IO, Jakarta – The Government has created a State Budget and State Expenditure Plan (Rancangan Anggaran Pendapatan – “RAPBN”) for 2019. The plan exudes optimism, despite treacherous and volatile global economic conditions. The basis of the 2019 RAPBN is 5.3% economic growth, 3.5% ± 1% inflation rate, a Rupiah exchange rate at Rp 14,400.00 per USD, Treasury Bonds (surat perbendaharaan negara – “SPN”) with 3-month interest rate set at an average of 5.3%, Indonesia’s crude oil price at USD 70.00 per barrel, petroleum lifting of 750,000 barrels per day, natural gas lifting at 1,250,000 mmcfd, State income and grants at Rp 2,142.5 trillion, income from taxes Rp 1.781 trillion, APBN deficit at 1.84%, and State expenditures Rp 2.439.7 trillion.
President Joko Widodo (Jokowi) explained that the total budget of Rp 2,439.7 trillion is meant to accelerate growth of the economy and generate welfare for the people. State expenditures comprise Central Government expenditures at Rp 1,603.7 trillion and transfers to Regional Governments and Village Funds of Rp 832 trillion.
Institute for Development of Economics and Finance (INDEF) Senior Economist Didik J. Rachbini explains that the 2019 RAPBN Government plan is flawed with major issues, the main one being that the amounts projected, from income to absorption, are actually unrealizable targets. Furthermore, there is a large volume of waste in expenditures, as State Budget (Anggaran Pendapatan dan Belanja Negara – “APBN”) expenditures are mostly directed at paying out wages. “We have a large amount of waste in our expenditures, mostly for repaying debts and paying wages. Our studies show that most expenditures are for routine items,” said Didik when Independent Observer met him in the “2019 RAPBN: Realistic vs Populistic” Public Discussion held in Kalibata, South Jakarta.
Didik stated that other than expenditures and income, there are also issues of bureaucracy, which has become a great burden on the State Budget. “During Soeharto’s era, APBN was Rp 60 trillion. Nowadays, APBN is huge, but many items are out of control. This is a management issue,” he said. Employee expenditures keep on swelling, showing how budgetary waste is rooted in the bureaucracy. This expenditure is 30 times bigger than that of the Soeharto era. He also criticizes the Government about its management of education funds, which he considered to be heavily diverted by the Ministry of Finance. “Our educational budget is being torn into pieces. It’s being used by the Ministry of Religious Affairs, Ministry of Finance, and Ministry of Transportation. We could only get Rp 46 trillion, because the funds are scattered in every direction,” he complained.
Difficult to Realize Economic Growth
The Government set an economic growth rate in the 2019 RAPBN at 5.3%. Harryadin Mahardika, Economic Observer from University of Indonesia (UI), opines that this target is going to be difficult to realize. He said that there is a difference in that the amount of money required to obtain 0.1% growth is harder than it was in 5-6 years ago. In order to grow 0.1%, we needed funds equal to 5.2% of the gross domestic product (GDP). But that was then – it has risen nowadays. Now we need 6.4% of GDP simply to grow 1%. This means that the economy has become more inefficient. “Let us compare ourselves with Malaysia, which only needs 4.2% of GDP to grow 0.1%. Thailand needs even less than that: only 3.1% of GDP. Therefore, the more advanced a country is, less capital is usually required for it to grow 0.1%,” Harryadin said.
According to his analysis, Indonesia’s economy has become more inefficient because investments in productive machinery and equipment continue to decline within the past 5 years. On the other hand, investments in infrastructure have risen sharply. It is true that such investments encourage growth, but it is only a 1-time thing and does not encourage further growth.
In view of this type of Government policy, Rizal E. Halim, another Economic Observer from UI, agrees that it will be hard to achieve 5.3% economic growth. “I predict that actual growth rate will be 4.9% to 5.1%. Our economic growth is stagnant because there are very few Government policies that directly stimulate the people; there are very few empowerment programs. On the contrary, foodstuff prices rise, electricity tariffs also rise, while in fact our biggest economic growth comes from household consumption,” Rizal said.
Meanwhile, Economist Ivana Rachmawati said that according to historical data, with Government expenditures at 15% of the GDP and if the investment climate and fundamental economic structure remains the same as it was for the past 4 years, it will be difficult to realize a 5.3% growth rate, especially if the Government does nothing extraordinary in 2019.
Muliadi Widjaja, also an UI Economic Observer, explained that Indonesia’s economic growth remained in the 5% range for the past 4 years. “We actually hope that the APBN is more than just the setting of a budget and the distribution of money, but that its setting and distribution also have specific intents and purposes – which we hope are more than populist purposes. However, our foreign reserves are currently draining away, while the Government has cut the tourism sector budget instead of increasing it. In fact, it increases activities that do not directly encourage economic growth. So, I conclude that the 2019 RAPBN will not yet be able to serve as a growth engine. Nowadays the Government seems to lack a sense of priority. It does construct infrastructure, but this does not have direct impact on economic growth. In fact, because the goods needed to construct infrastructure are imported, we are actually growing foreign economies,” he said.
