M Hatta Rajasa, Coordinating Minister for Economic Affairs: Interview

Interview: M Hatta Rajasa

What do you think are the main risks that Indonesia’s economy will face in 2013?

M HATTA RAJASA: We realise that the global economic uncertainty remains high since the problems in the eurozone are not likely to be resolved in the near future. Furthermore, these widespread issues will continue to dampen global economic growth. As such, global demand is likely to remain soft, restricting our growth in exports and the industries dealing in this area. At the same time, strong Indonesian domestic economic growth will mean higher demand for imported products. Eventually this could lead to deficits in trade and the current account balance. Our current account balance turned negative in the fourth quarter of 2011, creating some pessimistic sentiment.

Economic growth is also at risk of being hampered by higher global food prices. A significant increase in global food prices would exert a tangible impact on domestic food prices and mean higher inflationary pressures. This would erode household purchasing power, which might slow the pace of economic growth.

We also continue to closely monitor the developments in the Middle East, especially the increasing tensions between Israel and Iran. Worsening conditions in the area might trigger a significant rise in global oil prices, requiring greater subsidies or higher domestic fuel prices. These measures would raise inflationary pressures in the short term and reduce household purchasing power. If such a time arrived, we would be sure to handle subsidy reductions very carefully.

How can the fiscal impact of fuel subsidies be limited over the long term?

RAJASA: We understand that subsidies have created a large burden on our state budget. Therefore, we strive to keep our budget healthy by taking such measure as deciding to increase electricity tariffs in 2013. Over the long run we will change the way in which we provide subsidies to our people. The current general subsidies on goods will be replaced by targeted subsidies that will be channelled directly to those in need. The general subsidies will be gradually phased out – within five years for fuel subsidies, four years for electricity subsidies and three years for agricultural subsidies.

In terms of economic policies, what will be most useful to maintain economic growth?

RAJASA: First of all, we need to maintain household purchasing power by reining in inflationary pressures through improving distribution channels. We are enhancing our infrastructure to reduce transportation costs. In addition, to minimise the seasonal effects on domestic food prices, we have revitalised BULOG, the state logistics body. We have amended regulations so that BULOG can intervene more quickly than before.

Low inflationary pressure will create room for our central bank to maintain its benchmark rate at the current historically low rate of 5.75%. This will also allow the lending rate to be kept relatively low, making it more attractive for consumers to spend.

In addition, we will continue improving the investment climate in the country through infrastructure developments, bureaucratic reforms, and improvements in law and regulations. To mitigate the impact of economic recession in the eurozone on our exports, we will persist in diversifying our export destinations. In terms of our key markets, we are more diversified than we were in 2008.

We will also improve budget absorption so that government expenditure will contribute more significantly to our economic growth. Several laws and regulations have been revised to ensure better budget implementation in the near future. Furthermore, we have been optimising our government spending plans by reallocating funds initially assigned to unproductive activities to more productive activities.

Finally, one of our fundamental long-term goals is to make sure that MP3EI – the master plan for the acceleration and expansion of Indonesian economic development – is implemented as planned.