of Sri Mulyani Indrawati, the then Indonesian Minister of Finance, as
a managing director of the World Bank Group effective 1 June. Just hours before,
Sri Mulyani had broken the news of her appointment and resignation as Minister of Finance to her senior ministry oficials (Tempo, 12–18 May 2010: 33). They
were as stunned as the markets, with both stock prices and, to a lesser extent, the
exchange rate reacting negatively to the news (igure 1). When the dust had settled, questions turned to the reasons for her departure and the implications for
economic policy and reform. Perhaps more than anyone, Sri Mulyani has been
credited with maintaining Indonesia’s reputation for sound economic management over the past ive years and with successfully navigating the GFC. She has
also championed the causes of good governance and bureaucratic reform, especially within the Ministry of Finance. Would her departure signal the end of an
era? Or would others emerge to take up the reform mantle?
There is no doubt that it had been a dificult few months for the minister.
Along with Vice President Boediono, she had been targeted in a parliamentary
investigation into the bail-out of the troubled Bank Century. They both argued
that the bail-out was justiied to sustain inancial sector conidence and stability,
and no evidence of wrong-doing in the decision-making process has emerged
(Patunru and von Luebke 2010: 10–12). Yet the hearings, and the related walk-outs
when Sri Mulyani appeared before parliament subsequently, took their toll. Just
as things seemed to be settling down, another scandal erupted around accusations of corruption in the tax ofice. On 31 March, a tax auditor, Gayus Tambunan,
was arrested in Singapore after police investigation of a suspicious Rp 28 billion
bank deposit. This followed revelations by a former national police chief detective, Commander General Susno Duadji, who is also linked to the Bank Century
case and attacks on the Anti-corruption Commission (KPK) (box 1). Gayus in turn
threatened to expose other tax oficials involved in corruption. This was undoubtedly an indication of the dificulty of cleaning up the tax ofice – one of the cornerstones of the minister’s reform agenda. But it also provided an opportunity for Sri
Mulyani to ‘up the tempo’, and she moved swiftly to re-assign several tax oficials
and push for greater disclosure of their inancial assets.
These events were no doubt trying, but not in themselves enough to discourage a staunch reformer such as Sri Mulyani. Perhaps more pertinent was
the growing inluence of Aburizal Bakrie, the current chair of the Golkar Party
and the fourth-richest man in Indonesia, according to the latest Forbes Rich
List (with a reported net worth of $2.5 billion). It is no secret that Sri Mulyani
and Bakrie had crossed swords on several occasions (Patunru and von Luebke
2010: 12). These included Sri Mulyani’s refusal in November 2008 to maintain a
suspension of trading in Bakrie-controlled companies after they rapidly lost a
large proportion of their market value the previous month; disagreements over
Bakrie’s responsibility for the Lapindo mudlow disaster and his plans to buy
into one of the country’s largest gold mines; and the tax ofice’s active pursuit
of allegedly overdue tax payments by his companies. The president’s apparent
1 The authors gratefully acknowledge the contribution of Sunny Tanuwidjaja (Centre for
Strategic and International Studies, Jakarta) to this section.
Survey of recent developments
145
FIGURE 1 Composite Stock Price Index (CSPI) and Exchange Rate
CSPI
Rp/$
3,000
15,000
2,500
12,000
Sri Mulyani resigns
2,000
9,000
Downloaded by [Universitas Maritim Raja Ali Haji] at 19:27 18 January 2016
1,500
CSPI
Exchange rate
1,000
3,000
500
0
1-Jun-2009
6,000
12-Aug-2009
23-Oct-2009
7-Jan-2010
18-Mar-2010
0
1-Jun-2010
Sources: Indonesia Stock Exchange; Paciic Exchange Rate Service.
BOX 1 The SuSnO COnneCTiOn
On 12 March 2010, the Tangerang District Court acquitted Gayus Tambunan on
charges of money laundering and embezzlement. However, the former national police
chief detective, Commander General Susno Duadji, revealed details of tampering by
police oficers and prosecutors in the outcome of the trial. This then led to further
investigations into Gayus’s inances.
Susno Duadji has links to several recent legal cases, involving Bank Century, the
Anti-corruption Commission (KPK) and tax corruption (for details on the irst two
cases, see Patunru and von Luebke 2010: 8–12). It was Susno who facilitated a meeting
between Budi Sampoerna (the former owner of a cigarette conglomerate) and Bank
Century management in order to assist Sampoerna to withdraw a deposit of $18 million when the bank was collapsing. It was Susno’s phone that the KPK wire-tapped
while investigating this case. Susno’s name was mentioned several times in conversations between an Indonesian businessman and one of the state prosecutors when they
were planning to frame two KPK deputy commissioners, Bibit Rianto and Chandra
Hamzah. Susno was also allegedly involved in the suspected set-up of the KPK chief
commissioner (Antasari Azhar); he later strongly denied this allegation, even becoming a witness for the defence in Antasari’s trial.
After he was relieved of his position, and feeling that he had been made a scapegoat, Susno started to release information to the public about several corruption and
tax fraud cases. He claims to possess much more such information, so this episode
may not be over yet.
reluctance to support Sri Mulyani openly in these disputes no doubt relected
his strategy of giving priority to political stability over economic reform, and
it conirmed Bakrie’s growing inluence within the coalition government. Soon
after Sri Mulyani’s resignation, Bakrie was appointed executive chairman of a
146
Mark Baird and Maria Monica Wihardja
new joint secretariat to improve ‘coordination and communication’ among the
coalition parties.
Sri Mulyani did not mince words in explaining her resignation. She commented
in an interview (Cochrane 2010):
Downloaded by [Universitas Maritim Raja Ali Haji] at 19:27 18 January 2016
The (Indonesian) business community is not supportive of having the system coopted for very personal, narrow interests … If they start to allow one party to hijack
it, it is at the cost of everyone else … It is really a concern. It is a battle for Indonesia
now.
Other commentators agreed. While noting that Indonesia’s reputation for prudent economic management would probably remain intact, Hill (2010) expressed
concern at the prospects for continued economic and bureaucratic reform. He
warned that other reformers ‘may draw the conclusion: don’t take on the most
powerful in the land, especially where their business interests are at stake’.
Some of this initial concern was alleviated by the quick appointment of Agus
Martowardojo as inance minister and Anny Ratnawati as deputy minister. Agus
is a respected banker who has won plaudits for his professional management of
the largest commercial bank in Indonesia, the largely state-owned Bank Mandiri.
Anny is a respected inance ministry oficial (Director General for Budget). In the
current political environment, the two may well turn out to be more effective than
Sri Mulyani in proceeding with reform in a more measured and less confrontational manner.
Within the ministry of inance, much will depend on Agus’s leadership and the
commitment of key oficials to sustaining bureaucratic reforms. Strong support
will also be needed from the president to resist excessive parliamentary interference in the budget process and spending decisions. On the policy front, the new
team will have to move quickly to demonstrate its credentials and capacity to handle a broad range of economic policy issues (as opposed to a more narrow focus
on markets and budgets). In all of these areas, Sri Mulyani has left big shoes to ill.
MACROECONOMIC DEVELOPMENTS
Growth and investment
Despite the political turmoil resulting from the Bank Century case, and its impact
on both the inance ministry and the central bank, the economy has continued to
recover steadily from the effects of the GFC. GDP growth (year on year) returned
to pre-GFC levels in the fourth quarter (Q4) of 2009 and rose further to 5.7% in Q1
2010 (table 1a). The quarter-on-quarter growth of 1.4% in Q1 2010 (table 1b) is consistent with projected growth rates for 2010 as a whole in the range of 5.5% to 6.0%.
While China is expected to continue to grow more strongly (8.7%), Indonesia’s
performance should be in line with the average for other developing countries in
East Asia (5.5%) during 2010 (World Bank 2010c: 18). However, some caution is
needed, given current volatility in world inancial markets due to concerns about
Europe’s emerging iscal and debt problems. These concerns have the potential to
slow the recovery in global trade and commodity prices.
GDP growth in 2009 was held back somewhat by the rather modest increase in
private consumption, but boosted by strong growth in government consumption
(table 1a). According to World Bank estimates (2010b: 25–27), the government’s
Survey of recent developments
147
TABLE 1a Components of GDP Growth
(2000 prices; % year on year)
Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10
Downloaded by [Universitas Maritim Raja Ali Haji] at 19:27 18 January 2016
Gross domestic product (GDP)
GDP excluding petroleum & gas
By expenditure
Private consumption
Government consumption
Investment
Construction
Machinery & equipment
Transport
Other
Exports
Imports
By sector
Tradables
Agriculture, livestock, forestry &
isheries
Mining & quarrying
Manufacturing industries
Excluding petroleum & gas
Non-tradables
Electricity, gas & water supply
Construction
Trade, hotels & restaurants
Transport
Communication
Financial, rental & business services
Services
5.3
5.7
4.5
4.9
4.1
4.5
4.2
4.5
5.4
5.8
5.7
6.1
4.8
16.4
9.4
5.9
15.9
38.3
6.2
2.0
–3.7
6.0
19.2
3.5
6.2
–8.6
9.6
–4.2
–18.7
–24.4
4.8
17.0
2.4
6.1
–11.5
–0.6
–2.6
–15.5
–21.0
4.7
10.3
3.2
7.7
–12.7
–2.1
1.8
–7.8
–14.7
4.0
17.0
4.2
8.0
–3.9
–14.6
3.0
3.7
1.6
3.9
–8.8
7.9
7.3
7.7
20.8
2.4
19.6
22.6
2.8
5.1
2.9
5.9
2.2
2.9
2.7
3.3
4.5
4.6
3.4
2.9
2.4
1.8
2.1
2.6
1.5
1.9
3.4
1.5
1.8
6.2
1.3
1.5
5.2
4.2
4.9
3.5
3.6
4.0
7.6
9.3
5.9
5.5
–1.0
33.5
7.4
5.9
6.1
11.2
6.2
0.6
2.0
30.3
6.3
6.7
5.9
15.3
6.1
–0.0
5.7
26.6
5.3
7.2
5.6
14.5
7.7
–0.2
7.4
23.7
4.9
6.0
6.3
14.0
8.0
4.2
6.7
16.3
3.8
5.7
7.9
7.2
7.3
9.3
4.8
17.0
5.5
4.6
Source: CEIC Asia Database.
