Indonesia: Economy key in presidential run-in
By Bill Guerin

JAKARTA - Poverty, lackluster growth, rising prices, high unemployment and continuing widespread corruption are adding to the myriad problems facing the five candidates for the Indonesian presidency.

The weakening of the rupiah and rising oil prices have resulted in stronger inflationary pressures and there are concerns that the consumer-led economic expansion of the past few years will die if the government cannot continue to bring in new investment, both foreign and domestic. With unemployment on the rise, and a large portion of the population forced to live on less than US$2 a day, plans to create more jobs and stabilize the economy are high on the candidates' campaign agendas.

Incumbent President Megawati Sukarnoputri is among the candidates, and while many credit her and her ministers with restoring stability to Indonesia, the relative political stability has not been used to accelerate the resolution of underlying economic problems. Megawati, her critics say, has done little to eradicate graft or raise incomes.

This could spell trouble for the president who, in an effort to boost her re-election chances, jumped the gun on her four rivals when launching her re-election bid last Monday, a day before the campaign officially began on June 1.

At her first-ever press conference since taking office almost three years ago, the president unveiled a six-page populist manifesto that promised to create 12.7 million new jobs, nearly halve the poverty rate and appoint half a million new teachers over the next five years.

Megawati's promise to slash by 45% the number of people living in poverty came just after a report was released last week by the World Bank which warned that despite a recent fall in poverty levels, more than half the population of 220 million still lives on less than $2 a day. But though reducing the poverty rate is no doubt on her "wish list", she offered no clue as to how this veritable miracle might be achieved, nor did she say where the money to employ 100,000 extra teachers each year would come from.

Meanwhile, unemployment rose to 9.3% last year, with some two-thirds of the 40 million jobless between the ages of 15-24. Though the country's exit from the International Monetary Fund program last year did not trigger the economic collapse predicted by many conservative economists, these unemployment levels, if not prioritized, could prove to be a time bomb threatening major social, economic and even political problems. Megawati's manifesto so far has simply promised 12.7 million new jobs over the next five years.

Megawati's five-point agenda also included plans for new roads, better irrigation, rice and fuel subsidies, an expansion of the railway infrastructure and improved family planning and local medical clinics. She also promised to provide clean water to 55% of people living in towns and 30% to those in villages within five years.

Ironically, these ambitious targets for the provision of basic community services across the country seem to highlight just how little her administration has achieved in almost three years.

According to the World Bank, services to the poor are among the worst in the region: many primary school buildings are near to collapse, children go to school without shoes and the puskesmas (health clinics) quickly run out of basic medicines.

While Megawati gave prominence to poverty and unemployment, issues of institutionalized corruption, money politics and law reform were not addressed in the manifesto. Neither was a plan to reform the civil service, though Megawati pledged to raise civil servants' salaries by 15% every year for the next five years "to make the running of the government smooth, efficient and clean". Although a comprehensive blueprint for reforming the civil service has been handed over by both the Asia Foundation and the World Bank, little if any action has been taken.

Shortly after Megawati made her announcement, State Minister for State Owned Enterprises, Laksmana Sukardi, quickly pointed out that the public servant pay rises would not be automatic and would only be paid where there were productivity improvements.

The president was first to come out with some sort of policy paradigm in the run up to Indonesia's first ever direct presidential elections on July 5, though she may not be a hard act to follow - on the campaigning platform and in the sense of her achievements during her tenure.

Later in the week, front-runners Susilo Bambang Yudhoyono and running mate Yusuf Kalla released their manifesto in a campaign book which stated that "creating more jobs" was a top priority. An opinion poll released on Tuesday, when official campaigning began, showed former chief security minister Susilo with a 20-point lead over Megawati.

Moreover, the plans outlined by Susilo and Kalla were rather more specific than Megawati's. For example, they pledged to reduce the poverty rate to around 8.2% by 2009, and increase income per capita to $1,731 by the same year, from $968 in 2003.

The popular pair targeted growth at 7.6% by 2009, while Megawati's manifesto made no specific reference to growth, which is still among the slowest in the region. The Central Statistics Agency (BPS) reported on Tuesday that growth was slightly below the government's full-year 2004 target of 4.8% but above 2003's full-year rate of 4.1%.

