No. 1/Year II/March 2013

INDONESIAN ECONOMIC
REVIEW AND OUTLOOK

Infrastructure Development

Macroeconomic Dashboard
Facu...
Foreword
Indonesian Economic Review and Outlook
(IERO) is quarterly bulletin, which is
published by the Macroeconomic Dash...
Indonesian Economic Review and Outlook

I. Recent Economic Development

T

he impact of sluggish economic growth in US and...
Recent Economic Development

Figure 1: GDP Growth Rate Based on Constant 2000 Prices by Expenditure, 2005 – 2012 (in %, Yo...
Indonesian Economic Review and Outlook

Figure 2: Indonesia GDP Growth Based on 2000 Constant Prices by Industrial Origin,...
Developments in the Monetary Sector

decrease in unemployment level in Indonesia can be attributable to
the decrease in In...
Indonesian Economic Review and Outlook

January 2013, is also another important contribution to inflation level
in Februar...
Developments in the Monetary Sector

thirteen imported horticultural products in the domestic market
during January – June...
Indonesian Economic Review and Outlook

Table 1: Comparison of Inflation in 66 Cities /Municipalities in Indonesia, Februa...
Developments in the Monetary Sector

conditions in the economy and banking sector hence has decided to
maintain the deposi...
Indonesian Economic Review and Outlook

Figure 7: Developments in BI Rate, SBI, Deposit, and Credit/Loans Rates, 2009 – 20...
Developments in Government Finances

major Indonesian exports have all contributed to undermining the
value of Indonesian ...
Indonesian Economic Review and Outlook

Table 3: Central Government Expenditure, 2012 - 2013 (IDR trillion)
Expenditure on...
Developments in Government Finances

Table 4: Subsidies in the 2013 National Budget (IDR trillion)
Central Government expe...
Indonesian Economic Review and Outlook

global crisis and the decline in Indonesian competitiveness. To that
end, to avert...
Developments in Fiscal Policy

Meanwhile, in general the ratio of total value of Indonesian foreign
debt to GDP shows an u...
Indonesian Economic Review and Outlook

Figure 13 : Composition of Government Bonds
Fixed rate bonds consitute a dominant ...
Developments in Fiscal Policy

value of Treasury Bills was IDR 21.27 trillion, which shows a
downward trend from IDR 1.55 ...
Indonesian Economic Review and Outlook

Figure 15: Indonesia Trade Balance, January 2008 – January 2013
Indonesia continue...
International

Figure 16 :Indonesia Oil and Gas Export - Import, January 2008 – January 2013
The trade deficit has continu...
Indonesian Economic Review and Outlook

Figure 17 : Indonesian Non Oil and Gas Exports - Imports, January 2008 – January 2...
International

came as a result of the reduction in the surplus in non oil and gas
trade balance. This in general was caus...
Indonesian Economic Review and Outlook

The surplus in the capital and financial accounts increased from USD
6.0 billion i...
International

surplus of USD 0.8 Billion registered in the third quarter 2012. The
increase in BOP surplus was largely ar...
Indonesian Economic Review and Outlook

Figure 21: GAMA Leading Economic Indicators

are no indications that the economy w...
Macroeconomic Indicators Projection

Table 5: GDP Growth and Projection
2013-2014

Note: * = realization

Table 6 : Inflat...
Indonesian Economic Review and Outlook

economy. In fact, virtually all emerging markets, with the exception
of China, Ind...
Current Issue

The trade deficit is aggravated by the deficit on the balance of
account. In 2012, the current account defi...
Indonesian Economic Review and Outlook

Unless measures are taken to stem the rise in energy subsidies by
raising domestic...
Current Issue

the performance of their economies. The Euro, US dollar, Yen , Yuan,
all have the inclination to prefer dep...
Indonesian Economic Review and Outlook

not entirely misplaced given the reality that developments in the
global economy a...
INDONESIAN ECONOMIC REVIEW AND OUTLOOK
MACROECONOMIC DASHBOARD TEAM

MACROECONOMIC DASHBOARD
FAKULTAS EKONOMIKA dan BISNIS...
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Indonesian Economic Review and Outlook No 2 Year II/March 2013

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Transcript of "Indonesian Economic Review and Outlook No 2 Year II/March 2013"

