IERO NO 1/YEAR III/MARCH 2014

No 1/YEAR III/March 2014

Macroeconomic DashboardFaculty of Economics and BusinessUniversitas Gadjah Mada

Hope for Changefrom the New Representatives

INDONESIAN ECONOMICREVIEW AND OUTLOOK

Foreword

Letmehopeitisanenjoyablereading

Prof.Dr.SriAdiningsih,M.Sc

HeadofResearcher

MacroeconomicDashboard

IndonesianEconomicReviewandOutlook(IERO)isaquarterlybulletinthatgivesageneraldescriptionofthe latestdevelopments in the Indonesianeconomyanditsprospects in future,aswellasananalysisofmacroeconomicconditionsinSouthEastAsianregion.IEROispublishedbytheMacroeconomicDashboardin collaboration with PT Bank Mandiri, Tbk. TheDashboardisaneconomylaboratorythatfallsundertheaegisoftheDepartmentofEconomics,FacultyofEconomicsandBusiness,UniversitasGadjahMada.

IERO,quarterI-2014hasthetheme“HopeforChangefrom the New Representatives”. The year 2014 isspecialbecausethecountrywillholdpresidentialand

legislativeelections. Thesameconditionwillmakethisyearfullofhopeaswellasuncertainty.Theprocessandoutcomesof thegeneralelectionswillhaveastrongimpactonthestate'seconomy.Iftheconductofelectionsgoesonflawlessly,securely,andpeacefully,andproducesthekindofrepresentativesthathavethecapacitytomake thenecessary improvement, it ismost likely thateconomicstabilitywillbebetter,andtheeconomicgrowthandtheconsumptionwillincrease.

In themeantime, GAMA Leading Economic Indicator (GAMA LEI) in this edition,predicts adecline inGDPcycle, ofwhichhowever itwill be temperedbya slightincreaseinGDPgrowthin2014:Q1(y-o-yandq-t-q).GAMALEIconstitutesamodelwhich has been developed by the Macroeconomic Dashboard team to provideforecastsofconditionsofIndonesianeconomy.Theoutcomesoftheprediction,areexpectedtoassiststakeholdersinanticipatingthefutureeconomicconditions.

TheIEROofthisedition,assumesanewformatwhichhasbeendesignedtomakeitanenjoyablereading. It isa hopethatoursuggestions areuseful forpublicpolicymakers,businesscommunity,membersofacademia,andthegeneralpublic.

TABLE OF CONTENTS

FOREWORD....................................................................................................................... ii

EXECUTIVESUMMARY................................................................................................ v

A. DEVELOPMENTSINTHEECONOMYANDFISCALPOLICY 1. Theeconomyregisteredimprovementlargelyduetogrowth intheservicesandnetexports.................................................................... 1 2. InternationalTradecontinuestoFaceChallenges.............................. 3 3. GovernmentFiscalspacecontinuestobetightandthecapacity torepaydebthasweakened......................................................................... 8 4. PovertyIncidenceandEmploymentWorsened................................... 14

B. MONETARYSITUATIONANDFINANCIALMARKETS 1. RupiahContinuestoDepreciate................................................................. 16 2. Financialmarketsexudesoptimismastheyearended.................... 21

C. GAMALEIANDCONSENSUSONPROJECTIONOFTHEECONOMY 1. GAMALeadingEconomicIndicator(GAMALEI)................................. 25 2. ConsensusonMacroeconomicIndicatorProjections........................ 27

D. ASEAN:RegistersOptimumEconomicPotentialamidst GlobalandRegionalEconomicInstability.............................................. 29

E. CURRENTISSUE...................................................................................................... 35

f. ECONOMICOUTLOOK.......................................................................................... 39

Macroeconomic Dashboard Universitas Gadjah Mada iii

List of Terms

APBN StateBudget ASEAN AssociationofSouthEastAsianNations BI BankIndonesia BPS CentralBureauofStatistic CLMV Cambodia-LaoPDR-Myanmar-VietNam cq CasuQuo(Inthiscase) DIY DaerahIstimewaYogyakarta DPD RegionalRepresentativeCouncil DPR HouseofRepresentatives DPRD RegionalHouseofRepresentatives DSR DebtServiceRatio(TheRatioofPrincipalLoanPayment

andInteresttoExportValue) GAMALEI GadjahMadaLeadingEconomicIndicator IDR Rupiah IHK ConsumerPriceIndex IHSG JakartaCompositeIndex JISDOR JakartaInterbankSpotDollarRate LHS LeftHandSide LPG LiquifiedPetroleumGas LPS DepositInsuranceCorporation MAS MonetaryAuthorityofSingapore m-t-m Month-to-month NAD NangroeAcehDarussalam PBI BankIndonesia'sregulation PDB GrossDomesticProduct(GDP) q-to-q Quarter-to-Quarter RHS RightHandSide SUN Government'sBonds TheFed TheFederalReserve USD USDollar y-o-y Year-on-Year

Indonesian Economic Review and Outlookiv

EXECUTIVE SUMMARY

Indonesian economy registered a slight growth in Q4:2013, of which,

althoughitwashigherthaninthepreviousquarter,butitwasfaroffthelevel

sufficient to made any significant dent into poverty incidence and

unemployment(thatshowedanupwardtrendinlastSeptember).Economic

growthisdrivenbytheservicesectorbyitsnaturenotlaborintensive.Thisis

reflectedbyareductionof6millionjobsintheagriculturalsectorduring

2011-2013 period. With regards to GDP by expenditure, positive

performance in the export sector that marked the end of 2013 (as an

anticipation by the mineral and other extraction industries to the

implementationoftheMineralsLawthatcameintoforceatthebeginningof

thisyear)provedtransientandtradeaccountdeficitplummetedbackinto

deficitinJanuary2014.

Beside the deficit in the trade account, pressure on Rupiah continued to

mountfromtwosides:risinginflationanddepreciationoftheexchangerate.

Not surprisingly, the pressure on international reserves intensified. Bank

Indonesia,asthemonetaryauthority,respondedbyissuingBankIndonesia

regulation on Swap transactions Value Protection as well as introducing

Jakarta InterbankSpotDollarRate (JISDOR)asanofficial rate forRupiah

denominationsinSingaporeMoneymarket.

In themeantime, theGovernment through theMinistry of Finance, in its

capacityasthefiscalauthority,continueditseffortstomobilizefundsfrom

domestic sources, such as the announcing of six strategic steps aimed at

increasingtaxrevenues,andfromforeignsourcesbyissuingGlobalBonds

andbyforeignborrowing.Itisinterestingtonotethatthedebt-to-service

ratio(DSR),whichistheratioofprincipalandinterestpaymentstovalueof

exports),showsanupwardtrend,which inpart isattributable to thesub

optimal performance of the Indonesian export sector. As one of the

indicatorsofcapacitytorepaydebt,theriseinDSRbecomestheconcernfor

thegovernment,especiallyfortheMinistryofFinance.

Macroeconomic Dashboard Universitas Gadjah Mada v

After making a closer observation of various dynamics of Indonesian

economy, GAMA LEI predicts downward trend in Indonesian GDP cycle.

Nonetheless,byobservingthemovementandpatternoftheeconomy,both

year-on-year andquarter-to-quarter, indicate signs of a small increase in

economicgrowthin2014:Q1.

