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Asia-PacificFebruary 4 2008

No desire to become a Tiger

Indonesia’s finance minister Dr Sri Mulyani Indrawati tells Neil Sen that she is aiming for sustainable growth that will ensure equality.
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Dr Sri Mulyani Indrawati, The Banker’s Finance Minister of the Year 2007, is one of a triumvirate of women in the policy-making elite of Indonesia who have been dubbed “the three divas” by local journalists. She is the most powerful of the trio, who include trade minister Mari Pangestu and senior deputy governor of the Bank of Indonesia Miranda Goeltom. But the label “diva” gives an entirely false impression of Dr Indrawati – an accomplished and serious technocrat who seems to have little time for rhetorical flourish.

No tigers please

A former academic and IMF executive director who took her PhD at the University of Illinois Urbana-Champaign, 45-year-old Dr Indrawati eschews every opportunity to sound smug about her government’s achievements. This is despite a record of which many finance ministers would be proud, with the rate of gross domestic product (GDP) growth standing at a 10-year high and with most other indicators suggesting that economic conditions in Indonesia are improving. There is a widespread feeling that the country has fully recovered from the financial crisis of the late 1990s.

When it is put to her that Indonesia does not deserve to be quite so overshadowed by the BRIC (Brazil, Russia, India and China) countries, and she is asked if Indonesia is about to become a ‘Tiger’ economy once more, having set a realistic target of 6.8% GDP growth for 2008, she says: “The term ‘Tiger economy’ has become pejorative. It implies recklessly fast growth and inequalities of wealth. But growth needs to be sustainable and so we are trying to build the necessary foundations of an economy that will ensure equality as well as growth.

“In the three years since this government came to office, we have had to face a number of external and internal challenges, such as earthquakes and other natural disasters. International economic factors are not easy to deal with either. But we have now put together a detailed policy framework – an investment law, a revision of the tax schedule and a new customs law – which we are trying to translate into action. So far the result has been GDP growth this year of well over 6% and inflation has also been stabilised, partly because of the fuel subsidies introduced in 2005. Much more needs to be done, however: the bureaucracy, and our health and education services also need to be reformed.”

The tone of her remarks is subtly different from that of some of her colleagues, who have said recently that Indonesia could reach the growth rates achieved by China and India if it could only improve its infrastructure and attract more foreign investment.

Reform fever

To achieve the kind of sustainable growth that can benefit the whole population that she desires, Dr Indrawati has identified two particular priorities: fighting corruption and encouraging foreign investment.

President Susilo Bambang Yudhoyono’s government came to power in 2004 with a mandate to deal with corrupt officials, and with good reason. Indonesia usually ranks high in any list of the world’s most corrupt countries, and Dr Indrawati is blunt about the problems. “We need clearer lines of command for our administration. Our judicial system in particular is not working. And foreign investors have been easily able to bribe our senior officials. They can get good terms, but at what cost to the country?

“We want to achieve higher growth but not at the cost of the people. All of our people need to share in the benefits of foreign investment. We can sustain foreign direct investment (FDI) if it is transparent and based on good governance, so that if an investment is challenged it can be shown that it is beneficial to the country. We need to be able to deal with investors in a professional way and to ensure that economic growth is sustainable, comfortable and supported by the people of Indonesia,” she says.

Fighting corruption

She is zealous in rooting out corruption – a drive that she has described as “an obsession”. She has said that she wants to instil a “reform fever” in the bureaucracy, a “positive and contagious disease” that will clean up government. The effects of her reforms, which have included dismissals and raising salaries to take away the allure of bribes, have already had some effect. The finance ministry, of which she took charge in December 2005, is widely seen as the least corrupt government department.

She has had some success at Jakarta’s largest commercial port by sacking some staff and raising salaries for the remaining officials. This has resulted in a bigger volume of goods being handled by the port.

Her ministry is also trying to track down tax evaders in a country where, according to press reports, only one person in 170 pays tax and where companies often understate their profits.

