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Bulletin of Indonesian Economic Studies
ISSN: 0007-4918 (Print) 1472-7234 (Online) Journal homepage: http://www.tandfonline.com/loi/cbie20
SURVEY OF RECENT DEVELOPMENTS
Mike Waslin
To cite this article: Mike Waslin (2003) SURVEY OF RECENT DEVELOPMENTS, Bulletin of
Indonesian Economic Studies, 39:1, 5-26, DOI: 10.1080/00074910302004
To link to this article: http://dx.doi.org/10.1080/00074910302004
Published online: 17 Jun 2010.
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Date: 19 January 2016, At: 20:15
Bulletin of Indonesian Economic Studies, Vol. 39, No. 1, 2003: 5–26
SURVEY OF RECENT DEVELOPMENTS
Mike Waslin
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Canberra
SUMMARY
In the immediate aftermath of the 12 October Bali bombings, the government
acted to limit the repercussions by moving to arrest those involved in the planning and implementation of the attacks.
It also took steps to stimulate the
economy by increasing the 2003 budget
deficit by 0.5% of GDP to 1.8%.
The start of 2003 saw the economic
debate switch from the impact of the Bali
bombings to the government’s decision
to increase domestic electricity, fuel and
telephone charges. The simultaneous
price rises sparked public protests and opposition from both unions and business.
The increases were initially defended, including by the president, but the government quickly backed down. This decision
complicates the task of winding back the
budget deficit over the next two years,
and reduces budget flexibility in the runup to the 2004 election.
Consumption continues to be the
main driver of growth, although there
are signs that it is waning. Third quarter GDP growth came in at 3.9% year
on year, and GDP growth for 2002 as a
whole is likely to be 3.5–3.6%. The November trade data were disconcerting,
with a 22.4% decline in non-oil exports,
although there was some recovery in
December. Inflation in December was
10%, down from a year earlier, and just
above the Bank Indonesia (BI) target
range of 9–10% for the year. This and
BI’s medium-term target of 6–7% seem
too high, out of step with regional and
world developments, and likely to undermine Indonesia’s competitive position.
In 2003 many of the institutions and
arrangements put in place following the
1997 financial crisis come to an end: the
Indonesian Bank Restructuring Agency
(IBRA) will close; Indonesia will graduate from the IMF program; and the government will benefit from its final year
of Paris Club rescheduling of official
debt. The government must increasingly
take ownership of its economic policies.
There are signs that this is occurring, with
the formation of a group to examine policies for the post-IMF period. With political will and the right policy choices,
budget and associated debt management
can sustain macroeconomic stability in
the post-IMF era, but both are likely to
be susceptible to domestic political influence in the lead-up to the election.
The overarching priority in alleviating Indonesia’s debt burden is to accelerate real GDP growth through effective
implementation of the structural reform
program, leading to improved business
confidence and investment. The reality
is that Indonesia will probably be stuck
in a low growth scenario for a number
of years unless it can speed up its structural reform agenda.
ISSN 0007-4918 print/ISSN 1472-7234 online/03/010005-22
© 2003 Indonesia Project ANU
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6
POLITICAL ECONOMY
The government has been able to contain the economic repercussions of the
Bali bombings by moving swiftly to arrest those involved in planning and
carrying out the terrorist attack that
killed 202 people on 12 October 2002.
While investigations are continuing, by
early February the police had detained
30 people, including five main suspects
(JP, 4/2/2002). The next test for the government will be how the prosecutions
are handled when the trials begin in late
February.
At the same time BI sought to stabilise
the rupiah by announcing that it would
stand in the market against speculative
activity. While there was some speculation, BI was able to hold the exchange
rate reasonably steady, with very little
reduction in international reserves. Net
international reserves declined by $204
million between 7 October and 25 October 2002, but were subsequently rebuilt
by the end of the year.1 BI’s strategy of
announcing that it would stand in the
market could have backfired, by providing traders with a one-way bet, if BI had
run down reserves substantially in defending the currency, increasing the likelihood of depreciation.
The impact of the bombings on Bali’s
economy was also mitigated through the
relocation of government conferences to
Bali, promotion of domestic tourism,
and package deals from other Asian
countries. The question now is how well
tourism will hold up following the end
of the Indonesian holiday period.
In early 2003 the economic debate
switched from the impact of the Bali
bombings to the decision to increase electricity, fuel and telephone tariffs from
1 January 2003. Price rises for electricity
(6%), fuel (3–23%) and telecommunications (15%) took effect on 1 January (JP,
3/1/2003: 13), and brought public protests and combined opposition from the
Mike Waslin
unions and business. Although receiving
substantial press coverage, the public
protests were nevertheless relatively
small (up to 5,000 people), considering
the convergence of support from the various interest groups.
The protests seem to have taken the
authorities by surprise, as there had
been little public comment on the increases when they were first announced
in connection with the 2003 budget. Initially it seemed the government would
stand fast against this opposition and,
in a rare comment on economic matters,
President Megawati publicly defended
the price rises. However, the government quickly backed down, first announcing that it would take a week to
review the policy and then, on 20 January, on the eve of the meeting in Bali of
the Consultative Group on Indonesia
(CGI), stating that it would wind back
the increases.
While retaining the subsidies on fuel
and electricity, the government announced that it would be able to maintain the revised 2003 budget deficit at
1.8% of GDP through the use of contingency reserves and increased revenue
from higher oil prices. Donors at the CGI
meeting in January pledged up to $2.7
billion for financial year 2003, meeting the
government’s target range of $2.4–2.8
billion for funding the 2003 budget. The
immediate fiscal ramifications of the decision were therefore easily accommodated. However, the decision to back
down on plans for subsidy cuts could
make it more difficult to wind back the
budget deficit over the next two years,
and will reduce budget flexibility in the
lead-up to the 2004 election.
If the current increase in world oil
prices is only a temporary spike, the government will be able to use subsequent
falls in the world price to wind back the
subsidy. Controlling utility prices is
much more problematic. Electricity and
Survey of Recent Developments
7
FIGURE 1 GDP Growth, 2001–02
6%
5%
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4%
3%
2%
Year-on-year growth
1%
Annual average growth
0%
Q1 01
Q2 01
Q3 01
Q4 01
Q1 02
Q2 02
Q3 02
Source: Statistics Indonesia (BPS).
telephone infrastructure are badly in
need of investment, and maintaining
below-market tariffs will hold back such
investment. This was highlighted by PT
Telkom’s announcement that it had cancelled a planned investment worth $300
million following the government’s decision to delay the 15% tariff increase
(Business News, 17/1/2003: 4).
In moves reminiscent of the on-againoff-again 2001 fuel price increases, the
Director General for Posts and Telecommunications announced on 28 January
that the government still planned to implement the telephone tariff increases within
one to two months, but this was denied
the next day by Minister Agum Gumelar.
REAL SECTOR DEVELOPMENTS
Indonesia’s recent economic performance can be portrayed in two slightly
different ways, depending on whether
yearly average or year-on-year comparisons are made (figure 1). In year-on-year
terms, growth has steadily improved
from a low of 1.6% in the fourth quarter
of 2001 to 3.9% in the third quarter of
2002. In contrast, when measured in annual average terms, growth has remained relatively flat since the first
quarter of 2002 at just under 3%. With a
constant rate of growth, both of these
measures should converge. A worrying
sign is that growth appears to be settling
around the 3.5–4% range. In part the
slowdown is due to slower world economic growth, but there are questions
about Indonesia’s ability to take advantage of any upswing in world economic
activity when it occurs.
Among policy makers and local commentators, the general rule of thumb is
that Indonesia needs approximately 6%
growth to accommodate the expanding
workforce, and to make headway in reintegrating displaced workers within the
formal economy. According to BI, growth
of 3.5% in 2002 was only sufficient to
8
Mike Waslin
FIGURE 2 Consumption and Investment Spending
(March 1996 = 100)
140
120
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100
80
Consumption
60
Investment
40
Q1 96
Q1 97
Q1 98
Q1 99
Q1 00
Q1 01
Q1 02
Source: BPS.
absorb 1.2 million workers out of the 2.5
million expansion in the labour force.
Consumption
Consumption continues to be the main
driver of economic growth. As shown
in figure 2, it is now around 20% above
the pre-crisis level; in contrast, investment is approximately 20% below its
pre-crisis level.2
On an annual average basis, private
consumption contributed 4.8% to GDP
growth in the third quarter of 2002, up
on the 3.4% and 2.6% contributions for
the same period in 2001 and 2000 (figure 3). Nevertheless there are signs that
this component may be waning as the
major source of GDP growth. In yearon-year terms, private consumption’s
rate of growth declined from 9.2% in the
fourth quarter of 2001 to 4.7% in the
third quarter of 2002.
Consumption grew faster than GDP in
2001 and 2002, so the current slowdown
in its growth was inevitable. Nevertheless, it will continue to be the major driver
of growth in 2003. Even consumption
growth of around 5% is sufficient to provide GDP growth of 3–3.5%.
Partial indicators reveal that the consumption cycle is more advanced in
Indonesia than in other countries in the
region. For example, average monthly
car sales have been close to their precrisis level of 30,000 units for the past
three years. In comparison, car sales in
Thailand and the Philippines remain
below pre-crisis levels. Motorcycle
sales are regarded as an indicator of the
wellbeing of middle income earners.
The fasting month of Ramadan (6 November to 5 December) makes it difficult to assess trends in motorcycle sales
on a month-on-month basis. However,
on a 3-month moving average basis, it
is clear that the extraordinary growth
that occurred during early 2000, when
motorcycle sales rose by more than
Survey of Recent Developments
9
FIGURE 3 Components of GDP Growth: Expenditure Basisa
(annual average contribution to Q3)
6%
4%
2%
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0%
-2%
-4%
Q3 00
Q3 01
Q3 02
-6%
-8%
Private
consumption
Government
consumption
Investment
Net exports
Stocks/statistical
discrepancy
a
The contribution of each component to GDP growth is the absolute change in that component as a percentage of the initial level of GDP.
Source: BPS.
100%, has now passed, as pent-up demand has been satisfied. Sales slowed
over the course of 2002, from 58.9% in
March to 38.8% in October and 17% in
November. Domestic cement consumption continues to expand, albeit at a
slower pace; it rose by 6.8% in 2002,
down from 13.7% in 2001 (CEIC Asia
Database).