Oddly Huge Budget Items
There are 5 ministries and agencies (M & A) granted large budgets in the 2019 RAPBN: the Ministry of Public Works and People’s Housing, Ministry of Defense, Ministry of Religious Affairs, Ministry of Social Affairs, and the Police.
Harryadin said that the size of a ministry or agency budget depends on the purposes of the Government itself. He notes that these continue to shift. Before, it was the Nawacita (“Nine Aspirations”), and the mental revolution before that, but it has changed nowadays. The only thing remaining consistent is the construction of infrastructure. “As long as our M & A routine budget is not funded by debts we are doing fine, but nowadays some routine budget items are financed through debt. This is a violation of the principle of prudence in budget management, because debts should only be used for productive expenses instead of routine items,” he said.
Harryadin also criticizes the fact that subsidies are borne by State-owned Companies (Badan Usaha Milik Negara – “BUMN”). “Subsidies are borne by Pertamina and PLN. Even though this is allowed by law, it is very risky for BUMNs, because such debt is harder to trace. This means that our BUMNs are vulnerable. For example, a PLN default would affect the overall economy. We can resolve it financially, but psychologically it will destroy trust and it engender ripple effects. We now see how BUMNs are a vulnerability for us nowadays, because they are forced to bear the burden, to serve as the shield for the Government’s ambitions. Until now, any idle cash would immediately be appropriated by the Government,” he said.
He also criticizes the fact that the budget for the Hopeful Family Program (Program Keluarga Harapan – “PKH”) has jumped 100%, from Rp 17 T in 2018 to Rp 34 T in 2019. “This is image-building for sure, because if the purpose is really to provide welfare to the people, it’s too late. This should have been carried out from the first year of the administration. Nowadays, 10 out of 100 household heads were beneficiaries during the time of President SBY, but this number has been reduced to 3 from 10 during the President Jokowi administration. This has caused unrest and tension among the people. The numbers during SBY’s Government should have been maintained, because it was proven helpful. The system for the President’s Development Monitoring and Control Task Force (Unit Kerja Presiden Bidang Pengawasan dan Pengendalian Pembangunan – “UKP4”) was already good, but it was dismantled and replaced by an inferior system. That’s one of the most painful blunders of the Government, one that hurts the common people most nowadays, because it is very difficult for the people to find that they are no longer aid beneficiaries without being aware of the criteria,” he said.
Rizal, however believes that the Ministry of Social Affairs might actually need an additional budget, as there are so many social issues to face; meanwhile, the people have not actually felt much benefit of its programs. “I don’t think that the other M & As are urgent necessities. There is no threat of war, there are no domestic threats that require extraordinary effort. Meanwhile, we have the urgent issue of strengthening household economies as the sole pillar for GDP during the past 2 decades. We are now faced with a scale of priorities,” he said. As for the PKH budget surging 100%, Rizal said that when we review the data range and found that there is a sudden sharp increase at some point, it is possibly because 2019 Elections are now near.
Ivana said that the number of PKH beneficiaries has been rising since 2014, with the greatest increase occurring in 2016, at 2.5 million families. She feels that we need to question the Government’s justification for increasing the PKH budget so much that it sets such an ambitious target for increasing the number of PKH beneficiary families. “How come this ambitious increase of PKH beneficiary target was not set at the start of the current Government? Why at the ending year instead?” she said.
Muliadi Widjaja said that there is a political budget cycle one year close to the Elections, whereby the Government tends to try and attract people’s sympathy in order to get the incumbent re-elected. There is usually an expansion of expenditures, intensive increase of tax collections and expenditures, and the Government sacrifices a certain amount of State income to increase private economic welfare among the people. Indonesia is notoriously vulnerable to this.
There are many populist Government policies created specifically to secure public support and get re-elected. For example, the allocation of budget for public services rose to Rp 531.6 trillion. Proportionally, this is an increase of 4%, but it is actually an absolute increase of 25%. The defense budget remains stable, and the safety and order budget has declined. The Economic budget has risen from Rp 355.1 trillion to Rp 359.3 trillion, or 15%. The environment budget is up 10%, housing and public facilities going from 29% to 33%, but the health budget actually decreased from 64.3% to 54.8%. The health budget should rise because expenditures for Health Security (BPJS Kesehatan) is still running in a deficit.