Leaving the domestic economy aside, the performance of economies in

ASEANregiontendstobemixed.Politicalinstabilitythatisaffectingsome

ASEANeconomies,especiallyThailand,havehadadverseimpactonregional

development.Nevertheless,somecountriesintheregionshowremarkable

performance such as the Philippines and CLMV (Cambodia-Lao PDR-

Myanmar-VietNam).Thisthenoffersoptimismamidstbleakperformanceof

currenciesofASEANeconomiesintheaftermathoftaperingoffbytheUnited

States.

Lastly,IEROofthisedition,raisestheissueofgenerallegislativeelectionsby

whichthe citizens face two possibilities: the likelihood that the elected

representativeswillnotfomentchangeforthebetteror,onthecontrary,will

createthemuchneededimprovement.Asanascentdemocraticnation,itis

notadvisablethatdemocraticprocessisentrustedsolelytothewhimsofthe

government and elected representatives in thenational assembly.On the

contrary, in a democracy, members of society participate actively in the

processandthereby,creatinganincentivefortheelectedrepresentativesto

actinaccordancewithpublicinterestandexpectation. Thus,withoutthe

existence of reward and punishment from society to the elected

representatives,politicalrightswhichweregainedduringthereformation

willbeuseless.

Indonesian Economic Review and Outlookvi

A. DEVELOPMENTS IN THE ECONOMY AND FISCAL POLICY

Macroeconomic Dashboard Universitas Gadjah Mada

1. TheEconomyRegisteredImprovementLargelyDuetoGrowthinThe

ServicesandNetExports

Indonesian economy shows some slight improvements in quarter IV-

2013, registering 5.72% growth year-on-year, which was lower than

6.18%inthesameperiodlastyear. Thiswas largelyattributabletothe

incessantpressureonthecurrentaccountanddepreciationofRupiah,coupled

with rising inflation. Thedeficit on the current accountover the last three

quartersstokedinflation,whichinturninducedanupwardrevisionofreference

interestrate,followedbydepressedinvestment.Thus,despitethefactthatthe

levelofcurrentaccountdeficitshowedasignificantdeclinefromUSD8.5Billion

1

Notes:

Primarysector:AgriculturalSector,Livestock,ForestryandFisheries;andMiningandExtractionSector

IndustrialSector:ProcessingIndustrysector;ElectricitySector,GasandCleanWater;andConstructionSector

Services Sector: Trade Sector, Hotel and Restaurants; Transportation and Communications Sector;Financial,RealEstateandCompanyServicesSector;andServicesSector

Source:BPSandCEIC(2014)

Figure 1: GDPEconomicGrowth in Constant 2000Prices by EconomicActivity,2011–2013(y-o-y,in%)

Economicgrowthwasbyandlarge,proppedupbyCommunicationsandTransportationSector,aswellasinprimarysectorsalbeitatadecreasingrate

⁰ .88 ⁰ .9² ⁰ .8³ ⁰ .88 ⁰ .77 ⁰ .78 ⁰ .65 ⁰ .5² ⁰ .479.¹ ⁰ 9.⁰ 7 9.¹ 6

4

5

6

7

8

9

⁰

¹

²

³

54

Primary Industrial Services GDP(RHS)

Indonesian Economic Review and Outlook

inthepreviousquartertoUSD4BillioninquarterIV-2013,theeconomicgrowth

of5.78%registeredin2013waslowerthan6.23%recordedfor2012.

TheservicessectorcontinuestounderpineconomicgrowthinquarterIV-

2013.Nonetheless,thissectoralsoexperiencedslowereconomicgrowth,while

primaryandindustrialsectors,showedagradualupwardtrend. Theservices

sectorpostedlowergrowthofjust6.48%than7.66%inquarterIV-2012.Inthe

meantime,economicgrowthintheprimarysectorwas3.86%(y-o-y),which

was attributable to 3.91% growth in mining and extraction sector (y-o-y).

Despite the fact that theprimarysector registeredagrowth, the rateof the

growthshowsadownwardtrend.Meanwhile,theindustrialsectorregistered

growth of 5.60% (y-o-y),whichwas in linewith rate of growth in exports,

especially non-oil and gas category. Overall, transportation and

communicationssectorregisteredthehighestgrowth(10.32%,y-o-y),followed

byfinancial,realestateandcompanyservices(6.79%,y-o-y)andconstruction

sector(6.68%,y-o-y).

With respect to expenditure, economicgrowth inquarter IV-2013was

largelyattributabletotheincreaseinnetexports,whichthereforeserved

asanoffsettothedownwardperformanceofdomesticexpenditure.The

increaseinnetexportsinquarterIV-2013waspartlybecauseof7.40%(y-o-y)

2

Figure2:GDPgrowthrate,IndonesiainConstant2000PricesbyEconomicActivity,2011–2013(y-o-y,in%)

TheincreaseinIndonesianeconomicgrowthinthefourthquarterin2013isattributabletotheincreaseinnetexports


-5

0

5

10

15

20

ConsumptionExpenditures:Household ConsumptionExpenditures:GovernmentGrossFixedCapitalFormation ExportsofGoodsandServicesImportsofGoodsandServices


invalueofexportsandadeclineinthevalueofimports-0.60%(y-o-y).Thiswas

largelyduetoanincreaseinnon-oilandgasexportstomaintradingpartners

suchasChina,UnitedStatesandJapan.Meanwhile,householdconsumption,

government consumption and investment, registered lower growth rates,

5.25% (y-o-y), 6.45% (y-o-y) and 4.37 (y-o-y), respectively. To that end,

householdconsumption,governmentconsumption,andinvestment,inquarter

IV-2013, was lower than 5.48% (y-o-y), 8.91% (y-o-y) and 4.54% (y-o-y),

respectively,registeredinquarterIII-2013.Slowerinvestmentgrowth,wasin

partasaconsequenceofBankIndonesiapolicythatraisedreferenceinterest

rate from 7.25% inOctober 2013 to 7.50% inNovember 2013,whichwas

coupledwithpoliticaluncertaintyintherun-uptothegeneralelections.

2. InternationalTradeContinuestoFaceChallenges

In January 2014, the trade account fell back into deficit after three

consecutivemonthsofsurplus(October–December2013).During2013,

Indonesia balance of trade showed a deficit of USD 4.06 Billion, which

constitutedadeterioration froma tradedeficit ofUSD1.66Billion in2012.

RisingtradedeficitinIndonesiain2013,islargelyattributabletothefactthat

3

Developments in The Economy and Fiscal Policy

Figure3:IndonesianBalanceofTrade,January2012–January2014(USDBillion)

IndonesianBalanceofTradefellbackintodeficitatthebeginningoftheyear


-20

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0

5

10

15

20

Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14

Export Import BalanceofTrade


thesurplusontradebalanceofnonoilandgaswassmallerthanthedeficiton

tradebalanceofnonoilandgas. Onamonth-to-monthbasis,balanceoftrade

registeredadeclineof128%fromasurplusofUSD1.53BillioninDecember

2013toadeficitofUSD0.43BillioninJanuary2014.Theconditionwasbyand

largecausedbyadeclineinIndonesianexportsthatwaslargerthanadeclineof

imports,14%,and3%,respectively.