Considering the importance of consumption to Indonesian economic
growth, there was a real risk that the Bali
bombings would seriously undermine
consumer confidence, resulting in increased precautionary savings and reduced consumption. Surveys by the
Danareksa Research Institute (DRI 2002)
indicate that, despite a 4.8% fall in the
November consumer confidence index
to 94.1, buying intentions remained re-
silient, with the percentage of shoppers
intending to buy durables over the next
six months increasing from 21.6% to just
under 24%.
Substantial minimum wage increases
in 2001 and 2002 would have acted to
support consumption growth, particularly since the lower income groups have
a higher marginal propensity to consume. In 2003 the minimum wage increases are substantially lower, with
nominal monthly minimum wages rising by 6.8% in Jakarta, from Rp 591,000
to Rp 631,000. This will be the first time
since 1998 that real minimum wages
have not increased in Jakarta. In other
provinces, minimum wage increases
range from 4.6% in the district of Cilacap
(Central Java) to 28.8% in the province
of Nangroe Aceh.
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10
Investment
While investment improved marginally
in Q2 and Q3 2002, as measured in the
national accounts, it continues to be a
laggard in the Indonesian growth story,
remaining about 20% below pre-crisis
levels (figure 3). The obstacles to investment in Indonesia have been canvassed
widely in the past, and recently restated
by the National Planning Agency (Bappenas 2003). They include regional security; law enforcement; labour market
problems; the overlapping responsibilities of the central and provincial governments; regulatory burdens; distortions
in the tax system; and increased competition from other developing countries.
Investor perceptions, particularly
among companies not already operating within Indonesia, are affected by
the political climate and the treatment
given to foreign investors. The period
under review saw a number of incidents that continued to undermine investor confidence. Not least were the
Bali bombings, which again raised security concerns, and have imposed additional costs on doing business in
Indonesia as companies increase security for their businesses and families.
In addition, the use of criminal charges
in a commercial dispute again emerged
as a problem, when Indian executives
of Polaris Software Laboratories (partially owned by Citibank) in dispute
with Bank Artha Graha were arrested
and gaoled for one week on fraud
charges (AWSJ, 18/12/2002). The case
is reminiscent of another in which senior executives of the Manulife company were gaoled in 2001 in a dispute
over ownership of the company.
The government’s policy ‘flip-flop’ on
telephone and electricity charges has a
direct effect on the profitability, and
therefore the desirability, of investing in
Mike Waslin
these sectors. It may also impact on the
willingness of companies to invest in
state-owned enterprises more generally
on the basis of expected price changes
or, equally importantly, of assurances
that possible adverse policy changes will
not occur. In the case of the recent privatisation of Indosat, the sale was conducted in anticipation of the announced
telephone tariff increases, and the sale
price presumably reflected the proposed
rises.
Foreign direct investment (FDI) approvals declined by 35%, to $9.7 billion
in 2002 from $15.1 billion in 2001, and
38% of the approvals were for the expansion of existing plants. According
to the Investment Coordinating Board,
foreign investment approvals were concentrated in the trading and other services, metal, machinery, electronics,
transport, storage and communications, and hotel and restaurant sectors
(AWSJ, 8/1/2002). Domestic investment approvals fell by 57%, to Rp 25.3
billion from Rp 58.6 billion.
The dramatic decline in the approvals data does not accord with the national accounts figures, which show
more modest declines and even increasing investment in the second and third
quarters of 2002. Approvals data are notoriously inaccurate predictors of actual
investment, but they do provide an indication that there are fewer investment
projects in the pipeline, and that the
prospects for a speedy recovery in
investment are slim.
Indonesia is not alone in having declining FDI flows, or in having gross
fixed capital formation remain below
pre-crisis levels. FDI to the five crisis
countries fell to $6 billion in 2001, from
$12.6 billion in 2000 and $19.6 billion
in 1996 (UNCTAD, World Investment
Report 2002, cited in World Bank 2002a).
Survey of Recent Developments
11
FIGURE 4 Southeast Asia: Gross Fixed Capital Investment
(Q4 1996 = 100)
120
100
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80
60
40
Indonesia
Thailand
Philippines
Malaysia
20
0
Dec-96
Dec-97
Dec-98
Dec-99
Dec-00
Dec-01
Source: CEIC Asia Database.
Figure 4, which indexes investment
back to pre-crisis levels, shows that investment remains below its 1997 level
in Thailand, and has fallen further there
relative to its pre-crisis level than is the
case in Indonesia.
Even though its investment recovery
has been faster than that of Thailand,
Indonesia’s problems with the rule of
law, corruption, security, and enforcement of property rights mean that it is
likely to find it harder than other regional economies to attract FDI in an environment where total flows to the
region are diminishing. With increased
competition for FDI from China and
other emerging markets, it is improbable
that investment flows will ever return
to their pre-crisis levels for an extended
period. Growth will need to be driven
by improving productivity.
Production
Measured on a production basis, annual
average GDP growth slowed in the majority of sectors in 2000–02 (figure 5).
Most notable was the fall in the contribution of the manufacturing sector. The
declining competitiveness of that sector
is highlighted by Sony’s decision to
move its audio equipment production
to Malaysia. In addition, there have been
continual warnings of declining competitiveness in the textile and footwear
subsectors (James, Ray and Minor 2003,
in this issue; Alisjahbana and Manning
2002).
International Trade
The November 2002 trade data caused
alarm, with a 22.4% decline in non-oil
exports over the previous month. Nonoil exports partially recovered in
12
Mike Waslin
FIGURE 5 Components of GDP Growth: Production Basis
(annual average contribution to Q3)
2.5%
Manufacturing
2.0%
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1.5%
1.0%
Hotels &
restaurants
Agriculture,
forestry &
fisheries
0.5%
Construction
Electricity,
gas &
water
Mining
Transport
Finance
Services
0.0%
Q3 00
Q3 01
Q3 02
-0.5%
Source: BPS.
December, rising by 11.8%, and total exports were 20.3% higher than in December 2001 (figure 6). The November
decline in exports was concentrated in
electrical machinery (down 41.6%);
machines and mechanical appliances
(down 54.3%); animal and vegetable
fats and oils (down 47.5%); and nonknitted garments (down 34.5%). One
possible explanation for the disruption
in trade is the decision by Lloyds to remove Indonesia from the list of areas
excluded from war risk, thereby increasing uncertainty and shipping costs
to and from the country.3 The downward movement in November was substantial, and further data are required
to determine whether there has been a
structural decline in Indonesian trade.
Before November, non-oil exports
had been improving consistently over
the course of 2002. Accordingly, even if
Indonesia was able to hold its exports
constant on a month-on-month basis, it
would have been able to post reasonably
strong year-on-year export growth.
Indonesia recorded a balance of payments surplus in 2002, allowing BI to
increase foreign reserves to $31.6 billion
from $28 billion in December 2001. The
rise in foreign reserves was attributable
to increased oil and gas export revenues,
drawdowns on foreign government
loans, and IBRA asset sales.
Bali: The Impact of the Bombings
Initial indications are that the direct effects of the Bali bombings on the Indonesian economy will be relatively
modest. In assessing its economic impact it is important to distinguish between economic developments already
in train and consequences flowing from
the bomb blast. The official forecast was
for growth of around 4% in 2002. However, issues of declining competitiveness
Survey of Recent Developments
13
FIGURE 6 International Trade
($ billion)
6
5
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4
3
2
1
Jul-00
Jan-01
Jul-01
Jan-02
Balance
Non-oil exports
Total exports
Imports
Jul-02
Source: BPS.
and decelerating growth in consumer
demand meant that growth prospects
for 2002 had already been reduced to
3.6–3.8%. The additional reduction to
growth in 2002 due to the decline in the
tourist industry would be only marginal. BI’s preliminary estimate of GDP
growth for 2002 is 3.5% for the year.
This implies that the impact of the Bali
bombings on GDP was only around
0.1–0.2% in 2002.
The full year effect for 2003 will depend on whether Bali was an isolated
terrorist incident or whether attacks are
repeated across the nation. By moving
swiftly to arrest those involved in the
bombings the government may have
managed to contain the economic
damage.
Even before the bombings, the budget
assumption of 5% growth in 2003 was
considered overly ambitious by the market. The Consensus Economics growth
forecast for Indonesia in September was
only 4.2%.4 In revising the budget after
the Bali bombings, the government reduced its growth rate assumption to 4%,
while the November forecast by Consensus Economics was 3.6%.
Forecasts of the impact on the
economy immediately after the bombings concentrated on the direct consequences flowing from the reduction
in tourism (World Bank 2002b). Forecasts of a reduction in GDP of around
0.7% in 2003 were based on the direct
effect on the tourism, transport and
services sectors. Analysis was based
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14
on the experience following the 1987
bombing of Luxor in Egypt. The flowon effects on consumption could not
be predicted. The risk was that consumption could evaporate as consumers increased their precautionary
savings in the face of heightened uncertainty.
The fact that consumer spending intentions have held up despite a decline
in consumer confidence in the post-Bali
period suggests that the government’s
swift action to increase security and actively pursue the terrorists limited the
flow-on effects to the rest of the Indonesian economy. Nevertheless, the direct
impact on the Balinese economy has been
substantial. Direct tourist arrivals to Bali
fell by around 80% to 31,497 between
September and November, recovering to
64,352 in December (World Bank 2003:
3). Bappenas (2003: 11–16) estimates that
without speedy economic recovery the
loss of employment in Bali could be in
the range of 100,000–120,000 persons. To
limit the impact on the Balinese economy
the government has:
• increased promotion of Bali, including sponsorship of international sporting events;
• redirected government business by
holding all conferences in Bali; and
• accelerated local government infrastructure spending (including water,
drainage, sewerage systems and pavement projects) in and around the tourist
centres of Kuta and Legian.
FINANCE AND BANKING
Financial Markets
The rupiah ended the year as one of the
best performing currencies in the region, appreciating by 10.1% on average
over 2002, with lower volatility than
during the previous year (Sabirin 2003).
Despite the uncertainties after Bali, BI
was able to hold the currency relatively
Mike Waslin
stable: it depreciated by about 2.5% in
the immediate aftermath of the bombings, from Rp 9,027/$ on 11 October
to Rp 9,249/$ on 17 October 2002,
but recovered to finish the year at
Rp 8,975/$ (Pacific Exchange Rate Service, University of British Columbia,
http://pacific.commerce.ubc.ca/xr).
Monetary Policy
Inflation in December 2002 was 10.03%,
down from its level a year earlier, and
just above BI’s target range of 9–10% for
the year. BI is targeting an inflation rate
of 9% for 2003; included in that target is
an estimated impact of around 3% for
the effect of administered price increases
and provincial wage increases. The
question is whether BI will revise its inflation target downwards following the
government’s decision to wind back the
administered price increases.