  1. 1. No. 1/Year II/March 2013 INDONESIAN ECONOMIC REVIEW AND OUTLOOK Infrastructure Development Macroeconomic Dashboard Faculty of Economics and Business Universitas Gadjah Mada Political situation began to heat up
  2. 2. Foreword Indonesian Economic Review and Outlook (IERO) is quarterly bulletin, which is published by the Macroeconomic Dashboard, Department of Economic, Faculty of Economics and Business Universitas Gadjah Mada with the collaboration of PT. Bank Mandiri, Tbk. Pressures facing by Indonesian economic as a result of the global economic slowdown as well as the heat of national political climate became the theme in this IERO edition. The global economy uncertainty is predicted to have negative impact on Indonesia economy, very much in line with the prediction of GAMA Leading Economic Indicator (GAMA LEI). GAMA LEI is a reference which is issued by the Macroeconomic Dashboard predicting the condition and state of the Indonesian economy in the future. The underlying objective of GAMA LEI is to serve as a reference and guidance for policy makers in observing future possibilities which in turn will enable them to take policies in anticipation of such economic condition. In this edition, IERO discusses political economy as the theme on current issue. The objective of this analysis is to give a picture on the Indonesia condition which started to enter a politic year, even though the general election will be conducted in 2014, also its implications on Indonesia economy. The publication of IERO which covers hot issues is expected to serve as reference as well as becoming a source to public policy maker, business decision maker, also civitas academica in gaining information related to Indonesian economy. Wishing you an enjoyable reading Prof. Dr. Sri Adiningsih, M.Sc Head of Researcher Macroeconomic Dashboard
  3. 3. Indonesian Economic Review and Outlook I. Recent Economic Development T he impact of sluggish economic growth in US and Europe has begun to bear on Indonesia, as reflected in the decrease in exports. Despite the fact that Indonesia succeeded in registering economic growth of 6.23 % YoY in 2012, making one of best performing economy in Asia after China, which recorded economic growth of 7.8% (YoY). However the achievement is tempered by the fact that 2012 growth figure is in fact lower than the assumption of 6.5% which was used in making National Budget (APBN) for 2012. Moreover, economic growth rate for 2012, is even lower compared to economic growth registered in 2011, which able to reach 6.5% (YoY). In 2012, the value of Indonesian Gross Domestic Product (GDP) in 2000 constant prices was IDR 2,618.1 trillion, which was an increase of IDR 153.4 trillion from IDR 2,464.7 trillion in 2011. Based on its expenditure, Gross Fixed Capital Formation (PMTB) or physical investment was the sector that posted the highest growth of 9.81% (YoY) in 2012. However, based on quarterly data, PMTB growth registered a significant decrease. In the fourth quarter of 2012 in year on year terms, the growth of PMTB was 7.29%, which was lower than the previous quarter that registered growth of 9.80%. Moreover, in the second quarter 2012, PMTB grew by 12.47% (YoY). PMTB has extensive multiplier effect as it does not only impact on production but also stimulates consumption. PMTB promotes the creation and expansion of employment opportunities, increases people's incomes, which in turn stimulate people's consumption. Besides PMTB, private consumption, which grew by 5.8% (YoY) also contributed substantially to economic growth in 2012. Meanwhile, government consumption, posted 1.25% (YoY), which was lower than expectations. In the meantime, Indonesia economy has begun to feel the ripples of anemic growth of the global economy through falling exports which is attributable to weakening demand for exports in the destination countries. In 2012 Indonesian exports grew by 2.01% (YoY). Imports on the other hand, registered higher growth of 6.65% (YoY). In quarterly terms, Indonesian imports posted growth of 6.79% % (YoY) in the fourth quarter 2012, which a reversal of the performance in the third quarter that showed 0.17% (YoY) contraction. The Macroeconomic Dashboard Universitas Gadjah Mada 1
  4. 4. Recent Economic Development Figure 1: GDP Growth Rate Based on Constant 2000 Prices by Expenditure, 2005 – 2012 (in %, YoY) Sluggish economic growth in the global economy has weighted down on the performance of trade balance, reducing its contribution to economic growth in Indonesia (%) Household Expenditures Government Expenditures Gross Fixed Capital Formation Exports of Goods and Services Imports of Goods and Services 40 30 20 10 0 -10 -20 -30 Source: BPS dan CEIC increase in imports is by and large, attributable to rising oil and gas as well as non oil and gas imports. Besides, the increase in imports is also caused by a surge in imports of raw materials and capital goods. In 2012, imports of raw materials reached IDR 140,127.6 million, or posted 7.02% growth compared with IDR 130,934.3 million in the previous year. Meanwhile, the value of imports of capital goods reached IDR 38,154.8 million, which constituted 15.24% growth compared with IDR 33,108.4 million registered in 2011. In light of that Indonesia has registered a trade deficit as the value of imports is higher than exports. To that end, given uncertainty that still characterizes the global economy; Indonesian economy will continue to rely on domestic consumption and investment as source of economic growth in 2013. This is because falling global demand means that Indonesian exports will continue to decrease. With respect to industrial origin, 9 sectors registered positive growth in 2012. In 2012, Transportation and Communications sector posted the highest growth (9.98%), which was followed by Trade, Hotel, and Restaurant sector (8.11%), and Construction (7.50%). The lowest growth in 2012 was the Mining and Quarrying sector which registered 1.49%, attributable largely to the decline in mineral prices. Meanwhile, all sectors of the Indonesian economy contributed to economic growth registered in the fourth quarter 2012. That said, Mining and Quarrying posted the lowest growth of 0.48% (YoY). In the fourth quarter 2012, 6 sectors posted growth that surpassed GDP Macroeconomic Dashboard Universitas Gadjah Mada 2
  5. 5. Indonesian Economic Review and Outlook Figure 2: Indonesia GDP Growth Based on 2000 Constant Prices by Industrial Origin, 2005 – 2012 (in %, YoY) By industrial origin, the main driver of Indonesian economic growth in 2012 continues to be non-tradable sectors, that is Transportation and Communications as well as Trade, Hotels and Restaurants. Agriculture, Livestocks, Forestry and Fisheries Trade, Hotel and Restaurant (%) Mining and Quarrying Transport and Communication Manufacturing Financial, Ownership and Business Electricity, Gas and Water Supply Services Construction GDP (%) 20 8 7 15 6 5 10 4 5 3 2 0 2005:Q1 2005:Q2 2005:Q3 2005:Q4 2006:Q1 2006:Q2 2006:Q3 2006:Q4 2007:Q1 2007:Q2 2007:Q3 2007:Q4 2008:Q1 2008:Q2 2008:Q3 2008:Q4 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 1 -5 0 Source: BPS dan CEIC Figure 3: Unemployment Level in Indonesia, 2005 – 2012 Unemployment level in Indonesia shows a downward over the past few years. Labour Force Participation Rate (%) (%) Unemployment Rate (%) 80 70 68.020 66.790 66.740 66.160 66.990 66.600 67.330 67.180 67.600 67.230 67.830 67.720 69.960 68.340 69.660 67.880 60 50 40 30 20 10 10.260 11.240 10.450 10.280 9.750 9.110 8.460 8.390 8.140 7.870 7.410 7.140 6.800 6.560 6.320 6.140 0 Feb-05 Agust-05 Feb-06 Agust-06 Feb-07 Agust-07 Feb-08 Agust-08 Feb-09 Agust-09 Feb-10 Agust-10 Feb-11 Agust-11 Feb-12 Agust-12 Source: BPS dan CEIC growth rate of 6.11%. The sectors included Transportation and Communications (9.63%); Trade, Hotels and Restaurants sector (7.80%); Construction (7.79%); Manufacturing (7.79%); Financial, Ownership and Business (7.66%); and Electricity, Gas and Water Supply (7.25%). Despite signs of weakening economic growth, employment condition in Indonesia showed an improvement compared with the previous period, which contributed to the decrease in the unemployment level. Unemployment in Indonesia decreased in August 2012 compared with the February 2012. In August 2012, unemployment stood at 7.24 million or 6.14%, and decreased to 7.61 million or 6.32% in February 2012. It is also worth noting that unemployment level in August 2012 was lower than the level registered in the same month in the previous year (6.56%). That said, Macroeconomic Dashboard Universitas Gadjah Mada 3
