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Iero no 2 year ii june 2013

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  • 1. No 2/Year II/June 2013 INDONESIAN ECONOMIC REVIEW AND OUTLOOK Potret kemiskinan di Indonesia Antrian pembelian BBM Kemacetan di Yogyakarta Macroeconomic Dashboard Faculty Economics and Business Universitas Gadjah Mada
  • 2. Foreword Indonesian Economic Review and Outlook (IERO) is a quarterly bulletin which is published by the Macroeconomic Dashboard, Department of Economics – Faculty of Economics and Business, Universitas Gadjah Mada (FEB-UGM) in collaboration with PT Bank Mandiri, Tbk. The current IERO theme is the “Indonesia Economy becomes a hostage of the fuel,” in the midst of the large economic pressure, shadowed by the global economy uncertainty. In addition, the ambiguity – whether the subsidized fuel price will rise or not – has worsened the situation. Yet, it is a dilemma. If the fuel price goes up, the threatening high inflation will happen. On the other hand, if the fuel price stays the same, the national financial burden will increase at the rate that may collapse the state budget (APBN). The global condition as well as the Indonesian dilemma upon the subsidized fuel will have negative impact upon the Indonesian Economy. This, in fact, is match to what the GAMA Leading Economic Indicator (GAMA LEI) has predicted. GAMA LEI is an indicator that produced by the Macroeconomic Dashboard to forecast the Indonesia future Economy. The GAMA LEI is proven to have an accurate prediction. In its past editions GAMA LEI had predicted the decellaration of Indonesia Economic Growth. Although as such upstreamed the Indonesian Government (including Bank Indonesia) and other International organization (i.e. Asian Development Bank) projections – which believed that Indonesia Economy would be better – yet in reality GAMA LEI prediction was right. Hence, GAMA LEI enables the public and business decision makers to grasp the future economy so that they can anticipate the situation. Given such contemporary themes provided by the IERO publications, it is a hope that public policy and business decision makers, including academia, may acquire actual information concerning the Indonesian economy. Enjoy reading Prof. Dr. Sri Adiningsih, M.Sc Head of Researcher Macroeconomic Dashboard
  • 3. Indonesian Economic Review and Outlook I. Latest Economic Developments T he Indonesia's economy, which is measured by the amount of of Gross Domestic Product (GDP) at current prices registered growth from IDR 1,975.5 trillion in Q1 2012 to IDR 2,146.4 trillion in Q1 2013. Meanwhile, GDP at constant prices 2000 increased from Q1 2012 amounted for IDR 633.2 trillion to IDR 662.0 trillion in Q1 2013. However, as predicted by GAMA LEI, the Indonesia's economic growth in the Q1 2013 registered slight growth of just 6.02%, which was lower than 6.29% posted in the same period in 2012 and even lower than 6.1% in Q4 2012. This is the second time GAMA LEI has been able to predict precisely the signs of slower economic growth. On the contrary, predictions of the Indonesian government, pointed to signs of stonger economic growth. Moreover, Bank Indonesia had projected economic growth of 6.2% in the first quarter 2013 which was atrributable to strong investment and household consumption expenditure. Besides, GAMA LEI also succeeded to outperform predictions of the Asian Development Bank, which pointed to growth of 6.4 % of the Indonesian economy. The reality is that the Indonesia's economy experienced lower growth in the Q1 2013 than predictions of economic analysts'experts, which is commensurate with results of GAMA LEI research that stressed the fact that the performance of the Indonesia's economy in early 2013 would not be better than that posted in the previous year. Subsequently, based on industrial origin, with the exception of Mining and Quarrying, which contracted by 0.43% (YoY), all other sectors posted growth in Q1 2013. Meanwhile, sectors that registered high growth in Q1 2013 on a year-on-year basis include Transport and Communication (9.98%), followed by Financial, Ownership, and Business Services (8.35%), also the Construction sector (7.19%). From the vantage point of expenditure, slow economic growth in Q1 2013 was attributable to contraction in domestic demand and a weakeaning export. Household Consumption also posted slower growth as a result of lower purchasing power caused by high prices of food commodities and inflation expectations that were genetared by uncertainty that continue to surround prices of subsidized fuel prices. Meanwhile, Government Consumption showed slow growth at the Macroeconomic Dashboard Universitas Gadjah Mada 1
  • 4. Latest Economic Developments Figure 1: Growth Rate of GDP at Constant Price 2000 by Industrial Origin, 2005 – 2013* (YoY, in %) Economic Growth in Q1 2013 was merely 6.02%, the lowest growth rate over the last three years. Agriculture, Liv estoc s, Forestry and Fishe ries k Mi ni ng and Qua rrying Ma nufac turing E lec tricity, Gas a nd Wa te r Supply Construction Trade, Hotel and Res taurant (%) T ra nsport and Communica tion Financia l, Owne rship and Business S ervice s GDP (RHS) (%) 18 8 16 7 14 6 12 5 10 8 4 6 3 4 2 2 1 0 2009:Q1 2009:Q2 2009:Q3 2009:Q4 2010:Q1 2010:Q2 2010:Q3 2010:Q4 2011:Q1 2011:Q2 2011:Q3 2011:Q4 2012:Q1 2012:Q2 -2 Source : Central Bureau of Statistics (BPS) and CEIC (2013) start of the year due to the low absorption rate of government expenditure in general and on goods, in particular. On the other hand, investment started to slow down due to limited domestic and international demand. Besides, as the general elections approaches, investors are expected to go into a “wait-and-see” attittude. To that end, slower growth in investment and consumption has induced contraction in imports. Based on year on year figures, Household Consumption posted in Q1 2013 grew by 5.17%, Government Consumption registered 0.42% growth, Gross Fixed Capital Formation grew by 5.90%, while Exports increased by 3.39%, and imports contracted by -0.44% . As a way forward, the government can implement a number of policy alternatives to strengthen economic growth in the Q2 2013. One such policy is to accelerate the state budget absorption, which still has less contribution on Indonesia economic growth. Additionally, it is an onus on the government to maintain consumer confidence by ensuring that purchasing power on the general public is not undermined as well as providing low inflation. There is also need for the government to increase its focus on revitalizing infrastructure which is vital for improving investment. This is an issue that calls for urgent attention as slower investment is not only due to insufficient incentives but also the availability of sufficient requisite infrastructure, supporting institutions, and sound macroeconomic conditions Macroeconomic Dashboard Universitas Gadjah Mada 2 2012:Q3 2012:Q4 2013:Q1 0
  • 5. Indonesian Economic Review and Outlook Figure 2 : Growth Rate of GDP at Constant Price 2000 by Expenditure, 2005 – 2013* (YoY, in %) GDP growth slowdown in Q1 2013 due mainly to a moderation in domestic demand and investment amidst limited recovery of the export sector (%) CONSUMPTION EXPEN DITURE : HOU SEHOLD CONS UMPTI ON EX PENDITURE : GOVERNMENT GROS S FIXED C APITAL FOR MATION EXPORT IMPORT 30 20 10 0 2009:Q1 2009:Q2 2009:Q3 2009:Q4 2010:Q1 2010:Q2 2010:Q3 2010:Q4 2011:Q1 2011:Q2 2011:Q3 2011:Q4 2012:Q1 2012:Q2 2012:Q3 2012:Q4 2013:Q1 -10 -20 -30 Source : Central Bureau of Statistics (BPS) and CEIC (2013) .Although Indonesia's economy growth continued to slow down, the unemployment rate (TPT) by February 2013 reached 5.92%, which represents a decrease from 6.14% in August 2012, as well as the figures registered in February 2012 (6.32%). Nonetheless, the decrease in unemployment rate, which is equivalent to 440,000 people, from 7.61 million in February 2012 to 7.17 million in February 2013, is by all accounts small. This is the more so, given the fact that the number of underemployment rose from 12.77 million in August 2012 to 13.56 million in February 2013. The number of economically active population in Indonesia between February 2012 and February 2013 increased by 780,000 people, from 120.41 million people in February 2012 to 121.19 million people in February 2013. Nonetheless, there was a decrease in labor force participation rate of 0.45% during the same period of time (February 2012 – February 2013) The labour force participation rate in February 2013 was 69.2%, which represented a decrease from 69.66% in February 2012. Nonetheless, in comparison with August 2012 figures (67.88%), the labor force participation rate for February 2012, represented an increase. Based on structure of main industry, there isn't any significant change in the main source of employment between February 2011 Macroeconomic Dashboard Universitas Gadjah Mada 3
