2015-02-05



http://www.eastasiaforum.org Economics, Politics and Public Policy in East Asia and the Pacific Thu, 05 Feb 2015 11:00:21 +0000 en-US hourly 1 http://www.eastasiaforum.org/2015/02/02/banking-on-oil-offers-indonesia-prospects-of-a-new-bonanza/ http://www.eastasiaforum.org/2015/02/02/banking-on-oil-offers-indonesia-prospects-of-a-new-bonanza/#comments Mon, 02 Feb 2015 11:00:23 +0000

http://www.eastasiaforum.org/?p=45076

Author: A. Tony Prasetiantono, Universitas Gadjah Mada

Indonesia’s ‘oil bonanza’ is now over. It ceased to be a net oil exporter and became a net importer in 2004. Indonesia currently produces only slightly above 800,000 barrels per day while the consumption level is about 1.4 million barrels per day. This leaves about 600,000 barrels for net import. In the golden era of oil in the 1980s and 1990s, Indonesia produced 1.6 billion barrels per day while total consumption was about 800,000 barrels per day.



Indonesia suspended its membership of the Organization of Petroleum Exporting Countries (OPEC) in 2009 due to this dramatic shift in its oil trading status. Because of the widening gap between supply and demand it will be difficult for Indonesia to return to OPEC in the future.

From the supply side, Indonesia’s total oil reserves are now only four billion barrels. This accounts for approximately 1.2 per cent of the world’s oil production. Indonesia is ranked 21st among the world’s oil producers, with reserves far below the giants Iraq (140 billion barrels), Iran (160), Saudi Arabia (270) and, the largest, Venezuela (300). Indonesian reserves are still below Qatar (25), Algeria (12), Angola (9) and Ecuador (8).

But the oil business in Indonesia is still attractive. Net income (profit after tax) of Pertamina, the state- owned oil company, was US$3 billion in 2013. This was far above the most profitable bank in the country—Bank Rakyat Indonesia (BRI) — with US$2 billion. As a benchmark, the biggest private holding company, Astra International, also booked a net income record, of almost US$2 billion, in 2013. Astra International consists of 178 subsidiaries in areas that include the automotive sector, finance and banking, agribusiness, mining, infrastructure, heavy equipment, logistics, and the like.

Pertamina is the second-largest crude oil producer in Indonesia after Chevron Pacific Indonesia, which is a subsidiary of America’s Chevron. In 2013, Pertamina — with revenues totalling US$70.9 billion — ranked number 122 in the Fortune Global 500 list of companies. It currently produces 196,000 barrels of oil per day compared with 189,000 in the previous year, and accounts for about 20 per cent of total Indonesian production. Other significant producers are Chevron (about 47 per cent), Total (10), Conoco Phillips (7), CNOOC (4), Chevron Indonesia (4), PHE-ONWJ (4) and Mobil Cepu (3).

In brief, the oil business is still big business in Indonesia — especially in light of declining prices for commodities such as coal and palm oil over the last few years. Unfortunately the financial sector, particularly the banking industry, has had only a minor role in the oil sector to date. There are two reasons for this. First, most oil operators in Indonesia are foreign companies. Only Pertamina and a relatively small oil and gas private company named Medco, owned by Arifin Panigoro and family, are domestic players. Other oil and gas companies are from the US, UK and China.

Second, most Indonesian banks have insufficient experience and exposure in oil sector lending. Indonesia has 119 commercial banks, many fewer than the 250 that operated in the pre-Asian financial crisis period (before 1997). Lending in the banking industry falls into four categories: corporate lending (lending for big companies, which is usually above US$20 million), commercial lending (usually above US$10 million), consumer lending (for consumption purposes), and the smallest lending category for micro, small and medium enterprises.

Typically, most banks are involved in consumer, commercial, and small- and medium-enterprise lending. They enjoy a huge margin of interest and high profitability. Indonesia is well known as a ‘heaven’ in the region for net interest margin (NIM) and profitability. Providing lending for small and medium enterprises can attract an interest rate of more than 20 per cent, compared with less than 10 per cent for corporate lending.

Only two state banks have experience in corporate lending: Bank Mandiri and Bank Negara Indonesia (BNI). Since 2013 both state banks have been involved in many transactions in the oil business. BNI, for instance, has been appointed as a trustee and paying agent to handle the sales contracts of liquefied natural gas (LNG) and liquefied petroleum gas (LPG) in Mahakam Block, East Kalimantan. Under this appointment, all payments generated from sales should be paid to the seller’s account in BNI. The estimated gas sale value is approximately US$18 billion for a period of 10 years. As a result, BNI becomes the first state bank entering the trustee and paying agent business, whereas in the past all transactions were handled by foreign banks.

The oil sector is a huge business and provides a lot of opportunities for national banks, particularly state banks such as Bank Mandiri, BRI and BNI. In 2013, oil and gas industry transactions reached a total of US$57.8 billion. Major business included oil transactions (US$31.3 billion), pipeline gas (US$12.4 billion), and both LNG and LPG (US$14.1 billion).

These data show that the oil industry is not considered a ‘sunset industry’ for the banking sector. Increased demand and the increased oil price are two factors that indicate that the oil business will continue to be attractive and Indonesian banks should have greater involvement its business. From the macroeconomic point of view, greater volumes of foreign currencies handled by local banks will help stabilise the rupiah. From the banking industry point of view, greater exposure will help state banks be more competitive regionally.

Indonesian commercial banks, particularly state banks, need to strengthen capital (to mitigate the risks in corporate lending) and elevate their capacity to handle ‘sophisticated’ business. These are two key factors if Indonesia’s banks are to increase their role in the very dynamic oil business.

