Strongest signal of intentions will be new Cabinet lineup
Although the final result of the presidential election runoff has yet to be announced, it seems certain that Gen. (ret) Susilo Bambang Yudhyono will be the next president. The Jakarta Post's Kornelius Purba talked with the World Bank's Country Director for Indonesia, Andrew Steer, on Wednesday about international expectations regarding the new government. The following are excerpts from their conversation.
Question : What do you think should be the top priority of the new government, which will very likely be led by General Susilo, so as to maintain and even increase market confidence in the Indonesian economy?
Answer : The elections themselves have been a major achievement for Indonesia. Whoever is to win, they have rightly promoted pride among Indonesia's citizens, and built confidence in Indonesia's stability and maturing democracy. This in itself is very helpful to market sentiment. Today Indonesia faces greater opportunities than at any time in the past seven years since the crisis.
However, as was noted clearly during the campaign, investment, at 20 percent of GDP, remains much too low. It should be 30 percent, and growth is still insufficient to create enough good paying jobs. The government will be well positioned to act to address impediments, thus improving investor confidence. Some actions can be done quickly. For example it takes 150 days to get permission to start a company in Jakarta, compared with 33 days in Thailand, 41 days in China and 56 days in Vietnam.
Cutting this sort of red tape can be done quickly. So too, blockages that are preventing specific major investments can often be removed quickly. Other vital actions -- improving the legal system, reforming the civil service, curbing corruption, etc. -- will, of course, take years to achieve. But even here the announcement of time-bound, monitorable road-maps can demonstrate decisiveness and action, which is vital to changing investors' perceptions.
Other key ingredients required to create improved market confidence include a continuation of the excellent macroeconomic management of recent years, and a campaign to restore the eroded physical and social infrastructure that is the consequence of the crisis. In all of these issues, as in every new administration in every country, the strongest signal of intent will be the appointment of the members of the Cabinet. These must be men and women of technical excellence, integrity and courage. This will bode very well for the future.
How do you see the short and medium-term outlook for Indonesia's fiscal sustainability in the absence of any debt- rescheduling facility?
Indonesia has done an excellent job in managing its fiscal accounts in the last few years. The government's debt as a share of GDP has fallen from over 100 percent to 59 percent in just four years. Indonesia still has a big debt burden but is no longer in crisis. And each year Indonesia has more flexibility. It is now internationally creditworthy, as demonstrated by the bond issuance early this year. So Indonesia deserves strong marks on fiscal management, and indeed now is the time to focus on expanding prudently, expenditure for infrastructure and social services.
Do you mean that it is impossible for Indonesia to ask for debt rescheduling outside of the Paris Club mechanism?
Indonesia no longer needs wholesale rescheduling, but there are certainly financial options looking forward. This year Indonesia successfully graduated from the IMF program and fully normalized its relations with its creditors, and has also managed to significantly improve its credit ratings. Opportunities for formal debt rescheduling outside of the Paris Club mechanism are now very limited. There are still opportunities to undertake small debt swaps, and also to manage the debt structure by borrowing at low interest rates to pre-pay higher interest rate debt, which is like debt rescheduling but with a different name.
Fuel subsidies here have ballooned to more than Rp 63 trillion as the government has decided not to raise fuel prices this year. How do you assess this huge subsidy burden set against fiscal consolidation in the coming fiscal year?
If there is any good news about having such a large subsidy it is that it provides a lot of potential resources for the government should it choose to reduce or eliminate it. These resources could then be used to invest in schools, clinics, poverty programs and the like. There is a lot of analysis showing that the bulk of the benefits of these subsidies go to the rich and not the poor, and that the subsidies don't help the economy.
Raising prices does cause pain, however, and is often difficult politically. One idea would be to remove them according to a clear, announced path and specifically allocate the funds saved for pro-poor programs that would more than compensate those who are least able to afford price increases
Do you foresee any changes in Indonesian relations with the CGI creditor consortium under the new government?
The CGI has served a very useful purpose, but needs to change as Indonesia is changing. The needs of a newly confident, post- crisis Indonesia are different to those of the crisis period. We strongly support a transition towards full government leadership of the CGI (Consultative Group on Indonesia), and believe that there are exciting options for turning it into a genuine development forum where decision-makers on both the international and Indonesian sides can help solve real problems.