  6. 6. Developments in the Monetary Sector decrease in unemployment level in Indonesia can be attributable to the decrease in Indonesian work force in 2012. In August 2012 Indonesia work force was 67.88%, which was a decrease from 69.66%. in February 2012. II. Developments in the Monetary Sector A. Money Supply In line with weakening economy growth in the domestic economy, money supply growth has become more sluggish. In December 2012, M2 growth decreased to 14.9% (YoY) compared with 16.4% (YoY), which was registered in December 2011. By the same token, MI growth also decreased to 16.4 %(YoY) in December 2012, smaller than 19.4% (YoY) in December 2011. The decrease in the growth of M2 and MI is attributable to the decrease in Rupiah demand deposits, caused by slower credit expansion as a result of weakening economic growth from 6.5% (2011) to 6.23% (2012). B. Inflation Inflation rate year on year (February 2013 to February 2012) is 5.31%, which is a significant increase from 3.56%, registered in the same month in the previous year. The main factors contributing to inflation rate in February 2013 (YoY) include volatile (11.02%), administered price (2.91 %), and core component (9%). Inflation in February 2013 is attributable to general inflation (0.75%), core inflation (0.30%), administered price (0.72%), and volatile (2.32%). The high level of administered prices attests to the impact of expectation of an increase in electricity price. To that end, inflation level for the calendar year (January – February 2013) was 1.79%, while core inflation stood at 0.66%. Three factors explain the level of inflation in February 2013. First, the increase in prices of basic necessities that include food items due to bad weather conditions and floods that affected many areas in Indonesia. Bad weather conditions and floods which have affected several regions in Indonesia have hampered distribution and transportation of goods which are needed on daily basis by the population. Government policies that involved an increase in user charges for electricity users and provincial minimum wage which took effect in Macroeconomic Dashboard Universitas Gadjah Mada 4
  7. 7. Indonesian Economic Review and Outlook January 2013, is also another important contribution to inflation level in February 2013. The third factor is the adverse impact of the government policy that imposed restrictions in importing horticultural commodities, which induced an increase the prices thereof. The policy got into effect on January 2013. The policies were stipulated in the provisions of the Ministry of Agriculture regulation No.60/2012 on the recommendations on the importation of Horticultural commodities (RIPH), which was signed on 24 September 2012 and the Ministry of Trade Regulation No. 60/2012 on Requirements for the Importation of Horticultural Commodities, which was signed on 21 September 2012. The two regulations impose restrictions on distribution of Figure 4: Growth of Economic Liquidity in Indonesia, 2009 – 2012, (in %, YoY) Weakening economic growth in Indonesian economy has induced slower money supply growth M 1 (% ) M 2 (% ) 25 25 20 20 15 15 10 10 5 5 0 0 Source : Bank Indonesia and CEIC Figure 5: Inflation Level, 2009 – 2013* (in%, YoY) High inflation in February 2013 is largely attributable to government policies (%) Headline Core Administered Volatile 20 15 11.02 10 5.31 5 4.29 2.91 0 -5 -10 Source : BPS and CEIC Macroeconomic Dashboard Universitas Gadjah Mada 5
  8. 8. Developments in the Monetary Sector thirteen imported horticultural products in the domestic market during January – June 2013 period. The commodities listed include irish potatoes, cabbage, carrots, pepper, pineapples, durian, bananas, melon, papaya, mangoes, chrysanthemum, orchidaceous, and heliconia flowers. Based on category of expenditure, inflation in February 2013 is attributable to an increase in indices of several categories of expenditures, which are foodstuff (2.08%), also housing, water, electricity, gas and fuels (0.82%). This is followed by the health (0.56%); prepared food, beverages, cigarette and tobacco (0.47%); education, recreation and sports (0.19%); also transportation, communications and financial services (0.08%). Meanwhile, the clothing was the only expenditure category which registered a decrease in its price index by 0.59% in February 2013. Meanwhile, a comparison of inflation levels in 66 cities shows that 60 cities registered inflation while 6 experienced deflation in February 2013. Jayapura registered the highest inflation (3.15%), and Sibolga recorded the lowest (0.12%). As regards deflation, Ambon recorded the highest figure (2.29%,), while Ambon posted the lowest (0.01%). Breakdown of inflation by Island shows that with respect to Sumatera Island, all the 16 cities covered registered inflation in February 2013. Lhokseumawe registered the highest inflation (1.78%), and the lowest figure was recorded in Sibolga (0.12%). Figure 6: Inflation level 2009 – 2013* by Category of Expenditure (in %, MoM) Foodstuffs are the main source of inflation in February 2013 (%) Headline Foodstuff Prepared Food, Beverages, Cigarette and Tobacco Housing, Water, Electricity, Gas and Fuel Clothing 6 5 4 3 2 1 0 -1 -2 -3 Source : BPS and CEIC Macroeconomic Dashboard Universitas Gadjah Mada 6 Health Education, Recreation and Sports Transportation, Communication and Financial Services
  9. 9. Indonesian Economic Review and Outlook Table 1: Comparison of Inflation in 66 Cities /Municipalities in Indonesia, February 2012 and February 2013 (in %, MoM) Comparison of inflation level in 66 cities in February 2013, it is evident that Jayapura posted the highest level (3.15%), while Sibolga, showed the lowest inflation level ( 0.12%). S U M A T E R A IS LA N D BAN D A ACEH B A N D A R LA M P U N G BATAM B E N G K U LU DUM AI JA M B I LH O K S E U M A W E M EDAN PADANG P A D A N G SID E M P U A N P A LE M B A N G P A N G K A L P IN A N G PEKAN BARU P E M A T A N G SIA N T A R S IB O LG A T A N JU N G P IN A N G In fla tio n (% ) Fe b -1 3 0 .3 0 0 .7 3 0 .5 4 0 .6 9 0 .4 1 0 .5 2 1 .7 8 0 .8 0 0 .6 3 0 .3 0 0 .7 1 1 .1 9 0 .5 6 1 .1 6 0 .1 2 0 .8 2 JA V A IS LA N D D K I JA K A R T A D I YO GYAKARTA JE M B E R K E D IR I M A D IU N M A LA N G P R O B O LIN G G O SU M E N E P SU R A B A Y A PU RW O KERTO SE M A R A N G SU R A K A R T A TEG A L BAND UNG B E K A SI BOGOR C IR E B O N D EPO K SU K A B U M I T A SIK M A LA Y A C ILE G O N SE R A N G TAN GERAN G In fla tio n (% ) Fe b -1 3 0 .6 5 0 .9 3 0 .9 5 0 .9 4 0 .7 5 0 .8 8 0 .8 6 1 .0 0 1 .0 3 0 .4 0 0 .9 0 1 .0 3 0 .2 3 1 .0 3 0 .6 7 0 .5 7 0 .5 8 0 .7 2 0 .9 3 1 .0 0 1 .2 3 1 .1 0 1 .0 2 OTHERS B A LIK P A P A N SA M A R IN D A TARAKAN P A LA N G K A R A Y A S A M P IT P O N T IA N A K SIN G K A W A N G B A N JA R M A SIN DEN PASAR KUPANG M AU M ERE B IM A M ATARAM M A M U JU P A LU M ANAD O P A LO P O P A R E -P A R E U JU N G P A N D A N G W ATAM PO NE KEN D ARI G O R O N T A LO AM BON TERN ATE JA Y A P U R A M ANO KW ARI SO R O N G In fla tio n (% ) Fe b -1 3 0 .5 4 0 .6 8 0 .2 8 -0 .1 0 -0 .0 1 1 .0 4 0 .8 7 0 .4 3 1 .1 9 0 .5 6 -0 .9 2 1 .0 0 1 .0 1 0 .2 5 0 .5 8 1 .3 0 0 .7 0 0 .6 7 0 .7 3 0 .5 1 -0 .1 0 -0 .0 6 -2 .2 9 0 .8 9 3 .1 5 0 .5 6 1 .0 9 Source : BPS and CEIC Meanwhile, all cities covered on Java Island (23 in all), registered inflation in February 2013. Cilegon registered the highest inflation (1.23%),while Tegal posted the lowest figure (0.23%). For other cities outside Java and Sumatera Islands, 21 out of 27 cities registered inflation in February 2013, and the rest posted deflation. Jayapura registered the highest inflation (3.15%), while Mamuju recorded the lowest (0.25%). As regards deflation, Ambon posted the highest figure (2.29%), while Sampit recorded the lowest figure (0.01%). C. Interest Rate Bank Indonesia (BI) decided to maintain interest reference rate (BI Rate) in March 2013 at 5.75%. This means that Bank Indonesia has not changed the BI Rate since February 2012, which is over a period of 12 months. BI considers the interest rate position to be in line with the projected inflation target band of 4.5% ± 1 for 2013-2014 periods. The last time Bank Indonesia changed Bank Indonesia rate was on 9 Febuary 2012, which entailed a decrease of BI rate from 6% to 5.75%. As is the case with BI rate, the Indonesian Deposit Insurance Agency (LPS) has also maintained the reference deposit guarantee rate. LPS considers the deposit guarantee rate to be in line with prevailing Macroeconomic Dashboard Universitas Gadjah Mada 7