Tony Prasetiantono is Director of the Center for Economic and Public Policy Studies, Universitas Gadjah Mada, Indonesia, and Independent Commissioner, Permata Bank, Jakarta, Indonesia.

This article appeared in the most recent edition of the East Asia Forum Quarterly, ‘The state and economic enterprise’.

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http://www.eastasiaforum.org/2015/02/02/banking-on-oil-offers-indonesia-prospects-of-a-new-bonanza/feed/ 0 http://www.eastasiaforum.org/2015/01/12/the-hole-in-the-asian-doughnut/ http://www.eastasiaforum.org/2015/01/12/the-hole-in-the-asian-doughnut/#comments Mon, 12 Jan 2015 01:00:58 +0000

http://www.eastasiaforum.org/?p=44860

Author: Peter Drysdale, East Asia Forum

The mutuality of Asia’s economic interests centring on deepening economic integration is a potential foundation for building an Asian economic community that encompasses the ASEAN 10 plus their six neighbours, Japan, South Korea, China, India, Australia and New Zealand.



The group, with close to two-fifths of world output, constitutes a growing slice of the global economy — and is a major force of economic dynamism, with China’s growth expected to nudge 7 per cent again this year, India’s on the rise again and Indonesia’s stabilising at least, and possibly on the up once more. The ambitions for stronger economic cooperation are defined within ASEAN by the goal of building the ASEAN Economic Community (AEC) and, by the broader group, in the negotiation of a Regional Comprehensive Economic Partnership. This year, 2015, is a key year in both endeavours.

Yet, there’s a hole in the Asian doughnut, a zone of less than fulsome cooperation over rights to the fisheries, resources and territories across the seas that connect Asia’s growing economic powers. There are the territorial issues between Japan and China (as well as Taiwan) in the East China Sea and Japan and South Korea in the Sea of Japan (or the East Sea). And there are the issues between China and five of the ASEAN partners in the South China Sea. Resolving maritime issues is bound up with progress on building an Asia Community.

Indonesia’s new president, Joko Widodo (Jokowi), has declared a new maritime priority for the Indonesian state. The largest archipelagic state in the world, Indonesia encompasses huge marine resources. The country has a total land area of 1.9 million square kilometres and an additional 3.2 million square kilometres of ocean lie within its borders. Unlike its ASEAN partners, among them Vietnam, the Philippines, Malaysia and Brunei, Indonesia ostensibly has no direct maritime disputes with China, although Luhut Binsar Panjaitan, Jokowi’s newly appointed chief of staff, was recently keen to make clear that Natuna, an area supposedly rich in gas reserves and on the edge of China’s famous nine-dash line, was clearly Indonesian territory.

Last month saw the Jokowi government assert Indonesia’s new maritime priorities in a somewhat dramatic way — blowing up three Vietnamese boats found illegally fishing in the Natuna Sea. Carefully filmed and given wide publicity, this was meant to be a lesson, not specifically to the Vietnamese but to all who daily trespass in Indonesian waters. The Australian navy should be warned that its less than perfect navigational skills could be on notice! According to President Jokowi some 5,400 foreign boats intrude into Indonesian waters, ‘over 90 per cent of them illegally’.

Indonesia’s maritime priorities are an overdue and legitimate focus of national policy. Its seaways have too long been a barrier to, rather than a facilitator of, national integration. Its role as a maritime Asian nation needs to be strengthened as an enhancement to regional stability. Its neighbours, including Australia, Singapore, Malaysia as well as China and Japan have a constructive interest in this development.

But the Indonesian domestic political theatre around getting tough on illegal fishing in December and delivering ‘shock therapy’ (as Jokowi described it) to the Vietnamese offenders play somewhat awkwardly into the bigger regional drama surrounding the rights of access to the neighbouring South China Seas.

There is every sign that the Jokowi administration views the China relationship very positively and would not deliberately wish to knock it off course. He returned home after the APEC summit in China last November with very positive messages about its future. China is Indonesia’s second largest trading partner, and the bilateral relationship was upgraded into a comprehensive strategic partnership when President Xi visited Indonesia just over a year ago. Indonesia has joined the Asian Infrastructure Investment Bank (and offered to host it) and Jokowi in recent times noted the close alignment between Indonesia’s and China’s overarching maritime concepts — Indonesia’s Global Maritime Fulcrum and China’s Maritime Silk Road.

In this week’s lead essay, Sourabh Gupta reminds us that, on an extremely well-informed reading of the issue, China’s controversial nine-dash line in the South China Sea might be seen as an indication of ‘the geographic limit of China’s historically formed and accepted traditional fishing rights in the semi-enclosed waters of the South China Sea, which are exercised today on a non-exclusive basis’. He argues persuasively that a US State Department study incorrectly suggests that ‘China, in acceding to UNCLOS’s exclusive economic zone (EEZ) regime and its exclusivity-based prerogatives, effectively conceded all prior usage-based claims that it may have held in foreign EEZs, even in semi-enclosed seas’.

While the onus, Gupta maintains, is on China to suggest the basis on which the nine-dash line might be interpreted to be in compliance with international law, ‘so long as China limits these rights to traditional fishing activities — not resource development or marine scientific research — and exercises them on a non-exclusive basis, the nine-dash line as a perimeter of China’s exercise and enforcement of such historic rights is not inconsistent with international law…(and) can remain a permanent feature of the South China Sea’s political and maritime landscape’.

Indonesia has played an extremely constructive role in ASEAN-China diplomacy over the vexed territorial issues and access rights in the South China Sea. It might not wish to compromise its role and broader regional interests in building an effective Asian Community there by blowing up a few Chinese fishing boats, even if they have strayed into what are unequivocally Indonesian waters.

