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

INDONESIAN ECONOMIC

REVIEW AND OUTLOOK

Macroeconomic DashboardFaculty of Economics and BusinessUniversitas Gadjah Mada

No. 1/Year II/March 2013

Political situation began to heat upInfrastructure Development

ForewordIndonesian 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

Macroeconomic Dashboard Universitas Gadjah Mada

1

Indonesian Economic Review and Outlook

I. Recent Economic Development

he impact of sluggish economic growth in US and Europe has

begun to bear on Indonesia, as reflected in the decrease in Texports. 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


2

Recent Economic Development

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

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

Source: BPS dan CEIC

-30

-20

-10

0

10

20

30

40

Household Expenditures Government Expenditures Gross Fixed Capital Formation Exports of Goods and Services Imports of Goods and Services(%)


3


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,

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.


0

1

2

3

4

5

6

7

8

-5

0

5

10

15

20

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

Agriculture, Livestocks, Forestry and Fisheries Mining and Quarrying Manufacturing Electricity, Gas and Water Supply Construction

Trade, Hotel and Restaurant Transport and Communication Financial, Ownership and Business Services GDP(%) (%)

Figure 3: Unemployment Level in Indonesia, 2005 – 2012Unemployment level in Indonesia shows a downward over the past few years.


68.020 66.790 66.740 66.160 66.600 66.990 67.330 67.180 67.600 67.230 67.830 67.720 69.960 68.340 69.660 67.880

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 6.1400

10

20

30

40

50

60

70

80

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

Labour Force Participation Rate (%) Unemployment Rate (%)(%)


4

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

B. Inflation

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).

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


5


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

Source : Bank Indonesia and CEIC

Figure 4: Growth of Economic Liquidity in Indonesia, 2009 – 2012, (in %, YoY)

Weakening economic growth in Indonesian economy has induced slower money supply growth

0

5

10

15

20

25

0

5

10

15

20

25

M1 M2 (%) (%)

Figure 5: Inflation Level, 2009 – 2013* (in%, YoY)

High inflation in February 2013 is largely attributable to government policies

Source : BPS and CEIC

5.31

4.29

2.91

11.02

-10

-5

0

5

10

15

20

Headline Core Administered Volatile(%)


6

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

-3

-2

-1

0

1

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3

4

5

6

Headline Foodstuff Prepared Food, Beverages, Cigarette and Tobacco Housing, Water, Electricity, Gas and Fuel Clothing Health Education, Recreation and Sports Transportation, Communication and Financial Services(%)



7


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%).

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

C. Interest Rate

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%).


In fla tio n (% ) In flatio n (% ) In flatio n (% )

