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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Commentary: Beleaguered government throws out sound energy policy

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Economic rise snags on political turbulence

Vincent Lingga , Jakarta Mon, 12/21/2009 11:28 AM Review & Outlook

It is impossible to chart the economic outlook for 2010 without factoring the Bank Century debacle into the equation.

The nationwide controversy over the Nov. 21, 2008, bank bailout is not simply a temporary distraction, as several analysts say, insofar as the economic prospects for next year are concerned.

The manner and speed in which the parliamentary inquiry committee will complete its investigation will determine the magnitude of the political and financial market turbulence facing the nation within the next few weeks or even months.

Even more worrisome is that whatever the conclusions and recommendations from the committee, they will have an adverse impact on the economy, the government’s economic team and its policymaking credibility.

What an unfortunate development it was. Instead of riding on his landslide re-election with stronger confidence, President Susilo Bambang Yudhoyono has remained a diffident and indecisive president unwilling to take firm action.

He allowed his administration to be besieged by the tussle between the police and the Corruption Eradication Commission (KPK) for nearly 50 days before he finally decided to intervene with some recommendations, however weak they seemed.

The public’s attention and the national media will again be consumed by the parliamentary investigation over the next six weeks when vice president Boediono several ministers, the central bank governor and scores of other senior central bank and government officials and expert witnesses will be summoned to testify.

This political furor and the intermittent wave of street demonstrations set off by the findings of the political inquiry will continue until February, when the committee is scheduled to submit its conclusions and recommendations to the President.

This means Yudhoyono’s government has virtually lost or wasted the golden chance during what was supposed to have been the political honeymoon period for his second administration to take painful reform measures that are badly needed to kick-start new investment and the construction of badly needed infrastructure.

Put another way, the government simply did not take any benefit early on from the almost 61 percent of votes garnered by Yudhoyono in his re-election last July.

The President instead came out weaker from the legal tussle between the corruption busters and the police. His position could become even more beleaguered by the bank debacle, and his coalition government much weaker.

The worst impact on the economy is the huge erosion of the government’s policymaking capacity and credibility, resulting in a very slow pace of reform sorely needed to overcome obstacles to investment, without which the economy will never be able grow robustly.

Due to the impact of the two big cases, the Yudhoyono administration now has neither the mandate nor the capacity to fix quickly the problems caused by corruption, regulatory risks and weak legal framework (civil service and legal reforms).

The government is scheduled to launch several bold programs during its first 100 days, including a stronger legal framework for expediting land acquisition for infrastructure, streamlining investment licensing and comprehensive bureaucratic and legal structural reforms.

But all these top-priority programs will likely fall behind schedule because it is now extremely difficult to have the Yudhoyono Cabinet, dominated by political representatives from his coalition partners, to work strongly in a united and well-coordinated manner.

Likewise, the government coalition in parliament seems in disarray now due to different stances regarding the legal and policy issues related to the bank bailout.

True, the controversy over the Century bailout is the only cloud looming over political and macroeconomic stability next year, but this cloud could turn into a devastating storm.

Putting aside what is now often referred to as “Century gate” and its adverse impact on the economy next year, Indonesia’s medium- and long-term economic outlook is bright.

The country posted a fast, strong recovery this year, and is internationally praised as the third-highest growing economy after China and India, with an estimated expansion of 4.3 percent.

The US$500 billion economy, supported by the steady improvement in the financial and banking system and the green shoots in the world economy, could accelerate to a growth of 5.5 to 6 percent next year.

The country has a sound fiscal policy, strong balance of payments and sharply declining government debt to as low as 30 percent of gross domestic product.

But again all the estimates for next year will depend on the magnitude of the political and financial turbulence caused by the political process of resolving the bank debacle, notably the fate of Finance Minister Sri Mulyani Indrawati and Vice President Boediono, both nationally and internationally respected as icons of reform.

Barring any immediate devastating fallout from the parliamentary inquiry into the bank debacle, the Jakarta stock exchange will likely end the year with growth of more than 85 percent, the rupiah gaining an appreciation of 15 percent and inflation staying below 3 percent.

The low inflation rate will enable Bank Indonesia to keep its benchmark interest rate low, currently at 6.5 percent, and this in turn will bring down borrowing costs for businesses and consumers.

But whether the central bank will be able to check inflation next year will depend on the rupiah’s stability and improvements in infrastructure.

