Indonesia And Its Creeping Crisis

I would like to say that eco- conditions are more than the exis- tence of projects, even though many people still think that way. The fact is, our macro-economic indicators show a consistent deficit. Current transaction deficit in Quarter II of 2019 spiked to USD 8.4 billion or 3% of the GDP. Trade balance (cumula- tive) until Semester I of 2019 dropped to a deficit of USD 1.9 billion �" the worst rate yet during Joko Widodo (Jokowi)’s era.

Meanwhile, the economic team in Jokowi’s administration always blame external conditions for this situation, such as trade wars. On the contrary, the impact of trade wars was predicted 1.5 years ago.

Other countries, such as Vietnam, Myanmar, and Thailand have even benefit- ed from the trade war. They actually earned a surplus because of the trade war. However, because we are not used to anticipating future situations by creating simulations, we always get caught like deer in headlights. Like the Javanese say, we are eter- nally gumunan when problems occur: we are stunned with bad results even though everything has been predicted a year or two earlier. And our “Blast- ed Minister of Finance” continues to deny the situation even now!

Indonesia tax ratio in 2010-2018 shows that tax income ratio to the GDP in 2015 was 9.20% before Tax Amnesty, while today (2018) it is only 8.85%. How come tax income rate dropped far even de- spite Tax Amnesty? With such a big Tax Amnesty campaign, the resulting ratio was really unexpected. What went wrong?

Later, there is news for a another Tax Amnesty. It is simply ridiculous, because even the first Tax Amnesty was a total failure, why hold a sec- ond one? With a Tax Amnesty, the number of active taxpayers should increase. Instead it dropped. Spe- cific tax ratios, such as that cus- toms income, rose slightly. Mineral and natural resource tax ratios in- creased, but are still in the 11.45% range.

When I was the Coordinating Minister of Economic Affairs in 2000, our tax ratio was 12.50%. This shows the primary failure of the Blasted Minister of Finance. We refuse to call her the “Best” Minister of Finance, because that was only the assessment of creditors or for- eign companies. For our people and economy, she caused our economy to become blasted to smithereens.

One of the Minister of Finance’s primary duties is to increase tax ratio so that we do not depend on debt. However, if tax ratio were to decrease steadily, the longer it lasts the more we will depend on debt with ever-rising interest rates. As we know, the Blasted Minister of Finance issued USD 43 billion in bonds at an interest rate that is 1.5% higher than that of countries with lower ratings such as Viet- nam, Thailand, and the Philippines during Susilo Bambang Yudhoyono (SBY)’s era.

If we issue bonds, our interest rates should be lower than theirs. This happened when Agus Martowardoyo and Bambang Brodjonegoro were the Minister of Finance in their respective terms: every time they issued Gov- ernment bonds, they set the interest rate lower.

This is the correct way to do it when we issue bonds: we should do it at a lower interest rate than the three countries with lower rating than us. However, that is not the case with the Blasted Minister of Finance. 10-year bonds with 1.5% higher in- terest rate might end up increasing the amount to pay by nearly a full third. Consequently, the additional interest that Indonesian citizens have to pay is Rp 120 trillion higher. Even worse, nearing the Eid-el- Fitr this year, our Blasted Minister of Finance issued Samurai Bonds, which have higher interest rate than most other countries.

Consequently, the Indonesian people must pay out an additional IDR 663 billion in in- terest. This is a crime, or at least it should be considered as one. Howev- er, neither our people nor the media understand how dangerous such ac- tions are. We need to remember that with lowered tax ratio, we are forced to borrow more money at higher in- terest rates whether we want to or not, and this will cause more problems later.

We have not learned from history, in this case the 1997/1998 crisis. This is because our intellectuals and media have never made a conclusive analysis of the situation. Therefore, we keep on making the same mis- takes. At the time, the private compa- ny with the highest amount of loans was the Sinarmas Group.

They ran a good palm oil and paper business. However, they expanded too much: they issued USD 12 billion in bonds and could not pay them out when they matured in 1997. Their rating dropped immediately and they took down the rating of other companies in a chain reaction, causing the crisis to occur.

We have predicted the occurrence of the ‘98 crisis in October 1996 in a 150-page report. We stated that everyone should be careful, as the clouds at the time can prove to be- come pouring rain, even floods, in Indonesia’s economy in ‘97-’98. I showed data on current account defi- cit, about Indonesia’s excessive debts, about the rupiah being overvalued.

