Year in review: Never too late for economic stimuli

Year in review: Never too late for economic stimuli
Coordinating Economic Minister Darmin Nasution.
PHOTO: Reuters

Throughout the year, Indonesia's economy has been struggling with weak global demand for commodities, twin deficits and delayed infrastructure spending. Global uncertainties have made macroeconomic management more challenging and ultimately prompted substantial deregulation.

In the first half of 2015, Indonesia's economy followed the global slowdown, with domestic economic growth slowing from an annual rate of 4.71 per cent in the first quarter to 4.67 per cent in the second. The third quarter saw growth improve a little bit, to 4.73 per cent, but still down from the 4.92 per cent rate measured a year earlier.

All this happened while the country faced a twin deficit-a fiscal deficit and a current account deficit (CAD). Since the 1998 Asian financial crisis, Indonesia has been running fiscal deficits-where state spending outweighs state revenues-in a bid to fuel economic growth.

After the 2008 credit crisis, commodity prices were squeezed, which badly affected Indonesia as the main producer of coal and crude palm oil (CPO) and contributed heavily to the CAD. In 2015, Indonesia looks set to record a CAD of 1.9 per cent and a fiscal deficit of the same magnitude--which however, might soar to 2.7 per cent.

The failure to boost tax revenue worsened the CAD, as the government kept issuing global bonds to support budget spending, adding to the problem amid slow exports.

If deficit spending were used to finance investments with returns that exceed the interest paid on the deficit, this would not be much of a concern. Unfortunately, this is not the case, with Indonesia allocating around Rp300 trillion (S$6.4 trillion) for fuel subsidies and importing some 300 million barrels of oil and fuel (as of 2015).

After four years, the twin deficit has yet to be solved.

At the beginning of 2015, markets were euphoric after newly elected President Joko "Jokowi" Widodo slashed the burdening fuel subsidies by Rp200 trillion soon after his inauguration. He increased fuel prices by 30 per cent, on average.

Stock traders expected more courageous measures to follow in the first quarter of 2015, building optimism in the stock market, which reflected in a 6.7 per cent rally in the Jakarta Composite Index (JCI) to 5,518.67.

However, as months passed by, investors seemed disappointed with political upheaval amid attempts to criminalize leaders of the Corruption Eradication Commission (KPK), as well as with slow budget spending and especially with the cut in subsidized fuel prices-a "setback" from the previous increase.

Investors punished the government by selling stocks in the second quarter of 2015, bringing the JCI down by 11 per cent to 4,910.66 points. The index dropped by a further 14 per cent to 4,223.91 points in the third quarter.

President Jokowi responded to the anxiety with a reshuffle of his economic team on Aug. 12. The outspoken Rizal Ramli was inaugurated as coordinating maritime affairs minister; a former official from the Indonesian Bank Restructuring Agency (BPPN), Thomas Trikasih Lembong, became the trade minister.

Most importantly, former Bank Indonesia governor Darmin Nasution was inaugurated as coordinating economic minister, replacing Sofyan Djalil, who was appointed to head the National Development Planning Board (Bappenas).

Delayed stimuli

And then, stimuli packages came just a month after the inauguration. Since September, eight economic policy packages were released to simplify regulations and permit procedures in a bid to facilitate investment and support export activities.

The first economic package was unveiled on Sept. 9, focusing on boosting industrial competitiveness through deregulation, curtailing red tape and enhancing law enforcement and business certainty.

On Sept. 30, the second economic package was issued, focusing on investment permits in industrial estates, relaxation of import taxes on capital goods in industrial estates and aviation. There were also interest rate tax cuts for exporters and deregulation in the forestry sector.

On Oct. 7, the government unveiled the third economic package, which focused on cutting energy tariffs for labour-intensive industries, expanding micro loans and deregulating land permits.

On Oct. 14, the government announced the fourth economic package, which introduced a fixed formula to determine increases in minimum wages and expanded micro loans for small and medium, export-oriented, labour-intensive enterprises.

On Oct. 22, the fifth economic package launched, focusing on tax incentives for asset revaluation, scrapping double taxation on real estate investment trusts and deregulating Islamic banking.

On, Nov. 6 the sixth economic package was unveiled, focusing on tax incentives for investment in special economic zones (KEK), sustainable water supply and paperless licensing processes for pharmaceutical imports.

On Nov. 17, the seventh economic package waived income tax for workers in labour-intensive industries among other measures.

The eight and last economic policy package - this year at least - was unveiled on Dec. 21. It aimed to speed up oil refinery construction, standardize land mapping and provide incentives for the aviation industry.

Institute Development of Economics and Finance (INDEF) Executive Director Enny Sri Hartati praised the government's stimuli to boost the economy but added that the results of these policies had yet to be seen.

"The main problem is the slow implementation and the coordination among departments. To boost investment, we need simplified regulations, but it has yet to be achieved. Coordination between sectors to formulate appropriate policies is necessary to make this real," Enny told

The effectiveness of the series of policy packages, Enny continued, would be felt when significant investment, ultimately in the manufacturing sector, began to flourish despite sluggish commodity prices.

"The greatest challenge to our investment lies in permits and regulations. Those are the things our government must address," said Enny.

Coordinating Economic Affairs Minister Darmin Nasution said the policy packages were aimed at addressing short-, medium- and long-term problems in the sluggish economy.

"No immediate impact, but some of the effect will be seen in the first semester of 2016. For example, [the new policy on] liquefied petroleum gas [LPG] converters for fishermen will be implemented next year," said Darmin at a press briefing at Aryaduta Hotel Karawaci, Banten.

The government has made 2015 the year of planning and launching stimuli measures, a foundation needed for saving the economy through de-regulation and re-regulation.

It has been too late for the stimuli packages to address the twin deficits in 2015. However, as part of an ongoing process, it is never too late to save the macro economy, unless Darmin and the team fail on the implementation.

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