The operation of monetary policy is in
a transitionary phase. Officially, BI targets base money in the implementation
of monetary policy. The targets are announced in the government’s Letter of
Intent to the IMF. Yet at the same time BI
is moving to inflation targeting, and has
established a medium-term target of
6–7% inflation by 2006. As a result, monetary policy is being implemented with
an eye on both base money and inflation.5
BI’s target for base money growth of 13%
in 2003 is consistent with its inflation target of 9% and the growth forecast of 4%.
During 2002, BI reduced the interest rate
on one-month Bank Indonesia Certificates (SBIs) by 469 basis points, from
17.62% to 12.93% (Sabirin 2003).
Growth of cash in circulation declined during the first half of 2002, from
rates in excess of 20% in 2001 to around
7% in mid 2002. BI attributed the slower
rate of growth to a reduction in discretionary demand for cash following the
election of Megawati as president and
Survey of Recent Developments
15
FIGURE 7 Currency in Circulation
(Rp trillion)
120
Currency in circulation
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100
Trendline
80
60
40
Mar-98 Sep-98 Mar-99 Sep-99 Mar-00 Sep-00 Mar-01 Sep-01 Mar-02 Sep-02
Source: Bank Indonesia.
the greater political stability. From
about July, the increase in currency in
circulation resumed its historical trend.
The spike in currency in circulation
during November–December 2002 (figure 7) reflects the extended Idul Fitri and
Christmas holiday period, and possibly
increased holdings of discretionary balances following the Bali bombings. The
absence of disturbances over the holiday
period has seen cash return to the banking system.
While the government’s progress in
reducing inflation during 2002 was
good, it was not exceptional: the pace of
decline slowed from mid 2002, when the
inflation rate hovered around 10.5%. BI’s
2003 and medium-term inflation targets
are too high in a world where low inflation has become the norm and there is
concern over possible deflation. In this
environment, Indonesia’s competitive
position is being eroded as the real exchange rate appreciates.
The Banking Sector
The health of the banking sector improved in the past couple of years, with
negative net interest margins being replaced by an average return on assets of
1.86% for the top 22 banks in the first
half of 2002. Nevertheless the banking
system is far from being restored to full
health.
According to the governor of BI, the
system as a whole has net nonperforming loans (NPLs) below the
maximum level of 5% set by the central bank, although some banks have
NPLs above that level. BI has announced that because of ‘factors outside the control of individual banks’, it
will delay implementation of the 5%
policy (Sabirin 2003). Those banks
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16
currently failing the test are required
to report on how they are going to meet
the target in 2003. On a gross basis,
NPLs were 10.2% at the end of October; private sector estimates give NPLs
of over 40% for some banks. Clearly, the
long-term stability of the banking system can only be assured when all banks
are adequately capitalised and provisioned: it is essential that all banks at
least adhere to the 5% NPL target or
that appropriate action is taken.
New credit extended by banks increased by Rp 72 trillion between January and November, 27% higher than in
the same period a year earlier (Sabirin
2003). This growth in new lending overstates the real increase in credit, because
it includes funds provided to borrowers to purchase loans from IBRA, reflecting a portfolio switch in the way those
loans were recorded. In addition, the
percentage increase in lending is overstated because banks continue to hold
only a small proportion of their assets
as loans.
FISCAL POLICY
The actual 2002 budget deficit is estimated at 1.6% of GDP, or Rp 27 trillion
below the budget estimate of 2.4%. Domestic revenues were Rp 5 trillion lower
than budgeted, but this was more than
offset by lower expenditures, in particular underspending of Rp 7.2 trillion on
development. Underspending on development has been a consistent feature of
budget outcomes in recent years, and
comes at a longer-term cost to future
growth.
The budget for 2003 was revised in
the wake of the Bali bombings, to provide increased fiscal stimulus of Rp 8.1
trillion, or 0.5% of GDP. An extra
Rp 10.6 trillion was allocated for development spending, but it remains to be
seen whether all the funds will be disbursed.
Mike Waslin
The 2003 budget originally planned
to cut subsidies from Rp 30.5 trillion to
Rp 15.9 trillion, raising the price of petrol
from its current level of 75% of the world
price to 100%. The budget allocated
Rp 4.1 trillion to fund power subsidies.
The original proposal was for power
price increases of 14.5% per quarter.
However, parliament approved quarterly rises of only 6%. Increased prices
are necessary to improve the return on
investment in the electricity sector in order to justify new investments. The state
electricity company, PLN, is quoted as
saying that it has made no new investments since 1998 owing to a lack of
funds (JP, 6/1/2003).6
Following public protests, the government at first announced its intention
to reduce taxation imposts on businesses
by Rp 6 trillion to offset the cost of the
planned administrative price rises. The
proposed cuts involve exempting certain goods from the luxury tax, including cellular phones, television sets,
washing machines, refrigerators, VCRs,
DVDs and audio recorders. Despite the
decision to wind back the price increases, the tax cuts are to be retained
as a means of improving business competitiveness. Notably, the goods benefiting from the taxation concession were
the same goods that suffered the sharp
decline in exports in November 2002.
STRUCTURAL POLICY
The IMF Program
The government signed a further Letter
of Intent (LOI) to the IMF on 20 November, almost three months after the original date for completion of the review of
the previous IMF program. Finalisation
of the LOI had been delayed pending
progress on a number of areas of reform.
One performance criterion still awaiting finalisation is the Bank Indonesia
Liquidity Support (BLBI) settlement, an
agreement on how to apportion between
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Survey of Recent Developments
the government and BI the cost of liquidity support provided to the banking system during the financial crisis. It is a
matter of semantics whether this debt is
recorded on the government’s books or
those of BI, since it remains a cost to the
public sector (Alisjahbana and Manning
2002: 291), but this does have a presentational effect on the interest cost recorded in the budget. Finalisation of the
BLBI settlement would allow this longrunning political issue to be settled.
More importantly, it would remove one
of the impediments to parliament’s completing its deliberation of revisions to the
central bank legislation to make BI more
accountable.
Progress on bank sales has been much
slower than envisaged under the program at the beginning of 2002. The sale
of Bank Niaga, originally slated for June,
was not completed until November. As
a result, the sale of Bank Danamon and
preparations for the sale of a stake in
Bank Mandiri were also delayed.7
Privatisation receipts were also slow
to materialise. There were initial portfolio offerings in Indosat and Telkom in
the first half of the year. However, substantial progress in meeting the budget
privatisation target was not achieved
until the sale of a majority stake in Indosat was finalised at the end of the year.
The privatisations that have been successful to date have tended to be portfolio sales or strategic sales of corporations
already listed on the stock exchange.
This is because the initial hurdle of gaining public acceptance for some private
ownership has, in theory, already been
passed. What has yet to occur is strategic sales of enterprises wholly owned by
the government, i.e. state-owned companies not already listed on the stock
exchange.
The legal framework for Treasury
bond auctions was finally established
with the passage of the enabling legis-
17
lation in September. The first auction
took place in December (see discussion
of official debt below).
An area of recent controversy has
been the bank shareholder settlement
agreements. IBRA created a ‘stick and
carrot’ approach for dealing with the
debt of former bank owners. The process adopted involved an initial determination as to which shareholders had
been cooperative. Under the so-called
‘release and discharge’ policy, owners
deemed cooperative in settling their
debts to the government would be discharged from any further obligation.
The remaining shareholders would have
90 days in which to make payment or
face legal action. This policy has been
criticised by NGO groups as being a serious blow to justice, in that individuals
have not been required to account for
their actions.
Under the IMF’s June 2002 requirements for structural reform, the government had to finalise and publish by July
its initial determination of the former
bank owners’ compliance for each of the
settlement agreements. This process was
not completed until October. In November 2002, IBRA announced that it would
take legal action against five former bank
shareholders who had failed to pay what
they owed the government. The former
owner of Bank Risad Salim International
avoided legal action by paying Rp 27 billion in cash in October, on top of assets
previously surrendered to IBRA (JP,
12/11/2002).
An area that has slipped from recent
LOIs has been the structural reform
agenda and, in particular, legal reform,
with the exception of the establishment
of the Anti-Corruption Commission. This
was targeted as a June 2002 structural
requirement, but the enabling legislation
to establish the commission was not
passed until the end of November
(Business News No. 6847, 2/12/2002: 3).
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18
Finance Minister Boediono has identified
structural reforms aimed at improving
Indonesia’s competitiveness as the main
theme of policy for 2003, so it is likely
that this will be taken up in the current
review of the IMF program, scheduled
to be completed by mid February.
It is reported that the government has
reached agreement with the IMF over
the terms of the next LOI, but it is yet to
be released. Its main objective will be to
set the path of policy for 2003, the last
year of the IMF program.
In 2002, the People’s Consultative
Assembly (MPR) decided that Indonesia should graduate from the IMF program at the end of 2003. The country is
already in the final stages of the program, and is now repaying to the IMF
more than it is receiving in new loans.
During 2002, the government repaid
approximately $2.3 billion (Sabirin 2003:
5), with the result that indebtedness to
the IMF fell by $1.1 billion over the
course of the year. The issue for Indonesia is not the balance of payments support that the Fund provides, but access
to official credit.
Bank Restructuring
IBRA is scheduled to be wound up by
February 2004, but its chair, Syafrudin
Temenggung, has publicly stated his
desire to wind up the organisation by
September 2003. With IBRA having less
than a year to run, it is worthwhile to
reflect on its original objectives and what
it has achieved.
IBRA was established in January 1998
(Johnson 1998: 47–9) with three primary
objectives:
• to reorganise and support the banking system (including returning to the
private sector banks in which the government had acquired a substantial interest);
• to collect funds through the sale of
assets of previous bank owners; and
Mike Waslin
• to restructure and dispose of problem
loans moved to IBRA as part of the bank
restructuring.
IBRA was granted quasi-judicial
rights under Government Regulation 17
of 1999 (known as PP17). The regulation
provides IBRA with the authority ‘to
control and/or sell goods or assets
which have been transferred to obtain
compensation in respect of the … fault,
negligence and/or improper transaction
on the part of bank shareholders, directors and commissioners’ (IMF 2002). In
effect the regulation gives IBRA the authority to foreclose on debtors without
recourse to the courts, but the difficulties of enforcement remain.