  • 6. Latest Economic Developments and February 2013. Agriculture, trade, social services, and industrial sector continued to be major sources of employment in Indonesia. The number of people employed was higher in February 2013 compared with that in February 2012. The number of people employed increased by 790,000 people during February 2012 February 2013, with trading sector contributing 3.29%. A similar trajectory is evident in the construction sector, which posted an increase of 12.95% from the previous year, as was the industrial sector, which registered an increase of 4.01% from 14.21 million people in February 2012 to 14.78 million people in February 2013. Nonetheless, some sectors showed a decrease in number of people employed in February 2013 are the agricultural sector and other sectors, which posted decrease for about 3.01% and 5.73% respectively compared to February 2012. A decrease in unemployment rate makes a positive contribution in poverty reduction. Based on the latest BPS data, the number of people categorized as poor in Indonesia was 28.59 million in September 2012 (11.66%), which was decrease from 36.1 million (16.66%) registered in February 2004. If compared with the number of poor people in March 2012, the number of poor people decreased by 0.54 million. Figure 3: The Labor Participation Rate and Unemployment Rate in Indonesia, February 2005 – Febuary 2013 (in %) The labor force situation in Indonesia shows improvement in number of economically active population as well as in reducing unemployment rate, despite an increase in underemployment rate Labour Force Participation Rate (LHS) (%) 71 Unemployment Rate (RHS) (%) 12 11.2 10.5 10.3 10.3 70.0 9.8 70 69.7 9.1 8.5 8.4 69 7.9 7.4 68 68.0 67.3 66.8 67.0 66.7 67.8 67.6 67.2 67.2 66.6 67.7 6.8 6.6 6 6.3 6.1 5.9 4 66.2 65 64 Source: BPS and CEIC (2013) Macroeconomic Dashboard Universitas Gadjah Mada 4 8 68.3 7.1 67.9 67 66 10 69.2 8.1 2 0
  • 7. Indonesian Economic Review and Outlook Table 1: Population 15 Years of Age and Over Who Worked by Main Industry, 2011 – 2013* (in millions people) Until February 2013, Agriculture, trade, social services, and indutrial sector, continued to be the main source of employment. Main Industry Agriculture Manufacturing Industry Construction Trade Transportation, Storage, and Communication Financing Community, Social, and Personal Services Others 2011 February August 42.48 39.33 13.70 14.54 5.59 6.34 23.24 23.40 5.58 5.08 2012 February August 41.20 38.88 14.21 15.37 6.10 6.79 24.02 23.16 5.20 5.00 2013 February 39.96 14.78 6.89 24.81 5.23 2.06 17.02 2.63 16.65 2.78 17.37 2.66 17.10 3.01 17.53 1.61 1.70 1.92 1.85 1.81 Source : BPS Press Release No 35/05/Th.XVI, 6 Mei 2013 However, it is worth noting that the poverty line used in September 2012 was IDR 259,520 per capita per month, which is an increase of 4.35% compared with the level used in March 2012. On closer observation, therefore, there is no significant reduction in the number of poor people. As an illustration, based on poverty line of IDR 259,520 per month, a family which comprises a husband, wife, and one kid, with a single source of income of IDR 800,000, is not categorized as poor. Nonetheless, there is little doubt that living standard of such a family is far from decent. Based on the area of living, the number of poor people in Indonesia living in urban and rural areas decreased by 0.14 million (0.18%) and 0.40 million (0.42%) respectively from March 2012 to September 2012. The number of people categorized as unemployed and poor decreased, as income per capita in Indonesian increased from USD 3,004.9 in 2010 to USD 3,596.27 in 2012 (CEIC, 2013). Nonetheless, such rosy condition should not induce complacency by government, given the fact that in the not too distant future, prices of subsidized fuels will be raised. Undoubtedly, the hiking of prices of subsidized fuels will induce an increase in prices of gods and services including basic commodities, and consequently contribute to an increase in the number of poor people in Indonesia. The Indonesian government's policies to mitigate the adverse impact of the increase in prices of subsidized fuels on the number of poor people will involve various compensation packages, such as a temporary direct assistance Macroeconomic Dashboard Universitas Gadjah Mada 5
  • 8. Latest Economic Developments Table 2 : Number and Percentage of Poor People in Indonesia, 2004 – 2012 Number of Poor people in Indonesia shows a downward trend over the last 5 years. However, the increase in prices of subsidized fuels is likely to trigger a drastic increase in the number of poor people Year Feb – 04 Feb – 05 Mar – 06 Mar – 07 Mar – 08 Mar – 09 Mar – 10 Mar – 11 Sep – 11 Mar – 12 Sep – 12 Number of Poor People in Indonesia (in million people) (in %) 36.1 16.66 35.1 15.97 39.3 17.75 37.17 16.58 34.96 15.42 32.53 14.15 31.02 13.33 30.02 12.49 29.89 12.36 29.13 11.96 28.59 11.66 Source : Press Release BPS No.06/01/Th.XVI, 2 January 2013 for community (BLSM), a food subsidy program (Raskin), the family of hope scheme (PKH), and scholarships for the poor (BSM). However, some questions marks surround the effectiveness of the package of policies. In any event, not few people consider such compensation packages as political ploys and patronage to the benefit of various Ministries whose cadres assume Ministerial portfolios. A review of Indonesian experience in the aftermath of an increase in fuel prices in the past can shade some light on what to expect. The Indonesian government raised prices of subsidized fuels from IDR 1,810/liter which took effect on 1 January 2003 to IDR 4,500/liter on 1 October 2005, the policy adversely affected people's purchasing power. The drastic drop in people's purchasing power was attributable to an increase in the cost of public transportation. Consequently, the number of people categorized as poor increased drastically to 39.3 million people (17.75%) in March 2006, which represented a significant uptick compared with 35.1 million people (15.97%) registered in Febuary 2005. This was despite temporary unconditional cash transfer (BLT), which the government implemented with the intension of mitigating the impact of the increase in prices of subsidized energy fuels on the well being of the poor. Apparently, the surge in the number of poor categorized as poor in the aftermath of the policy, attested to the fact that it was potent enough to mitigate all the adverse effects of the policy on the poor. Macroeconomic Dashboard Universitas Gadjah Mada 6
  • 9. Indonesian Economic Review and Outlook II. Monetary Development in Indonesia A. Money Supply In April 2013, the central bank registered an increase in the level of money supply, M1 and M2 of IDR 836.51 trillion and IDR 3,364.12 trillion. If compared to the same period in the previous year, the level of M1 and M2, showed an increase of 16% and 15% respectively. The increase in money supply has a tendency of contributing to depreciation of Rupiah and an increase in general level of prices. The high growth in money supply contributes to high inflation as it induces a rise in demand which if not accompanied by growth in the real sector generates an increase in prices. B. Inflation The level of inflation in Indonesia showed a decrease in May 2013, weighed down by a decrease in commodity prices. Based on BPS data, the level of general inflation year on year in May 2013 was 5.47%, which was lower than 5.57% recorded in March 2013. The decrease in inflation in May 2013 was in part an impact of the Policy implemented by the Ministry of Trade, which was embodied in the Minister of Trade regulation No. 16/M-DAG/PER/4/2013 on the importation of Horticultural products. The thrust of the regulation laid in its provisions that loosened restrictions on the importation of some agricultural products which included garlic. Besides, the Minister of Trade implemented the regulation in the wake of a note of complaint to Word Trade Organization (WTO), issued by the United Figure 4: Money Supply, 2009 – 2013* (in IDR Trillion) In April 2013 M1 increased by 16% while M2 rose by 15% compared to April 2012 M1 IDR TRILYUN M2 4000 3500 3000 2500 2000 1500 1000 500 0 Sumber : Bank Indonesia dan CEIC (2013) Macroeconomic Dashboard Universitas Gadjah Mada 5 7
  • 10. Monetary Development in Indonesia Figure 5: Inflation Rates by Component Group, 2009 – 2013* (YoY, in %) Indonesia recorded lower annual inflation rates in the aftermath of loosening import restrictions on agricultural products. H E A D L IN E (% ) C ORE A D M IN I ST E R E D V O L A T IL E 20 15 10 5 0 -5 -1 0 Source: BPS and CEIC (2013) Figure 6: Inflation Rate by Expenditure Group, 2009 – 2013* (MoM, in %) Deflation which occurred in May 2013 was attributable to a decrease in prices of processed food and clothing (%) 6 Food Processed Food, Beverages, Tobacco Housing, Electricity, Gas and Fuel Clothing Health Education, Recreation and Sports 5 4 3 2 1 0 -1 -2 -3 Source: BPS and CEIC (2013) States which complained about increasing complications and uncertainty of Indonesian import regime, which had adverse impact on exports of US agricultural products to Indonesia. As the US trade representative noted (2013), “import regulations in Indonesia violate the obligations of WTO members, including 1994 agreements on Tariffs and Trade”. In the meantime, core inflation and volatile show a decrease from 4.12% and 12.06% recorded in April 2013 respectively to 3.99% and 12.06% respectively in April 2013. Macroeconomic Dashboard Universitas Gadjah Mada 8 Transportation, Communication and Finance
