Time to close Indonesia’s $21 billion cookie jar

By Korea Herald
  • Published : Jul 15, 2014 - 20:11
  • Updated : Jul 15, 2014 - 20:11
As Indonesians head to the polls, the outside world is antsy about where the next president might take Southeast Asia’s biggest economy. The nationalistic tone of the contest has investors fearing the pro-market reforms of outgoing Susilo Bambang Yudhoyono will fall by the wayside.

Question is, how will we know if the geopolitically vital country with the world’s biggest Muslim population is moving forward or lurching backward? It all may come down to one word: subsidies.

The financial support Indonesia doles out to 250 million people has been part of this election all along, but a maddeningly vague one. Both Jakarta Governor Joko Widodo and Suharto-era General Prabowo Subianto pledged to curb the giveaways that rob funds from upgrades in education, healthcare and infrastructure.

Whoever prevails must work quickly to set out a specific and iron-clad timeline to stop squandering a fifth of the annual budget in such unproductive ways. It’s clear how to do it: by year-end, kerosene and gasoline prices will rise by this much, and next year and the year after by that much. What’s needed is political will. Mustering it is vital because so many of the changes Indonesia needs are connected to subsidies. Here are four:

Infrastructure: When you’re trying to reduce poverty in a sprawling archipelago of 17,000-plus islands, physical connectivity is everything. Getting coal, coffee, gold, oil, rubber, silver, tobacco and other goods into the global marketplace requires a level of efficiency and speed Indonesia has yet to muster. Granted, Yudhoyono has been plenty busy these last 10 years creating the vibrant democracy Indonesia has become since the bad old days of dictator Suharto, who was ousted in 1998. And the post-Lehman-Brothers-collapse era has hardly been a kind one for developing nations trying to maintain healthy growth. But paying for new roads, bridges, ports and power grids is hard when public handouts squander so many resources and corrupt officials steal even more.

Foreign investment: In trying to attract the hundreds of billions of dollars Indonesia needs to finance this building boom, it faces and chicken-and-egg quandary. Many foreigners are loath to pour money into a nation with such poor hardware. But then, their cash is needed to improve it. These overseas interests also know the pivotal role subsidies play in restraining Indonesia’s investments in its future. Politicians everywhere raise fuel prices at their own peril (ask Suharto). But acting early and ambitiously to curtail subsidies would send a strong message abroad: Indonesia is open for business ― and you won’t regret putting your money there.

Credit rating: The street cred Indonesia would get with long-term investors overseas would enhance its relationship with Fitch, Moody’s and Standard & Poor’s. One of Yudhoyono’s biggest achievements was winning investment-grade status from Fitch in December 2011 and from Moody’s in January 2012. S&P, though, still rates the country junk. Here’s why Subianto’s plan to raise some $300 billion of debt over five years is so worrisome ― and why investors prefer Widodo. The last time Indonesia had debt exceeding 50 percent of gross domestic product was about a decade ago. Why would anyone want to go back to that chaotic time and have Fitch and S&P rethinking recent upgrades? Also, some of that money might be used to expand subsidies, not cut them. Higher long-term borrowing costs are the last thing the nation needs.

Corruption: Subsidy roll-backs are a litmus test for attacking graft. Such programs provide countless opportunities for officials in Jakarta and local ones far from the capital to line their pockets or divert subsidized goods to cronies. It’s the ultimate cookie jar for wayward politicians ― at least $21 billion a year from fuel subsidies alone ― and it’s a key reason why Transparency International places Indonesia after Egypt, Tanzania and Kosovo in corruption rankings. For all his successes, Yudhoyono failed to use a solid second-term mandate to close the lid on that cookie jar. His successor, be it Widodo or Subianto, must do that right out of the gate ― or risk losing street cred around the globe. It’s not the answer to all Indonesia’s troubles, but it’s a good and highly symbolic start.

By William Pesek  

William Pesek is a Bloomberg View columnist based in Tokyo and writes on economics, markets and politics throughout the Asia-Pacific region. ― Ed.