IBRA took some time to begin its work,
with much of 1998–99 spent trying to assess the scope of the problem. It was not
until 1999 that the recapitalisation of the
banks got under way, and even then it
did not proceed smoothly. There were
many delays, owing to concern about the
interest cost implications for the budget.
Because of rising interest rates, the government issued banks with an increasing
proportion of fixed rate recapitalisation
bonds as the process continued. The delay in recapitalising the banks and the issuing of fixed rate bonds saw many
banks continue to earn negative net interest margins. Only during 2002, when
interest rates began to decline, did bank
profitability improve.
Despite criticism of IBRA’s poor performance in pursuing debtors and
former bank owners, it has broadly met
its budgetary targets (table 1). However,
in IBRA’s case, meeting budgetary targets and pursuing defaulting debtors are
not the same thing. Until 2001, around
60% of IBRA’s cash revenue came from
loan assets, and mainly in the form of
debt service (IMF 2002). (IBRA received
performing as well as non-performing
loans when it took over the failed banks.)
Survey of Recent Developments
19
TABLE 1 IBRA’s Budgetary Performance
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Cash
Bonds
a
1999/2000
2000
2001
2002
Actual Budget
Actual Budget
Actual Budget
Actuala Budget
12.9
4.2
17.0
20.2
18.9
28.0
29.5
27
10
40.7
7.5
35.3
7.5
As at 23 December 2002.
Source: IBRA, Monthly Report, various issues (www.bppn.go.id).
By the end of 2001, IBRA still held
over 86% of the assets that had been
transferred to it. Despite meeting its
budgetary commitments, it has not
achieved the rapid disposal of assets to
repurchase recapitalisation bonds that
was originally envisaged. The most visible example is its slow pace in returning banks to the private sector. The
September 2000 ‘Supplementary Memorandum of Economic and Financial Policies’ signed with the IMF envisaged the
sale of Bank Central Asia (BCA) and
Bank Niaga by the end of 2000, and
completion of the bank divestiture process by the end of 2001. In the event, the
sale of the two banks was not finalised
until the end of 2002, two years later
than originally planned, and the other
banks were yet to be sold at the time of
writing. As we have seen, the recovery
of assets from former bank owners
through the bank shareholder settlement agreements has also been slow.
The year 2002 saw a marked acceleration in asset disposal. The most controversial aspect was the decision to sell
loans on an obligor basis, rather than as
a pool of loans from different borrowers. Under the obligor system, loans to
companies within the same corporate
group were packaged together. The con-
cern was that sales by obligor provided
a simple mechanism by which debtors
could buy back their own debt. In a system where there is effective enforcement
of insolvency laws, debtors would not
be in a position to buy back their own
debt because those resources would already be available to creditors. In
weaker enforcement systems, the public choice issue is whether to maximise
recovery, which might be achieved by
the acquisition of the debt by the debtor,
or to minimise the moral hazard inherent in borrowers believing they can default on their debts and buy back the
debt at a discount at a later date. In practice, whether a loan is sold back to an
obligor (debtor) or to an unrelated third
party, there is likely to be little difference in the final outcome: the third party
will seek to maximise returns, and that
is likely to occur through a settlement
with the debtor for approximately what
the debtor would have been prepared
to pay for the loan.
For 2003, IBRA has a cash recovery
target of Rp 18 trillion. Assuming that this
is met, IBRA’s total recoveries over its life
will equal approximately Rp 161 trillion,
representing a recovery rate of less than
25% on the total amount of recapitalisation bonds and bonds issued to BI. Note
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20
that this is an overstatement, as it ignores
the time value of money and includes interest income on performing loans.
What Is Left to Be Achieved. There are
five categories of assets that IBRA has
yet to dispose of:
• loans left over from the sale by obligor: there were approximately Rp 50–
60 trillion in loans that failed to sell as
part of the sale of recent loans by obligor; these are to be packaged in bundles
of approximately Rp 10 trillion and
sold;
• loans not offered for sale—i.e. loans
greater than Rp 750 billion (the top five
obligors, e.g. Texmaco), plus loans that
are subject to legal action;
• equity in the BTO banks (‘banks taken
over’ by IBRA)—Bank Danamon, Bank
Lippo and Bank Bali (incorporating
Bank Universal, Bank Patriot, Bank
Artha Media and Bank Prima Express);
• the property portfolio: branches of
banks that have been closed, and security on loans that have been foreclosed,
are being offered through a property
asset sales program (PPAP). Consideration is also being given to developing
an industry-based strategy to encourage
a secondary mortgage market;
• recovery of money from former bank
shareholders through the bank shareholder settlement agreements.
IBRA must now dispose of its least
saleable assets. The easiest category of
assets to sell should be equity in the
banks that IBRA has acquired, although
this has not proved easy in the past, with
parliament taking an increasing interest
in the process.
Privatisation
The privatisation process has been a difficult one for the government. Over the
past few years it was supposed to contribute to the financing of the budget
deficit. In 2002 privatisation proceeds
reached and even exceeded the budget
Mike Waslin
target for the first time, with a realisation
of Rp 7.6 trillion. This was achieved
mainly though the partial sale of Indosat. The process proceeded reasonably
smoothly until the Indosat sale was
finalised, when there were protests by
employees seeking to have the sale overturned.
The 2003 budget targets privatisation
proceeds of Rp 8 trillion. Given likely
rising nationalist sentiment in the leadup to the 2004 election, it will be a hard
task for the government to achieve this
target. However, following the decision
to wind back the removal of the fuel and
electricity subsidies, there will be strong
fiscal pressure to press ahead with the
privatisation program.
The government has announced its
intention to sell interests in the following companies during 2003: Bank Rakyat Indonesia (BRI); construction
company PT Adhi Karya; gas distribution company PT Perusahaan Gas
Negara (PGN); housing contractor PT
Pembangunan Perumahan; airport operator Angkasa Pura II; securities firm
PT Danareksa Securities; insurance firm
Asuransi Kredit Indonesia (Askrindo);
and real estate companies Kawasan
Berikat Nusantara, Jakarta Industrial
Estate Pulo Gadung and Surabaya Industrial Estate Rungkut. The sales are
still subject to parliamentary approval.
Added to this list are companies not
sold during 2002, such as Bank Mandiri, PT Kimia Farma and PT Ankasa
Pura I (JP, 19/11/2002).
Privatisation will need to assume an
even larger role in financing the 2004
budget deficit, in view of the expected
closure of IBRA by the end of the year.
While privatisation is important to the
funding of the budget deficit, it could be
argued that the government is simply
substituting one asset class for another:
its net asset position remains unchanged
if it uses the proceeds of privatisation to
Survey of Recent Developments
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repay debt. The major gains from privatisation are that it puts private sector
rather than government capital at risk (an
important consideration in the banking
system) and that it has the potential for
substantial efficiency gains.
OFFICIAL DEBT
Management of public debt remains a
contentious issue, and there have been
calls for foreign debt forgiveness on the
basis that borrowings by the Soeharto
government were misused. External
debt increased from 25.6% of GDP in
1996 to 42.8% in 2001. This rise was
driven largely by exchange rate depreciation: in dollar terms debt increased
only from $50.9 billion in December 1997
to $61.6 billion in February 2002, reflecting increased borrowings from donors
and the international development
banks.
The issuance of domestic bonds has
been viewed by the public as meeting
the cost of bailing out the conglomerates
rather than the cost of protecting bank
depositors.8 Domestically, the government has issued Rp 647.2 trillion in
bonds to recapitalise the banking system
and compensate BI for liquidity support
provided to banks. As a result, domestic debt increased from zero in 1996 to
48.6% of GDP in 2001.
Given the perception that both foreign and domestic debt have been
inappropriately incurred, it is understandable that there has been a reluctance on the part of NGOs and other
commentators even to accept the need
to service the debt, let alone develop a
strategy for managing it.
Indonesia has nevertheless made significant and, in some respects, unexpectedly good progress in reducing its debt
burden. The country’s public debt profile had improved from over 100% of
GDP in 2000 to 72% by the end of 2002.9
This improvement has been driven by
21
strong growth in nominal GDP and appreciation of the rupiah. The failure of
BI to control inflation has had the unintended consequence of partially inflating away domestic debt. However, this
is a reduction in the relative debt burden only: absolute levels of government
debt have not been reduced, as IBRA has
failed to recover assets of sufficient
quantity to repay a substantial part of
the debt.
In terms of the government’s overall
balance sheet, the decline in the value
of the debt is roughly matched by a decline in the value of assets, because
bonds are largely held by state banks
and banks in which the government has
acquired a majority stake. Inflating
away the real value of the government’s
debt also inflates away the real value of
the government’s equity holdings in the
banking system.
The improvement in Indonesia’s ratio
of public debt to GDP means that the
country’s debt is no longer substantially
out of line with that of other regional
economies. Thailand’s public sector debt
is expected to rise to a little over 60% of
GDP in fiscal year 2002, and the Philippines’ public debt is also estimated at
around 60% of GDP.
Work by the World Bank shows that
the ratio of Indonesia’s debt to GDP
could fall below 50% by 2008 and reach
its pre-crisis level of 25% by 2016 (World
Bank 2002b). The key to sustainability
is accelerating real GDP growth; fiscal
policy geared to achieving primary surpluses (i.e. excluding interest cost) of
about 3% of GDP; and asset sales and
privatisations aimed at financing deficits, so that additional debt is not added
to the stock, and any additional proceeds
are directed at reducing public debt.
The substantial rise in government
debt has imposed a significant strain on
the budget. The interest carrying cost
peaked in 2001, when interest payments
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22
totalled Rp 95.5 trillion, or 32% of revenue. This was also the year in which
the cost of subsidies peaked, with the
result that payments on interest and subsidies represented 55% of revenue. The
brunt of the interest and subsidy carrying cost was borne by development
spending, which fell to 13.1% of revenue
in 2001 from 37.6% in 1996–97. A decline
in domestic interest rates and a rise in
revenue have resulted in the interest carrying cost falling to a projected 24.4% of
revenue in 2003, enabling the development budget to be expanded to 19.4%
of revenue.
The notional external interest cost has
remained relatively stable, with budgeted interest decreasing from Rp 29.3
trillion in 2001 to Rp 26.8 trillion in 2003
(though in reality most of the foreign
interest burden was rescheduled in 2002
and 2003). As a proportion of revenue,
external interest expenses have declined
from 9.8% in 2001 to 8% in 2003, compared with 11% in the pre-crisis period.