Peter Drysdale is Editor of the East Asia Forum.

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http://www.eastasiaforum.org/2015/01/12/the-hole-in-the-asian-doughnut/feed/ 2 http://www.eastasiaforum.org/2014/12/22/hopes-on-the-economic-upside-in-indonesia/ http://www.eastasiaforum.org/2014/12/22/hopes-on-the-economic-upside-in-indonesia/#comments Mon, 22 Dec 2014 01:00:57 +0000

http://www.eastasiaforum.org/?p=44642

Author: Peter Drysdale, East Asia Forum

We begin the 2014 ‘year in review’ series, looking at developments in Asia over the year past and the prospects for the year ahead, with a look at how Indonesia is travelling and the prospects for its economy.

The contest that saw Joko Widodo (Jokowi) elected as Indonesia’s president was a tough test for democratic transition in Indonesia. His election saw a remarkable campaign, and certainly one with an edge to it — ‘one of the dirtiest election campaigns in Indonesian history‘. Yet, in the end, the President’s inauguration was a calm and dignified transition of power that bodes well for the country’s economic as well as its political future. Jokowi’s presidency offers Indonesia the promise that politics is not the preserve of the elite — those with established power and privilege — to hold and to handle as if by some self-appointed divine right — and that there will be a triumph of technocracy over special interests in running the economy. And, despite the worries about Jokowi’s ‘too-much-more-of-the-same’ cabinet, that remains a promise that is of truly historic significance.

There’s no doubt that whether Jokowi succeeds in delivering on the promise of his presidency will depend greatly on how he is able to manage Indonesia’s economy. On that, Jokowi has been dealt a very tough job. Growth is slowing, business costs are on the rise, and the list of policy weaknesses and economic vulnerabilities is long. The Indonesian economy had been doing quite well until the past year or so, with an average growth in real terms above 6 per cent annually. But the growth rate slipped below 6 per cent this year and the World Bank and the IMF both currently forecast that it’s unlikely to recapture its lustre next year.

Jokowi has taken up the challenge, saying last July that he aims to push the growth rate above 7 per cent: a rate that would double Indonesia’s income over the coming decade.

Indeed, a revival of confidence appears to be in the making if the government can continue to convince investors that it has a constructive reform path. There are positive signals of this. Two competing forces — significant challenges on the ground versus the success of government in reviving investor confidence — will shape the Indonesian economy in 2015 and beyond.

One opportunity for Indonesia lies in the growth of its workforce and the youth of its population. This means that it is not only possible but necessary to create jobs for millions joining the workforce each year. The slowdown in growth has come at the tail end of the resource boom, although the effect of end of the boom was not felt immediately because of the easy money in global capital markets from quantitative easing in the United States. To keep inflation under control and avoid a balance of payments crisis, fiscal and monetary authorities have been engineering a slowdown and demand-side consolidation. A policy-induced slowdown with a growth rate under 6 per cent in an economy at Indonesia’s level of development — and with its young and growing population — means that there are major structural problems in the economy.

Dealing with these structural problems and lifting growth to its true potential between 7 and 10 per cent is the big challenge for the Jokowi presidency.

As David Nellor observes in our lead this week, ‘the government lacks a parliamentary majority and, at least to date, the opposition has shown little indication that it will support the government’s program’. But there are moves by the government to centralise policy making and make it more evidence-based and that will help avoid the interest group capture of policy that characterised the last years of the presidency of Susilo Bambang Yudhoyono. There are, nonetheless, still very strong interests opposing trade and investment reforms that are essential for the emergence of a more competitive Indonesian economy.

‘Reviving investor confidence by implementing a proactive reform agenda is thus essential. The drivers of the economic slowdown remain in place and some needed policy actions may well intensify the slowdown. Reducing subsidies hits private demand and has resulted in electricity and diesel prices rising by nearly 40 per cent in 2014. A further challenge for business activity is a cumulative increase in minimum wages of over 50 per cent in the last couple of years’.

The government can do a great deal whether or not it has parliamentary support, as Nellor points out. The increase in fuel prices prompted by the huge budget cost of subsidies is the highest profile action. Fortunately international oil prices are coming down so that will ease the burden of higher fuel prices on consumers a little. Cutting fuel subsidies, at the same time, will ease the budget burden for a few years, providing some fiscal room to move.

Giving priority to the investment climate is a strategic move that can deliver relief on the cost of doing business without needing parliamentary involvement.

President Widodo brought a strong message back from APEC in November about the role of a coherent vision in planning infrastructure for the long term and the need to ‘focus on getting infrastructure and factories on the ground rather than worrying if that resulted from foreign investment’. It will take time to get projects on the ground. But as Nellor concludes, if the government can do that consistently with the macroeconomic constraints, there is cause for optimism on the outlook for Indonesian growth, despite the magnitude of the challenges facing the new government.

And on behalf of Shiro and my dedicated colleagues at East Asia Forum, may we extend our warmest good wishes to you all over the coming Holiday and New Year Season and thank you for your support and encouragement throughout the past year.

Peter Drysdale is Editor of the East Asia Forum.

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http://www.eastasiaforum.org/2014/12/22/hopes-on-the-economic-upside-in-indonesia/feed/ 0 http://www.eastasiaforum.org/2014/12/21/optimism-on-the-rise-in-indonesia/ http://www.eastasiaforum.org/2014/12/21/optimism-on-the-rise-in-indonesia/#comments Sun, 21 Dec 2014 11:00:08 +0000

http://www.eastasiaforum.org/?p=44634

Author: David Nellor, Jakarta

A greater sense of optimism prevails in Indonesia about the economy in 2015 than a year ago, even though the reality is now more challenging. Growth is slowing, business costs are on the rise, and key economic vulnerabilities persist. In simple terms, the new government of President Joko Widodo (Jokowi) has been dealt a difficult hand of cards. At the same time, a revival of investor confidence is in prospect if the government can pursue a constructive reform path and there are positive signals in this regard. These competing factors — significant challenges on the ground versus the success of government in reviving investor confidence — will shape the Indonesian economy in 2015.

