CONVERSION OF AGRICULTURAL LAND INCREASINGLY ALARMING

Industry and property development in Indonesia has eroded productive agricultural lands. Consequently, Indonesia lost more wetland, and national food security is threatened. Data from the Ministry of Agriculture stated that Indonesia loses 80,000 - 100,000 hectares of rice fields per year because the government’s ability to create land could not balance the conversion of agricultural land into non-agricultural land. Conversion of agricultural land, which is increasingly worrisome, was due to lack of partiality to the agricultural sector, land fragmentation, and weak law enforcement.

Director of Irrigation Water Management of Directorate General of Agricultural Infrastructure and Facilities at the Ministry of Agriculture, Tunggal Iman Panudji, in Jakarta, on Tuesday (June 24) recorded that in 2013 Indonesia has a wetland of 8.13 million hectares, dry land of 18.58 million hectares, and plantation 18.93 million hectares, which has the potential to continue to decrease due to conversion to residential areas or plantations. Outside Java, approximately 48.6% of wetlands are converted to plantation, while in Java most of are converted to plantations, while in Java most of the agricultural land (58.7%) is converted to residential areas.

This is worsened by the quality of the newly created rice fields which is only on third of the quality of the existing rice fields, as well as the lack of certainly of spatial planning. Of a total of 491 local government, there are 347 neighborhoods (RT/RW) that have been defined, but only 160 regional regulations that stipulate sustainable agricultural land for food farming (LP2B). To that end, he asked the regental/city government who not yet completed regional Regulation to first prepare a Regent or mayor Regulation in order to maintain the wetlands.

On the other hand, the ability to create wetlands is only 40,000 hectares/year, due limited budget. Even more worrisome, he said, is that the conversion of productive agricultural lands is unstoppable due to weak commitment of local governments. Because of that, he lamented the regents and mayors who did not issue regional regulations to protect productive agricultural land. According to him the authority to protect agricultural land is in the hand of the mayors and the regents.

According to Tunggul, the solution to boost productivity of agricultural crops is by creating farming technology. Agricultural innovation and technology from the Ministry of Agriculture’s Research & Development, academicians and private sectors, such as the National Week activities of the National Outstanding Farmers and Fishermen Association (Penas), people need to be introduced to keep them enthusiastic to do farming business. It is important to remember that the young generation now has lack of interest in farming, so that cost of farm workers becomes expensive. He pointed out that “Jajar Legowo” planting technology is proven to increase the productivity of rice crops from 5 tons per hectares to 8 tons per hectare.

He said that his party is targeting the creation of wetland of 50.000 hectares in 2014 with the consideration that it has the nearest water source. To create wetland is not just opening wetland alone, but it requires a study. He said that the potential to create wetland is not easy now. The reason is that vacant land for rice farming is increasingly scare and limited due to land conversion. However he believed that farmers need not worry about lack of wetland due to agricultural budget saving, they will be provided with great opportunities to create wetlands.

Admittedly, the problem of limited agricultural lands is due to lack of suitable land, conversion to non-agricultural land, paddy fields demanded for non-agricultural activities and fragmentation. This is because agricultural land is very easy and cheap to be converted to industrial or residential areas. He said that to date, agricultural land and plantations are still about one third of the total land area in Indonesia, while two-third of it consist off forests. This makes agriculture development difficult. (E)

Business News - June 27, 2014

INDUSTRIES IN THE EAST STILL DIFFICULT TO GROW

The Indonesian Employers Association (APINDO) considered that the development of the manufacturing industry is still difficult to be done intensively in eastern Indonesia because the businesses faced problems of legal certainty, availability of human resources, and infrastructure support. Central government policies which tend to overlapping with local regulation cause investment in the manufacturing industry in eastern Indonesia still difficult to develop.

Sofyan Wanandi, General Chairman of APINDO, in Jakarta, on Tuesday (June 24), stated overlapping policies, too many licensing, not to mention the availability of human resources and unsupportive infrastructures, eventually cause soaring cost production, thereby inhibiting the development of the manufacturing industry. According to Sofyan, the problem actually occurs in all part of Indonesia, it is much more complex due to development imbalances between the western and the eastern parts of Indonesia.

These conditions also cause multinational companies to hold in the manufacturing sectors in Eastern Indonesia although the eastern part of Indonesia has a quite abundant natural resources and raw materials. Based on data of the central bank, economic growth in eastern Indonesia only reached 4.6% or lower than the national average which reached 5.2% in the first quarter of 2014.