  • 11. Indonesian Economic Review and Outlook Comparing to April 2013, the economy in May 2013 experienced deflation of 0.03% which also means a decrease in the consumer price index from 138.64 in April 2013 to 138.60 in May 2013. The deflation is attributable to the decrease in prices of processed food category and clothing category, these categories recorded -0.83% and -1.22% of growth respectively in May 2013. Despite a decrease in inflation rate, there is needed to anticipate the potential impact of an increase in prices of subsidized energy fuels on general level of prices. Based on Bank Indonesia predictions, the raise in prices of fuel is projected to induce an increase inflation level to 7.76%. Based on government projections, the price of premium fuel will be raised to IDR 6,500/liter, while solar will be raised to IDR 5,500/liter. However, there was still no information on the measures Bank Indonesia will take to stymie the increase in inflation. C. Interest Rate Bank Indonesia Board of Governors meeting on 13 June 2013 decided to increase BI rate at level 6.0%. Nonetheless in the event the government goes a head to raise prices of subsidized fuels, there is little doubt that Bank Indonesia will have to adjust its monetary policy. In line with BI's decision to increase BI rate by 25 basis point (bps), Indonesia Deposit Insurance Corporation (LPS) has also Figure 7: Developments in the BI Rate, SBI, Bank Deposits, and Guarantee Rate, 2009 - 2013* (in %) Along with the increase of BI rate, the maximum guarantee rate has also risen by LPS as response on high inflation expectation as well as to maintain sound macroeconomic and stable financial system (% ) D e p o s it R a t e 1 M o n t h M a x G u a r a n te e 3 M o n th s B I R a te B a n k I n d o n e s i a C e r t if ic a t e s R a t e 9 M o n t h s 12 10 8 6 4 2 0 Source : Bank Indonesia and CEIC (2013) Macroeconomic Dashboard Universitas Gadjah Mada 9
  • 12. Monetary Development in Indonesia increase the maximum guarantee rate by 25 bps for period between June 15, 2013 and September 14, 2013. Consequently, maximum guarantee rate on rupiah-denominated increase at level 5.75%. LPS' decision in increasing the maximum guarantee rate is based on the increase of BI rate as response on high inflation expectation as well as to maintain sound macroeconomic and stable financial system. In the meantime, in April 2013, the level of foreign exchange reserves increased from USD 104.80 billion to USD 107.27 billion. The increase in the level of foreign exchange reserves is attributable to Indonesian government policy that involved the issuing global bonds in April 2013. The government issued international bonds to the value of USD 3 billion, of which USD 1.5 Billion has 10 year maturity bearing 3.34% coupon, and USD 1.5 billion, with 30 year maturity, bearing 4.63% coupon. Nonetheless, the increase in the level of foreign exchange reserves in April 2013 still falls short of USD 124.6 billion, the record since Indonesia gained independence, which was registered in August 2011. However, in May 2013 foreign exchange reserve decrease again to USD 105.149 billion. By May 2013, both domestic and external factors continued to weigh in on the movement of the exchange rate of Rupiah. With respect to external factors, uncertainty of economic conditions of developed nations, and compounded by down ward revision of economic growth projection by IMF in April 2013, continued to exert downward pressure on Rupiah. IMF predicts that the global economy will grow by 3.3 % in 2013, which is lower than initial projection of 3.5%. The revision of global economic projection is an indication that economic recovery continues be bedevilled by uncertainty. With respect to domestic factors, Rupiah exchange rate has been weighed down by negative sentiments that emanated from an increase in inflation in March 2013, attributable to obstacles that hampered the distribution of food and uncertainties that continue to character government policy on subsidized fuels. Foreign investors perceive government as very uncertain in raising fuel prices, which has contributed to undermining confidence in Rupiah. In late May Macroeconomic Dashboard Universitas Gadjah Mada 10
  • 13. Indonesian Economic Review and Outlook Figure 8: Indonesian Foreign Exchange Reserves, 2009 - 2013* (in USD Billion) The increase in Foreign exchange reserves until April 2013 is propped up by the issuing of foreign currency denominated global bonds by the government. International Reserves USD Billion 140 120 100 80 60 40 20 0 Source: Bank Indonesia and CEIC (2013) Figure 9: The Exchange Rate of Rupiah and Share Prices, 2009 - 2013* Uncertainty that shrouds the increase in prices of subsidized fuel, is one of the factors that has contributed to the depreciation of Rupiah ID X ID X ID R p e r U S D (R H S ) 6 00 0 1 40 00 1 20 00 5 00 0 1 00 00 4 00 0 8 00 0 3 00 0 6 00 0 2 00 0 4 00 0 1 00 0 2 00 0 0 0 Source: Indonesia Stock Exchange, Bank Indonesia and CEIC (2013) 2013, the value of Rupiah depreciated by 0.82% (mtm) to IDR 9802 per USD. In the meantime, the movement of the composite share price index in May 2013 shows an upward trend. The Indonesia Composite Index (IDX) hovered around 5068, which is higher than 4453, registered at the start of 2013 (represents an increase of 13.8%). However, the IDX is likely to experience down ward correction once ramifications associated with uncertainty of government policy on subsidized fuels are factored in Macroeconomic Dashboard Universitas Gadjah Mada 11
  • 14. Developments in Fiscal and Government Debt III. Developments in Fiscal and Government Debt A. Development in Fiscal In Q1 2013, Indonesia posted economic growth of 6.02%, which is lower than 6.29%, registered in the same period previous year. Slower economic growth is by and large, attributable to low utilization/absorption rate of the national budget, which in quarter I, was under 10 percent. In addition, the decrease in the performance of trade balance caused by falling commodity prices also contributed to lower than expected economic growth in the first quarter. To that end, it is not surprising that such conditions culminated in the revision of macroeconomic assumptions the 2013 state budget. The RAPBN-P 2013 contains revised macroeconomic assumptions, which include economic growth that is revised down wards from 6.8% to 6.3%, which is attributable to uncertainty that continues to characterize the global economy. The intension of the government to raise prices of subsidized fuels led to an upward revision of the assumption of inflation from 4.9% to 7.2%. Indonesia Crude Price (ICP) was revised upward from USD 100 to USD 108, lifting of petroleum oil was revised down wards from 900,000 barrels per day to 840,000 barrels per day, and lifting of natural gas was revised down ward from 1.36 million barrels to 1.24 million barrels per day. Consumption of subsidized fuel for March 2013 had surpassed the quota set. To that end, it is expected that the quota set in the national budget for over all consumption of subsidized fuels will reach 48.5 million kiloliters, a quantity that is far higher than 46 million kiloliters set in the 2013 national budget. This is the main reason that Table 3: Revised State Budget Plan 2013 Government proposal to raise fuel prices will induce higher inflation in the revised state budget plan Source: Ministry of Finance (2013) Macroeconomic Dashboard Universitas Gadjah Mada 12
  • 15. Indonesian Economic Review and Outlook compelled the government to implement the policy which once coming into force will restrict the use of subsidized fuels. On the other hand, there is need the reduction of expenditure on subsidized fuels to ensure that the government has healthy and sound fiscal space. In the 2013 state budget, the allocation budget for subsidized fuel expenditure reached IDR 193.8 trillion. This is a staggering amount of expenditure, which is more than half of all budget allocations for all various subsidies. The central government spent 16.7% of its expenditure on fuel subsidies. Moreover, if combined with subsidies on electricity, 23.8% of government expenditure was spent on subsidies. Doubtless, budget allocation for subsidized fuels will be higher that budget allocations because fuel consumption will surpass the quota set in the national budget. As late as early June, the government and DPR were still locked in deliberations on the revised state budget plan that relates to proposed raise in prices of subsidized energy fuels. For many sources, current budget allocation for subsidized fuels is too large and poses a danger to sustainable fiscal. In addition, the staggering amount spent on subsidized fuels has evoked sentiments of injustice in the expenditure of the national budget. To illustrate the point, government expenditure on subsidized fuels, which has been decried for its inefficacy, and poor targeting, is higher than government expenditure on capital goods and social contribution which received budget allocation of just IDR 184.4 trillion and IDR 73.6 Trillion in 2013 national budget, respectively. As a comparison, budget allocation on subsidized fuels is equivalent to the construction of 43 Suramadu bridges, 15 MRT lines in Jakarta, or 4,845 kilometers of road tolls. Moreover, higher consumption is likely to generate higher budget deficit, which the government will be compelled to finance by issuing government bonds. In relation to the proposal to raise fuel prices, the government proposes compensation scheme for the poor. The new scheme, which bears the name, temporary direct assistance for community (BLSM) which is not fundamentally different from the temporary unconditional cash transfer (BLT) was intended to distributed to the poor for the same purpose in the past. Despite fears that the policy Macroeconomic Dashboard Universitas Gadjah Mada 13