The economic reality on the ground is challenging. Prospects of capital flow volatility and flagging demand from China paint a picture of a difficult 2015 external environment, albeit offset in part by lower global oil prices. The external current account deficit sits stubbornly at around 3 per cent of GDP despite the growth slowdown and means continued reliance on portfolio-related flows. The rate of credit growth is trending down, falling by a half since end 2014, and financial stability is closely watched.

The environment for policy reform has its own challenges. The government lacks a parliamentary majority and, at least to date, the opposition has shown little indication that it will support the government’s program. Welcome moves by the government to centralise policy making and make it more evidence-based will help avoid the interest group capture of policy that has characterised recent years. Yet there remain strong interests opposing trade and investment reforms that are essential for the emergence of a more competitive Indonesian economy.

Reviving investor confidence by implementing a constructive reform agenda is thus essential. The drivers of the economic slowdown remain in place and some needed policy actions may well intensify the slowdown. Reducing subsidies hits private demand and has resulted in electricity and diesel prices rising by nearly 40 per cent in 2014. A further challenge for business activity is a cumulative increase in minimum wages of over 50 per cent in the last few years. Labour market issues more broadly are a major policy challenge but one that has not yet featured in the government’s agenda.

The antidote to a growth slowdown is the timely rebalancing of the economy toward more productive investment. This means higher public and foreign investment: without the latter, risks to the external position will mount as growth picks up. Investment decisions and prospects for a quick turnaround in growth will thus be driven by the strength of reform actions in shining a bright light at the end of the challenging reform tunnel.

The government is off to a good start and can do much irrespective of parliamentary support. The increase in fuel prices prompted by the huge budget cost of subsidies is the highest profile action. This move provides a two or three year window for fiscal reform that needs to find a bridge between rapidly rising spending and stagnating revenues. The government’s priority on the investment climate is a sensible strategic move. This has the potential to address the cost of doing business in a profound way while not requiring parliamentary involvement. Actions on licensing and permit issue along with clarity and transparency (even if not abolition) on the plethora of non-tariff measures and regulations that were introduced in recent years would represent significant progress.

The government’s narrative of high quality and inclusive growth links closely to the essential structural reform agenda. We will not see major new infrastructure on the ground for some time but a meaningful start on key energy, transport, and port investments that can support a larger manufacturing sector would send a strong signal. Urban infrastructure is one of the more potent vehicles to improve the well-being of the urban poor. Essential tax reform will need to be tackled with base broadening in mind rather than a quick fix if it is to secure a brighter investment climate as well as promote social justice and equity.

The government’s policy narrative is still taking shape but the signs are encouraging. On his return from APEC, President Widodo said he took three lessons from his visit to China: the role of a unified vision, to plan infrastructure for the long term, and to focus on getting infrastructure and factories on the ground rather than worrying if that resulted from foreign investment. If the administration adopts this modus operandi to shape policy and frames it in a consistent macroeconomic framework then indeed the prospects are bright despite the magnitude of the challenges facing the new government.

Dr David Nellor is a consultant based in Jakarta.

This article is part of an EAF special feature series on 2014 in review and the year ahead.

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http://www.eastasiaforum.org/2014/12/21/optimism-on-the-rise-in-indonesia/feed/ 0 http://www.eastasiaforum.org/2014/12/10/time-to-rethink-economic-policies-in-indonesia/ http://www.eastasiaforum.org/2014/12/10/time-to-rethink-economic-policies-in-indonesia/#comments Tue, 09 Dec 2014 23:17:18 +0000

http://www.eastasiaforum.org/?p=44513

Author: Ross McLeod, ANU

Economic performance in post-Suharto Indonesia has been inferior to that achieved during the previous three decades, with economic growth slower and income inequality increasing. With the recent election of a new president, now is a good time to focus on improving the quality of economic policymaking.

To begin, how should Indonesia make use of its rich natural resources? Broadly speaking, these can be used either to finance consumption or to create productive assets that will generate future income. Former president Suharto chose the latter option, using resource revenues to build roads, schools, markets, health facilities, irrigation networks and drinking water supply. Indonesia benefited considerably from such investments in terms of higher incomes and reduced poverty.

Later presidents have favoured the option of selling the family silver. All of the Susilo Bambang Yudhoyono (SBY) government’s resource revenue was frittered away as unnecessary subsidies for energy consumption, reducing Indonesia’s growth potential and contributing to increases in income inequality — since these subsidies flowed overwhelmingly to the rich and middle class. Incoming president Joko Widodo has already earned plaudits for reducing the fuel subsidy, but SBY did exactly the same thing soon after coming to office. Neither removed the subsidy altogether, nor took the opportunity to link domestic energy prices to the world oil price. If the latter now increases as it did under SBY, the subsidy cost will increase commensurately, and Indonesia will be back at square one.

Another question facing the administration is: what is the appropriate policy for the manufacturing sector? The share of manufacturing in total output peaked in about 2001 and has declined subsequently, causing considerable angst. Yet this trend reflects Indonesia’s past success in raising average incomes. As populations become wealthier they demand more services (education, health care, banking, entertainment, and the like) relative to manufactured goods. Most services are not imported so more must be produced, which means withdrawing labour and capital from manufacturing. Globally, manufacturing typically peaks at 25–30 per cent of total output, declining thereafter to 10–15 per cent or less. Even in the manufacturing powerhouse of China manufacturing has been declining since the mid-1990s.

