Fall of the Indonesian Empire: Is our economy in shambles?

122

IO, Jakarta – Rupiah is losing its value, food prices soar, purchasing power weakening, economic growth is stagnant, petroleum fuel prices spiked, State debts increased to Rp 5,000 trillion, and the Electricity Base Rate (tarif dasar llistrik – “TDL”) subsidies are revoked. Various issues make up Indonesia’s current face: economic, education, and law enforcement.

Education, which is the key for generating qualified and competitive human resources, have been undergoing various backwardness. For example, the data released by the Indonesian Education Monitoring Network (Jaringan Pemantau Pendidikan Indonesia – “JPPI”) in 2017 shows that the quality of Indonesian education is lower than the Ethiopia and the Philippines. In fact, the Global Human Capital Report 2017 issued World Economic Forum (WEF) shows that Indonesia’s education is the 53rd in the world, far below neighboring Vietnam at 8th place. A sad show!

In law enforcement, the many cases of corruption show that our law enforcement is marching in space. Furthermore, the series of suicide bombing terrors in Mako Brimob, Polrestabes Surabaya, Polda Riau and 3 churches Surabaya has caused the people to be warier. These problems show the bad performance of the Jokowi-JK Government. The Government fails to secure the safety of its people, let alone maintain the people’s welfare.

High Rise of Food Prices
The Government frequently says in various occasions that Indonesia’s economy is fine. However, facts in the field show differently, especially when we see the continued high rise of food prices.

Senior Economist Fuad Bawazier states that food prices rise so high because the majority of ingredients are imported. “When the Rupiah exchange rate against the US Dollar weakens, the price of imported stuff would naturally increase. This would naturally affect domestic foodstuffs, which must also raise prices,” he said to Independent Observer.

However, Enny Sri Hartati, Executive Director of INDEF, believes that the increase of food prices depends on demand dan supply. “Rising prices, then it means supply is diminished, or demand increases. On the contrary, falling prices mean the demand has decreased, or the stock has increased. So the main variable is availability,” she said.

Food prices are related to availability. “Availability” is not just the aggregate quantity available, but the equality of supply distribution. Distribution of basic foodstuff, especially from the upstream point (production), is uneven throughout Indonesia, while all Indonesia demand them. For example, not all rice producers produce the same amount and quality of rice. “Distribution costs, market structure, all these affect the profit margin. The disparity between consumer prices and producer prices cannot be resolved using the command system. The Government cannot just order something and it happens immediately,” Enny said.

Five Ministries are responsible for foodstuff, from production, availability, to distribution. “This is what makes the coordination between agencies so complicated, as the bureaucracy is too intricate. The solution of simple problems becomes complicated. If we review the issue of food price fluctuations, there has been no progress for ages. Meaning that the problem has always been upstream problems, distribution problems, and the long and expensive supply chain,” she said.

Due to the complexity of the issue, the Government usually takes a shortcut by increasing imports. The Government wants to stabilize prices and protect the consumer, but this causes problems in the upstream sector. “This is what makes the farmers’ exchange rate and welfare continue to decrease,” she said.

Enny further said that this kind of market imperfection cannot be resolved using the market’s own mechanism, therefore Governmental intervention is required. “In principle, the State must be present to regulate strategic commodities. When market balance or structure becomes unhealthy, the Government must be there to intervene, and such intervention must be systemic. At least Bulog should be present as food support agency. So when Bulog is present, the Government Purchase Price (Harga Pembelian Pemerintah – “HPP”) from the farmers is protected, and Bulog is also present to protect the Maximum Retail Price (Harga Eceran Tertinggi – “HET”) for the consumers,” she said.

Enny hopes that the Government understands the whole issue, as Government commitment is necessary for handling food issue. “So the Government is not just present for image building, but consistently make concrete efforts,” she said.

Fuad admits that the Government used to be much more present through Bulog. “In the old days, primary foodstuff was controlled by the Government, but that’s not the case anymore. So Bulog controls rice, sugar, soy bean, wheat flour. It controls all that. Bulog stabilizes. Nowadays there’s practically nothing like that, everything is left to the market, while most of the major players are cartels,” he said.

Stagnant Economic Growth
In the early days of his administration, President Jokowi promised that economic growth would reach 7%. However, during his 4 years’ in office, economic growth remains barely sufficient at 5%. In 2018, the Government targets economic growth at 5.4%. However, Fuad, a former Minister of Economy during the President Soeharto era, feels that the target will be difficult to realize. He noted that the economic growth for Quarter I of 2018 is only 5.06%, while the target 5.2%. Furthermore, exports during Quarter I of 2018 only grew 6.17%., while imports grew 12.75%. This means that the trade balance tends towards a deficit.

