Euromoney Indonesia Investors Conference

Penulis: Anggito Abimanyu

Ladies and Gentlemen:

On behalf of Minister Boediono, I would like to thank the organizers for today’s invitation. Unfortunately the Minister is not able to attend today’s conference and has asked me to convey his regrets. On behalf of the Ministry and indeed the entire government let me say how important it is to increase foreign participation in the economy. Two years of hard work have delivered the strong foundations needed for sustained growth and this has and will continue to create the new opportunities signaled by this conference. In my remarks I will leave the discussion of specific investment opportunities to my colleagues in today’s session and address the fiscal strategy that have and should continue to provide the underpinnings necessary to sustain stability and accelerate growth in the medium to longer term.

In my remarks I will provide our view of the current budgetary situation relate to macroeconomic picture and where we see things going in the next year or so. And then on the fiscal policy part, two most important elements, policy reforms and issues financing. On the financing issue I would like to share with you the government’s medium term financing plan in the context of our medium term economic outlook. On the policy reform issue I would like to go into more depth on the reforms we are undertaking at the Ministry of finance and in particular in the areas of taxes, customs and budgeting.

adies and Gentlemen,

Let me begin by saying that our fiscal policy strategy has been central to overall economic strategy and we believe to our success. A lesson of the post crisis period is that a weakening budget position leads to flight from the Rupiah, triggers inflation and forces up interest rates. With falling deficits [Background budget balance] and a clear articulated program to continue to reduce them the process reverses: the Rupiah strengthens, and inflation and interest rates fall with varying lags. [Background inflation, and interest rate graphs] Put another way the fundamental issue has been confidence. A lack of confidence in the government’s fiscal position results in a higher risk premium on the exchange and interest rate hurting investment and confidence again in a vicious cycle. As the budget picture improves the risk premium falls and the macroeconomic fundamentals strengthen. The government’s decision to raise fuel prices (on multiple occasions), increase our tax effort and control spending has resulted in a falling deficit, a stronger exchange rate lower inflation and interest rates and a dramatic reduction in the debt to GDP ratio. From over 100% of GDP in 2000 the debt to GDP ratio is now approximately 67%. [debt to GDP in background]

Ladies and Gentlemen,

There are numerous dimensions to this as laid out in the Economic Policy Program or White Paper, but I would like to focus on a core set of reforms program to improve our fiscal performance. We believe that these will assist us in consolidating our fiscal position, improving service to the private sector and increasing transparency and accountability. Let me start with our policy reforms. [Graph on Tax and Custom Reforms] There are continuing reforms in the areas of taxes and customs. Let me start with taxes where there is a focus on administration and on tax policy. Tax administration reforms have been underway for some time but are now being accelerated. Traditionally the tax office has been organized by type of tax. Thus a taxpayer might have received tax officials responsible for corporate income tax, value added tax, property tax and so forth. Starting last year we introduced a new system where the tax office, for the largest taxpayers, was organized by taxpayer, called the Large Taxpayer Office (LTO). Under this system there is one person responsible for all taxes from a given company or individual. This office is fully computerized and the results have been very successful. Both the government and taxpayers are giving the new office high marks. Thus we are now expanding this system, adding more taxpayers at the first LTO, adding LTOs and beginning a pilot for medium size and smaller taxpayer offices also organized by taxpayer and not tax. Other initiatives designed to assist the taxpayer include simplified VAT audits and refunds for good taxpayers and various reforms designed to improve the quality of taxpayer service through improved information, a taxpayer bill of rights and tax officer code of ethics among other things. At the same time we are working on an amendment to the tax law, including income tax and VAT. The idea is to promote competitiveness, to simplify the tax system, increase compliance and broaden the tax base. The internal government process is not yet complete but the basic objective or our exercise is to improve the tax system by adjusting allowances, lowering single corporate rates, simplifying personal income tax, reducing or eliminating assorted luxury taxes, speed-up the tax refunds, etc.

On customs we are working to increase access to the green lane (gold card) by cross indexing good taxpayers and importers. We are also working to improve and speed up tax and customs clearance through a single on line payment and improved computer support for customs valuation. On the improvement of budget management and process, We will start with the reorganization of the Ministry of Finance since that underpins the reforms. With the passage of the State Finance Law the Ministry has gained approval to streamline treasury operations, consolidate debt management and budgeting operations and separate policy direction from implementation. This reorganization will begin in 2004.

Combining a single treasury unit with improved computer support should improve transparency and accountability in financial management. Combining foreign and domestic debt operations is critical to effectively addressing the tradeoffs between these sources of financing. Consolidating budget operations, combining routine and development expenditures, adding performance budgeting and lengthening budget horizons should greatly increase the efficiency of budget operations at a time when resources need to be used wisely. Finally creating an embrio of policy units within the ministry with sufficient expertise and data to assess tax, financial and customs policy is critical to creating the checks and balances that improve service deliver, accountability and transparency. In sum, the Ministry is moving ahead on a set of comprehensive reforms and a major reorganization designed to improve operations, service and governance.