Feb -1 3 Feb -1 3 Feb -1 3

B AN D A A C EH 0 .30 D KI JA K AR TA 0.6 5 BA LIKP A P A N 0 .54

B AN D A R LA M P U N G 0 .73 D I YO G YA KA R TA 0.9 3 SA M A R IN D A 0 .68

B AT AM 0 .54 JEM B ER 0.9 5 TA RA KA N 0 .28

B EN G KU LU 0 .69 KED IR I 0 .9 4 P A LA N G KA R AY A -0 .10

D U M A I 0 .41 M A D IU N 0.7 5 SA M P IT -0 .01

JA M BI 0 .52 M A LAN G 0.8 8 P O N TIA N A K 1 .04

LH O K SEU M A W E 1.78 P R O B O LIN G G O 0.8 6 SIN G KA W A N G 0 .87

M ED A N 0 .80 SU M EN EP 1.0 0 BA N JA R M A SIN 0 .43

P A D A N G 0 .63 SU R AB A YA 1.0 3 D EN P AS AR 1 .19

P A D A N G SID EM P U A N 0 .30 P U R W O KE RTO 0.4 0 KU P A N G 0 .56

P A LEM B AN G 0 .71 SEM A R AN G 0.9 0 M AU M ER E -0 .92

P A N G KA L P IN A N G 1 .19 SU R AK A RTA 1.0 3 BIM A 1 .00

P EK AN B A R U 0 .56 T EG A L 0 .2 3 M AT AR A M 1 .01

P EM A TA N G SIA N T AR 1 .16 B AN D U N G 1.0 3 M A M U JU 0 .25

SIB O LG A 0.12 B EKA SI 0 .6 7 P A LU 0 .58

TA N JU N G P IN A N G 0 .82 B O G O R 0.5 7 M AN A D O 1 .30

C IR EB O N 0.5 8 P A LO P O 0 .70

D EP O K 0.7 2 P A RE -P A R E 0 .67

SU KA B U M I 0.9 3 U JU N G P A N D A N G 0 .73

TA SIKM A LA YA 1.0 0 W AT AM P O N E 0 .51

C ILE G O N 1 .2 3 KEN D AR I -0 .10

SER A N G 1.1 0 G O R O N TA LO -0 .06

TA N G ER A N G 1.0 2 A M B O N -2 .29

TER N A TE 0 .89

JA Y A P U R A 3 .15

M AN O KW A RI 0 .56

SO R O N G 1 .09

SU M A T ER A ISLA N D JA V A ISLA N D O T H E R S


8

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%

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.

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

D. Foreign Reserves

E. Exchange Rate and Share Prices



9


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

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


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



10

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

Table 2 : National Budget 2012 and 2013

Indonesia Economic growth for 2012 was below target

Source: Ministry of Finance

Economic Indicator APBN 2012 APBN-P 2012 Realization APBN 2013

Economic Growth (%) 6.7 6.5 6.3 6.8

Inflation y.o.y (%) 5.3 6.8 4.3 4.9

Exchange Rate (Rp/US$) 8800 9000 9384 9300

3-month SBI (%) 6 5 3.2 5

Indonesian Crude Oil Price (US$/barrel) 90 105 112.7 100

Lifting Oil (thousand barrel per day) 950 930 861 900

Lifting Gas (thousand barrel per day) - - - 1360

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.


11


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.

Table 3: Central Government Expenditure, 2012 - 2013 (IDR trillion)Expenditure on subsidies and personnel expenditure dominate central government expenditure


Items APBN 2012 APBN-P 2012

Semester I Realization

Semester II Prognosis

APBN-P 2012 Prognosis

APBN 2013% change of APBN 2012

1 Personnel Expenditure 215.9 212.3 104.1 102.2 206.3 241.6 11.9

2 Material Expenditures 188.0 162.0 41.8 128.2 170 200.7 6.8

3 Capital Expenditures 152.0 176.1 30.6 122.7 153.4 184.4 21.3

4 Interest Payment 122.2 117.8 49.6 62.3 111.9 113.2 -7.3

a. Interest of Domestic Debt 88.5 84.7 80.7 -8.8

b. Interest of Foreign Debt 33.7 33.0 32.5 -3.5

5 Subsidy 208.9 245.1 134.7 212.2 346.9 317.2 51.9

a. Energy 168.6 202.4 274.7 63.0

b. Non Energy 40.3 42.7 42.5 5.4

6 Grant Expenditures 1.8 1.8 0 1.1 1.1 3.6 101.6

7 Social Assistance 47.8 86.0 30.2 17.7 47.9 73.6 54.1

a. Natural Disaster Rescue 4.0 4.0 4.0 0.0

b. Ministry/institution Assistance 43.8 82.0 69.6 59.1

8 Other Expenditures 28.5 68.5 2.9 18.1 21 20.0 -30.0


12

Table 4: Subsidies in the 2013 National Budget (IDR trillion)Central Government expenditure on fuel subsidies continues to increase

