Indonesia Needs to Make Structural Reforms

KOMPAS/DWI BAYU RADIUS

Workers affix decals to ceramic bowls on 13 May 2019 at the Indo Porcelain tableware factory in Tangerang, Banten. The company produces about 1.7 million pieces of dishware per month, 65 percent of which is exported to the United States, Europe and Asia.

The risk of global economic turmoil continues to cast a shadow over Indonesia. Therefore, the government must prepare strategies, including structural reforms, to reduce vulnerabilities.

JAKARTA, KOMPAS - Indonesia\'s tax revenue is relatively low and the financial market condition is still shallow. This condition makes Indonesia\'s economic fundamentals vulnerable to global economic turmoil.

In addition, Indonesia still relies on foreign fund inflows to cover its budget and current account deficits. The dependence on foreign capital has made the country’s economic stability, especially the rupiah exchange rate, vulnerable to external headwinds.

Therefore, Indonesia must further issue structural reforms. The Indonesian government is also advised to develop a short-term revenue strategy to find new sources of revenue and to encourage financial market deepening by increasing the number of domestic investors.

The suggestion was conveyed by the IMF Executive Board in the 2019 Article for Consultation report, which was issued on Thursday.

The report said Indonesia must reduce its dependence on foreign capital to minimize the impacts of the slowing global economy and trade. Foreign debts should be further controlled by creating financing alternatives through tax revenue and public-private partnerships.

At present, foreign investors hold 40 percent of rupiah-denominated government bonds. Based on the Indonesia Balance of Payments (NPI) released by Bank Indonesia (BI), the current account in the first quarter of 2019 suffered a deficit of US$6.96 billion. The deficit was covered by a financial transactions surplus of $10.051 billion, meaning the balance of payments was $2.419 billion in surplus.

Responding to the IMF’s recommendations, Finance Minister Sri Mulyani Indrawati said Indonesia would attract more foreign investment to minimize the impacts of global risks. A number of national strategic projects have no longer been given to state-owned enterprises, but now involve the private sector. "We are preparing economic policy formulations that will provide an overview of prospects and openness [for investment]," Sri Mulyani said.

Meanwhile, the World Bank’s chief economist for East Asia and the Pacific, Andrew Mason, said structural reforms were needed for inclusive and sustainable economic growth. The policies and incentives issued by the government must reduce poverty and increase economic growth.

Mason advised policymakers to focus on five areas, namely promoting economic competitiveness, improving the quality of human resources, increasing financial inclusion, strengthening government institutions and increasing state revenues to begin the transition to a high-income country.

AP PHOTO/MANUEL BALCE CENETA

US Federal Reserve chairman Jerome Powell speaks at a press conference on 31 July 2019, following a Federal Open Market Committee meeting in Washington, D.C. The Fed cut its benchmark lending rate on Wednesday for the first time in more than a decade to stimulate the economy, after a year of sustained pressure from President Donald Trump. With many economists expected at least one more rate cut this year, Powell said the move on Wednesday was to "insure" the economy against global uncertainties, while signaling that the Fed was not launching a new round of rate cuts to boost the economy.

"The government must act decisively or it will lose the momentum to maintain the performance of regional development, which is now very good," Mason said in an economic discussion organized by the Finance Ministry’s Fiscal Policy Office in Jakarta.

JCI in the red

The decision of the United States central bank, the Federal Reserve, to lower its interest rate target to 2 to 2.25 percent received a cool welcome from the market. The Jakarta Composite fell 0.14 percent to close at 6,381.54 on Thursday.

The head of research at Valbury Sekuritas, Alfiansyah, said global and regional stock markets were under pressure as investors were disappointed at the Fed’s warning against a lengthy US monetary easing cycle.

"In addition, negotiations related to the US-China trade war, which ended without any agreement, were also a negative catalyst," he said.

The director of PT Garuda Berjangka, Ibrahim Assuaibi, said the Fed\'s warning against a lengthy monetary easing cycle encouraged financial market investors to place their capital in US dollar instruments.

"This situation led to the weakening of the rupiah and other Asian currencies against the US dollar," Ibrahim said. Based on the Jakarta Interbank Spot Dollar Rate (Jisdor) reference rate, the rupiah weakened to Rp 14,098 per US dollar.

Sri Mulyani was convinced the Fed\'s rate cut of 0.25 percent would make Indonesia more appealing than other developing countries because investor confidence in Indonesia had improved.

In addition, the cut in the Fed\'s benchmark interest rate provides room for domestic companies to improve their performance and help increase economic growth in the third and fourth quarters.

Kompas/Raditya Helabumi

Taxpayers reporting their annual tax return form (SPT) of individual income tax (Pph) at the tax office in Kembangan, West Jakarta, Wednesday (29/3). The Finance Ministry’s tax directorate general has extended the deadline for SPT reporting to April 21, 2017.

Separately, the head of the Center for Macroeconomic Studies at the University of Indonesia, Febrio Kacaribu, said that a reduction in the Fed\'s benchmark interest rate could trigger foreign capital outflows, but not significantly. The reason is, among other things, investors see that the risk of weakening US economic growth will continue. (KRN/DIM)