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Indonesia's rising
debt
By Bill Guerin
Indonesia's economy, the biggest in
Southeast Asia, may not be badly hit by the
devastating tsunami disaster. "Given that the
energy (mainly oil and natural gas) production
facilities in Aceh or Northern Sumatra have
survived the tsunami, the overall damage to
Indonesia's economy appears to be minimal," United
States investment bank Morgan Stanley said last
week. Aceh contributes only a little over 2% to
the country's gross domestic product (GDP).
Yet, saddled with government debt equal to
more than a third of its GDP, the new government
has found it will need to allocate a sum
equivalent to a quarter of its domestic tax
revenues just to service the national debt for
2005. Total external debts are around $136
billion, with some $78.81 billion of that
government debt penciled in for debt repayments.
Some $47.78 billion is owed to the Paris Club, a
group of 19 creditor nations. This debt alone
needs payment of $3.15 billion in principal and
$1.36 billion in interest for 2005. Almost all
Paris Club donors are also affiliated with the
World Bank-led Consultative Group on Indonesia, or
CGI, which meets each year to discuss Indonesia's
external financing needs from the international
donor community. The Asian Development Bank and
Japanese government are also included in the
group.
During the presidential election,
campaign promises were made that new borrowing
would be reduced this year, though a draft
government proposal shows plans to borrow another
$3.09 billion from international lenders to help
finance the budget. According to the draft, the
government will ask the CGI for $2.77 billion,
leaving other lenders to top up with $320 million.
Last year, the CGI pledged $3.4 billion. The
request will be discussed at the next CGI meeting,
scheduled in Jakarta for January 19-20.
The country may be offered debt relief to
ease pressure on the budget and give the economy
some breathing space though some economists fear
that such a move could downgrade the country's
sovereign rating and create new pressure on the
rupiah, thus raising the cost of servicing its
debt. Debt rescheduling is little more than a
temporary relief measure in coping with short-term
cash flow problems. The impact on the net cash
available to the government will be marginal.
Economists point out that sustainable, robust
economic growth that can generate larger tax
revenues for the government is the best option for
reducing the national debt. Much of this debt
resulted from the misuse and squandering of loans
by former authoritarian leader Suharto and his
cronies. Extending debt repayments by several
years would pass the burden onto the next
generation.
Several members, including the
United Kingdom, Germany, France and Japan, have
proposed a moratorium for Indonesia. The proposal
will be discussed at a meeting of the Paris Club
this Wednesday. Jakarta has said it wants to be
certain that any arrangement would not be tied to
a new International Monetary Fund (IMF) program
and conditions.
Growth
Morgan
Stanley stands by its 4.5% growth forecast for
this year, though in a year-end economic
assessment, Coordinating Minister for the Economy
Aburizal Bakrie said the government was confident
that growth would reach 5% this year.
The
IMF is making no predictions on the level of
growth, but it upbeat on the prospects. "While GDP
growth is still below Indonesia's potential and
unemployment remains high, economic performance
has continued to improve in recent months and
financial markets have rallied," the agency said
in a statement late last month.
Tax
breaks
The government is targeting tax
revenue of Rp297.51 trillion ($32.7 billion) in
the 2005 state budget. Last year, it raked in
Rp238.9 trillion - Rp300 billion above its own
target - but only 2 million or so individual
income taxpayers are on the books, not count ing
civil servants and private sector employees whose
income taxes are deducted from their salaries by
their employers.
The unfavorable taxation
regime in the country has long been seen as one of
the main obstacles to attracting new investors.
This looks likely to change with the Ministry of
Finance finalizing a whole range of new tax break
facilities to help improve the business climate
and attract new investment, as well help reduce
unemployment rates by encouraging further
expansion by existing businesses. These are likely
to come into force this month.
Director
General of Taxation Hadi Purnomo said the
incentives would include a reduction in the 30%
withholding tax on dividends to 10%, and
extensions on untaxable income due to operational
losses would be extended from the current five
years to 10 years. Another ruling would also allow
companies to claim tax refunds on asset
depreciation within two years, instead of the
current five.
Businesses in underdeveloped
regions, mainly in the east of the country, will
be allowed to set aside a minimum of 30% of
profits for investment and expansion, without
having to pay for the expenditure tax at the end
of their annual fiscal year. The government is
also considering a tax amnesty, which could see
the return of up to $60 billion in funds to help
implement its major infrastructure plans.
A tax amnesty could encourage rich
Indonesians who had moved their money out of the
country or into foreign banks in Indonesia during
and following the financial crisis in 1998, to
reinvest their funds in domestic banks without
fear of being questioned and slapped with tax
demands.
Investment
Election
promises to push growth to 7% by 2009 spurred an
ambitious five-year plan for major investments in
infrastructure. Roads, railways, ports, airports,
power plants, telecommunication facilities, gas
distribution, water plants, irrigation facilities
and housing projects planned over the period will
need between Rp700 trillion and Rp1quadrillion,
expected to come from the private sector.