Thetradebalanceofoilandgasdeterioratedduring2013.Tradebalanceof

oilandgaswhichregisteredadeficitofUSD5.6Billionin2012,increasedtoUSD

12.6Billionin2013.Thedeteriorationintradebalanceofoilandgasin2013,

waslargelyduetosmalleroilandgasexportsandhigheroilandgasimportsin

2013thanin2012.Inthemeantime,inDecember2013,oilandgasrecordeda

tradeaccountdeficitofUSD0.82Billion,whichincreasedslightlytoUSD1.06

BillioninJanuary2014.Theincreaseofdeficitintradebalanceofoilandgaswas

asaresultofadeclineofUSD0.9Billioninoilandgasexportsandasmaller

declineofoilandgasimports(USD0.7Billion).

OilandgasexportsinJanuary2014declined.Onamonth-to-monthbasis,oil

andgasexportsdeclinedfromUSD3.41BillioninDecember2013toUSD2.5

BillioninJanuary2014.Thelargestdecrease(42.1%)affectedcrudeoilexports,

followedbyexportsofoil andgasproducts,whichdeclinedby23.28%and

16.66%,respectively.Overall,oilandgasexportsregisteredadecreaseof26.7%

4

Figure4:TradeBalanceofOilandGas,January2012–January2014(USDBillion)

TheTradeBalanceofOilandGasrecordedadeficit


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0

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10

15

20

Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14

Export:OilandGas Import:OilandGas Export

Import TradeBalance:OilandGas


inJanuary2014.InDecember2013,Indonesianoilandgasimportswerevalued

atUSD4.22Billion.Nonetheless,inJanuary2014,thevaluedeclinedtoUSD3.56

Billion(thevalueofimportsdeclinedby15.7%betweenDecember2013and

January2014).

Overall,theperformanceoftradebalanceofnonoilandgasin2013is

betterthanin2012.In2013,thenon-oilandgassurpluswasUSD8.57billion,

farlargerthanUSD3.93billionregisteredin 2012,andrepresentedarapid

increaseof118.9%. Theriseoftradebalanceofnonoilandgassurpluswas

largelyattributabletoa5.21%declineinnon-oilandgasimportsorinabsolute

values,USD7.78billion.Asregardsexports,Indonesiannon-oilandgasexports

in2013showedadeclineofUSD3.12billioncomparedtothevalueregistered

for2012.

Likewasthecasewiththeoilandgastradeaccount(TradeBalanceofOil

and Gas), the performance of non-oil and gas trade account (Trade

Balance of Non Oil and Gas) deteriorated. At quarter IV-2013, the

performanceofTradeBalanceofNonOilandGashadshownapositivetrend.

Butdeterioratedlaterasthedeclineofnonoilandgasexportssetin,coupled

withanincreaseinnon-oilandgasimports.Consequently,non-oilandgastrade

account registeredadeclineof73.1% in January2014.Thedeterioration is

reflectedinthedramaticdeclineintheoilandgastradeaccountsurplusfromof

5

Figure5:TradeBalanceofNonOilandGas,Indonesia,January2012–January2014(USDbillion)

TradeBalanceofNonOilandGassurplusdeclinedinJanuary2014


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0

5

10

15

20

Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14

Export:NonOilandGas Import:NonOilandGasExport ImportTradeBalance:NonOilandGas



USD2.34billioninDecember2013,tojustUSD0.63billioninJanuary2014.

The decline in non-oil and gas exportswas as result of a decrease in

mineralexports.Non-oilandgasexportsdeclinedby11.6%fromUSD13.58

billioninDecember2013 to USD11.99billioninJanuary2014. Basedon

month-to-month,BPSdatashowsthatthedrasticchangeaffectedores,slag,and

ash commodities,which registered a decline of 70.13% duringDecember

2013–January2014period,whichwas incontrast toan increaseof40.18%

postedduringNovember-December2013period.Thesameappliedtomineral

fuelsandmineraloilproductscommoditieswhichdeclinedagainby17.13%in

January2014,largerthan1.27%declineregisteredinDecember2013. Based

on Bank Indonesia quarterly report, the decline that affected mineral

commoditieswasingeneralasaresultofthecomingintoeffectoftheActon

MineralsandCoalinJanuary2014.Inthemeantime,importsofnon-oilandgas

increasedfromUSD11.24billiontoUSD11.36billioninJanuary2014,which

represented an increase of 1.13% from the position in December 2013.

Commodities of Elect. machinery, sound react.,tv etc. registered the largest

increaseof24.64%(m-t-m).

The surplus on goods trade balance registered a drastic increase in

quarterIV-2013. ThesurplusincreasedfromUSD0.2billioninquarterIII-

6

Figure6:BalanceofTradeandIncome,2010:Q1-2013:Q4(USDbillion)

ThedeficitontheCurrentAccountshowssomeimprovement

Source:BankIndonesiaandCEIC(2014)

-15

-10

-5

0

5

10

15

2010:Q1 2010:Q4 2011:Q3 2012:Q2 2013:Q1 2013:Q4

TradeBalanceGood TradeBalanceService IncomeAccount

CurrentTransfer CurrentAccount


2013toUSD4.9billioninthenextquarter.Thedrasticincreaseinthesurpluson

goodstradebalanceisattributabletoanincreaseinthesurplusoftradebalance

ofnonoilandgasandadeclineonthedeficitoftradebalanceofoilandgas.In

quarterIII-2013,thesurplusonthetradebalanceofnonoilandgas,whichstood

atjustUSD2.8billion,shotuptoUSD7billioninquarterIV-2013.Meanwhile,

thedeficitoftradebalanceofoilandgasincreasedfromUSD0.5billioninthe

previousquartertoUSD2.2billion.Theincreaseinthesurplusoftradebalance

ofnonoilandgaswasasaresultofRupiahdepreciationduringNovember-

December2013period,whichhadanaugmentingeffectonnon-oilandgas

commodityexportsthatsawanincreaseofUSD4.3billioninquarterIV-2013.

TheimplementationofLawNo.4/2009onMiningMineralsandCoalandthe

MinisterialregulationPermenESDMNo.7/2012inJanuary2014,increasedthe

surplusongoodstradebalance.Thedeclineinthedeficitoftradebalanceofnon

oilandgaswasattributabletotwothings,namely,anincreaseinthesurpluson

thegastradeaccountandadeclineinthedeficitontheoiltradeaccount.

On year-on-year basis, current account position shows some

improvement. In the same period in 2012, Indonesian current account

registeredadeficit ofUSD7.8billion. Inquarter IV-2013, thedeficit on the

currentaccountdeclinedby48.7%toUSD4billion. Inquarter IV-2013, the

performanceofcurrentaccountpositionregisteredsomeimprovement.Thisis

reflectedinthedecreaseinthelevelofthedeficitfromUSD8.5billioninquarter

III-2013 to USD 4 billion in quarter IV-2013. Improvement in the current

accountpositionisattributabletoasurplusofgoodstradebalanceandcurrent

transferthatwaslargerthanthedeficitofservicetradebalanceandincome

account.