Despite the relative improvement in
the debt service position, substantial
challenges remain. Indonesia is entering
the next phase of debt management,
ISSN: 0007-4918 (Print) 1472-7234 (Online) Journal homepage: http://www.tandfonline.com/loi/cbie20
SURVEY OF RECENT DEVELOPMENTS
Mike Waslin
To cite this article: Mike Waslin (2003) SURVEY OF RECENT DEVELOPMENTS, Bulletin of
Indonesian Economic Studies, 39:1, 5-26, DOI: 10.1080/00074910302004
To link to this article: http://dx.doi.org/10.1080/00074910302004
Published online: 17 Jun 2010.
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Date: 19 January 2016, At: 20:15
Bulletin of Indonesian Economic Studies, Vol. 39, No. 1, 2003: 5–26
SURVEY OF RECENT DEVELOPMENTS
Mike Waslin
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Canberra
SUMMARY
In the immediate aftermath of the 12 October Bali bombings, the government
acted to limit the repercussions by moving to arrest those involved in the planning and implementation of the attacks.
It also took steps to stimulate the
economy by increasing the 2003 budget
deficit by 0.5% of GDP to 1.8%.
The start of 2003 saw the economic
debate switch from the impact of the Bali
bombings to the government’s decision
to increase domestic electricity, fuel and
telephone charges. The simultaneous
price rises sparked public protests and opposition from both unions and business.
The increases were initially defended, including by the president, but the government quickly backed down. This decision
complicates the task of winding back the
budget deficit over the next two years,
and reduces budget flexibility in the runup to the 2004 election.
Consumption continues to be the
main driver of growth, although there
are signs that it is waning. Third quarter GDP growth came in at 3.9% year
on year, and GDP growth for 2002 as a
whole is likely to be 3.5–3.6%. The November trade data were disconcerting,
with a 22.4% decline in non-oil exports,
although there was some recovery in
December. Inflation in December was
10%, down from a year earlier, and just
above the Bank Indonesia (BI) target
range of 9–10% for the year. This and
BI’s medium-term target of 6–7% seem
too high, out of step with regional and
world developments, and likely to undermine Indonesia’s competitive position.
In 2003 many of the institutions and
arrangements put in place following the
1997 financial crisis come to an end: the
Indonesian Bank Restructuring Agency
(IBRA) will close; Indonesia will graduate from the IMF program; and the government will benefit from its final year
of Paris Club rescheduling of official
debt. The government must increasingly
take ownership of its economic policies.
There are signs that this is occurring, with
the formation of a group to examine policies for the post-IMF period. With political will and the right policy choices,
budget and associated debt management
can sustain macroeconomic stability in
the post-IMF era, but both are likely to
be susceptible to domestic political influence in the lead-up to the election.
The overarching priority in alleviating Indonesia’s debt burden is to accelerate real GDP growth through effective
implementation of the structural reform
program, leading to improved business
confidence and investment. The reality
is that Indonesia will probably be stuck
in a low growth scenario for a number
of years unless it can speed up its structural reform agenda.
ISSN 0007-4918 print/ISSN 1472-7234 online/03/010005-22
© 2003 Indonesia Project ANU
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6
POLITICAL ECONOMY
The government has been able to contain the economic repercussions of the
Bali bombings by moving swiftly to arrest those involved in planning and
carrying out the terrorist attack that
killed 202 people on 12 October 2002.
While investigations are continuing, by
early February the police had detained
30 people, including five main suspects
(JP, 4/2/2002). The next test for the government will be how the prosecutions
are handled when the trials begin in late
February.
At the same time BI sought to stabilise
the rupiah by announcing that it would
stand in the market against speculative
activity. While there was some speculation, BI was able to hold the exchange
rate reasonably steady, with very little
reduction in international reserves. Net
international reserves declined by $204
million between 7 October and 25 October 2002, but were subsequently rebuilt
by the end of the year.1 BI’s strategy of
announcing that it would stand in the
market could have backfired, by providing traders with a one-way bet, if BI had
run down reserves substantially in defending the currency, increasing the likelihood of depreciation.
The impact of the bombings on Bali’s
economy was also mitigated through the
relocation of government conferences to
Bali, promotion of domestic tourism,
and package deals from other Asian
countries. The question now is how well
tourism will hold up following the end
of the Indonesian holiday period.
In early 2003 the economic debate
switched from the impact of the Bali
bombings to the decision to increase electricity, fuel and telephone tariffs from
1 January 2003. Price rises for electricity
(6%), fuel (3–23%) and telecommunications (15%) took effect on 1 January (JP,
3/1/2003: 13), and brought public protests and combined opposition from the
Mike Waslin
unions and business. Although receiving
substantial press coverage, the public
protests were nevertheless relatively
small (up to 5,000 people), considering
the convergence of support from the various interest groups.
The protests seem to have taken the
authorities by surprise, as there had
been little public comment on the increases when they were first announced
in connection with the 2003 budget. Initially it seemed the government would
stand fast against this opposition and,
in a rare comment on economic matters,
President Megawati publicly defended
the price rises. However, the government quickly backed down, first announcing that it would take a week to
review the policy and then, on 20 January, on the eve of the meeting in Bali of
the Consultative Group on Indonesia
(CGI), stating that it would wind back
the increases.
While retaining the subsidies on fuel
and electricity, the government announced that it would be able to maintain the revised 2003 budget deficit at
1.8% of GDP through the use of contingency reserves and increased revenue
from higher oil prices. Donors at the CGI
meeting in January pledged up to $2.7
billion for financial year 2003, meeting the
government’s target range of $2.4–2.8
billion for funding the 2003 budget. The
immediate fiscal ramifications of the decision were therefore easily accommodated. However, the decision to back
down on plans for subsidy cuts could
make it more difficult to wind back the
budget deficit over the next two years,
and will reduce budget flexibility in the
lead-up to the 2004 election.
If the current increase in world oil
prices is only a temporary spike, the government will be able to use subsequent
falls in the world price to wind back the
subsidy. Controlling utility prices is
much more problematic. Electricity and
Survey of Recent Developments
7
FIGURE 1 GDP Growth, 2001–02
6%
5%
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4%
3%
2%
Year-on-year growth
1%
Annual average growth
0%
Q1 01
Q2 01
Q3 01
Q4 01
Q1 02
Q2 02
Q3 02
Source: Statistics Indonesia (BPS).
telephone infrastructure are badly in
need of investment, and maintaining
below-market tariffs will hold back such
investment. This was highlighted by PT
Telkom’s announcement that it had cancelled a planned investment worth $300
million following the government’s decision to delay the 15% tariff increase
(Business News, 17/1/2003: 4).
In moves reminiscent of the on-againoff-again 2001 fuel price increases, the
Director General for Posts and Telecommunications announced on 28 January
that the government still planned to implement the telephone tariff increases within
one to two months, but this was denied
the next day by Minister Agum Gumelar.
REAL SECTOR DEVELOPMENTS
Indonesia’s recent economic performance can be portrayed in two slightly
different ways, depending on whether
yearly average or year-on-year comparisons are made (figure 1). In year-on-year
terms, growth has steadily improved
from a low of 1.6% in the fourth quarter
of 2001 to 3.9% in the third quarter of
2002. In contrast, when measured in annual average terms, growth has remained relatively flat since the first
quarter of 2002 at just under 3%. With a
constant rate of growth, both of these
measures should converge. A worrying
sign is that growth appears to be settling
around the 3.5–4% range. In part the
slowdown is due to slower world economic growth, but there are questions
about Indonesia’s ability to take advantage of any upswing in world economic
activity when it occurs.
Among policy makers and local commentators, the general rule of thumb is
that Indonesia needs approximately 6%
growth to accommodate the expanding
workforce, and to make headway in reintegrating displaced workers within the
formal economy. According to BI, growth
of 3.5% in 2002 was only sufficient to
8
Mike Waslin
FIGURE 2 Consumption and Investment Spending
(March 1996 = 100)
140
120
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100
80
Consumption
60
Investment
40
Q1 96
Q1 97
Q1 98
Q1 99
Q1 00
Q1 01
Q1 02
Source: BPS.
absorb 1.2 million workers out of the 2.5
million expansion in the labour force.
Consumption
Consumption continues to be the main
driver of economic growth. As shown
in figure 2, it is now around 20% above
the pre-crisis level; in contrast, investment is approximately 20% below its
pre-crisis level.2
On an annual average basis, private
consumption contributed 4.8% to GDP
growth in the third quarter of 2002, up
on the 3.4% and 2.6% contributions for
the same period in 2001 and 2000 (figure 3). Nevertheless there are signs that
this component may be waning as the
major source of GDP growth. In yearon-year terms, private consumption’s
rate of growth declined from 9.2% in the
fourth quarter of 2001 to 4.7% in the
third quarter of 2002.
Consumption grew faster than GDP in
2001 and 2002, so the current slowdown
in its growth was inevitable. Nevertheless, it will continue to be the major driver
of growth in 2003. Even consumption
growth of around 5% is sufficient to provide GDP growth of 3–3.5%.
Partial indicators reveal that the consumption cycle is more advanced in
Indonesia than in other countries in the
region. For example, average monthly
car sales have been close to their precrisis level of 30,000 units for the past
three years. In comparison, car sales in
Thailand and the Philippines remain
below pre-crisis levels. Motorcycle
sales are regarded as an indicator of the
wellbeing of middle income earners.
The fasting month of Ramadan (6 November to 5 December) makes it difficult to assess trends in motorcycle sales
on a month-on-month basis. However,
on a 3-month moving average basis, it
is clear that the extraordinary growth
that occurred during early 2000, when
motorcycle sales rose by more than
Survey of Recent Developments
9
FIGURE 3 Components of GDP Growth: Expenditure Basisa
(annual average contribution to Q3)
6%
4%
2%
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0%
-2%
-4%
Q3 00
Q3 01
Q3 02
-6%
-8%
Private
consumption
Government
consumption
Investment
Net exports
Stocks/statistical
discrepancy
a
The contribution of each component to GDP growth is the absolute change in that component as a percentage of the initial level of GDP.
Source: BPS.
100%, has now passed, as pent-up demand has been satisfied. Sales slowed
over the course of 2002, from 58.9% in
March to 38.8% in October and 17% in
November. Domestic cement consumption continues to expand, albeit at a
slower pace; it rose by 6.8% in 2002,
down from 13.7% in 2001 (CEIC Asia
Database).
