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Macroeconomic indonesia

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Macroeconomic indonesia

  1. 1. Macroeconomic Gross Domestic Product of Indonesia Indonesia faced a big economic turbulence that trigger economic crisis. Indonesian currency was pushed down with exchange value above 10.000 per US$. The GDP growth in 1998 went down to minus 13, 31%, substantially lower than the average growth rate in 1960-1971. This happen because Asian Financial Crisis that also effect other countries such as followed by Thailand (-8%), Malaysia (-7.4%), South Korea (-5.84%) and Philippines (-0.48%). In the 1999 Indonesia GDP raise to 0.79%, in this period Indonesia established reformation and economic stabilization program strictly to raise the GDP growth rate.
  2. 2. Indonesia GDP growth rate in 2008 increased to 6,01 %, then in the middle of global crisis GDP growth declined to 4,58 % in 2009. This condition happened because there was an increasing of oil price in international commerce. Despite sharply falling commodity prices, a falling stock market, higher domestic and international bond yields and a depreciating exchange rate, Indonesia GDP growth rate recovered significantly to 6,2% in 2010 and 6,5% in 2011, which means economic condition in this period has grown. This success was mainly due to relatively limited importance of Indonesian exports towards the national economy, maintained high market confidence, and sustained robust domestic consumption. Even though the GDP has dropped to 4,58%, Indonesia could reach a low inflation rate at 2,78%, most macroeconomistd believe that the best rate of inflation is somewhere between 0 and 3%. Slowing economic growth in 2013 (6 percent) was caused by a combination of severe global uncertainty due to the looming end of the Federal Reserve's monthly USD $85 billion bond-buying program (quantitative easing) resulting in significant capital outflows from emerging economies, and internal financial weaknesses: a record high current account deficit, high inflation (after the government raised prices of subsidized fuels in June 2013) and a sharply depreciating rupiah exchange rate. In order to tackle these troubles and safeguard the country's financial stability, Indonesia's central bank raised the country's benchmark interest rate significantly, at the expense of further economic growth.
  3. 3. Composition of Indonesia GDP Aggregate Demand: Household consumption (C), Government expenditure (G), Investment (I),Exports (E) , Imports (IM) Growth sources from aggregate demand side could be estimated by analyzing rate or composition of GDP according to spending. The composition of GDP consists of household consumption (C), investment (I), government spending (G), and net export (exports (E) subtract imports (IM)). The rate of Indonesia aggregate demand can be seen from the figure clearly. Overall trend, it can be clearly seen that the rate of growth of aggregate demand have a tendency to decrease. The rate of household consumption (C) remained stable on average 5,35 %, government expenditure (G) still fluctuated, investment (I) showed a downward trend to 8,50 %, meanwhile, exports (E) reached the lowest point in 2009 then rose rapidly to 14,92 % in 2010. Imports (IM) initially depicted a downward trend from 1961 to 2009 then increased significantly in 2010. Investment showed the highest rate in 2008 in 11,89%. However, in 1998- 2007 because of economic crises investment declined to the lowest rate 1,48 %, as well in 2009 which only rose to 3,30%. Consumption reached the lowest rate 5,34 % in 2008. Interestingly, government spending grew positively to 4,65 % in 1998-2007, in which Indonesia suffered from monetary crisis. In 1998-2007 all component of aggregate demand went down (except for government expenditure). Monetary crisis in that period has hit the whole component to
  4. 4. the lowest point rate. Afterwards, all composition recovered strongly. For exports and imports, overall trend illustrated the growth rate of import still higher than exports. In the last ten years (2000-2010), we could also see the role of each composition of aggregate demand to GDP remained stable. Consumption still contributed the highest proportion to GDP. The second highest proportion was exports, which means that Indonesia got trade surplus (exports higher than imports). Investment still showed a stagnant proportion to GDP; meanwhile government spending contributed the lowest proportion. It could be concluded that Indonesian economic still depend on the movement of consumption and this was quite relevant to defend from economic crises, rather than rely on exports like other countries.