  10. 10. Developments in the Monetary Sector conditions in the economy and banking sector hence has decided to maintain the deposit insurance rate for Rupiah denominated deposits in general commercial banks at 5.50% in February 2013. Meanwhile, in February 2013, BI raised the interest rate on Bank Indonesia Certificates (SBI), 9 months maturity series, from 4,84% to 4.86% D. Foreign Reserves Indonesia foreign reserve position shows a drastic decrease at the start of 2013. By the end of January 2013, Indonesian foreign reserves decreased by USD 4 Billion from USD 112 Billion late Desember 2012 to USD 108.78 Billion. The drastic decrease registered at the beginning of 2013, is attributable to the demand for foreign currency to meet a surge in domestic demand in the economy. Foreign reserve position by late January 2013 was equivalent to 5.9 months of imports and government's external debt services. E. Exchange Rate and Share Prices An observation of the point by point movement of Rupiah against USD shows that the exchange rate in fact strengthened from IDR 9698 per USD at the end of the previous month to IDR 9667 per USD in February 2013. However, overall, the movement of Rupiah against USD during February 2012 - February 2013 shows the domestic currency has experienced depreciation. The depreciation of Rupiah is attributable to the high demand for US dollars in the domestic economy which is not easily met by limited domestic supply. This dynamic has created imbalance in the domestic foreign exchange market. Besides, pressures that are emanating from the performance of the current account deficit caused by limited growth of exports and high import growth induced by strong domestic demand, have also contributed to the depreciation of Rupiah. Morever, the movement of Rupiah has been weighed down by negative sentiments emanating from external factors. Fears about the potential impact of US federal fiscal policy tightening, the continuation of economic stimulus by the Federal Reserve, and high uncertainty that surrounds prospects for resolving the crisis in Europe and the still anemic macroeconomic conditions in Europe, have all undermined quick recovery of the global economy. In addition, low international commodity prices which constitute Macroeconomic Dashboard Universitas Gadjah Mada 8
  11. 11. Indonesian Economic Review and Outlook Figure 7: Developments in BI Rate, SBI, Deposit, and Credit/Loans Rates, 2009 – 2013* (in %) BI rate has remained unchanged at 5.75% for over a year Source : Bank Indonesia and CEIC Figure 8: Indonesia Foreign Reserves 2009 – 2013* (in USD Billion) Early 2013, has seen a drastic decrease in Indonesia Foreign Reserves by USD 4 Billion Source : Bank Indonesia and CEIC Figure 9: Exchange Rate and Share Prices, 2009 – 2013* The movement of the rupiah is still driven by negative sentiments in the global markets. Lingering fears about prolonged uncertainty in the global economy have induced investors to sell assets they consider risky and buy USD dollars. Source : Indonesia Stock Exchange, Bank Indonesia and CEIC Macroeconomic Dashboard Universitas Gadjah Mada 9
  12. 12. Developments in Government Finances major Indonesian exports have all contributed to undermining the value of Indonesian Rupiah. Meanwhile, the composite share price index (IHSG) in February 2013 shows an upward trend compared with the position at the beginning of the year. By late February 2013, IHSG movement hovered around 4795, which was an indication that it had strengthened compared with 4453 registered in the previous month, or a growth of 7.7%. III.Developments in Government Finances The state of macroeconomic conditions at the end of 2012 was not consistent with assumptions that underpinned 2012 revised budget. Uncertainty that continue to bedevil economic conditions in the domestic economy and the global economy, have constrained growth of the economy to just 6.2%, which is below the assumption of 6.5% in the 2012 revised national budget. This is in part attributable to the trade deficit registered in 2012. In addition, budget utilization or absorption rate in 2012 was 95.6%, hence below target. The assumptions used in drawing 2013 national budget are too optimistic. This is reflected in the assumption of economic growth of 6.8%, which was based on economic conditions in 2012. The theme of 2013 national budget adopted by the Indonesian government is “strengthen the domestic economy to expand public welfare”, which conveys the message that the government is committed to enhance the resilience of the domestic economy. Nonetheless, high uncertainty in the global economy have become a major obstacle to realize such a goal. Table 2 : National Budget 2012 and 2013 Indonesia Economic growth for 2012 was below target Economic Indicator Economic Growth (%) Inflation y.o.y (%) Exchange Rate (Rp/US$) 3-month SBI (%) Indonesian Crude Oil Price (US$/barrel) Lifting Oil (thousand barrel per day) Lifting Gas (thousand barrel per day) APBN 2012 APBN-P 2012 Realization 6.7 5.3 8800 6 90 950 - 6.5 6.8 9000 5 105 930 - Source: Ministry of Finance Macroeconomic Dashboard Universitas Gadjah Mada 10 6.3 4.3 9384 3.2 112.7 861 - APBN 2013 6.8 4.9 9300 5 100 900 1360
  13. 13. Indonesian Economic Review and Outlook Table 3: Central Government Expenditure, 2012 - 2013 (IDR trillion) Expenditure on subsidies and personnel expenditure dominate central government expenditure Items 1 2 3 4 5 6 7 8 APBN 2012 Personnel Expenditure Material Expenditures Capital Expenditures Interest Payment a. Interest of Domestic Debt b. Interest of Foreign Debt Subsidy a. Energy b. Non Energy Grant Expenditures Social Assistance a. Natural Disaster Rescue b. Ministry/institution Assistance Other Expenditures 215.9 188.0 152.0 122.2 88.5 33.7 208.9 168.6 40.3 1.8 47.8 4.0 43.8 28.5 APBN-P 2012 212.3 162.0 176.1 117.8 84.7 33.0 245.1 202.4 42.7 1.8 86.0 4.0 82.0 68.5 Semester I Realization 104.1 41.8 30.6 49.6 Semester II Prognosis 102.2 128.2 122.7 62.3 APBN-P 2012 Prognosis 206.3 170 153.4 111.9 134.7 212.2 346.9 0 30.2 1.1 17.7 1.1 47.9 2.9 18.1 21 APBN 2013 241.6 200.7 184.4 113.2 80.7 32.5 317.2 274.7 42.5 3.6 73.6 4.0 69.6 20.0 % change of APBN 2012 11.9 6.8 21.3 -7.3 -8.8 -3.5 51.9 63.0 5.4 101.6 54.1 0.0 59.1 -30.0 Source: Ministry of Finance Realizing that increasing capital expenditure is one of the ways that stimulate economic growth, 2013 national budget raised capital expenditure by 21.3% compared with 2012 national budget. The expectation is that capital expenditure can be absorbed as planned, which should help in increasing economic growth. Subsidies still constitute major portion of the 2013 national budget, which is 27.5% of total central government expenditure. Besides, expenditure on subsidies in 2013 national budget increased drastically from 2012 national budget level from IDR 208.9 trillion to IDR 317.2 trillion, which represents an increase of 51.9%. Government expenditure for social assistance programs is another item in the national budget which registered a drastic increase of 54.1% from IDR 47.8 trillion in 2012 national budget to IDR 73.6 trillion in 2013 national budget. Subsidies on non energy items in 2013 national budget registered an increase of 5.4% compared with 2012 national budget. The change is attributable to an increase in expenditure on several items in 2013 national budget compared with the 2012 national budget. Such changes are discernible in the item on food subsidies which shot up by 10.2%, tax subsidies which increased by 14.9%, and seed subsidies which increased more than four times. It is essential that general public and all stakeholders have participated in monitoring and supervising various items of expenditures especially social safety net budget and subsidies which are prone to abuse. This is more so given the fact that 2013 is considered a year that is rife with political dynamics, which may end up in directing national budget funds to uses other than those stated in the national budget. Macroeconomic Dashboard Universitas Gadjah Mada 11