Significant improvements in infrastructure are essential because unusually high logistics costs — caused by inadequate infrastructure, regulatory barriers, bureaucratic inertia and corruption — are one of the main causes of the economic inefficiency.

Inflation will be manageable next year, within the target range of 4 to 6 percent, if the expansion on the demand side of the economy is accompanied by adequate expansion in the domestic capacity on the supply side.

Domestic consumption will continue to be the main driver of growth, as investment and exports are expected to expand only modestly at 5 percent.

Direct investment, which this year remains cautious despite the resilience of the overall economy, is expected to accelerate next year, but a slower-than-expected pace of reforms to remove major barriers to businesses may stand in the way of robust investment.

Foreign capital turned in big inflows, increasing the foreign reserve holding of the central bank to more than $65 billion or more than five months of imports.

But instead of helping bolster the economy’s real sector, this short-term hot money makes the country vulnerable to sudden shocks as capital flight could happen at the slightest hint of trouble.

This vulnerability should cause great concern in view of the political turbulence likely to be set off by the finding of the parliamentary inquiry into the bank bailout.

Given the downside, at best the economy will likely muddle through the political turbulence with growth of 5 percent next year.

SBY economic team may lose trust and market confidence

Vincent Lingga , Jakarta Thu, 12/03/2009 12:22 PM

Who in the government can we trust if then Bank Indonesia governor Boediono and Finance Minister Sri Mulyani Indrawati turn out to have compromised their policy decisions in bailing out Bank Century in late November 2008?

That was one of the great concerns expressed by most businessmen I talked to during an Indonesian-Australian business conference in Yogyakarta last week.

They were worried about all the possible findings or conclusions of the investigation into the medium-size bank’s rescue to be made by the House of Representatives and the Corruption Eradication Commission (KPK), not to mention the political and financial market turbulence arising during the process.

The Supreme Audit Agency (BPK) already issued early last week a very damaging report after an investigative audit that lasted more than three months, blaming the central bank and the now-defunct Financial System Stability Committee, chaired by Mulyani, for negligence and incompetence in deciding on the bailout.

The more devastating impact would be if the upcoming investigation by the House concluded that Boediono (now the Vice President) or Mulyani, or both — though quite a remote possibility — had deliberately compromised their policy decisions for political gain.

Another possible compromise solution would see Boediono and Mulyani made the scapegoats, taking the fall for the sake of political stability but at the risk of causing suspicions about the implication of Yudhoyono and/or members of his family in the bank debacle.

Whatever the final outcome, it will adversely affect the public’s trust and market confidence in the government, especially its economic team.

Many, if not most, remain in great doubt that either technocrat, with such impeccable integrity and high financial competence, would have risked their reputations for financial or political gain by deciding on a bank bailout that was not necessary.

Boediono, in his capacity as chief economics minister and later the BI governor, and Mulyani as the minister of finance, made up the bedrock of President Yudhoyono’s economic management during his first term in office.

They had been perceived nationally and internationally as personalities who had the courage to stand up to even the President when it came to maintaining policy-making credibility.

If the verdict of the House inquiry is policy incompetence, both Boediono and Mulyani — the leaders of the economic reform — must resign for moral and ethical reasons, even though their “honest mistake” was caused by wrong or incomplete input from their subordinates.

There is an inherent risk of an honest mistake being made in a bank bailout, given the time pressures and rapidly worsening problem, even after all the standard procedures for decision making have been fulfilled, as Boediono and Mulyani claim to have done for Bank Century.
That is because different from other businesses, banks may sometimes — often based on nothing more than rumor — face a run. And a bank that faces a run by depositors, lacking the cash to meet their demands, may go bust even if the rumor is false.

Bank runs can also be contagious as depositors at other banks are likely to get nervous too, setting off a chain reaction like that in 1997-1998.

But the caveat of debating now whether Bank Century then (November 2008) posed a systemic risk to the whole banking industry or not is the big difficulty in reconstructing the precise national and international economic and financial condition prevailing when the bailout was decided.

True, Indonesia’s financial sector was rather fragile between September and December last year due to the fallout from the global financial crisis, which was triggered by the bankruptcy of Lehman Brothers investment bank in the US.

