JAKARTA - A week after investors were
promised a better deal, including lower taxes,
surging world oil prices are dealing Indonesia's
economy a double whammy, battering the currency
and blowing out the domestic budget.
A
week ago, the rupiah closed at 9,985/9,995 to the
dollar after briefly hitting the psychologically
important level of 10,000. This week, despite
intervention from Bank Indonesia, the central
bank, the beleaguered currency dropped to fresh
lows. Traders sold off the currency amid thin
dollar supplies and fears the central bank
would not keep up its earlier
aggressive defense of the rupiah. So far it has
lost 9.7% of its value this year and efforts to
support it have cost at least US$5 billion since
April.
Panic buying of dollars by local
businesses to pay for imports, and, in many cases,
service dollar-denominated debts, extended the
rupiah's two-week slide to 10,300 per dollar, the
currency's lowest point since February 2002. At
least one local analyst was prompted to say the
situation could prove to be "very dangerous".
Arguing that the current scenario is similar to
that during the run-up to the 1997-1998 financial
crisis, Kahlil Rowter, head of research at Mandiri
Securities, said any further slide of the rupiah
would no longer depend on technical factors.
Economists warn that the central bank
needs to take drastic moves to signal a
full-blooded commitment to defend the rupiah. On
Wednesday, it raised a key interest rate by a
quarter of a point, to 7.5%, to encourage rupiah
buyers, but further rate increases could push up
government borrowing costs and impact on economic
growth. Overall, the economy grew 5.54% in the
second quarter, down from 6.19% in the first. The
government forecasts GDP growth of 6% in 2005 and
6.2% in 2006, the fastest pace since 1996.
However, Burhanuddin Abdullah, the central
bank governor, says that although the bank will
continue to try "to reduce volatility", what is
important is not the level of the rupiah but
stability, so that businesses can "make their
plans". These sentiments are at odds with the
perception of the business community.
Mohamad Hidayat, chairman of the
Indonesian Chamber of Commerce and Industry
(KADIN), was quoted as saying: "It is true that
businessmen are panicky. It happened after they
realized that the rupiah is moving out of
control." Industry is now facing a serious risk of
foreign exchange losses and rising costs for raw
material imports, he said.
The
Coordinating Minister for the Economy, Aburizal
Bakrie, who was KADIN chairman for 10 years before
being appointed to the cabinet, has warned the
central bank's intervention would only be
"temporarily" effective in curbing the rupiah's
fall and what is needed to ease pressure on the
currency is a change in the fuel subsidy policy.
Bakrie said one factor that has caused the
rupiah's depreciation is the public perception
that the country is facing a huge budget deficit,
even though the current account and capital
account are expected to post a surplus of $4.7
billion this year. He blamed poor market sentiment
over the potential impact of subsidies on the
budget deficit, though conceding that the main
pressure on the currency was due to the need to
spend dollars for oil imports and then subsidize
fuel at the same time.
The central bank
has bought around Rp13 trillion in the last four
months while, conversely, the government has been
buying dollars to finance subsidies. Indonesia is
the only OPEC member that is a net importer of
oil. State oil giant Pertamina needs on average $1
billion every month to import crude oil and
refined petroleum to meet a rapidly growing
domestic demand. The 2005 budget assumes Rp76.5
trillion will be spent on selling fuel at
below-market prices. Yet at current
fuel-consumption levels, and with oil prices above
$60 dollars a barrel, subsidies would need to be
almost doubled to Rp150 trillion ($15.3 billion).
Rolling back the costly subsidies,
however, and forcing consumers to bear more of the
brunt of record-high costs, could lead to a social
and economic backlash. Bakrie said the government
needed to shift to a more targeted subsidy system
as the current policy has often led to illegal
sales of subsidized fuels to industrial customers.
By Wednesday, President Susilo Bambang Yudhyono
had entered the fray, promising the government and
the central bank would act quickly to bolster the
rupiah, and urging currency speculators to stop
selling the rupiah.
"We have agreed that
we'll take concerted efforts to overcome the
rupiah's weakness," Yudhoyono told journalists
after an unprecedented late-night meeting with
senior officials of Bank Indonesia. "We will
continue to reduce the deficit and [fuel]
subsidies, without sacrificing the lower-income
people whom we have to protect," he said.
Plugging the gap The state
budget has been a constantly moving target for
months. The Megawati administration had set a 2005
budget deficit target of 0.8% of GDP but in March
the new government revised this to 1.07% to
reflect the impact of higher oil prices. The draft
2006 budget outlined in the president's first
"state of the nation" speech to the House of
Representatives assumes a reduced deficit of 0.7%
of GDP. Yudhoyono warned that the financing
challenge of the budget "is not less menacing"
given the need to repay maturing foreign debts of
Rp60.4 trillion and domestic debts of Rp30.4
trillion. Interest payments of Rp73.5 trillion are
also due this year.
There are limited
options to increase revenues. The government plans
to increase the sale of bank assets to help
achieve the budget deficit target. Funds are
expected from privatization and disposal of
banking assets held by state asset management firm
PT Perusahaan Pengelola Aset (PPA). The full-year
asset sales target for these assets, taken over by
the government during the financial crisis, has
been raised to Rp5 trillion from Rp4 trillion.
Overall, state revenue is estimated at
Rp539.4 trillion in 2006, up from Rp491.59
trillion for this year. This will come from tax
revenues of Rp402.1 trillion, non-tax revenues
ofRp132.6 trillion and grants of Rp4.7 trillion.
Another Rp19.6 trillion will come from government
investment account and treasury bonds sales and
Rp29.9 trillion in foreign loans.
The
show must go on Despite the growing
uncertainty, the government is moving on with its
commitment to create a business-friendly
regulatory environment and push for more inward
investment. Draft revisions of the tax legislation
based on Ministry of Finance proposals have been
hailed as they offer relatively low tax rates
while encouraging better compliance among
taxpayers. The president has promised to cut taxes
for listed companies and said he would triple the
minimum threshold for personal taxation in a bid
to attract support from lower-paid workers.
The drafts propose a reduction in the
corporate income tax rate to 28% in 2007 and 25%
in 2010, down from the current 30%. Personal
income tax rates would be reduced to 33% in 2007
and 30% in 2010 from a current rate of 35%. The
ceiling on luxury taxes, targeted in particular at
luxury cars, is to be raised to 200% from 75%.
However, the draft laws have still to be debated
and approved by parliament. Hidayat said the draft
laws offered incentives that would not only
stimulate the economy but also help expand the tax
base through the introduction of a simpler
taxation regime.
Approved foreign direct
investment jumped 79% to $6.64 billion from $3.71
billion in the same period last year. The
Investment Coordinating Board (BKPM) and the
Coordinating Ministry for the Economic Affairs
will co-host the Indonesian Global Investment
Forum in September. This will promote investment
opportunities in SE Asia's largest economy to
exclusively invited audiences of institutional and
foreign direct investors in London and New York.
Bakrie will head up the forum in London and the
president will join key government ministers and
corporate leaders in New York
Some comfort
came from the IMF whose managing director Rodrigo
Rato emphasized that despite the "inflationary
problem", Indonesia's economy was on a "strong
footing". The sting in the tail was his reminder
that though subsidies may be politically very
popular, they are not efficient. The Indonesian
government must accept that "masquerading the
reality of oil prices is not a sustainable
policy".
Bill Guerin, a Jakarta
correspondent for Asia Times Online since 2000,
has worked in Indonesia for 20 years as a
journalist. He has been published by the BBC on
East Timor and specializes in business/economic
and political analysis in Indonesia.
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