Economy Update

Apr 7th, 2007, in Business & Economy, by

The World Bank's report card and predictions for the Indonesian economy.

The World Bank in its "East Asia & Pacific Update" says a strong pickup in economic growth occurred at the end of 2006 and into early 2007, but recent natural disasters such as the Jakarta floods, the Sumatra earthquake, as well as transport accidents such as the Adam Air crash and the Garuda crash, will likely dampen this.

Growth is expected to be at 6.3% for Indonesia in 2007 and 6.5% in 2008. World economic growth will slow down mildly in 2007 but Indonesia is less dependent on exports than other East Asian economies. Bank lending rates should come down. Central and regional government should be more generous in their spending programs.

2006 exports exceeded $100 billion for the first time ever, rising by 18% on 2005 in dollar terms, led by 20% growth in non-oil and gas products, this being partly caused by high international commodity prices especially for rubber, palm oil and coal.

The current account surplus rose to $9.6 billion in 2006, much higher than 2004 ($1.6 billion) and 2005 ($0.3 billion). International reserves rose from $35 billion in 2005 to $43 billion in 2006.

Markets are becoming confident, the rupiah has been steady in the range of 9,000-9,200 against the US dollar. Government bond yields continue to fall reflecting a positive outlook for inflation and further cuts in interest rates.

The Jakarta stock exchange continues to trade near all time highs.

Inflation fell to 6.6% at the end of 2006, lower than Bank Indonesia's target of 7-9% but higher than expected due to recent increases in food and especially rice prices. January and February 2007 inflation was worryingly high.

Government spending continued to be lower than forecast in the budget and the debt to GDP ratio fell sharply. The preliminary 2006 results show a budget deficit of 1.1% of GDP, lower than previous estimates at 1.3% of GDP. The government debt to GDP ratio dropped to 41% from 45% in 2005. Both central and regional government spending are too low, capital spending needs to be higher.

In mid 2006 the President announced major new poverty reduction programs designed to create employment, stimulate local economies, build community participation, and improve health and education standards.

The key to poverty reduction is the price of rice. Recent increases in rice prices, as well as the termination of the unconditional cash transfer program could weaken poverty reduction efforts or even lead to an increase in poverty rates in 2007 despite good economic growth. However prices of rice are being stabilised by the government's decision to import some rice.

Unemployment appears to have stabilized at just over 10%.

Parliament has passed a new investment law providing, among other things, equal treatment between domestic and foreign investors, binding international arbitration, the elimination of forced divestiture, land use rights of up to 95 years (from 35 years previously) in certain cases, and extended residency permits for foreign investors.

Important tax laws remain under discussion in parliament however. Few large infrastructure projects are actually getting underway. World Bank


14 Comments on “Economy Update”

  1. avatar Sputjam says:

    Indonesian lack confidence investing in major infrastructure, such highways, railroad connecting major cities and islands.

    It should have by now, good highway/rail networks in java and sumatra. These infrastructure benefit the people and businesses.

    China didn’t take too long to build a railway line to tibet, or even a “bullet train” linking Shanghai to beijing, which is planned and will be built soon.

    Malaysia/Singapore have a bullet train planned between KL and Singapore serving a combine population less than jakarta’s.

    For an island of 100million, java is vastly underdeveloped. That potential needs to be unlocked. steam turbines could be used to harness the heat generated by lava flows to generate cheap electricity.

    In sumatra and kalimantan, dams could be built instead of using carbon fuels to generate electricity.

    In europe, carbon emmitters are taxed. These taxed dollars have to be invested into carbon absorbing projects such a planting trees and foresttry. Why don’t the Indonesian government propose to the europeans that they will preserve a portion of the equatorial jungle for a fee?

  2. avatar Odinius says:

    Sputjam

    I totally agree. Indonesia’s road system, for example, is horrible. I can’t believe how long it takes to drive across Java, which is obviously bad for internal commerce.

    But I do think this report shows that the country is moving in the right direction and with far less of the cronyism and corruption of the Suharto boom (though still too much of it).

  3. avatar Marie Antoinette says:

    Well at least finally the DPR got their act together and passed the Investment Law. With much less debate than that which accompanied the Anti-Pornography law. Which goes to show a lot of energy goes to addressing problems which aren’t that crucial.
    It’s the economy, stupid.

  4. avatar Yunir says:

    Hi Sputjam…

    I agree that transport plays an important role in developing the economy.
    But there are two points I want to raise.

    #1. Transport system for the sake of transportation is not really a wise idea. It is obviously about connecting significant areas that are geographically dispersed.
    Now, my question, do Java have such dispersed areas of economic interest?
    e.g: plantation areas, residential areas, manufacturing plants, business district e.t.c….