Some of the indicators:
• In early October 2008, the capital market management and regulator stopped trading at the Jakarta stock exchange for a few days after the benchmark index, which had fallen steeply since September, crashed to 1,451, losing almost 50 percent of its capitalization from early that year.
• Even when the central bank kept reassuring the people that our banking system was sound and its fundamentals were much stronger than back in 1997, the government decided on Oct. 12 to increase the ceiling amount of bank deposits covered by the Deposit Insurance Agency 20 times, from Rp 100 million (US$10,000) to Rp 2 billion.
• Three days later, the government proposed to the House a regulation-in-lieu-of-law on the establishment of the framework of a financial safety net that would authorize the finance minister to lead the management of a financial crisis, indicating an emergency condition.
• The problem was then made more difficult by the virtual stoppage of inter-bank lending as big banks, awash with liquidity, were reluctant to lend to others on fear that their money would not be repaid.

However Boediono’s and Mulyani’s points of argument for defending the Bank Century rescue were made very weak after the discovery of the massive cost overruns, the questionable massive withdrawal of deposits a few days before and after the bailout, and the discovery of banking crimes by the bank’s owners and management.

All this led critics to suspect that both Boediono and Mulyani had put aside their professional judgment in assessing the systemic risks posed by Bank Century

Bank Century debacle: The investing public lose their shirts

Vincent Lingga , The Jakarta Post , Jakarta Thu, 09/17/2009 2:33 PM Headlines 

The hotly debated, US$670 million bailout of Bank Century last November did at least one big thing right: The move didn't save the bankers and the shareholders. In fact, one of its former major shareholders, Robert Tantular, and its former deputy president, Hermanus Hasan Muslim, have been punished, though very lightly, with four years and three years in jail respectively.

The big problem, though, is that before the bailout of the publicly traded Bank Century, the bank was majority-owned by the investing public, with 57.16 percent equity holding. These shareholders were institutional and individual investors who each held less than 5 percent.
It is a big irony then that while the investing public lost their shirts after the central bank classified Bank Century as an insolvent and failed bank and immediately transferred it to the state-owned Deposit Insurance Agency (LPS), the money of the bank's depositors has remained safe.

Even if the bank had not been bailed out, its depositors would still have gotten back their deposits of up to Rp 2 billion ($200,000) per account - the maximum amount insured by the LPS.

The business rationale is that since the bank's capital equity was already negative (-35 percent) when it failed, the bank's shares automatically became valueless.

Article 40 of Law No. 24/2004 on the LPS also stipulates that once the LPS bails out a failed bank, it automatically wholly owns the bank, and that if the bank's equity capital is already negative when it is taken over by LPS, the old shareholders are not entitled to any proceeds from the eventual sales of the bank after restructuring.

However, this provision is not fair for Bank Century's investing public, especially because more evidence has surfaced indicating that it was largely Bank Indonesia's inadequate supervision and incompetent examiners that let the poorly managed Bank Century remain in operations until last November.

Proper enforcement of banking regulations should have seen Bank Century closed down or at least forced to be acquired or merged with a bigger bank as early as three years ago. Bank Indonesia's decision to let the bank in operations much longer thus amounted to a gross ignorance of toxic assets traded on the stock market.

Preliminary audits found it was major shareholders Robert Tantular and his relatives, with 22.13 percent, and two other individual investors - one from Saudi Arabia and the other one from the UK, with 20.70 percent - who controlled the bank management and allegedly robbed the bank. The two major foreign shareholders remain at large.

Simply put, the central bank's incompetent supervision put the investing public in the dark about the real condition of the bank. Had Bank Indonesia's examiners and the stock market watchdog (Bapepam) done their job properly, the investing public could have salvaged their investment or at least cut their losses by unloading their shares on the market long before the bank was put by the central bank under its special oversight on Nov. 6, 2008, or about two weeks before it went belly-up.

True, as the Companies Act stipulates, in the case of a company going bankrupt and eventually being liquidated, shareholders are the last entitled to make claims on any proceeds from the eventual sales of the bankrupt firm's carcass.

But since Bank Century has not been liquidated, the question then is, is it fair to let Bank Century's investing public lose every cent of their investment in the bank?
It is most urgent and imperative for the government to resolve this issue. Otherwise, no investors will again touch shares in mid-size banks on the stock market.