Therewasnosignificantchangeinthebalanceofservicetradebalance,

incomeaccount,andcurrenttransfer. InquarterIV-2013,thepositionof

servicetradebalance,incomeaccount,continuedtoregisterdeficitofUSD2.9

BillionandUSD7.1Billion, respectively. Comparedwith theposition in the

previousquarter,theservicetradebalanceandincomeaccount,registeredan

increase of 7.6% and 3%, respectively.Meanwhile, current transfer account

postedaslightimprovementfromasurplusofUSD0.9billioninquarterIII-

2013toUSD1.6billion,whichrepresentsanincreaseof19.6%.

7


Indonesian Economic Review and Outlook8

3. GovernmentFiscalSpaceContinues tobeTightandtheCapacity to

RepayDebtHasWeakened

AsperJanuary2014,revenueandgrantrealizationhadreached5.5%of

the target of IDR 1,667.1 trillion set in the state budget 2014, while

government expenditure realizationwas 5.3%. Target of revenue and

grantsconsistofIDR1,665.78trillionandIDR1.36trillion,indomesticrevenues

andgrants,respectively. Todate,taxrevenueshavereached6.5%ofthetarget

setinstatebudget2014ofIDR1,280.4trillion,werejust2%ofthetargetofIDR

385.4trillion.Totalgovernmentexpenditureinstatebudget2014,issetatIDR

1,842.5 trillion, which comprise IDR 1,249.9 trillion in central government

expenditureandIDR592.6trillioninregionalgovernmenttransfer.ByJanuary

2014, realized central government expenditure has reached 3.2%, while

transferlocalgovernmentswas9.6%.Debtrepaymentandsocialcontributions

constitute the largest percentage of realized government expenditure,

registering10.8%and10.1%,respectively.

Transfertotheregions,includesfundstransferredwithintheframework

of specialautonomyandadjustmentwhich in the2014annualbudget

registeredanincreaseof24.8%comparedwiththepreviousyear.Infact

thepercentageoffundstransferredwithintheframeworkofspecialautonomy

and adjustment to the total funds transferred to the regions, increased by

17.66%.Oneof thenewdevelopments, is the budget allocation of IDR520

billionforspecialadministrationpurposes,whichwasofficiallyearmarkedfor

Figure7:GovernmentRevenue&GrantandExpenditureRealizationasperJanuary2014(%)

Revenueandgrantrealizationis5.5%,whereasexpenditureis5.3%

Source:MinistryofFinance(2014)

(a)RevenueandGrant (b)GovernmentExpenditure

5.5

94.5

Realization Total

5.3

94.7

Realization Total


Yogyakartaspecialadministrativeregion(DIY).Nonetheless,comparedwiththe

budget allocation for other special autonomy in the country, the amount

allocatedforDIYisstillverysmall.

Thegovernmentstillreliesheavilyontaxrevenuestopayforgovernment

expenditure. Overthelastthreeyears,taxrevenueshavecontributedmore

than75%ofgovernmentrevenues. Inotherwords,despite the fact that the

contributionoftaxrevenuestothenationalbudgetshowsadownwardtrend,

realizedtaxrevenuescontinuetobean importantcomponentthatsupports

fiscalpolicysustainability.

Inanattempttoensurethatthetargetsetfortaxrevenueisachieved,the

DirectorateGeneraloftaxationhasputinplaceoptimizationefforts.The

steps have been translated into six strategic programs: (i) improving tax

administrationsystem;(ii)expansionoftaxeligibleindividuals;(iii)expansion

oftaxbase,includingsmallandmediumsizeenterprises(SMEs);(iv)optimizing

theuseofdataandinformationfromotherinstitutions;(v)strengtheninglaw

enforcement fortaxevaders;and(vi) improvingtaxregulationsthroughthe

formationoftheharmonizationteam.

Figure8:SpecialAutonomyandAdjustmentFund(IDRtrillion)

Specialautonomyandadjustmentfundincreasedby24.8%in2014(y-o-y);DIYreceivedIDR520billioninspecialautonomyfunds

Source:DirectorateGeneralofBudgetingandCEIC(2014,processed)

9


6.78

2.55

6.82

0.52

-

1

2

3

4

5

6

7

8

SpecialAutonomyandDIYPrivilegeFund

14.97% 15.86%

17.66%

20.06%

19.04%

24.80%

0%

5%

10%

15%

20%

25%

30%

0

50

100

150

2012 2013 2014

SpecialAutonomyandAdjustmentFund

Total(LHS)

PercentagefromTotalRegionalTransfer(RHS)

Growth(RHS)


Besides,otherprogramstoincreasetaxrevenueswhicharestill inthe

worksincludetheintensificationoffinancialtaxandsettingfinaltaxrate.

Theideaofintensifyingfinancialtaxentailstheimpositionoftaxonmonetary

transactionssuchasstocks/shares,bonds,andfutures. Thereasonforthatis

thatthefinancialsectorgeneratesalotofprofits,andthefinancialsectorwasa

beneficiary to government bailouts during the financial crisis. Meanwhile,

settingfinaltaxrates,isoneofthesolutionsforincreasingtheeffectivenessof

self-assessmentsystemwithoutincreasingthenumberoftaxofficials.

Inanattempttoincreasefundsrequiredtomeetdomesticexpenditure,

theMinistryofFinanceissuedIDR50.5trillioninGlobalBondsinJanuary

2014.Theincreaseinitiallyledtoariseinthelevelofoutstandinggovernment

securities in January 2014. However, total government securities (SBN) in

February2014,decreasedbyIDR3.45trillionfromtheJanuary2014levelto

IDR1,459.29trillion,whichrepresentedanincreaseofIDR339.22trillionfrom

thelevelinFebruary2013(seeFig.13).Interestonfixedbondsregisteredan

increaseofIDR22.25trilliontoIDR793.07trillionandincreasedbyIDR153.47

trillionfromFebruary2014. Governmentshariabonds declinedbyIDR5.98

trilliontoIDR77.15trillionfrom January2014,andincreasedby IDR4.63

trillion from February 2014. In February, 2014, government bonds

denominatedinforeigncurrency,registeredadeclineofIDR21.72trilliontoIDR

Figure9: TaxRevenueTargetandPercentageofTaxintheStateBudgets2012-2014Despiteretainingitsimportanceasthemainsourceofgovernmentrevenue,theroleoftaxrevenuesintheannualbudgetshowsaslightdeclineovertime

Source:DirectorateGeneralofBudgetingandCEIC(2014,processed)

10

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RPQR RPQS RPQT

ĔÏ ŎĔÏ ÒĴ Į ÔHĎĈĒLČĄËÔÒĹŁĹÕŃI

ĔÏ ŎËĮ ÖĮ ŃÕĮ ÊĮ ÒĬĮ ŃÔÏ Ĵ Į ĲÒŇĿ ĔŇÔÏ ŁËĮ ÖĮ ŃÕĮ Ï Ńİ ĆÒÏ ŃÔHËĈĒI


428.26 trillioncomparedwith theposition in January2014,whichhowever

representedanincreaseofIDR164.57trillionforthepositioninFebruary2013.

TheincreaseaffectedgovernmenttreasuriesthatshotupbyIDR2trillionfrom

thepositioninJanuary2014toIDR38.5trillion.Theincreaserepresentedan

increaseofIDR16.53trillionfromthepositioninFebruary2013.

