Analysts Say Domestic Demand, Not Government Stimulus, Saved Indonesian Economy

Jakarta Globe, Muhamad Al Azhari, Irvan Tisnabudi & Dion Bisara

Workers replacing the power lines for the train plying the Tanjung Priok-Ancol route in Jakarta, Tuesday (8/4).The cables were replaced to improve railway traffic in the area. (JG Photo/Safir Makki)

Despite the turbulence in financial markets decimating global commerce and nearly toppling trade-driven economies in February, the Bank Indonesia governor at the time, Boediono, said the nation had “a blessing in disguise.”

He was referring to the economy not being advanced enough to become reliant on international trade. As a result, the collapse in global demand would not seriously dent growth, he forecast.

“Thank God consumer purchasing power remains strong, otherwise we could have been hit badly,” Chris Kanter, deputy chairman for investment at the Indonesian Chamber of Commerce (Kadin), said in December.

The predictions of Boediono, professor of Gadjah Mada University School of Economics and the current vice president, have proved correct. But he said the challenge ahead would be positioning Indonesia as “the first developing nation” to take advantage of an awakening global economy this year when the collective hangover begins to wear off.

While 2009 saw some trade-dependent neighbors’ economies contract sharply, such as Malaysia and Singapore, Indonesia is expected to post 4.3 percent growth, the third-best growth in Asia behind China and India.

But how did Southeast Asia’s biggest economy record such impressive growth? Consumer spending, economists say.

“Indonesia suffered a relatively mild impact from the global financial crisis and was more resilient compared to some of its neighbors because of its sustainable household spending,” M Ikhsan Modjo, an economist from the Institute for Development of Economics and Finance, said at a seminar last month.

According to the Central Statistics Agency (BPS), household consumption, which accounts for about 60 percent of the nation’s economy, grew 5.2 percent last year through September. It sustained economic growth when exports contracted and investment slowed.

But did government fiscal and monetary policies do much to combat the effect of the global downturn at home? Among those who say neither policy worked is Lim Su Sian, an economist for DBS in Singapore. “Government spending didn’t really add that much to the strong growth picture,” she said. “This growth came about without much fiscal help and very little credit [from banks] oiling the wheels.”

The government expected its stimulus plan to help domestic manufacturers survive the downturn and keep consumer spending strong to support demand at home, and the House of Representatives approved in February a proposal for an Rp 73.3 trillion ($7.9 billion) stimulus package. More than half the funds went to tax incentives for businesses and consumers, and about 16 percent, or Rp 11.55 trillion, for infrastructure projects.

Chris of Kadin said the tax incentives had not helped domestic manufacturers much because they were poorly implemented.

“The reaction from industry players is that the disbursement of tax incentives was not satisfactory,” said Chris, pointing to the complicated procedures to claims tax credits.

In addition, the central bank gradually eased its benchmark rate by 3 percentage points to historic lows of 6.5 percent in August, in a bid to boost commercial lending and create jobs.

Despite BI’s rate cuts, Lim said the “effect on credit levels has been relatively minimum.”

On New Year’s Day, the Finance Ministry announced the state budget had come in at Rp 87.2 trillion, or just 1.6 percent of GDP. The figure was far lower than the 2.4 percent target expected taking stimulus spending into account, showing that the government spending had been slow.

As far as stimulus in the form of infrastructure projects, spending was pushed back to the fourth quarter of last year and disbursement was lower than expected.

Dedy Priyatna, a deputy state minister for national development planning, said the state had disbursed only about 70 percent of the stimulus spending through early December to build ports, airports, toll roads and bridges.

Timing was also an issue, with less than 25 percent of the funds had disbursed through the end of September, with the vast majority of the infrastructure spending coming afterward.

“Such [slow] spending implementation is not good. The impact to employment is marginal,” said David Sumual, an economist from PT Bank Central Asia.

Harry Azhar Azis, chairman of the House budgetary commission, said “This is just a traditional bad habit in which spending is only pushed quickly in the last few quarters,” he told the Jakarta Globe last month, adding that the full impact of the stimulus would not be visible until next year.

On the lending side, the central bank’s monetary policy review for the fourth quarter, noted that lending rates fell only 76 basis points — a small drop compared with the 300 basis points of BI cuts since December 2008.

Gundy Cahyadi, an analyst at IDEAGlobal in Singapore, said the time lag for BI rate cuts to be followed by lenders was quite high. “It might take up to six to 12 months before any impact could be felt from the low rates,” he said in early December.

According to Bank Indonesia, lending grew only 5.3 percent to Rp 1,377 trillion last year through October, far off the 10 percent rise predicted by the central bank.

Looking ahead, analysts have been pondering whether Indonesia is poised to take advantage of the global economic recovery next year. Most experts are upbeat the nation will book strong 5 percent to 5.5 percent next year, thanks to the expected revival in exports and an increase in investment.

Despite the upbeat targets, BCA’s Sumual posed an interesting question.

“When other [nations] start to grow faster, where will we be? Will we return to being a lagging nation? This year, a lot of homework awaits. There are infrastructure problems, customs and excise preparation for the [China-Asean] free-trade pact, legal certainty and questions from investors about the Bank Century scandal.

“I hope all these factors will not make investors choose rival economies as a destination for their funds,” he warned.