  • 16. Developments in Fiscal and Government Debt Figure 10: Central Government Expenditure Expenditure on Energy Subsidies is Projected to Increase in the RAPBN-P 2013 APBN 2013 (%) RAPBN-P 2013 (%) 30 25.97 25 23.80 20.93 20 20.13 17.39 15.98 15.97 15.67 15 9.81 9.46 10 6.38 5.98 5 3.68 4.05 1.73 0 Personnel Material Capital Expenditure Expenditures Expenditures Interest Payment Energy Subsidies Non Energy Grant Subsidies Expenditures Source: Ministry of Finance (2013) may be prone to abuse in furtherance of political interests, the government seems unwavered in its decision to implement the compensation program. Based on program plans, BLSM will benefit poor households, by mitigating the adverse impact of the increase in fuel energy prices on their consumption levels. Budget allocation for BLSM in the revised national budget plan 2013, is put at IDR 11.6 trillion, which will be distributed to 15.5 milion households that are categorized as very poor (RTSM) within each receiving IDR150,000 per month for the duration of five months. However, House of Representative – Budget Committee decided to distribute BLSM amounted for IDR 9.3 trillion, so that every RSTM is going to receive IDR 150,000 per month for four months. Tax revenues have for long become a reliable source of government revenues. However, tax revenues for 2013 are likely to miss the target of IDR 1,193 trillion set in the 2013 state budget to IDR 1,139.3 trillion in the revised state budget plan for 2013. The decrease in tax revenues is in part attributable to slow export performance and weakening domestic economy, both of which are traceable to uncertainty that continue to bedevil the global economy. Table 4 depicts trajectory of tax revenues in the domestic economy by April 2013, outside customs. In comparison with the same period of Macroeconomic Dashboard Universitas Gadjah Mada 14 2.57 0.31 0.20 Social Assistance Other Expenditures
  • 17. Indonesian Economic Review and Outlook Table 4: Domestic Tax Revenues for 1 January to 30 April 2013 (in IDR Billion) Domestic tax revenues posted an increase of 9.04% during 1 January- 30 April 2013 Source: Directorate General of Taxation (2013) Table 5: Budget Deficit in APBN 2013 and RAPBN-P 2013 (in IDR Billion) Budget deficit is projected to reach 2.48% of GDP Source: Ministry of Finance (2013) 2012, tax revenues in the domestic economy increased by 9.04% during 1 January 2013 to 30 April 2013, period. In general, income tax revenues from oil and non oil sources, valued added tax and luxury goods sales tax, and other taxes registered an increase during the period, land and construction tax (PBB) is the only tax, which posted a decrease of 59%. To that end, serious attention need to be paid to indication of a decrease in government revenue, which is compounded by the widening gap between the quota of subisized fuel set in the national budget and consumption of subsidized fuels. As a remedial measure to avert a widening budget deficit, the revision of the 2013 national budget was deemed imperative. In the revised national budget for 2013, the government proposed deficit target of 2.48% of GDP, which is higher than 1.65% of GDP, initially set in 2013 state budget. In the Nota Keuangan dan RAPBN-P 2013, it is predicted that government revenue will decrease by IDR 41,347.7 billion (2.7%). The budget deficit will increase due to a surge in government expenditure to the tune of IDR 39,019.3 billion (2.3%). The widening Macroeconomic Dashboard Universitas Gadjah Mada 15
  • 18. Developments in Fiscal and Government Debt budget deficit will be financed by IDR 77,782.7 billion in domestic financial resources, which will represent an increase from IDR 172,792.1 billion in the national budget, 2013, to IDR 250,574.8 billion. Meanwhile, net external financing sources will decrease by IDR 2,584.3 billion, from IDR 19,454.2 billion to a deficit of IDR 16,869.8 billion. The decrease will comes as a result of retiring higher level of foreign debt than serving the principal. B. Developments in Government Debt Total value of tradable government securities (SBN) outstanding by 31 May 2013 reached IDR 1,191.22 trillion, which represented an increase of IDR 124.92 trillion, compared tradable SBN outstanding by 30 April 2013 that registered IDR 1,066.30 trillion. The largest composition of SBN outstanding in May 2013 is represented by fixed rate bond, recorded for about IDR 672.39 trilliun. Meanwhile, treasury bills in May 2013 registered for about IDR 22.47 trilliun, reflected an increase compared to the previous month that reached IDR 21.02 trilliun. Meanwhile, the variable rate bond has shown no significant changes from the early 2013 up to May 2013, registered stable value for about IDR 122.75 trilliun. In general, the total value of foreign ownership of securities, in the form of SBN and stock has increased between January and May 2013. Foreign ownership of SBN in January 2013 recorded for about IDR 273.2 trillion, rise to IDR 302.94 trillion in May 2013. Compared to Figure 11 : Composition of Government Securities Fixed rate bonds continue to dominate the composition of government securities I D R T r il li o n G o v er n m e n t D eb t S ec u r i t i es ( S U N ) T r ea s u r y B il l s ( S P N ) G o v e r n m e n t B o n d (O N ) 90 0 80 0 70 0 60 0 50 0 40 0 30 0 20 0 10 0 0 Source: Bank Indonesia, Ministry of Finance and CEIC (2013) Macroeconomic Dashboard Universitas Gadjah Mada 16 Z er o C o u p o n B o n d F i x e d R a te B o n d V a r i a b l e R a te B o n d
  • 19. Indonesian Economic Review and Outlook Figure 12 : Foreign Ownership of Securities There has been an increase in foreign ownership of securities F o re ig n O w n e rs h ip o f S B I F o r e ig n O w n e r s h i p o f S B N F o r e i g n O w n e r s h ip o f E q u i t i e s T o ta l o f F o r eig n O w n er sh ip 2500 2000 1500 1000 500 0 Source: Bank Indonesia, Ministry of Finance and CEIC (2013) May 2012, the total value of foreign ownership of SBN has increased for IDR 78.44 trillion in May 2013. Regarding to foreign ownership of SBI, the total value reached IDR 1.02 trillion in May 2013, shows a decrease compared to the previous month which registered IDR 1.65 trillion. Similarly, compared to May 2012, the total value of foreign ownership of SBI in May 2013 has decreased, amounted for IDR 0.63 trillion. The reduction is attributable to the impact of the regulation on 6 months holding period issued by Bank Indonesia on 13 May 2011. IV. International Indonesia trade balance has deteriorated in April 2013. If in March 2013, Indonesia trade balance posted a surplus of USD 0.1 billion, conversely the economy relapsed into a trade deficit of USD 1.6 billion in April 2013. The deterioration in trade balance is attributable to the surge in imports by 9.6%. The rise in the value of imports is in part as a result of a surge in non oil imports from USD 11 billion to USD 12.7 billion, meanwhile, oil imports registered a decrease of USD 0.3 billion or 7.7%. The decrease in exports from USD 15.02 billion to USD 14.7 billion is another factor that contributed to the drop in the trade balance in April 2013. Compared with the position in April 2012, Indonesian trade balance in April 2013 has deteriorated. The trade deficit increased from USD Macroeconomic Dashboard Universitas Gadjah Mada 17
  • 20. International Figure 13: Indonesia Trade Balance, January 2008 - April 2013 Indonesian Trade Balance falls into deficit once again. (USD Billion) Export Import Balance of Trade 25.00 20.00 15.00 10.00 5.00 0.00 -5.00 -10.00 -15.00 -20.00 Source: BPS and CEIC (2013) 0.8 billion in April 2012 to USD 1.6 billion in April 2013. Factors attributable to the deterioration in the trade balance, among others, include a decrease of 9.1 % in value of exports of which oil and gas exports contracted by 32.9% and non oil and gas exports decreased by 2.4%. In general, the performance of trade balance during January - April 2013 decreased compared to the same period in 2012. The trade balance, which initially registered a surplus of USD 2 billion during January – April 2012 dropped into deficit of USD 1.9 billion during January – April 2013. The decrease in trade balance is in the main attributable to the fall in the value of exports from USD 64.7 billion during January – April 2012 to USD 60.1 billion in the same period in 2013. The decrease in exports indicates marked deterioration in the competitiveness of Indonesian products in international markets and the effect of lingering weakness in the global economy. Indonesia trade balance continued to post a deficit in April 2013. A trade deficit of oil and gas rose from USD 1 billion in March 2013 to USD 1.2 billion in April 2013. The rise of deficit in Indonesia trade balance of oil and gas was attributable to a decrease in oil and gas exports from USD 2.9 billion in March 2013 to USD 2.4 billion in April 2013. The under performance of oil and gas exports was is in part caused by 21.9% decrease in crude oil exports, 20.47% contraction in oil and gas derived exports and 15.9% drop in gas exports. In the meantime, the performance of oil and gas exports in April 2013 also deteriorated, if compared to the same period in the previous year. The Macroeconomic Dashboard Universitas Gadjah Mada 18