  14. 14. Developments in Government Finances Table 4: Subsidies in the 2013 National Budget (IDR trillion) Central Government expenditure on fuel subsidies continues to increase Category A. 1 2 B. 1 2 3 4 5 6 7 8 9 APBN 2012 Energy Fuel Subsidy Electricity subsidy Non Energy Food subsidy Fertilizer Subsidy Seed Subsidy PSO Interest Subsidy on Credit Program Cooking Oil Subsidy Tax Subsidy Soybean Subsidy Other Subsidy Total 202.4 137.4 65 42.7 20.9 14 0.1 2.2 0.8 Semester I Realization 124.4 88.9 35.5 10.3 5.2 4.4 0 0.7 Semester II Prognosis 181.5 127.9 53.6 30.7 14.2 9.5 0.1 2 0.6 APBN-P 2012 Prognosis 305.9 216.8 89.1 30.7 19.4 14 0.1 2 1.3 4.3 - 4.3 4.3 245.1 134.7 212.2 346.9 APBN-P 2012 168.6 123.6 45.0 40.3 15.6 16.9 0.3 2.0 1.2 0.0 4.2 0.0 0.0 208.9 APBN 2013 274.7 193.8 80.9 42.5 17.2 16.2 1.5 1.5 1.2 0.0 4.8 0.0 0.0 317.2 % change of APBN 2012 63.0 56.8 80.0 5.4 10.2 -4.2 419.5 -24.9 1.1 Source: Ministry of Finance Figure 10: Primary Deficit (IDR trillion) The 2013 National Budget will produce a recurrence of a primary deficit 60 41.5375 40 20 8.8624 5.1632 0 -20 2009 2010 2011 2012* -40 -40.0942 -60 -80 -78.9216 -100 Note: * Prognosis ** APBN 2013 Sumber: Kementrian Keuangan The government should pay serious attention to the adverse effect of the rising primary deficit on the fiscal balance which if not handled carefully poses the danger to undermine fiscal health as a result of paying interest on debt by contracting new loans. Primary deficit for 2012 budget was IDR 72.32 trillion, and predicted realization was IDR 78.92 trillion, meanwhile, in 2011, there was still a surplus of IDR 8.86 trillion. In the 2013 budget, projected primary deficit is IDR 40.09 trillion. The primary deficit is attributable to the realization of government revenues that fall short of expectations, and the rising expenditure on subsidies and government employees. Suboptimal government revenues are among other factors attributable to the Macroeconomic Dashboard Universitas Gadjah Mada 12 2013** 14.9 51.9
  15. 15. Indonesian Economic Review and Outlook global crisis and the decline in Indonesian competitiveness. To that end, to avert rising primary deficits in future budgets, the government should increase its revenues and enhance the quality of its expenditures. IV. Developments in Fiscal Policy In general, the value of government and private sector foreign debt has increased. In the fourth quarter 2012 the value of government and private sector foreign debt was USD 125,081 million, which is an increase of USD 1,811 million from USD 123,270 million in the previous quarter. The value was an increase of USD 18,349 million from the fourth quarter in the previous year. The total value of Indonesia foreign debt in the fourth quarter 2012 was USD 251.2 billion, which represents an increase of USD 7.3 Billion from USD 243.91 billion registered in the previous quarter, and an increase of USD 25,825 Billion from USD 225.3 Billion in the previous year. The value of government foreign debt in the fourth quarter 2012 was USD 116.2 billion, which is an increase of USD 1,150 million from USD 115.037 Billion in the previous quarter. The value also represented an increase of USD 3,760 million from USD 112.43 Billion registered in the fourth quarter in the previous year. Figure 11: Government and Private External Debt Need for paying serious attention to rising foreign debt Source: BPS, Bank Indonesia, and CEIC Macroeconomic Dashboard Universitas Gadjah Mada 13
  16. 16. Developments in Fiscal Policy Meanwhile, in general the ratio of total value of Indonesian foreign debt to GDP shows an upward trend over the years. In the fourth quarter 2012, the ratio was 28.60%, which is an increase of 2.91% from 25.7% for the previous quarter and an increase of 1.97% from the fourth quarter in the previous year. Thus, both government and private sector foreign debt registered an increase. To that end attention should not only be paid to the increase in foreign debt, but also the purpose to which such debt is put. The ratio of government debt to GDP shows a downward trend. This is reflected in the fact that while government debt was IDR 1,975 trillion by the end of December 2012 or 23.96% of GDP, which is decrease of 0.39% from 2011 ratio of 24.35% which was based on GDP for 2011. Despite that, the value of government debt in 2012 shows an increase. The hope is higher growth of GDP should lead to a lower debt to GDP ratio. By January 2013, total government bonds outstanding (SBN) was IDR 1,374.16 trillion, which is an increase of IDR 13.06 trillion from IDR 1,361.1 trillion in December 2012. The value of SBN outstanding in 2012 constituted an increase of IDR 173.445 trillion from the value of SBN in 2011. Fixed rate bonds constitute the largest component SBN outstanding, amounting to IDR 625.093 trillion. In January 2013, the Figure 12: Ratio of Government Debt Despite a downward trend in the ratio of government debt to GDP , the value of government debt continues to rise Source: Ministry of Finance and CEIC Macroeconomic Dashboard Universitas Gadjah Mada 14
  17. 17. Indonesian Economic Review and Outlook Figure 13 : Composition of Government Bonds Fixed rate bonds consitute a dominant component of government domestic debt Source: Bank Indonesia, Ministry of Finance and CEIC Figure 14 : Foreign Ownership of SBI and Government Bonds Foreign ownership of Government Bonds shows an upward trend Source: BAPPEPAM, Bank Indonesia, and CEIC Macroeconomic Dashboard Universitas Gadjah Mada 15
  18. 18. Developments in Fiscal Policy value of Treasury Bills was IDR 21.27 trillion, which shows a downward trend from IDR 1.55 trillion registered in December 2012 and IDR 12.83 trillion in January 2012. The decrease is also shown in variable rate government bonds. On the contrary, the value of fixed coupon government bonds shows an upward trend. In January 2013 was IDR 625.093 trillion, which was an increase of IDR 14.7 trillion from the value, registered in December 2012 and is also an increase of IDR 100.132 trillion from the value recorded at the beginning of 2012. In general, the value of government bonds and Bank Indonesia Certificates held by foreign entities shows an upward trend. However, foreign ownership of government bonds shows an increase, the value of Bank Indonesia certificates in foreign entities shows a downward trend. In January 2012, the value of Bank Indonesia Certificates and government bonds held by foreigners was IDR 243.61 trillion. In January 2013 the value of foreign ownership of Indonesian government portfolio was IDR 273.35 trillion, which is an increase of IDR 2,420 Billion in December 2012 and IDR 29,740 trillion registered in January 2012. Meanwhile the value of government bonds held by foreign entities in January 2013 was IDR 273.2 trillion, which were an increase of IDR 2.68 trillion from the value registered in December 2012 and an increase of IDR 37.23 trillion in January 2012. The value of Bank Indonesia Certificates held by foreigners in January 2013 was IDR 150 Billion, which is an increase of IDR 260 billion from the value registered in December 2012 and also a drastic decrease of IDR 7.49 trillion from the value for January 2012. The drastic decrease in the value of Bank Indonesia Certificates held by foreigners is largely attributable to the implementation of the 6 months holding period policy by Bank Indonesia. The policy, which was issued on 13 May 2011, initially obliged one month holding period (28 Calendar days) and was later lengthened to 6 months (182 Calendar days), stipulates that the transfer of ownership of bank Indonesian certificates from one party to another can only be done after a holding period of six months. V. International Indonesia trade balance deficit in 2012 was accounted for USD 1.7 billion, which is worse compared to its performance in 2011 that registered surplus USD 26.1 billion. The weakening of Indonesia balance of trade in 2012 is attributable to the decrease in the oil and gas' trade balance from surplus of USD 0.8 billion in 2011 to deficit of Macroeconomic Dashboard Universitas Gadjah Mada 16
  19. 19. Indonesian Economic Review and Outlook Figure 15: Indonesia Trade Balance, January 2008 – January 2013 Indonesia continues to experience a deficit in trade balance Ekspor (Miliar US$) 25.00 Impor Neraca Perdagangan 20.00 15.00 10.00 5.00 0.00 -5.00 -10.00 -15.00 -20.00 Source: Bank Indonesia and CEIC USD 5.6 billion in 2012. Besides, the deteriorating of Indonesia trade balance also caused by the decrease of non oil and gas' trade balance from USD 25.3 billion in 2011 to USD 4 billion in 2012. There is a slight improvement in Indonesia trade balance in January 2013 compared to the December 2012. Indonesia trade balance deficit in January 2012 was USD 0.17 billion, which is a decrease from USD 0.19 billion trade deficit in December 2012. The decrease in the trade deficit in January 2013 compared with December 2012 , is attributable to the decrease in the value of imports from USD 15.58 billion in December 2012 to USD 15.55 billion in January 2013. However, in comparison with January 2012, Indonesian trade deficit in January 2013 shows a deterioration. Indonesian trade balance in January 2012 registered a surplus of USD 1.02 billion, but became a deficit of USD 0.17 billion in January 2013. The trade deficit in January 2013 was a result of an increase in the value of imports from USD 14.55 Billion in January 2012 to USD 15.55 billion in anuary 2013, which was in addition to a decrease of 1.24% in the value of exports in January 2013 compared with value for Januari 2012. This is an indication that the weak global economy contnues to depress Indonesian exports. Indonesia trade balance of oil and gas registered a deficit of USD 5.6 billion in 2012, a significant decrease compared to 2011 which registered surplus of 0.8 billion. A deficit in Indonesia trade balance of oil and gas in 2012 was a result of import rising from USD 40.7 Macroeconomic Dashboard Universitas Gadjah Mada 17
