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

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

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


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

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

2


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


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


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,

3

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

4


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

5


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


6

Health

Education, Recreation and Sports

Transportation, Communication and Financial Services


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


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

7


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

8


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


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

9

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

10

6.3
4.3
9384
3.2
112.7
861
-

APBN 2013
6.8
4.9
9300
5
100
900
1360


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


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.

11

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


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

12

2013**

14.9

51.9


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

13

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

14


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

15

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

16


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

17

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


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

18


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


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

19

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


20


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


21

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

22


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.

23

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:'
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

24


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.

25

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.

26


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

27

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

28


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.

29

INDONESIAN ECONOMIC REVIEW AND OUTLOOK
MACROECONOMIC DASHBOARD TEAM

MACROECONOMIC DASHBOARD
FAKULTAS EKONOMIKA dan BISNIS
UNIVERSITAS GADJAH MADA
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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

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

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