  • 21. Indonesian Economic Review and Outlook Figure 14: Indonesia Oil and Gas Exports - Imports, January 2008 – April 2013 Indonesia continues to experience a trade deficit of oil and gas. (USD B illion) Exp ort: Oil and Ga s Im po rt: O il a nd G as Export Im port Balance of T rade: O il a nd Ga s 25 20 15 10 5 0 -5 -10 -15 -20 Source: BPS and CEIC (2013) deficit in Indonesia trade balance of oil and gas increased from USD 0.5 billion in April 2012 to USD 1.2 billion in April 2013. Poor performance of the oil and gas export sector is also attributable to falling prices of Indonesian crude oil exports from USD 107.42 per barrel in March 2013 to USD 104.19 per barrel in April 2013. The fall in prices of Indonesian crude oil reflects the downward trend in prices of crude oil on international commodity markets. Crude oil prices at WTI (Nymex) dropped from USD 92.96 per barrel to USD 92.07 per barrel or prices of Brent (ICE), which decreased from USD 109.54 per barrel to USD 103.43 per barrel in the same period. The fall in prices of petroleum oil prices is largely attaributable to an increase in supply of crude petroleum oil on the International market. Production of crude petroleum oil increased from 90.83 million barrels per day in Marct 2013 to 91.26 million per day in April 2013. The production of crude oil in Indonesia, though still below the target set in APBN 2013 (900,000) barrels per day, increased on average to 890,000 barrels per day in Q1 2013. Overall, the deficit in trade balance of oil and gas increased from USD 1.1 billion during January-April 2012 to USD 4.6 billion in JanuaryApril 2013. This is also attributable to an increase of 3.2% in oil and gas imports as well as an decrease of 22.2 % in oil and gas exports. Macroeconomic Dashboard Universitas Gadjah Mada 19
  • 22. International Figure 15: Indonesia Non Oil and Gas Export - Imports, January 2008 – April 2013 The performance of Indonesia non oil and gas export-imporrts has deteriorated once again (U S D B illio n ) E xp o r t: N o n O il a n d G a s Im p o rt : N o n O il a n d G a s E x p o rt Im p o rt B a la n ce o f T ra d e : N o n O il a n d G a s 25 20 15 10 5 0 -5 -1 0 -1 5 -2 0 Source: BPS and CEIC (2013) In April 2013, Indonesia registered a trade deficit of USD 0.41 billion in the non oil and gas trade sector, which followed a surplus of USD 1.1 billion in March 2013. Th rise in non oil and gas deficit was attributable to 15.8 % in non oil and gas imports increase, which could not be offset by an increase of 1.7% in non oil and gas exports. Compared to the condition in April 2012, which posted a deficit of USD 0.2 billion, the deficit in trade balance of non oil and gas in April 2013 showed a slight increase that registered USD 0.4 billion. Worsening Indonesia trade balance of non oil and gas deficit is largely attributable to a decrease of non oil and gas exports, amounted for 2.4 % between April 2012 and April 2013. Overall, the performance of non oil and gas trade balance in April 2013 showed deterioration from the same period in the previous year. During January-April 2013, non oil and gas trade balance recorded a surplus of US$ 2.7 billion, which was lower than the surplus of USD 3.1 billion recorded during January-April 2012 period. The decrease of 3% in non oil and gas exports compared with the same period in January-April 2012 is considered to be the main factor responsible for the decline in performance. During January – April 2013, exports of 10 categories of goods which comprise crude petroleum oil; fats and fatty acids; machinery /electric appliances; rubber and rubber products; machinery /mechanical instruments; iron, kerak and iron dusts; vehicles and components; garments; shoes; timber, wooden products contributed 62.10% of non oil and gas exports. Macroeconomic Dashboard Universitas Gadjah Mada 20
  • 23. Indonesian Economic Review and Outlook In Q1, 2013, the current account deficit showed 31 % decrease compared with the position in the previous quarter. Indonesia registered current account deficit of USD 5.3 billion in quarter I, 2013, which was a significant decrease from USD 7.6 billion recorded in the Q4 2012. The decrease in the current account deficit is attributable to an increase in the trade surplus from USD 0.8 billion in Q4 2012 to USD 1.6 billion in Q1 2013. To that end, improvement in the balance of trade and income contributed to a reduction in the current account position. Meanwhile, the performance on the current account in Q1 2013, if compared to Q1 2012, showed marked deterioration. The current account deficit increased from USD 3.1 billion in Q4 2012 to USD 5.3 billion in Q1 2013. Rising current account deficit in Q1 2013 is attributable to 57% (YoY) decrease in the trade balance of goods and 11.5% (YoY) increase in the balance of trade. The position of capital and financial accounts in the Q1 2013 marked a drastic deterioration. Capital and financial transactions decreased drastically from a surplus of USD 11.9 billion in Q4 2012 to a deficit of USD 1.4 billion in Q1 2013. The deterioration in the performance of the capital and financial transactions is attributable to weakness in Other investments item which moved from a surplus of USD 7.2 bilion in Q4 2012 to USD 7.7 billion in deficit, which is a direct consequence of an increase in offshore savings by domestic banks. The increase in the level of domestic bank foreign currency assets is a direct response to the policy implemented by Bank Indonesia that involved taking control of all available foreign currency to finance oil and gas imports. To that end, the intervention by Bank Indonesia to supply foreign currency which Pertamina needs to spend on oil and gas imports is expected to reduce the demand for foreign currency. The decrease in the demand for foreign currency in the domestic economy, in turn expected to mitigate the down ward pressure on Rupiah, thereby reducing its variability. As a response, domestic banks found themselves with alot of excess liquidity in foreign currency, which they deposited offshore. Overall, the performance of capital and financial transactions, in Q1 2013, is not any better than the position in Q1 2012. In Q1 2012, capital and financial transactions registered a surplus of USD 2.1 billion. The main cause of the deterioration in the performance of then capital Macroeconomic Dashboard Universitas Gadjah Mada 21
  • 24. International Figure 16: Current Account, 2006:Q1 – 2013:Q1 The current account deficit has decreased once again (U SD B illio n ) G o o d s T r a d e B a la n c e ( LH S ) S e r v ice T r a d e B a la n ce ( L H S ) I n co m e A c co u n t ( L H S ) C u r r en t T r a n s fer ( L H S ) C u r r e n t A cc o u n t ( R H S ) 15 (U S $ b n ) 6. 0 0 4. 0 0 10 2. 0 0 5 0. 0 0 0 -2 .0 0 -4 .0 0 -5 -6 .0 0 -10 -8 .0 0 -15 -1 0 .0 0 Source: Bank Indonesia and CEIC (2013) Figure 17: Capital and Financial Accounts, 2006: Q1 – 2013:Q1 Capital and financial accounts, which initially was in surplus, descended drastically into a deficit (U S D B i ll io n ) D i r e c t In v e s t m e n t ( L H S ) P o r t f o li o In v e s tm e n t ( L H S ) O t h e r In v e s t m e n t ( L H S ) C a p it a l a n d F i n a n c i a l A c c o u n t ( R H S ) C u rre n t A c co u n t (R H S ) (U S $ b n ) 15 1 5 .0 0 10 1 0 .0 0 5 5 .0 0 0 0 .0 0 -5 - 5 .0 0 -1 0 - 1 0 .0 0 Source: Bank Indonesia and CEIC (2013) Gambar 18: Neraca Pembayaran Indonesia, 2006:Q1 – 2013:Q1 Neraca pembayaran yang surplus mulai defisit lagi (U S D B illio n ) C u rr e n t A c c ou n t (L H S ) C a p it a l an d F in a nc ia l A c c ou n t (L H S ) E rr o rs a n d C o m m iss io ns ( L H S ) B a la n c e o f Pa y m e nt (R H S ) (U S $ b n ) 15 1 5 .0 0 10 1 0 .0 0 5 5 .0 0 0 0 .0 0 -5 -5 .0 0 -1 0 Sumber: Bank Indonesia dan CEIC (2013) Macroeconomic Dashboard Universitas Gadjah Mada 22 -1 0 . 00
