Survey of recent developments

Survey of Recent Developments

for

Bulletin of Indonesian Economic Studies

Ross McLeod

Indonesia Project, ANU

23 February 2011

Survey of Recent Developments

Main Topics

• Political developments• Macroeconomic developments• Export trends: a longer-term perspective• Rethinking city management• Financial Services Authority• The eruption of Mount Merapi

Political Developments• Government’s approval rating (LeSI)

– High but falling (85% to 63% July 09 to December 10)– Corruption specific (84% to 51%)

• Gayus saga confirms fears about lack of progress on corruption– Bribes to tax officials– Bribes to law enforcement officials– Bribes to prison officials– Bribes to immigration officials…– Higher officials remain untouchable?

• Government ‘lies’ (i.e. gap between rhetoric and action)– Protection of citizens– Improved transparency/accountability– Reduction of corruption– Reduction of poverty– Damage to environment– Neo-liberal economics/foreign takeovers…

Macroeconomic Developments

• But the good news is– Economy is in good shape– Growth rate has risen to almost 7%p.a.– Inflation around 7%p.a.

• a little higher than targeted (4-6%), but under control• but food prices a concern

– Stock market performed very well in 2010• More later if there is time…

Rethinking City Management

• SBY’s proposals– New capital city– New administrative capital– Neither approach would solve problems of Jakarta and

other big cities– News flash: Jakarta Governor ordered to solve the

problem by 2020 (with demonstrable progress by 2014…)!

• Reinterpreting the problem– Not just traffic congestion/inadequate public transport,

but poor city management in general• poor water supply• groundwater pumping and subsidence• lack of sewerage and water-borne disease• flooding• broken roads• garbage problems …

Rethinking City Management

• Fixing problems or replicating them?– We need to know: why don’t cities work well?– Nobody seems to offer a clear and persuasive analysis

• A hypothesis for consideration– Prices of services and rates too low to cover cost of

service provision– Almost a guarantee of inadequate, poor quality supply of

services• Managing a city for profit

– The case of Lippo Village, Karawaci– Can this approach be applied more widely?

Avoiding Banking Disasters

• A new Financial Services Authority (OJK)?– AFC was original catalyst

• Banking collapse in 1997-98 cost $50 billion– Decision in principle appeared in law on BI in 1999– Supposed to be established by end 2002– Deadline missed, then shifted to end 2010

• Draft law 11 years, still under discussion– With no ‘champion’ the decision had been forgotten– Revived interest reflects 2008 Bank Century failure (cost

$700 million)– Model is FSA in UK: but already found wanting by GFC!

Avoiding Banking Disasters

• Internal inconsistency– Art 34 of BI Law: Bank supervision transferred from BI to OJK– Art 24 of BI Law: Bank supervision is carried out by BI– Inconsistency repeats in draft OJK law

• Unclear objectives– What purpose is served by creating this new organisation?

• Protect economy against serious destabilisation?• Protect customers of financial institutions against improper

business conduct?– These are two very different objectives, perhaps best handled

by different organisations• Unclear logic

– Why should supervision be better than before?– Answer has to start from analysis of why supervision failed

previously• Bottom line: policy decisions should be based on careful

analysis, not knee-jerk reactions to events

Mount Merapi Eruption• New natural disasters in October/November,

many fatalities– Wasior (flash flood, 300 dead); Mentawai islands

(tsunami, 500 dead); Merapi (multiple eruptions, 400 dead)

• Awan panas and lahars– Immediate and delayed damages/fatalities

• Evacuation and support– Well planned; seems to have worked well– Evacuees want support, not just charity

• Return or relocate?• Redesigning and rebuilding infrastructure

– Merapi is a fact of life– Need to design infrastructure with this in mind– Urgent need to clean out Kali Code

Gunung Merapi

Macroeconomic Developments in Detail

• Growth• Unexpected surge to 6.9% p.a. in Q4 2010• Strong investment the main demand

factor• Private consumption a slight concern• Manufacturing still lagging, but improving• Trade, hotels and restaurants very strong

GDP Growth (Demand side)(% p.a.)

Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10-10

-5

0

5

10

15

20

Gross Domestic Product (GDP) Private consumptionGovernment consumption Investment

GDP Growth (Demand side) (% p.a.)

Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10-20

-15

-10

-5

0

5

10

15

20

25

Gross Domestic Product (GDP) Exports Imports

GDP Growth (Supply Side)(% p.a.)

Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10-2

0

2

4

6

8

10

Gross Domestic Product (GDP) Manufacturing Construction

Trade, hotels & restaurants

GDP Growth Quarter on Quarter (Seasonally adjusted, % p.a. annualised rates)

Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-100

2

4

6

8

10

12

14

Private consumption Manufacturing ConstructionTrade, hotels & restaurants

GDP Growth Quarter on Quarter (Seasonally adjusted, % p.a. annualised rates)

Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10-20

-10

0

10

20

30

40

50

60

70

Exports Imports

Macroeconomic Developments• Inflation

– Target exceeded slightly in 2010– Monetary policy too loose

• Money growth too fast/interest rates reduced• Recent increase in ‘policy rate’ means little or

nothing

• Food prices– Increasing rapidly– Climatic factor (too much rain)– Bureaucratic factor (delayed rice imports by

Bulog)• Import tariffs temporarily removed

Macroeconomic Developments

• Financial markets– Exchange rate against $US very stable

• At great cost to BI– Stock market has been booming

• But recent signs of nervousness

Macroeconomic Developments

• The budget– Fuel subsidies limited by forcing private car

owners to purchase Pertamax rather than Premium?

– Subsidies continue for motor cycles (50 million votes vs 10 million car owners…)

• Budget unlikely to have stimulatory impact in 2011

2010 and 2011 Budgets(Rp trillion)

2010 2011 Change relative to Revised budget Actual

Actual: budget Proposed

2010 rev. budget

2010 act. budget

Key revenue items % % %

Income tax 362 357 98.4 415 14.4 16.2

VAT 263 252 95.8 309 17.6 22.8

Spending on

Personnel 163 148 90.8 181 11.0 22.3

Goods and services 113 91 80.8 132 16.8 44.6

Capital 95 75 79.4 122 28.1 61.3

Energy subsidies 144 140 97.2 134 -7.1 -4.4

Macroeconomic Developments

• Return of discretionary taxes– Special (discretionary) treatment for ‘pioneer’

industries• Strong linkages; high value added/externalities; new

technology… (all operationally undefinable?)

Longer-term Export Trends

• Changes in major component shares• Changes in sub-component shares• Changes in country destinations

– Benefiting from Asia’s growth

Monetary Policy and Inflation (% p.a.)

Jan-10 Apr-10 Jul-10 Oct-10 Jan-11-2

0

2

4

6

8

10

12

14

16

CPI inflation Currency in circulation SBI rate 6 monthReal SBI rate

6-Jan-10 6-Mar-10 6-May-10 6-Jul-10 6-Sep-10 6-Nov-10 6-Jan-110

1,000

2,000

3,000

4,000

0

3,000

6,000

9,000

12,000

Composite Stock Price Index (CSPI) and Exchange Rate

CSPIExchange rate

CSPI Rp/$

Chemicals

Food & Live Animals

Crude Materials, Inedible

Animal & Vegetable Oils & Fats

Mineral Fuels

Manufactures

0 10 20 30 40 50

Change in Export Composition, 1988-2010

(% of total value)

2010

1996

1988

0

5

10

15

20

25

30

Trends in Energy Exports(% of total exports)

Oil

Gas

Coal

0

3

6

9

12

Trends in Other Natural Resource Exports

(% of total exports)Vegetable Oil & Fats

Crude Rubber

Metalliferous Ores & Metal Scrap

Seafood

Coffee, Tea, Cocoa & Spices

0

4

8

12

16

20

Trends in Key Manufactured Exports(% of total exports)

Wood Manufactures Paper & Cardboard

Footwear Electrical & telecomm's

Textiles & clothing

Japan

USA

China

Singapore

India

Malaysia

Others

0 10 20 30 40 50

Country Shares of Indonesian Non-Oil and Gas Exports

(%)

1997

2010

Japan

South Korea

China

Singapore

Australia

Malaysia

Others

0 10 20 30 40 50

Country Shares of Indonesian Oil and Gas Exports

(%)

1997

2010