  5. 5. Money Supply In general, the central bank noted an increase in the number of circulating M1 and M2 be 836.51% and £ 3364.12 trillion in April 2013. Compare with the same period a year earlier, M1 and M2 increased respectively by 16% and 15%. The more amounts of money in circulation then the exchange rate will tend to weaken and prices will rise. Growth in the money supply is high also often the cause of high inflation due to the increase in the money supply will increase demand in the end if it is followed by the growth in the real sector will lead to rising prices.
  6. 6. Inflation in Indonesia and CPI Inflation is an increasing of price generally and continually. Inflation happened because of the pressured from supply side (cost push inflation), demand side (demand pull inflation), and the expectation of inflation4. Information about inflation is very important, particularly for policy maker and firms, because it can affect income distribution. On the other hand, inflation might influence the decision of firms to invest because of the uncertainty in price. The level and volatility of Indonesia's inflation rate have historically been higher than in some peer emerging nations. Whereas these other emerging countries shared inflationary rates of between three and five percent during the period 2005 to 2013, Indonesia contained an average annual inflation rate of around 7.5 percent in the same period. Indonesia Inflation Rate (Annual Percentage Change on Consumer Price Index) source: BPS Peaks in Indonesia's inflation volatility correlate with administered price adjustments. Energy prices (fuel and electricity) are set by the government and therefore do not float according to market conditions, meaning that the resulting deficit has to be absorbed by subsidies. This
  7. 7. puts serious pressure on the government's annual budget deficit and also limits public spending in more long-term productive matters, such as infrastructure and social expenditures. Moreover, re-arranging energy subsidies implies political risks as social unrest emerges inflicted by inflationary pressures. One characteristic of Indonesia is that a large quantity of its population is clustered just above the poverty line, meaning that a relatively minor inflationary shock can push them below that line. When the President Susilo Bambang Yudhoyono administration decided to reduce its massive fuel subsidies in late 2005 due to the rising international oil price, it soon led to double-digit inflation rates of between 14 and 19 percent (year on year) until October 2006. Reduction of energy subsidies remain a top priority on the government's agenda. In early 2012, the government proposed a fuel price increase but social unrest and political opposition in parliament made a sudden increase impossible. Eventually in June 2013, gasoline was raised by 44 percent to IDR 6,500 (USD $0.66) and diesel by 22 percent to IDR 5,500 (USD $0.56) per liter. But despite the 2013 price hike, a significant portion of Indonesia's fuel prices remain subsidized and therefore various international organizations (including the World Bank and International Monetary Fund/IMF) as well as domestic institutions (such as Indonesia's Chamber of Commerce and Industry/Kadin) support further subsidy reductions. In 2013 and 2014, the government has also reduced subsidies for electricity - both for households (although exempting the poorer segments of society) and industries. Indonesia's inflation outlook is highly influenced by the decision to further reduce these subsidies. The World Bank estimates that a IDR 2,000 increase in fuel prices can add about three percentage points to the level of headline inflation and can add over one percentage point to core inflation.. Indonesia's characteristic volatile inflation rate causes a traditionally larger deviation from the annual inflation projections of Bank Indonesia. The consequence of such inflationary uncertainty is that it creates economic costs, such as the country's higher (domestic and international) borrowing costs compared to its emerging market peers. Food prices are traditionally highly volatile in Indonesia and subsequently impose a big burden on the poorer households who live under or just above the poverty line. These households spend more than half of their total expenditure on food items. Higher food prices
  8. 8. therefore cause serious poverty basket inflation which may lead to increases in the level of poverty. Traditional Peaks of Inflation in Indonesia Discarding administered price adjustments, there are two traditional annual peaks of inflation in Indonesia. The December-January period always brings higher prices due to Christmas and New Year celebrations, while the traditional floods in January (amid a peak of the rainy season) results in disrupted distribution channels in several regions and cities, thus causing higher logistics costs. The second peak comes in the July-August period. Inflationary pressures in these two months emerge as a result of the holiday period, the holy Muslim fasting month (Ramadan), Idul Fitri celebrations and the arrival of the new school year. A marked increase is detectable in spending on food and other consumables, accompanied by retailers adjusting prices upwards. Unemployment Rate in Indonesia The unemployment rate is the ratio of the number of people who do not have a job but are looking for one. This data is very important because it has a direct effect to the welfare of the unemployed, and a signal that the economy may not be using some of its resources efficiently. During the course of Suharto's New Order, economic development added many new jobs to Indonesia's job market, thereby pushing down the national unemployment rate. Particularly
  9. 9. the industry and services sectors saw major increases in its employment shares towards national employment, at the expense of the agriculture sector. The graph clearly illustrates that the unemployment rate remained stable from 1986 to 1993 at average 2,71 %. The Asian Financial Crisis that erupted in the late 1990s, however, reversed these developments temporarily and caused the country's unemployment rate to reach over 20 percent, with underemployment rising equally rapidly. More than a decade of macroeconomic growth has succeeded in pushing Indonesia's unemployment rate into a steady downward trend. But, as around two million Indonesians enter the labor force each year, it will be a challenge for the Indonesian government to stimulate job creation so that the labor market can absorb this group of annual newcomers. The table below indicates Indonesia's unemployment rate in recent years. It shows a steady downward trend. A characteristic of Indonesia is the unemployment rate is highest for people between the age of 15 and 24, far above the country's national average. Freshly graduated students from universities, vocational schools and secondary schools have difficulties finding their place in the national workforce. Almost half of Indonesia's total number of workers possess a primary school degree only.