  • 25. Indonesian Economic Review and Outlook and financial transactions is the increase in the deficit recorded in the Other Investments category from USD 2 billion in Q1 2012 to USD 7.7 billion in Q1 2013. In Q1 2013, Indonesian balance of payments position registered a deficit of USD 6.6 billion, from a surplus of USD 3.2 billion in Q4 2012. Weakening performance of the balance of payments in Q1 2013, is attributable to a deficit on capital and financial transactions (USD 1.4 billion), from a surplus of USD 11.8 billion in the previous quarter. Overall, the balance of payments position in Q1 2013 shows deterioration from the Q1 2012. The balance of payments deficit increased from USD 1 billion in Q1 2012 to USD 6.6 billion in Q1 2013. Factors which contributed to weakening balance of payments in Q1 2013 include an increase in the current account deficit from USD 3.1 billion in Q1 2012 to USD 5.3 billion in Q1 2013, and poor performance of capital and financial accounts which moved from a surplus of USD 2.1 billion to USD 1.4 billion in deficit in quarter I2013. V. GAMA Leading Economic Indicator GAMA LEI has succeeded twice in predicting accurately and precisely potential signs of weakening performance of the Indonesian economy. GAMA LEI predicted economic growth decreased, which has been shown by lowering economic growth of 6.11% and 6.01% (YoY) in Q4 2012 and Q1 2013 respectively. GAMA LEI predictions were in stark contrast with those issued by most economic analysts who projected higher economic growth rate. In this edition, GAMA LEI predicts slow economic growth in Q2 2013. The predictions are based on the fact that 2013 continues to be characterized by higher uncertainty in the global economy, and being a year to the general and Presidential elections, it is going to be fraught with high political dynamics in Indonesia. As we went to press, Indonesian economy is in the midst of uncertainty that shrouds the direction and composition of government policy on subsidized fuels. Expenditure on preparations for the general elections will temporarily help to sustain economic growth. However, the implication is the economic growth is not based on sound economic policy. Inflation prior to and after the government Macroeconomic Dashboard Universitas Gadjah Mada 23
  • 26. GAMA Leading Economic Indicator Figure 19 : GAMA LEI Indonesia, 2000:Q1 – 2013:Q1 implements its policy to raise prices of subsidized fuels, calls for serious attention and anticipation. Doubtless, high inflation expectations will exert more pressure on already weakening economic growth in coming quarters. This is the more so, given the fact that based on GAMA LEI predictions, there is still no indication that the downward trend which kicked in the economy in Q4 2012, is fizzling out any time soon. The value of Rupiah is almost reaching IDR 10,000 per USD driven by rising oil and gas imports, which in turn is attributable to high demand for subsidized fuel. High demand for subsidized fuels is largely attributable to the low retail price consumers pay for it in the domestic economy. Subsidized fuels, the higher the volume of oil and gas imports. This translates into high demand for US dollars to pay for energy fuels, which in turn contributes to the depreciation of Rupiah. What this means is that unless policy makers implement concrete pro growth policies, thereby marking a change from the prevailing conditions, based on LEI predictions, Indonesian economy will continue to weaken in the next quarter. This is far from expectations of all, which is higher economic growth. GAMA LEI is a cycle, which comprises composite a selection of indicators that have the potential to precede Indonesian business cycle (Indonesian Economic Review and Outlook, March 2013). The construction of GAMA LEI is based on analyses of hundreds of internal and external macroeconomic indicators. The selection of macroeconomic indicators that form GAMA LEI is done under very stringent considerations. Data on indicators is renewed every quarter, which means that LEI that is developed continues to improve and becomes more accurate. Based on the latest quarterly data on Indonesian GDP for 2000-2013, indication point to highly Macroeconomic Dashboard Universitas Gadjah Mada 24
  • 27. Indonesian Economic Review and Outlook fluctuating economy. However, GAMA LEI is able to predict with high precision, the point when the economy changes course. During 2008 global financial crisis, LEI was able to predict sigs of an economy changing course in Q3 2007, and predicted the down turn of Indonesian economy in Q3 2008. Consensus on Macroeconomic Indicators Projections Results obtained from a survey, which involved respondents drawn from lecturers in the Faculty of Economics and Business, UGM, yielded predictions of levels and range of principal macroeconomic indicators that include GDP, inflation, and exchange rate of Rupiah against US$ right from Q2 2013 to year 2014. Predictions of GDP (YoY) indicate an economy that is still weighed down by pessimism. Prediction of real GDP growth for the Q2 2013 and Q3 2013 were within 6.02% ± 0.2% and 6.05% ± 0.2% range, respectively. However, predictions of real GDP based on the latest data for 2013 and 2014, show that the economy is expected to post growth by 6.13% ± 0.22% and 6.19% ± 0.21%, respectively. Meanwhile, predictions of Inflation (YoY) show an upward trend. This is reflected in the predictions for Q2 2013 and Q3 2013, which are 5.93% and 6.12%, respectively. However, predictions for inflation for 2013 and 2014 are 5.71% and 5.66%, respectively. Table 6 : GDP Estimation (YoY, in %) Sources: Primary data, processed (2013) Table 7 : Inflation Estimation (YoY, dalam %) Sources: Primary data, processed (2013) Table 8 : Exchange Rate Estimation (IDR per USD) Sources: Primary data, processed (2013) Macroeconomic Dashboard Universitas Gadjah Mada 25
  • 28. Current Issue In the meantime, while the prediction of the exchange rate for Q2 2013 in the previous edition was expected to hover around IDR 9776, in this edition Rupiah is expected to depreciate against US dollar. The depreciation is attributable to uncertainty facing both the domestic and global economy. In that regard, survey results point to a depreciation in the exchange rate to be IDR 9,837 and IDR 9,834 for Q2 2013 and Q3 2013 respectively. Meanwhile, exchange rate for 2013 and 2014 is expected to be IDR 9,818 and IDR 9,831 respectively. VI. Current Issue Postponement is not a Choice; Fuel Subsidies is growing “Time Bomb” that is Holding the Economy Hostage By Dr. Rimawan Pradiptyo1 History Repeated For the umpteenth time, during the reformation regime, Indonesia faces a dilemma which is associated with reducing fuel subsidies. Various road maps on how best to reduce fuel subsidies have been proposed since 2008, neither of which as it turned out, were a far cry from interests of politicians. Our collective memory is still fresh with government proposal to regulate and control the consumption of fuels in 2010, which was supposed to implemented in phases starting with Jakarta, and afterwards to cover the whole country by late 2013. However, apparently the plan failed to get off the ground due to the difficulty of acquiring requisite land for expanding storage fuel tanks that refuelling stations faced, which was compounded by the DPR rejection of research findings on the fuel policy and the best policy forward , by the team that comprised three Universities UGM-ITB-UI. In its research report, the UGM-ITB-UI research, noted the two proposals by bureaucrats and politicians to regulate and control the consumption of subsidized fuels, were inefficient and ineffective. This was because the estimates of the cost of implementing the two policies far outweighed the benefits. Moreover, the policy posed the danger of creating horizontal conflicts among refuelling stations and between consumers and refuelling station operators. In fact, the policy recommendations continued, the two programs, in implemented as designed would have the potential of changing the venue of demonstrations from Presidential offices (Istana Negara) and DPR/MPR premises to refuelling stations all over the country from Sabang to Merauke. 1 Dr. Dr. Rimawan Pradiptyo is Deputy Research and Coordinator of Publication & Data Research and Training Economics and Business (P2EB) FEB UGM Macroeconomic Dashboard Universitas Gadjah Mada 26
  • 29. Indonesian Economic Review and Outlook To that end, the joint research team of UGM-ITB-UI researchers, proposed a decrease of reduction of fuel subsidies through a gradual increase of subsidized fuel prices by IDR 500, which should be implemented overtime (for instance once every 6-12 months) until the price of Premium fuel reaches the free market price. The phased reduction of subsidized fuels, should be go hand in hand with the implementation of a subsidy compensation program, targeting poor families. The proposed increase of IDR 500/liter , was considered to be the right figure, which would accommodate both the interests of the economy and politicians. However, the government rejected policy proposal out of hand and the coalition of political parties in government failed to support and advocate for the implementation of the policy. During early 2012, the rising burden of subsidized fuels on government finances came into the limelight once again. And once again, the government requested three a team of researchers drawn from three Universities (Unpad-ITB-UI) to conduct a research on the policy of subsidies. The research team proposed that the price of Premium should be raised by Rp1500/liter, which received stiff opposition from various elements in country, especially University students , manifested in demonstrations staged in various cities in the country. The spate of demonstrations against the policy programs was attributable to the fact that policy recommendation to raise premium fuel by IDR 1500/liter failed to take into account political repercussion which is often associated with hiking fuel prices. To that end, the increase of IDR 1500/liter, which UpadITB-UI team proposed, was higher than IDR 500/liter and gradual reduction of fuel subsidies that UGM-ITB-UI team recommended. Once again, in 2012, the ruling party showed its reluctance to raise fuel prices, and eventually fuel prices remained intact. In the meantime, the intensity of discussions on the prospects of raising fuel prices with no data set to effect the policy, created inflation expectations among economic agents, especially traders. This assertion is very much in line with research findings by Pradiptyo et al. (2010) , which showed that the expectation of a potential increase in fuel prices is the main source of information traders use in forming inflation expectations. Since February 2013, the burden of fuel subsidies on the government budget came into the spotlight, once again. The Budget deficit for 2011 and 2012 was 1.1% and 1.84% of GDP, respectively, but still lower that maximum limit of 3% of GDP. This year, the budget deficit will rise to 3.38% of GDP if the policy on reducing fuel subsidies is not implemented. What is also worth Macroeconomic Dashboard Universitas Gadjah Mada 27