February 2009 GFC stimulus package added about 1 percentage point to growth
in 2009. Budget igures suggest that the main impact came from lower taxes than
originally budgeted (see budget table below). While there was also spending
on stimulus programs, this was offset by spending shortfalls elsewhere in the
budget. The growth of government consumption became strongly negative in Q1
2010, but there are encouraging signs of some pick-up in investment. The yearon-year data show a huge improvement in export growth, but it remains to be
seen whether this will be sustained, with seasonally adjusted quarter-on-quarter
growth in Q1 2010 turning negative (table 1b). Moreover, whereas imports have
generally been declining more rapidly, or growing more slowly, than exports in
recent times, resulting in a positive impetus to GDP growth from net exports, this
outcome was reversed in Q1 2010. Observers such as Basri and Rahardja (2010),
148
Mark Baird and Maria Monica Wihardja
TABLE 1b Components of GDP Growth
(2000 prices; seasonally adjusted; % quarter on quarter)
Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10
Downloaded by [Universitas Maritim Raja Ali Haji] at 19:27 18 January 2016
Gross domestic product (GDP)
GDP excluding petroleum & gas
By expenditure
Private consumption
Government consumption
Not seasonally adjusted
Investment
Construction
Machinery & equipment
Transport
Other
Exports
Imports
0.9
0.9
1.1
1.1
1.2
1.3
1.2
1.4
1.5
1.7
1.4
1.5
1.3
2.8
25.6
0.9
1.7
–7.8
8.7
–0.9
–4.7
–8.7
1.6
7.2
–28.7
–1.1
1.7
–11.1
–16.0
–2.8
–14.7
–14.4
0.6
0.6
23.7
0.6
1.7
–1.4
4.2
2.5
6.1
4.4
1.1
0.3
–0.4
2.8
2.1
8.1
6.4
3.2
6.9
4.6
0.7
1.3
33.2
1.8
1.8
1.4
–3.6
0.2
7.0
8.2
1.3
–3.7
–44.4
2.4
1.5
–0.4
4.2
–3.5
–1.5
3.7
By sector
Tradables
Agriculture, livestock, forestry &
isheries
Mining & quarrying
Manufacturing
Excluding petroleum & gas
0.5
0.9
0.9
1.3
0.7
0.5
0.9
0.9
1.0
1.0
0.8
0.7
0.9
–1.4
–1.7
0.9
0.9
1.2
1.4
0.9
1.1
2.1
0.8
1.1
–0.2
1.4
1.1
–0.6
0.4
1.0
Non-tradables
Electricity, gas & water supply
Construction
Trade, hotels & restaurants
Transport
Communication
Financial, rental & business services
Services
1.3
2.5
1.7
–1.1
1.3
7.4
2.0
1.5
0.7
4.3
1.7
–3.4
2.0
4.0
0.8
1.8
1.8
3.2
1.7
2.1
2.3
5.0
0.6
1.9
1.7
2.1
2.1
2.3
1.4
5.5
1.4
0.7
1.9
2.6
1.8
3.3
0.8
1.0
0.9
1.2
2.1
1.0
1.5
1.3
0.2
4.6
2.5
0.9
Source: CEIC Asia Database.
who have argued that Indonesia’s economy was to some extent protected from
the GFC by its relatively low dependence on exports (compared, say, with Singapore, Malaysia and Thailand), appear to have overlooked the equally important
impact of changes in import growth. Ironically, now that world trade is recovering, Indonesia is unlikely to beneit as much as other countries from export recovery, and if imports continue to grow even more rapidly than exports, GDP growth
will suffer even further in the short run (although increased imports of capital
goods will add to productive capacity in the medium term).
On the production side, GDP growth is still dominated by the non-tradable sectors (such as domestic trade and communications), which expanded collectively
Downloaded by [Universitas Maritim Raja Ali Haji] at 19:27 18 January 2016
Survey of recent developments
149
by 7.9% (year on year) in Q1 2010 (table 1a). The manufacturing sector (excluding
oil and gas) is recovering more slowly, up by 4.0% in Q1 2010. According to Danamon (2010), manufacturing sector growth is also relatively narrowly based, being
concentrated in a few sub-sectors such as vehicle manufacturing and chemicals.
By contrast, the wood, paper and printing, basic metals and steel, and textiles and
footwear sub-sectors are continuing to contract.
In early May 2010 the Investment Coordinating Board (Badan Koordinasi
Penanaman Modal, BKPM) released new data on foreign and domestic investment realisation for the irst quarter of 2010. Investment realisation totalled Rp 42
trillion for 574 projects, of which Rp 35 trillion ($3.8 billion) was foreign investment in 424 projects and Rp 7 trillion was domestic investment in 150 projects.
While these numbers suggest a signiicant rise in foreign investment and fall in
domestic investment compared with Q1 2009, they are not strictly comparable.
BKPM now bases its investment data on investment activity reports rather than
relying, as before, on data on the issue of permanent business licences. Over time,
this change should provide more accurate estimates of realised investments.
However, initial compliance with the new reporting requirements is incomplete,
so the new data probably under-record actual investment activity.
Balance of payments and trade policy
Exports recovered during 2009 from their March lows (igure 2a), spurred by
strong demand and higher prices for commodities, but they fell back slightly in
Q1 2010. Meanwhile imports continued to rise (igure 2b), narrowing the merchandise trade surplus from $11.5 billion in Q4 2009 to $7.9 billion in Q1 2010
(table 2). However, strong portfolio investment inlows ($6.2 billion in Q1 2010,
more than three times larger than a year earlier) continued to bolster the overall
balance of payments. Foreign direct investment has been more subdued, although
FIGURE 2a Exports
($ values, 3-month rolling sum, July 2008 = 100)
120
100
80
60
40
20
Crude materials, inedible
Chemicals
Animal & vegetable oils & fats
Manufactures
Food, beverages, tobacco, live animals
0
Feb-2009
Apr-2009
Source: CEIC Asia Database.
Jun-2009
Aug-2009
Oct-2009
Dec-2009
Feb-2010
150
Mark Baird and Maria Monica Wihardja
FIGURE 2b Imports
($ values, 3-month rolling sum, July 2008 = 100)
120
100
80
Downloaded by [Universitas Maritim Raja Ali Haji] at 19:27 18 January 2016
60
40
20
Food & live animals
Manufactures
Crude materials, inedible
Chemicals
Machinery & transport equipment
0
Feb-2009
Apr-2009
Jun-2009
Aug-2009
Oct-2009
Dec-2009
Feb-2010
Source: CEIC Asia Database.
TABLE 2 Balance of Payments
($ billion per quarter)
Mar-09
Current account
Exports
Non oil & gas
Oil & gas
Imports
Non oil & gas
Oil & gas
Merchandise trade balance
Non oil & gas
Oil & gas
Services
Income
Current transfers
Capital account
Financial account
Direct investment
Portfolio investment
Other investment
Errors & omissions
Overall balance (change in
reserves)
2.9
24.2
20.5
3.7
17.2
15.2
2.0
7.0
5.3
1.6
–2.5
–2.7
1.1
0.0
1.7
1.7
1.9
–1.8
–0.7
4.0
Sources: CEIC Asia Database; Bank Indonesia.
Jun-09
Sep-09
Dec-09
3.1
27.5
23.1
4.5
18.8
16.5
2.3
8.7
6.6
2.1
–3.1
–3.7
1.2
0.0
–2.4
0.0
2.0
–4.5
0.4
1.1
2.2
31.3
25.6
5.7
22.8
19.0
3.8
8.5
6.6
1.8
–3.5
–4.1
1.2
0.0
2.5
0.5
3.0
–1.0
–1.1
3.5
3.4
35.9
29.2
6.8
24.5
20.7
3.7
11.5
8.4
3.0
–4.6
–4.7
1.3
0.0
1.4
1.0
3.3
–2.9
–0.9
4.0
Mar-10
1.6
34.3
27.8
6.5
26.4
22.0
4.4
7.9
5.8
2.1
–3.6
–4.0
1.2
0.0
4.3
1.9
6.2
–3.9
0.8
6.6
Downloaded by [Universitas Maritim Raja Ali Haji] at 19:27 18 January 2016
Survey of recent developments
151
Danamon (2010: 10) reports some signs of a recovery in the manufacturing sector in Q1 2010. To offset the impact of portfolio lows on the exchange rate, Bank
Indonesia (BI) has accumulated foreign reserves, which rose from $52 billion to
$66 billion over 2009 and further to $79 billion by the end of April 2010. This
means that Indonesia is effectively forgoing the opportunity to use available foreign savings to inance imports, in order to support investment and growth by
instead lending these savings back to the rest of the world. However, this trend
has moderated more recently, because foreign investor interest in Indonesia has
been adversely affected by the impact of Europe’s debt problems on risk appetite.
On the trade front, most attention in recent months has focused on the ASEAN–
China Free Trade Agreement (ACFTA).2 As noted in the last survey (Patunru and
von Luebke 2010: 27–30), there was considerable pressure from domestic producers and parliament for Indonesia to re-negotiate tariffs on 228 items in the steel
products, textiles and footwear sectors. Following a meeting between Indonesian
and Chinese oficials in Yogyakarta on 3 April 2010, however, it was decided that
the ACFTA would be implemented as planned. At the same time, both countries
agreed that, if there is a bilateral trade imbalance, ‘the surplus country is obliged
to implement steps to increase imports’ and to provide whatever ‘support is
needed by the partner country’.3 This is a good outcome in terms of honouring
Indonesia’s international obligations, while also recognising the potential impact
of factor market and exchange rate distortions in China. However, in practice, it
remains to be seen how China would respond to a bilateral trade imbalance with
Indonesia. And, in economic terms, the individual country components of Indonesia’s overall trade balance with the rest of the world are of little consequence.
Inlation, monetary policy and inancial markets
Consumer price inlation has been creeping up since November 2009, reaching
an annual rate of 4.2% in May 2010 (igure 3). However, monthly inlation in May
(0.3%) was relatively mild, and there is no evidence of a strong upward trend
in core inlation or wholesale prices. This is due partly to the moderating inluence of the rupiah’s appreciation against the US dollar over the past year. This
exchange rate effect may now unwind as the US dollar strengthens on world
markets. There may also be some moderate inlationary pressure from rising
prices in Indonesia’s trading partners and the proposed 10% increase in electricity tariffs. The impact of the latter is expected to be small, however, because tariff
rises for low-end consumers (who account for around 65% of household energy
usage) will be excluded, and because electricity costs comprise just 3.5% of input
costs for medium and large-scale manufacturing industries (Danamon 2010: 14).
Inlationary expectations remain low and inlation is expected to stay well within
BI’s range of 4–6% during 2010.
That said, there is little room for complacency on monetary policy. While BI’s
policy rate has stayed at 6.5% since August 2009 (igure 3), the 30-day SBI (Bank
Indonesia Certiicate) rate has tracked down in recent months (from 7.3% in
May 2009 to 6.3% in May 2010). This downward trend is a better indication of
2 For an analysis of the implementation and impact of ACFTA on the Indonesian economy,
see World Bank (2010b): 27–32.
3 Press brieing by the trade minister, Mari Pangestu, Jakarta, 5 April 2010.
152
Mark Baird and Maria Monica Wihardja
FIGURE 3 Monetary Policy and Inlationa
(% p.a.)
12
9
Downloaded by [Universitas Maritim Raja Ali Haji] at 19:27 18 January 2016
6
3
0
May-2009
CPI inflation
Real SBI rate
SBI rate 30 days
Currency in circulation
Jul-2009
Nov-2009
Sep-2009
Policy rate
Jan-2010
Mar-2010
May-2010
a CPI = consumer price index; SBI = Sertiikat Bank Indonesa (Bank Indonesia Certifcate).
Source: CEIC Asia Database; Bank Indonesia.
BI’s relaxed monetary stance than the ixed policy rate. Portfolio capital lows
from overseas have inluenced monetary conditions, because BI’s open market
operations have not been enough to sterilise the extra liquidity resulting from
its accumulation of reserves (intended to moderate upward pressure on the
rupiah) (World Bank 2010b: 32–5). The net effect of these developments has been
a doubling in the rate of growth of currency in circulation since September 2009
(igure 3). It would be prudent for BI to moderate its ‘dovish’ position, and act if
necessary, well before inlation reaches the top (6%) of its inlation band.