Attempting to reverse this pattern is not in Indonesia’s best interests. One such policy is to mandate the domestic processing of metal ores rather than exporting them. The rationale for this is that Indonesia supposedly has been missing out on the potential for ‘value adding’: that is, converting metal ore to the much more valuable metal prior to export.

It is always possible to increase value added in any activity by making further processing artificially more profitable — in this case by removing the option of exporting unprocessed ore. The effect is to shift labour and capital away from the rest of the economy into ore refining, so the increased value added (that is, earnings of labour and capital) in manufacturing is offset by reduced value added elsewhere. Domestic processing in Indonesia is more costly than processing in other countries, so this policy actually reduces the net gain to Indonesia from the exploitation of its natural resources.

Finally there is the question of spending on infrastructure. SBY put considerable emphasis on public private partnerships (PPPs) at the beginning of his term in office, arguing that the government itself could not afford the level of spending required. But two international infrastructure summits intended to secure private sector participation turned out to be wishful thinking.

The prerequisite for private sector involvement is simply that projected returns are commensurate with the risks involved. Evidently the combination of return and risk in Indonesia is considered unacceptable. This is explained by the government’s insistence on controlling infrastructure user charges, and the fear on the part of potential partners and their bankers that regulated charges will be subject to the vagaries of politics. If this fear can be overcome, the private sector will quickly come on board.

The SBY administration often excused its poor performance in relation to building new infrastructure by emphasising the difficulty of taking over the land needed for this purpose, but this difficulty is self-imposed. The government has an unambiguous constitutional power to compulsorily acquire land that is needed in the best interests of the public, subject to fair compensation for the existing owners. Successive governments have adopted a policy where the amount of compensation has to be accepted by the owners before the land changes hands, but there is no reason why this should be so. Indeed, common sense demands that the land should be acquired immediately the need for it is demonstrated, with compensation being paid at that time. If landowners dispute that the compensation is fair, they should have the right to have the amount reviewed by the courts, but this process need not delay government acquisition of the land.

Ross McLeod is Adjunct Associate Professor at the Indonesia Project, The Australian National University. He was Editor of the Bulletin of Indonesian Economic Studies from 1998–2011. This is an edited version of his presentation at the Indonesia Study Group seminar on 26 November 2014.

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http://www.eastasiaforum.org/2014/12/10/time-to-rethink-economic-policies-in-indonesia/feed/ 0 http://www.eastasiaforum.org/2014/11/04/good-cop-bad-cop-can-responsible-opposition-save-indonesia-from-itself/ http://www.eastasiaforum.org/2014/11/04/good-cop-bad-cop-can-responsible-opposition-save-indonesia-from-itself/#comments Mon, 03 Nov 2014 23:10:27 +0000

http://www.eastasiaforum.org/?p=44094

Author: Yohanes Sulaiman, Indonesian National Defense University

There is good news and bad news about the recent string of victories of the ‘Red and White’ coalition in the Indonesian parliament. The good news is that unlike previous Indonesian presidents, President Joko Widodo — popularly known as Jokowi — will have to face a critical and probably hostile parliament. This is also the bad news.

It sounds counterintuitive, but the fact that Jokowi will most likely have to face a hostile parliament filled with a real opposing coalition is actually a good development for Indonesian politics and democracy because it will foster more responsible political behaviour.

There has been no real opposition in the parliament in recent years as broad ruling coalitions were built which took in almost all the significant political parties in parliament. During the second term of Susilo Bambang Yudhoyono’s presidency, the only parties that did not join the ruling coalition were PDI-P, Hanura and Gerindra, together holding only 24.81 per cent of seats in the parliament.

Yet when Yudhoyono tried to increase the fuel price back in 2012, two political parties in the ruling coalition that adamantly opposed the fuel price increase — the Prosperity and Justice Party and Golkar — switched to the opposition, causing havoc in the government.

Not surprisingly, this kind of arrangement fosters irresponsible political behaviour, where political parties can have their cake and eat it too: enjoying all the perks and benefits of being in a governing coalition, but at the same time, escaping the fallout from unpopular yet necessary policies. This made the government hesitant to implement such policies, including cutting fuel subsidies, since nobody could be sure whether the government had enough votes in parliament to pass such legislation — unless the government was willing to grant significant concessions.

Part of the blame for this dysfunctional system should be put squarely on Yudhoyono’s shoulders. As president he was unwilling to act decisively to expel these parties, and the very idea of principled opposition in Indonesia seemed alien to the government — parties would rather behave opportunistically than truly throw their support behind either the ruling coalition or opposition.

In this sense, the Red and White coalition is actually good news for Indonesian democracy. If the coalition acts decisively, they could force the Jokowi administration to rule competently and thus develop a culture of responsible democracy in Indonesia. Policies would be debated and dissected, rather than rushed through the parliament — an abuse of process which can lead to many bad laws, such as the notorious Law on Information and Electronic Transaction which was often used to criminalise critics.

But if the opposition only oppose Jokowi’s policies for the sake of opposition, then Jokowi could find his proposed laws blocked needlessly. Such unprincipled opposition would make it much more difficult for Jokowi to implement much needed reforms, such as cutting red tape, cleaning up corruption and waste, and getting rid of incompetent bureaucrats. It would be disastrous for Indonesian democracy, as the people, sick of the political gridlock, would start to question whether democracy was really beneficial.

The law abolishing direct local elections was a case in point. The goal was simple: to allow the opposition bloc to solidify their gains by ensuring that only people loyal to their bloc are nominated. The law, in essence, strengthens the power of political parties vis-à-vis regional executives, making these executives responsible only to the political parties that nominated them. Any party defecting from the coalition would see its nominees blocked by members of its former coalition.