  • 30. Current Issue noting is that Indonesia has been a net importer of petroleum oil since 2004. This means an increase in the consumption of subsidized fuels will translate into heavier burden on the balance of payments due to higher import volumes and value of Pertamax fuel2. Thus, the recurrence of the fuel subsidy problem over the last three years , does not mean serious measures to deal with it, are easy to come any time soon. Nonetheless, what is apparent from the pattern of efforts to deal with the problem is the significant shift in policy from relying on hard evidence (reality) to anecdotal evidence (myths). Fuel Subsidies is increasingly becoming a Time Bomb The subsidized fuel policy, despite being touted as tailored to support low income earners, is by and large, to the benefit of middle and high income consumers. Consumption of subsidized fuels constitutes compensated consumption phenomenon, which means that the government has to meet the demand for fuel consumption by anybody, and for any activity. This means that the government pays all the quantity /volume of subsidized fuels, which Pertamina oil Tanks fill into refuelling stations. The compensated consumption phenomenon can be described in the following way. Imagine if you have a credit card which has no higher limit3. Then, give that credit card to a teenager, who in the morning, revels in going to the highest upscale shopping Mall in this county4. You inform the teenager that he has the right to buy anything, regardless of price, as all the purchases using the credit will be on your account. At night, as the Mall closes its doors, you pick up the teenager and you ask him to hand over all the receipts for all the purchases he/she has made during the day. Is there any person on this planet earth who can guess with precision the value of the purchases the teenager has made during his/her shopping binge all day round? The answer is definitely in the negative. To that end, the above illustration attests to the complexity and magnitude of the problem which bureaucrats face in estimating the ever rising consumption of subsidized fuels. Therefore, it is not surprising that every year, estimating the quantity of subsidized fuel to be consumed is very difficult, which is why the quota set in the budget always turns out to be lower than the quantity consumed. Essentially, what are the factors that influence the increase in consumption of subsidized fuels? Several factors influence the rising consumption of 2. On the international market, RON 92 is the Minimum standard for fuels which is equivalent to Pertamax. Thus, to bridge the gap between domestic demand and domestic production, the government imports Pertamax. This type of credit card is black and has short account number, not as long as those on ordinary credit cards. It is only a few individuals who can own such credit cards 4 In some Malls in Jakarta, Luxury vehicles such as Ferarri, Porsche and Jaguar are on Sale. The credit card does not a maximum limit, makes it possible for one to purchase such luxurious vehicles . 3 Macroeconomic Dashboard Universitas Gadjah Mada 28
  • 31. Indonesian Economic Review and Outlook subsidized fuels . These include: 1) increase in economic activities attributable to economic growth; 2) rising international fuel prices; 3) appreciation of foreign currencies; 4) shift of consumption from Pertamax to premium; 5) increase in black market activities to meet the demand for industries; and 6) smuggling of subsidized fuels to other countries. Of all the six factors that influence the increase in demand for subsidized fuels, it is only economic growth, which is the endogenous factor that the government can exercise control, while the other five factors are exogenous, over which the government has little, if any control. This means that, raising prices of subsidized fuels is the only leverage the government has to control the rising fuel subsidies as other determinants are not in government purview, rather the international market, behaviour of the general public in consuming subsidized fuels, and agents in black markets and subsidized fuel smuggling networks. In other words, leaving the policy on subsided fuel prices as it is, tantamount to relegating the determination and formation of the national budget to foreign elements and subsidized fuel smuggling rings. Thus, the question, one should poses is where does this fit in the commitment of this country to determine and exercise decision making on issues of sustainable economic development in an independent manner ? It is not farfetched, to describe the rising burden of fuel subsidies on government finances, as time bomb which is growing over time and unless handled in time, will explode anytime. In light of that, considering the adverse impact of subsidized fuels on the national budget and burden on the economy, silence is not a commendable solution to resolve this complex problem. Moreover, rising consumption of subsidized fuels increases the vulnerability of the economy arising from surging imports of Pertamax, which in turn will lead to higher pressure on the balance of payments and exchange of Rupiah against other currencies. The problem becomes the more complex simply because subsidized fuels is available everywhere, and everyone has easy access to it. There is little doubt that with higher purchasing power, the general public has better means to consume fuel, which is why the demand for subsidized fuels is higher among middle and high income earners than is the case with low income earners. A lot of research5 showed hard evidence that subsidized fuels contribute to worsening income disparity. Data obtained from The Ministry of Energy and Mineral resources shows that the proportion of consumption of subsidized fuel by category of users and region: 1) vehicle owners (53%) compared with motorcycle owners (47%); 2) Java and Bali Macroeconomic Dashboard Universitas Gadjah Mada 29
  • 32. Current Issue population (59%); 3) land transportation (89%). Meanwhile based on Ministry of Finance (2008) sources, 25% of high income households consume 77% of subsidized fuels; middle income households consume 25%; and low income households just 15% of subsidized subsidies. Facts attest to the reality that the black market and smuggling networks of subsidized fuels determine the volume of subsidized fuel consumed and by extension, amount of money spent on subsidized fuels. Consequently, the higher the magnitude of subsidies on fuels the government spends, the more lucrative it becomes to perpetrators of subsidized fuels smuggling and black market in subsidized fuels. The above facts, provide eloquent testimony to the fact that subsidized fuels , by and large, suffers from poor targeting of its intended beneficiaries. In light of that, it is not far fetched to say that any effort to maintain the current level of subsidies on fuels amounts to protecting subsidies which are largely enjoyed by middle and high income earners, as well as perpetrators of subsidized fuel smuggling and black market operators. This argument, therefore debunks the assumption that raising prices of subsidized fuel energy epitomizes betrayal of the people and aggravate their destitution. Abundant evident indicate that rich, are the beneficiaries of the most of the subsidized fuels in comparison with the poor. To that end, any policy that stresses commitment to maintain higher subsidized on fuels undermines efforts to promote justice and fairness for all, as the beneficiaries are largely those who are rich and not the poor. Pradiptyo and Sahadewo (2012) conducted a laboratory-based survey on 335 households in Yogyakarta, comprising those who do not own any vehicles and those who have more than one vehicle. Research results indicated that respondents who do not own any motor vehicle whatsoever, who are categorized as poor, readily accepted and receptive to the idea to raise fuel prices , compared with respondents who own vehicles. For respondents who do not own any vehicle, reducing subsidies on fuels gradually was not considered a problem as long as the relocation of subsidies was channelled to specific subsidy programs ( for instance vaccine, infrastructure and transportation) , which generate direct benefits to households. On the contrary, respondents who own vehicles were not bothered by the way the relocation of subsidies which arise from reduction in subsidized fuels was done, as long as the reduction of subsidies was carried out gradually. In light of that, one can draw the inference that high income households who enjoy the lion's share of subsidized fuels, 5 See Ministry of Finance (2008), World Bank (2010) Macroeconomic Dashboard Universitas Gadjah Mada 30