Considering the importance of consumption to Indonesian economic
growth, there was a real risk that the Bali
bombings would seriously undermine
consumer confidence, resulting in increased precautionary savings and reduced consumption. Surveys by the
Danareksa Research Institute (DRI 2002)
indicate that, despite a 4.8% fall in the
November consumer confidence index
to 94.1, buying intentions remained re-
silient, with the percentage of shoppers
intending to buy durables over the next
six months increasing from 21.6% to just
under 24%.
Substantial minimum wage increases
in 2001 and 2002 would have acted to
support consumption growth, particularly since the lower income groups have
a higher marginal propensity to consume. In 2003 the minimum wage increases are substantially lower, with
nominal monthly minimum wages rising by 6.8% in Jakarta, from Rp 591,000
to Rp 631,000. This will be the first time
since 1998 that real minimum wages
have not increased in Jakarta. In other
provinces, minimum wage increases
range from 4.6% in the district of Cilacap
(Central Java) to 28.8% in the province
of Nangroe Aceh.
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10
Investment
While investment improved marginally
in Q2 and Q3 2002, as measured in the
national accounts, it continues to be a
laggard in the Indonesian growth story,
remaining about 20% below pre-crisis
levels (figure 3). The obstacles to investment in Indonesia have been canvassed
widely in the past, and recently restated
by the National Planning Agency (Bappenas 2003). They include regional security; law enforcement; labour market
problems; the overlapping responsibilities of the central and provincial governments; regulatory burdens; distortions
in the tax system; and increased competition from other developing countries.
Investor perceptions, particularly
among companies not already operating within Indonesia, are affected by
the political climate and the treatment
given to foreign investors. The period
under review saw a number of incidents that continued to undermine investor confidence. Not least were the
Bali bombings, which again raised security concerns, and have imposed additional costs on doing business in
Indonesia as companies increase security for their businesses and families.
In addition, the use of criminal charges
in a commercial dispute again emerged
as a problem, when Indian executives
of Polaris Software Laboratories (partially owned by Citibank) in dispute
with Bank Artha Graha were arrested
and gaoled for one week on fraud
charges (AWSJ, 18/12/2002). The case
is reminiscent of another in which senior executives of the Manulife company were gaoled in 2001 in a dispute
over ownership of the company.
The government’s policy ‘flip-flop’ on
telephone and electricity charges has a
direct effect on the profitability, and
therefore the desirability, of investing in
Mike Waslin
these sectors. It may also impact on the
willingness of companies to invest in
state-owned enterprises more generally
on the basis of expected price changes
or, equally importantly, of assurances
that possible adverse policy changes will
not occur. In the case of the recent privatisation of Indosat, the sale was conducted in anticipation of the announced
telephone tariff increases, and the sale
price presumably reflected the proposed
rises.
Foreign direct investment (FDI) approvals declined by 35%, to $9.7 billion
in 2002 from $15.1 billion in 2001, and
38% of the approvals were for the expansion of existing plants. According
to the Investment Coordinating Board,
foreign investment approvals were concentrated in the trading and other services, metal, machinery, electronics,
transport, storage and communications, and hotel and restaurant sectors
(AWSJ, 8/1/2002). Domestic investment approvals fell by 57%, to Rp 25.3
billion from Rp 58.6 billion.
The dramatic decline in the approvals data does not accord with the national accounts figures, which show
more modest declines and even increasing investment in the second and third
quarters of 2002. Approvals data are notoriously inaccurate predictors of actual
investment, but they do provide an indication that there are fewer investment
projects in the pipeline, and that the
prospects for a speedy recovery in
investment are slim.
Indonesia is not alone in having declining FDI flows, or in having gross
fixed capital formation remain below
pre-crisis levels. FDI to the five crisis
countries fell to $6 billion in 2001, from
$12.6 billion in 2000 and $19.6 billion
in 1996 (UNCTAD, World Investment
Report 2002, cited in World Bank 2002a).
Survey of Recent Developments
11
FIGURE 4 Southeast Asia: Gross Fixed Capital Investment
(Q4 1996 = 100)
120
100
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80
60
40
Indonesia
Thailand
Philippines
Malaysia
20
0
Dec-96
Dec-97
Dec-98
Dec-99
Dec-00
Dec-01
Source: CEIC Asia Database.
Figure 4, which indexes investment
back to pre-crisis levels, shows that investment remains below its 1997 level
in Thailand, and has fallen further there
relative to its pre-crisis level than is the
case in Indonesia.
Even though its investment recovery
has been faster than that of Thailand,
Indonesia’s problems with the rule of
law, corruption, security, and enforcement of property rights mean that it is
likely to find it harder than other regional economies to attract FDI in an environment where total flows to the
region are diminishing. With increased
competition for FDI from China and
other emerging markets, it is improbable
that investment flows will ever return
to their pre-crisis levels for an extended
period. Growth will need to be driven
by improving productivity.
Production
Measured on a production basis, annual
average GDP growth slowed in the majority of sectors in 2000–02 (figure 5).
Most notable was the fall in the contribution of the manufacturing sector. The
declining competitiveness of that sector
is highlighted by Sony’s decision to
move its audio equipment production
to Malaysia. In addition, there have been
continual warnings of declining competitiveness in the textile and footwear
subsectors (James, Ray and Minor 2003,
in this issue; Alisjahbana and Manning
2002).
International Trade
The November 2002 trade data caused
alarm, with a 22.4% decline in non-oil
exports over the previous month. Nonoil exports partially recovered in
12
Mike Waslin
FIGURE 5 Components of GDP Growth: Production Basis
(annual average contribution to Q3)
2.5%
Manufacturing
2.0%
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1.5%
1.0%
Hotels &
restaurants
Agriculture,
forestry &
fisheries
0.5%
Construction
Electricity,
gas &
water
Mining
Transport
Finance
Services
0.0%
Q3 00
Q3 01
Q3 02
-0.5%
Source: BPS.
December, rising by 11.8%, and total exports were 20.3% higher than in December 2001 (figure 6). The November
decline in exports was concentrated in
electrical machinery (down 41.6%);
machines and mechanical appliances
(down 54.3%); animal and vegetable
fats and oils (down 47.5%); and nonknitted garments (down 34.5%). One
possible explanation for the disruption
in trade is the decision by Lloyds to remove Indonesia from the list of areas
excluded from war risk, thereby increasing uncertainty and shipping costs
to and from the country.3 The downward movement in November was substantial, and further data are required
to determine whether there has been a
structural decline in Indonesian trade.
Before November, non-oil exports
had been improving consistently over
the course of 2002. Accordingly, even if
Indonesia was able to hold its exports
constant on a month-on-month basis, it
would have been able to post reasonably
strong year-on-year export growth.
Indonesia recorded a balance of payments surplus in 2002, allowing BI to
increase foreign reserves to $31.6 billion
from $28 billion in December 2001. The
rise in foreign reserves was attributable
to increased oil and gas export revenues,
drawdowns on foreign government
loans, and IBRA asset sales.
Bali: The Impact of the Bombings
Initial indications are that the direct effects of the Bali bombings on the Indonesian economy will be relatively
modest. In assessing its economic impact it is important to distinguish between economic developments already
in train and consequences flowing from
the bomb blast. The official forecast was
for growth of around 4% in 2002. However, issues of declining competitiveness
Survey of Recent Developments
13
FIGURE 6 International Trade
($ billion)
6
5
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4
3
2
1
Jul-00
Jan-01
Jul-01
Jan-02
Balance
Non-oil exports
Total exports
Imports
Jul-02
Source: BPS.
and decelerating growth in consumer
demand meant that growth prospects
for 2002 had already been reduced to
3.6–3.8%. The additional reduction to
growth in 2002 due to the decline in the
tourist industry would be only marginal. BI’s preliminary estimate of GDP
growth for 2002 is 3.5% for the year.
This implies that the impact of the Bali
bombings on GDP was only around
0.1–0.2% in 2002.
The full year effect for 2003 will depend on whether Bali was an isolated
terrorist incident or whether attacks are
repeated across the nation. By moving
swiftly to arrest those involved in the
bombings the government may have
managed to contain the economic
damage.
Even before the bombings, the budget
assumption of 5% growth in 2003 was
considered overly ambitious by the market. The Consensus Economics growth
forecast for Indonesia in September was
only 4.2%.4 In revising the budget after
the Bali bombings, the government reduced its growth rate assumption to 4%,
while the November forecast by Consensus Economics was 3.6%.
Forecasts of the impact on the
economy immediately after the bombings concentrated on the direct consequences flowing from the reduction
in tourism (World Bank 2002b). Forecasts of a reduction in GDP of around
0.7% in 2003 were based on the direct
effect on the tourism, transport and
services sectors. Analysis was based
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14
on the experience following the 1987
bombing of Luxor in Egypt. The flowon effects on consumption could not
be predicted. The risk was that consumption could evaporate as consumers increased their precautionary
savings in the face of heightened uncertainty.
The fact that consumer spending intentions have held up despite a decline
in consumer confidence in the post-Bali
period suggests that the government’s
swift action to increase security and actively pursue the terrorists limited the
flow-on effects to the rest of the Indonesian economy. Nevertheless, the direct
impact on the Balinese economy has been
substantial. Direct tourist arrivals to Bali
fell by around 80% to 31,497 between
September and November, recovering to
64,352 in December (World Bank 2003:
3). Bappenas (2003: 11–16) estimates that
without speedy economic recovery the
loss of employment in Bali could be in
the range of 100,000–120,000 persons. To
limit the impact on the Balinese economy
the government has:
• increased promotion of Bali, including sponsorship of international sporting events;
• redirected government business by
holding all conferences in Bali; and
• accelerated local government infrastructure spending (including water,
drainage, sewerage systems and pavement projects) in and around the tourist
centres of Kuta and Legian.
FINANCE AND BANKING
Financial Markets
The rupiah ended the year as one of the
best performing currencies in the region, appreciating by 10.1% on average
over 2002, with lower volatility than
during the previous year (Sabirin 2003).
Despite the uncertainties after Bali, BI
was able to hold the currency relatively
Mike Waslin
stable: it depreciated by about 2.5% in
the immediate aftermath of the bombings, from Rp 9,027/$ on 11 October
to Rp 9,249/$ on 17 October 2002,
but recovered to finish the year at
Rp 8,975/$ (Pacific Exchange Rate Service, University of British Columbia,
http://pacific.commerce.ubc.ca/xr).
Monetary Policy
Inflation in December 2002 was 10.03%,
down from its level a year earlier, and
just above BI’s target range of 9–10% for
the year. BI is targeting an inflation rate
of 9% for 2003; included in that target is
an estimated impact of around 3% for
the effect of administered price increases
and provincial wage increases. The
question is whether BI will revise its inflation target downwards following the
government’s decision to wind back the
administered price increases.