Furthermore, the tourism budget has also declined, while tourism is an important economic sector that supports foreign currency income. Budget for the Ministry of Religious Affairs is up 10%, education up from Rp 151 trillion to Rp 156 trillion, or 4%. The most amazing increase is the security budget, rising from Rp 161 trillion to Rp 185 trillion, or nearly 20%. The top three budget proportions are distributed to public service, economy, and security.
Infrastructure Budget Increasing Massively
Within the 4 years of President Jokowi’s leadership, the infrastructure budget in the 2019 RAPBN is the biggest, i.e. 420.5 trillion, rising Rp 10 trillion from that of 2018. Jokowi explained that infrastructure construction will strengthen connectivity, connect various economic potentials throughout Indonesia, equalize development, grow new economic activities, and increase the distribution of goods and services. Its end results should include the improvement of the people’s welfare, the reduction of poverty and unemployment, and the reduction of inequality.
Harryadin states that the current cabinet’s logic is a feudalist one, as ministers do not dare say or show anything that is damaging to their leaders. “We may assume that there is an optimum point for infrastructure investments at Rp 300 trillion, but this is forced simply because “it must happen”. I suggest that we delay some of these projects, especially if they do not directly affect national logistics systems or support national exports,” he said.
As of the end of 2017, the University of Indonesia’s Agency of Economic and Community Investigation (Lembaga Penyelidikan Ekonomi dan Masyarakat – “LPEM”) analyzed the impact of infrastructure construction. They discovered a paradoxical relation between infrastructure growth and economic growth: infrastructure growth is not in fact aligned with economic growth. “As proof, economic growth for the past 4 years has remained the same, while infrastructure construction expenses have reached Rp 2,500 trillion. That should have been enough to generate economic growth of 6-7%,” Harryadin said.
Meanwhile Rizal observed how the increase of the infrastructure budget does not stimulate the people’s welfare. “The trickle-down effect has been proven to be a failure. Our infrastructure actually only has a “trickle up effect”, enjoyed by only the top groups in our population pyramid,” he said.
In fact, Ivana said infrastructure such as toll roads, airports, highways, and railways might not exert any direct effect on the level of public welfare because the orientation of these investments is to improve the business climate. Dams, irrigation channels and people’s housing will have a more direct effect on public welfare, especially that of farmers.
Relentless Depreciation of the Rupiah
The Rupiah exchange rate assumed for the Dollar in the 2019 RAPBN is Rp 14,400.00. Unfortunately, in early September, the Dollar shot up to Rp 15,002.00. Now the Rupiah has strengthened slightly, as the 11 September exchange rate hung at Rp 14,800.00 per USD. Our Rupiah continues to weaken despite interventions by Bank Indonesia.
Harryadin considers BI’s policy of increasing interest rates and intervening in the market to be ineffective. “As the central bank, Bank Indonesia should only raise interest rates as necessary; don’t increase interest rates and intervene in the market at the same time. But that’s BI’s valiant effort to keep the Rupiah from falling even further. We are also criticizing the fact that Bank Indonesia is not independent: it is always interfered with by the Government,” he said. Harryadin further said that with the current Rupiah exchange rate, the Government will need to set an amended RAPBN. Such adjustments have to be made 2-4 months ahead, because nowadays the Rupiah exchange rate will be at a “new normal point” at a level of Rp 14,800 per USD.
This is because pressures against the Rupiah are both internal and external. External factors will continue for at least 2 months, while internal factors will extend some 4 months ahead. Global factors that also affect exchange rates include the fact that some other countries, such as Turkey and Argentina, are undergoing a crisis themselves. “Therefore, investors, especially those who hold shares in emerging market countries, have started to withdraw, because liquidity withdrawals occurred in America due to the increase of interest rates by the Fed. Funds will easily return to the US, because Indonesia is a country with a high level of net international investment position (NIIP) at 35%. Countries with high NIIP generally will suffer continued impact of currency weakening, because investors will attempt to cut their holdings in these very countries. There is a very real concern that a crisis is looming,” he said.
Meanwhile, Harryadin cited Government financial deficits as the main internal factor that impair Rupiah value. Subsidies to petroleum fuels continue to increase, because their prices rise. There is also funding for infrastructure construction and debt payments. Both principal and interest on our debt must be paid down from more debt, causing the Government to overdraw on operational costs. We must find a solution for this – we need to suppress our losses and overdrafts.
Rizal concludes that further weakening of the Rupiah is inevitable, as our balance of payments structure has a weak primary income balance, generated by investment income and debt income minus investment costs and debt repayments, inasmuch as our primary income balance is USD 8.6 billion, and current transaction deficit is USD -8 billion, with 100% contribution from primary income balance. This is why our current transaction balance is in a deficit.
