Indonesia goes on spending spree

President Susilo Bambang Yudhoyono says he wants to spend more next year to alleviate poverty, but how will he pay for it?
Indonesia's President Susilo Bambang Yudhoyono told his nation this week that he will spend more money in 2007 to help alleviate poverty, create more jobs and attract more foreign direct investment.

This is not surprising, since one of YudhoyonoÆs very first political pledges was to cut poverty by half. High oil prices, which in turn drove up petrol prices for the average driver û no matter how much the government subsidised it û has only hindered his job. Creeping inflation has been another adversary. Meanwhile Mother Nature, with her tsunamis and volcanic eruptions, has been laughing at him all along, forcing Yudhoyono to dig into public coffers time and again for aid and reconstruction money.

But are his priorities for addressing poverty concerns right? Are they realistic? And above all, how will Indonesia pay for it?

Tackling poverty is certainly a good idea û and his approach since he was first elected in 2004 has played to populist demand. He managed to hike fuel prices last year without drawing too many protests. But consider this: Yudhoyono plans to spend about Rp66,600 billion ($7.5 billion) on fuel subsidies in 2007, which is considerably more than his government plans to spend on education (Rp51,300 billion) û and thatÆs after he adds on an 18.5% increase for schooling in the budget.

While itÆs clear Yudhoyono needs to keep petrol prices down now so people can get to their jobs without having to take on a second one just to pay for fuel, worrying about the quality of your work force in the future surely should be a bigger priority.

"An 18.5% increase [for education] is significant, so cut him a break,ö says one analyst based in Jakarta. ôItÆs just that he was starting from a low base. The question is, can he implement the changes he wants to make in the next few years, [The election is in 2009, so realistically campaigning begins in 2008] before people start calling him on his campaign promises."

One way to fulfill his promises and increase spending in the budget will be through sovereign bonds. The government announced earlier this week it expects net government bond issues worth Rp34.2 trillion next year.

But it also needs foreign direct investment to help support economic growth. And there is reason to believe the regionÆs largest archipelago will attract it. In a recent research report, ABN AMRO analysts wrote that a stabilising domestic cycle, coupled with a pick-up in local consumption, improvements in local liquidity and less stretched valuations are all signs that the market is at a turning point. "The poor global environment means there is no rush, but we believe investors should start reassessing their Indonesian exposure and that large-cap 'blue-chips' will lead on a 12-18 month outlook."

Indonesia is also (finally) taking the right steps to get more oil investment. The government recently invited bids for 41 onshore and offshore oil-and-gas blocks to boost dwindling production in the country. Macquarie Research analysts point out that after delaying the bidding round at least three times, the Ministry of Oil and Energy recently invited companies to bid for exploration rights in 20 areas and plans to award 21 areas through so-called direct offerings. What's key here is that for the upcoming bids, the government will increase the profit-sharing proceeds for investors. They will get about 20% of the production proceeds for exploration in non-frontier areas and 35% in frontier areas; thatÆs up from the 15% they were previously allowed to take of the proceeds. While Macquarie says about 80% of the companies said to be taking part in the bidding process are local, there are overseas investors taking a second look at oil-and-gas production in Indonesia. ConocoPhilips, the third-largest US oil company, is expected to be among those companies taking part in the bidding process.

So with the markets looking stronger, and investment in resources potentially yielding higher returns, it's likely that foreign investors will give Indonesia a second glance. If they invest, they may be the ones who ultimately alleviate poverty in Indonesia through employment.
¬ Haymarket Media Limited. All rights reserved.
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