  • 33. Indonesian Economic Review and Outlook showed higher reluctance to accept the policy proposal to reduce fuel subsidies than low income households. According to Pradiptyo (2012a,b), corrupt individuals enjoy subsidies in Indonesia as the maximum sentence they face based on Law on Corruption is very low. Based on sentences passed out by MA during 2001-2012 period, the explicit cost of corruption hovers around Rp 168.19 trillion, meanwhile, the financial value of the sentences was just Rp 15.09 trillion (constant 2012 prices). To that end, members of society foot the difference between the values Rp.153.1 trillion. In other words, members of the general public subsidized corrupt individuals. This makes the circle of people's suffering, especially those with middle and low incomes, complete. Ideally, subsidies should be given to disadvantaged members of society who earn low incomes, which is contrary to the reality in Indonesia. The policy of subsidized fuel energy is huge boon for high income earners, subsidized fuel smugglers and black market agents. On the other hand, thanks to loopholes in the anti corruption Law, obedient tax payers have ended up subsidizing corruptors , who are in the main middle and high income earners. Keep the Momentum The burden of fuel subsidies on the economy can be minimized if the government, and political parties in particular have strong commitment to enhance the independence of the economy in the policies it makes. Nonetheless, efforts toward that direction, are often undermined by short term political interests. In 2005 the government raised prices of Premium fuels by 160%, but in 2008 as the general elections in 2009 approached, the government reduced prices of Premium fuels to the current level IDR 4500. It should worth noting that in addition to the lack of commitment by the ruling political party coalition, political interests contributed much to rejection by DPR, policy recommendations on dealing with rising fuel subsidies, which UGM-ITB-UI team made in 2011. The same was at work in 2012. As this piece is written, government indecisiveness to reduce subsidies, is attributable to political bickering and differences among political parties in Senayan. The potential danger lies in the fact were the current state of procrastination to continue, the government may fail to take this opportunity and momentum to reduce fuel subsidies. Let us calculate the value of subsidies which the government could have saved, had the government implemented policy recommendation of UGM- Macroeconomic Dashboard Universitas Gadjah Mada 31
  • 34. Current Issue ITB-UI research team, of gradually raising the price of premium fuel by IDR 500/liter (for example every 1 April)? If the policy was implemented was 2011, the price of Premium fuel at the pump would no longer be IDR 4500/liter but IDR 6000/liter. If the policy was implemented, taking into consideration that elasticity of premium is -0,16, and assuming that Solar (diesel) also has the same elasticity, and the government did not implement any other policy on subsidized fuels by December 2013, total amount of subsidies which the government would saved would be IDR 134.23 trillion. Meanwhile, if the government goes ahead with its plan to raise prices of subsidized Premium fuel and Solar by IDR 6000/liter, the policy of gradually increasing fuel prices by IDR 500/liter since 2011 would have saved IDR 97,42 trillion. Let us compare the value of government expenditure on subsidies saved with the government subsidies on fertilizers and food stuffs , which in 2013 budget is IDR 17.2 trillion and IDR 16.2 trillion, respectively. Operational cost of UGM is just IDR 2 trillion per year , and it is the largest University in Indonesian, with a student population of 52,000, right from three year diploma to Doctorate level. Let us assume that operational cost of running the University is increased to Rp3 trillion per year in order to finance requisite expenditure on facilities and infrastructure tailored to scaling up the quality of education service provision to such a level that enables UGM to compete with Universities in the developed world. Based on this scenario, it is only IDR 30 trillion per year, that is required to transform 10 best Universities which have the same level and scale as UGM in Indonesia to provide free education right from D3 to S3! Just imagine by spending just IDR 30 trillion per year , 520 000 students in the best Universities in Indonesia would be able to undergo education free of charge! This is the minimum cost, which the Indonesian economy is paying due to procrastination of policy makers in this country. March, April, and May, is the best time for the government to increase prices of subsidized fuels. This is based on the trajectory of inflation over the years, which is lowest in April and ratchets up in May. To that end, the two months provide the right time to reduce fuel subsidies as the impact on inflation is likely to be the smallest. However, current government plan is to increase prices of subsidized fuels in June, which is not ideal given the fact that the fasting month of Ramadhan is around the corner. Nonetheless, the rising budget deficit and worsening balance of payments, mean that the government can no longer delay the policy of raising the prices of subsidized fuels this time around. Macroeconomic Dashboard Universitas Gadjah Mada 32
  • 35. Indonesian Economic Review and Outlook VII. Economic Outlook Indonesian economy in Q2 2013, encountered many internal and external challenges, which increased macroeconomic instability. The realm of decision making is plagued by political intrigue, which explains the procrastination the government has shown in its decision to increase prices of subsidized fuel prices, and eventually setting the date of Mid June 2013 (latest limit for latest IERO edition). It is no wonder the delay has generated uncertainty in the economy, as it amounts to holding the economy hostage. Such condition, tantamount to “a growing time bomb” as Dr. Rimawan Pradiptyo has succinctly stated in this edition. This is the more so, considering the increasingly hot political economy in Indonesia, amidst the global economy, which is facing uncertainty concerning quantitative easing monetary policy by the central bank in United States and Japan, and shroud of uncertainty that hovers over European economy, have all contributed negatively to Indonesian economy. As is that was not enough, the World Bank, revised down the global economic growth projection for 2013 from 2.4% in January 2013 to 2.2% in June 2013; the growth of the economy of China which has become the main growth engine of the global economy, was revised downwards from 8.4% to 7.7%; while projection of economic growth for Indonesia were revised downwards from 6.3% to 6.2%. Amidst growing uncertainty in the domestic and global economy, GAMA Leading Economic Indicators predicts contraction in economic growth in the short term. To that end, the contraction in the economy is projected to continue, which is a continuation of GAMA LEI's projections that were proved correct over the past two quarters in succession. The same applies to the consensus of members of Faculty in the Faculty of Economics and Business, UGM, with respect to projections of key macroeconomic indicators, which were very much in line with GAMA LEI predictions that Indonesian economy is projected to contract , due to rising economic instability and slowdown in economic growth. There is little doubt, if such conditions continue for long, have the potential to endanger Indonesian economic development. As way forward, there is need for the government to take decision on the subsidized fuels which will go a long way curbing current uncertainty and speculation and attendant adverse effects on the economy. Besides, all relevant economic authorities should in the short term put more emphasis on efforts to preserve macroeconomic stability, which should prevent rising political tensions from degenerating into macroeconomic instability and deterioration of the economy. Macroeconomic Dashboard Universitas Gadjah Mada 33
  • 36. INDONESIAN ECONOMIC REVIEW AND OUTLOOK MACROECONOMIC DASHBOARD TEAM S.E. ,S.E. +62 274 548517 ext 373 MACROECONOMIC DASHBOARD FAKULTAS EKONOMIKA dan BISNIS UNIVERSITAS GADJAH MADA th Pertamina Tower Building 4 fl. Room 4.1 Jl. Humaniora No. 1 Bulaksumur, Yogyakarta 55281 Phone : +62 274 548 517 ext 373 Email : iero@macroeconomicdashboard.com Website : www.macroeconomicdashboard.com

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