On 17 October, there was a glimmer of hope as suddenly, after a visit from Jokowi, Prabowo Subianto, the de facto leader of Red and White coalition, signalled his desire to work with Jokowi to maintain a stable government. There is hope that it might now be possible for Indonesia to have a responsible opposition in parliament.

Hopefully it will not have been a false dawn.

Yohanes Sulaiman is a writer, analyst and lecturer at the Indonesian National Defense University.

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http://www.eastasiaforum.org/2014/11/04/good-cop-bad-cop-can-responsible-opposition-save-indonesia-from-itself/feed/ 6 http://www.eastasiaforum.org/2014/11/02/jokowis-cabinet-a-mixed-bag/ http://www.eastasiaforum.org/2014/11/02/jokowis-cabinet-a-mixed-bag/#comments Sat, 01 Nov 2014 23:00:46 +0000

http://www.eastasiaforum.org/?p=44076

Authors: Hal Hill and Budy Resosudarmo, ANU

Indonesia’s recently inaugurated president, Joko Widodo (Jokowi), announced his cabinet this week. Jokowi’s policy platform espoused broad philosophies but was short on detail. His cabinet appointments provide the clearest indication to date of his policies and priorities in what in all likelihood will be a decade in power.

The appointments will cement his political alliances and satisfy his powerful backer, former president Megawati. But it will disappoint his reformist supporters who, attracted to his earlier commitment to appoint a ‘cabinet of professionals’, were looking for signs of an energetic administration prepared to tackle the country’s many daunting development challenges. It is a cabinet of managers, business people, and — perhaps inevitably — a surprising number of political appointees.

First, the good news.

The cabinet scores relatively well on personal integrity. Jokowi cleverly referred his draft list to the national anti-corruption commission (KPK), and eight names were dropped. Jokowi was relieved that the KPK in effect blacklisted several unattractive political appointees from the draft.

Second, like the president himself, the cabinet is a decisive break with the past. It is younger, and has more women than any previous Indonesian cabinet. It is essentially a secular cabinet, in this the country with the largest number of adherents to Islam. There are also excellent appointments in some key portfolios, notably Finance, Foreign Affairs, and Basic Education and Culture.

At least 14 of the 34-member cabinet are clear political appointments. Starting with Megawati’s daughter, Puan, the majority of these people — though not all — owe their position more to their party affiliation than their talent. Another eight ministers come with senior business experience, often in Indonesia’s sprawling state enterprise sector. The ‘technocratic’ appointments, of able non-party professionals, that have been a feature of all Indonesian cabinets since the mid 1960s are greatly reduced.

This managerial approach may be no bad thing. It is consistent with Jokowi’s approach to local government, and also that of his vice president, Jusuf Kalla. But it may well signal a more inward-looking Indonesia, consistent with the strong nationalist rhetoric that featured in the presidential and parliamentary campaigns.

In the economics team, the able new Finance Minister, Professor Bambang Brodjonegoro, a deputy minister in the previous government, will have his work cut out for him, especially given looming budget problems. His coordinating economics minister can be expected to focus more on housekeeping than reform. The trade minister is an accomplished businessman, yet firmly in the nationalist cum protectionist camp, just as Indonesia is set to join the ‘seamless Southeast Asian economy’ promised by the ASEAN Economic Community. The state enterprises minister, a Megawati loyalist and trade minister in her earlier administration, cannot be expected to undertake the much-needed reform this sector urgently requires. The agriculture, industry, labour and planning ministers are relatively unknown figures, and are likely to keep a low profile.

Notwithstanding these qualifications, the new cabinet needs time to settle in. This has been a heady year for Indonesia. A political outsider with limited financial means, but a demonstrated record of integrity and effective governance at the local level, was elected peacefully and convincingly. In his earlier life as a mayor and a governor, Jokowi has exhibited a remarkable ability to get things done. But now the euphoria generated during the election campaigns has had to meet the political reality of constructing a ‘rainbow cabinet’, representing all the disparate elements in the Jokowi camp.

Indonesia is an immensely complicated country to govern. Jokowi has attempted to induce some parties from the fiercely obstructionist ‘red and white’ opposition coalition to join his governing coalition. But he still does not possess a majority in the Parliament. In any case, national governments in Indonesia have limited room to manoeuvre. They have to deal with more than 500 increasingly assertive sub-national governments. A good deal of the national budget is effectively pre-committed through various expenditure mandates. And Jakarta has to rely on a sluggish, unreformed bureaucracy to implement its policies.

The next major test for Jokowi will be how he delivers on his 100-day agenda, in pushing through budgetary reform, getting infrastructure moving again, and simplifying the complex regulatory regime. This week’s cabinet appointments suggest that we should not expect as many of the ‘quick wins’ that his reformist supporters were hoping for.

Hal Hill is Professor of Economics at the Australian National University. Budy Resosudarmo is Head of the Indonesia Project at the Australian National University.

A version of the article first appeared here in the Australian Financial Review.

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http://www.eastasiaforum.org/2014/11/02/jokowis-cabinet-a-mixed-bag/feed/ 1 http://www.eastasiaforum.org/2014/11/01/close-enough-not-good-enough-for-jokowis-cabinet-picks/ http://www.eastasiaforum.org/2014/11/01/close-enough-not-good-enough-for-jokowis-cabinet-picks/#comments Sat, 01 Nov 2014 11:00:23 +0000

http://www.eastasiaforum.org/?p=44065

Author: Edward Aspinall, ANU

Indonesia’s new president, Joko Widodo (Jokowi) promised to bring a new spirit of reform to Indonesia. Indeed, he has offered nothing less than a ‘mental revolution’. In his first real test, the formation of cabinet, Jokowi seems to have gone for realpolitik over reform.