The operation of monetary policy is in
a transitionary phase. Officially, BI targets base money in the implementation
of monetary policy. The targets are announced in the government’s Letter of
Intent to the IMF. Yet at the same time BI
is moving to inflation targeting, and has
established a medium-term target of
6–7% inflation by 2006. As a result, monetary policy is being implemented with
an eye on both base money and inflation.5
BI’s target for base money growth of 13%
in 2003 is consistent with its inflation target of 9% and the growth forecast of 4%.
During 2002, BI reduced the interest rate
on one-month Bank Indonesia Certificates (SBIs) by 469 basis points, from
17.62% to 12.93% (Sabirin 2003).
Growth of cash in circulation declined during the first half of 2002, from
rates in excess of 20% in 2001 to around
7% in mid 2002. BI attributed the slower
rate of growth to a reduction in discretionary demand for cash following the
election of Megawati as president and
Survey of Recent Developments
15
FIGURE 7 Currency in Circulation
(Rp trillion)
120
Currency in circulation
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100
Trendline
80
60
40
Mar-98 Sep-98 Mar-99 Sep-99 Mar-00 Sep-00 Mar-01 Sep-01 Mar-02 Sep-02
Source: Bank Indonesia.
the greater political stability. From
about July, the increase in currency in
circulation resumed its historical trend.
The spike in currency in circulation
during November–December 2002 (figure 7) reflects the extended Idul Fitri and
Christmas holiday period, and possibly
increased holdings of discretionary balances following the Bali bombings. The
absence of disturbances over the holiday
period has seen cash return to the banking system.
While the government’s progress in
reducing inflation during 2002 was
good, it was not exceptional: the pace of
decline slowed from mid 2002, when the
inflation rate hovered around 10.5%. BI’s
2003 and medium-term inflation targets
are too high in a world where low inflation has become the norm and there is
concern over possible deflation. In this
environment, Indonesia’s competitive
position is being eroded as the real exchange rate appreciates.
The Banking Sector
The health of the banking sector improved in the past couple of years, with
negative net interest margins being replaced by an average return on assets of
1.86% for the top 22 banks in the first
half of 2002. Nevertheless the banking
system is far from being restored to full
health.
According to the governor of BI, the
system as a whole has net nonperforming loans (NPLs) below the
maximum level of 5% set by the central bank, although some banks have
NPLs above that level. BI has announced that because of ‘factors outside the control of individual banks’, it
will delay implementation of the 5%
policy (Sabirin 2003). Those banks
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16
currently failing the test are required
to report on how they are going to meet
the target in 2003. On a gross basis,
NPLs were 10.2% at the end of October; private sector estimates give NPLs
of over 40% for some banks. Clearly, the
long-term stability of the banking system can only be assured when all banks
are adequately capitalised and provisioned: it is essential that all banks at
least adhere to the 5% NPL target or
that appropriate action is taken.
New credit extended by banks increased by Rp 72 trillion between January and November, 27% higher than in
the same period a year earlier (Sabirin
2003). This growth in new lending overstates the real increase in credit, because
it includes funds provided to borrowers to purchase loans from IBRA, reflecting a portfolio switch in the way those
loans were recorded. In addition, the
percentage increase in lending is overstated because banks continue to hold
only a small proportion of their assets
as loans.
FISCAL POLICY
The actual 2002 budget deficit is estimated at 1.6% of GDP, or Rp 27 trillion
below the budget estimate of 2.4%. Domestic revenues were Rp 5 trillion lower
than budgeted, but this was more than
offset by lower expenditures, in particular underspending of Rp 7.2 trillion on
development. Underspending on development has been a consistent feature of
budget outcomes in recent years, and
comes at a longer-term cost to future
growth.
The budget for 2003 was revised in
the wake of the Bali bombings, to provide increased fiscal stimulus of Rp 8.1
trillion, or 0.5% of GDP. An extra
Rp 10.6 trillion was allocated for development spending, but it remains to be
seen whether all the funds will be disbursed.
Mike Waslin
The 2003 budget originally planned
to cut subsidies from Rp 30.5 trillion to
Rp 15.9 trillion, raising the price of petrol
from its current level of 75% of the world
price to 100%. The budget allocated
Rp 4.1 trillion to fund power subsidies.
The original proposal was for power
price increases of 14.5% per quarter.
However, parliament approved quarterly rises of only 6%. Increased prices
are necessary to improve the return on
investment in the electricity sector in order to justify new investments. The state
electricity company, PLN, is quoted as
saying that it has made no new investments since 1998 owing to a lack of
funds (JP, 6/1/2003).6
Following public protests, the government at first announced its intention
to reduce taxation imposts on businesses
by Rp 6 trillion to offset the cost of the
planned administrative price rises. The
proposed cuts involve exempting certain goods from the luxury tax, including cellular phones, television sets,
washing machines, refrigerators, VCRs,
DVDs and audio recorders. Despite the
decision to wind back the price increases, the tax cuts are to be retained
as a means of improving business competitiveness. Notably, the goods benefiting from the taxation concession were
the same goods that suffered the sharp
decline in exports in November 2002.
STRUCTURAL POLICY
The IMF Program
The government signed a further Letter
of Intent (LOI) to the IMF on 20 November, almost three months after the original date for completion of the review of
the previous IMF program. Finalisation
of the LOI had been delayed pending
progress on a number of areas of reform.
One performance criterion still awaiting finalisation is the Bank Indonesia
Liquidity Support (BLBI) settlement, an
agreement on how to apportion between
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Survey of Recent Developments
the government and BI the cost of liquidity support provided to the banking system during the financial crisis. It is a
matter of semantics whether this debt is
recorded on the government’s books or
those of BI, since it remains a cost to the
public sector (Alisjahbana and Manning
2002: 291), but this does have a presentational effect on the interest cost recorded in the budget. Finalisation of the
BLBI settlement would allow this longrunning political issue to be settled.
More importantly, it would remove one
of the impediments to parliament’s completing its deliberation of revisions to the
central bank legislation to make BI more
accountable.
Progress on bank sales has been much
slower than envisaged under the program at the beginning of 2002. The sale
of Bank Niaga, originally slated for June,
was not completed until November. As
a result, the sale of Bank Danamon and
preparations for the sale of a stake in
Bank Mandiri were also delayed.7
Privatisation receipts were also slow
to materialise. There were initial portfolio offerings in Indosat and Telkom in
the first half of the year. However, substantial progress in meeting the budget
privatisation target was not achieved
until the sale of a majority stake in Indosat was finalised at the end of the year.
The privatisations that have been successful to date have tended to be portfolio sales or strategic sales of corporations
already listed on the stock exchange.
This is because the initial hurdle of gaining public acceptance for some private
ownership has, in theory, already been
passed. What has yet to occur is strategic sales of enterprises wholly owned by
the government, i.e. state-owned companies not already listed on the stock
exchange.
The legal framework for Treasury
bond auctions was finally established
with the passage of the enabling legis-
17
lation in September. The first auction
took place in December (see discussion
of official debt below).
An area of recent controversy has
been the bank shareholder settlement
agreements. IBRA created a ‘stick and
carrot’ approach for dealing with the
debt of former bank owners. The process adopted involved an initial determination as to which shareholders had
been cooperative. Under the so-called
‘release and discharge’ policy, owners
deemed cooperative in settling their
debts to the government would be discharged from any further obligation.
The remaining shareholders would have
90 days in which to make payment or
face legal action. This policy has been
criticised by NGO groups as being a serious blow to justice, in that individuals
have not been required to account for
their actions.
Under the IMF’s June 2002 requirements for structural reform, the government had to finalise and publish by July
its initial determination of the former
bank owners’ compliance for each of the
settlement agreements. This process was
not completed until October. In November 2002, IBRA announced that it would
take legal action against five former bank
shareholders who had failed to pay what
they owed the government. The former
owner of Bank Risad Salim International
avoided legal action by paying Rp 27 billion in cash in October, on top of assets
previously surrendered to IBRA (JP,
12/11/2002).
An area that has slipped from recent
LOIs has been the structural reform
agenda and, in particular, legal reform,
with the exception of the establishment
of the Anti-Corruption Commission. This
was targeted as a June 2002 structural
requirement, but the enabling legislation
to establish the commission was not
passed until the end of November
(Business News No. 6847, 2/12/2002: 3).
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18
Finance Minister Boediono has identified
structural reforms aimed at improving
Indonesia’s competitiveness as the main
theme of policy for 2003, so it is likely
that this will be taken up in the current
review of the IMF program, scheduled
to be completed by mid February.
It is reported that the government has
reached agreement with the IMF over
the terms of the next LOI, but it is yet to
be released. Its main objective will be to
set the path of policy for 2003, the last
year of the IMF program.
In 2002, the People’s Consultative
Assembly (MPR) decided that Indonesia should graduate from the IMF program at the end of 2003. The country is
already in the final stages of the program, and is now repaying to the IMF
more than it is receiving in new loans.
During 2002, the government repaid
approximately $2.3 billion (Sabirin 2003:
5), with the result that indebtedness to
the IMF fell by $1.1 billion over the
course of the year. The issue for Indonesia is not the balance of payments support that the Fund provides, but access
to official credit.
Bank Restructuring
IBRA is scheduled to be wound up by
February 2004, but its chair, Syafrudin
Temenggung, has publicly stated his
desire to wind up the organisation by
September 2003. With IBRA having less
than a year to run, it is worthwhile to
reflect on its original objectives and what
it has achieved.
IBRA was established in January 1998
(Johnson 1998: 47–9) with three primary
objectives:
• to reorganise and support the banking system (including returning to the
private sector banks in which the government had acquired a substantial interest);
• to collect funds through the sale of
assets of previous bank owners; and
Mike Waslin
• to restructure and dispose of problem
loans moved to IBRA as part of the bank
restructuring.
IBRA was granted quasi-judicial
rights under Government Regulation 17
of 1999 (known as PP17). The regulation
provides IBRA with the authority ‘to
control and/or sell goods or assets
which have been transferred to obtain
compensation in respect of the … fault,
negligence and/or improper transaction
on the part of bank shareholders, directors and commissioners’ (IMF 2002). In
effect the regulation gives IBRA the authority to foreclose on debtors without
recourse to the courts, but the difficulties of enforcement remain.