  20. 20. International Figure 16 :Indonesia Oil and Gas Export - Import, January 2008 – January 2013 The trade deficit has continued (US$ bn) Expo rt: N on O il a nd Gas Im po rt: N on O il a nd Gas B alance of Tra de: N o n Oil a nd Ga s E xp ort Impo rt 25.00 20.00 15.00 10.00 5.00 0.00 -5.00 -10.00 -15.00 -20.00 Source: Bank Indonesia and CEIC billion in 2011 to USD 42.6 billion in 2012. Additionally, a deficit in Indonesia trade balance of oil and gas is also attributable to an decrease of oil and gas export from USD 41.5 billion in 2011 to USD 37 billion in 2012. In January 2013, Indonesia trade balance of oil and gas continued registering a deficit. A deficit in trade balance of oil and gas in January 2013 was accounted for USD 1.43 billion, which was higher than USD 0.74 billion deficit registered in December 2012. The rise in the trade balance of oil and gas in January 2013 is attributable to an increase of the value of oil and gas imports, acounted for 9% in December 2012. Compared to trade balance of oil and gas in January 2012, it is evident that Indonesia trade balance in January 2013 shows a significant decrease. Trade balance of oil and gas decreased from a surplus of USD 0.12 billion in January 2012 to deficit of USD 1.43 billion in January 2013. The deterioration in the trade balance of oil and gas was a result of a decrease in the value of oil and gas exports from USD 3.14 billion in January 2012 to USD 2.61 billion in January 2013, as well as a drastic increase in the oil and gas imports from USD 3.02 billion in January 2012 to USD 4.04 billion in January 2013. A surplus in Indonesia trade balance of non oil and gas has experienced a deterioration from USD 25.3 billion in 2011 to USD 4 billion in 2012. It is caused by the increase in the value of non oil and gas imports from USD 136.7 billion in 2011 to USD 149 billion in 2012, as well as a decrease in the value of non oil and gas exports from USD 162 billion in 2011 to USD 153 billion in 2012. A rising in the value of Macroeconomic Dashboard Universitas Gadjah Mada 18
  21. 21. Indonesian Economic Review and Outlook Figure 17 : Indonesian Non Oil and Gas Exports - Imports, January 2008 – January 2013 The surplus in the non oil and gas trade balance has continued Export: Oil and Gas (US$ bn) 25.00 Import: Oil and Gas Balance of Trade: Oil and Gas Export Import 20.00 15.00 10.00 5.00 0.00 -5.00 -10.00 -15.00 -20.00 Source: Bank Indonesia and CEIC non oil and gas imports as well as a decrease in the value of non oil and gas exports has decreased a surplus in trade balance of non oil and gas in 2012. The trade balance of non oil and gas in January 2013 registered a surplus. There was an improvement in non-oil and gas trade balance from a surplus of USD 0.55 Billion in December 2012 to a surplus of USD 1.25 Billion in January 2013. Improvement in the performance of the non oil and gas sector in January 2013, is attributable to among other factors, a decrease in the value of non oil and gas imports and an increase in non oil and gas exports which occurred in the January 2013. In comparison with January 2012, the trade balance of non oil and gas registered an increase in January 2013. The trade surplus in the non oil and gas increased from USD 0.89 billion in January 2012 to USD 1.25 billion in January 2013. The rise in trade balance in the non oil and gas sector is largely as a result of an increase in non oil and gas exports from USD 12.43 billion in January 2012 to USD 12.76 billion in January 2013. In the fourth quarter 2012 current account deficit increased 45.5% compared to the third quarter, 2012. Indonesia registered a currenct account transactions deficit of USD 7.8 billion in the fourth quarter 2012, which represented an increase from USD 5.3 billion registered in the third quarter 2012. The rise in the current account deficit is attributable to the decrease in the trade balance for goods which Macroeconomic Dashboard Universitas Gadjah Mada 19
  22. 22. International came as a result of the reduction in the surplus in non oil and gas trade balance. This in general was caused by the performance of non oil and gas exports, which did not increase significantly when non oil and gas imports increased. Overall, for the whole of 2012, current account registered a deficit of USD 24.2 billion. In comparative terms, the performance of current account in 2012 was rather poorer than in 2011 which registsred a surplus of USD 1.7 Billion. The sub par performance of current account transctions in 2012, was largely was caused by a significant decrease in trade balance in goods, which was compounded by the deficit in the trade balance in services that remains. Figure 18 : Current Account, 2006 – 2012 The current account deficit shows an increase (US$ bn) Goods Trade Balance (LHS) Services Trade Balance (LHS) Income Account (LHS) Current Transfers (LHS) Current Account (RHS) 15.00 (US$ bn) 6.00 4.00 10.00 2.00 5.00 0.00 0.00 -2.00 -4.00 -5.00 -6.00 -10.00 -8.00 -15.00 -10.00 Source Bank Indonesia and CEIC Figure 19 : Capital and Financial Accounts, 2006 – 2012 Despite showing high volatility, the surplus in the capital and financial accounts shows an upward trend (US$ bn) Direct Investment (LHS) Portfolio Investment (LHS) Other Investment (LHS) Current Account (RHS) Capital and Financial Account (RHS) 15.00 (US$ bn) 15.00 10.00 10.00 5.00 5.00 0.00 0.00 -5.00 -5.00 -10.00 -10.00 Source: Bank Indonesia and CEIC Macroeconomic Dashboard Universitas Gadjah Mada 20
  23. 23. Indonesian Economic Review and Outlook The surplus in the capital and financial accounts increased from USD 6.0 billion in the third quarter 2012 to USD 11.4 billion in the fourth quarter 2012. The rise in the surplus in the fourth quarter 2012 was twice that registered in the previous quarter. The rise in surplus is attributable to the increase in other investments from a deficit of USD 0.8 billion in the third quarter 2012 to a surplus of USD 6.7 billion in the fourth quarter 2012. The increase in other investments was a result of a repatriation domestic savings abroad, a surge in savings for non residents in domestic banks, and an increase in other investment requirements in the public sector. Besides, the still large foreign direct investment inflows all contirbuted to the capital and financial transactions registered in the fourth quarter 2012. The rapid inflow of foreign funds reflects positive sentiments foreign investors have about Indonesian economy. In general, capital and financial accounts in 2012 registered an increase in the surplus by 83.6% from USD 13.6 billion in 2011 to USD 24.9 billion in 2012. The increase in the suprlus was largely attributable to rise in the suprlus in investment portfolio and direct investment, and a surplus registered in other investments from deficit in 2011. The surplus registered in the balance of payments (BOP) showed an increase in the fourth quarter 2012 compared with the previous quarter. In the fourth quarter 2012, the balance of payments surplus was USD 3.2 Billion, which represented an increase from the BOP Figure 20 : Indonesia Balance of Payments , 2006 - 2012 Balance of payments that was initially a deficit, bounced back into a suplus (USD bn) Current Account (LHS) 15.00 Capital and Financial Account (LHS) Errors and Commissions (LHS) Balance of Payment (RHS) (US$ bn) 14.00 12.00 10.00 10.00 8.00 5.00 6.00 4.00 0.00 2.00 0.00 -5.00 -2.00 -4.00 -10.00 -6.00 Source: Bank Indonesia and CEIC Macroeconomic Dashboard Universitas Gadjah Mada 21