    Are these areas (and of course others) dispersed throughout Java? Or are they already concentrated in a single district?

    #2. Obviously, the railway systems will have to run in populated areas and not isolated areas. But this will inevitably cause the problem of interrupting residential areas.

    Being a democratic country, Indonesia will definitely be careful not to anger the locals and make necessary compensation/relocation of affected residents.

    China’s railway to Tibet is highly criticized. Only the Chinese gained from it, but the local Tibetans? They get their environment ‘destroyed’. And China can get away with it because it is not a democratic country.

    The significance of democracy can also be seen in other aspects of development projects. In Vietnam, the Song Hinh hydroelectric dam has been built without the consideration of affected residents in that area. They were displaced without any compensation. Again, Vietnamese Government can get away with it because it’s not democratic.

    I’m not saying the Government should avoid improving transport systems or any other development projects solely because they might disrupt local residents. I just want to point out that it’s not as easy as it seems.

    The first priority of the Government should be her people. It must make sure that economic growth is passed on to her people, not to foreign corporates.

  5. avatar Odinius says:

    Yunir, yeah “transport for transport’s sake” may be worthless, but why is there no highway from jakarta to surabaya? Can you think of a single developed country that doesn’t have a highway linking its biggest to its second biggest cities?

  6. avatar Sputjam says:

    Without proper transportation, major industrial areas will be compressed, much like jakarta. If you have good transportation, java only requires one major port for export. which could be linked island-wide by good road/rail networks. major economic activities could be dispresed to the rural countryside. migration to jakarta could be stopped as economic activities are spread evenly i.e. instead of concentrated in one spot.

    If you look at peninsular malaysia as an example, there are actually three major economic areas, i.e. Penang and surrounding areas, johore baru and surrounding areas amd Klang valley/KL. The economic activities are spread to the whole population instead of concentraing in a central point, like Indonesia.

    Thailand also face similar centralisation like Indonesia, i.e. only one major economic region which is bangkok.

    Long term foreign corporates/investors are vital for the well being of the country. Do not treat them like pariahs. If the nations fundamentals are right, these foreign investors will pump in tonnes of money, which hopefully will be distributed to the populace and create jobs.

    If the fundamentals if the country is screwed up, even local investors will exit and make park their money in Singapore.

  7. avatar Yunir says:

    Alright Odinius, you’ve addressed my first question thx.

  8. avatar Odinius says:

    i think Indonesia could also take a page out of thailand’s book and start getting transport in jakarta more organized. as is, in a few years there will be macet total. i would:

    1. incorporate all buses. let metromini, kopaja, patas, etc run, but under license from the city with a central, organized route system and clear rules about emissions, safety regulations, etc.

    2. incorporate all taxes.

    3. pass a sidewalk law in major business areas, mandating 1 meter for pedestrian walking

    4. change 3 in 1 to 2 in 1. the system now just creates more macet.

    5. create a progressive car tax, where if you have 4 cars, you pay 4 times the tax for the 4th one as you do for the 1st one.

    6. create a tax incentive for buying hybrid or diesel cars

  9. avatar DoOs says:

    Before I would like to make a comment about this article,
    I am an 11th grade student of Jakarta International School who is taking a Microeconomic and Macroeconomic major studies.

    Government spending continued to be lower than forecast in the budget and the debt to GDP ratio fell sharply. The preliminary 2006 results show a budget deficit of 1.1% of GDP, lower than previous estimates at 1.3% of GDP. The government debt to GDP ratio dropped to 41% from 45% in 2005. Both central and regional government spending are too low, capital spending needs to be higher.

    The Indonesian Government as said should increase their Government spending due to the following reasons. Firstly, when the private sector of the economy weaken, considering the fact that agricultural production is low and price stability for primary goods such as rice is unstable, the market will not correct itself. Secondly, with Government spending money will be injected to the Economy’s flow of income, which is an increment to account for National Income.

    The key to poverty reduction is the price of rice. Recent increases in rice prices, as well as the termination of the unconditional cash transfer program could weaken poverty reduction efforts or even lead to an increase in poverty rates

    I’ve heard that the Government reacted with a public transfer payment program called the BLT (Bantuan Langsung Tunai). In my opinion this is a poor program to account Government spending due to the following reasons. Firstly, a public transfer payment is excluded from the economic GDP. This program will not be taken into any considerations of the economy’s economic growth. Secondly, the money from a public transfer payment will not grow because the money will be taken for household’s spending instead and will be injected back to the government. Since then the program will not cause any growth.

