Indonesia plans to increase spending on the country’s overburdened roads, airports and power plants and pare down restrictions on businesses to encourage investment and allow Southeast Asia’s largest economy to continue to grow, President Susilo Bambang Yudhoyono said Thursday.
Unveiling his programme to keep the country’s economy expanding, Yudhoyono said Indonesia needs to boost spending on ports, roads, power plants and other infrastructure by 15 percent next year, as well as reduce the number of regional regulations on business and fight corruption.
His budget proposal for 2013 – which must gain parliament approval – is to reduce the country’s deficit to 1.6 percent of gross domestic product next year, down from a target of 2.23 percent this year.
Yudhoyono’s moves are aimed at ensuring that Indonesia continues to clock some of the strongest growth in the world, even as much of the globe struggles with slowdown. With his last term scheduled to end in less than two years, he hopes to leave a legacy of better incomes and opportunities for Indonesia’s 250 million citizens. Economists say the best way to make that happen is for Indonesia to spend less on government-subsidised fuel and more on the country’s network of railroads, bridges and other infrastructure.
The president predicted that even with the debt problems in Europe, Indonesia would see growth of 6.8 percent in 2013, up from the 6.5 percent he expects this year.
“We can survive the global [debt] crisis,” he said. “Our economic fundamentals are strong, our fiscal health is relatively good and poverty and unemployment are falling. These facts are all encouraging.”
While Indonesia’s economy has expanded more than 5 percent in seven of his eight years in office, President Yudhoyono and his Democratic Party have been struggling with sliding approval ratings.
Recent surveys show that voters are fed up with high-profile corruption cases involving members of the ruling party. The president needs to ensure that Southeast Asia’s largest economy continues to grow, analysts say, if he wants his party and its choice for his successor to have any chance in the national elections scheduled for 2014.
One of the biggest restraints on further growth, analysts and executives said, is the country’s overburdened infrastructure. Traffic jams are boosting delivery costs and times. A lack of power is restricting capital investment. Meanwhile, delays at the country’s outdated airports and ports are slowing the flow of exports. These bottlenecks are not only putting pressure on the inflation rate through added costs, but they have also helped to worsen the country’s trade balance as consumers and companies are forced to import goods and materials to feed growing demand.
“GDP growth exceeding the 6.0 percent to 6.5 percent level for a prolonged period of time does pose overheating risk, especially if existing supply-side bottlenecks are not addressed,” said Philip McNicholas, sovereign-debt analyst at Fitch Ratings.
Yudhoyono’s budget proposed lifting infrastructure spending to 194 trillion rupiah ($20 billion) in 2013 from a target of 169 trillion rupiah this year. He The fund will be used to improve 4,431 kilometers of road, add 380 kilometers of new railway, and finance construction of 15 new airports and the expansion of another 120.To encourage local and international investment, said he planned to abolish more than 800 regional restrictions on businesses that clash with the national regulations.
He said the government will also try to streamline the process companies have to go through to get their investments approved. Executives in Indonesia often complain that unclear and conflicting regulations keep them from investing more as they have to deal with multiple regulators at the national and local levels.
Regulatory confusion “creates an uncertain, high-cost economy and hurts our chances for higher and better quality growth,” Yudhoyono said.
Whether Yudhoyono will push through the much-needed spending and reform remains to be seen. The sliding popularity of his party seems to be keeping him from making the tough decisions needed to turbocharge growth, analysts said. His embarrassing failure in March to get approval for a much-needed increase in subsidised fuel rates, is the latest example of how the ruling party seems to have lost its ability to lead.
The president said Thursday that the country’s energy-subsidy bill would likely balloon 36 percent to 275 trillion rupiah in 2013, up from 202 trillion rupiah this year.
While commodities exports and a giant and growing middle class will continue to power Indonesia’s economy, economists said, it needs to follow through on plans for reform and spending if it wants to become the next big Asian country to experience decades of steady growth. Without reforms it risks becoming the next Vietnam, which saw its growth rates plunge as it struggled with inflation.
“I’m not very optimistic,” said Franky Sibarani, chair of the Indonesian Food and Beverage Producers Association.
“What I’ve seen among the bureaucracy is that there is no sense of urgency yet. The investment climate must be improved.”