By A. Tony Prasetiantono[1]

The year 2013 is a crucial one from the vantage point of political economy, because it sets the stage for next year, which will be a year of politics in which the conduct of elections for both the legislature and the President will be getting underway. In common parlance, such a year is often referred to as the year of living dangerously. However, I have the boldness to assure all, that there will not be economic and political uncertainty simply because of the   general elections.

Taking a leaf from the last election year, 2009, Indonesian economy was able to register economic growth of 4.5%. That said, there is no denying the fact that the economy experienced slight slowdown, which was not attributable to any political events, rather the global repercussions of the subprime mortgage crisis on the Indonesian economy. In fact, virtually all emerging markets, with the exception of China, India, and Indonesia, suffered economic contraction.

The question one would pose is what about the year of politics 2014? Will the year become punctuated by uncertainty which will impact adversely on the performance of Indonesian economy, or on the contrary, the economy will benefit from economic stimulus coming from liberal spending of political parties during political campaigns?

To my reckoning, political party spending during general elections will not be that much. Perhaps, in nominal terms, one could say the amount spent will be large, but relative to the size of Indonesian economy, that is far from the case. Today, Indonesian economy Gross Domestic Product stands at IDR 8,200 trillion, of which household consumption contributes around IDR 5,000 trillion. If all political parties that will participate in the general elections will spend IDR 2 trillion, the total spending of all the 10 political parties will amount to just IDR 20 trillion. This is an amount which is not significant on the macroeconomic.

To that end, I do not expect the conduct of general elections will provide an economic stimulus that will have significant impact on the national economy. On the contrary, political sentiments tend to weigh more toward fiscal policy. At a time when the burden of large energy subsidies is getting beyond tolerable limits, the government is still reluctant to raise prices of subsidized fuels. By all accounts, this is an action, which is extremely urgent.

Pressure coming from unfavourable balance of trade has become too strong to bear. Just imagine, in 2011 the economy registered a surplus of USD 26 Billion in a single year, yet in 2012, the surplus as if in free fall, nosedived into USD 1.3 Billion in deficit. Such negative trend continues in January 2013, reflected in the trade balance that registers a deficit of USD 174 million. In terms of average per year, the trade deficit for this year will fall with the range between USD 1.6 Billion and USD 2 Billion. The problems the economy of Indonesian face remain the same: (1) falling prices of primary commodities; (2) rising imports of capital and intermediate goods and raw materials which is driven by an increase in household consumption; and (3) an increase in oil and gas imports, attributable to the decrease in Oil lifting from 900000 to 830000 barrel per day.

The trade deficit is aggravated by the deficit on the balance of account. In 2012, the current account deficit was USD 28 billion, which is 3.6% of GDP. Traditionally, this deficit is largely a reflection of Indonesia’s weakness in the chess board of global services sector.   As an example, Indonesia’s trade merchandize with other countries often use foreign registered ships. The same applies to insurance, which is largely under the control of foreign corporations, which implies that Indonesia has to pay large amount of foreign exchange for such services. To that end, the initiative of changing trade transactions from using FOB (free on board system ), which implies that Indonesia does not handle loading and unloading of merchandize on ships and insurance, to CIF (cost of insurance and freight), is expected to help in reducing the deficit. That said, making such a change is no easy feat, as it requires a lot of preparations that should in the end enhance the competitiveness of Indonesian logistics services and insurance sectors globally. .

In the meantime, I do believe that the policy that rescinded the requirement for Indonesian citizens to pay IDR 1 million in tax prior to departing for foreign destinations, has in some way contributed to aggravating the current account deficit. This is because all such measures contribute to the decrease in Indonesia’s foreign exchange reserves. If in the middle of 2011, Indonesia registered USD 124.7Billion, which is the highest foreign exchange reserves on record so far, by the end of 2012, the level of foreign exchange reserves had plummeted to USD 112 Billion, and as this piece is written, has again dropped to USD 105 Billion, largely due to rising deficits on trade and current balances. It is such factors that have driven exchange rate of Rupiah against USD to go beyond IDR 9700 per USD, which is evidently represents substantial depreciation from the target of IDR 9300 per USD.