How this plays out over the next few months will depend a lot on developments in world inancial markets and their impact on international prices and risk
perceptions. As events in recent weeks have shown, Indonesian markets are very
sensitive to changes in risk appetites (igure 1). A sustained crisis in Europe, for
example, could cause foreign investors to pull back from Indonesia, with negative
effects on the stock market and the exchange rate. While the government has had
no dificulty so far in meeting its bond issue targets for 2010 (with more than half
the total requirement fulilled by mid-May), fund-raising could become more dificult with a deterioration in foreign investor sentiment.
The banking system appears to be in good health, with reported commercial
bank non-performing loan ratios remaining at around 3.4% in Q1 2010 – slightly
lower than the averages for 2009 and 2008, and well below the averages for 2007
(5.6%) and 2006 (8.0%) (World Bank 2010b: 9). However, as shown in the Bank
Century case, oficial numbers do not always tell the whole story, and averages,
dominated by the top 14 commercial banks, may conceal weaker performance in
some smaller ones. For example, Bank Eksekutif revealed a non-performing loan
ratio of 15.6% in September 2009 and has been placed under enhanced BI surveillance. Lending growth has also started to recover, after modest growth in 2009
Survey of recent developments
153
Downloaded by [Universitas Maritim Raja Ali Haji] at 19:27 18 January 2016
(11.5%), and average rates for working capital loans have started to fall below 14%.
However, bank net interest margins, at over 5.8% in March 2010, are still among
the highest in the region (World Bank 2010b: 10–11), presumably relecting the high
perceived risks of doing business in Indonesia and the low eficiency of banking.
Fiscal policy
The revised budget for 2010 (table 3) was inally approved by parliament on
3 May 2010.4 The revised macro assumptions – especially the increase in the
assumed oil price from $65 to $80 per barrel – are prudent given current volatility
in world inancial and commodity markets. The main question mark – other than
the dificulty of predicting the volatile oil price – is over the assumed level of oil
production (965,000 barrels per day), which may be on the high side. The revised
budget also assumes that electricity tariffs will be raised on average by 10% in
July, with proportionately higher increases for larger power consumers.5 Even so,
most of the increase in spending is allocated to higher subsidies, with departmental spending close to original estimates.
The overall deicit is raised from Rp 98 trillion (1.6% of GDP) in the original
2010 budget to Rp 134 trillion (2.1% of GDP) in the revised budget. The increase
will be funded largely by drawing on unspent funds of Rp 38 trillion from the
previous year. However, if past experience is any guide, budget spending and
the deicit are likely to fall well short of planned levels. Last year, for example,
the revised deicit after the stimulus package was projected to be 2.5% of GDP,
but the actual deicit was only 1.6% of GDP. For this year, the World Bank (2010b)
is projecting a deicit closer to 1.3% of GDP, owing to higher GDP and revenue
estimates and lower spending than in the revised budget.
This pattern of spending shortfalls raises more fundamental issues about the
appropriate iscal stance. Indonesia has jealously guarded its reputation for iscal prudence over the past 30 years (box 2), even though there have been lapses
along the way (as during the Asian inancial crisis) and even though the means of
inancing the deicit have changed over time (with a signiicant shift from oficial
loans to sovereign bond issues during the past decade). Trends in budget inancing and public debt are summarised in igures 4a and 4b.6 Now that public debt
has been brought back down below 30% of GDP, it is appropriate to ask whether
a larger deicit may be justiied to boost economic growth (through infrastructure
investment, for example) or to expand coverage of anti-poverty programs.
4 Two parties, PDI–P (the Indonesian Democratic Party of Struggle) and Hanura (the People’s Conscience Party) walked out of the parliament (DPR) during Sri Mulyani’s address
on the budget, in protest at her role in the bail-out of Bank Century (Jakarta Post, 5/5/2010).
5 Vice President Boediono recently announced that the government would also raise the
price of gas sold on the domestic market to levels on par with international prices, to encourage producers to sell gas to local buyers (Jakarta Post, 19/5/2010). However, the timing
and the scale of these adjustments are not yet clear.
6 The oficial inancing data shown in igure 4a exclude grants, which are recorded above
the line in the budget (or not recorded at all). A signiicant growth of grants in recent years
is due in large part to the expansion of the Australian aid program. Australia will provide
over A$450 million to Indonesia in 2010/11, of which about A$325 million will be in grants.
154
Mark Baird and Maria Monica Wihardja
TABLE 3 Budgets for 2009 and 2010
(Rp trillion)
2009
Downloaded by [Universitas Maritim Raja Ali Haji] at 19:27 18 January 2016
Original
REVENUES & GRANTS
Tax revenues
Non-tax revenues
Grants
2010
Revised Preliminary Originala Revised
Actual
985.7
725.8
258.9
0.9
871.0
652.0
218.0
1.0
866.8
641.2
224.5
1.1
949.7
742.7
205.4
1.5
992.4
743.3
247.2
1.9
EXPENDITURES
1,037.1
Interest payments
101.7
Subsidies
166.7
Transfers to regional governments
320.7
Otherb
448.0
1,000.8
109.6
158.1
309.3
423.8
954.0
93.8
159.5
308.6
392.1
1,047.7
115.6
157.8
322.4
451.8
1,126.2
105.7
201.3
344.6
474.6
DEFICIT
% of GDP
–51.3
–1.0
–129.8
–2.5
–87.2
–1.6
–98.0
–1.6
–133.8
–2.1
FINANCINGc
Domestic inancing (net)
Foreign inancing (net)
Gross drawings
Amortisation
51.3
60.8
–9.5
52.2
–61.6
129.8
142.6
–12.7
56.3
–69.0
125.2
142.6
–17.4
98.0
107.9
–9.9
57.6
–67.5
133.8
133.9
–0.2
54.0
–54.1
0.0
0.0
38.0
0.0
0.0
5,194
4.3
5.0
10,600
7.5
61.0
960
5,613
4.5
2.8
9,408
7.6
61.6
952
6,126
5.5
5.0
10,000
6.5
65.0
965
6,369
5.8
5.3
9,200
6.5
80.0
965
UNSPENT FUNDS
MACRO ASSUMPTIONS & OUTCOMES
GDP (Rp trillion)
5,134
GDP growth (%)
6.0
Inlation (% p.a.)
6.2
Exchange rate (average, Rp/$)
9,400
3-month SBI rate (average % p.a.)
7.5
Oil price (average, $/barrel)
80.0
Oil production (‘000 barrels/day)
960
a Data in this column relect the budget approved by the DPR. Some amounts differ from those origi-
nally proposed, which were reported in the previous survey.
b ‘Other’ includes departmental spending on personnel, material, capital, social and other items.
c Foreign inancing is from oficial sources only. All bonds (including those denominated in foreign
currencies and those held by foreigners) are included in the domestic inancing igures.
Sources: 2009 macro outcomes: World Bank; all other data: Ministry of Finance.
From a inancing point of view, deicits of around 2% of GDP should be manageable without risking Indonesia’s credit rating. Deicits in this range have
already been projected for 2009 and 2010 without upsetting the domestic bond
markets. Additional inancing from oficial creditors and donors could also be
tapped for worthwhile development programs, or to provide stand-by inancing
Survey of recent developments
155
Downloaded by [Universitas Maritim Raja Ali Haji] at 19:27 18 January 2016
BOX 2 A Brief hiSTOry Of DefiCiTS AnD DeBT in inDOneSiA
Indonesia has earned a reputation for sound iscal management over the past 30 years.
During the Soeharto era, the economic team (often referred to as the ‘technocrats’)
maintained iscal discipline through the ‘balanced budget rule’, which kept spending
roughly equal to domestic revenues plus oficial external assistance. The level, allocation and implementation of development spending were largely determined by loans
mobilised from the international community. These were on concessional terms and
were considered to be more ‘development-oriented’ than commercial credits. Windfalls in oil revenues were often ‘hidden’ and used to cushion spending cuts when oil
prices fell (and also to fund ‘off-budget’ programs). Additional program loans were
also sought from donors in times of crisis (such as when oil prices collapsed in 1986).
This model broke down during the AFC. Although public debt was only 23% of
GDP in 1996/97, this was quickly inlated by the impact of the rupiah depreciation on
external debt, and by the issuing of new domestic debt to recapitalise banks and compensate BI for the non-repayment of last-resort loans issued during the early months
of the crisis. Initial attempts under the IMF program to run budget surpluses proved
counter-productive, as output fell sharply. Subsequent efforts to operate deicits ran
into inancing constraints, because conditions for promised program lending were not
met. Although the budget situation was eventually brought under control, public debt
had risen to almost 100% of GDP by 2000.
Over the past decade the government has worked hard to restore the credibility of
budget institutions, by passing new laws on public inancial management and reforming the Ministry of Finance (especially the tax and customs directorates). It has also kept
tight control over the budget deicit to lower the burden of public debt. By 2009 public
debt had been reduced to less than 30% of GDP. More than 60% of public debt is now
in the form of government bonds (denominated in both rupiah and foreign currencies),
while net borrowing (that is, new borrowing less repayments of outstanding loans)
from oficial sources is negative. The decision to abolish the Consultative Group on
Indonesia (CGI) in January 2007 symbolised the end of Indonesia’s ‘aid dependence’,
and ushered in a new era of bilateral ‘partnerships’ with major creditors and donors.
In response to the GFC, the government implemented a modest stimulus package
of tax and spending measures to raise the budget deicit to 2.5% of GDP in 2009. This
higher deicit was to be funded by additional bond issues, while various stand-by
facilities were also put in place in case market conditions deteriorated. But spending
fell well short of plans, and the actual deicit was only 1.6% of GDP. Similar outcomes
are expected in 2010. For the medium term, the policy debate has shifted back to the
scope for running larger deicits to boost economic growth and anti-poverty programs,
while still safeguarding Indonesia’s hard-earned reputation for iscal prudence.
in case market conditions deteriorate.7 That said, the recent experience of countries such as Greece is indicative of the dangers of relaxing the discipline of limits on budget deicits. Small deicits can expand signiicantly in just a few years
as politicians respond to the pressures of populism, producing an unsustainable
public debt burden. One of the great achievements of the balanced budget rule
7 In an innovative response to the GFC, Indonesia’s major creditors provided $5.5 billion
in stand-by facilities and bond guarantees during 2009. While some of the guarantees from
Japan have been used to guarantee samurai bonds issued by the Government of Indonesia,
none of the stand-by facilities from the World Bank, the Asian Development Bank (ADB)
and Australia have been drawn down to date.
156
Mark Baird and Maria Monica Wihardja
FIGURE 4a Budget Financinga
(% of GDP)
4
3
2
Total financing
Downloaded by [Universitas Maritim Raja Ali Haji] at 19:27 18 January 2016
1
0
Official borrowing
-1
-2
1996
1998
2000
2002
2004
2006
2008
a Data for the years 1996–99 refer to iscal years ending in March the following year.
Source: Ministry of Finance.
during the Soeharto era was to prevent this from happening. Nevertheless, the
real issues in Indonesia today lie on the spending side. Two challenges stand out.
