Global Crisis: Indonesia s Fiscal Policy Response Fauziah, Ph.D One Day International Seminar What kind of regulation for the economy? The case for Asia. (China, India, Indonesia, Japan) Tuesday, November 3 rd 2009 @ Auditorium of New Building, Magister Management FEUI, Depok
Awareness Economic and Finance: Revise National Budget in 2008 and 2009 to accommodate adjustments for crisis response Increasing deficit and subsidy Fiscal Stimulus Programs Perpu 2/2008: second amendment on UU 23/1999 about Bank of Indonesia
Awareness Industry and Trade: Joint Four-Minister decree to anticipate economic slowdown: Minimum Regional Wage cannot exceed economic growth Guarantee export financing Decrease fuel prices Support domestic market
Impact of Crisis 0.0 5.0 10.0 15.0 20.0 25.0-40% -20% 0% 20% 40% 60% 80% 2007-J F M A M J J A S O N D 2008-J F M A M J J A S O N D 2009-J F Trillion Rp yoy ytd TotalVAT 0.0 2.0 4.0 6.0 8.0 10.0 12.0-40% -20% 0% 20% 40% 60% 80% 2007-J F M A M J J A S O N D 2008-J F M A M J J A S O N D 2009-J F Trill Rp yoy ytd Domestic VAT 0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0-40% -20% 0% 20% 40% 60% 80% 100% 2007-J F M A M J J A S O N D 2008-J F M A M J J A S O N D 2009-J F Trillion Rp yoy ytd VAT from Import Source: MOF 2009
State budget 2006-2010 State Budget 2006-2010 14 12 10 8 GDP % growth GDP amount (quadr rupiahs) y.o.y inflation (%) Currency exchange 6 BI rate, 3 months ave (%) 4 COP (100 US$/barrel) 2 Oil lifting (mil bar per day) 0 Real Real Real APBN RAPBN-P RAPBN 2006 2007 2008 2009 2010
State budget 2006-2010 (in billion rupiahs) 1200000 1000000 800000 600000 400000 200000 0 LKPP LKPP LKPP APBN RAPBN-P RAPBN 2006 2007 2008 2009 2010 Revenue and grant Expenditure
State budget's revenue 2006-2010 (in billion rupiahs) 1000000 900000 800000 700000 600000 500000 400000 300000 200000 100000 0 LKPP LKPP LKPP APBN RAPBN-P RAPBN 2006 2007 2008 2009 2010 Domestic taxes Int'l trade taxes Non-tax Revenue
National Policy and Budget Response Ineffective monetary policy monetary easing + more rely on fiscal policy Fiscal policy: tax savings and subsidy immediate effect, public spending medium term effect but can waste resources. Increase fiscal stimulus: tax cut, subsidy, government spending. Increase budget deficit fom 1% to 2.5% in 2009
Expenditures State budget's expenditure 2006-2010 (in billion rupiahs) 1200000 1000000 800000 600000 400000 200000 0 LKPP LKPP LKPP APBN RAPBN-P RAPBN 2006 2007 2008 2009 2010 K/L Non K/L Balancing Fund Special Autonomy and Adjustment Fund
Gov't spending 2006-2010 (in billion rupiahs) 800000 700000 600000 500000 400000 300000 200000 100000 0 LKPP LKPP LKPP APBN RAPBN-P RAPBN 2006 2007 2008 2009 2010 Employee spending Goods spending Capital spending Loan interest payment Subsidy Grant spending Social spending Others
Subsidy 2006-2010 (in billion rupiahs) 300000 250000 200000 150000 100000 50000 0 LKPP LKPP LKPP APBN RAPBN-P RAPBN 2006 2007 2008 2009 2010 Fuel subsidy Electricity subsidy Food subsidy Fertilizer subsidy Seed subsidy PSO Loan programme interest subsidy Cooking oil subsidy Tax subsidy Soy-bean subsidy Generic drug subsidy Others
12 2009 Fiscal Stimulus totaling of Rp73.3 T (1,4% of GDP) A. Tax Savings 43.0 1. Income tariff reduction PPh OP (35% --> 30%) and tariff 13.5 2. Tax allowance increase to Rp15,8 mio 11.0 3. CIT rate decrease (30% -> 28%) and for Public listing 18.5 companies --> 5% decreasing B. Tax Subsidy 13.3 1. Vegetables oil VAT 0.8 2. Biofuel VAT 0.2 3. Customs Duties for importing raw material and capital goods 2.5 4. Oil and Gas Exploration VAT 2.5 5. Geothermal VAT 0.8 6. Income Tax 6.5 C. Non-tax Subsidy 17.0 1. Decreasing Diesel Oil Price 2.8 2. Discounted Electricity rate for Industries 1.4 3. Extending Small Credit Access 0.6 4. Tambahan Stimulus Belanja 12.2 Total Amount 73.3 12
13 The objectives of Fiscal Stimuli in 2009 Budget Sustain consumers purchasing power: income tax saving, tax exemption, increasing public officers salary, increasing social spending and direct subsidy for the poor Sustain private sector competitiveness and endurance: reducing corporate tax rate, subsidy for energy and water consumption, etc. Anticipate layoff impact: additional infrastructure spending, increasing small credits, etc.