What is striking about the new cabinet he announced on 26 October is how familiar it looks. It’s a cabinet with the standard mixture we have come to expect in democratic Indonesia: a few decent reformers are located in technocratic posts, but many party hacks also get seats. More appointments are surprisingly bad than are surprisingly good.

Indonesian cabinets always contain a mixture of intellectuals, business leaders, and technocrats, alongside party appointees. This usually makes it possible for reformers outside the government to take comfort from the presence of a few individuals with records of integrity and professional skill in the cabinet. Things are much the same this year.

The new minister for culture and elementary and secondary education, for example, is the highly respected Anies Baswedan — rector of Jakarta’s Paramadina University — and a man with many visionary ideas about the future of education in Indonesia. Pratikno, the rector of Gadjah Mada University and new state secretary, is also highly regarded. Some of the technocratic and economic ministers are respected in their fields. The new foreign affairs minister, Retno Marsudi, is the first woman in the post and a respected diplomat (as is almost always the case). Nila Moeloek, the new health minister, is a professor of medicine at the University of Indonesia and a strong advocate for public health (she’s also one of eight women in the cabinet — a new record).

No doubt some of these professionals will turn out to be very competent and productive ministers. But it is striking that so few of them (Anies Baswedan is the obvious exception) have established independent reputations as reformers, even though many such people were included in the many lists of potential cabinet members that circulated in the lead up to the announcement.

What is really striking about the new cabinet is how bad some of the appointments are. Special mention should be made of the new Defence Minister, Ryamizard Ryacudu. It has been a 15-year tradition to appoint civilians to this post, as a symbol of civilian supremacy in the new Indonesia. This appointment breaks that tradition. It also appals members of Indonesia’s human rights community.

As Army Chief of Staff back in the mid-2000s, Ryacudu infamously praised soldiers who were convicted of murdering a famous Papuan independence campaigner as ‘heroes’. He also actively tried to sabotage the Aceh peace process and intensify military operations there in the aftermath of the December 2004 tsunami. He is the most conservative former military officer to have been included in a cabinet since 1999.

Another appointment ringing alarm bells in Indonesia is new state enterprises minister, Rini Soewandi. Like Ryacudu, Soewandi is a confidante of Megawati Soekarnoputri and owes her cabinet position to this connection. She was a trade and industry minister under Megawati, and was last year questioned by the Corruption Eradication Commission (KPK) in regard to her alleged role in the massive Bank Indonesia (BI) liquidity assistance scandal. It is highly suspicious that a patronage politician like this should be appointed to head the State Enterprises Ministry, one of the ‘wettest’ in Indonesia and long a cash cow for the party that controlled it.

These appointments show that Jokowi has had to make compromises with the political parties who backed his presidential campaign and whose support he will need in parliament. Again, there is nothing unusual in this: Yudhoyono had six parties represented in his last cabinet; Jokowi has five. But it was believed that Jokowi would intervene to ensure that the party appointees were highly reputable and effective. He called on the KPK to screen candidates and weed out those suspected of corruption: the process led to some candidates proposed by the parties being abandoned. But there is little evidence it led to an overall improvement of the quality of party appointees.

Jokowi, despite much speculation, did not appoint any of the PDI-P’s younger and more dynamic reformers. Instead his cabinet includes figures like Tjahjo Kumolo, the party’s unscrupulous general secretary and all-round fixer appointed to the politically crucial position of Interior Minister. (Kumolo is another new minister with the dubious distinction of having been questioned by the KPK). Puan Maharani, Megawati’s daughter and one of the most reviled figures in contemporary Indonesia, gets a senior coordinating ministerial post.

The new coordinating minister for economic affairs, Sofyan Djalil, was an undistinguished minister for state enterprises during Yudhoyono’s first term and is in the new cabinet because he is close to Vice President Jusuf Kalla. And so on.

It was always clear that Jokowi would have to make compromises with the political parties that backed him and the old forces of patronage that underpin them. In that regard, there is little that is surprising in the composition of the new cabinet. But it is surprising just how far Jokowi has gone in making these compromises.

This is a cabinet that continues rather than breaks with Indonesia’s emerging political traditions. It is possible that some of the ministers will emerge as strong reformers. But at first glance, this cabinet is far from being the fresh start that Jokowi promised.

Edward Aspinall is a professor of politics in the Department of Political and Social Change in The Australian National University’s School of International, Political and Strategic Studies, College of Asia and the Pacific.

This article first appeared here in the New Mandala.

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http://www.eastasiaforum.org/2014/11/01/close-enough-not-good-enough-for-jokowis-cabinet-picks/feed/ 2 http://www.eastasiaforum.org/2014/10/21/balancing-the-short-and-long-term-in-indonesia-fuel-subsidy-debate/ http://www.eastasiaforum.org/2014/10/21/balancing-the-short-and-long-term-in-indonesia-fuel-subsidy-debate/#comments Tue, 21 Oct 2014 10:46:21 +0000

http://www.eastasiaforum.org/?p=43921

Author: Keoni Indrabayu Marzuki, RSIS

Despite having won the president and vice-president posts respectively, Joko Widodo and Jusuf Kalla will possess little control, if at all, on the formulation of the next Indonesian budget for fiscal year 2015–16. One particular issue that concerns the new administration is the large portion of funds for energy subsidies, particularly fuel subsidies.

To ensure his administration would have more fiscal space to fund new government projects and minimise the budget deficit, President-elect Joko Widodo (Jokowi) asked outgoing president Susilo Bambang Yudhoyono to increase the price of subsidised fuel as his final policy gesture before stepping down. President Yudhoyono turned down the request on the grounds that increasing the price of subsidised fuel would increase the economic burden on the Indonesian people.