This signifies that our investment income is already in a deficit. Much foreign investment profits are extracted from Indonesia. To make this even worse, this year and the next (2019) Payment is due for settling debt in the greatest amount for the next 10 years. This year, the Government must pay its principal debt and interest at USD 278 billion. Next year, we must pay USD 263 billion in Government principal debt and interest, with the amount for subsequent years over the next decade totaling USD 150 billion. “This is our biggest trouble, because even though we accelerate exports and investments, if our investment income and debt income are low, that would not signify much. We see that during Jokowi’s Government, this year we have suffered the greatest primary income deficit ever; this is indeed a bad record,” Rizal said.
The Government has urged foreign investors to come to Indonesia, but they extract their profits from this country as soon as they can. There was previously a plan for setting dividend repatriation; the risk of such a regulation is that it would reduce the attractiveness of investments; however, if we look at China and India, who have both succeeded in doing this, they have sufficient power to prevent profits from leaking out. Capital inflow and outflow is also too free, which further depresses the Rupiah. Foreign net sales in our capital markets in 2017/2018 net sell are steep, causing large amounts of capital outflow that also further depressed the Rupiah.
In order to resolve primary income deficits, we need to check incoming investments, both direct and indirect. Such investments should be able to provide added value to our national economy, not just profits. “I suspect that pressure on the Rupiah will continue until next year. I would say that the Rupiah will not be able to get back to Rp 13,500.00; it will be a major achievement even if we can manage to hold it at Rp 14,700.00 per USD. This is because the pressure is enormous – our primary income balance deficit is extremely large and we have such a huge amount of maturing debts to deal with by the end of the year. This will last until next year. Meanwhile, our economic structure has no structural transformation, no change in comparison to last year. Even vital survival sectors such as agriculture have weakened up to 3%, while 30% of our workers are in the agriculture sector and it is they who are vulnerable to becoming poorer. In fact, the agricultural sector has the biggest worker absorption in Indonesia with this amount,” Rizal said.
Our petroleum and natural gas income has been declining since 2011. We cannot concentrate on petroleum and natural gas exports, because our energy sources are dried up; we do not have new wells. We cannot pin our hopes on petroleum and natural gas, because our petroleum lifting has declined, even though nowadays we have gas lifting. The only thing left for us to do is accelerate non-petroleum and natural gas exports more massively. However, this is still an issue, because non-petroleum and natural gas exports grow much slower than petroleum and natural gas imports. Rupiah weakening causes debt to swell, because APBN assumptions will almost certainly be missed and we need to recalculate the whole thing. When the Rupiah is depressed, all dollar payments will shoot up. Yet we receive our income in Rupiah. Infrastructure construction is an added burden because it causes funding deficits, and if it does not prove profitable, infrastructure will become a financial time bomb for us.
Muliadi said budget deficits cause the Government to go deeper into debt and cover deficits in order to generate enough income to fund expenditures. Meanwhile, Government debt is dominated by foreign obligations. Expenditures for goods and infrastructure are also mostly caused by imports, strongly linked to the current account deficit.
About 40% of Government debt is in foreign currency, i.e. in USD. With the weakening of the Rupiah, Government debt swells, and expenditures for goods also swell. Government income from petroleum and natural gas is positive with the weakening of Rupiah, as global oil prices increase. However, our expenditures are still bigger, especially expenditures for imported goods and for infrastructure construction needs. Our debts also continue to swell. With this budget deficit, our appraised debt rating might actually fall back. Furthermore, a weakening Rupiah threatens importers and businessmen who use imported materials, as nearly all-important materials for production are brought in from abroad. The whole situation is bad for all importers and businessmen.
Suggestions for the Government
Harryadin determined our Government jargon is “optimizing growth”. This is fine, as long as there is a chance for growth. But what the Government refuses to acknowledge is that growth is mostly funded by debt, so it is all forced. “So, we shouldn’t be saying “optimizing growth”, but “balancing growth” so that we can fix our economic fundamentals, starting from controlling exchange rates to finding new industries to rely on,” he said. He further stated that Government would do well to improve its debt portfolio and correct economic growth projections to a more realistic figure.
Rizal considered the 2019 RAPBN targets to be highly normative, unrealistic, and out of touch with what is currently happening at grassroot levels among the common people. Furthermore, the high increase of budgets for social programs like the Hopeful Family Program will naturally be associated with 2019 political year momentum.
In the 2019 RAPBN, Government targets income from taxes at Rp 305.3 trillion to Rp 307.3 trillion; Ivana considers this projection of income from taxes target to be far too ambitious, as revenues from tax targets in the past few years were never achieved, forcing the Government to accept a budget deficit and deal with expenditures later.
Now, the ball of economic policy is in the Government’s court. Is the Government willing to become more realistic about the current troubling situation, or will populist policies become the main priority at the cost of the people’s interest, because this is a political year? Only time will tell. (Dessy Aipipidely, Ekawati)