“Why is this target unachievable? Because as we see it, household consumption grows only 4.95%, and that is with Governmental social aid. If household consumption is low, it is difficult to encourage economic growth. Because household consumption is 57% of the Gross Domestic Product (GDP),” he said.

Similar to Fuad, Enny admits that the Government’s economic growth target is difficult to realize. She noted that until the end of 2018, maximum growth rate is 5.1%. “If Government target is growth at 5.4%, by the First Quarter we should achieve a minimal growth rate of 5.1%. However, the growth rate then was only 5.06%. So we can be sure that the target of 5.4% growth in 2018 will not be achieved. Especially in view that household consumption growth is 58%, but growth rate is below 5%. This means that we can expect about the same results in Quarter II. Economic growth is very difficult to increase, because there are no accelerating triggers. The industrial sector is also stagnant, and job opportunities remain limited. Unemployment rates seem to have lowered, but it actually only shifts to the informal sector,” she said.

Weak Rupiah
Jokowi’s victory during the 2014 Presidential Elections was hoped to trigger the strengthening of the Rupiah exchange rate to the level of Rp 10,000.00 per USD. However, the prediction remains unrealized until now. On the contrary, Rupiah even weakened to the Rp 14,000.00 range in the second week of May 2018. Enny does not find the low Rupiah exchange rate to the US Dollar strange, as our current account has been in deficit since 2012. In other words, we spend more foreign currency than we earn. Furthermore, the structure of the Government bonds is that 40% of it is in foreign hands.

Enny confirms that our economic fundamentals are relatively weak. However, other than fundamental issues, there are non-economic factors that cause the Rupiah to weaken. “For example, people notes conflicting policies, conflicting statements made by different ministries. Or the replacement of the President Director of Pertamina. There’s actually nothing wrong, but the momentum caused by rising global petroleum prices causes market actors to speculate. Later, the President Director of Bulog was replaced nearing Ramadhan, and there is that recording of the phone discussion between the Minister of State-owned Enterprises (Badan Usaha Milik Negara – “BUMN”) and the President Director of PLN. These, plus the news that economic growth targets were unachieved, make the people lose trust. Then suddenly there were bombing attacks. Well, these unexpected – and some unnecessary – non-economic factors pressurize our Rupiah,” she said.

In order to keep the Rupiah from devalueing even further, Bank Indonesia spends up to USD 7 billion. “I think that’s not enough, that BI increases interest rate to maintain the Rupiah exchange rate. The Rupiah exchange rate must be kept from running out of control, and further capital drain must be prevented,” Fuad said.

There have been indications of capital drain in the Indonesian Stock Exchange: net selling has occurred within these past few weeks. In other words, more foreign parties withdrew instead of investing in Indonesia. There are even rumors that Rp 2 trillion is being withdrawn back to foreign countries in a day. “Net selling means that the foreigners are taking back their monies to their own countries. So the Government increases interest rate to prevent such capital drain. So the increased interest rate is expected to maintain exchange rate, as well as reduce capital drain,” Fuad said.

Increasing Debts
With the weakening Rupiah, Indonesia’s foreign debts (utang luar negeri – “ULN”) in Quarter I of 2018 is recorded at USD 358.7 billion, or equal to Rp 5,021 trillion (Rp 14,000.00 exchange rate). To quote data from the Indonesian Foreign Debt Statistics (Statistik Utang Luar Negeri Indonesia – “SULNI”), the Government’s Quarter I of 2018 foreign debts in May 2018 is recorded at USD 181.13 billion or about Rp 2,535.8 trillion. This is an increase from total foreign debt in February 2018 at USD 177.85 billion.

Government ULN at the end of Quarter I of 2018 increased USD 3.8 billion from that of the previous quarter. This increase is mostly caused by the issuance of Global Sukuk at USD 3 billion, which includes Green Bond or Green Sukuk Framework at USD 1.25 billion, in line with the commitment to a green, environmentally-friendly financing.

Fuad said that it is not so easy for the Government to get loans as before. Therefore, the construction of several infrastructure projects is suspended due to difficulty in liquidities. On the other hand, the budget for other projects are decreased for funding social security. “This is part of image-building as well as an indication of insufficient finances,” he said.

Debts are not just used for financing construction of infrastructures, but also for financing routine payments (including the payment of other loans’ interest). “Our economy is in trouble already. Adding to it this kind of management. We are such spendthrifts: for constructing a rapid train, we are given higher prices than in other similar projects in other countries. These higher prices are an indication of mark ups,” he said.

