The latest analysis by the International Monetary Fund which portends a weakening global economy could adversely affect Indonesia's economic prospects, which have looked much rosier after a respectable growth of 6.1 percent in the first half.
Most analysts had earlier been buoyed by the more robust economic growth since the last quarter of 2006, expecting that the pace of economic expansion would accelerate next year on the back of an expansive state budget that has been designed for pump priming.
This certainly was very good news for President Susilo Bambang Yudhoyono's government, which marked its third anniversary on Saturday, because in terms of economic achievement Yudhoyono has been criticized as a failed president who promised much but delivered little.
The IMF's projection last week, which foresees the world economy weakening from an estimated 5.2 percent growth this year to 4.8 percent next year, and a steady upward trend in international oil prices to more than US$85/barrel, spells big trouble for Indonesia's economic outlook.
If international oil prices remain over $80/barrel next year, Indonesia's economy will be in for severe turbulence because subsidies for domestic fuel prices have been estimated on average oil prices of $60. Fuel subsidies will have to be jacked up to keep the budget deficit from running out of control. This in turn may make investors jittery and rush to dump government bonds, triggering tremendous pressure on the rupiah.
The IMF lowered its growth projection for Indonesia to 6.1 percent next year, compared to the official target of 6.8 percent as stipulated in the 2008 state budget. As recently as last month, the Manila-based Asian Development Bank still forecast Indonesia's economy to expand by at least 6.4 percent next year.
The sub-prime mortgage (high-risk housing loans) crisis in the US in August seemed to have caused more damage to the world's economy than most analysts had earlier believed. The latest bout of spiraling rises in oil prices has further dampened the growth prospects of most developed economies.
Many analysts tend to play down the impact of the weakening US economy on East Asia, including Indonesia. They point out China remains the strongest driving force in the global economy, making the single largest contribution to global growth with its economy expanding by more than 11.50 percent this year and at least by 10 percent next year. Moreover, Indonesian economic dependence on the US market has declined as its exports to America now account for less than 12 percent of its total exports, while Indonesia's ties with China's economy have steadily expanded.
However, we should also remember that China's economy depends largely on the U.S for its exports. The blunt fact is much of the Asian intra-regional trade is in parts and components assembled into final goods in China and sold to the United States.
To cope with unfavorable external factors, we think there is no other alternative for the government but to fuel domestic demand by accelerating budget spending. So far, the government's actual disbursement of its investment budget has been very slow, hindered by bureaucratic inertia and indecisiveness on the part of project managers due to excessive fears of being investigated on corruption charges. In the first nine months of this year, only 40 percent of the budgeted investment had been realized.
The almost 50 percent increase in capital expenditures to Rp 101.5 trillion ($11 billion) next year will be meaningless if it is not fully spent.
Another delay in the implementation of public investment will be especially damaging because the bulk of the spending will go to basic infrastructure such as roads, seaports, airports, education and health services.
Indonesia's economic competitiveness has weakened due to inadequate infrastructure. Crumbling infrastructure due partly to an acute lack of maintenance after the 1997 economic crisis has been cited as one of the major barriers to new investment in the country.
As 2009 will be an election year, 2008 will be the last opportunity for President Yudhoyono to prove he is really capable of leading the country. The key indicator of such leadership is whether he can do away with his inherent weakness of being indecisive, diffident and unwilling to take action.
A critical situation requires bold measures and only a strong leader is able and has the courage to take bold action.