Commodity Prices Pose Big Risk in 2010: Sri Mulyani Indrawati

Bloomberg

Commentary by Sri Mulyani Indrawati

Dec. 28 (Bloomberg) -- Indonesia can look back at 2009 as a major outperformer, being one of the few countries in the world where gross domestic product expanded over the year.

The structure of the economy, which isn’t overly dependent on exports, clearly helped. The government’s efforts to protect the most vulnerable social groups through its cash handouts and support to businesses through tax measures -- all equivalent to 1.6 percent of GDP -- were key to the success. The timing of the presidential elections in July was fortuitous and the re- election of Susilo Bambang Yudhoyono has resulted in continued stability, allowing the country to weather the global storm.

There are a few things that recent experience has taught us.

First, the world economy is much more integrated today than it was 10 years ago. This implies a greater need for dialogue and coordination between policy authorities to have desired outcomes, as no country lives in isolation. The timing, speed and magnitude of policy support made 2009 mostly a success.

Second, the government needs to be able to undertake counter-cyclical policy measures to support the economy. This means that continued commitment to fiscal consolidation, especially in boom years, is imperative.

Third, the conservatism and prudence in the banking industry that Indonesia adopted after the 1997 Asian crisis allowed our financial system to come out relatively unscathed in the recent turmoil.

Better Footing

We remain committed to strengthening the system -- with the establishment of a financial supervisory agency as mandated by law -- and to following through on bureaucratic reform.

Indonesia enters 2010 with optimism because the global economy is on a better footing and most of our trading partners have come out of recession. It’s not a time to be complacent, but it’s an opportunity to take Indonesia to the next level.

We must also remain vigilant of developments, such as those that recently took place in Dubai. Recent experience has shown that a single event can have strong repercussions on activity and sentiment around the globe.

The big risk for 2010 is rising commodity prices, with food and oil being key, as these have the potential to feed into inflationary expectations at home.

Accelerating inflation eats into disposable incomes, with the poor and the unemployed being affected the most. The government is ready to help the vulnerable groups in society if such a situation were to unfold.

Oil Prices

Higher oil prices will also have an impact on the budget, primarily through the subsidy cost. However, we have some leeway, as there is an emergency fund within the budget that will allow the country to manage subsidies up to an average price of $85 per barrel for oil in 2010.

Over time, we are committed to the idea of gradually moving toward a market-based pricing of oil-related products so as to free up more space in the budget to boost investment spending.

Given the developments of the last two years, we believe that investors are going to be more discerning when deploying capital. This means that Indonesia will be facing stiff competition from others in the region to attract capital.

In this regard, we aim to improve the investment climate in the country by continuing our anti-corruption drive and making it easier to set up a business in Indonesia.

Indonesia has already taken steps to do this. It now takes only 60 days to start a business compared with 105 a few years ago, closing in on the East Asian average of 40 days. More needs to be done, especially on the infrastructure front, which is very important to the current government.

The country also has a goal to gain an investment-grade rating before 2014.

(Sri Mulyani Indrawati is Indonesia’s finance minister. The opinions expressed are her own.)

To contact the writer of this column: Sri Mulyani Indrawati at dkiweb@jakarta.go.id