In for difficult year

Minister of Finance Boediono was not exaggerating in charting out a much more difficult time for both the economy and fiscal management in 2004 due to the combination of unfavorable external and internal factors.

The global economic outlook remains uncertain with big downside risks despite the successful end of the war in Iraq, and intra-regional economic activities in Asia have been hindered by the threats of Severe Acute Respiratory Syndrome (SARS).

Indonesia itself is in for heightened political emotions and turbulence next year when an estimated 130 million voters across the world's largest archipelago state will hold three rounds of general elections, one for national and regional legislative bodies and the other two for president and vice president.

Even though money politics will likely fuel bigger spending, general consumer confidence will decline. Likewise business confidence will weaken as investors put most business plans on hold, waiting for the new government and its policy stance.

No wonder, most analysts predict economic growth next year at a range of 3.3 percent to 3.5 percent, with similar levels expected for the following year.

Further clouding the economic outlook is the bigger threat to sound fiscal management and, consequently, to macroeconomic stability.

Boediono told the Budget Committee of the House of Representatives on Wednesday that if the government did not renew the extended fund facility of the International Monetary Fund after its expiry later this year, the country would be deprived of the chance of getting new debt rescheduling deals from the Paris Club of sovereign creditors.

Without the debt-rescheduling facility, the government's spending on foreign debt amortization alone will triple to almost Rp 47 trillion (US$5.2 billion) next year. Further threatening fiscal sustainability is the bigger sums of government domestic debts (bonds) maturing in 2004 and in subsequent years. Next year, domestic debt principal payments alone will double to Rp 30.5 trillion from Rp 13.5 trillion this year.

Hence, total foreign and domestic service burdens (interest and principal payments) next year will take up as much as 41 percent of total domestic revenues.

How will the government cover this?

Increasing the budget deficit from this year's level of 1.78 percent of gross domestic product is politically unfeasible as the National Five-Year Development Program (2000-2004) mandates a zero deficit next year.

Such a fiscal stance also would make the market jittery, increase sovereign risk thereby raising the costs of government borrowing (T-bond coupon), heighten inflationary pressures and increase downward pressure on the rupiah.

Increasing tax revenues is extremely difficult amid low economic growth. Even the tax receipt target this year is already a tall order due to the recent sharp cuts in the luxury sales taxes on many goods. Oil and natural gas tax revenues are not so promising either in view of the downward trend in international oil prices. Boediono himself assumes a price range of $17 per barrel to $20 per barrel next year, down from $22 per barrel to $23.50 per barrel this year.

The privatization of state companies, which is tasked with raising Rp 8 trillion this year, is even more difficult. Not even one of the two dozen state firms selected for divestment has thus far been sold, due to political opposition from many House members.

The political climate for privatization next year is expected to be much more hostile as many politicians will likely tend to whip up narrow-minded nationalist sentiment against foreign investors.

Moreover, most foreign investors are now jittery about taking stakes in state companies after the wave of political and legal entanglements faced by privatized companies such as PT Indosat late last year.

Asset recovery by the Indonesian Bank Restructuring Agency (IBRA) will no longer produce big proceeds as most of the prize assets under the agency's management have been disposed of. Its sales revenue target of Rp 26 trillion this year could be the peak of IBRA's asset recovery before the end of its mandate next February.

Bigger loans from the Consultative Group on Indonesia (CGI) creditor consortium are also virtually impossible, especially if the government decides not to extend its IMF-supervised reform program. The most the government can expect from the CGI next year is as large as its total pledges of $2.7 billion this year.

Boediono said he was still optimistic about checking the state budget deficit at one percent of GDP next year, provided all branches of the government are united with strong determination to push ahead with economic reforms and to maintain high fiscal discipline.

But this is quite a big appeal as most governments tend to pursue populist measures in an election year. Moreover, virtually the whole government, from the President and vice president down to Cabinet ministers, House members, governors and district chiefs will be preoccupied with campaigning for their respective political parties.

The ominous signals conveyed by Boediono should serve as a strong warning to the government, including the House, to stick to the reform agenda and to seriously consider extending the IMF- supervised reform program at least for one year.

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