THE gleaming new terminal 3 at Jakarta’s Soekarno-Hatta airport is the latest striking symbol of a newfound economic confidence in Indonesia.
A decade ago Indonesia was the sick man of Asia. In 1998 its economy had collapsed, with GDP falling a massive 13 per cent. Its banking system was in disarray and a series of weak presidents struggled to cope with the aftermath of the financial crisis that had toppled long-serving president Suharto.
Today it is Susilo Bambang Yudhoyono’s proud boast that his country stands alongside China and India as the only regional nations still recording positive economic growth.
On current indicators, Indonesia is the stand-out performer in Southeast Asia. While its neighbours, including Thailand, Malaysia and Singapore, are all going backwards, Indonesia looks to have weathered the global financial storm.
A trouble-free general election in April and the near certainty that Yudhoyono (widely known as SBY) and his economic team will be returned for a second five-year term later this year have given foreign and domestic investors an added confidence boost.
In 2007 and 2008, real GDP grew by 6.3 and 6.1 per cent, respectively. While economic growth has now dipped to about 4.4 per cent, Indonesia’s growth rate is still well ahead of more pessimistic forecasts issued at the beginning of the year by the IMF and the Asian Development Bank. The indications are that Indonesia may have largely escaped the economic woes afflicting its regional neighbours.
SBY’s talented economic advisers, led by former Bank Indonesia chief and now vice-presidential running mate, Boediono, and the country’s able and courageous Finance Minister, Sri Mulyani Indrawati, anticipated the global downturn and worked hard to avoid the sharp erosion of confidence that occurred in 1997-98.
Talking to The Australian in her ministerial office in Jakarta, Sri Mulyani says the lessons of a decade ago have been hard learned by the Government.
But there has still been plenty of worry and anxiety, particularly in the latter half of 2008 as the currency lost nearly 30 per cent of its value against the US dollar.
“We first looked at the banking systems, their balance sheets, and the vulnerability of the exchange rate. The population is sensitive to extreme exchange rate volatility. We looked at the balance of payments and our own budget and whether we have the space to cushion this shock.”
As Sri Mulyani points out, Indonesia’s relatively slow recovery from the 1997-98 Asian financial crisis, combined with prudent macroeconomic policies, have helped it escape some of the worst excesses of the recent boom years experienced by its main trading partners.
Indonesia has experienced strong economic growth only since 2004 when real GDP growth hit 5 per cent. It took until 2005 for per capita real GDP to exceed 1997 levels and only last year did per capita income top the $US2000 ($2422) mark.
Sri Mulyani says open communication with all the key economic players has been critical to Indonesia’s relatively good position in the current global downturn. This is in sharp contrast to the obvious lack of confidence and trust in the Suharto government’s handling of the 1997-98 crisis.
“The blessing of this democracy is that we have been forced to explain to the parliament, the business community, the people and the media, our policies and how we read the data,” she says.
“We are not perfect but the business community knows the risk exactly. So they can make their preparations and reduce their exposure.”
As Sri Mulyani points out, while Indonesia’s exports are down nearly 20 per cent on last year, the country is far less export dependent than its neighbours, especially Singapore. The export share of Indonesia’s GDP is less than 25 per cent.
Indonesia has had its own series of fiscal stimulus packages with cash payments to poorer families. But, unlike the central banks of many of its neighbours, Bank Indonesia has not moved to slash interest rates to boost domestic demand.
“Always the inflation factor is a hangover in Indonesia,” Sri Mulyani says.
“One stubborn problem for us is to reduce inflation, still running at 6 or 7 per cent. We are aiming for 5 per cent. Compared with other countries, that is still very high. This is going to constrain the central bank and its ability to reduce interest rates.”
Sri Mulyani says she has a good rapport with the central bank. “We understand and respect each other and how much room we have to manoeuvre and maximise our instruments. Most important is that both fiscal and monetary institutions have similar understanding of the economic challenge — that is, that the inflation risk is less, and stimulating the economy much more, prominent.”
By global standards, Indonesia still operates a very conservative fiscal policy. The country’s debt to GDP ratio is less than 30 per cent and the budget’s stimulus package amounts to only 1.3 per cent of GDP. As the finance minister says, Indonesia doesn’t like budget deficits. Even with the current stimulatory settings, the budget deficit is only 2.5 per cent of GDP.
“We have prepared for 2009 if things get worse. They (the parliament) gave us the fiscal space to manoeuvre (on) tax cuts, spending on infrastructure, cash transfers to poorer households. I think I enjoy more support compared to Wayne Swan,” Sri Mulyani observes.
Asked about the policy challenges over the next five years, Sri Mulyani says the reform of Indonesia’s governing institutions and the anti-corruption drive must continue. This includes her personal drive to clean up the financial system and the taxation office, as well as efforts to overhaul the judicial and legal systems.
“You cannot attract a good quality of investor if this is not going to be provided. This is quite difficult. In my portfolio it is not about political will; it’s not even about whether you can provide funding. It is really about the competence and quality of human resources. We can be very proud that, yes, Indonesia internationally has been recognised as being committed to good governance, human rights, democracy and so on. But really turning this idea into reality is going to mean a lot of effort.”
Lifting much-needed investment in infrastructure is another big challenge, not least because of the Government’s continuing struggle to reform the land title system.
Increasingly, China is a major financier of infrastructure projects including two big new coal-fired power stations on Java and the country’s longest bridge, linking Surabaya with the island of Madura, which will be officially opened by SBY next week.
Reducing the incidence of absolute poverty from its current level of 15 per cent of Indonesia’s total population of 235 million is another top priority.
Sri Mulyani believes Indonesia’s economy probably bottomed in February. Since then there has been a recovery in exports, particularly commodities, and retail sales. Achieving much higher rates of economic growth of more than 7 per cent can be achieved only with more thorough structural change.
“I think for the next five years the most realistic picture is going to between 6 and 7 per cent (growth),” she says.
She also sees the prospect of a global recovery later in 2009, but emphasises that a return to growth will depend on the policy responses adopted by the major trading nations.
Here Sri Mulyani sees big challenges ahead for the Obama administration and Britain’s Gordon Brown with looming debt problems created by the massive taxpayer-funded bank bailouts.
Sri Mulyani recently discussed the issue with US Treasury Secretary Tim Geithner.
“Looking at Indonesia in 97-98, it took us three years of argument on how to recapitalise the banks,” she recalls, alluding to the harsh and unnecessary fiscal medicine prescribed by Washington and the IMF to Jakarta at the height of the crisis.
“I said to Tim, ‘you were here in Jakarta in 97-98 with Larry Summers. You asked us to carry out a lot of policy prescriptions’. So I said ‘why don’t you look at your notes and maybe it will help you to do the same thing in the US?”‘ she says disarmingly.
So what’s next for the 46-year-old finance minister — undoubtedly one of the brightest stars of SBY’s first-term cabinet?
“Well, it’s really a kind of personal obligation. I wish I could have my own choice, in a sense. It depends on who is going to win this election as to whether I am going to be in a portfolio or not.”
“SBY has the choice of putting me as co-ordinating minister, finance minister or Bank Indonesia governor. I think he will put me in the best position where I can serve.”
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October 20th, 2010 → 2:12 pm
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