If this problem is not resolved once and for all, Bank Century will face a big risk of an endless string of lawsuits from investors, messy litigation that will adversely affect the restructuring of the bank and the LPS's plan to divest of its investment in the bank within three to five years, as required by law.

Bank Century, which had been beleaguered by negative publicity over the past weeks due to the controversy of its bailout last November, cannot bear another wave of bad news, let alone another bout of litigation.

Because Bank Century is already mired in lawsuits brought by several of its big depositors in relation to their purchases of Antaboga discretionary funds worth Rp 1.3 trillion ($130 million), which were marketed through the bank. The depositors have not been able to redeem Antaboga funds - issued by PT Antaboga Delta Securitas, formerly one of Bank Century's major shareholders, with a 7.50 percent holding - because the funds had allegedly defaulted.

It was in fact the default of the Antaboga funds that triggered the massive deposit withdrawals and precipitated Bank Century's severe liquidity crisis in early November, which eventually led to its insolvency on Nov. 20.

Resolving worrisome questions around Bank Century's bailout

Vincent Lingga , The Jakarta Post , Jakarta Wed, 09/02/2009 1:11 PM Headlines

 

The Finance Ministry and Bank Indonesia, responsible for the bailout of Bank Century last November, steadfastly defended the urgency and legitimacy of the rescue, citing the financial uncertainty, severe liquidity problems at 23 other mid-size banks and weakening rupiah at the time.

They kept saying they had no choice, as though a gun had been pointed at their heads. Without the bailout, things would have been much worse in the banking industry and losses to the economy could have been more devastating.

The Indonesian financial system during the last quarter of last year indeed faced adversity from the impact of the global financial crisis since September, and letting the financially distressed Bank Century go down could have triggered a massive run on many other banks.

True, a panic was prevented within the banking industry. But the argument about the systemic risk is now heatedly debated, even though such debate now seems a no-brainer because it is impossible now to reconstruct the kind of vulnerable conditions our banking industry was mired in last November for counter analysis.

As details about the bailout were revealed to the public and the cost of the rescue turned out to be many times more than the preliminary assessment, we cannot help but cry out the fault. The move simply threw out two of the basic principles of a bailout program: transparency, and least cost to the taxpayer.

True, banks differ from other commercial firms. The failure of a bank results in particular hardship to depositors and can lead to broader problems in the economy through multiple transactions.

These are among the reasons the government has provided deposit insurance through the Deposit Insurance Agency (LPS). But this means that when a bank fails, as Bank Century did on Nov. 21, the government comes in to pick up the pieces.

However, past experience has taught us that when banks are at risk of failure, their managers and shareholders often engage in behavior that risks losing even more taxpayer money.
This, we think, was what may have happened at Bank Century between November and December 2008, when the bank lost Rp 5.6 trillion (US$560 million) in deposit withdrawals.

Bank Indonesia had injected a Rp 700 billion emergency liquidity loan into Bank Century around mid-November and put it under its intensive and then special surveillance, before deciding to throw in the towel and ask the government (the Finance Ministry) and the LPS to take over.

But the developments, which followed what was then hailed as a strategic decision to maintain stability within the financial sector, left behind several worrisome questions about the integrity and competence of the central bank's supervision and the auditors of the publicly listed Bank Century, and the enforcement of disclosure requirements by the stock market watchdog (Bapepam) upon publicly listed companies.

How could a bank with total assets of Rp 15.2 trillion ($1.2 billion), net nonperforming loans of only 2.71 percent - lower than the average 3.90 percent within the industry - and capital adequacy ratio of 14.76 percent - much higher than the minimum 8 percent - as of September 2008 flirted with bankruptcy just six weeks later?

How could the value of Bank Century's assets have fallen so steeply within such a short time so as to have eroded its capital standard far below the minimum 8 percent?

Why did the preliminary agreement signed by Bank Sinar Mas Multi Artha, a subsidiary of the big Sinar Mas conglomerate, on Nov. 16 to acquire 70 percent of Bank Century fail to restore confidence in the problem bank?

Was the Sinar Mas Group able to sneeze time bombs of toxic assets in Bank Century, which Bank Indonesia examiners failed to detect?

How could we have been kept in the dark about a publicly listed bank that is supposed to be subject to stringent disclosure requirements?

These questions, we think, are some of the worrisome puzzles the Supreme Audit Agency should answer through its investigative audit in order to resolve once and for all the problems surrounding the bailout of Bank Century.