The irst challenge is to ix the mechanics of budget spending. Past surveys (for
example, Kuncoro, Widodo and McLeod 2009: 159) have highlighted the problem
of bunched spending in the last quarter of the iscal year. According to the latest
analysis from the World Bank (2010b), while there has been some improvement
in the spending performance of line ministries, more than 40% of spending still
occurred in the last quarter of 2009. This pattern leads to wasteful spending and
budget shortfalls for the year as a whole. International experience suggests that the
solution lies in better advance planning before the start of the iscal year, greater
lexibility in spending during the iscal year and more scope to carry over funding
at the end of the iscal year.8 While Indonesia’s new budget laws provide for some
lexibility, oficials rarely exploit this, for fear of violating budget rules and being
accused of corruption. Major changes are needed in the ‘control and compliance’
mindset of oficials in both the Ministry of Finance and line ministries.
The second challenge is to ensure that money is well spent. During the Soeharto era, the technocrats used the planning process and the budget constraint to
weed out ‘white elephant’ projects. However, as discussed below, the planning
process is no longer as strong or as well linked to the budget as in the past. Therefore, in the current political environment, there is a risk that ‘pet’ projects will
get funded without adequate vetting for economic and social returns. The recent,
8 For international experience with budget carry-overs, including discussion of some of
the risks in developing countries, see Lienert and Ljungman (2009). For a detailed discussion of budget spending constraints and solutions in Indonesia, see World Bank (2009).
Survey of recent developments
157
FIGURE 4b Public Debta
(% of GDP)
100
80
Public debt
Downloaded by [Universitas Maritim Raja Ali Haji] at 19:27 18 January 2016
60
40
Foreign official debt
20
0
1996
1998
2000
2002
2004
2006
2008
Source: Ministry of Finance (foreign currency denominated debt converted to rupiah using International Monetary Fund International Financial Statistics end-of-year exchange rates). The igure for
1996 is a World Bank estimate.
ultimately unsuccessful, proposal from Golkar – initially with the support of
other parties – to allocate Rp 15 billion for each DPR law maker in the 2011 budget
(Jakarta Post, 4/6/2010) is a case in point. Close scrutiny of the budget by the Ministry of Finance provides some insurance against poor spending decisions.9 It is
also important to monitor the results of budget spending. The proposed move to
performance-based budgeting next year will help shift the focus of accountability
from ex ante controls to ex post results. But, as with the mechanics of spending, a
lot will depend on how the new system is used and how it feeds back into spending decisions. If it just becomes another layer in the spending management system, without any simpliication of ex ante controls, it could further reduce budget
lexibility.
THE NEW FIVE-YEAR PLAN
The ive-year National Medium-term Development Plan (Rencana Pembangunan
Jangka Menengah Nasional, RPJMN) for 2010–14 was launched in early February 2010. It is a very large document, in three volumes. The irst volume outlines the government’s development strategy for the next ive years to realise the
president’s vision of a ‘prosperous, democratic and just’ Indonesia. The other two
volumes expand on the sectoral and regional development plans. It is easy to
dismiss the plan as excessive rhetoric, having little impact on budget or policy
9 A 2002 constitutional amendment stipulating that 20% of the central government budget
must be spent on education also distorts the allocation and undermines the eficiency of
additional spending (World Bank 2010b: 35–9).
158
Mark Baird and Maria Monica Wihardja
TABLE 4 National Medium-term Development Plan 2010–14,
Selected Macroeconomic Targets
Downloaded by [Universitas Maritim Raja Ali Haji] at 19:27 18 January 2016
GDP growth (%)
Inlation (CPI) (% p.a.)
Tax revenues/GDP (%)
Budget deicit/GDP (%)
Public debt/GDP (%)
2010
2011
2012
2013
2014
5.5–6.0
4.0–6.0
6.0–6.3
4.0–6.0
6.4–6.9
4.0–6.0
6.7–7.4
3.5–5.5
7.0–7.7
3.5–5.5
12.4
–1.6
29.0
12.6
–1.9
28.0
13.0
–1.6
27.0
13.6
–1.4
25.0
14.2
–1.2
24.0
Source: Bappenas (2010).
decisions. Nonetheless, a lot of time and effort will now be spent translating the
RPJMN into the strategic plans of line ministries (Rencana Strategis Kementerian
Lembaga, Renstra–KL) and the development plans of provincial and district governments. In April the president held a two-day retreat in Bali with his full cabinet
and all provincial governors to prepare a ‘roadmap’ to achieve the plan’s goals. So
it is worth examining what the plan says and the main development challenges it
identiies for the next ive years.
The plan projects an average annual economic growth rate of 6.3–6.8% for
2010–14. Provided the global economy stabilises and there are no further major
economic crises, the growth rate is expected to reach 7% or more by 2014 (table 4).
Along with various pro-poor programs, this growth is expected to reduce the poverty rate from 14.2% in 2008–09 to 8–10% in 2014, and the open unemployment
rate from 7.9% to 5–6% over the same period. Eleven national priorities are identiied to achieve these outcomes: bureaucracy and governance reform; education;
health; poverty reduction; food security; infrastructure; investment and business
climate; energy; environment and disaster management; least developed, frontier,
outer and post-conlict areas; and culture, creativity and technological innovation.
The overall tone of the plan is consistent with the vision laid out in the president’s
Independence Day address in August 2009 (Yudhoyono 2009). There is a heavy
emphasis on building a strong, stable, uniied country, based on self-reliance and a
well-connected domestic economy. Issues of economic eficiency and international
competitiveness are mentioned, but take a back seat to concerns about domestic
equity and connectivity. This is perhaps understandable, especially in the aftermath
of the GFC. But it is also a missed opportunity to set more ambitious growth targets,
needed to make signiicant inroads on poverty over the next ive years.
The macroeconomic framework for the plan is also conservative. The budget
deicit is projected to fall to 1.2% of GDP, and public debt to 24% of GDP, by 2014
(table 4). Higher tax revenues and lower subsidies apparently provide more than
enough resources to inance the proposed public investment program (although
numerical values are not speciied in the plan). As discussed above, there is scope
on the inancing side for considering a more expansionary iscal policy to support
economic growth and anti-poverty programs. However, this can only be justiied
and realised if current spending constraints are addressed.
Downloaded by [Universitas Maritim Raja Ali Haji] at 19:27 18 January 2016
Survey of recent developments
159
Unfortunately, the plan does little to clarify spending priorities. The 11 priorities outlined above are very comprehensive, and provide little guidance for
the preparation of the national budget, sectoral programs and regional plans.
While the program for the irst 100 days of the president’s second term has been
rightly criticised for its vagueness and limited scope (Patunru and von Luebke
2010: 24–27), it did at least initiate a process for monitoring progress on priority
actions. The same approach has now been carried over into Inpres (Presidential
Instruction) No. 1 for 2010, which outlines the government’s priorities for 2010.
It has only 155 priority activities, compared with 1,167 in the ive-year plan. The
Presidential Unit for Development Supervision and Control (Unit Kerja Presiden
untuk Pengawasan dan Pengendalian Pembangunan, UKP4), under Kuntoro
Mangkusubroto, is responsible for monitoring progress and identifying possible
bottlenecks. Although this process brings some much-needed discipline to the
government’s program, it depends on the right priorities being identiied at the
outset. This is where a close working relationship between the national planning
agency, Bappenas, and UKP4 is essential.
Connectivity10
One of the recurring themes of the plan is the importance of ‘connecting Indonesia’ so as to unify the country and ensure that the beneits of economic growth
are widely shared.11 This is relected in the plan’s national priorities, infrastructure targets and regional development strategy. But what is less clear is what ‘connectivity’ means in terms of investment and policy choices. One framework for
thinking about these issues is provided in the 2009 World Development Report on
Reshaping Economic Geography (World Bank 2008a).12 This stresses that as economies progress from low to high income, production becomes more concentrated
spatially. For Indonesia the concentration is on Java, especially around the Greater
Jakarta area, and in smaller regional centres in the outer islands. This is not a
trend that can or should be reversed. Rather, the need is to ind ways to share
the beneits of concentrated production across regions and income groups, while
recognising that almost 60% of the poor live on Java.
For Indonesia, the challenge of connectivity can be broken down into three
dimensions: intra-island, inter-island and international connectivity. Intra-island
connectivity is important to link poorer rural areas to urban growth poles and to
link growth poles to each other. Differential strategies are required, with ‘backbone’ infrastructure on the more densely populated islands of Java and Sumatra;
‘special-purpose’ infrastructure connecting major resource-based industries with
their ports on Sumatra and Kalimantan; and ‘ink-spot’ development around
smaller growth poles on the more remote and less densely populated islands
of eastern Indonesia. Much of the infrastructure in both urban and rural areas
10 This section draws on work done by Mark Baird for the World Bank during the irst
half of 2010 and summarised in World Bank (2010d). A more complete analysis will be
published by the Bank in its next Country Economic Memorandum.
11 The term ‘connectivity’ covers all aspects of infrastructure and logistics that improve
the movement of people and goods, as well as related policy issues.
12 For applications to Indonesia, see Hill, Resosudarmo and Vidyattama (2008) and Deichmann et al. (2005).
Downloaded by [Universitas Maritim Raja Ali Haji] at 19:27 18 January 2016
160
Mark Baird and Maria Monica Wihardja
will come from local governments. The private sector can contribute to inancing
infrastructure projects – including, for example, toll roads on Java and those serving resource-based industries on the outer islands. But the central government
also has a role to play in providing a sound regulatory framework, including for
land acquisition, local borrowing and pricing and subsidy decisions.
Inter-island connectivity is especially important in a far-lung archipelago like
Indonesia. At the Asia Paciic infra
ISSN: 0007-4918 (Print) 1472-7234 (Online) Journal homepage: http://www.tandfonline.com/loi/cbie20
Survey of recent developments
Mark Baird & Maria Monica Wihardja
To cite this article: Mark Baird & Maria Monica Wihardja (2010) Survey of recent
developments, Bulletin of Indonesian Economic Studies, 46:2, 143-170, DOI:
10.1080/00074918.2010.486107
To link to this article: http://dx.doi.org/10.1080/00074918.2010.486107
Published online: 27 Jul 2010.
Submit your article to this journal
Article views: 191
View related articles
Citing articles: 13 View citing articles
Full Terms & Conditions of access and use can be found at
http://www.tandfonline.com/action/journalInformation?journalCode=cbie20
Download by: [Universitas Maritim Raja Ali Haji]
Date: 18 January 2016, At: 19:27
Bulletin of Indonesian Economic Studies, Vol. 46, No. 2, 2010: 143–70
SURVEY OF RECENT DEVELOPMENTS
Downloaded by [Universitas Maritim Raja Ali Haji] at 19:27 18 January 2016
Mark Baird
Bay of Islands, New Zealand
Maria Monica Wihardja
Centre for Strategic and International Studies, Jakarta
SUMMARY
Sri Mulyani’s resignation as inance minister in May disturbed markets and
aroused concern about the government’s commitment to reform. This concern
was partly alleviated by the appointment of two well-respected individuals as
inance minister and deputy inance minister. Further progress with reform will
depend heavily on this new team and other key oficials. Strong presidential support will also be needed to resist attempts by parliament to interfere excessively
with the inance ministry’s work.