Ingeneral,Indonesiantotalexternaldebtincreased,withprivatesector

debtcontributingmosttothegain.Theratioofprivateexternaldebttototal

externaldebtreach53.21%,whiletheratioofgovernmentandBankIndonesia

externaldebttototalexternaldebtwas46.79%.Indonesiantotalexternaldebt

inDecember2013raisedbyUSD2.6billiontoUSD264.06billioncomparedto

thepositioninNovember2013(anincreaseof1%);increased by USD12.6

billion(5%)fromthepositioninJanuary 2013andUSD11.17billion(4.6%)

comparedtothepositioninDecember2012.Meanwhile,privateexternaldebt

inDecember2013increasedbyUSD2.3billiontoUSD140.5billioncomparedto

thepositioninNovember2013(anincreaseof2%).

Government external debt in December 2013 increased by USD 212

milliontoUSD114.29billioncomparedtothepositioninNovember2013

whichgain0.2%.ItwasdecreasedbyUSD914million(-1%)comparedtothe

positioninJanuary2013andUSD1.8billion(-1.6%)comparedtothepositionin

December 2012. Short-term private external debt by original maturity in

Figure10:GovernmentandPrivateSectorExternalDebt,September2011–December2013(USDbillion)

Privatesectorexternaldebtincreased

Source:TheMinistryofFinanceandCEIC(2014)

11

SP

SR

ST

SV

SX

TP

TR

TT

P

UP

QPP

QUP

RPP

RUP

SPPÆŎÔĮ ÒŃÏ ŁĄĮ Ī ÔĆŇÖĮ ÒŃĿ Į ŃÔÏ ŃİǺĮ ŃÔÒÏ ŁÅÏ ŃĻHĎĈĒI

ÊÒĹÖÏ ÔĮ ÆŎÔĮÒŃÏ ŁĄĮ Ī ÔHĎĈĒI

ĔŇÔÏ ŁÆŎÔĮÒŃÏ ŁĄĮ Ī ÔHĎĈĒI

ĒĶŇÒÔMĔĮÒĿ ÊÒĹÖÏ ÔĮÆŎÔĮ ÒŃÏ ŁĄĮ Ī ÔZÉÒĹĴ ĹŃÏ ŁĐ Ï ÔÕÒĹÔŐHËĈĒI

ĒĶŇÒÔMĔĮÒĿ ÊÒĹÖÏ ÔĮÆŎÔÒĮ ŃÏ ŁĄĮ Ī ÔZËĮ Ŀ Ï ĹŃĹŃĴ Đ Ï ÔÕÒĹÔŐHËĈĒI



December2013increasedbyUSD1.9billiontoUSD40.67billioncomparedto

thepositioninNovember2013(anincreaseof4.9%).Theincreasecontinuedin

January2013,whenshort-termprivateexternaldebtshotupbyUSD4.84billion

(14%)comparedtothepositioninJanuary2013 andUSD3.8billion(1.04%)

compared to theposition inDecember2012.Meanwhile, short-termprivate

externaldebtbyremainingmaturityinDecember2013 declinedbyUSD338

milliontoUSD41.159billioncomparedtothepositioninNovember2013(a

decreaseof-0.8%);increasedbyUSD2.3billion(6%)comparedtotheposition

in January 2013 and USD 1.09 billion (2.7%) compared to the position in

December2012.

DebtServiceRatiowhichshowsanupwardtrend,rosesharplyinquarter

IV-2013. In the last quarter of 2013, IndonesiaDSR reached 52.7%,which

reflectsweakeningcapacityoftheIndonesiangovernmenttorepayitsdebtfrom

onequartertothenext,whichinturnhasstokedupriskfortheIndonesian

economy.

Foreign ownership of securities increased. Foreign ownership of

governmentbonds in January2014raisedby IDR4.8 trillion to IDR328.65

trillioncomparedtothepositioninDecember2013,andincreasedbyIDR55.45

trillioncomparedtothepositioninJanuary2013.Thisfollowedtheissuingof

Global Bonds in January 2014. Meanwhile, foreign ownership of equity in

December2013stoodatIDR1,475.45trillion,andincreasedtoIDR1.7trillion


Figure11:IndonesiaDebtServiceRatio,December2007–December2013(%)

DebtServiceRatioincreasedsharply

12

RPNQY

TQNPP

URNWP

P

QP

RP

SP

TP

UP

VP


compared to the position in November 2013. However, it suffered a sharp

declineofIDR87.4trillioncomparedtothepositioninJanuary2013andIDR

71.6trillioncomparedtoDecember2012.ForeignownershipofBankIndonesia

Certificates(SBI)increasedbyIDR3.9trillioninJanuary2014,andincreasedby

IDR180billioncomparedtothepositioninDecember2013andincreasedby

IDR3.7trillioncomparedtothepositioninJanuary2013.

Figure12:ForeignOwnershipofSecurities,October2011–January2014(IDRtrillion)

ForeignownershipofIndonesiansecuritiesincreased

Source:MinistryofFinance,BankIndonesia,OJK,andCEIC(2014)

Figure13:CompositionofGovernmentSecurities,2011–February2014(IDRtrillion)

Governmentsecuritiesoutstandingdeclinedslightly

Source:DMOMinistryofFinanceandCEIC(2014)

13

P

U

QP

QU

RP

RU

SP

SU

P

RPP

TPP

VPP

XPP

QLPPP

QLRPP

QLTPP

QLVPP

QLXPP

RLPPP

ÉĬÔMQQ ĊÏ ŃMQR ĂÑÒMQR ĊÕŁMQR ÉĬÔMQR ĊÏ ŃMQS ĂÑÒMQS ĊÕŁMQS ÉĬÔMQS ĊÏ ŃMQT

ǼŇÒĮ ĹĴ ŃÉŌŃĮ ÒÓĶĹÑŇĲÆŅÕĹÔŐHĎĈĒI

ǼŇÒĮ ĹĴ ŃÉŌŃĮ ÒÓĶĹÑŇĲĆŇÖĮ ÒŃĿ Į ŃÔÅŇŃİ ÓHĎĈĒI

ǼŇÒĮ ĹĴ ŃÉŌŃĮ ÒÓĶĹÑŇĲǺĮ ÒÔĹĲĹĬ Ï ÔĮ ŇĲÅÏ ŃĻČŃİ ŇŃĮ ÓĹÏ HËĈĒI

QLTUY

WYS

QRS

TUP

P

UPP

QLPPP

QLUPP

RLPPP

RLUPP

SLPPP

SLUPP

ÈŇÖMQQ ǼĮ Ī MQR ĐÏŐMQR ĂÕĴMQR ÈŇÖMQR ǼĮ Ī MQS ĐÏ ŐMQS ĂÕĴMQS ÈŇÖMQS ǼĮ Ī MQT

ĆŇÖĮÒŃĿ Į ŃÔÅŇŃİ ZÉÕÔÓÔÏ Ńİ ĹŃĴ ĢĮ ÒŇǺŇÕÑŇŃÅŇŃİǼĹŎĮ İ ËÏ ÔĮ ÅŇŃİ ĘÏ ÒĹÏ Ī ŁĮ ËÏ ÔĮ ÅŇŃİĔÒĮ Ï ÓÕÒŐÅĹŁŁ ĆŇÖĮ ÒŃĿ Į ŃÔČÓŁÏ Ŀ ĹĬ ĒĮ ĬÕÒĹÔĹĮ ÓHĆČIǼŇÒĮ ĹĴ ŃǺÕÒÒĮ ŃĬŐĄĮ ŃŇĿ ĹŃÏ ÔĮ İ HǼǺI



4. PovertyIncidenceandEmploymentWorsened

Despite the fact that the economy showed slight improvement in

quarter IV 2013, unemployment increased in August 2013. Open

unemployment rose to6.3% inAugust 2013 from6.1%during the same

periodinthepreviousyear.Besides,basedonBPSpublication,thenumberof

peopleinIndonesianworkforceincreasedby150,000from118.05millionto

118.19million.Viewedfromthevantagepointofgender,theparticipationof

men and women in the work force declined from 84.42% and 51.39%,

respectively,inAugust2012,to83.58%and50.28%,respectively,inAugust

2013.Ingeneral,theparticipationofwomenintheworkcontinuestotrail

thatofmen.