IBRA took some time to begin its work,
with much of 1998–99 spent trying to assess the scope of the problem. It was not
until 1999 that the recapitalisation of the
banks got under way, and even then it
did not proceed smoothly. There were
many delays, owing to concern about the
interest cost implications for the budget.
Because of rising interest rates, the government issued banks with an increasing
proportion of fixed rate recapitalisation
bonds as the process continued. The delay in recapitalising the banks and the issuing of fixed rate bonds saw many
banks continue to earn negative net interest margins. Only during 2002, when
interest rates began to decline, did bank
profitability improve.
Despite criticism of IBRA’s poor performance in pursuing debtors and
former bank owners, it has broadly met
its budgetary targets (table 1). However,
in IBRA’s case, meeting budgetary targets and pursuing defaulting debtors are
not the same thing. Until 2001, around
60% of IBRA’s cash revenue came from
loan assets, and mainly in the form of
debt service (IMF 2002). (IBRA received
performing as well as non-performing
loans when it took over the failed banks.)
Survey of Recent Developments
19
TABLE 1 IBRA’s Budgetary Performance
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Cash
Bonds
a
1999/2000
2000
2001
2002
Actual Budget
Actual Budget
Actual Budget
Actuala Budget
12.9
4.2
17.0
20.2
18.9
28.0
29.5
27
10
40.7
7.5
35.3
7.5
As at 23 December 2002.
Source: IBRA, Monthly Report, various issues (www.bppn.go.id).
By the end of 2001, IBRA still held
over 86% of the assets that had been
transferred to it. Despite meeting its
budgetary commitments, it has not
achieved the rapid disposal of assets to
repurchase recapitalisation bonds that
was originally envisaged. The most visible example is its slow pace in returning banks to the private sector. The
September 2000 ‘Supplementary Memorandum of Economic and Financial Policies’ signed with the IMF envisaged the
sale of Bank Central Asia (BCA) and
Bank Niaga by the end of 2000, and
completion of the bank divestiture process by the end of 2001. In the event, the
sale of the two banks was not finalised
until the end of 2002, two years later
than originally planned, and the other
banks were yet to be sold at the time of
writing. As we have seen, the recovery
of assets from former bank owners
through the bank shareholder settlement agreements has also been slow.
The year 2002 saw a marked acceleration in asset disposal. The most controversial aspect was the decision to sell
loans on an obligor basis, rather than as
a pool of loans from different borrowers. Under the obligor system, loans to
companies within the same corporate
group were packaged together. The con-
cern was that sales by obligor provided
a simple mechanism by which debtors
could buy back their own debt. In a system where there is effective enforcement
of insolvency laws, debtors would not
be in a position to buy back their own
debt because those resources would already be available to creditors. In
weaker enforcement systems, the public choice issue is whether to maximise
recovery, which might be achieved by
the acquisition of the debt by the debtor,
or to minimise the moral hazard inherent in borrowers believing they can default on their debts and buy back the
debt at a discount at a later date. In practice, whether a loan is sold back to an
obligor (debtor) or to an unrelated third
party, there is likely to be little difference in the final outcome: the third party
will seek to maximise returns, and that
is likely to occur through a settlement
with the debtor for approximately what
the debtor would have been prepared
to pay for the loan.
For 2003, IBRA has a cash recovery
target of Rp 18 trillion. Assuming that this
is met, IBRA’s total recoveries over its life
will equal approximately Rp 161 trillion,
representing a recovery rate of less than
25% on the total amount of recapitalisation bonds and bonds issued to BI. Note
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20
that this is an overstatement, as it ignores
the time value of money and includes interest income on performing loans.
What Is Left to Be Achieved. There are
five categories of assets that IBRA has
yet to dispose of:
• loans left over from the sale by obligor: there were approximately Rp 50–
60 trillion in loans that failed to sell as
part of the sale of recent loans by obligor; these are to be packaged in bundles
of approximately Rp 10 trillion and
sold;
• loans not offered for sale—i.e. loans
greater than Rp 750 billion (the top five
obligors, e.g. Texmaco), plus loans that
are subject to legal action;
• equity in the BTO banks (‘banks taken
over’ by IBRA)—Bank Danamon, Bank
Lippo and Bank Bali (incorporating
Bank Universal, Bank Patriot, Bank
Artha Media and Bank Prima Express);
• the property portfolio: branches of
banks that have been closed, and security on loans that have been foreclosed,
are being offered through a property
asset sales program (PPAP). Consideration is also being given to developing
an industry-based strategy to encourage
a secondary mortgage market;
• recovery of money from former bank
shareholders through the bank shareholder settlement agreements.
IBRA must now dispose of its least
saleable assets. The easiest category of
assets to sell should be equity in the
banks that IBRA has acquired, although
this has not proved easy in the past, with
parliament taking an increasing interest
in the process.
Privatisation
The privatisation process has been a difficult one for the government. Over the
past few years it was supposed to contribute to the financing of the budget
deficit. In 2002 privatisation proceeds
reached and even exceeded the budget
Mike Waslin
target for the first time, with a realisation
of Rp 7.6 trillion. This was achieved
mainly though the partial sale of Indosat. The process proceeded reasonably
smoothly until the Indosat sale was
finalised, when there were protests by
employees seeking to have the sale overturned.
The 2003 budget targets privatisation
proceeds of Rp 8 trillion. Given likely
rising nationalist sentiment in the leadup to the 2004 election, it will be a hard
task for the government to achieve this
target. However, following the decision
to wind back the removal of the fuel and
electricity subsidies, there will be strong
fiscal pressure to press ahead with the
privatisation program.
The government has announced its
intention to sell interests in the following companies during 2003: Bank Rakyat Indonesia (BRI); construction
company PT Adhi Karya; gas distribution company PT Perusahaan Gas
Negara (PGN); housing contractor PT
Pembangunan Perumahan; airport operator Angkasa Pura II; securities firm
PT Danareksa Securities; insurance firm
Asuransi Kredit Indonesia (Askrindo);
and real estate companies Kawasan
Berikat Nusantara, Jakarta Industrial
Estate Pulo Gadung and Surabaya Industrial Estate Rungkut. The sales are
still subject to parliamentary approval.
Added to this list are companies not
sold during 2002, such as Bank Mandiri, PT Kimia Farma and PT Ankasa
Pura I (JP, 19/11/2002).
Privatisation will need to assume an
even larger role in financing the 2004
budget deficit, in view of the expected
closure of IBRA by the end of the year.
While privatisation is important to the
funding of the budget deficit, it could be
argued that the government is simply
substituting one asset class for another:
its net asset position remains unchanged
if it uses the proceeds of privatisation to
Survey of Recent Developments
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repay debt. The major gains from privatisation are that it puts private sector
rather than government capital at risk (an
important consideration in the banking
system) and that it has the potential for
substantial efficiency gains.
OFFICIAL DEBT
Management of public debt remains a
contentious issue, and there have been
calls for foreign debt forgiveness on the
basis that borrowings by the Soeharto
government were misused. External
debt increased from 25.6% of GDP in
1996 to 42.8% in 2001. This rise was
driven largely by exchange rate depreciation: in dollar terms debt increased
only from $50.9 billion in December 1997
to $61.6 billion in February 2002, reflecting increased borrowings from donors
and the international development
banks.
The issuance of domestic bonds has
been viewed by the public as meeting
the cost of bailing out the conglomerates
rather than the cost of protecting bank
depositors.8 Domestically, the government has issued Rp 647.2 trillion in
bonds to recapitalise the banking system
and compensate BI for liquidity support
provided to banks. As a result, domestic debt increased from zero in 1996 to
48.6% of GDP in 2001.
Given the perception that both foreign and domestic debt have been
inappropriately incurred, it is understandable that there has been a reluctance on the part of NGOs and other
commentators even to accept the need
to service the debt, let alone develop a
strategy for managing it.
Indonesia has nevertheless made significant and, in some respects, unexpectedly good progress in reducing its debt
burden. The country’s public debt profile had improved from over 100% of
GDP in 2000 to 72% by the end of 2002.9
This improvement has been driven by
21
strong growth in nominal GDP and appreciation of the rupiah. The failure of
BI to control inflation has had the unintended consequence of partially inflating away domestic debt. However, this
is a reduction in the relative debt burden only: absolute levels of government
debt have not been reduced, as IBRA has
failed to recover assets of sufficient
quantity to repay a substantial part of
the debt.
In terms of the government’s overall
balance sheet, the decline in the value
of the debt is roughly matched by a decline in the value of assets, because
bonds are largely held by state banks
and banks in which the government has
acquired a majority stake. Inflating
away the real value of the government’s
debt also inflates away the real value of
the government’s equity holdings in the
banking system.
The improvement in Indonesia’s ratio
of public debt to GDP means that the
country’s debt is no longer substantially
out of line with that of other regional
economies. Thailand’s public sector debt
is expected to rise to a little over 60% of
GDP in fiscal year 2002, and the Philippines’ public debt is also estimated at
around 60% of GDP.
Work by the World Bank shows that
the ratio of Indonesia’s debt to GDP
could fall below 50% by 2008 and reach
its pre-crisis level of 25% by 2016 (World
Bank 2002b). The key to sustainability
is accelerating real GDP growth; fiscal
policy geared to achieving primary surpluses (i.e. excluding interest cost) of
about 3% of GDP; and asset sales and
privatisations aimed at financing deficits, so that additional debt is not added
to the stock, and any additional proceeds
are directed at reducing public debt.
The substantial rise in government
debt has imposed a significant strain on
the budget. The interest carrying cost
peaked in 2001, when interest payments
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22
totalled Rp 95.5 trillion, or 32% of revenue. This was also the year in which
the cost of subsidies peaked, with the
result that payments on interest and subsidies represented 55% of revenue. The
brunt of the interest and subsidy carrying cost was borne by development
spending, which fell to 13.1% of revenue
in 2001 from 37.6% in 1996–97. A decline
in domestic interest rates and a rise in
revenue have resulted in the interest carrying cost falling to a projected 24.4% of
revenue in 2003, enabling the development budget to be expanded to 19.4%
of revenue.
The notional external interest cost has
remained relatively stable, with budgeted interest decreasing from Rp 29.3
trillion in 2001 to Rp 26.8 trillion in 2003
(though in reality most of the foreign
interest burden was rescheduled in 2002
and 2003). As a proportion of revenue,
external interest expenses have declined
from 9.8% in 2001 to 8% in 2003, compared with 11% in the pre-crisis period.
Despite the relative improvement in
the debt service position, substantial
challenges remain. Indonesia is entering
the next phase of debt management,