Tackling Indonesia's Challenges

Its Coordinating Minister of Economic Affairs reveals how the country is dealing with soaring inflation, terrorism, and a possible bird flu crisis

The past year has been a test for Indonesian Coordinating Minister of Economic Affairs Aburizal Bakrie -- the country has battled with the aftermath of the tsunami, skyrocketing oil prices, and, now, the specter of a possible avian flu crisis. After months of delay, the government finally reduced fuel subsidies that were crippling the public purse, leading to a jump in prices of gasoline by 87%, diesel fuel by 104%, and cooking fuel by 184% at the beginning of October. Inflation has spiked, causing some to question the impact on the country's growth prospects.

Bakrie discussed Indonesia's economic challenges with BusinessWeek Asia correspondent Frederik Balfour on the sidelines of the BusinessWeek CEO Conference in Beijing this past week. Here are edited excerpts of the conversation:

Some analysts have been lowering growth forecasts. What is your prognosis?

Our economy performed very well compared to other parts of Asia, with growth up to 5.8% [in September] -- it is No. 3 after China and India. The performance of the stock market is No. 2, just after the Kospi [of Korea]. The loan [debt] to GDP ratio is 48%, compared to 53% last year. So we're not going to change our growth prediction of 5.7% to 5.8% this year and 6% to 6.2% real growth next year.

We knew when we took the decision to increase the fuel price [which was doubled in October to relieve the cost of subsidies] there would be inflation, but when you look at core inflation, it doesn't change much. If you look at the 8.7% increase in prices, 3% was from the oil increase in October. We think by the end of next year, year-on-year inflation will be 7% to 8%.

Although consumption is falling, government spending is coming up. By September the government spending was only 30% of budget, and we will have another 30% by yearend, so there's 40% carryover into next year. It will be very important to have government spending next year used for projects with heavy labor content.

We predict there will be 1.6 million new jobs created this year, compared with only 900,000 last year. But there have been 1.8 million new entrants [to the labor market].

Some say the government hasn't delivered on all its promises made [since the elections in October, 2004.]

I don't agree. We have done everything except the privatizations. We have made regulations to deregulate all other infrastructure, toll roads, water projects, power -- all done. There are three laws waiting to go to Parliament on railways, harbors, and airports to open them up completely to foreign direct investment.

On Nov. 15 you said the government would take control of the Cepu oil field if Exxon Mobil (XOM ) and Pertamina cannot come to an agreement. What kind of a signal are you sending to foreign investors?

Our job is to make a production-sharing contract work, so if these parties don't do anything and are only sitting on the oil field, the government has the right to take it over and give it to other parties. It has to be by the end of the year. The government does not want to see people who are given a contract not do anything.

Isn't the problem of overall security deterring foreign investment?

Bombs could happen anywhere in the world, as they did happen in London, in New York, in many countries. I think investors have already discounted this. The most important thing is the investment environment rather than security as such. Security on their contract is more important than physical security. They would like to see our new tax law be competitive with regional tax laws, also that labor laws are business-friendly. Licenses could be given in a shorter time, [this is] still not competitive compared to the region. We want the approval period down to 30 days, from 80 days at present.

The government is trying to strengthen security. Ten years ago, if people saw the army in airports, you'd think it's crazy. Now if you see them in airports, ports, and tourist areas, people feel safe.

What is the government doing to prepare against a bird flu epidemic?

We have already made a lot of efforts to contain the problems -- [we have] already informed all international organizations, and in Geneva we are the country that is prepared to give the real picture on what is happening and give information to all the world and ask for international cooperation. We need more than $150 million to make all the preparations.

In the last two days we have had Cabinet-level meetings. Indonesia is trying to put more medical supplies in place -- there's not enough. We expect a patent to be given to Indonesia and will ask our Minister of Health to make a formal request [to Roche, makers of Tamiflu.]

Why has privatization been so slow?

Prices are very low, we would like to see the markets get better.

But you said earlier the stock market is the second-best performing and the economy, the third-best performing in the region.

We're waiting for a time when the price-earnings ratios become better for government-owned companies. Our target next year is 1 trillion rupiah from privatizations from strategic investors, not including IPOs. We have asked the State-Owned Enterprises Department Minister to streamline all the companies. There are now more than 160 SOEs. We would like to reduce to [them to] 60 -- some companies are to be sold, some will be merged.

Can you comment on speculation that you might lose your job in a Cabinet reshuffle?

It's all speculation, there's no certainty about this. Whoever becomes Finance Minister or Coordinating Minister has an easy job because the basic groundwork is already done.

How is Indonesia leveraging on China's rapid growth?

We expect [that] China, [flush] with all the foreign exchange, would like to invest somewhere, and Indonesia is one of best countries to invest in. For example, [Nov. 15] in Jakarta, I received 500 businessmen accompanying the party secretary of Guangdong province and signed $800 million worth of cooperation agreements with Indonesia.

Edited by Beth Belton

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