The economy continued its steady recovery from the impact of the global inancial crisis (GFC), but the recovery could still be jeopardised if sovereign debt concerns in Europe persist and block the rebound in global trade and commodity
prices. Inlation continues to accelerate, suggesting little room for complacency
on monetary policy. Fiscal policy, on the other hand, remains conservative. The
higher deicit in the revised 2010 budget is not excessive, and is unlikely to be
realised in any case. The real budget challenge is to spend budgeted amounts
fully and well. The new ive-year plan is also conservative and does little to clarify
spending priorities, including for the president’s ‘connectivity’ agenda.
Despite the GFC, poverty continued to decline, thanks largely to the uninterrupted expansion of GDP and to cash transfers to the poor. Unemployment also
continued to fall, although particular groups suffered slight increases in unemployment (young workers 15–25 years old) and somewhat larger reductions in
working hours (urban, non-poor, and male-headed households). Nevertheless the
large and sustained deceleration of manufacturing growth and the closely related
dramatic shift of employment from the formal to the informal sector provide
cause for concern. Distortionary labour market policies may help to explain both.
A new mining law signiicantly alters the legal environment for irms in this
industry, and also introduces long discredited policies intended to ‘increase value
added’ by requiring the domestic processing of minerals. A new law on local government taxes attempts to reduce uncertainty for citizens and investors, but the
nature of overall spending by local governments is of much greater importance
for the investment climate. The central government has recently been seeking to
restore the role of the ‘missing intermediate’ level of government and to boost the
centre’s indirect control over local governments through provincial governments
and governors. This strategy is unlikely to succeed, but it highlights the conlicting requirements for provincial governors to act as agents of the central government while also being accountable to their provincial electorates.
ISSN 0007-4918 print/ISSN 1472-7234 online/10/020143-28
DOI: 10.1080/00074918.2010.486107
© 2010 Indonesia Project ANU
Downloaded by [Universitas Maritim Raja Ali Haji] at 19:27 18 January 2016
144
Mark Baird and Maria Monica Wihardja
POLITICAL DEVELOPMENTS1
On 4 May 2010 the president of the World Bank, Robert Zoellick, announced the
appointment of Sri Mulyani Indrawati, the then Indonesian Minister of Finance, as
a managing director of the World Bank Group effective 1 June. Just hours before,
Sri Mulyani had broken the news of her appointment and resignation as Minister of Finance to her senior ministry oficials (Tempo, 12–18 May 2010: 33). They
were as stunned as the markets, with both stock prices and, to a lesser extent, the
exchange rate reacting negatively to the news (igure 1). When the dust had settled, questions turned to the reasons for her departure and the implications for
economic policy and reform. Perhaps more than anyone, Sri Mulyani has been
credited with maintaining Indonesia’s reputation for sound economic management over the past ive years and with successfully navigating the GFC. She has
also championed the causes of good governance and bureaucratic reform, especially within the Ministry of Finance. Would her departure signal the end of an
era? Or would others emerge to take up the reform mantle?
There is no doubt that it had been a dificult few months for the minister.
Along with Vice President Boediono, she had been targeted in a parliamentary
investigation into the bail-out of the troubled Bank Century. They both argued
that the bail-out was justiied to sustain inancial sector conidence and stability,
and no evidence of wrong-doing in the decision-making process has emerged
(Patunru and von Luebke 2010: 10–12). Yet the hearings, and the related walk-outs
when Sri Mulyani appeared before parliament subsequently, took their toll. Just
as things seemed to be settling down, another scandal erupted around accusations of corruption in the tax ofice. On 31 March, a tax auditor, Gayus Tambunan,
was arrested in Singapore after police investigation of a suspicious Rp 28 billion
bank deposit. This followed revelations by a former national police chief detective, Commander General Susno Duadji, who is also linked to the Bank Century
case and attacks on the Anti-corruption Commission (KPK) (box 1). Gayus in turn
threatened to expose other tax oficials involved in corruption. This was undoubtedly an indication of the dificulty of cleaning up the tax ofice – one of the cornerstones of the minister’s reform agenda. But it also provided an opportunity for Sri
Mulyani to ‘up the tempo’, and she moved swiftly to re-assign several tax oficials
and push for greater disclosure of their inancial assets.
These events were no doubt trying, but not in themselves enough to discourage a staunch reformer such as Sri Mulyani. Perhaps more pertinent was
the growing inluence of Aburizal Bakrie, the current chair of the Golkar Party
and the fourth-richest man in Indonesia, according to the latest Forbes Rich
List (with a reported net worth of $2.5 billion). It is no secret that Sri Mulyani
and Bakrie had crossed swords on several occasions (Patunru and von Luebke
2010: 12). These included Sri Mulyani’s refusal in November 2008 to maintain a
suspension of trading in Bakrie-controlled companies after they rapidly lost a
large proportion of their market value the previous month; disagreements over
Bakrie’s responsibility for the Lapindo mudlow disaster and his plans to buy
into one of the country’s largest gold mines; and the tax ofice’s active pursuit
of allegedly overdue tax payments by his companies. The president’s apparent
1 The authors gratefully acknowledge the contribution of Sunny Tanuwidjaja (Centre for
Strategic and International Studies, Jakarta) to this section.
Survey of recent developments
145
FIGURE 1 Composite Stock Price Index (CSPI) and Exchange Rate
CSPI
Rp/$
3,000
15,000
2,500
12,000
Sri Mulyani resigns
2,000
9,000
Downloaded by [Universitas Maritim Raja Ali Haji] at 19:27 18 January 2016
1,500
CSPI
Exchange rate
1,000
3,000
500
0
1-Jun-2009
6,000
12-Aug-2009
23-Oct-2009
7-Jan-2010
18-Mar-2010
0
1-Jun-2010
Sources: Indonesia Stock Exchange; Paciic Exchange Rate Service.
BOX 1 The SuSnO COnneCTiOn
On 12 March 2010, the Tangerang District Court acquitted Gayus Tambunan on
charges of money laundering and embezzlement. However, the former national police
chief detective, Commander General Susno Duadji, revealed details of tampering by
police oficers and prosecutors in the outcome of the trial. This then led to further
investigations into Gayus’s inances.
Susno Duadji has links to several recent legal cases, involving Bank Century, the
Anti-corruption Commission (KPK) and tax corruption (for details on the irst two
cases, see Patunru and von Luebke 2010: 8–12). It was Susno who facilitated a meeting
between Budi Sampoerna (the former owner of a cigarette conglomerate) and Bank
Century management in order to assist Sampoerna to withdraw a deposit of $18 million when the bank was collapsing. It was Susno’s phone that the KPK wire-tapped
while investigating this case. Susno’s name was mentioned several times in conversations between an Indonesian businessman and one of the state prosecutors when they
were planning to frame two KPK deputy commissioners, Bibit Rianto and Chandra
Hamzah. Susno was also allegedly involved in the suspected set-up of the KPK chief
commissioner (Antasari Azhar); he later strongly denied this allegation, even becoming a witness for the defence in Antasari’s trial.
After he was relieved of his position, and feeling that he had been made a scapegoat, Susno started to release information to the public about several corruption and
tax fraud cases. He claims to possess much more such information, so this episode
may not be over yet.
reluctance to support Sri Mulyani openly in these disputes no doubt relected
his strategy of giving priority to political stability over economic reform, and
it conirmed Bakrie’s growing inluence within the coalition government. Soon
after Sri Mulyani’s resignation, Bakrie was appointed executive chairman of a
146
Mark Baird and Maria Monica Wihardja
new joint secretariat to improve ‘coordination and communication’ among the
coalition parties.
Sri Mulyani did not mince words in explaining her resignation. She commented
in an interview (Cochrane 2010):
Downloaded by [Universitas Maritim Raja Ali Haji] at 19:27 18 January 2016
The (Indonesian) business community is not supportive of having the system coopted for very personal, narrow interests … If they start to allow one party to hijack
it, it is at the cost of everyone else … It is really a concern. It is a battle for Indonesia
now.
Other commentators agreed. While noting that Indonesia’s reputation for prudent economic management would probably remain intact, Hill (2010) expressed
concern at the prospects for continued economic and bureaucratic reform. He
warned that other reformers ‘may draw the conclusion: don’t take on the most
powerful in the land, especially where their business interests are at stake’.
Some of this initial concern was alleviated by the quick appointment of Agus
Martowardojo as inance minister and Anny Ratnawati as deputy minister. Agus
is a respected banker who has won plaudits for his professional management of
the largest commercial bank in Indonesia, the largely state-owned Bank Mandiri.
Anny is a respected inance ministry oficial (Director General for Budget). In the
current political environment, the two may well turn out to be more effective than
Sri Mulyani in proceeding with reform in a more measured and less confrontational manner.
Within the ministry of inance, much will depend on Agus’s leadership and the
commitment of key oficials to sustaining bureaucratic reforms. Strong support
will also be needed from the president to resist excessive parliamentary interference in the budget process and spending decisions. On the policy front, the new
team will have to move quickly to demonstrate its credentials and capacity to handle a broad range of economic policy issues (as opposed to a more narrow focus
on markets and budgets). In all of these areas, Sri Mulyani has left big shoes to ill.
MACROECONOMIC DEVELOPMENTS
Growth and investment
Despite the political turmoil resulting from the Bank Century case, and its impact
on both the inance ministry and the central bank, the economy has continued to
recover steadily from the effects of the GFC. GDP growth (year on year) returned
to pre-GFC levels in the fourth quarter (Q4) of 2009 and rose further to 5.7% in Q1
2010 (table 1a). The quarter-on-quarter growth of 1.4% in Q1 2010 (table 1b) is consistent with projected growth rates for 2010 as a whole in the range of 5.5% to 6.0%.
While China is expected to continue to grow more strongly (8.7%), Indonesia’s
performance should be in line with the average for other developing countries in
East Asia (5.5%) during 2010 (World Bank 2010c: 18). However, some caution is
needed, given current volatility in world inancial markets due to concerns about
Europe’s emerging iscal and debt problems. These concerns have the potential to
slow the recovery in global trade and commodity prices.
GDP growth in 2009 was held back somewhat by the rather modest increase in
private consumption, but boosted by strong growth in government consumption
(table 1a). According to World Bank estimates (2010b: 25–27), the government’s
Survey of recent developments
147
TABLE 1a Components of GDP Growth
(2000 prices; % year on year)
Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10
Downloaded by [Universitas Maritim Raja Ali Haji] at 19:27 18 January 2016
Gross domestic product (GDP)
GDP excluding petroleum & gas
By expenditure
Private consumption
Government consumption
Investment
Construction
Machinery & equipment
Transport
Other
Exports
Imports
By sector
Tradables
Agriculture, livestock, forestry &
isheries
Mining & quarrying
Manufacturing industries
Excluding petroleum & gas
Non-tradables
Electricity, gas & water supply
Construction
Trade, hotels & restaurants
Transport
Communication
Financial, rental & business services
Services
5.3
5.7
4.5
4.9
4.1
4.5
4.2
4.5
5.4
5.8
5.7
6.1
4.8
16.4
9.4
5.9
15.9
38.3
6.2
2.0
–3.7
6.0
19.2
3.5
6.2
–8.6
9.6
–4.2
–18.7
–24.4
4.8
17.0
2.4
6.1
–11.5
–0.6
–2.6
–15.5
–21.0
4.7
10.3
3.2
7.7
–12.7
–2.1
1.8
–7.8
–14.7
4.0
17.0
4.2
8.0
–3.9
–14.6
3.0
3.7
1.6
3.9
–8.8
7.9
7.3
7.7
20.8
2.4
19.6
22.6
2.8
5.1
2.9
5.9
2.2
2.9
2.7
3.3
4.5
4.6
3.4
2.9
2.4
1.8
2.1
2.6
1.5
1.9
3.4
1.5
1.8
6.2
1.3
1.5
5.2
4.2
4.9
3.5
3.6
4.0
7.6
9.3
5.9
5.5
–1.0
33.5
7.4
5.9
6.1
11.2
6.2
0.6
2.0
30.3
6.3
6.7
5.9
15.3
6.1
–0.0
5.7
26.6
5.3
7.2
5.6
14.5
7.7
–0.2
7.4
23.7
4.9
6.0
6.3
14.0
8.0
4.2
6.7
16.3
3.8
5.7
7.9
7.2
7.3
9.3
4.8
17.0
5.5
4.6
Source: CEIC Asia Database.