Sofyan advised that the local governments in Eastern Indonesia should build a center of economic growth in each region by optimizing the natural resource potentials. According to Sofyan, there should be one region in each province designated as a natural potential-based economic center to attract investment activities from investors.

In eastern Indonesia, said Sofyan, the development of economic growth centers could be done trough mining, agriculture and fisheries-based industries. Meanwhile, the three sectors are the backbone of the economy of eastern Indonesia as a whole. According to him, the development of economic growth centers will be an attraction for investors to plan investment activities appropriately, based on regional potential.

Infrastructure is currently one of the things highlighted by entrepreneurs in economic development. Without infrastructure support, it is difficult to hope that national competitiveness would be adequate in facing the increasingly competitive global competition. The Master Plan for the Acceleration and Expansion of Indonesia Economic Development (MP3EI) is expected to be the locomotive of infrastructure development throughout Indonesia in the years ahead.

The government has also committed to accelerating regional infrastructure in six economic corridors that could be seen from the increasing number of infrastructure budget allocation which reached 20%, or a total of IDR 213 trillion in the short term. In 2013, the government has allocated IDR 17 trillion to facilitate the preparation of development planning documents in various regencies/cities. Infrastructure development is a tactical step to continue to focus on Indonesian economic growth, particularly in the development of economy in Eastern Indonesia.

He also saw that there are at least four issues that are considered to be inhibiting the progress of development in Eastern Indonesia. The four issues are natural resources which are not optimally manage, human resource quality, lack of infrastructure, as well as institutional system that needs to be improved. He reminded that Eastern Indonesia requires development and spur competitiveness.

Another obstacle, according to him, is industrial development and investment in Eastern Indonesia, due to the provision of land and infrastructures, such as roads and ports. From the banking sector, access to capital is still an obstacle for the local businesses. And, the quantity and quality of transportation infrastructures and energy generation is less supportive to production efficiency and goods distribution. (E)

Business News - June 27, 2014

HEDGING IN STATE-OWNED COMPANIES

Lately there had been heightening argument about hedging done by State Owned Companies [BUMN]. The substantial problem was fear that hedging by BUMN would someday” disadvantage the state financial”.

So BUMN players felt the need for legal protection for them in doing the hedging strategy in every transaction based on foreign currency so they would not be criminalized in the future. As known, there had been different opinion between Government’s auditor and BUMN executives in regards to hedging practices. It seemed reasonable that BUMN circles demanded legal protection whereby to their job professionally.

First all the definition of hedging itself must be commonly understood by both parties to synchronize perception. Hedging was strategy in trading “to restrict” or “to protect’ traders form disadvantageous currency. Hedging enable traders to protect themselves from any possible loss when making transaction. The step saw to minimize the risk of loss when monetary fluctuation made it impossible for traders to make profit.

So far the Government already had the Regulation of the Ministry of finance on hedging, i.e. Permenkeu No. 12/PMK.08/3013 on Hedging Transaction in managing Government’s debt. In Permenkeu it was mentioned that although hedging was a system to mitigate risk or protect the value position or obligation against the risk of fluctuation of interest and currency value of the future.

The transaction of hedging was transaction exercised by the Government with their counterpart in controlling inflation risk payment of interest and capital and/to protect the position of debt value from risk or predicted to happen due to currency volatility.

Counterparty of hedging, further referred to as counterparty was bank or non-bank institution and/or international financial institution who was willing and ready to do hedging with the Government. But the substance of the Permenkeu was not addressed to BUMN, so it was necessary to give legal protection for BUMN.

Legal protection which was never given to companies, especially BUMN was classic; excuse by corporate not to do hedging. Beside no legal assurance, BUMN circles also feared the potential of loss in doing hedging, because the risk must be paid for.

In this case, BUMN doing hedging was like buying some sort of insurance policy to prevent loss in the future due to difference in currency exchange value. As know Rupiah was the most fluctuative currency in Southeast Asia, so hedging could mitigate the risk of exchange rate value.

For example, PLN once lost to as much as Rp48 trillion due to currency exchange risk. In combination with company’s income the loss borne by PLN in 2013 totaled Rp29 trillion. And yet in 2012 PLN made profit of Rp.3.2 trillion.