Local Budget Response How do local government respond to the crisis? Most are not aware Business as usual Most do not understand fiscal stimulus program launched by central government Idle funds are still significant Demand for more transfers
Local Budget Response Luckily, the impact of crisis is not severe for Indonesia Regions experience slower but still positive grow, partly because of national election Continuing wrong incentive in profileration scheme potentially increases number of new regions New regions increasing national fiscal burden
Stable Saving Rate People's savings in bank 2006-2009 1,000,000,000 900,000,000 800,000,000 700,000,000 600,000,000 500,000,000 400,000,000 300,000,000 200,000,000 100,000,000 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2007 2008 2009 Giro Saving Giro + Saving Deposito
Trade Balance: declining but manageable NO Account 2006 2007 2008 TREND(%) 04-08 Jan-Aug 2008 Jan-Aug 2009*) Change (%) I EXPORT 100.798,6 114.100,9 137.020,4 17,18 95.391,1 70.302,9-26,30 -O&G 21.209,5 22.088,6 29.126,3 14,81 21.932,7 10.295,6-53,06 - NON O&G 79.589,1 92.012,3 107.894,2 17,82 73.458,4 60.007,3-18,31 II I M P O RT **) 61.065,5 74.473,4 129.197,3 25,83 90.345,0 59.358,2-34,30 -O&G 18.962,9 21.932,8 30.552,9 23,89 23.663,7 10.725,7-54,67 - NON O&G 42.102,6 52.540,6 98.644,4 26,50 66.681,3 48.632,5-27,07 III TOTAL 161.864,1 188.574,3 266.217,7 20,92 185.736,1 129.661,1-30,19 -O&G 40.172,4 44.021,4 59.679,2 19,01 45.596,4 21.021,3-53,90 - NON O&G 121.691,7 144.552,9 206.538,6 21,52 140.139,7 108.639,8-22,48 IV TRADE BALANCE 39.733,2 39.627,5 7.823,1-17,96 5.046,1 10.944,7 116,89 -O&G 2.246,6 155,7-1.426,6 0,00-1.731,0-430,1-75,15 - NON O&G 37.486,6 39.471,7 9.249,7-11,69 6.777,1 11.374,8 67,84
Trade Balance There was a declining export trend to US, EU, and Japan for about 2-3% during the past five years There was a double increasing export value to China, India, and East Asia during the past five years Supporting factors: investment realization in 2007, non impacted products, and import shifting to western countries from China and Vietnam to Indonesia (textiles, toys, footwears)
Current Situation: Budget Account Revenue & Grants Budget Revised Budget Absorption % % 2008 985.73 871.00 563.56 64.70 109.68 Expenditure 1,037.07 1,000.84 596.79 59.63 99.65 Primary Balance 50.32 (20.25) 39.79 66.63 93.29 Surplus/Deficit (51.34) (129.84) (33.23) 25.59 4.63 Financing 51.34 129.84 63.81 49.15 88.96 Balance 0.00 0.00 30.58 0.00 0.00 Source: MOF 2009, Oct 2009 Problems in: - Level of absorption - Quality of spending
Current Situation: Industry Domestic manufacturing industry is still facing problems of: Weak engineering and design Weak quality control Weak domestic market demand Lack of government support Lack of investment No large-scale manufacturing company Non streamlined fiscal policy
Investment Climate Ease of doing business rank: from 129 (2008) to 122 (2009) out of 183 countries. Not a great leap but there were some improvements. Local governments contribute to improvements on streamlining business license (through OSS establishments) Stable political and security environment helps improvements
Investment Climate Economy Year Ease of Doing Business Rank Starting a Dealing with Employing Registering Getting Credit Business Construction Permits Workers Property Rank Rank Rank Rank Rank Indonesia 2009 129 173 57 150 110 109 Indonesia 2010 122 161 61 149 95 113 Economy Year Ease of Doing Business Rank Protecting Investors Paying Taxes Trading Across Borders Enforcing Contracts Closing a Business Rank Rank Rank Rank Rank Indonesia 2009 129 53 119 40 142 141 Indonesia 2010 122 41 126 45 146 142 Source: DoingBusiness, IFC
Current Situation: Policy Easing fiscal policy for 2010 budget policy Cost of rocking political condition wait and see Increasing government salary burden both at national and local budgets One of main priorities for the next 5 years is accelerating infrastructure development expect for increasing role of private sector through PPP scheme
Current Situation: Policy There s a significant need to equip local governments with understanding and knowledge about PPP. The role of central institutions is not clearly defined yet. The key for avoiding fiscal risk is at prudent policy of MOF The key for promoting right PPP scheme is at Bappenas and Line Ministries
Thank You!