  10. 10. Even though economic growth declining, the unemployment rate until February 2013 until 5,92% or declining with unemployment rate in February 2012 which is 6,32%. This decline actually not really big, only around 440 thousand people from 7,61 million people from February 2012 become 7,17 million people on February 2013. From the labor force rate from February 2012 to February 2013 there are 780 thousand labor force in Indonesia, where in February 2012 labor force is 120,41 million while in February 2013 it increase become 121,19 million people. Poverty in Indonesia In line with the decline in the unemployment rate in Indonesia, also reduced the number of poor people. Based on the latest data from the BPS, the poor in Indonesia in September 2012 as many as 28.59 million people (11.7%) lower than in February 2004, which reached 36.1 million people (16.7%). When compared with the number of poor people in March 2012, then during the next term decline in the number of poor population of 0.54 million people. However, keep in mind that the poverty line used in September 2012 amounted to Rp 259.520 per capita per month, an increase of 4.35% compared to March 2012, if we critically examined it, it did not indicate poor population decreased. As an illustration, based on the poverty line was set at Rp 259 520 per month, meaning a family that has one child with a
  11. 11. single income of Rp 80,000 per month is not said to be poor. In fact, it is clear that family life is certainly very improper. Between the mid-1960s and 1996, when Indonesia was under the rule of Suharto's New Order government, the country witnessed a significant decline in poverty - both urban and rural - due to robust economic growth and efficient pro-poor programs. During the Suharto period the number of Indonesians that lived below the poverty line eased from over half of the total population to 11 percent. However, when the Asian Financial Crisis hit in the late 1990s it had a devastating impact on poverty alleviation, causing the poverty rate to slip back from 11 to 19.9 percent in late 1998, meaning that much of the New Order's accomplishments had been reversed. The following graph provides poverty figures Source: BPS The graph above shows a steady decline in national poverty. However, the Indonesian government applies rather easy terms and conditions regarding the definition of the poverty line, resulting in a more positive picture than reality. In 2013 the Indonesian government defined the poverty line at a monthly per capita income of 292,951 rupiah. This amount equals approximately USD $25 and, thus, indicates a very low standard of living, even for Indonesian standards. But if we apply the poverty threshold as is used by the World Bank, which classifies the percentage of the Indonesian population living on less than USD $1.25 a
  12. 12. day as poor, the percentages in the table above will rise by a couple of percentage points. Moreover, according to the World Bank, when taking into account the percentage of the Indonesian population that lives on less than USD $2 a day, the figure for 2009 rises to 50.6 percent of the population. This shows that a large proportion of the Indonesian population is in fact near poor. More recent reports in Indonesian media assert that around a quarter of Indonesians (which translates to around 60 million people) are currently near poor. In recent years, Indonesian poverty numbers have shown a steady downward trend. It is assumed, however, that in the future this downward trend will continue at a slower pace. Most of the Indonesians that rose out of poverty in recent years, were those that lived just below the poverty line. This means it took less effort to push them out of poverty. But as this group is slowly narrowing in number, it is now the bottom base of Indonesia's poverty that needs to be alleviated. This will be more complicated and thus results in slowing rates of poverty reduction. Public Debt of Indonesia Indonesia's public debt as a share of its gross domestic product (GDP) has shown a significant improvement since the Asian Financial Crisis erupted in the late 1990s. From over 150 percent of GDP in 1998, Indonesia's external debt declined to around 28 percent in 2013. This represents a healthy condition compared to many developed countries