PLN suffered loss because they did not do any hedging when paying debt. Fluctuating Rupiah against USD was because the domestic money market was shallow. By May 2014, the total transaction of foreign currency in Indonesia came to USD 5 billion, while Singapore had posted USD 300 billion per day. And Malaysia and Thailand had scored USD 12 billion per day.

Most Countries of the world were doing transaction of foreign currency by swap. In Indonesia 70% of foreign currency transaction was at the spot market, so in case of sudden transaction where vast amount of USD was needed. Rupiah could suddenly weaken. It would be the right step for the Government to prepare a legal umbrella for BUMN whereby they could do hedging.

Legal protection was an urgent matter because so far BUMN feared that hedging had the potential to cause loss on Government part. The important thing was common perception over hedging itself. Hedging was a way to minimize risk.

For example, Rupiah exchange rate value was Rp11,400 per USD. Considering Rupiah volatility a company choosed to make hedging at Rp11,600 per USD. When soon Rupiah was at Rp11,700 the company only had to pay the excess of hedging. In case Rupiah strengthen to Rp11,200 per USD the over value would be regarded as cost.

Reluctance among BUMN to do hedging was payment in post Rupiah strengthen was feared to be classified as “Government’s loss” trough evaluation by Government’s Auditor or Financial Examination Board [BPK] in fact the hedging concept was just like health insurance policy or natural disaster insurance where premium was paid monthly. Heading expenses was regarded as cost to be paid.

The way it had been, companies or BUMN choosed to buy USD at the spotmarket. By high demand amidst limited supply of foreign currency might cause pressure on Rupiah, but if a company had done hedging, demand at the spot market would be reduced. The result was that Rupiah depreciation would lessen in that case Rupiah stability could be maintained.

To illustrate, PT Pertamina [Persero] as BUMN with high demand of foreign currency per day had not done hedging for fear of the above. And yet high import of oil-gas amidst depreciation of Rupiah could trigger such enormous deficit in oil-gas. For that matter, the Government must sit together to pursue regulation for hedging toward common perception of all parties.

Soon Pertamina could buy USD on forward transaction basis for a certain period of time, for example 3-6 month as needed. Thereby if Pertamina made hedging they could not be blamed as accounting wise payment based on hedging by Pertamina was cost, not loss.

About the technical team who would set up legal ground, it would be best to involve BI, the Ministry of Finance, the Ministry of BUMN, The Financial Examination Board [BPKP], the Police, State Court, and Corruption Eradication Commission [KPK].

Previously BI had issued regulation on hedging transaction for buying and selling. This PBI regulation was supportive to the Regulation [Permen] of BUMN and hedging transaction by BUMN on September 25, 2013. The regulation enable BUMN companies to do hedging

In the future development, BPK had conducted coordinative meeting under the theme of hedging for the interest of the nation to prevent moral hazard. In a closed meeting at the BPK office in Jakarta June 19, 2014 last attended by related institutions i.e. BI, BPK, the Ministry of finance, Bereskrim, KPK, Jampidsus and BPKP.

The meeting outcome presented by BI about hedging, the participants attending meeting at BPK office agreed that the hedging transaction was inclusive of cost consequences, as long as transactions were done consistently, consequently and accountably in accordance with regulation, and the cost was cost to be borne by the Government.

Furthermore with the implementation hedging policy, it was expected that payment of overseas debt [ULN] by the Government trough the ministries/institutions was unaffected by Rupiah depreciation against USD. However implementation of hedging might incur loss due to the difference in exchange rate although the value was not as much as hedging. The point was that risk and burden of hedging would be account of current year APBN.

The coordinative meeting also agreed on common effort to pursue three objective:

Firstly, coordinate effort to stabilized Rupiah through hedging-based transactions.

Secondly, synchronous perception of transaction by hedging of Government’s debt and forex obligation of BUMN especially in regard to loss caused by exchange rate disparity in the hedging process. As known, according to data complied by BI and BPK, only 2 BUMN had done hedging. And yet Hedging could save the company from the risk of loss due to Rupiah depreciation.

Thirdly, to enhance effort of preventing fraudulence caused by hedging of government’s debt. Besides, the coordinative meeting agreed to set up a technical team to follow up action, among others to review stipulation and underscore implementation of regulation and to exercise illumination widely.

In the post agreement era, BI rated that loss caused by hedging on BUMN’s debt was not loss on State’s finance. However, the hedging was done consistently, consequently and the accountable way in accordance with the Law.