Inthemeantime,basedonthestructureofemployment,inaccordance

with the position in August 2013, the contribution the population

workingintheagriculturalsectorcontinuestodecline.InAugust2012,

agricultural sector contributed 35.09% of the work force, but by August

2013, it has declined to 34.36%. The decline in the workforce in the

agricultural sector is in part attributable to the high wage differential

between wages offered in agricultural sector and other sectors such as

industryandtrade.Nonetheless,theagriculturalcontinuestobethelargest

sourceofemploymentinIndonesia,followedbytrade,socialservices,and

industry in that order. Nonetheless, workforce in the construction and

Industrysectorsalsodeclinedto 5.67%and13.43%in2013,from6.13%


14

XTNXV XTNSP XUNVW XTNTR XUNQRXSNUX

UUNQS URNTT USNWQ UQNSY USNSV UPNRX

VNXVNV

VNSVNQ

UNY

VNS

P

R

T

V

X

P

RP

TP

VP

XP

QPP

ǼĮ Ī MQQ ĂĴ ÕÓÔMQQ ǼĮ Ī MQR ĂĴ ÕÓÔMQR ǼĮ Ī MQS ĂĴ ÕÓÔMQS

Đ Ï ŁĮ ĎÏ Ī ŇÕÒǼŇÒĬĮ ÊÏ ÒÔĹĬĹÑÏ ÔĹŇŃËÏ ÔĮ HĎĈĒI

ǼĮ Ŀ Ï ŁĮ ĎÏ Ī ŇÕÒǼŇÒĬĮ ÊÏ ÒÔĹĬĹÑÏ ÔĹŇŃËÏ ÔĮ HĎĈĒI

ĖŃĮ Ŀ ÑŁŇŐĿ Į ŃÔËÏ ÔĮ HËĈĒI

Figure 14: Workforce Participation Rate by Gender and OpenUnemploymentinIndonesia,February2011–August2013(in%)Openunemploymentincreased


and13.87%in2012,respectively.

Inevitably, the increase in open unemployment, has led to higher

povertyincidence.Peoplewhowerecategorizedaspoor increasedfrom

28.07million(11.37%oftotalpopulation)inMarch2013to28.55million

(11.47%ofthetotalpopulation)inSeptember2013.Thedrasticincreasein

povertyisinpartattributabletotheriseininflationasadirectconsequence

ofgovernmentpolicyto raisefuelpricesinJune2013. Meanwhile,open

unemployment inAugust2013,was6.3%,whichrepresentedan increase

fromthepositioninFebruaryof5.9%.Theincreaseinpovertyin2013was

aggravated by rising income inequality reflected in the Gini Ratio,which

increasedfrom0.410in2012to0.413in2013.Thisatteststoineffectiveness

ofincomedistributionprograms.Risingincomeinequalitycontinuestogrow

amidstrisingeconomicgrowth.Tothatend,thereisneedforthegovernment

to increase its focus on equitable development rather than pursuing

economicgrowthforitssake.

Table 1: Population 15 Years Old and Above by Main Source ofEmployment,2011-2013(in%)

Contributionofpopulationtoworkforceintheagriculturalsectorcontinuestodecrease,whilethatintheindustryshowsanincrease


15

ǼĮ Ī Aug Feb Aug Feb Aug

Agriculture 38.17 35.86 36.52 35.09 35.05 34.36

ManufacturingIndustry 12.31 13.26 12.6 13.87 12.96 13.43

Construction 5.02 5.78 5.41 6.13 6.04 5.67

Trade 20.88 21.34 21.29 20.9 21.76 21.43

Transportation,Storage,andCommunication 5.01 4.63 4.61 4.51 4.59 4.55

Financing 1.85 2.4 2.46 2.4 2.64 2.63

Community,Social,andPersonalServices 15.29 15.18 15.4 15.43 15.37 16.44

Others 1.45 1.55 1.7 1.67 1.59 1.51

TOTAL 100 100 100 100 100 100

Đ Ï ĹŃČŃİ ÕÓÔÒŐ2011 2012 2013


Table2:DevelopmentsinPovertyandInequalityinIndonesia,2011-2013

PovertyincidenceandIncomeInequalityinIndonesiahaveincreased


(inmillionpeople) (in%)

Mar-11 30.02 12.49

Sep-11 29.89 12.36

Mar-12 29.13 11.96

Sep-12 28.59 11.66

Mar-13 28.07 11.37

Sep-13 28.55 11.47

NumberofPoorPeopleinIndonesiaGiniIndex

0.41

0.41

0.413

Year


B. MONETARY SITUATION AND FINANCIAL MARKETS

1. RupiahContinuestoDepreciate

High inflationarypressure in Indonesia isoftenattributable tonon-

monetary factors such as poor infrastructure, floods, and natural

disasters.Sucheventshaveoftenendedupsendingpricesof foodprices

higher,whichinturnfuelsinflation.InflationinJanuary2014rosesharply

compared to the position inDecember 2013 (8.08%, y-o-y). Besides, the

increaseinpricesofcommoditiesthatareundergovernmentdirectionand

control—suchastheincreaseinliquefiedpetroleumgaswhichoccurredat

thebeginningoftheyear—alsocontributedtothedrasticriseininflation.

InFebruary2014,thegovernmentsucceededindepressinginflationto

7.75%(y-o-y),whichislowerthanthepreviousmonth,8.22%(y-o-y).

ControloverinflationinFebruary2014isinpartattributabletoadoptionof

government policy that imposed import quotas based on closed system

whichisstillunderway.Impositionofimportquotasisstillunderway,until

pricesaredeemedrelativelystable. Intheeventfoodsuppliesaredeemed

sufficient,theimpositionofimportquotaswillbeputintoeffectonceagain.

Figure15:Inflation,February2011–February2014(y-o-y,in%)

InflationinFebruary2014was7.75%(y-o-y)


0

2

4

6

8

10

12

14

16

18

20

02/2011 08/2011 02/2012 08/2012 02/2013 08/2013 02/2014

Inflation,2012=100 Core Administered Volatile

Macroeconomic Dashboard Universitas Gadjah Mada 17

In order for the government to succeed in putting inflation under

control, there isneed forensuringthatdistributionof foodsupplies

runs smoothly which requires carrying out repairs on national

infrastructure. InFebruary2014,year-on-year,coreinflationwas5.26%,

while administered price component stood at 16.76%, and volatile

component was 8.73%. Meanwhile, based on month-to-month trend,

inflation in February 2014 was 0.26%, which was lower than 1.07%

registeredinthepreviousmonth.