Although some economists suggest that this tough approach to corruption has curbed the inflow of foreign investment, as officials become circumspect about projects, the figures for 2007 look impressive. According to the state investment agency, BKPM, FDI rose to $9bn in the first 10 months of 2007, an increase of 103% on the same period in 2006. FDI approvals in the same period rose 177% to $36.75bn. More is needed. “To achieve 7% GDP growth, we will need to raise foreign investment by 22-24%,” says Dr Indrawati.

“Most areas of the economy are open to FDI, although there is no discrimination in favour of foreign investors,” she says. The most attractive sectors are “chemicals, food, automotives and natural resources”.

Banking progress

Dr Indrawati seems happy overall with the progress made in the banking sector. “The banking sector is very open to foreign investment, and it is fairly well consolidated. Bank Indonesia is trying to consolidate ownership and lending further,” she says.

Asked about the concerns of the rating agencies about the risk profile of the country’s banks, she replies: “The banks’ risk profile is affected both by macro-economic policy, including the sovereign rating, and by events at micro-economic and management level. I am sure that everyone will be very serious in following consistent and better policies.”

Some overseas investors are worried by the government’s new Single Presence Policy, which prohibits shareholders from owning a controlling stake in more than one bank, compelling them to divest by the end of 2010. Dr Indrawati is clearly impatient with Temasek, the Singapore investment company that owns stakes in Bank Danamon and in Bank International Indonesia. “Temasek has been very noisy about asking if it needs to sell one of its banks.” There is perhaps no love lost between Temasek and the Indonesian government: they are now embroiled in a dispute about the Singapore company’s holdings in Indonesian telecoms companies.

Regulatory policy

On regulatory policy in the banking sector, Dr Indrawati is supportive of the role of Bank Indonesia, the central bank. “I agree with its policy of creating a healthy and strong banking sector,” she says. But she acknowledges that the rest of the financial services sector needs more regulation. “A credible regulator is needed. Even if we have learned from the financial crisis, there is a lot of room to improve ourselves. We’re not saying we’ve got this right yet,” she says.

Bankers in Jakarta say that the government has been unable to agree with Bank Indonesia on who or what this new regulator should be. The government is thought to be keen to follow the UK’s example and set up a financial services authority, but the central bank is believed to want a larger role for itself.

Although it is widely acknowledged that more reforms and investment, especially in infrastructure, are needed to boost growth, the government’s overall economic management has looked sound to most economists and bankers. Interest rate cuts have not stimulated excessive inflation, the country has a healthy balance of payments of surplus, and Bank Indonesia has more than $55bn in foreign exchange reserves – a record high. The formal budget deficit figure of 1.5% of GDP is “low by ASEAN [Association of South-East Asian Nations] standards”, Dr Indrawati says, “and the actual figure is 1.3%.”

In a move that Dr Indrawati regards as a “vote of confidence in our reform programme”, the World Bank has recently approved two loans worth $800m, the country’s largest loan package from the institution in almost 10 years. The World Bank said the first loan of $600m reflected Jakarta’s success in meeting its policy targets and was intended to help the government to improve public services delivery.

There are some concerns about the economy, however. One is that rising fuel and commodity prices will have a damaging effect on the budget because Indonesia is a net oil importer and the government funds large fuel subsidies. But Dr Indrawati believes that the overall effect will be “revenue neutral”. She says: “Oil and gas revenues will increase and offset price rises. We are also trying to cut our subsidies by reducing the need for fuel by encouraging energy saving measures.”

Another fear is that the effects of the US subprime crisis will be felt in south-east Asia. So far, emerging markets have remained robust but that could change. “As an ASEAN country, we will be cushioned against the crisis. If there is a long and deep crisis, we could be affected but even then the impact is likely to be limited,” says Dr Indrawati.

Indonesia is moving into an environment of higher risks. It badly needs more foreign investment at a time when liquidity is becoming a problem. But if its financial policy continues to be led by someone as capable and as determined as Dr Indrawati, the country is assured of international respect, a healthy share of global investment and an encouraging environment for banks.

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