February 2009 GFC stimulus package added about 1 percentage point to growth
in 2009. Budget igures suggest that the main impact came from lower taxes than
originally budgeted (see budget table below). While there was also spending
on stimulus programs, this was offset by spending shortfalls elsewhere in the
budget. The growth of government consumption became strongly negative in Q1
2010, but there are encouraging signs of some pick-up in investment. The yearon-year data show a huge improvement in export growth, but it remains to be
seen whether this will be sustained, with seasonally adjusted quarter-on-quarter
growth in Q1 2010 turning negative (table 1b). Moreover, whereas imports have
generally been declining more rapidly, or growing more slowly, than exports in
recent times, resulting in a positive impetus to GDP growth from net exports, this
outcome was reversed in Q1 2010. Observers such as Basri and Rahardja (2010),
148
Mark Baird and Maria Monica Wihardja
TABLE 1b Components of GDP Growth
(2000 prices; seasonally adjusted; % quarter on quarter)
Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10
Downloaded by [Universitas Maritim Raja Ali Haji] at 19:27 18 January 2016
Gross domestic product (GDP)
GDP excluding petroleum & gas
By expenditure
Private consumption
Government consumption
Not seasonally adjusted
Investment
Construction
Machinery & equipment
Transport
Other
Exports
Imports
0.9
0.9
1.1
1.1
1.2
1.3
1.2
1.4
1.5
1.7
1.4
1.5
1.3
2.8
25.6
0.9
1.7
–7.8
8.7
–0.9
–4.7
–8.7
1.6
7.2
–28.7
–1.1
1.7
–11.1
–16.0
–2.8
–14.7
–14.4
0.6
0.6
23.7
0.6
1.7
–1.4
4.2
2.5
6.1
4.4
1.1
0.3
–0.4
2.8
2.1
8.1
6.4
3.2
6.9
4.6
0.7
1.3
33.2
1.8
1.8
1.4
–3.6
0.2
7.0
8.2
1.3
–3.7
–44.4
2.4
1.5
–0.4
4.2
–3.5
–1.5
3.7
By sector
Tradables
Agriculture, livestock, forestry &
isheries
Mining & quarrying
Manufacturing
Excluding petroleum & gas
0.5
0.9
0.9
1.3
0.7
0.5
0.9
0.9
1.0
1.0
0.8
0.7
0.9
–1.4
–1.7
0.9
0.9
1.2
1.4
0.9
1.1
2.1
0.8
1.1
–0.2
1.4
1.1
–0.6
0.4
1.0
Non-tradables
Electricity, gas & water supply
Construction
Trade, hotels & restaurants
Transport
Communication
Financial, rental & business services
Services
1.3
2.5
1.7
–1.1
1.3
7.4
2.0
1.5
0.7
4.3
1.7
–3.4
2.0
4.0
0.8
1.8
1.8
3.2
1.7
2.1
2.3
5.0
0.6
1.9
1.7
2.1
2.1
2.3
1.4
5.5
1.4
0.7
1.9
2.6
1.8
3.3
0.8
1.0
0.9
1.2
2.1
1.0
1.5
1.3
0.2
4.6
2.5
0.9
Source: CEIC Asia Database.
who have argued that Indonesia’s economy was to some extent protected from
the GFC by its relatively low dependence on exports (compared, say, with Singapore, Malaysia and Thailand), appear to have overlooked the equally important
impact of changes in import growth. Ironically, now that world trade is recovering, Indonesia is unlikely to beneit as much as other countries from export recovery, and if imports continue to grow even more rapidly than exports, GDP growth
will suffer even further in the short run (although increased imports of capital
goods will add to productive capacity in the medium term).
On the production side, GDP growth is still dominated by the non-tradable sectors (such as domestic trade and communications), which expanded collectively
Downloaded by [Universitas Maritim Raja Ali Haji] at 19:27 18 January 2016
Survey of recent developments
149
by 7.9% (year on year) in Q1 2010 (table 1a). The manufacturing sector (excluding
oil and gas) is recovering more slowly, up by 4.0% in Q1 2010. According to Danamon (2010), manufacturing sector growth is also relatively narrowly based, being
concentrated in a few sub-sectors such as vehicle manufacturing and chemicals.
By contrast, the wood, paper and printing, basic metals and steel, and textiles and
footwear sub-sectors are continuing to contract.
In early May 2010 the Investment Coordinating Board (Badan Koordinasi
Penanaman Modal, BKPM) released new data on foreign and domestic investment realisation for the irst quarter of 2010. Investment realisation totalled Rp 42
trillion for 574 projects, of which Rp 35 trillion ($3.8 billion) was foreign investment in 424 projects and Rp 7 trillion was domestic investment in 150 projects.
While these numbers suggest a signiicant rise in foreign investment and fall in
domestic investment compared with Q1 2009, they are not strictly comparable.
BKPM now bases its investment data on investment activity reports rather than
relying, as before, on data on the issue of permanent business licences. Over time,
this change should provide more accurate estimates of realised investments.
However, initial compliance with the new reporting requirements is incomplete,
so the new data probably under-record actual investment activity.
Balance of payments and trade policy
Exports recovered during 2009 from their March lows (igure 2a), spurred by
strong demand and higher prices for commodities, but they fell back slightly in
Q1 2010. Meanwhile imports continued to rise (igure 2b), narrowing the merchandise trade surplus from $11.5 billion in Q4 2009 to $7.9 billion in Q1 2010
(table 2). However, strong portfolio investment inlows ($6.2 billion in Q1 2010,
more than three times larger than a year earlier) continued to bolster the overall
balance of payments. Foreign direct investment has been more subdued, although
FIGURE 2a Exports
($ values, 3-month rolling sum, July 2008 = 100)
120
100
80
60
40
20
Crude materials, inedible
Chemicals
Animal & vegetable oils & fats
Manufactures
Food, beverages, tobacco, live animals
0
Feb-2009
Apr-2009
Source: CEIC Asia Database.
Jun-2009
Aug-2009
Oct-2009
Dec-2009
Feb-2010
150
Mark Baird and Maria Monica Wihardja
FIGURE 2b Imports
($ values, 3-month rolling sum, July 2008 = 100)
120
100
80
Downloaded by [Universitas Maritim Raja Ali Haji] at 19:27 18 January 2016
60
40
20
Food & live animals
Manufactures
Crude materials, inedible
Chemicals
Machinery & transport equipment
0
Feb-2009
Apr-2009
Jun-2009
Aug-2009
Oct-2009
Dec-2009
Feb-2010
Source: CEIC Asia Database.
TABLE 2 Balance of Payments
($ billion per quarter)
Mar-09
Current account
Exports
Non oil & gas
Oil & gas
Imports
Non oil & gas
Oil & gas
Merchandise trade balance
Non oil & gas
Oil & gas
Services
Income
Current transfers
Capital account
Financial account
Direct investment
Portfolio investment
Other investment
Errors & omissions
Overall balance (change in
reserves)
2.9
24.2
20.5
3.7
17.2
15.2
2.0
7.0
5.3
1.6
–2.5
–2.7
1.1
0.0
1.7
1.7
1.9
–1.8
–0.7
4.0
Sources: CEIC Asia Database; Bank Indonesia.
Jun-09
Sep-09
Dec-09
3.1
27.5
23.1
4.5
18.8
16.5
2.3
8.7
6.6
2.1
–3.1
–3.7
1.2
0.0
–2.4
0.0
2.0
–4.5
0.4
1.1
2.2
31.3
25.6
5.7
22.8
19.0
3.8
8.5
6.6
1.8
–3.5
–4.1
1.2
0.0
2.5
0.5
3.0
–1.0
–1.1
3.5
3.4
35.9
29.2
6.8
24.5
20.7
3.7
11.5
8.4
3.0
–4.6
–4.7
1.3
0.0
1.4
1.0
3.3
–2.9
–0.9
4.0
Mar-10
1.6
34.3
27.8
6.5
26.4
22.0
4.4
7.9
5.8
2.1
–3.6
–4.0
1.2
0.0
4.3
1.9
6.2
–3.9
0.8
6.6
Downloaded by [Universitas Maritim Raja Ali Haji] at 19:27 18 January 2016
Survey of recent developments
151
Danamon (2010: 10) reports some signs of a recovery in the manufacturing sector in Q1 2010. To offset the impact of portfolio lows on the exchange rate, Bank
Indonesia (BI) has accumulated foreign reserves, which rose from $52 billion to
$66 billion over 2009 and further to $79 billion by the end of April 2010. This
means that Indonesia is effectively forgoing the opportunity to use available foreign savings to inance imports, in order to support investment and growth by
instead lending these savings back to the rest of the world. However, this trend
has moderated more recently, because foreign investor interest in Indonesia has
been adversely affected by the impact of Europe’s debt problems on risk appetite.
On the trade front, most attention in recent months has focused on the ASEAN–
China Free Trade Agreement (ACFTA).2 As noted in the last survey (Patunru and
von Luebke 2010: 27–30), there was considerable pressure from domestic producers and parliament for Indonesia to re-negotiate tariffs on 228 items in the steel
products, textiles and footwear sectors. Following a meeting between Indonesian
and Chinese oficials in Yogyakarta on 3 April 2010, however, it was decided that
the ACFTA would be implemented as planned. At the same time, both countries
agreed that, if there is a bilateral trade imbalance, ‘the surplus country is obliged
to implement steps to increase imports’ and to provide whatever ‘support is
needed by the partner country’.3 This is a good outcome in terms of honouring
Indonesia’s international obligations, while also recognising the potential impact
of factor market and exchange rate distortions in China. However, in practice, it
remains to be seen how China would respond to a bilateral trade imbalance with
Indonesia. And, in economic terms, the individual country components of Indonesia’s overall trade balance with the rest of the world are of little consequence.
Inlation, monetary policy and inancial markets
Consumer price inlation has been creeping up since November 2009, reaching
an annual rate of 4.2% in May 2010 (igure 3). However, monthly inlation in May
(0.3%) was relatively mild, and there is no evidence of a strong upward trend
in core inlation or wholesale prices. This is due partly to the moderating inluence of the rupiah’s appreciation against the US dollar over the past year. This
exchange rate effect may now unwind as the US dollar strengthens on world
markets. There may also be some moderate inlationary pressure from rising
prices in Indonesia’s trading partners and the proposed 10% increase in electricity tariffs. The impact of the latter is expected to be small, however, because tariff
rises for low-end consumers (who account for around 65% of household energy
usage) will be excluded, and because electricity costs comprise just 3.5% of input
costs for medium and large-scale manufacturing industries (Danamon 2010: 14).