ThecompositionofinflationinFebruary2014wasrelativelyevenforall

item categories, compared with the previous month, which was

dominated by food stuffs. Processed food, beverages, and tobacco,

contributedmosttoinflationinFebruary2014. Theexpenditurecategory

contributed0.08%oftotalinflationinFebruary2014whichstoodat0.26%.

Meanwhile, inflationof thatcategory is0.36%(m-t-m)or9.62%(y-o-y).

FooditemscontributedthelargestproportiontoinflationinJanuary2014,

Table3:InflationbyTypeofExpenditure,2011–2014

(2012=100,m-t-m,in%)

Foodpricescontinuetobeveryhigh;inflationforFebruary2014was0.26%

Notes:(1)Foodstuffs;(2)Processedfoods,Beverages,Tobacco;(3)Housing,Electricity,Gas,andFuels;(4)Clothing;(5)Health;(6)Education,Recreation,andSports;(7)Transportation,Communications,andfinance


(1) (2) (3) (4) (5) (6) (7)

15.64 6.96 4.08 6.51 2.19 3.29 2.69

3.64 4.51 3.47 7.57 4.26 5.16 1.92

5.68 6.11 3.35 4.67 2.91 4.21 2.2

Jan 3.39 0.46 0.56 0.25 0.29 0.05 -0.28

Feb 2.08 0.47 0.82 -0.59 0.56 0.19 0.08

Mar 2.04 0.4 0.21 -0.7 0.24 0.12 0.19

Apr -0.8 0.3 0.41 -1.13 0.22 0.15 0.1

May -0.83 0.35 0.75 -1.22 0.23 0.06 0.05

Jun 1.17 0.67 0.21 -0.29 0.23 0.04 3.8

Jul 5.46 1.55 0.44 -0.09 0.4 0.69 9.6

Aug 1.75 0.68 0.66 1.81 0.37 1.36 0.95

Sep -2.88 0.78 0.61 2.99 0.27 0.71 -0.79

Oct -0.62 0.55 0.26 -0.56 0.33 0.31 0.53

Nov -0.47 0.27 0.68 -0.03 0.34 0.11 0.02

Dec 0.79 0.73 0.44 0.17 0.16 0.06 0.56

Jan 2.77 0.72 1.01 0.55 0.72 0.28 0.2

Feb 0.36 0.43 0.17 0.57 0.28 0.17 0.152014

Tahun

2010

2011

2012

2013

Monetary Situation and Financial Markets


0.56%of inflationinFebruary2014of11.43%(y-o-y)or2.77%(m-t-m).

Besides, expenditure on housing, water, electricity, Gas, and fuels also

contributed0.25%,toinflationof7.63%(y-o-y)or1.01%(m-t-m),inJanuary

2014.

Meanwhile,basedoninflationin82largestcitiesIndonesia,mostcities

inIndonesiaregisteredinflationinJanuaryandFebruary2014.Based

ondatareleasedbyBPSinFebruary2014,55citiesexperiencedinflation.

Pontianak recorded the highest inflation of 2.73% (m-t-m). However, 27

citiesinIndonesiaexperienceddeflationinFebruary2014.Sibolgarecorded

thehighestdeflationof2.43%(m-t-m).Meanwhile,inJanuary2014,78cities

registeredinflation,withPangkalPinangpostingthehighestfigureof3.79%,

whilefourcitiesexperienceddeflation,withSorongregisteringthehighest

0.17%.

Highinflation,coupledwithlowerlevelofinternationalreservesthan

in previous years, stoked rupiah depreciation. The level of Indonesia

internationalreservesinJanuary2014wasUSD100.651billionorincreased

byUSD1.265 billion comparedwith the position in the previousmonth.

Figure 16: Indonesia International Reserves (billion USD) andDevelopmentsintheRupiahExchangerate(IDR/USD),February2011–February2014InFebruary2014,IndonesianregisteredthehighestlevelofInternationalreservesoverthelast9months


6,000

7,000

8,000

9,000

10,000

11,000

12,000

13,000

60

70

80

90

100

110

120

130

InternationalReserve(billion),LHS IDR/USD,RHS


Meanwhile, in February 2014, international reserve rose to USD 102.74

billion,orincreasedbyUSD2.09billion.Thepositivetrendhascontinued

since August 2013. Nonetheless, the level of international reserves put

Indonesiainapositionthatcouldberegardedasmorethansufficient.The

increaseininternationalreservesinJanuaryandFebruary2014wasinpart

duetoBankIndonesiaeffortstoimprovethecountry'stradeaccountposition

byimplementingBankIndonesiaregulation(PBI)No.15/17/PBI/2013on

ProtectingtheValueofSwapTransactions,andgovernmentbondsauctions

intheendofJanuaryandinmidFebruary2014.

Besides,BankIndonesiaregulationonprotectionofswaptransactions,

BankIndonesiaalsoimplementedrupiahexchangeratestabilization

effortsbydeepeningforeignexchangemarket.Theeffectofsucheffortsis

visible in improvements inexchangerateofRupiahwhichappreciatedby

4.84% to IDR 11,643/USD in February, which in brought to a stop the

depreciationofthecurrencythatbeguninNovember2013.InJanuary2014,

theexchangerateofRupiahstoodatIDR12,226/USD,whichrepresenteda

depreciationof0.3%comparedwith theposition inDecember2013.The

appreciation of Rupiah is in part attributable to the implementation of

governmentpolicythatinvolvedtheissuingofUSD4billionofgovernment

bondsdenominatedinUSdollars,whichwasaimedatattractinginflowof

globalinvestors.ThesellingofbondsisalsoaimedatstrengtheningRupiahin

thewakeofUSFed'sdecreaseinlevelofquantitativeeasingthattookeffectin

January2014. Thedebtsecuritiesissuedbythegovernmentconsistedof

bondswith10yearmaturity,couponrateof5.95%,and20yearbondswith

couponof6.85%,USD2billionineachcategory.

Inrelationtoeffortstocontrolrupiahexchangerate,BankIndonesia

through JISDOR (Jakarta Interbank Spot Dollar Rate) succeeded in

achieving international recognition. Singapore Monetary Authority

(MAS)witheffectfrom27March2014startedtoadoptJISDORastheofficial

exchangerateforRupiahdenominationsinSingaporemoneymarket. This

wasverymuchinlinewiththegoalofBankIndonesiaoflaunchingJISDORin

20May2013,whichhadthemaingoalofensuringthatRupiahexchangerate

Rupiahwasafairone. Asaconsequence,financialdeepeningisboundto

occurduetoimprovementinmarketefficiency.



DespiteinflationarypressureandweakeningRupiah,BankIndonesia

decidedtoleaveBIrateunchanged.BasedonminutesofBankIndonesia

council meeting that convened on 13 February 2014, BI rate remained

unchangedat7.5%.ThepolicyunderscoresBankIndonesia's intentionto

continuetocontrolinflationandimproveIndonesianbalanceofpayments

position. It is worth noting that, the last time BI rate changed was in

November2013whichatthetimewasraisedby0.25basispoints.