Ladies and Gentlemen,

Another dimension that I would like to underline is the financing plan for the budget. The end of the IMF program brings with it the end of our access to Paris Club rescheduling and in our discussions with investors the number one topic has been on how this will be financed in the next few years. Clearly we do not have a crystal ball, and new government may make different choices but based on the broad evolution of the economy and conventional wisdom on the appropriate policy mix the likely fiscal strategy is as follows. First the government and Parliament remain committed to continue to reduce the deficit and eliminate it by 2006.

In fact the budget for 2005 will be prepared by the current cabinet and we project a deficit of less than 0.5% of GDP (Rp. 9 trillion) bringing us most of the way to our target. The effort to reduce the remaining deficit will have to be a balanced one. Over time it will require improving tax administration and reform although most of the payoff will only begin to be felt in 2006 and beyond, continuing to replace general fuel subsidies with subsidies targeted to the poor, and constrained increases in development spending and regional transfers. This comprehensive effort should reduce, although far from eliminate, the amount of additional financing needed.

The most difficult year for financing, in share of GDP terms, will be next year when there is a projected increase in gross financing requirements of almost 1% of GDP (a bit over 20 trillion Rupiah or 2.5 billion dollars). This overall increase comes from the large increase in foreign financing, a smaller increase in domestic financing as more bonds come due. Although this problem was dramatically by the government’s reprofiling of the State Bank Debt coming due. Finally as I indicated the smaller deficit reduces gross financing needs some.

The government option to meet these requirements through the sale of IBRA assets will be reduced as IBRA is phased out, and privatization during the election should result in a smaller contribution as well. To compensate the government intends to work with our with our partners at the CGI to increase official borrowing, increase the amount of bonds issued and draw down government accounts. I should note that we have agreed with Parliament that the government will have the option to assess the amount of domestic and international bonds that need to be issued depending on the costs and benefits of the respective sources of financing. In subsequent years the gross requirements return to present levels as the deficit continues to decline although domestic debt amortization continues to rise. With financing needs returning to current levels we will not need to draw down our bank account significantly and can hold net total bond issuance (foreign and domestic) approximately constant in share of GDP terms. We intend to use some of the money that collected from on-lend mechanism to SOEs and regions and to return back to overseas sources.

Clearly this strategy represents a shift. Future budget financing will be increasingly dependent on commercial and especially domestic sources and less dependent on asset sales and official financing. While we project that the overall share of debt to GDP will decline rapidly the reliance on foreign debt will be reduced even faster. This new strategy has some minuses and some pluses. On the minus side official financing is usually long term and relatively inexpensive. Conversely bonds have shorter maturities and higher cost thus raising the government’s financing risk. On the plus side there is no free lunch, while we appreciate the outcome of our partnership with other countries at the CGI it too has costs. Too often project lending is tied to the donor country’s priorities, and program lending comes with difficult to fulfill conditions. All in all it is time for Indonesia to have a broader more diversified financing system.

Reducing the costs and extending the maturity of government bonds depends critically on the kind of macroeconomic stability that has been delivered by our fiscal consolidation strategy and I am confident that this will continue to be the government stance. However, it also requires a liquid domestic bond market. [Put up Slide of Domestic Bond Market.] This is already happening. Foreign investors, mutual funds, insurance companies and pension funds have now substantially entered the government bond market thus increasing the amounts and frequency of trades and we expect this trend to continue.

The amounts of new bonds issued in 2004 and beyond will be substantially greater (Rp. 32.5 trillion in 2004) than at present but still represent a very small fraction of additional financial assets created each year. While we intend to continue to use official sources as much as possible we are also confident of our ability to tap into domestic and foreign bond markets to provide financing in the years to come. We have been given a flexibility by the parliament on the distribution of domestic and international bonds issuance depending on the market conditions. The international bonds issuance is needed for the republic, besides to finance the deficit, to go back and re-enter overseas capital markets, after the first issuance sometime before financial crisis. On that matters we have been conducting a successful non-deal road-show, and now in the process of preparing a selection of financial advisors. In sum, I believe that the financing need for the budget, despite not having access to Paris Club rescheduling anymore, will be safe and secure.

Ladies and Gentlemen,

With the exception of the initiative to issue domestic and international bonds what I have described can not fairly be labeled new opportunities. However I hope I have convinced you that the government, particularly the ministry of finance are committed to continuing the policies that provide the necessary underpinning for private sector opportunities. Indonesia has planted the seed of high return and we strongly urge you to join us as we reap the dividends. Please invest your money, we believe you will get a high return and in the same time promoting democracy as a bonus.

Anggito Abimanyu
Head Fiscal Policy Agency
Department of Finance
Indonesia


December 6th, 2003

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