BI had pled corporation including BUMN to manage overseas debt effectively, to avoid the risk of mismatch. In this case hedging was the right way to do it: but the few BUMN doing hedging forced BI to run publicizing, illumination and coordination with the Government to enable other BUMN to do hedging. (SS)

Business News - June 27, 2014

NEW GOVERNMENT ECONOMIC BURDEN

The Presidential candidates for election who were struggling to win Presidency as well as their respective supporter team must observe development of Indonesia’s macro economy. Understandable because many economist predicted that fiscal disaster would stand on the way of the next Government.

By the time national economy was in need of fiscal stimulus, the Government and house axed ministrial budget to the amount of Rp 43.05 trillion, due to increase subsidy for energy from Rp 282.1 trillion Rp 350.31 trillion. In APBN-P State Budget 2014 subsidy for energy was set at Rp 350.31 trillion, an increase of 24% against APBN 2014 amounting to Rp 282.1 trillion. The subsidy consisted of subsidy for oil, LPG and bio fuel amounting to Rp 246.49 trillion and subsidy for electricity Rp 103.81 trillion.

Meanwhile ministrial expenditure was axed by Rp43.05 trillion, although as a whole state expenditure increased. State’s expenditure was increased from Rp 1,842.5 trillion to become Rp 1,876.87 trillion, consisting of Central Governments spending Rp 1,280.36 trillion and transfer to the regions Rp 596.50 trillion.

However, state’s income was posted at Rp1,635.38 trillion or down against APBN 2014 at Rp 1,667.1 trillion. The result was that deficit in state budget expanded to Rp 241.49 trillion against GDP against the previous Rp 175.4 trillion [1.7%]. The APBN-P Budget was passed at Parliament’s Plenary Meeting together with Government last week [18/6].

The Government and House had agreed on some basic assumptions in RAPBN-P State Budget 2014. Economic growth was set at 5.5% in 2014, inflation target 5.3%, rupiah exchange rate value Rp 11,600 per USD and SPN interest 6% for 3 months. Indonesia’s Crude Oil Price was set at USD 105 per barrel, oil lifting on the average 818,000 barrel per day and gas lifting 1,224 barrel on the average per day.

Based on the macro indicators and the measures to be taken, the following were breakdown of the points agreed upon in APBN-P State Budget 2014:

Firstly state’s income amounting to Rp 1,635.37 trillion consisting of domestic income Rp 1,633.05 trillion and received grant Rp 2.32 trillion. Income-from-tax Rp 1,246.10 and state’s non-tax income Rp 386.94 trillion.

Secondly, state’s expenditure was agreed at Rp 2,876.87 consisting of Central Government Rp 1,280.36 trillion ad transfer to the region Rp 596.50 trillion. State’s expenditure was agreed at Rp 2,876.87 trillion consisting of Central Government’s spending Rp 1,280.36 trillion and transfer to the region Rp 596.50 trillion. Central Government’s spending was allocated for subsidy Rp 403.05 trillion. Energy subsidy came to Rp 350.31 trillion consisting of subsidy for oil, LPG and bio fuel Rp 246.49 and electricity Rp 103.81 trillion.

Thirdly deficit was assessed at 2.4% against GDP or Rp 241.49 trillion. The figure was lower than RAPBN-P 2014 amounting to 2.5% of GDP or Rp 251.72 trillion. This was because there was reduced additional budget Rp 10 trillion of the amount proposed to become Rp 241.5 trillion.

Fourthly, Axing of budget from Rp 100 trillion in APBN-P 2014 to become Rp 43.25 trillion in APBN-P 2014 or lower by 56%.

In fact passing of the State Budget was a challenging and at the same time putting the next Government a hostage after the Presidential election on July 9 next. The heavy burden was nothing but subsidy for oil fuel. As known President SBY’s administration never put an end to deficit problem once and for all even till end of his office.

The result budget for subsidy this year increased drastically from Rp 282.1 to become Rp 350.31 trillion. Of that amount Rp 50 trillion was included in 2015 budget as carry over. To make it easy, the Government seemed to be “hedging” the subsidy fund. Now the Government argued that the fiscal burden of this year was already too heavy so they had to “take a little” from the budget of 2015. Subsidy for energy kept increasing on account of weakening Rupiah value.