Meanwhile, inflation has compounded the problems. By end of 2012, inflation was still under control at 4.3%. The source of the problem is not predominantly the ineffectiveness of Bank Indonesia policy in managing the monetary sector, rather largely fiscal trade off, which arises from rising energy subsidies that hit the IDR 300 trillion marks in 2012 budget. This is a staggering figure and no doubt a source of disappointment, because it constitutes 20% of the national budget of IDR 1 500 trillion.

Unless measures are taken to stem the rise in energy subsidies by raising domestic fuel prices, expenditure of subsidies will at least hover around IDR 320 trillion. In fact the value can go as high as IDR 400 trillion, as extremely cheap fuel prices of subsidized energy (IDR 4500 per litre) is prone to moral hazard, which is manifested in malpractices of luxurious vehicles owners to create additional fuel tanks and smuggling to foreign destinations.   Surely, such rampant misallocation of subsidized fuel is serious cause for concern. To that, nearly all economists strongly recommend the need to raise prices of subsidized fuel. I have received information from some reliable sources that President Yudhoyono has expressed willingness to raise fuel prices, simply because the 2013 national Budget can no longer bear the increasingly large burden of subsidized energy hat is hovering around IDR 400 trillion.

If the option of raising prices of subsidized fuels is chosen, what impact it such an option likely to have on inflation? Inflation in January 2013 stunned many and was far from conventional wisdom and tradition. Inflation year on year in late February 2013 hit 5.3% mark, which means that it was already above the government target of 4.9%. By raising prices of subsidized fuel between IDR 1000 and IDR 1500 per litre, inflation is likely to spiral above 6%. If this were to materialize, there is little doubt that interest rate will rise. BI rate which is 5.75% this month will possibly become the last low rate, prior to gradually rising to 6%, 6.25%, and even 6.50%.

Nonetheless, the rise in inflation and BI rate if and when it occurs; will not imply worsening conditions in the economy. In 2009, when emerging market was experiencing economic contraction, Indonesia was able to register positive economic growth of 4.5%. Moreover, BI rate at the time was 6.5%. In 2013, even if BI rate were to rise to 6.5 %, growth in other countries, especially US and China, will help to support Indonesian exports. Based on such projections, Indonesian economic growth will still be within the   5-6% range, despite an increase in prices of subsidized fuels and the rise in Bank rate to 6.5%.

Concerning the performance of Rupiah, which has depreciated to IDR 9 700 per USD level, there is little doubt that is has become a necessity. Despite the woeful lack of acknowledgement, the reality is that the global economy is essentially engulfed in   strong currency wars. Today, all countries need weak currencies in order to improve the performance of their economies. The Euro, US dollar, Yen , Yuan, all have the inclination to prefer depreciated currencies which is expected to promote exports while at the same time impose restraints and constraints on imports. To that end, the depreciation of Rupiah to IDR 9 700 per USD level is according to me, both a necessity and requirement. How is it possible that Rupiah can appreciate yet at the same time our key trading partners are experiencing deficits?

Finally, we have to be realistic and willing to accept the reality, that some of the macroeconomic assumptions should be revised. Some of the recommendations and new assumptions are : (1) the price of subsidized fuels should be raised to become IDR 6 000 per litre, a move that is expected to support the national budget by averting moral hazard; (2) economic growth should be corrected to become 6.3%; (3) inflation projected should be raised to between 6 and 6.5%; (4) BI rate is predicted to gradually rise toward 6.5%; (5) Indonesia crude price is put at USD 110 per barrel. Meanwhile, there is no way   oil lifting   cannot be increased suddenly. Nonetheless, there is need to take systematic measures to push Oil lifting toward 900 000 barrel per day in several years to come.

The year 2013 is not an easy one; promises to be punctuated by twists and turns and very different from the time the government drew out the assumptions in late August 2012.   However, of all the issues that are crucial, hiking the price of subsidized fuel is the most urgent that needs action. This is by no means an easy task for the President, but considering the circumstances, taking such an action is imperative. Definitely, the President is feeling a lot of political pressure on his shoulders, but that should not always be to the detriment of economic logic. This is because the upper limit of fiscal tolerance has long been passed.