[nasional_list] [ppiindia] Indonesia hypes the economy
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- Date: Wed, 11 Jan 2006 01:54:40 +0100
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**http://www.atimes.com/atimes/Southeast_Asia/HA10Ae02.html
Indonesia hypes the economy
By Bill Guerin
JAKARTA - Despite current unfavorable economic indicators, optimistic 2006
budget parameters set by the Indonesian government assume the country's US$280
billion economy will grow by 6.2% to $304 billion, and that inflation will be
pegged at about 8%, as will interest rates be pegged.
The central bank, meanwhile, predicts the economy will grow 5-5.7%, similar to
last year. Inflation slowed to 17.1% last month from a six-year high of 18.4% a
month earlier, and analysts expect it to drop further. The bank's benchmark
interest rate is 12.75%, and observers expect it to remain at that level or go
up marginally, possibly a quarter point.
High unemployment and poverty levels carry a social-political economic risk and
could even threaten stability. At least 17% of the country's 220 million people
are unemployed or underemployed, and 40 million live on $2 a day or less.
"The year 2005 was not an easy year ... We must examine what we did in 2005 and
admit the shortcomings and weaknesses," President Susilo Bambang Yudhoyono said
in his New Year's address. "Only by doing so can we move forward."
His administration had been stretched to the limit in handling a series of
unforeseeable calamities, such as natural disasters and contagious diseases, he
said.
In a December cabinet reshuffle, Yudhoyono made significant changes in his
economic team, which had been criticized for bureaucratic inertia and failing
to sufficiently improve the investment climate, as well declining growth and
soaring inflation.
His appointment of former International Monetary Fund regional director Sri
Mulyani as minister of finance and respected technocrat Boediono as
coordinating minister for economic affairs won praise from investors and the
markets.
The team's focus in 2006 will be on containing the inflation rate, maintaining
macroeconomic stability and taking steps to address the remaining impediments
in the investment climate. Continued efforts to strengthen the financial sector
can be expected, including sound banking supervision and improvements in the
asset quality of state-owned banks. This would enhance the ability of the
banking sector to support private economic activity.
"Since economic stability and inflation is one of our focuses in 2006, we will
do anything to ensure inflation will not go up so that by the end of 2006 we
can reach our target of single-digit inflation," Boediono, who like many
Indonesians uses only one name, said last week.
The government plans to focus on curbing price pressures to improve consumers'
purchasing power and restore economic stability.
The central bank will need to cut interest rates to boost investment and
consumer spending, but conversely any further pressure on inflation and the
exchange rate could see it increasing rates.
"We will accelerate spending and improve the investment climate, and will
cooperate with Bank Indonesia [the central bank] to help reduce interest rates
and boost investment," Boediono said.
Approved domestic and foreign investment plans last year reached Rp110.86
trillion ($11.66 billion), an increase of 88.02 % - more than Rp58.96 trillion
($6.2 billion) in 2004.
Although Rp18 trillion will be spent this year on building roads, bridges,
irrigation facilities and other infrastructure to boost investment and reduce
unemployment, servicing sovereign debt will account for a massive 21% of
government expenditure.
The payments of Rp73.47 trillion in interest and Rp60.38 trillion in principal
due this year are much higher than the mere 2.7% of the budget allocated for
capital spending - badly needed to help stimulate the economy.
Inflation hit 17.1% year-on-year in December following massive fuel price rises
forced on the government by soaring global oil costs and a slump in the rupiah.
Expensive fuel has driven up transport costs by more than 40% and food prices
have increased by 18%, says Badan Pusat Statistik (BPS-Statistics Indonesia), a
government institution directly responsible to the president.
October fuel increases had pleased investors and the market but the ensuing
hike in the cost of living has been a major blow to the poor. The price of
kerosene, the main cooking fuel of the masses, soared by 185.71 %, while petrol
increased by 87.5 % and diesel by 104.76%. Inflation also hit hardest at the
lower end of the consumer sector as wealthier consumers are better placed to
protect themselves against inflation.
Though inflation fell in December for the first time in seven months, the rise
in inflation, along with rising interest rates, has slowed economic growth
overall and put the brakes on consumer spending, with both consumer loans and
credits for business expansion becoming more expensive.
This limits working capital options, economic expansion, job creation and puts
the brakes on public consumption, which for several years has been the main
driver of growth in the economy. Labor-intensive industries have slashed more
than 1 million jobs in the past three months.
Though consumer prices fell by 0.04% in December, the first time in seven
months, the fuel price increases have led to a decline in real disposable
income for consumers and raised input costs for the business sector.
Unfinished business
On the business side, several other pending issues have to be addressed, such
as the excessive regulatory burden, investment and labor law amendments and tax
reforms. The government will push through a number of policies this year to
promote robust economic activity for the private sector and help spur growth,
geared to providing certainty and stability for the business community.
A draft revision of the labor law is due to be delivered to legislators for
deliberation in February or March. Several articles in the law, which forces
companies to pay compensation for workers who opt to resign, are reported to be
under amendment to encourage companies to hire more workers.
Business leaders warn that the tax system is already causing domestic and
foreign investors to withdraw or minimize their investment. Crucial tax reforms
in the pipeline may not be implemented until early 2007 after an expected
drawn-out debate in the legislature, and a planned corporate tax cut would not
take effect until 2010.
"Businesses are already going to China and Vietnam, and one of the main
problems is our tax policy," said Sofyan Wanandi, chairman of the National
Economic Recovery Committee. "Even Indonesian businesses are investing
elsewhere.
The 35% company tax rate made it uncompetitive for businesses, Wanandi added.
The Indonesian Chamber of Commerce and Industry said the proposed amendments
"place too much power in the hands of tax officials and excessively heavy
sanctions on taxpayers".
Peter Fanning, chairman of the International Business Chamber, warned, "If the
bills are not revised, we believe that it will scare away potential investors
and make existing investors consider leaving."
Tax receipts account for more than 75% of government revenue, and the budget
sets tax revenue at Rp416.3 trillion, or 13.7% of gross domestic product this
year.
Boediono has warned the business community not to expect to enjoy tax cuts or
write-offs. "The government needs the income from taxes to fund development of
the educational and health sectors," he told a news conference.
The economy has grown in the face of a formidable series of challenges over the
past year, including the tsunami, high world oil prices, avian influenza and
polio outbreaks.
The president's election promises and goals of economic growth of 7% by 2009,
job creation and poverty reduction remain in place. This year is likely to be
much the the same as last year, in terms of intent and commitment, darkened by
anxieties about external factors and sustainability of growth.
Bill Guerin, a Jakarta correspondent for Asia Times Online since 2000, has been
in Indonesia for 20 years, mostly in journalism and editorial positions. He has
been published by the BBC on East Timor and specializes in business/economic
and political analysis related to Indonesia. He can be reached at
softsell@xxxxxxxxxxxxx
(Copyright 2006 Asia Times Online Ltd. All rights reserved. Please contact us
for information on sales, syndication and republishing .)
[Non-text portions of this message have been removed]
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