Only trouble was that in line with upjump of subsidy fund, income from tax was getting hard to obtain. APBN-P of 2014 assessed income from tax at Rp 1,246.1 trillion, down against APBN target 2014 which set it at Rp 208.3 trillion. The Budgeting Board House [Banggar] agreed slashing of Government’s budget in Ministries and increase of subsidy for oil and electricity.

In this case the quota for subsidized oil came to 46 million kilolitre and subsidy for electricity came to Rp 103 trillion. Hence, total energy subsidy for 2014 came to Rp 453.3 trillion and non-energy subsidy was Rp 52.7 trillion. Of the 2014 budget posture, just because of extravagance, axing of budget by up to Rp 43 trillion looked like a short cut attempt.

To cover the ever widening deficit, domestic debt was to be jacked up. The Government would avoid overseas debt as such was unpopular act. Seeking for new debt would be increased to around Rp 66 trillion, against the previous Rp 175.5 trillion.

Clearly effort of the present Government to control budget deficit by axing budget and carry over of energy subsidizing would burden the next Government. In the end there would be less room for the new Government for fiscal maneuvering. The conclusion was that carry over of budget indicated that the present Government had no courage to solve the energy subsidy problem. Probably there was no much that the next Government could do.

Feeling unpleasant with the accusation, the Minister of Finance Chatib Basri cast aside accusation that the present budget policy but will burden to the next Government. Finance Minister Basri claimed that the present Government wished to let the next Government to propose a parameter as underlying reference for changing energy subsidy budget as well as for price of oil and Rupiah exchange rate value.

The problem was that Minister Chatib regretted House for cancelling the parameter. The result was that in discussing the APBN 2014 the Government was unable to propose additional amount of the ceiling set. In that case double deficit in Government budget and Indonesia’s current transaction would be out of control.

Prohibition of export of raw mineral ore, low export of coal and CPO, and slump in oil low production output, was feared to worsen Indonesia’s deficit. Looks like Government of RI blew the “trumpet of victory” too soon when Indonesia’s economic growth reached 6.5% in 2012. And yet at that time the posture of Indonesia’s GDP still hid big problem, i.e. high inflation and deficit in current transaction.

It was not surprising that a certain foreign rating agency dared to revise deficit current transaction to become 3% of GDP against the previous 2.8% - whilst deficit in Government budget was increased to 2.5% against the previous 2%. Estimate of annual GDP growth was also lowered to 5.2% against the previous.

Widening deficit in fiscal and current transaction would put Indonesia in the risky position of capital outflow and further financial pressure. Deficit in current transaction which had been happening since end of 2011, was feared to bring heavier pressure due several factors.

The main factor was Government’s step which in January last prohibited export of mineral ore in the effort to promote development of mineral processing at home. As result of the regulations, export of nickel ores and copper was instantly stopped, and so was export of bauxite which dropped.

Meanwhile coal as the biggest export commodity was also having downturn, not just in volume but also in price in International market. On the other hand, export of coal was rated as un prospective with restriction of production done in pricing game.

What make things worse, export of CPO as premium export commodity was having the problem of low demand abroad. What’s more, Indonesia’s production of crude oil tend to be lower than estimated in Government budget to import was inevitable.

Weakening of current transaction was more on account of structural weakness against cycle factor, i.e. intensive technology not developing well resulting in dependency on import and increased reliance on export of commodity due to export of manufacturing product and high subsidy for oil resulting in increase of crude oil importing and domestic consumption.

In terms of budget, the Government had the risk of breaking the oil subsidy target, which might worsen deficit. Oil subsidy was the highest budget expenditure sector, way above budget for health, education or infra structure building. So the highest grievances in Indonesia was poor fiscal condition as manifestation of high oil subsidy which triggered exploding demand while domestic oil production kept shrinking.

For years, the Government of RI was rated as underestimating the upblowing oil subsidy and recently again proposed to revise target of oil subsidy to Rp 285 trillion against the previous target of Rp 210 trillion. Even some foreign observers felt that the target would be broken to more than Rp 300 trillion: and the estimate would be proven when the revised energy subsidy, including oil, broke the Rp 350 trillion limit.

From the above picture it was apparent that the task of the next Government was to secure fiscal health to be productive enough to support development. One of the thinkable way out was to lower energy subsidy figure especially oil so productiveness of budget could be maximized to jack up inclusive and sustainable economic growth. (SS)

Business News - June 25, 2014