  24. 24. International surplus of USD 0.8 Billion registered in the third quarter 2012. The increase in BOP surplus was largely arose from a surplus registered in the capital and financial account in the fourth quarter 2012. However, in general Indonesian balance of payments showed a decrease in 2012 compared with the previous year. In 2011 Indonesian payments of payments posted a suplus of USD 11.9 billion, which was far larger than USD 0.2 Billion in 2012. The decrease in the balance of payments surplus is attributable to the current account deficit of USD 24.2 billion in 2012. Nonetheless, the deficit in current account was offset by a surge in the suprlus on the capital and financial transactions which implied that overall, Indonesia registered a balance of payments suprlus of USD 0.2 Billion in 2012. VI. GAMA Leading Economic Indicator Indonesian business cycle if approached using the quarterly GDP for 2000-2012 period, shows a highly fluctuating trajectory. The movement of GDP business cycle was well predicted by GAMA Leading Economic Indicator (LEI). GAMA LEI are able to predict the point at which a business cycle of an economy starts to change course. During the 2008 global economic crisis, using GAMA LEI signs of an economic changing course in the third quarter 2007 was able to predict the deterioration in the performance of the Indonesian economy in third quarter 2008. Subsequently, GAMA LEI signs of changing course in the first quarter 2009, succeeded in predicting improvement in the performance of the Indonesian economy in the fourth quarter in 2009. GAMA LEI in the second quarter 2012 shows a change in course, which was followed by deterioration in performance or a change in course in the movement of the business cycle in the third quarter 2012. GAMA LEI shows a downward trend until the last quarter 2012, an indication that Indonesian is showing signs of weakening. In the beginning of the first quarter 2013, it is predicted that business cycle or Indonesia economic performance point to a weakening. This is the case because based on GAMA LEI signals or projections, there Macroeconomic Dashboard Universitas Gadjah Mada 22
  25. 25. Indonesian Economic Review and Outlook Figure 21: GAMA Leading Economic Indicators are no indications that the economy will improve since the fourth quarter 2012. The expectation is that policy makers in the government and private sector use GAMA LEI signals of a weakening economy until the fourth quarter 2012 to implement strategies that will stave off an economic downturn at the beginning and middle of 2013. VII. Macroeconomic Indicators Projection In a survey that involved several respondents who were drawn Lecturers in the Faculty of Economics and Business, UGM, provides a picture on the prediction of GDP growth, inflation, and exchange rate of Rupiah against US dollar, from Q1 2013 until 2014. Predictions of real GDP growth (YoY) point rather a pessimistic note. Prediction for I and II quarter , 2013 , indicate that real GDP growth will be 6.17% and 6.21 %, respectively, as shown in Table 5. Meanwhile, GDP growth for 2013 and 2014, is predicted to be 6.32% and 6,3%, respectively. Inflation (YoY) forecasts in general point to an increase. Prediction of inflation for the first quarter and second quarter 2013 based on survey outcome shown in Table 6, will be 4.46% and 4.52%, respectively. Meanwhile, inflation for 2013 and 2014 is predicted to be 4.67% and 4.88%, respectively. As regards exchange rate of Rupiah against US dollar for the I and II quarter 2013, predictions point to IDR 9,738 and IDR 9,776, respectively. Meanwhile, the Rupiah/USD exchange rate for 2013 and 2014, is predicted to be IDR 9,704 and IDR 9,765, respectively. Macroeconomic Dashboard Universitas Gadjah Mada 23
  26. 26. Macroeconomic Indicators Projection Table 5: GDP Growth and Projection 2013-2014 Note: * = realization Table 6 : Inflation and Projection 2013-2014 Note: * = realization Table 7: Exchange Rate and Projection 2013-2014 Note: * = realization VIII. Current Issue: “Indonesia Economy 2013 Toward the Year of 'Politics:' By A. Tony Prasetiantono 1 The year 2013 is a crucial one from the vantage point of political economy, because it sets the stage for next year, which will be a year of politics in which the conduct of elections for both the legislature and the President will be getting underway. In common parlance, such a year is often referred to as the year of living dangerously. However, I have the boldness to assure all, that there will not be economic and political uncertainty simply because of the general elections. Taking a leaf from the last election year, 2009, Indonesian economy was able to register economic growth of 4.5%. That said, there is no denying the fact that the economy experienced slight slowdown, which was not attributable to any political events, rather the global repercussions of the subprime mortgage crisis on the Indonesian 1 A. Tony Prasetiantono, Ph.D. is a Lecturer in the Faculty of Economics and Business , UGM; Head, Center for Economic Studies and Public Policy, UGM Macroeconomic Dashboard Universitas Gadjah Mada 24
  27. 27. Indonesian Economic Review and Outlook economy. In fact, virtually all emerging markets, with the exception of China, India, and Indonesia, suffered economic contraction. The question one would pose is what about the year of politics 2014? Will the year become punctuated by uncertainty which will impact adversely on the performance of Indonesian economy, or on the contrary, the economy will benefit from economic stimulus coming from liberal spending of political parties during political campaigns? To my reckoning, political party spending during general elections will not be that much. Perhaps, in nominal terms, one could say the amount spent will be large, but relative to the size of Indonesian economy, that is far from the case. Today, Indonesian economy Gross Domestic Product stands at IDR 8,200 trillion, of which household consumption contributes around IDR 5,000 trillion. If all political parties that will participate in the general elections will spend IDR 2 trillion, the total spending of all the 10 political parties will amount to just IDR 20 trillion. This is an amount which is not significant on the macroeconomic. To that end, I do not expect the conduct of general elections will provide an economic stimulus that will have significant impact on the national economy. On the contrary, political sentiments tend to weigh more toward fiscal policy. At a time when the burden of large energy subsidies is getting beyond tolerable limits, the government is still reluctant to raise prices of subsidized fuels. By all accounts, this is an action, which is extremely urgent. Pressure coming from unfavourable balance of trade has become too strong to bear. Just imagine, in 2011 the economy registered a surplus of USD 26 Billion in a single year, yet in 2012, the surplus as if in free fall, nosedived into USD 1.3 Billion in deficit. Such negative trend continues in January 2013, reflected in the trade balance that registers a deficit of USD 174 million. In terms of average per year, the trade deficit for this year will fall with the range between USD 1.6 Billion and USD 2 Billion. The problems the economy of Indonesian face remain the same: (1) falling prices of primary commodities; (2) rising imports of capital and intermediate goods and raw materials which is driven by an increase in household consumption; and (3) an increase in oil and gas imports, attributable to the decrease in Oil lifting from 900000 to 830000 barrel per day. Macroeconomic Dashboard Universitas Gadjah Mada 25