Around Rp200 trillion will be funded from
the state budget and an equal amount by local
banks but the rest needs to come from local and
foreign institutional investors, and the World
Bank and the Asian Development Bank. An Indonesian
Infrastructure Summit set up by the Coordinating
Ministry for the Economy and the National
Development Planning Agency (Bappenas) has been
oversubscribed. At least 700 potential investors,
foreign and domestic, have asked for one of the
500 seats available at next week's event. Both
President Susilo Bambang Yudhoyono and Vice
President Jusuf Kalla will address the visitors,
who include executives from General Electric,
Siemens, Paiton Energy, Sumitomo Corp, Alcatel and
Motorola.
The target is to increase
investment from the current 20.5% to 28.4% of GDP
by 2009. If the five-year plan succeeds, it should
be sufficient to reduce the unemployment rate to
6.7% from the current 9.5%. About 40 million of
Indonesia's 235 million people are either jobless
or work fewer than 35 hours a week. Almost 70% of
the current workforce is comprised of elementary
and high school graduates, or school dropouts.
More than $4.2 billion worth of new oil and gas
contracts were signed last month though these are
unlikely to create many new jobs, unlike
investments in the labor-intensive manufacturing
and infrastructure sectors.
Cost of
living
Retail spending represents more than
two-thirds of the economy and consumers are likely
to pay more for goods and services this year.
Petrol prices will be raised early this year while
tariffs for kerosene - widely used for cooking -
and diesel - used in the farming sector and in
public transport - will be kept low. Higher
transport costs will also affect food prices,
which account for 38% of inflation calculations. A
1.51% increase in the price of basic foods as well
as a 0.31% rise in clothing costs contributed to
6.4% inflation in 2004. The government expects to
peg inflation to 7% for 2005, an upward revision
of its earlier target of 5.5%.
The fuel
price hike may also trigger increases in other
prices such as electricity, water and telephone
charges. The price of several goods and services
have already risen slightly on news that the
government would go ahead with fuel price
increases in line with its commitment to bringing
domestic energy prices closer to world prices.
Andrew Steer, the World Bank's Indonesia
representative, pointed out that the subsidies are
not "sound policies" and their reduction and
eventual elimination should boost competitiveness.
Budget balancing
The total cost
for reconstructing Aceh is expected to be at least
$1.07 billion over the next five years but with
major assistance pledged by the international
community, the effect on the budget may be
minimal. Though the state budget has run deficits
since 1998, the new administration plans to
balance the budget by 2007. It wants to narrow the
deficit to 0.8% of GDP in 2005 and is likely to
push ahead with a sale of a $1.5 billion worth of
bonds to help achieve this.
The deficit
last year amounted to Rp27.8 trillion, or 1.4% of
GDP, higher than the initial projection of Rp26.3
trillion, or 1.3% of GDP. The higher deficit was
caused by a rise in fuel subsidies following
soaring global oil prices. The government paid out
Rp70 trillion in fuel subsidies in 2004, though
early in the year the cost was forecast at only
Rp31.82 trillion. The 2005 subsidy bill is to be
cut to Rp25 trillion and the 2005 budget deficit
is estimated at Rp7.4 trillion.
Overall, promising
Improving
macro-economic stability inherited from the
previous administration has also encouraged Bank
Indonesia to continue cutting interest rates,
which stood at a record low of 7.41% in December.
A stronger rupiah and a lower interest rate
environment should continue to enhance the
economy. Conversely, any pressure on inflation and
the exchange rate could see the central bank
increasing rates. The rupiah is forecast to
average 8,900 to the dollar this year, hardly
changed from its average strength of 8,925 last
year.
Cheaper consumer loans has fuelled
private consumption. Sales of electronic
appliances, cell phones, motorcycles, and,
particularly, cars, soared throughout last year.
Indonesia is now the second-fastest growing
automotive market after China. The Association of
Indonesian Automotive Industries (Gaikindo) raised
its 2004 vehicle sales forecast by over 7% to
420,000 units and predicts total sales of well
over 465,000 vehicles for the year once the
figures are in, an increase of around 30% on last
year.
Though private consumption has been
the main engine of growth, most sectors saw higher
growth last year with the exception of the mining
and extractive industries sector, which declined
by 5.96%, bedeviled by various uncertainties,
which stalled investment.
Ready to
go
"In the midst of this grief, no matter
how difficult, the government will complete the
(100-day) program," Yudhoyono said last week prior
to ringing the opening bell at the Jakarta Stock
Exchange to mark the first trading day of 2005.
His 100-day program outlines his priority reforms
agenda and aims to improve public confidence in
the new government.
Voters chose Yudhoyono
for his pledges to fight corruption, reduce
poverty and attract investors to create jobs. "The
time for competition is over. The time is now for
unity. If God wills it, and we can work hard and
together, we will be able to build a better
Indonesia, a safer, more just and wealthier
Indonesia," Yudhoyono said when being sworn in as
president. He has a lot of political capital, and,
with his deputy now heading Golkar, one of the two
leading opposition parties, is well positioned to
push reforms through parliament to deliver on his
promises.
Bill Guerin, a Jakarta
correspondent for Asia Times Online since 2000,
has worked in Indonesia for 19 years in journalism
and editorial positions. He has been published by
the BBC on East Timor and specializes in
business/economic and political analysis in
Indonesia.
(Copyright 2005 Asia Times
Online Ltd. All rights reserved. Please contact us
for information on sales, syndication and republishing.) |
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