All of these are based on quantitative data. I fully remember how international agencies dismissed my predic- tion and declared how Indonesia’s economy in ‘97-’98, especially in ‘98, would be great. Entrepreneurs, Bank Indonesia, and the Department of Finance also deemed Rizal Ramli’s forecast to be erroneous, but it all happened.

Other than macro-indicators such as tax ratios, micro indi- cators have also shown signs of danger. One of these is the continued slowdown of the retail sector. This means that consumer buying power will continue to drop this year, and property will take a hard hit because they are too highly leveraged with continued expansion, combined with even fewer property buyers as time passes.

Commodities such as palm oil, rubber, and copper have also shown a tendency to decline. Secondly, on a con- crete level, default rates increase. Major compa- nies such as Jababeka, Podomoro, Duniatex, etc. are proven to be unable to pay off their matured bond certificates. Imagine the case with so many smaller companies. The boils have started to pop one by one, and more will continue to pop if we leave them alone. However, our officials continue to act as if nothing has happened, precisely as in 1998.

Thirdly, as perfectly stated by Nik kei, there is a high incidence of “zom- bie companies”. These are companies listed in the Exchange whose debt interest cannot be covered by profit only. Such companies can only sur- vive through constant refinancing, constant restructuring of their debts, and constant search of new debt to settle old. The proportion of zom- bie companies from 2017 to 2019 in Indonesia increased 11%. Nikkei reports that the current proportion of zombie companies in Indonesia is 24%, or nearly a fifth of all our companies in the Exchange.

This is the kind of bubble that will turn up as a problem later, especially if the macro-economy is unsupportive. However, if the macro-economy is supportive with an economic growth rate of 6%-8%, such problems will not occur. Yet because macro-eco- nomic growth has fallen to 4.5%, the boils keep on increasing �" and when they pop, actual crises will occur. We call this condition a “creeping crisis” as it creeps slowly but surely towards us, as clearly shown by micro-eco- nomic, macro-economic, and corpo- rate data, which shows that firings occur more frequently and the trend continues to rise.

The question is, “Is there hope for us? Is there a way for us to prevent continued economic downtrend?”

Albert Einstein stated it perfectly, if rather harshly, “It is stupid to ex- pect a different result if you are using the same method to solve the prob- lem.”

Similarly, Confucius also stated that “If the goal cannot be achieved, do not change the goal, but change the steps used to achieve it.” In our case, that’s exactly the opposite: we change the goal in order to be able to use the same method instead. For example, we know Tax Amnesty has failed, but we plan to do it again.

Are there other failed ways that we insistently use? Yes, austerity �" reducing expenditures. It’s true that the World Bank and IMF suggest to developing countries that they should restrict their State Budgets and go after taxes when their economic growth slows.

Curiously, however, developed countries never abide by this meth- od, as the economy would actually worsen if they do that when growth is slow. Yet this is precisely what is always suggested to developing coun- tries to do in a crisis!

Mr. Jokowi once asked me when he invited me to the Palace after I was no longer a minister, “Brother Rizal, I am confused. I am a furniture sell- er. If I should cut down my budget every 6 months, my goods would not sell, the capitalization would be out of date, the cost would be too high and I would not deserve praise. I feel odd every time a foreigner come and tell me ‘You are a great president’ because I cut budgets. I do not think it makes sense.”

The answer is actually very simple: it is because we will have money to pay them when we cut budgets. They are happy then, and they would not care if the people and businesses get into trouble.

Jokowi laughed when he asked me if it really is as simple as that, and I told him yes, it is. If our economy crashes, our asset value would also crash, and that would give the opportunity for foreign investors to scoop up as many Indonesian assets as possible.

The austerity program has been tested many times in Latin America and it has always failed. They also tried it out in Greece three times. I personally know Prime Minister Alex- is Tsipras. Greece had too much debt at the time, and they took the advice of reducing their budget and aggres- sively seeking taxes for three years.

The economy worsened, more people became unemployed, and social ex- penditures had to be slashed further. There was more pressure to imple- ment the budget cut package for the second time. The economy dropped even further and the people became even poorer.

Nearing the execution of the third repeat of the plan, I went to Greece for a visit. Greece’s Coor- dinating Minister of the Economy asked me to make a memo to Prime Minister Alexis Tsipras and suggest another way for him.

