JAKARTA – Indonesian Finance Minister Sri Mulyani Indrawati, perhaps President Joko Widodo’s most valued Cabinet member, has good reason to treat one expression like the plague she is confronting: it is called “moral hazard.”
Indrawati, who celebrates her 58th birthday this month, knows all about moral hazard, which according to its economic definition occurs when a party has an incentive to increase its exposure to risk because it wants to avoid bearing the full cost of that risk.
In fact, it cost the former academic her job as finance minister in the previous Susilo Bambang Yudhoyono administration, the scapegoat in the 2008 Bank Century bailout scandal which is now acting as a disincentive for bureaucrats to spend the country out of its current malaise.
Spending is what Indonesia needs if it is to get 695.2 trillion rupiah (US$47.5 billion) in emergency relief funds into the hands of its most disadvantaged groups and to stimulate an economy heading from 5.2% growth in 2019 to an expected contraction of up to 0.4% at year end.
But it isn’t happening, certainly not at the pace Widodo wants, in part because civil servants are fearful of making a misstep and later facing accusations of causing “losses to the state,” often the basis for corruption charges even if self-enrichment is not in evidence.
Indrawati has now confirmed an Asia Times investigation showing that thegovernment is also handicapped by a failure to maintain the comprehensive data base, drawn up under former vice-president Boediono, listing the lowest-earning 40% of Indonesian households.
Little has been done in the past three years to keep the social safety net records updated, leaving deputy state enterprise minister Budi Sadikin’s newly-formed Covid-19 economic recovery team scrambling to make the best of the data they have. That may mean relief funds will reach only two-thirds of those targeted – if that.
“They’re trying to do something about it, but it takes time,” says one former government official, who worked on the project in its earlier days. “The data isn’t solid and there will be a lot of errors in who gets the money. But they don’t have any alternative.”
In an effort to widen the pool of beneficiaries, officials have fallen back on the records of the Employment Social Security Agency (BJPS), announcing it will expand an existing $2.7 billion wage subsidy scheme from 13 million to 15.7 million registered workers.
The safety net data was originally compiled by the National Team for the Acceleration of Poverty Reduction (TNP2K), a special unit in the vice-president’s office tasked by President Susilo Bambang Yudhoyono with creating Indonesia’s first social security system.
But in 2017, the responsibility for updating the information on the country’s neediest families passed to the Social Affairs Ministry, then the portfolio of current East Java Governor Khofifah Parawansa, who passed the job to regional governments. That proved to be a mistake
That proved to be a mistake – and not for the first time. As a legislator, she did little to help the victims of the 2006 Sidoarjo mud volcano disaster and as governor she was slow to enforce measures that could have limited the impact of the pandemic.
Why the data collection was taken out of the poverty alleviation unit’s hands when it had proved such a success remains a mystery, but the reasons appear to have been both bureaucratic and political. Unlike the ministry, TNP2K is only a quasi-government institution.
Since then, the program that made Indonesia a global pioneer in evidence-based policy-making has not been given the same priority, with its former architects complaining about a breakdown in the complex targeting system from which it will be difficult to recover.
“We’re very disappointed,” says outgoing TNP2K executive director Bambang Widianto, noting that while the regular so-called sembako program, covering nine essential food items, still reaches 25%, or 15.5 million of the country’s lowest-earning households, that falls far short of what is needed now.
For example, in the most populous province of West Java, it represents only 2.63 million households. But with 21 million now unemployed, even if only a third of those need income support, it still amounts to just 2.6 million people.
Jakarta is the same. While 183,200 households are covered under the sembako scheme, more than 1.3 million people, each representing a household, are listed as unemployed, many of them presumably in the informal sector. The result, says Widianto, is “chaos.”
Last June’s stimulus package provides $13.9 billion to strengthen health and social spending, $8.4 billion for small and medium businesses, $8.2 billion for tax incentives, $6.6 billion to help ministries and regional governments, and $3 billion for state enterprises and labor-intensive industry.
For spender-in-chief Indrawati, moral hazard translated into a concerted effort by hostile politicians to criminalize the2008 policy decision to bail out Bank Century which, it later transpired, had been robbed of $1.5 billion by the bank’s corrupt management.
Among her chief protagonists at the time was senior Golkar Party politician Bambang Soesatyo, a cohort of tycoon and Indrawati foe Aburizal Bakrie, who is now chairman of the People’s Consultative Assembly (MPR), the country’s highest legislative body.
Her reputation intact in international financial circles, the minister resigned under duress in 2010 and moved to Washington to become one of the managing directors of the World Bank, a post she held until Widodo persuaded her to return home in 2016.
A decade later, she talks about moral hazard being an “incredible dilemma,” particularly in tackling potential problems in the banking sector and in providing either tax breaks or direct assistance to struggling private businesses.
So far, the banking sector has remained relatively stable, but there are concerns that a crisis of confidence later in the year may see the current flight of capital from smaller institutions to the ten or so largest banks turn from a trickle into a flood.
A reshuffle of the Covid-19 task force, coming days after the president slammed his ministers for taking the pandemic too lightly, has left economic coordinating minister Airlangga Hartarto and State Enterprise Minister Erick Thohir in charge of the overall handling of the pandemic.
Under them is Sadikan, at the head of the economic relief unit, and Doni Monardo, an active-duty three-star army general and leader of the National Disaster Management Board who leads the effort to contain the pandemic.
Now known as the Economic Recovery and Covid-19 Response Team, the new name and leadership change suggest a greater emphasis on economic recovery, with growth plunging by -4.3% in the second quarter, on top of a faltering 2.97% in the first three months.
