KEN warns against policy mistakes

JAKARTA. Despite predicting stronger economic performance next year, the President’s Economic National Committee (KEN) warned on Monday of risks associated with currency exchange, fuel subsidies and low government spending that may harm the country’s economy.

KEN, whose members consist of high-profile businesspeople and economists, has expressed its wariness in its annual report over the government’s plan to considerably reduce the amount of foreign debt.

“Among the factors that should be taken into account from the drastic reduction in foreign debt is a heightened pressure on the rupiah. The 2013 state budget reveals the government would need to convert Rp 19.4 trillion [US$2.02 billion] into US dollars to service its debts,” the report stated.

“This additional need will undermine the rupiah should the execution not be conducted wisely. This policy is not always good for fiscal conditions, and its implementation must be done carefully to avoid any disturbance in the currency market.”

Indonesia’s debt ratio has steadily declined to 25 percent of gross domestic product (GDP) from 67 percent in 2002, posing no risks to the state budget and the ability to implement it. The rate is one of the lowest in the emerging-economies market.

However, on the heels of heightened nationalist sentiment, fueled by several noted politicians trying to gain support for the 2014 general elections, the government is under pressure to reduce the country’s foreign debt that is worth more than $220 billion.

Concerns over the weak rupiah have been on the rise following Indonesia’s trade balance, which fell back to a record shortfall of $1.5 billion in October as imports grew faster than exports.

The condition will possibly put more pressure on the country’s balance of payments. A negative balance, should it continue much longer, will reduce the country’s ability to service its foreign debt and essential imports.

However, despite the pressure, KEN forecasts the rupiah will hover between 9,059 and 9,459 per US dollar.

The rupiah saw its highest gain in two weeks on Monday, rebounding from a three-year low, on speculation that the central bank would intervene in the market to stabilize the currency, according to Bloomberg. The rupiah strengthened 0.2 percent to 9,635 per dollar as of 3:28 p.m. in Jakarta, the biggest gain since Nov. 26, prices from local banks compiled by Bloomberg showed.

Aside from the rupiah, KEN also highlighted low government spending that had not only hampered infrastructure development but had also reduced liquidity in the financial system.

As of October this year, Rp 215 trillion of government money remained unspent, sitting idle in Bank Indonesia accounts. “It is not surprising that the fiscal push to economic growth remains less than optimal,” said KEN.

Due to the massive idle funds, KEN warned the government not to cut fuel subsidies and increase fuel prices in order to provide more development funds in the state budget, as the government had for years failed to meet its spending targets.

KEN argued that cutting subsidies would only trigger higher inflation and undermine consumer spending needed to propel the economy, while exports and investments slumped due to global economic uncertainty. Around 60 percent of Indonesia’s economy is fueled by domestic consumption.

“Indonesia still faces the protracted problem of low government spending. There is less chance that the extra funds retrieved from a cutting of the fuel subsidy would be spent efficiently on infrastructure development,” said KEN chairman Chairul Tanjung.

Poor bureaucracy was the major trigger that KEN blamed for the lack in government spending, which had increased the country’s economic inefficiency, as measured via the so-called low incremental capital output ratio (ICOR) — a measurement of how much investment is needed to generate one unit of output.

Indonesia’s ICOR stood at 5.2 percent of GDP as of June this year, meaning that Indonesia needs at least 5.2 percent of investment to generate 1 percent of economic growth. “In 2003, we only needed investments of 4.1 percent of our GDP to boost our economy by 1 percent. Hence, our economy is now less efficient,” KEN said. (sat)
 

KEN recommendations

• Anticipating the global crisis: The Financial System Safety Net (JPSK) bill a priority in 2013
• More fiscal room and stimulus funding provide funds that can be used to support liquidity and social safeguards
• Subsidy adjustment for fuel and electricity
• Improve economic efficiency
• Improve competitiveness
• Provide more job opportunities through better business climate and government incentives
• Labor issues: The government should thoroughly evaluate Labor Law and policies
• Reduce poverty gap and provide social protection measures
• Safeguard consumer purchasing power and domestic economic resilience

(The Jakarta Post)