Category APBN 2012 APBN-P 2012Semester I Realization

Semester II Prognosis

APBN-P 2012 Prognosis

APBN 2013% change of APBN

2012

A. Energy 168.6 202.4 124.4 181.5 305.9 274.7 63.0

1 Fuel Subsidy 123.6 137.4 88.9 127.9 216.8 193.8 56.8

2 Electricity subsidy 45.0 65 35.5 53.6 89.1 80.9 80.0

B. Non Energy 40.3 42.7 10.3 30.7 30.7 42.5 5.4

1 Food subsidy 15.6 20.9 5.2 14.2 19.4 17.2 10.2

2 Fertilizer Subsidy 16.9 14 4.4 9.5 14 16.2 -4.2

3 Seed Subsidy 0.3 0.1 - 0.1 0.1 1.5 419.5

4 PSO 2.0 2.2 0 2 2 1.5 -24.9

5 Interest Subsidy on Credit Program 1.2 0.8 0.7 0.6 1.3 1.2 1.1

6 Cooking Oil Subsidy 0.0 0.0

7 Tax Subsidy 4.2 4.3 - 4.3 4.3 4.8 14.9

8 Soybean Subsidy 0.0 0.0

9 Other Subsidy 0.0 0.0

Total 208.9 245.1 134.7 212.2 346.9 317.2 51.9


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

Figure 10: Primary Deficit (IDR trillion)

The 2013 National Budget will produce a recurrence of a primary deficit

Sumber: Kementrian Keuangan

5.1632

41.5375

8.8624

-78.9216

-40.0942

-100

-80

-60

-40

-20

0

20

40

60

2009 2010 2011 2012* 2013**

Note: * Prognosis** APBN 2013

Developments in Government Finances


13


IV. Developments in Fiscal PolicyIn 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.

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.

Figure 11: Government and Private External DebtNeed for paying serious attention to rising foreign debt

Source: BPS, Bank Indonesia, and CEIC


14

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


15


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


16

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. InternationalIndonesia 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

Developments in Fiscal Policy


17


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

Figure 15: Indonesia Trade Balance, January 2008 – January 2013Indonesia continues to experience a deficit in trade balance

Source: Bank Indonesia and CEIC

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Ekspor Impor Neraca Perdagangan(Miliar US$)


18

International

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

Figure 16 :Indonesia Oil and Gas Export - Import, January 2008 – January 2013

The trade deficit has continued


-20.00

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Expo rt: N on O il and Gas Im po rt: N on O il and Gas B alance of Trade: N o n Oil and Gas Exp ort Impo rt(US$ bn)


19


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

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


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Export: Oil and Gas Import: Oil and Gas Balance of Trade: Oil and Gas Export Import(US$ bn)


20

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 – 2012The current account deficit shows an increase

Source Bank Indonesia and CEIC

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Goods Trade Balance (LHS) Services Trade Balance (LHS) Income Account (LHS) Current Transfers (LHS) Current Account (RHS)(US$ bn) (US$ bn)


Figure 19 : Capital and Financial Accounts, 2006 – 2012

Despite showing high volatility, the surplus in the capital and financial accounts shows an upward trend

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Direct Investment (LHS) Portfolio Investment (LHS) Other Investment (LHS) Current Account (RHS) Capital and Financial Account (RHS)(US$ bn) (US$ bn)

International


21


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

-6.00

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Current Account (LHS) Capital and Financial Account (LHS) Errors and Commissions (LHS) Balance of Payment (RHS)(USD bn) (US$ bn)


22

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 IndicatorIndonesian 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

International


23


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.


24

Macroeconomic Indicators Projection

Table 5: GDP Growth and Projection

2013-2014

Note: * = realization

Table 6 : Inflation and Projection

2013-2014


Table 7: Exchange Rate and Projection

2013-2014


VIII. Current Issue:

“Indonesia Economy 2013 Toward the Year of 'Politics:'

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

By 1A. Tony Prasetiantono

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


25


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.


26

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.


27


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


28

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

Current Issue


29


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.

INDONESIAN ECONOMIC REVIEW AND OUTLOOKMACROECONOMIC DASHBOARD TEAM

MACROECONOMIC DASHBOARDFAKULTAS EKONOMIKA dan BISNIS

UNIVERSITAS GADJAH MADAth

Pertamina Tower Building 4 fl. Room 4.1Jl. Humaniora No. 1 Bulaksumur, Yogyakarta 55281

Phone : +62 274 548 517 ext 373Email : [email protected]

Website : www.macroeconomicdashboard.com

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

Education

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