On the other hand, another Senior Economist, Ichsanuddin Noorsy, said that he has been warning the Government from a year and a half ago that Indonesian debts have reached critical levels. “We are given yellow light already. That means we are already given an alarm, we must not continue. Please stop, don’t add any more debts,” he said. Noorsy is most worried about our fragile economic foundations, especially since 40% of the National Government Bonds (Surat Berharga Negara – “SBN”) are possessed by foreigners. “This is dangerous. The indication is that foreigners possess nearly 40% of SBNs means that SBN interest is higher than Central Bank interest. So the Government is practically begging from foreign countries,” he said.

Noorsy confirms that the Government takes new debts to cover old ones. This shows that the Government is trapped in a modern slavery system. The Government supports the interest of capitalists. In other words, these capitalists have successfully dictated the Government.

“So the Government works for outsiders. We’re just slaves – they possess the resources, control the production, determine monetary rate, and control distribution as well. We are nothing but a field of exploitations,” he said. The more liberal the trade and financial economies are, the lower the Government’s dignity is. “Debts has become a new means for colonizing Indonesia. So Jokowi’s Trinity is not about economic control, but economic dependence,” Noorsy said.

Reduced Buying Power
Enny said that there are 4 main indicators for measuring the people’s buying power:

  • First, the manufacturing industry (in this case, non-petroleum and natural gas processing industry). In the past two years, its growth is lower than GDP growth rate, while the industrial sector is one of the main sectors that provide employment opportunities in Indonesia. No less than 14.05% (August 2017) of workers work in the industrial sector.
  • Second, the growth of the retail sector. Fast moving consumer goods only grew 2.7% up to September 2017, while the average annual growth rate in previous periods was 11%.

On the other hand, according to data from Nielsen, online shopping grew…but only very slightly (1%) in comparison with offline shopping. In other words, decreased demand in the offline retail sector is not yet compensated with increased demand in the online retail sector, a clear sign of reduced purchasing power of the people.

  • Third, the growth of real income. The real income of farm laborers and construction workers in September 2016 were at Rp 37,259.00 per day and Rp 65,768.00 per day respectively, changing slightly in September 2017 to Rp 37,711.00 per day and Rp 64,867.00 per day respectively (farm labor wages increased slightly, while construction worker wages decreased slightly). This data does not represent the entire range of occupations available, but it is at least an early indication that some of the people, especially among the lower class, have stagnant or even reduced purchasing power.
  • Fourth, the growth of funds deposited in banks. Savings interest rates decreased from 6.87% in September 2016 to 6.34% in September 2017 (OJK, 2017). The decrease of interest rate is ironically followed with the rising trend of Third Party Funds (Dana Pihak Ketiga – “DPK”) in banks, from Rp 4,836.8 trillion in 2016 to Rp 5,142.9 trillion in September 2017.

The paradox of increasing savings amount during the reduction of banking interest rates show that the business world is weakened, so that the people prefer to save their money rather than invest in the real sector. Credit growth does not accelerate, even though credit interest is slightly lowered.

Enny further said that limited job opportunities also weaken the people’s purchasing power. “The creation of job opportunities is still hindered, as confirmed with the BI survey that shows that the people’s optimism on obtaining a job is still below 80%. “Optimism” is when you are more than 100% certain of getting a job, this is far below that. We have confirmed that Employment BPJS has a high deficit rate, because many people cash them out. This means that there is a high number of people being dismissed from their work. We must beware: people nowadays still shop, but trouble in the real sector will definitely lower the people’s buying power in the future,” he said.

Currently, the amount of open unemployment is reduced, but very little. In fact, they only move to the informal sector, because the number of informal sector workers have increased. “So in other words, these are hidden unemployed, because the proportion of workers who work only 35 hours a week or less have increased. They are not unemployed, but their income is insufficient for much shopping,” Enny said.

Fuad also admits that the people’s purchasing power has decreased. For example, in Quarter I of 2017, car sales grew 6.51%, but now it only grows 2.88%. “This shows reduced purchasing power or market weakness. For the lower classes, we should watch retail sales. Retail sales in 2017 grew 5.05%, but now in 2018 it decreased 0.4%. So reduced buying power is found across all levels of society,” he said.

With such complex issues being faced by the nation, we all ask, “Where is the Government?” We need the Government to be present with solutions, not just saying that Indonesia in good condition, because on the contrary we face problems in various aspects of our daily lives. Come on Government, please stop building of your image. Let us all resolve the problems during the remaining 1 year of Jokowi’s leadership. The people are awaiting the realization of your promises. (Dessy Aipipidely)