    In a situation like this, the Government should focus more on project spending in the factors of infrastructure (railroad, port, road, telecommunication, energy, electricity, irigation, and ect). However these undergoing projects currently progressing slowly and is below National Budget’s target. Some factors that causes this to happen is the following:

    – Reformed system in bureaucracy is not yet formed in the transition to Democracy.

    – Fear of anti-corruption act in the bureaucracy mechanism.

    – Power is distributed among many institution and therefore there is no certain direct command.

    – The relationship between Central Government and Provincial Government is weak.

    I hope this analysis is taken into consideration.

    Regards,
    DoOs

  10. avatar Sputjam says:

    Current congestion in jakarta can easily be done away with if the federal government were to place its offices outside jakarta, say in bogor, in a planned and well built city.
    Instantly over several years, the population of jakarta will decrease by say 10-20%.

    In order to minimise government bereaucracy, the application for licenses should be transparent, and if the applicant is succesfull in meeting the criteria, then the clerk should just authorise the issuance of license instead of the department head. The job of department head should be focus on more important task such as making the bereaucracy more efficient and to improve communication between government department.

    Corruption breeds because all application takes too long to process.

    Minning and tourism are other neglected segment ot the economy. Decentralise jakarta as the main entry point, and encourage point to point destination such as manado, which is closer to japan/china/korea by direct flight.

    Every major town/cities in Indonesia should have their own local newspapers/TV stations/local banks/etc issued by the local authorities. this will create jobs and investment. Local bank license should differ from those issued by federal government in jakarta and cannot have branches except in their district.

    And a major highway bridge should really connect island as far as timur through java to sumatra. This will increase local tourism activities and busineses and channel some of the wealth accumulated in jakarta to provincial areas. Cost of building such infrastructure can easily be recovered by increase in public spending over a number of years.

  11. avatar DoOs says:

    I agree with your resolution Sputjam. Indonesia is leaning towards decentralization with the Islamic Radicals arising. The government must focus on improving infrastructure outside Jakarta and promote investemnt outside Jakarta in places like what you’ve said.

    The problem is how will the government mantain a tight security for investment in rural areas while the anti-corruption policy itself prevents investment by pouring fear to the rich.

  12. avatar Dragonwall says:

    I wonder how many of DoOs could be found in this forum to inject fresh ideas to the government.

    Many political leaders in the DPR/MPR when they talked about a restructure they tend to keep aside something to benefit themselves. What ever happens to the general public becomes secondary. They saying goes “mau ngapain buang waktu”.

    Anyway DoOs keep it up. It’s nice to see someone like you able to project the macro but unfortunate the Indonesian’s micro cannot be undermined in within a short period of time. By which time they get there it is already too late.

    The government are more concern in supporting the rupiahs from falling by ignoring many factors that could easily help boost the rupiahs without the interception of Central Bank. Any interception by Central Bank is always critical when implemented. Any wrong move will cause the Rups to go under and in most case remedy was always very short lasting and they are back to square one.

    There are many many assets seized by the government under liquidation pertinent to BLBI and are still waiting or awaiting for the right person to come along and make a bid and you know those bagi bagi kind of stuffs.

    Indonesia needs to get out of the dilemna quick and this kind of thing is like cancer. It spreads rapidly and must not take too long to iron out.

    To project growth there are many factors to focus indepth to be able to summarize a public announcement insteads of later being disputed and a miscalculation.
    If it is conservative so what, let it be. They can’t make a nice projection to give hope. When it comes to national economy there is no such things as hope. Achievements would be more ppropriate.
    There were many in the cabinets who have tertiary education. That academic is not good enough. What about qualification and experience!

    Why is Kwik Kian Gie only making comments! Why is Aburizal Bakrie making comments! What have they achieved in the past for the Indonesian people? There can never be a national coalition. None of them see eye to eye on the same topic.

  13. avatar Sputjam says:

    In Indonesia’s case, maybe its a good thing to ensure that any person who represent the people in parliament, should have a minimum educational qualification and real work experience in prominent businesses. That way, all the religious scholars and beach bums will be eliminated.

  14. avatar DoOs says:

    A smart person can bring a tyrant of fruitful ideas, but cannot defeat a tyrant of ignorance and obidience. An expirienced person can find his way through a tyrant of ignorance and obidience, however does not have enough power to defeat the tyranny itself. However, some are enlightened to see that to disguise being in a group of ignorance and obidience for a good purpose can defeat the tyranny like a venomous snake. A cleaver person with expirience and intelectual knowledges should represent the people in parliament.

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