But while officials insist that health remains the priority, Widodo has been strangely reluctant to replace ineffective Health Minister Terawan Putranto despite his unhappiness at the slow disbursement of the $6.9 billion allocation for health care.
It has been the same with small and medium enterprises (SMEs), which form the backbone of the economy and are struggling to keep their heads above water. A recent World Bank survey has found that only 10% of SMEs feel they are getting government assistance.
After Bank Century, where she was left to fight a lone battle, Indrawati will want to ensure that Widodo is fully engaged in any decision-making. “Sri Mulyani will be too traumatized to make a decision on her own,” says one former minister. “And it’s just not the banks. It’s also the corporates.”
With the government as the so-called “rescuer of last resort,” and non-performing loans on the rise, policymakers will have to decide as transparently as possible what sectors and what companies, state and private, need the most help.
Last March’s regulation in lieu of law (Perppu) authorizing the new spending programs includes a provision under which any untoward losses incurred are to be considered “economic costs to save the country from crisis” rather than state losses.
But one analyst says he doubts that will hold water in what he called a “real setting,” noting the uncompromising attitude of the Anti-Corruption Commission (KPK) in past cases where officials, such as former Pertamina oil company chief Karen Agustiawan, have been jailed for making what turned out to be poor business decisions.
Analysts say it is a measure of the seriousness of the situation that a fiscal conservative like Indrawati would agree to a once-only scheme under which Bank Indonesia (BI) will buy 397 trillion rupiah ($27.1 billion) in government bonds with newly-printed money, part of a controversial approach to monetary policy known as Modern Monetary Theory.
Earmarked for emergency public benefit programs, the challenge will be to see what happens to that money at the maturity of the 3-5 year bonds. Ideally, it will be withdrawn from circulation, reducing its impact on inflation, but there is concern the government will lack the political will to do that.
Fiscal sustainability could become an issue in the medium term, with the budget deficit rising to an unprecedented 6.43% of GDP, more than double the previous 3% threshold, and taxation revenue in a slump as businesses struggle to survive.
But that will depend on how fast the economy rebounds and whether debt interest rates can be kept in check in the meantime.
Widodo has been criticized for supposedly neglecting the health crisis and paying more attention to the economy. But it is a dilemma faced by all world leaders, the Indonesian president in particular because of the country’s history of social unrest.
Overall, dealing with the health emergency remains a major challenge for the government, particularly in testing and tracing and in the coordination of agencies involved in the response, always a problem in the Indonesian bureaucracy.
Meanwhile, a spate of workplace demonstrations directed at companies that have failed to pay wages or meet severance obligations during the lockdown suggest serious labor issues may lie ahead as the economy limps towards the end of the year.
Workplace unrest is also likely to intensify if the government tries to push ahead with the long-delayed and potentially explosive Omnibus Bill which, among other things, seeks to roll back worker-friendly provisions in the 2003 Labor Law.
Protests against the bill have become common-place across the country at a time when 3.7 million Indonesians have already lost their jobs and the vast number of people employed in the informal sector are struggling to make ends meet.
Widodo’s Indonesian Democratic Party for Struggle (PDI) and the National Democrat Party (Nasdem), two pillars of the ruling coalition, have both suggested dropping the provisions. But that would defeat one of the main purposes of the bill: to improve the climate for flagging foreign investment.
Maritime coordinating minister Luhut Panjaitan claimed in a virtual meeting with correspondents this week that six of the eight big trade unions were now on board and that he expected the bill to pass either at the end of this month or in early September.
The point man for Chinese investment, Panjaitan has other problems dealing with unions unhappy over the influx of thousands of mainland Chinese to work on nickel projects in Central Sulawesi and Halmahera, something he says will change when local workers are trained to replace them.
Fears of a so-called Chinese “invasion,” stoked by long-held prejudices and xenophobia over the origins of the coronavirus, has often been used by the political opposition and radical Islamists to attack Widodo and Panjaitan as puppets of Beijing.
China’s more aggressive actions in the southern reaches of South China Sea is only adding to anti-Chinese sentiment. Nothing is more likely to raise the nationalist ire of the average Indonesian than challenges to the country’s sovereignty.
While he is prevented from serving a third presidential term in 2024, Widodo is acutely aware of how easily his mishandling of the pandemic could tarnish his legacy. Despite several missteps, fair-minded analysts feel he has done as well as can be expected under the circumstances.
With economic growth plunging into the negative in the first and second quarters, and investment on a downward spiral, the next few months will be crucial in determining whether the government can do better at containing the virus while reviving consumer demand, which contributes to 56.6% of GDP.
Jakarta and East Java, the two epicenters of the virus, make up about a third of that. While office openings in the capital have led to a surge in the disease, East Java is the area of most concern by failing to enforce measures that have flattened the curve in more populous western Java.
Economists agree with government forecasts of zero to minus 0.4% growth for 2020, but they say with infections expected to go on growing at a moderate pace, much depends on how long the country remains in partial lockdown and the condition of global markets.
Spending on transport, clothing, housing and electronics, which make up about 60% of overall consumption, has fallen sharply over the past five months. So too have exports, which along with foreign and domestic investment form the major components of demand and remain key to the country’s eventual recovery.
If the opening up of the economy begins in earnest in the final quarter of 2020, the World Bank believes next year could see a surprisingly fast rebound to 4.8% growth, assuming the stimulus has an impact, consumption rebounds and there is some recovery in investment.
But the World Bank’s less optimistic scenario sees GDP at 3%, with per capita income held down by heavily-populated Java having to go through several partial opening and closing cycles before the pandemic stabilizes and the government is able to restore a greater measure of public confidence.