I wrote a three-page memo, telling him that it is basically very difficult to get Greece out of the problem be- cause they had to get out from us- ing the Euro currency system. This currency is just too strong for them. If they use their own currency, they can become more competitive by increasing exports and growing do- mestic industry.

As it turned out, de- spite pressures from here and there, the Prime Minister went on with the third austerity period. Consequent- ly, the people of Greece became even poorer. Unemployment was astro- nomical and asset values crashed. The price of villas and other proper- ties simply dived. I was actually confused because 500 m2 homes in the capital city were sold at a low price of IDR 60-70 million.

After the third austerity program, China started to buy the biggest ports in Greece, as well as airports and vil- las. The economy started to recover, but it did not matter too much for Greek citizens who became even poor- er and jobless. In the election held two weeks ago, Alexis Tsipras lost because the people are tired of his consistent inability to make their lives better.

Austerity and aggressive taxing are a combination that has been proven a failure everywhere. When the econo- my slows down, we should stimulate it in order to grow faster, and try to seek taxes later. We must especially note that the people whom the Blast- ed Minister of Finance seek to tax are smalltime entrepreneurs such as sell- ers of pempek (fish dumpling), pecel lele (fried catfish), etc.

Naturally, they can only generate small tax income, if any. She does not dare to chase after big industries that can pay more tax- es, such as coal, CPO, etc. at the risk of being a broken record, I repeat that austerity has been proven to have failed everywhere. If we take this policy, as I told Presi- dent Jokowi at the time, we will re- main stuck at 5% economic growth until 2019. I told him that the policy is super conservative, and everything that we have predicted during the past three years will come to pass.

If there are no changes, no better strat- egies and policies, our economy will be driven even further underground and the creeping crisis will grow into a full-blown crisis next year.

Who will the victim be in such a case? The common people, as always. Every time a crisis hits, the ones that got hit worst are the middle to lower classes, who become poorer. On the contrary, the elites, the top quarter of the population, become richer. That was what happened in Latin Ameri- ca, and that was also what happened in Indonesia during the 1998 Crisis.

How come?

The rich would usually invest in foreign currency, gold, and many others. During the 1998 Crisis, peo- ple who had American dollar sav- ings became extremely rich because USD value suddenly jumped from Rp 2,500.00 for each USD 1.00 to Rp 16,000.00. The one hardest hit is usually the lowest classes, who became even poorer, and unemployment increased to 40 million people.

This happens everywhere in the world: every time a crisis occurs, the common people, the middle to lower classes are hit because they cannot afford to diversify their portfolio like the upper class.

Is there hope to get out of this creeping crisis? Is there any way to prevent it from continuing?

The answer is “Yes.”

First, stop austerity and stop seeking tax from the little people. The Government must make out- of-the-box approach by accelerat- ing economic growth to 6%-8%, in- crease the common people’s buying power, and provide stimulus.

I am not spouting fairy tales. Rizal Ramli became the Coordinating Minister of the Economy to President Gus Dur in 2000. When we came in, Indonesia’s economic growth was 3%. We pushed the growth to 4.5% in 21 months, or an increase of 7.5%. We doubled ex- ports and maintain the stability of food prices in order to keep the peo- ple’s buying power high.

What we did that is unusual in Indonesia was that we raised the salary of civil servants, soldiers, and retirees by 125% within these 21 months.

The theory is simple: lower-level PNS could not make ends meet if they did not become corrupt. Therefore, we raised their salaries. Suddenly they had buying power and they spent 99% of their money. This caused the retail sector to become more dynamic, and consequently the economy slowly revived thanks  to consumer goods.

The sequence is reversed if I provide the rich with tax amnesty stimulus: they would keep their monies safely in another country, and they would not use it to refresh the economy. Again, when you stimulate the little people’s buying power, they would spend it all. When the retail sector is revived, when the economy is stronger, then we go for taxes.

However, our current batch of neo-liberal economists have burst-out logics. They choose to reduce salaries instead. This occurred during Joko- wi’s first four years of ruling. It was the first time in Indonesia that civil servants, soldiers, and retirees did not have increased income at all, because the Government’s priority was to re- pay creditors. However, the impact is quite clear: Jokowi lost votes greatly in all military and civil housing com- plexes, even among the Presidential Guard.

Naturally their (soldiers and civil servants’) wives and adult chil- dren vote, while their salary has not increased for four years. Usually, no matter who is in charge, when in- flation rate gets to 6%, salaries are raised 7%-8%. This shows us that their economic policy is dedicated to serve the creditors instead of the peo- ple. On the contrary, we try to stimu- late the middle and lower classes.

