Taking the pulse after two years into the SBY administration

The Jakarta Post

October 20, 2006

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.