  28. 28. Current Issue The trade deficit is aggravated by the deficit on the balance of account. In 2012, the current account deficit was USD 28 billion, which is 3.6% of GDP. Traditionally, this deficit is largely a reflection of Indonesia's weakness in the chess board of global services sector. As an example, Indonesia's trade merchandize with other countries often use foreign registered ships. The same applies to insurance, which is largely under the control of foreign corporations, which implies that Indonesia has to pay large amount of foreign exchange for such services. To that end, the initiative of changing trade transactions from using FOB (free on board system ), which implies that Indonesia does not handle loading and unloading of merchandize on ships and insurance, to CIF (cost of insurance and freight), is expected to help in reducing the deficit. That said, making such a change is no easy feat, as it requires a lot of preparations that should in the end enhance the competitiveness of Indonesian logistics services and insurance sectors globally. . In the meantime, I do believe that the policy that rescinded the requirement for Indonesian citizens to pay IDR 1 million in tax prior to departing for foreign destinations, has in some way contributed to aggravating the current account deficit. This is because all such measures contribute to the decrease in Indonesia's foreign exchange reserves. If in the middle of 2011, Indonesia registered USD 124.7Billion, which is the highest foreign exchange reserves on record so far, by the end of 2012, the level of foreign exchange reserves had plummeted to USD 112 Billion, and as this piece is written, has again dropped to USD 105 Billion, largely due to rising deficits on trade and current balances. It is such factors that have driven exchange rate of Rupiah against USD to go beyond IDR 9700 per USD, which is evidently represents substantial depreciation from the target of IDR 9300 per USD. Meanwhile, inflation has compounded the problems. By end of 2012, inflation was still under control at 4.3%. The source of the problem is not predominantly the ineffectiveness of Bank Indonesia policy in managing the monetary sector, rather largely fiscal trade off, which arises from rising energy subsidies that hit the IDR 300 trillion marks in 2012 budget. This is a staggering figure and no doubt a source of disappointment, because it constitutes 20% of the national budget of IDR 1 500 trillion. Macroeconomic Dashboard Universitas Gadjah Mada 26
  29. 29. Indonesian Economic Review and Outlook Unless measures are taken to stem the rise in energy subsidies by raising domestic fuel prices, expenditure of subsidies will at least hover around IDR 320 trillion. In fact the value can go as high as IDR 400 trillion, as extremely cheap fuel prices of subsidized energy (IDR 4500 per litre) is prone to moral hazard, which is manifested in malpractices of luxurious vehicles owners to create additional fuel tanks and smuggling to foreign destinations. Surely, such rampant misallocation of subsidized fuel is serious cause for concern. To that, nearly all economists strongly recommend the need to raise prices of subsidized fuel. I have received information from some reliable sources that President Yudhoyono has expressed willingness to raise fuel prices, simply because the 2013 national Budget can no longer bear the increasingly large burden of subsidized energy hat is hovering around IDR 400 trillion. If the option of raising prices of subsidized fuels is chosen, what impact it such an option likely to have on inflation? Inflation in January 2013 stunned many and was far from conventional wisdom and tradition. Inflation year on year in late February 2013 hit 5.3% mark, which means that it was already above the government target of 4.9%. By raising prices of subsidized fuel between IDR 1000 and IDR 1500 per litre, inflation is likely to spiral above 6%. If this were to materialize, there is little doubt that interest rate will rise. BI rate which is 5.75% this month will possibly become the last low rate, prior to gradually rising to 6%, 6.25%, and even 6.50%. Nonetheless, the rise in inflation and BI rate if and when it occurs; will not imply worsening conditions in the economy. In 2009, when emerging market was experiencing economic contraction, Indonesia was able to register positive economic growth of 4.5%. Moreover, BI rate at the time was 6.5%. In 2013, even if BI rate were to rise to 6.5 %, growth in other countries, especially US and China, will help to support Indonesian exports. Based on such projections, Indonesian economic growth will still be within the 5-6% range, despite an increase in prices of subsidized fuels and the rise in Bank rate to 6.5%. Concerning the performance of Rupiah, which has depreciated to IDR 9 700 per USD level, there is little doubt that is has become a necessity. Despite the woeful lack of acknowledgement, the reality is that the global economy is essentially engulfed in strong currency wars. Today, all countries need weak currencies in order to improve Macroeconomic Dashboard Universitas Gadjah Mada 27
  30. 30. Current Issue the performance of their economies. The Euro, US dollar, Yen , Yuan, all have the inclination to prefer depreciated currencies which is expected to promote exports while at the same time impose restraints and constraints on imports. To that end, the depreciation of Rupiah to IDR 9 700 per USD level is according to me, both a necessity and requirement. How is it possible that Rupiah can appreciate yet at the same time our key trading partners are experiencing deficits? Finally, we have to be realistic and willing to accept the reality, that some of the macroeconomic assumptions should be revised. Some of the recommendations and new assumptions are : (1) the price of subsidized fuels should be raised to become IDR 6 000 per litre, a move that is expected to support the national budget by averting moral hazard; (2) economic growth should be corrected to become 6.3%; (3) inflation projected should be raised to between 6 and 6.5%; (4) BI rate is predicted to gradually rise toward 6.5%; (5) Indonesia crude price is put at USD 110 per barrel. Meanwhile, there is no way oil lifting cannot be increased suddenly. Nonetheless, there is need to take systematic measures to push Oil lifting toward 900 000 barrel per day in several years to come. The year 2013 is not an easy one; promises to be punctuated by twists and turns and very different from the time the government drew out the assumptions in late August 2012. However, of all the issues that are crucial, hiking the price of subsidized fuel is the most urgent that needs action. This is by no means an easy task for the President, but considering the circumstances, taking such an action is imperative. Definitely, the President is feeling a lot of political pressure on his shoulders, but that should not always be to the detriment of IX. Economic Outlook The beginning of 2013 has been characterized by a host of political issues, which underscore what to many is already an open secret that the year of politics has dawned on Indonesia, notwithstanding the reality that the conduct of elections is still more than a year away. Doubtless, some serious concern is being raised that heightening of political temperature and tension will someway have an adverse impact on economic and financial conditions in Indonesia, by for instance distracting the concentration of government official from carrying out their duties and functions, which in turn will undermine the effectiveness of economic policies in Indonesia. Such worries are Macroeconomic Dashboard Universitas Gadjah Mada 28
  31. 31. Indonesian Economic Review and Outlook not entirely misplaced given the reality that developments in the global economy at the beginning of 2013 are far from pleasant. In European economic region, the Euro zone experienced contraction (0.9%) in the fourth quarter 2012, while US could only post 1.5% growth. Moreover, the Euro zone is still facing serious problems, which if coupled with the regime of rising taxes and budget austerity in US point to a global economy that will continue to register anaemic growth at best. Meanwhile, economic growth in China and India has slowed. To that end, the global economy is predicted to weaken. The weakening of the economy compounded with uncertainty in the global economy will impact negatively on Indonesian economy. International factors will continue to depress the economy through trade, foreign investment or financial markets, and domestic conditions which are not yet to provide conducive climate for business and investment will no doubt exert serious pressure on macroeconomic stability and economic growth. In that backdrop, we predict that Indonesian economy will continue to face downward pressure, an indication that a full-fledged economic recovery is still far off. Inflation is predicted to rise, volatility of Rupiah will continue, and prospects for significant economic growth will remain elusive. In light of that, we expect economic authority to maintain their keen focus on macroeconomic stability and provide all the requisite support and stimulus necessary for the business sector and economy. Such actions are imperative to sustain economic stability and avert a decrease in economic growth. Macroeconomic Dashboard Universitas Gadjah Mada 29
  32. 32. INDONESIAN ECONOMIC REVIEW AND OUTLOOK MACROECONOMIC DASHBOARD TEAM 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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