Inlationary expectations remain low and inlation is expected to stay well within
BI’s range of 4–6% during 2010.
That said, there is little room for complacency on monetary policy. While BI’s
policy rate has stayed at 6.5% since August 2009 (igure 3), the 30-day SBI (Bank
Indonesia Certiicate) rate has tracked down in recent months (from 7.3% in
May 2009 to 6.3% in May 2010). This downward trend is a better indication of
2 For an analysis of the implementation and impact of ACFTA on the Indonesian economy,
see World Bank (2010b): 27–32.
3 Press brieing by the trade minister, Mari Pangestu, Jakarta, 5 April 2010.
152
Mark Baird and Maria Monica Wihardja
FIGURE 3 Monetary Policy and Inlationa
(% p.a.)
12
9
Downloaded by [Universitas Maritim Raja Ali Haji] at 19:27 18 January 2016
6
3
0
May-2009
CPI inflation
Real SBI rate
SBI rate 30 days
Currency in circulation
Jul-2009
Nov-2009
Sep-2009
Policy rate
Jan-2010
Mar-2010
May-2010
a CPI = consumer price index; SBI = Sertiikat Bank Indonesa (Bank Indonesia Certifcate).
Source: CEIC Asia Database; Bank Indonesia.
BI’s relaxed monetary stance than the ixed policy rate. Portfolio capital lows
from overseas have inluenced monetary conditions, because BI’s open market
operations have not been enough to sterilise the extra liquidity resulting from
its accumulation of reserves (intended to moderate upward pressure on the
rupiah) (World Bank 2010b: 32–5). The net effect of these developments has been
a doubling in the rate of growth of currency in circulation since September 2009
(igure 3). It would be prudent for BI to moderate its ‘dovish’ position, and act if
necessary, well before inlation reaches the top (6%) of its inlation band.
How this plays out over the next few months will depend a lot on developments in world inancial markets and their impact on international prices and risk
perceptions. As events in recent weeks have shown, Indonesian markets are very
sensitive to changes in risk appetites (igure 1). A sustained crisis in Europe, for
example, could cause foreign investors to pull back from Indonesia, with negative
effects on the stock market and the exchange rate. While the government has had
no dificulty so far in meeting its bond issue targets for 2010 (with more than half
the total requirement fulilled by mid-May), fund-raising could become more dificult with a deterioration in foreign investor sentiment.
The banking system appears to be in good health, with reported commercial
bank non-performing loan ratios remaining at around 3.4% in Q1 2010 – slightly
lower than the averages for 2009 and 2008, and well below the averages for 2007
(5.6%) and 2006 (8.0%) (World Bank 2010b: 9). However, as shown in the Bank
Century case, oficial numbers do not always tell the whole story, and averages,
dominated by the top 14 commercial banks, may conceal weaker performance in
some smaller ones. For example, Bank Eksekutif revealed a non-performing loan
ratio of 15.6% in September 2009 and has been placed under enhanced BI surveillance. Lending growth has also started to recover, after modest growth in 2009
Survey of recent developments
153
Downloaded by [Universitas Maritim Raja Ali Haji] at 19:27 18 January 2016
(11.5%), and average rates for working capital loans have started to fall below 14%.
However, bank net interest margins, at over 5.8% in March 2010, are still among
the highest in the region (World Bank 2010b: 10–11), presumably relecting the high
perceived risks of doing business in Indonesia and the low eficiency of banking.
Fiscal policy
The revised budget for 2010 (table 3) was inally approved by parliament on
3 May 2010.4 The revised macro assumptions – especially the increase in the
assumed oil price from $65 to $80 per barrel – are prudent given current volatility
in world inancial and commodity markets. The main question mark – other than
the dificulty of predicting the volatile oil price – is over the assumed level of oil
production (965,000 barrels per day), which may be on the high side. The revised
budget also assumes that electricity tariffs will be raised on average by 10% in
July, with proportionately higher increases for larger power consumers.5 Even so,
most of the increase in spending is allocated to higher subsidies, with departmental spending close to original estimates.
The overall deicit is raised from Rp 98 trillion (1.6% of GDP) in the original
2010 budget to Rp 134 trillion (2.1% of GDP) in the revised budget. The increase
will be funded largely by drawing on unspent funds of Rp 38 trillion from the
previous year. However, if past experience is any guide, budget spending and
the deicit are likely to fall well short of planned levels. Last year, for example,
the revised deicit after the stimulus package was projected to be 2.5% of GDP,
but the actual deicit was only 1.6% of GDP. For this year, the World Bank (2010b)
is projecting a deicit closer to 1.3% of GDP, owing to higher GDP and revenue
estimates and lower spending than in the revised budget.
This pattern of spending shortfalls raises more fundamental issues about the
appropriate iscal stance. Indonesia has jealously guarded its reputation for iscal prudence over the past 30 years (box 2), even though there have been lapses
along the way (as during the Asian inancial crisis) and even though the means of
inancing the deicit have changed over time (with a signiicant shift from oficial
loans to sovereign bond issues during the past decade). Trends in budget inancing and public debt are summarised in igures 4a and 4b.6 Now that public debt
has been brought back down below 30% of GDP, it is appropriate to ask whether
a larger deicit may be justiied to boost economic growth (through infrastructure
investment, for example) or to expand coverage of anti-poverty programs.
4 Two parties, PDI–P (the Indonesian Democratic Party of Struggle) and Hanura (the People’s Conscience Party) walked out of the parliament (DPR) during Sri Mulyani’s address
on the budget, in protest at her role in the bail-out of Bank Century (Jakarta Post, 5/5/2010).
5 Vice President Boediono recently announced that the government would also raise the
price of gas sold on the domestic market to levels on par with international prices, to encourage producers to sell gas to local buyers (Jakarta Post, 19/5/2010). However, the timing
and the scale of these adjustments are not yet clear.
6 The oficial inancing data shown in igure 4a exclude grants, which are recorded above
the line in the budget (or not recorded at all). A signiicant growth of grants in recent years
is due in large part to the expansion of the Australian aid program. Australia will provide
over A$450 million to Indonesia in 2010/11, of which about A$325 million will be in grants.
154
Mark Baird and Maria Monica Wihardja
TABLE 3 Budgets for 2009 and 2010
(Rp trillion)
2009
Downloaded by [Universitas Maritim Raja Ali Haji] at 19:27 18 January 2016
Original
REVENUES & GRANTS
Tax revenues
Non-tax revenues
Grants
2010
Revised Preliminary Originala Revised
Actual
985.7
725.8
258.9
0.9
871.0
652.0
218.0
1.0
866.8
641.2
224.5
1.1
949.7
742.7
205.4
1.5
992.4
743.3
247.2
1.9
EXPENDITURES
1,037.1
Interest payments
101.7
Subsidies
166.7
Transfers to regional governments
320.7
Otherb
448.0
1,000.8
109.6
158.1
309.3
423.8
954.0
93.8
159.5
308.6
392.1
1,047.7
115.6
157.8
322.4
451.8
1,126.2
105.7
201.3
344.6
474.6
DEFICIT
% of GDP
–51.3
–1.0
–129.8
–2.5
–87.2
–1.6
–98.0
–1.6
–133.8
–2.1
FINANCINGc
Domestic inancing (net)
Foreign inancing (net)
Gross drawings
Amortisation
51.3
60.8
–9.5
52.2
–61.6
129.8
142.6
–12.7
56.3
–69.0
125.2
142.6
–17.4
98.0
107.9
–9.9
57.6
–67.5
133.8
133.9
–0.2
54.0
–54.1
0.0
0.0
38.0
0.0
0.0
5,194
4.3
5.0
10,600
7.5
61.0
960
5,613
4.5
2.8
9,408
7.6
61.6
952
6,126
5.5
5.0
10,000
6.5
65.0
965
6,369
5.8
5.3
9,200
6.5
80.0
965
UNSPENT FUNDS
MACRO ASSUMPTIONS & OUTCOMES
GDP (Rp trillion)
5,134
GDP growth (%)
6.0
Inlation (% p.a.)
6.2
Exchange rate (average, Rp/$)
9,400
3-month SBI rate (average % p.a.)
7.5
Oil price (average, $/barrel)
80.0
Oil production (‘000 barrels/day)
960
a Data in this column relect the budget approved by the DPR. Some amounts differ from those origi-
nally proposed, which were reported in the previous survey.
b ‘Other’ includes departmental spending on personnel, material, capital, social and other items.
c Foreign inancing is from oficial sources only. All bonds (including those denominated in foreign
currencies and those held by foreigners) are included in the domestic inancing igures.
Sources: 2009 macro outcomes: World Bank; all other data: Ministry of Finance.
From a inancing point of view, deicits of around 2% of GDP should be manageable without risking Indonesia’s credit rating. Deicits in this range have
already been projected for 2009 and 2010 without upsetting the domestic bond
markets. Additional inancing from oficial creditors and donors could also be
tapped for worthwhile development programs, or to provide stand-by inancing
Survey of recent developments
155
Downloaded by [Universitas Maritim Raja Ali Haji] at 19:27 18 January 2016
BOX 2 A Brief hiSTOry Of DefiCiTS AnD DeBT in inDOneSiA
Indonesia has earned a reputation for sound iscal management over the past 30 years.
During the Soeharto era, the economic team (often referred to as the ‘technocrats’)
maintained iscal discipline through the ‘balanced budget rule’, which kept spending
roughly equal to domestic revenues plus oficial external assistance. The level, allocation and implementation of development spending were largely determined by loans
mobilised from the international community. These were on concessional terms and
were considered to be more ‘development-oriented’ than commercial credits. Windfalls in oil revenues were often ‘hidden’ and used to cushion spending cuts when oil
prices fell (and also to fund ‘off-budget’ programs). Additional program loans were
also sought from donors in times of crisis (such as when oil prices collapsed in 1986).
This model broke down during the AFC. Although public debt was only 23% of
GDP in 1996/97, this was quickly inlated by the impact of the rupiah depreciation on
external debt, and by the issuing of new domestic debt to recapitalise banks and compensate BI for the non-repayment of last-resort loans issued during the early months
of the crisis. Initial attempts under the IMF program to run budget surpluses proved
counter-productive, as output fell sharply. Subsequent efforts to operate deicits ran
into inancing constraints, because conditions for promised program lending were not
met. Although the budget situation was eventually brought under control, public debt
had risen to almost 100% of GDP by 2000.
Over the past decade the government has worked hard to restore the credibility of
budget institutions, by passing new laws on public inancial management and reforming the Ministry of Finance (especially the tax and customs directorates). It has also kept
tight control over the budget deicit to lower the burden of public debt. By 2009 public
debt had been reduced to less than 30% of GDP. More than 60% of public debt is now
in the form of government bonds (denominated in both rupiah and foreign currencies),
while net borrowing (that is, new borrowing less repayments of outstanding loans)
from oficial sources is negative. The decision to abolish the Consultative Group on
Indonesia (CGI) in January 2007 symbolised the end of Indonesia’s ‘aid dependence’,
and ushered in a new era of bilateral ‘partnerships’ with major creditors and donors.
