Taking the pulse after two years into the SBY administration
Kahlil Rowter, Jakarta
It is that time of year again when report cards are being contemplated. And not just for school children but for the government of Susilo Bambang Yudhoyono. Although there is more than two months left of the year, we can imagine how things are going to pan out.
The obvious starting point is growth and its quality. The main reason for having a government, after all, is to raise living standards. To this end, the government, in its medium-term plan (RPJM), targeted unemployment rates of 9.5 percent and 8.9 percent for 2005 and 2006. This translates to 9.9 and 9.4 million openly unemployed people. The outcome, however, is a lot worse with unemployment rates of 11.2 percent and 10.4 percent for 2005 and 2006. Consequently, the number of unemployed people stood at 11.9 and 11.1 million in those two years.
Another indicator of overall living standards is poverty. And like unemployment the record here is dismal. The medium-term plan does not give a year-to-year target, only an end of program figure of close to 19 million poor people or 8.2 percent of the population by the end of 2009.
This appears to be a tall order. In February 2005 the number of poor was 35 million or about 16 percent of the population. In March 2006 the figures swelled to 39 million or about 17.8 percent of the population. On an annual basis this is puzzling given the rise in economic growth from 5.05 percent in 2004 to 5.60 percent in 2005. But in terms of quarterly GDP the evidence supports this, as 1st quarter 2005 growth was 6.25 percent while for the same period in 2006, growth was only 4.7 percent.
The main reason, of course, was the massive rise in inflation. Unfortunately spiraling food prices hit the poor particularly hard. General inflation was 18 percent between February 2005 and March 2006. But with their higher dependency on food the poor were hurt more than the general population. In general this suggests a failure in controlling rice prices. And in particular it also points to the shortcomings of the rice-for-the-poor program and the direct cash transfer program.
The growth record in these two years is mixed. For 2005 growth at 5.6 percent was a tad higher than the target of 5.5 percent, while for 2006 growth, the target of 6.1 percent in all likelihood will not be met. In regards to inflation, no statistics are needed to conclude the target for 2005 (7 percent) was missed. But even for 2006, the target of 5.5 percent appears likely to be out of reach. Most likely 2006 inflation will be around 7 percent.
The rupiah also refuses to settle with an average of 9,750 in 2005 against the target of 8,900. In 2006 the average target is 8,800, but more likely the average will be around 9,200.
The main engine for growth this year was exports and to some extent the burst in government spending in the 2nd quarter. Exports rose mainly on the back of the rise in commodity prices, not so much the increase in production. This is worrying should the global economy slow down next year.
In the face of a budget deficit of 1.1 percent, government expenditure cannot be expected to sustain a boost in growth. However, if global oil prices drop to below $63 the money set aside for energy subsidy can be reallocated for capital expenditure.
Declining interest rates should encourage consumers to reallocate their income from savings to consumption. This may be true for those in the middle class and above. Investment may rise at a later stage, once the lending rate starts to decrease. Major banks cut deposit rates while maintaining lending rates to compensate for slow loan growth. And they can get away with it because of the steady decline in deposit guarantee amounts -- slated to be reduced to Rp 100 million in March 2007.
The result is: depositors at major banks are staying put while those with money in smaller banks are like cats on a hot tin roof.
The 2004 story when declining rates first boosted consumer spending looks likely to recur. Already several medium-sized banks, yielding to competitive pressure, are cutting automotive and housing loans.
These developments are largely outside direct government influence. Just like in 2003-2004, much of the increase in consumer spending and ultimately growth was the result of monetary stimulus. The government plays an indirect role by maintaining fiscal discipline mainly by not increasing key administered prices like electricity. This is more like an exercise in moving numbers around.
A more active role, other than cheerleading, would be to overcome all the well-known investment impediments. It should also be noted that an ever-increasing amount of resources are handed over to regional governments. The central government should take advantage of this by helping regional leaders overcome their problems. We need to resuscitate the previously overused word: coordination.
For example there are a lot of inter-district projects that can take advantage of economies of scale. At the same time, low regional budget absorption requires a massive effort to enhance planning and budgeting skills.
These two years have been challenging for the government, but especially for the people who put it in power. The result has been lackluster. Other than maintaining fiscal discipline not much direction has been forthcoming. As a result the economy is riding on the promise of monetary easing and not much else. Recent inflows into the financial market are at the same time fickle and disconnected from the real sector. Hence there is not much use for a broad-based increase in living standards.
We expect a lot more in the remaining three years of this administration.
The writer is chief economist, CIMB-GK Securities Indonesia. The views expressed are personal.