Tough challenges, right choices
|MINISTER OF FINANCE of the year: |
DR SRI MULYANI INDRAWATI, INDONESIA
“She’s added a high degree of stability from the perspective of the international markets,” says the head of debt capital markets at an international investment bank. “She’s done a good job to tackle the issues facing the country.”
There is indeed much to applaud. The decision to raise fuel prices by abolishing fuel subsidies was brave. Although the move came before Mulyani’s appointment, it is she who has been left to fight the resulting inflation, a battle that she looks to be winning, with inflation having fallen to 15.5% in June from a peak of 18.4% in November 2005. Analysts expect inflation to fall further because of weak domestic demand and a strengthening rupiah.
The improved inflation outlook has enabled the Bank of Indonesia to lower interest rates, a much-needed move if the country’s economy is to move faster again. Burgeoning foreign exchange reserves as a result of slowing imports and the stronger currency have enabled the Bank of Indonesia to prepay half of the country’s outstanding $7.5 billion debt to the IMF, some four years early. There is even talk of the country prepaying the balance by the end of the year. To confirm the improving fiscal outlook, Standard & Poor’s and Moody’s have raised their long-term foreign currency sovereign debt ratings one notch to BB-/B1, still three notches or so below investment grade.
Full marks therefore to Mulyani and team in tackling one side of the economy. However, another crucial aspect presents the minister with her key challenge, as Fauzi Ichsan, senior economist at Standard Chartered Bank in Jakarta, explains.
“She’s been very impressive by and large,” he says. “On the macroeconomic side, her policies have been good and things are looking pretty optimistic – public debt to GDP is falling, foreign debt is coming down. Her problem is not the macro side. It’s the need to stimulate the real side of the economy.”
Indonesia needs to stimulate growth badly if it is to continue to grow sufficiently to create jobs for the estimated 2 million new job entrants annually. To achieve that, analysts estimate GDP needs to grow by about 6%. The scrapping of fuel subsidies in October 2005, while applauded as fiscally prudent in the long term, caused a significant drag on the consumer economy that accounts for more than half of Indonesia’s GDP. That drag has pared GDP growth in the last three quarters from 5.6% in Q3 2005 to 4.6% in Q1 2006, threatening the government’s GDP growth target for 2006 of 5.9%.
Where’s the stimulus?
The expected drag on economic growth caused by a slowdown in the consumer economy was supposed to be made up for by a significant fiscal stimulus from the government in the form of spending on infrastructure projects. That has not happened. According to Standard Chartered Bank, despite a government commitment to “front-end loading” its development budget, by the first half of this year just 22% of the total annual budget had been spent. The government is currently sitting on idle funds of Rp70 trillion ($7.7 billion) while regional governments have Rp47 trillion of cash in bank deposits.
“GDP growth has slowed significantly,” says Ichsan. “Some 60% of the economy is funded by the domestic economy and that’s been hit very badly. That slowdown could have been minimized had the government channelled those fuel subsidy savings quickly into infrastructure projects – they didn’t.”
Ironically, the reason for this lack of spending is the central government’s success in its attempts to curtail corrupt practices within government. So fearful are local government officials of accusations of graft that they are reluctant to spend on agreed infrastructure projects. Mulyani has played a key role in the government’s fight against corruption, as a Jakarta-based analyst explains.
“She’s made some tough decisions,” he says. “The removal of the directors general of the tax and customs was quite daring. They were seen to be the most corrupt of the officials. So she’s been very impressive in that sense.”
Mulyani herself admits that the government’s success in stamping on corruption is hindering her plans for infrastructure spending. How she copes with that dilemma in the rest of the year will have a strong bearing on the government reaching its stated GDP target. Time is already running out and analysts are beginning to pare back their forecasts. Standard Chartered Bank is now expecting full-year GDP growth of perhaps 5.5%.
“The risk [of that forecast] is increasingly on the downside,” writes Ichsan.
It seems harsh to penalize Indonesia’s new finance minister for her success in helping to eradicate what is arguably Indonesia’s biggest impediment to future economic growth. Although analysts will acknowledge this, they also point out that the edge Mulyani enjoys with the international community works against her in Indonesia’s domestic politics.
“She’s a technocrat who is well tuned to international investors’ concerns,” says an analyst. “She knows how to speak their language, she was previously a director of the IMF. She’s not tainted because she’s not from the bureaucracy and not burdened by vested interests. But she needs to build relations with parliament – she doesn’t have enough exposure with the political forces in Jakarta, especially since SBY’s government is a coalition.”
Standard Chartered Bank’s Ichsan is sympathetic to Mulyani’s dilemma but equally clear about the need for her to find a solution to the problem.
“Just because government ministers aren’t spending enough isn’t her fault,” says Ichsan. “That’s not her job. But it’s her challenge to encourage them to spend more on infrastructure.”
The government is beginning to tackle the issue with plans to penalize regional governments behind on their infrastructure spending commitments. That means Mulyani has as much work to do in the next few years of her tenure as she has already achieved since she took office. It is no small feat, says Lito Camacho, vice-chairman of Credit Suisse’s Asian investment banking division.
“The challenges facing her are no surprise,” he says. “She has to balance the need for growth – the need to relax on the fiscal side to spur growth and consumption – but at the same time keep inflation in check, which is still relatively high. I think inflation will continue to haunt many Asian economies, including Indonesia.”
Confidence and control
Fortunately for Indonesia’s economic prospects, Mulyani appears equal to the challenges before her, says Camacho.
“She has a quick mind and a very deep knowledge of the details [of her job],” he says. “That’s very reassuring – you don’t just get a headline response. It hasn’t been easy in Indonesia over the last two years or so. To have someone like her as finance minister gives you a feeling of confidence, a sense that she’s always in control. Any observer of Indonesia should take comfort in that.”
As the government of SBY gets to grips with Indonesia’s endemic corruption and simultaneously attempts to steer its economy towards a long-term growth trajectory, Mulyani’s role in that collective effort will be crucial. The future might be uncertain but her record so far is very impressive. Able to meet the tough challenges, Mulyani has proved that she is also determined to make the right choices. That is encouraging for the future of Indonesia.
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