In response to the GFC, the government implemented a modest stimulus package
of tax and spending measures to raise the budget deicit to 2.5% of GDP in 2009. This
higher deicit was to be funded by additional bond issues, while various stand-by
facilities were also put in place in case market conditions deteriorated. But spending
fell well short of plans, and the actual deicit was only 1.6% of GDP. Similar outcomes
are expected in 2010. For the medium term, the policy debate has shifted back to the
scope for running larger deicits to boost economic growth and anti-poverty programs,
while still safeguarding Indonesia’s hard-earned reputation for iscal prudence.
in case market conditions deteriorate.7 That said, the recent experience of countries such as Greece is indicative of the dangers of relaxing the discipline of limits on budget deicits. Small deicits can expand signiicantly in just a few years
as politicians respond to the pressures of populism, producing an unsustainable
public debt burden. One of the great achievements of the balanced budget rule
7 In an innovative response to the GFC, Indonesia’s major creditors provided $5.5 billion
in stand-by facilities and bond guarantees during 2009. While some of the guarantees from
Japan have been used to guarantee samurai bonds issued by the Government of Indonesia,
none of the stand-by facilities from the World Bank, the Asian Development Bank (ADB)
and Australia have been drawn down to date.
156
Mark Baird and Maria Monica Wihardja
FIGURE 4a Budget Financinga
(% of GDP)
4
3
2
Total financing
Downloaded by [Universitas Maritim Raja Ali Haji] at 19:27 18 January 2016
1
0
Official borrowing
-1
-2
1996
1998
2000
2002
2004
2006
2008
a Data for the years 1996–99 refer to iscal years ending in March the following year.
Source: Ministry of Finance.
during the Soeharto era was to prevent this from happening. Nevertheless, the
real issues in Indonesia today lie on the spending side. Two challenges stand out.
The irst challenge is to ix the mechanics of budget spending. Past surveys (for
example, Kuncoro, Widodo and McLeod 2009: 159) have highlighted the problem
of bunched spending in the last quarter of the iscal year. According to the latest
analysis from the World Bank (2010b), while there has been some improvement
in the spending performance of line ministries, more than 40% of spending still
occurred in the last quarter of 2009. This pattern leads to wasteful spending and
budget shortfalls for the year as a whole. International experience suggests that the
solution lies in better advance planning before the start of the iscal year, greater
lexibility in spending during the iscal year and more scope to carry over funding
at the end of the iscal year.8 While Indonesia’s new budget laws provide for some
lexibility, oficials rarely exploit this, for fear of violating budget rules and being
accused of corruption. Major changes are needed in the ‘control and compliance’
mindset of oficials in both the Ministry of Finance and line ministries.
The second challenge is to ensure that money is well spent. During the Soeharto era, the technocrats used the planning process and the budget constraint to
weed out ‘white elephant’ projects. However, as discussed below, the planning
process is no longer as strong or as well linked to the budget as in the past. Therefore, in the current political environment, there is a risk that ‘pet’ projects will
get funded without adequate vetting for economic and social returns. The recent,
8 For international experience with budget carry-overs, including discussion of some of
the risks in developing countries, see Lienert and Ljungman (2009). For a detailed discussion of budget spending constraints and solutions in Indonesia, see World Bank (2009).
Survey of recent developments
157
FIGURE 4b Public Debta
(% of GDP)
100
80
Public debt
Downloaded by [Universitas Maritim Raja Ali Haji] at 19:27 18 January 2016
60
40
Foreign official debt
20
0
1996
1998
2000
2002
2004
2006
2008
Source: Ministry of Finance (foreign currency denominated debt converted to rupiah using International Monetary Fund International Financial Statistics end-of-year exchange rates). The igure for
1996 is a World Bank estimate.
ultimately unsuccessful, proposal from Golkar – initially with the support of
other parties – to allocate Rp 15 billion for each DPR law maker in the 2011 budget
(Jakarta Post, 4/6/2010) is a case in point. Close scrutiny of the budget by the Ministry of Finance provides some insurance against poor spending decisions.9 It is
also important to monitor the results of budget spending. The proposed move to
performance-based budgeting next year will help shift the focus of accountability
from ex ante controls to ex post results. But, as with the mechanics of spending, a
lot will depend on how the new system is used and how it feeds back into spending decisions. If it just becomes another layer in the spending management system, without any simpliication of ex ante controls, it could further reduce budget
lexibility.
THE NEW FIVE-YEAR PLAN
The ive-year National Medium-term Development Plan (Rencana Pembangunan
Jangka Menengah Nasional, RPJMN) for 2010–14 was launched in early February 2010. It is a very large document, in three volumes. The irst volume outlines the government’s development strategy for the next ive years to realise the
president’s vision of a ‘prosperous, democratic and just’ Indonesia. The other two
volumes expand on the sectoral and regional development plans. It is easy to
dismiss the plan as excessive rhetoric, having little impact on budget or policy
9 A 2002 constitutional amendment stipulating that 20% of the central government budget
must be spent on education also distorts the allocation and undermines the eficiency of
additional spending (World Bank 2010b: 35–9).
158
Mark Baird and Maria Monica Wihardja
TABLE 4 National Medium-term Development Plan 2010–14,
Selected Macroeconomic Targets
Downloaded by [Universitas Maritim Raja Ali Haji] at 19:27 18 January 2016
GDP growth (%)
Inlation (CPI) (% p.a.)
Tax revenues/GDP (%)
Budget deicit/GDP (%)
Public debt/GDP (%)
2010
2011
2012
2013
2014
5.5–6.0
4.0–6.0
6.0–6.3
4.0–6.0
6.4–6.9
4.0–6.0
6.7–7.4
3.5–5.5
7.0–7.7
3.5–5.5
12.4
–1.6
29.0
12.6
–1.9
28.0
13.0
–1.6
27.0
13.6
–1.4
25.0
14.2
–1.2
24.0
Source: Bappenas (2010).
decisions. Nonetheless, a lot of time and effort will now be spent translating the
RPJMN into the strategic plans of line ministries (Rencana Strategis Kementerian
Lembaga, Renstra–KL) and the development plans of provincial and district governments. In April the president held a two-day retreat in Bali with his full cabinet
and all provincial governors to prepare a ‘roadmap’ to achieve the plan’s goals. So
it is worth examining what the plan says and the main development challenges it
identiies for the next ive years.
The plan projects an average annual economic growth rate of 6.3–6.8% for
2010–14. Provided the global economy stabilises and there are no further major
economic crises, the growth rate is expected to reach 7% or more by 2014 (table 4).
Along with various pro-poor programs, this growth is expected to reduce the poverty rate from 14.2% in 2008–09 to 8–10% in 2014, and the open unemployment
rate from 7.9% to 5–6% over the same period. Eleven national priorities are identiied to achieve these outcomes: bureaucracy and governance reform; education;
health; poverty reduction; food security; infrastructure; investment and business
climate; energy; environment and disaster management; least developed, frontier,
outer and post-conlict areas; and culture, creativity and technological innovation.
The overall tone of the plan is consistent with the vision laid out in the president’s
Independence Day address in August 2009 (Yudhoyono 2009). There is a heavy
emphasis on building a strong, stable, uniied country, based on self-reliance and a
well-connected domestic economy. Issues of economic eficiency and international
competitiveness are mentioned, but take a back seat to concerns about domestic
equity and connectivity. This is perhaps understandable, especially in the aftermath
of the GFC. But it is also a missed opportunity to set more ambitious growth targets,
needed to make signiicant inroads on poverty over the next ive years.
The macroeconomic framework for the plan is also conservative. The budget
deicit is projected to fall to 1.2% of GDP, and public debt to 24% of GDP, by 2014
(table 4). Higher tax revenues and lower subsidies apparently provide more than
enough resources to inance the proposed public investment program (although
numerical values are not speciied in the plan). As discussed above, there is scope
on the inancing side for considering a more expansionary iscal policy to support
economic growth and anti-poverty programs. However, this can only be justiied
and realised if current spending constraints are addressed.
Downloaded by [Universitas Maritim Raja Ali Haji] at 19:27 18 January 2016
Survey of recent developments
159
Unfortunately, the plan does little to clarify spending priorities. The 11 priorities outlined above are very comprehensive, and provide little guidance for
the preparation of the national budget, sectoral programs and regional plans.
While the program for the irst 100 days of the president’s second term has been
rightly criticised for its vagueness and limited scope (Patunru and von Luebke
2010: 24–27), it did at least initiate a process for monitoring progress on priority
actions. The same approach has now been carried over into Inpres (Presidential
Instruction) No. 1 for 2010, which outlines the government’s priorities for 2010.
It has only 155 priority activities, compared with 1,167 in the ive-year plan. The
Presidential Unit for Development Supervision and Control (Unit Kerja Presiden
untuk Pengawasan dan Pengendalian Pembangunan, UKP4), under Kuntoro
Mangkusubroto, is responsible for monitoring progress and identifying possible
bottlenecks. Although this process brings some much-needed discipline to the
government’s program, it depends on the right priorities being identiied at the
outset. This is where a close working relationship between the national planning
agency, Bappenas, and UKP4 is essential.
Connectivity10
One of the recurring themes of the plan is the importance of ‘connecting Indonesia’ so as to unify the country and ensure that the beneits of economic growth
are widely shared.11 This is relected in the plan’s national priorities, infrastructure targets and regional development strategy. But what is less clear is what ‘connectivity’ means in terms of investment and policy choices. One framework for
thinking about these issues is provided in the 2009 World Development Report on
Reshaping Economic Geography (World Bank 2008a).12 This stresses that as economies progress from low to high income, production becomes more concentrated
spatially. For Indonesia the concentration is on Java, especially around the Greater
Jakarta area, and in smaller regional centres in the outer islands. This is not a
trend that can or should be reversed. Rather, the need is to ind ways to share
the beneits of concentrated production across regions and income groups, while
recognising that almost 60% of the poor live on Java.
For Indonesia, the challenge of connectivity can be broken down into three
dimensions: intra-island, inter-island and international connectivity. Intra-island
connectivity is important to link poorer rural areas to urban growth poles and to
link growth poles to each other. Differential strategies are required, with ‘backbone’ infrastructure on the more densely populated islands of Java and Sumatra;
‘special-purpose’ infrastructure connecting major resource-based industries with
their ports on Sumatra and Kalimantan; and ‘ink-spot’ development around
smaller growth poles on the more remote and less densely populated islands
of eastern Indonesia. Much of the infrastructure in both urban and rural areas
10 This section draws on work done by Mark Baird for the World Bank during the irst
half of 2010 and summarised in World Bank (2010d). A more complete analysis will be
published by the Bank in its next Country Economic Memorandum.
11 The term ‘connectivity’ covers all aspects of infrastructure and logistics that improve
the movement of people and goods, as well as related policy issues.
12 For applications to Indonesia, see Hill, Resosudarmo and Vidyattama (2008) and Deichmann et al. (2005).
Downloaded by [Universitas Maritim Raja Ali Haji] at 19:27 18 January 2016
160
Mark Baird and Maria Monica Wihardja
will come from local governments. The private sector can contribute to inancing
infrastructure projects – including, for example, toll roads on Java and those serving resource-based industries on the outer islands. But the central government
also has a role to play in providing a sound regulatory framework, including for
land acquisition, local borrowing and pricing and subsidy decisions.
Inter-island connectivity is especially important in a far-lung archipelago like
Indonesia. At the Asia Paciic infra