A forensic audit would be able to find more evidence of banking fraud, either by shareholders, management or big depositors.

This could have been the main reason why the capital injection by the LPS to rescue the bank ultimately ballooned to Rp 6.76 trillion, almost three times the central bank's preliminary assessment. The new wave of bad publicity will certainly make it much more difficult for the LPS to restructure the bank.

But it is much better now to raise and resolve all the questions, so that when the LPS eventually divests Bank Century within the next three to five years, as required by the law, the potential buyer will not uncover a time bomb, as encountered by Standard Chartered during a due diligence of Bank Bali in 1999, in light of a planned acquisition.

Standard Chartered uncovered that Bank Bali had paid about $78 million in bribes to brokers to have its inter-bank claims settled by the then Indonesian Bank Restructuring Agency under the deposit insurance scheme.

A more politically confident SBY to propose his 2010 budget plan

Vincent Lingga , THE JAKARTA POST , JAKARTA Fri, 07/31/2009 1:45 PM Headlines

There are at least two positive factors that will make the 2010 budget proposal President Susilo Bambang Yudhoyono will submit to the House of Representatives on Monday more politically and fiscally credible. His re-election for the 2009-2014 period will provide his budget plan with a stronger political certitude, different from the political situation when then president Megawati Soekarnoputri proposed the 2005 draft state budget in mid-August 2004, two months before the installation of President Yudhoyono's government.


The green shoots that have begun to sprout in some developed economies and the stabilizing global financial market certainly help the government draw more reliable macroeconomic assumptions for aggregate revenue and spending estimates.
Putting it briefly, the external factor for next year's budget implementation will not be as adverse as this year.


That is strikingly different from the turbulent period for the preparations of the current 2009 budget last August, when the global financial crisis peaked, forcing the government to amend the budget plan several times even before it began to be implemented in January.

Internally, the 4.4 percent economic growth in the first quarter, compared to deep contraction in most other countries, is a confidence-building block for the economy, especially investors.
Yet another positive factor is that the upcoming spending plan is designed by a politically more confident President who will run his second and last term with much less political debt to the various parties in parliament.


Despite all these positive developments, though, we cannot expect the 2010 budget to be significantly more expansive than the current one, because economic improvements around the world next year will be incremental at best.

The total spending will most likely remain in the neighborhood of US$100 billion.
Most analysts foresee the economy to expand within the range of 5 percent to 5.5 percent next year, up slightly from an estimated 4.5 percent this year, driven primarily by private and government consumption. Hence there will not be much space for pump priming, let alone for public-sector investment, because tax revenues will not be able to increase significantly amid the sluggish real sector of the economy and weak commodity prices.


Deficit spending may increase to as much as 2.5 percent of gross domestic product (GDP), but this will not provide any boost to economic activities if bureaucratic inertia and inadequate institutional capacity remain the biggest hurdle to budget disbursement as they are this year.

The fiscal policy must therefore take into account the need to ensure the timely flow of funds to programs and projects by removing differences in outlook between budget personnel and program and planning staff related to background, values and functions.


With all the severe limitations within the budget financing, the government should design its spending programs according to policy priorities of alleviating poverty and unemployment through programs targeted to micro-, small- and medium-scale businesses and others to reinvigorate labor-intensive manufacturing operations.
Given the persistently big debt-servicing burdens, the government will not be able to significantly increase appropriations for investment.


However, larger investment spending, notably for infrastructure, would still be possible should a more confident President Yudhoyono have the courage to reduce fuel and electricity subsidies, which have been the biggest barrier to energy efficiency and conservation in the country.

All in all, the 2010 budget will not be an expansive, nor pump-priming one.
But since the budget plan is a communication system, conveying signals about behavior, prices, priorities, intentions and commitments, it can still play a catalytic role for buoying the financial market and the investment climate.


A realistic budget and a prudent fiscal system will be able to reinvigorate the pace of private investment, the third engine of growth that has run very slowly over the past few years.
A budget system, however fiscally viable, is not self-contained as it is influenced by multiple, converging uncertainties, entrenched patterns of expenditure, inflation and structural imbalances between expectations and resources.


The 2010 budget must be designed to cope with these realities, while being aware of self-inflicted uncertainties or rigidities associated with oil prices and financial markets.