that are currently in trouble to ease public debt. Similarly, Indonesia's external debt as a percentage of its exports has shown an impressive decline as well; from 179.7 percent in 2004 to 97.4 percent in 2011. These numbers measure the government's ability to make future payments on its debt, thus positively affecting Indonesia's borrowing costs, government bond yields and international credit ratings when this debt is as low as in the case of Indonesia. This development is particularly due to the prudent fiscal policy approach of the Indonesian government and compliance with fiscal rules that set limits on the upper level of debt. The Indonesian government's external debt consists of bilateral and multilateral loans, export credit facilities, commercial loans, leasing and government securities (SBN) owned by non- residents, issued on both foreign and domestic markets. Government securities consist of government debt securities (SUN) and government Islamic securities (SBSN). Government debt securities consist of government bonds due more than 12 months and Treasury Bills
  13. 13. (SPN) due less than or 12 months. Government Islamic Securities consist of both long-term security (Ijarah Fixed Rate/IFR) and Global Sukuk. Largest Contributors to Indonesian Government Debt Bilateral Loans 31.4% SBN (non-resident) 22.4% Multilateral Loans 20.2% Bonds 18.4% Source: Bank Indonesia (BI) As of July 2012 around 40 percent of this public debt is borrowed in US dollars and approximately 28 percent in Japanese Yen. Indonesia borrows mostly from other countries; countries that act as creditor account for three thirds of total Indonesian public debt. Most important creditor countries are Japan and the United States. International organizations provide around 25 percent of Indonesia's debt, of which the World Bank, the Asian Development Bank and the International Monetary Fund are the largest contributors. Around 93 percent of Indonesia's government debt constitutes long term debt, meaning that the debt is due at least one year after the date of indebtedness. Although in absolute terms Indonesia's government debt has grown by approximately USD 48 billion between 2006 and 2012 (a number which includes debt held by the Central Bank), as a percentage of GDP it has fallen significantly since the end of the Asian Financial Crisis. Only sharp nominal depreciation in late 2008 as well as in early 2009 temporarily led to an increase in the external debt to GDP ratio. The IMF forecasts a further moderate decline in public debt due to rupiah appreciation, falling interest rates, and robust economic growth. Future energy subsidy reduction and tax administration reforms in combination with strong economic growth will support a further decline in public debt. Due to the persistent global economic turmoil, Indonesia's debt to GDP ratio increased a little in the first half of 2012 to 27.3 percent according to Bank Indonesia.
  14. 14. Indonesian Debt to GDP Ratio 2008–2013 Macroeconomic shocks will only have a limited impact on Indonesia's public debt ratio. Standard stress tests suggest that even under severe shocks from contingent liabilities, sharp exchange rate movements and higher interest rates, the debt ratio is likely to remain modest. Fiscal contingent liabilities amounting to 10 percent of GDP could raise public sector debt to 30 percent of GDP by 2016. Currency depreciation of 30 percent would raise the debt ratio to about 25 percent of GDP. And an increase in real interests rates would have a smaller effect with the debt ratio reaching around 23 percent of GDP by 2015. Other macroeconomic shocks will likely have more limited impacts than the ones mentioned above. Bagan 1 Source: Internation Monetary Fund
  15. 15. References 1. http://www.indonesia-investments.com/finance/macroeconomic- indicators/poverty/item301 2. http://www.indonesia-investments.com/finance/macroeconomic- indicators/unemployment/item255 3. http://www.indonesia-investments.com/finance/macroeconomic-indicators/gross- domestic-product-of-indonesia/item253 4. http://www.indonesia-investments.com/finance/macroeconomic- indicators/inflation-in-indonesia/item254 5. www.bps.go.id 6. www.bi.go.id 7. A, Rustan. Assesing Macroeconomic Development in Indonesian

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