On August 16 President Susilo Bambang Yudhoyono used his annual address to unveil a fiscal stimulus package meant to address what most investors see as the major hurdle for Indonesia.
The plan calls for an increase in the budget for the ministry of public works of 41.1% over the previous year, to $3.8bn. In parallel, the allocation for the ministry of transport is set to rise 64.1% over last year to reach $1.7bn. Total capital expenditure, a majority of which is slated to go towards infrastructure development, is expected to rise 50% to $10.8bn.
"The government is determined to become increasingly focused in its fiscal policies to develop and repair infrastructure that is strategic to the economy," Yudhoyono said.
Government expenditures are thus set to rise 12% over this year's budget provisions, with the total package set to reach $89bn while state receipts have been forecast to rise by 11.2%, to $81bn.
By making infrastructure a main engine of growth, the aim is to boost GDP growth from the predicted 6.3% in 2007 to 6.8% in 2008. The fiscal stimulus will, however, widen the estimated budget deficit to almost $8bn, 1.7% of GDP. This will be financed mostly through bond issuance on the domestic markets according to Finance Minister Sri Mulyani Indrawati.
A challenge for the government has been to spend the budgeted money fast enough given the pronounced need for infrastructure investment. For this fiscal year, for example, a mere 23% of the investment budget has been spent as of early August, while just 27.5% of the budgeted procurement of goods has been spent, due to bureaucratic hurdles and financing difficulties.
Uncertainty stems from the underlying assumptions behind the draft budget. In addition to the forecast economic growth rate of 6.8%, the government is banking on several key economic factors: inflation will stabilise at 6%, the average exchange rate will be Rp9100 to the dollar (it has fluctuated between Rp8900 and Rp9100 this year), the benchmark interest rate will be 7.5%, and average international price of oil will be $60 a barrel.
Indonesia's growth rate reached 6.28% in the second quarter of this year, indicating the economy is on track to reach 6.3% GDP growth over the whole year. At the same time, relatively low inflation, by historical standards, of 6% should allow the country's central bank, Bank Indonesia, to cut interest rates again.
Chatib Basri, executive director of the University of Indonesia's Institute for Economic and Social Research (LPEM-UI), justified these assumptions, arguing that infrastructure projects will directly boost economic growth while keeping inflation low.
"Infrastructure projects under the public works department and transportation can rectify many issues that cause supply constraints, which in turn can also dampen inflation," Basri said.
However, the Indonesian Chamber of Commerce and Industry (KADIN) has marked a note of caution, arguing that the budget's assumptions are unrealistic.
"A 6.8% growth rate is too optimistic, 6.5% would have been more reasonable," Mohammad S Hidayat, KADIN's chairman, told the legislature after the president's speech. But Hidayat has commended the plan to boost infrastructure spending.
The draft budget is set for debate in the House of Representatives before it is put to a vote in October. Eight of the country's ten political parties have raised objections to the budget and some of its assumptions, including the timeliness of the disbursement of funds.
However, there is growing consensus that prioritising infrastructure as a means of stimulating growth is the correct way forward.
"In the past, the government has been slow to spend the funds voted on in the budget," an industry insider told OBG. "The types of infrastructure that will benefit from the added investment have not been detailed. We need to see what the funds are spent on."
The president made clear in his speech that the infrastructure investments into Indonesia would be guaranteed by the government, indicating the government's seriousness about drawing more private investment into Indonesia. Given that Indonesia has a relatively high country risk rating from international organisations and rating agencies, this is a necessary measure by the government to shore up its credibility.
As a sign of this increased focus, the head of state-owned railroad operator PT RaiLink unveiled plans for a railway linking Jakarta to the Soekarno-Hatta International Airport on August 22.
The $180m, 18km project is due to be completed by 2009. Although a monorail for the Indonesian capital is also under construction, this would be the first light railway service.
The train is expected to carry around 20% to 30% of the passenger traffic bound for the airport. In 2006, there were 30m passengers travelling through Jakarta's airport.