Amending the fuel subsidy budget would be an important step towards fuel subsidy reform. The government allocated 300 trillion rupiah (about US$25 billion) to energy subsidies in 2014. Around 80 per cent of the energy subsidy fund, or about 250 trillion rupiah, is spent on fuel subsidies alone. In his proposed 2015-16 budget, Yudhoyono allocated 290 trillion rupiah for fuel subsidies.

The new budget also forecasts a relatively large fiscal deficit: 2.32 per cent of GDP. Finance minister Chatib Basri estimated that by increasing the price of fuel and thereby reducing the subsidies, the government could reduce the deficit ratio to 1.32 per cent.

External influence such as the end of quantitative easing by the US Federal Reserve may negatively affect the rupiah in the coming months. The weakening of the currency would mean that the new administration would have to spend more to buy oil on the international market. Consequently, fuel subsidies may impose a severe burden on the budget.

Fuel subsidies are ineffective. They were initially intended to help the poor access affordable energy supplies. But as the economy grew, fuel subsidies benefited the middle and upper classes instead. The Ministry of Energy and Mineral Resources estimated that around 70 per cent of subsidised fuel is consumed by the middle and upper classes.

Fuel subsidies also hinder much-needed infrastructure development. As fuel subsidies consume about 20 per cent of the state budget, it constrains the remaining fiscal allocation for infrastructure development. Consequently, Indonesia still suffers from basic infrastructure deficiencies in numerous public sectors, including clean water, sanitation, health, public transportation, communication, education and electricity despite the booming economic growth in recent years.

Ultimately, fuel subsidies undermine Indonesia’s energy security by encouraging extravagant demand as fuel prices are relatively low. With Indonesia’s oil production output stagnating, the government would have to import more oil. Dependence on foreign sources renders Indonesia’s energy security vulnerable to supply disruptions and rapid price fluctuations.

In addition, heavily subsidised fuel consumption also undermines Indonesia’s effort to diversify its energy intake, as demand for cheaper fuel will undermine demand for other forms of available energy. Furthermore, excessive consumption could also lead to a supply crisis as it boosts fuel consumption far beyond the allotted quota.

The path to reallocating fuel subsidy funds is politically difficult. First, Jokowi would have to convince the opposition to pass the proposed revision to the budget, which was approved by parliament in September. The government’s coalition would have to secure an additional 20 per cent of parliamentary votes to acquire a simple majority. Golkar and the Democrat Party (PD) would be ideal allies. However, political developments in Golkar, combined with the Indonesian Democratic Party of Struggle’s (PDI-P) rivalry with PD, may have closed this opportunity in the short term.

The infancy of the new administration will also be a challenge. Putting forward such a bold program so early in the life of the government may invite a severe public backlash. Anger would be directed at the PDI-P as the party has always rejected President Yudhoyono’s policy to increase the price of fuel. Such a flip-flop would weaken PDI-P’s popularity in the future.

Ultimately, time is not on Jokowi’s side. The primary concern is how to cushion the poor from the negative implications of expected price hikes. The new administration would have to introduce temporary relief to minimise such impacts. Finding a solution within a tight deadline may be challenging for the administration.

There are a series of steps to enact fuel subsidy reform, but considering the challenges Jokowi faces, it is of utmost importance to develop a plan to cushion the poor from the adverse economic effects.

Direct cash assistance schemes may be a viable short-term option. But such a policy would not tackle the fundamental problem of economic empowerment, as the poor will face the same economic hardship after the cash assistance program ends.

The best solution would be to redirect the fuel subsidy fund into infrastructure development to encourage job creation, thus increasing the purchasing power of the poor. Unfortunately, such a program would take too long to materialise. The new administration would have to find a balance between short and long-term measures to alleviate potential negative consequences.

Most importantly, the public needs to be assured that the fuel price hike does not mean that fuel subsidy funds are being reduced, but rather reallocated into other sectors essential for the people’s social welfare.

Keoni Indrabayu Marzuki is a research asociate of the Indonesia Programme at the S. Rajaratnam School of International Studies (RSIS), Nanyang Technological University.

This article was first published here, as RSIS commentary CP14198.

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http://www.eastasiaforum.org/2014/10/21/balancing-the-short-and-long-term-in-indonesia-fuel-subsidy-debate/feed/ 0 http://www.eastasiaforum.org/2014/10/14/red-and-white-coalition-spells-trouble-for-jokowi/ http://www.eastasiaforum.org/2014/10/14/red-and-white-coalition-spells-trouble-for-jokowi/#comments Mon, 13 Oct 2014 23:41:05 +0000

http://www.eastasiaforum.org/?p=43800

Author: Adelle Neary, CSIS

Many commentators assumed following Indonesia’s 9 July presidential election that members of defeated candidate Prabowo Subianto’s six-party ‘Red and White’ coalition would not want to be locked out of government and would seek to realign themselves with president-elect Joko Widodo (‘Jokowi’). Nearly three months later, however, the losing coalition remains remarkably intact and Jokowi’s Indonesian Democratic Party of Struggle (PDI-P), which hasn’t governed nationally since 2004, has been quiet in the political horse-trading.

<img class="aligncenter wp-image-43801 size-medium" title="Indonesian activists and students chant during a protest against a new bill on local elections outside the parliament building in Jakarta on 25 September 2014. (Photo: AAP)." src="http://www.eastasiaforum.org/wp-content/uploads/2014/10/20140925001035981793-minihighres-400x276.jpg?d93754" alt="Indonesian activists and students chant during a protest against a new bill on local elections outside the parliament building

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