Reforms for Indonesia s Future

Transcription

1 Reforms for Indonesia s Future by Victor Julistiono Barlian Introduction Indonesia, being South East Asia s largest economy with a GDP of close to US$1 trillion in 213, has enormous economic potential. After the1998 financial crisis, the archipelago nation has come back stronger than before. It has undergone political reforms and has made significant progress in its macroeconomic management. Currently Indonesia enjoys a relatively stable political climate and robust economy. Democracy is blossoming, with the last three general elections conducted peacefully. Inflation has dropped from double to single digits and both its public and private debt has fallen significantly. The political stability and improved macroeconomic management has caused Indonesia s economy to remain resilient even during the 28 global financial crisis, making it The World s Most Stable Economy in the Last Five Years according to The Economist. Indonesia is also the world s 4 th largest country in terms of population size, with around 24 million individuals. With a young demographic, Indonesia offers great potential in terms of productivity and creativity. In 211, Indonesia s total median age is 28.2 years, which implies that 5% of the population is below 28.2 years Against this backdrop, it did not come as a surprise that McKinsey predicted that Indonesia would rise from the world s 16 th largest economy to the world s 7 th largest come 23. The growth story of Indonesia is promising. Nevertheless, it is not without any challenges. In this article, I would like to highlight two major challenges that need to be resolved immediately in order for Indonesia to continue progressing economically. The upcoming presidential election in July would pose a pivotal moment for Indonesia, where the nation will elect its leader for the next five years. Therefore, it is important that the next government should take a clear stance on these pressing issues. Infrastructural Reforms The first reform that Indonesia should engage in is with regards to the infrastructure sector. If one were to visit Indonesia s capital Jakarta, you would immediately notice that infrastructure is indeed a big problem. Traffic jams are widespread, and it could take hours for one to reach a destination not too far away. Indonesia is indeed behind its peers by a wide margin in terms of infrastructure adequacy. Data from the World Bank shows that the country s logistics costs were 27% of gross domestic product (GDP), higher than those in Japan (1.6%), South Korea (16.3%) and the US (9.9%). Furthermore, the country s competitiveness in terms of infrastructure and logistics was ranked 118 th out of 148 countries in the Global Competitiveness Index, released by World Economic Forum (WEF). To put things into perspective, let us take a look at Indonesia s infrastructure in terms of seaports, railways and road networks and compare it to its peers. Looking at Indonesia s standing in terms of dwell time at seaports in Figure 1 below, we can see

2 Km Km/land area Days that Indonesia lags behind its peers. The dwelling time at Jakarta s Tanjung Priok port is higher compared to its regional peers and key seaports around the world. Furthermore, Indonesian domestic shipping rates are also much higher than international rates. For example, the cost of shipping a 4-foot container from Padang to Jakarta is US$6 while the cost of shipping the same container from Jakarta to Singapore is only US$185, despite Singapore being further away Figure 1. Dwell time at key seaports Source: Worldbank In terms of railway and road density, Indonesia also lags behind significantly when compared to Japan, India, and China as shown in the figures below China India Japan Indonesia India Japan China Indonesia Figure 2. Rail lines Figure 3. Road density Source: Worldbank The National Development Planning Agency (Bappenas) estimates that Indonesia needs to invest at least 7% of its GDP in infrastructure so as to achieve the ideal 7%-8 % levels of economic growth. However, in 213, its total infrastructure expenditure (inclusive of investments by the private sector) was only US$34 billion, or 4% of total GDP. If this figure remains constant, this will inevitably cause the logistics cost-to-gdp to remain high at over 27 %, hampering productivity and in turn, economic growth.

3 Central Government Oil Subsidy Goods and Services Investment (Capex) Interest payment Electricity Subsidy Social assistance Non energy subidies Others Grant expenditure Central Government Expenditures Oil Subsidy Electricity Subsidy Interest payment Non energy subidies Grant expenditure Social assistance Others Goods and Services expenditures Investment (Capex) RpTn Rptn The Need to Redirect Fuel Subsidies towards Infrastructure Expenditure Despite the lack of expenditure on infrastructure, Indonesia spent around US$3 billion on energy subsidies, while capital expenditure was only approximately US$15 billion (Figure 4). This already low figure is aggravated by the government s move to revise its 214 state budget by reducing capital expenditure further, and adding another US$1 billion towards energy subsidies (Figure 5). 1,4 1,2 1, (2) (4) (6) (8) Figure 4. Revised government expenditure 214 Source: Ministry of Finance Figure 5. Changes in government expenditures 214 Although the logical way to improve infrastructure in Indonesia is to remove the subsidies and allocate it towards developing infrastructure, this is indeed a politically challenging move. Every time there is a plan to increase fuel prices, the public has always responded negatively. For example, last year s 44% hike in fuel prices sparked anger and protests from the public. This issue would be inherited by the next government, by means of the huge financial burden on the energy subsidy to the 215 state budget. Oil and Gas Sector Reforms Besides infrastructural reforms, there is a need for a reform in Indonesia s energy sector as well. Despite having abundant energy resources, Indonesia is currently on the brink of becoming a net energy importer. Indonesia s net energy exports was 3.5% of its GDP in 21, but this figure declined rapidly to.42% of GDP in 214. This is a problem that needs to be resolved immediately, as a continual decline in energy would put further pressure on Indonesia s overall trade balance and eventually harm Indonesia s economic well-being. The precarious state that Indonesia s energy sector is currently in is due to the decline in oil output levels and an expected increase in domestic energy consumption levels in the coming years. Indonesia was once a net exporter of oil. In 1977, Indonesia s oil production was 1.7 million barrels per day (bpd), while its consumption was only 285, bpd. This suggests that the surplus was 1.4 million bpd, which is similar to Indonesia s current levels of oil consumption. However, things began to change in 1991 as Indonesian oil production levels started to decline. In 23, Indonesia s oil