Much of that growth is being driven by consumer demand, as corporate investment, both domestic and foreign, remains weak. Major obstacles to foreign investment include the lack of legal supremacy and endemic corruption, but Megawati has denied that her government had not been serious in tackling corruption, urging the media to "check with the attorney general's office" on all the cases it was handling.

The consumer-led economic expansion of the past few years will peter out if there is no new investment. Kalla, minister of industry and trade for a brief spell during the administration of Abdurrahman Wahid, has said that a boom in domestic investment would reduce the high unemployment rate and replace dependency on foreign investment.

He plans to encourage domestic private investment by boosting government spending on infrastructure and issuing bonds to finance the development of toll roads, ports and telecommunications networks - easier said than done. Investors who held $1 billion worth of bonds sold on March 3 by the government in its first international debt sale since the 1997 Asian financial crisis, have already lost more than 10% of their money.

Kalla also suggested that the infrastructure in rural and remote areas be improved to give the poor more access to economic resources, better health services and education.

The World Bank report, meanwhile, said rising labor costs, now 35% higher than in 1996, are outpacing gains in productivity in the aftermath of the regional financial crisis, and rising costs related to corruption and failing infrastructure are reducing the country's competitiveness.

Strong and stable economic prospects are what draw in long-term investors and the inherent optimism in the report, which suggested that Indonesia could benefit in the short term from a strong upswing in international economic activity and continued macroeconomic stability, may be a bit premature.

The country remains extremely vulnerable to adverse external developments. In the past month, borrowing costs have surged, and the rupiah, the worst performer this year among 15 Asia-Pacific currencies, has tumbled dramatically, losing about 11% since the start of the year. The sinking rupiah has also pushed up the cost of production for many companies, as they are dependent on imported raw materials.

The dollar surged as high as Rp9,590 last week, it's highest since April 10, 2002, mostly on buying from local corporates and speculators. JP Morgan Chase, the world's fourth-biggest currency trader, cut its forecast for the rupiah to 10,000 to the dollar by year's end from Rp9,200.

Senior deputy governor of the central bank Anwar Nasution blames the rupiah's fall partly on high liquidity in the banking sector, which he said had created the environment for speculation. US dollar interest rates - at 1%, the lowest levels since the 1950s - have encouraged short-term capital inflows. Interest rates in Japan, Singapore, Malaysia, Hong Kong and Thailand are also extremely low.

But speculative portfolio investors have now switched from rupiah assets back to dollar-based assets following news that the US Federal Reserve could start raising its key short-term interest rates next month.

The weakening of the rupiah and rising oil prices also have resulted in stronger inflationary pressures. BPS said last week that inflation in May rose by 6.47% from the same month last year, stronger than the year-on-year inflation rate of 5.29% in April. BPS predicted that inflation for the full year will surpass the government's 6.5% target. This has prompted speculation that the central bank may have to reverse a two-year downtrend in interest rates.

Indonesia is the only Organization of Petroleum Exporting Countries member to become a net oil importer, and in March, it imported an average 484,000 barrels of crude oil a day against exports of only 448,000 barrels a day. Inefficient utilization of the country's oil resources and the lack of legislative encouragement to the industry are being blamed for the slide.

And with crude oil futures in New York surging to a record $42.33 a barrel last week, the soaring oil price will widen Indonesia's budget deficit from the target of 1.2% of gross domestic product (GDP). The finance ministry said fuel subsidies would now cost as much as Rp46 trillion compared to the Rp14.5 trillion it projected earlier for this year.

The Jakarta Composite Index closed last week at 697.94 points, down by 4.9% from the previous week, and the rupiah depreciated yet another 2% against the dollar. Yet there is little evidence of any sense of crisis.

Finance Minister Boediono said last week: "The budget will remain manageable and controllable, but we hope expenditures will also be kept under strict control." This comment, however, came on the same day that the government announced its plan to give a 13th-month bonus in salary to civil servants, police and the military, a deal that is expected to cost nearly $1.5 billion.

Former military chief Wiranto is also a frontrunner in the presidential race, while two candidates who made their reputations as Muslim leaders round out the field, trailing way behind the leading three in opinion polls.

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