AWSJ: Indonesia's Draft Budget Pleases Analysts (fwd)

[Robert Weissman <rob@essential.org>]

January 5, 1999
AWSJ: Indonesia's Draft Budget Pleases Analysts
By JEREMY WAGSTAFF
Dow Jones Newswires

  Staff Reporter

JAKARTA - Indonesia unveiled its draft budget for the next fiscal year,
currying favor with analysts who mostly welcomed its somber tone and
cautious
benchmarks.
It was a far cry from last year's budget, which was so quickly dismissed as
unrealistic it helped usher in the final collapse of the country's economy
as
well as President Suharto. Within two weeks of his budget speech a year
ago,
the rupiah had plunged from 7,000 to 17,000 to the dollar and Mr. Suharto
had
been forced by the International Monetary Fund into a humiliating budget
revision. Ironically, the rupiah is now back to a little below 8,000 and
the
man the markets feared would become vice president then is now president:
Mr.
Suharto's protege, B.J. Habibie.
Mr. Suharto's replacement may well have learned the lesson. Delivering a
sober
budget speech to Parliament on Tuesday, Mr. Habibie made no bones that
times
were hard and would get harder. "We're aware our economy has not recovered
yet; it's still far from normal," he said.
Analysts liked the realism. "A year ago, people just laughed when they saw
the
budget. This year, it's broadly in line with economic reality," said Fred
Thomas, head of research at ABN Amro Asia Securities in Jakarta. Among the
assumptions for the year ending March 31, 2000: zero economic growth,
coming
after a contraction of 12% the previous year; 17% inflation; oil - a big
export earner - priced at $10.50 a barrel, and an exchange rate of 7,500
rupiah to the dollar.
Still, it's a delicate walk for Mr. Habibie's government, and the budget is
just one step. Indonesia remains mired in an economic swamp, where
government
efforts are split between trying to resolve the banking crisis that stymies
any serious recovery and stemming further social breakdown through
subsidies
to the swelling army of poor. Estimates vary, but the United Nations
predicted
in June that 47% of the population would be in poverty by the end of 1998.
The threat of widespread poverty and unrest has raised fears that Mr.
Habibie
would succumb to political pressure - and any ambitions he may harbor about
keeping his post - to whip up support through populist policies at the
expense
of budgetary restraint. Parliamentary elections are due to be held in June,
with a new president to be elected by November. Daily reports of violence,
some of it politically inspired, but much of it spontaneous outbursts of
social tension, have sapped public patience and kept investors running
scared.
Indeed, some saw signs of grandstanding in the budget. In the only two
areas
to see increased spending, funds budgeted for government salaries are up
29%
while funds for the provinces have been boosted by 39%. That reflects what
Mr.
Habibie said was the need to boost public servants' earnings and give more
money back to regions long resentful of the center. This marks a shift,
ministers said, from the grand, centrally directed infrastructure projects
of
old to smaller projects designed to directly assist poorer areas. "We want
to
increase the role and responsibility of the regions in carrying out
development," Mr. Habibie said.
To some, this smacks of money politics. Indonesians like consultant Hartojo
Wignjowijoto see efforts to grant more financial autonomy to the provinces
as
less an acknowledgment that government has become too centralized than an
attempt to spread funds around months ahead of a general election. "They're
buying votes from the provinces," Mr. Hartojo said.
It isn't just increased regional expenditure that alarms critics like Mr.
Hartojo. Moves to assist small business and cooperatives, described by Mr.
Habibie as an "effort to revive the economic wheel," are labeled by Mr.
Hartojo as "strengthening the newly established power base" of some
ministers.
This, Mr. Hartojo argues, is more part of a long-running tussle between
various factions within the government than genuine efforts to raise the
plight of the poor in Indonesia's remoter corners.
Not everyone would agree. Most economists said the budget was less populist
than they feared, and appeared to carry the austere signature of the IMF,
which has been working closely with the government on the draft. Government
spending will drop 17%, compared with the past fiscal year's approved
budget.
This should ease the process of securing the $10.3 billion in foreign loans
required to plug the expected shortfall, which Coordinating Minister for
the
Economy, Finance and Industry Ginandjar Kartasasmita estimates to be 4.8%
of
gross domestic product.
Although large, in dollar terms the budget deficit is little changed from
last
year, and within expectations. "This will be easier for Ginandjar to sell
to
the donors," said Song Seng Wun, regional economist for GK Goh in
Singapore.
Another keenly watched issue: the government's ambitious plan to
recapitalize
the nation's banks by issuing roughly 300 trillion rupiah ($37.74 billion)
of
bonds. These bonds would be exchanged for stakes in about 80 banks,
providing
80% of the banks' recapitalization needs. The government would also pay
interest on the bonds, which the banks could use as working capital.
Earmarking 18 trillion rupiah to fund the interest paid on the bonds,
Finance
Minister Bambang Subianto said another 16 trillion rupiah would be raised
from
the banks themselves - by recovering bank assets. He later told Parliament
that the interest rate on the bonds would amount to 20% - three percentage
points above forecast inflation. Before the budget announcement, the IMF
figured that, assuming 40 trillion rupiah would be required to cover
interest
costs during the fiscal year, obligations on the bonds during the year
would
amount to 3.25% of GDP. That is slightly more than the interest costs
Thailand
faces for similar debt.
Despite the welcome lack of ridicule, no one is predicting a serious
turnaround for Indonesia's economy in the wake of Tuesday's budget. The
main
blocks: the country's political clouds and the long-term stresses of
building
up foreign debt. "The concerns in Indonesia right now are not about the
framework for the budget for the next fiscal year, but where the risks lie
in
terms of political developments and the fiscal position over time," said
Donald Hanna, a former World Bank officer in Jakarta and now regional
economist at Goldman, Sachs & Co. in Hong Kong.
Kevin Ng, regional economist for ABN Amro in Singapore, put it more
bluntly:
"It's realistic, but it's not a cure-all for the government - definitely
not."
                       Hard Times
  Indonesia's Budget Plans in trillions of rupiah
                                         Fiscal    Years
                                         1999      2000
                                     Approved  Proposed
                                        budget    budget
Total expenditure                263.9     218.2
Debt-service payment           66.2      44.8
Personnel expenditure          24.8      32.0
Regional expenditure            13.3      18.4
Revenue from foreign aid    114.6      77.4
Oil revenue                          49.7      20.9
Income-tax revenue              25.8      40.6
Source: Indonesian government