4 mtoe Thousand barrels/day consumption finally surpassed its consumption levels for the first time. Since then, oil production has always been below consumption levels. From its peak 1.7 million bpd in 1991, Indonesia has seen a 47% decline in oil production to 882, bpd in 213. It is a pity to see Indonesia s current condition bearing in mind that it was once one of the major oil exporting nations and a member of OPEC Production Consumption Figure 6.Indonesian oil production and consumption levels Source: BP statistical review of world energy 214 The decline in oil output was due to the lack of upstream developments. Almost 8% of Indonesian oil production comes from old oilfields that were exploited before Major oilfields in Indonesia are drying up, and there is lack of exploratory work. Weak government management, bureaucracy and an unclear regulatory framework are the main culprits of this lack of exploration. According to Indonesia s upstream regulator, SKK Migas, it would take 5 to 8 years from the time of initial drilling to prove reserves, develop feasibility plans and finally open a new field. 5 to 8 years is a not short period, thereby making the case that decisive actions to reform this sector are urgently needed. On the consumption side, we see a robust intake of energy in the past few years. Figure 6 shows that as Indonesia s economy grows, its primary energy consumption has increased as well. Being a young and growing nation, it is expected that Indonesia s energy consumption will continue to increase in the next few years GDP (LHS) Primary energy consumption (RHS) Figure 6. Indonesia s GDP and primary energy consumption Source: BP statistical review of world energy 214

5 As Indonesia s energy consumption is highly geared towards oil (44%), we can therefore expect its oil consumption to rise in the coming years. If Indonesia maintains this energy mix and no further development in the sector is apparent, Indonesia could risk having an energy crisis in the next few years. 2% 1% 32% 44% 21% Oil Natural gas Coal Hydro-electricity Renewables Figure 7. Indonesia energy consumption (213) Source: BP statistical review of world energy 214 The impending energy crisis in Indonesia would pose numerous problems if it is not resolved immediately. Hence, reforms in the oil and gas sector should be the top priority of the incoming government. Conclusion While Indonesia does indeed face issues in other sectors as well, the two problems that were highlighted in this article are in my opinion, of the greatest threat to Indonesia s economic progress, and I therefore feel these issues require urgent attention from the Indonesian government. The two presidential and vice presidential candidates have shown their concerns and have outlined their strategies to address the issues in both the infrastructure and energy sectors, despite having different approaches. Overlooking the grandiose plans that were outlined by the candidates, what is crucial, in my opinion, is the ability of the next government to execute their vision and mission well, as the execution and implementation of policies has always been one of the Indonesian government s weakest points. For now, let us await the arrival of 9 July the day when Indonesians would vote in its top leaders, and see if this very day would be the country s turning point for the better.

6 References Indirasardjana, P. (214). 22 Indonesia Dalam Bencana Krisis Minyak Nasional CLSA (214). Block by block Technocrats get things rolling CLSA (214). Energizers How sector reform is essential for growth McKinsey Global Institute (212). The archipelago economy: Unleashing Indonesia s potential The Global Competitiveness Report Indonesia Investments (213). Population of Indonesia Jakarta Post (214) budget cut will put RI s already low logistic competitiveness at risk Indonesia Investments (213). Logistics Costs Reduce Economic Potential of Indonesia Bisnis Indonesia (214) BAPPENAS: Indonesia Butuh Investasi Infrastruktur 7% Terhadap PDB Indonesia oil and gas upstream challenges - r_upstream_challenges.php US Energy Information Administration - Indonesia

7 SEIC Correspondents for Issue 52: Wong Shi Jun Aaron (Vice President, SPEX) Lee Kong Chian School of Business Lee Yin Wei (Writer) School of Economics Tay Qi Hang (Writer) School of Economics Zhou Li (Creative Director) School of Economics Rao Pranav (Writer) Lee Kong Chian School of Business Victor Julistiono Barlian (Writer) Lee Kong Chian School of Business