I remember that there were many agricultural debts during Habibie’s rule. Most of these defaulting farmers only had 0.5 to 1 ha of land. This is not right: we should restructure the credit of these smalltime farmers in- stead of arresting them. While at it, why not free them of these debts? Gus Dur agreed, and consequently agriculture was revived. We cannot repeat it often enough: helping the people would cause our economic growth to strengthen, while provid- ing incentives to the rich would only cause them to store their monies even more remotely.

Now we need to create plans and implement actions in order to allow Indonesia to benefit from the trade war crisis between America and Chi- na. Until now, I have not heard any Government official explain how Indo- nesia can benefit from the trade crisis. Vietnam, Thailand, and Myanmar all benefit from the trade war, while we not do not have any plans whatsoever.

Any crisis is a double-blade sword: it is both a problem and an opportunity. However, we never see the opportu- nity. Suppose for example you broke up with your lover. If you only take in the negative, you would drown in your sorrow and would not be able to do anything. However, if you take in the positive, you would put in the effort to improve yourself, your behavior, and your achievements.

Who knows, s/ he might see how you have improved and return? Unfortunately, the In- donesian government does not have any plan or action to benefit from the trade crisis, even though it has been predicted a year and a half ago.

We must dare to step to the right direction. We must not dare one thing but be cowardly in others. For example, we dare to fire any soldier who does not participate in fighting forest fires. Yet we do not dare to fire Minister of Trade Enggar, even though he has been summoned by the Corruption Eradication Commission (Komisi Pemberantasan Korupsi �" “KPK”) three times.

I complained about imports, and got reported to the Police by the National Democrat party for insult, while I have never said anything negative about the Party. They filed a complaint about my statement, “This is dastardly.” I was referring to a policy that acted as a detriment to farmers at the time, not to Surya Paloh who issued the policy. It was a policy of excessive imports. Yet I was reported for saying that “Surya Paloh is dastardly.” This is ridiculous. I re- fused to accept that, because I have always been professional and factu- al in my statements, and based on actual data. Therefore, we filed a counter-report against them to the Criminal Investigation Unit.

Eight months ago, I filed charges against this excessive import game for shallot and sugar community to KPK with strong evidence �" figures, estimates, twisted interpretation of articles, etc. Currently, KPK has only made arrests about the shallot case. They still investigate the sugar case because the scope is much bigger. Last month, KPK raided Enggar’s of- fice and discovered evidence in the form of memos about sugar. I won- der why the Minister increased gar- lic imports, not to mention salt and other commodities. For example, he increased 2 million tons of import sugar and 1 million tons of import salt from actual needs.

I seriously wonder why KPK re- mains silent about a person that it has summoned three times, but dared to be strict with others. What is going on here? Mr. Jokowi does not dare to fire him until now, even though he repeatedly stated in his speeches that he dares to do this and that. Why don’t you show your courage then by firing Enggar, Sir? I would definitely raise my hat to you then.

Note that macro-economy indica- tors: current account deficit, trade balance, balance of payments, and other indicators continue to drop. This means that economic growth and tax income will also continue to drop, so that we will be forced to depend on ever higher foreign loans with higher interest rates. On mi- cro-economic and corporate levels, buying power continues to drop as firings continue to rise. This is com- bined with rising credit defaults as Podomoro, Duniatex, Jababeka, etc. fail to make payments, one after an- other.

If we still persist with our current policies, a crash would come closer and closer as boils become bigger and bigger. However, the boils can be lanced and our economy can be saved if our growth rate can be in- creased 6%-8%. There is a way and means for it, but please let me ex- cuse myself for saying that even now, there are still many people who only quarrel with each other and feed Jo- kowi the illusion that everything is fine and there is no problem.

If our economy in 2019 slumps to under 5% and remains stagnant at 5% in 2020, buying power and retail sales will continue to drop,
causing the number of zombie companies to increase (estimated to be rising 5%-10% of their current rate).

The consequent potential of default payments will drag Indonesia into a crisis. However, if we can just get economic growth to 6%-6.5% level in 2020, retail sales and company income will increase, defaulting companies and zombie companies will shrink and we will have narrowly avoided a crisis.

The author is a Senior Economist and former Coordinating Minister of Maritime Affairs.