In general, interest rates have not shown significant movements in

JanuaryandFebruary2014comparedwiththepositioninDecember

2013.InterestrateonLPSguaranteedloans,increasedby0.25basispointsto

7.5%(rupiahdenominated)andby1.5%(onforeigncurrencydenominated)

inJanuary2014,whichremainedunchangedinFebruary2014.Theincrease

was aimed at ensuring that LPS continued to guarantee people's savings

amidstrisinginterestratethatoccurredinDecember2013. Ontheother

hand,interestrateontimedeposits3monthsshowedanupwardtrend,and

roseaboveinterestrateonloansaswellasBIrate. InDecember2013,

interestrateon timedeposits3monthswas7.61%,butrose to7.95%in

January 2014. This may be potential sign that banks are facing liquidity

problems.

Figure17:DevelopmentsinBIRate,February2011–February2014(in%)

BIrateremainedunchangedat7.5%inFebruary2014


3

4

5

6

7

8

9

02/2011 08/2011 02/2012 08/2012 02/2013 08/2013 02/2014


2. FinancialMarketsExudesOptimismastheYearEnded

Financial markets, Jakarta composite index (IHSG) showed positive

movements,whilegovernmentbonds(SUN)showedsomefluctuation

in January and February 2014. IHSG increased by 3.38% to 4,418.757

(December 2013 – January 2014), and continued that trend by posting

another increase of 4.56% to 4,620.216 (January – February 2014). The

strengtheningofIHSGinJanuaryandFebruary2014maysignalthatforeign

investors have started returning to Indonesia. On the other hand, the

movement of the yield on government bonds in the market, indicated

fluctuation that hovered around8.6% (December 2013), 9.01% (January

2014),and8.4%(February2014). Thisisbecauseyieldsfollowinflation.

Yieldincreasewheneverinflationincreases,aswasthecaseinJanuary2014,

anddeclinewheninflationrecedeswhichisalsowhathappenedinFebruary

2014.SUNbearingmediumtermmaturitysuchas10yearsisthefavourite

forinvestorsasitisconsideredasafeandsecureinvestment.Itservesasa

goodinvestmentincounteringthepotentialfornegativesentimentsinthe

financialmarkets,anditissufficientlyliquidinthesecondarymarket.

Figure18:DevelopmentsinInterestRateonLPSGuaranteedLoansandDeposits,2011–2014*(in%)

LPSraisedinterestrateonguaranteedloans,3monthdepositrateishigherthanBIrateandLPSinterestrate

*=January2014(timedeposits)danFebruari2014(LPSguaranteedloans)


4

5

6

7

8

9

10DepositRateMaxGuarantee(IDR,1Month) TimeDepositRate3Months



After initially registering a decline in quarter III-2013, capital and

financial account begun to show an upward trend in IV-2013. The

surplusonthecapitalandfinancialaccountincreasedfromUSD5.6billion

to USD 9.2 billion, which represents an increase of 65.4% quarter-to-

quarter.Theincreaseinthesurplusisattributabletothedrasticchangeinthe

componentsofotherinvestmentsthatoccurredinquarterIII-2013,which

initiallywas in deficit butmoved into a surplus in the following quarter.

Directinvestmentandportfolioinvestmentcontinuedtoregisterasurplus.

Thevalueof direct investment andportfolio investmentdeclined in

quarter IV2013.The largestdecrease indirect investmentwasUSD5.7

billioninquarterIII-2013toUSD1.6billioninquarterIV-2013.Meanwhile,

portfolioinvestmentexperiencedslightdeclinefromadecreaseofUSD1.9

billiontoUSD1.8billion.Inpercentageterms,thevalueofdirectinvestment

andportfolio investmentdeclinedby71.9%and9.6%during theperiod,

respectively.Thedeclineindirectinvestmentwasaresultofanincreasein

thedeficitondirectinvestmentabroadtoUSD2.5billioninquarterIV-2013,

farlargerthanUSD87milliondeficitinthepreviousquarter.Besides,the

surplusonforeigndirectinvestmentinIndonesiaalsodecreasedbyUSD1.7

billioncomparedwiththepositioninthepreviousquarter.

Figure19:MovementofIHSGandYieldonSUN10YearMaturity,February2011-February2014(in%)

IHSGcontinuedtostrengthenrightfromDecembertoFebruary;yieldonSUNdecreasedinlateFebruary2014

Source:IDX,CEIC,andBloomberg(2014)

0

1

2

3

4

5

6

7

8

9

10

0

1,000

2,000

3,000

4,000

5,000

6,000

IDXComposite,LHS YieldSUN10Year(%),RHS


OtherInvestmentsincreaseddrasticallyinquarterIV-2013.Inquarter

III-2013thevalueofotherinvestmentsregisteredadeficitofUSD2billion,

but movedbackintosurplus ofUSD5.9billioninthefollowing quarter.

According to the data from Bank Indonesia, The drastic increase in the

surplusonotherinvestmentsisattributabletowithdrawalofbankdeposits

heldoffshoreandnetsurplusonprivatesectorliabilities.

Compared with quarter–IV, 2012, the performance of capital and

financialaccount, registeredadecline.This is reflected in thevalueof

surpluswhichwashigherinquarterIV-2012(USD12billion),thanUSD9.2

billion registered in quarter IV-2013. On year-on-year basis, capital and

financialaccountpositionposteda23.1%decrease.

Balance of payments position in quarter IV-2013 improved. This is

indicatedbythebalanceofpaymentspositionthatregisteredasurplusof

USD 4.4 billion in quarter IV-2013. On the contrary, in quarter III-2013,

IndonesianbalanceofpaymentspositionplummetedintoadeficitofUSD2.6

billion. Improvement in balance of payments was a result of surplus on

capitalandfinancialaccount,andthedeclineinthedeficitonthecurrent

account.

Figure20:CapitalandFinancialAccountPosition,2010:Q1-2013:Q4(USDbillion)

Surplusonthecapitalandfinancialaccount,increased


-15

-10

-5

0

5

10

15

2010:Q1 2010:Q4 2011:Q3 2012:Q2 2013:Q1 2013:Q4

DirectInvestment PortfolioInvestmentOtherInvestment CapitalandFinancialAccountCurrentAccount



ComparedwithquarterIV-2012,balanceofpaymentspositionshowed

slightimprovement.InquarterIV-2012,duetoasurplusofUSD3.2billion

onthebalanceofpayments,whichincreasedinthesameperiodin2013to

USD 4.4 billion. On year-on-year basis, the surplus on the balance of

paymentsregisteredanincreaseof36.8%.

Figure21:BalanceofPayments2010:Q1-2013:Q4(USDbillion)

BalanceofpaymentscontinuedtobeinSurplusinquarterIV-2013


-15

-10

-5

0

5

10

15

2010:Q1 2010:Q4 2011:Q3 2012:Q2 2013:Q1 2013:Q4

TransaksiBerjalan TransaksiModaldanFinansial

SelisihPerhitungan NeracaPembayaran


C. GAMA LEI AND CONSENSUS ON

PROJECTION OF THE ECONOMY

1. GAMALeadingEconomicIndicator(GAMALEI)

GAMALeadingEconomicIndicator(GAMALEI)isamodel,whichwas

developedbyMacroeconomicDashboardteam,ofFEB,UGM,whichhas

theabilitytoundertakestateoftheartforecasting.Predictionresults

generatedbyGAMALEImodelhavetheability topredict thedirectionof

movements of Indonesian economy in future long before the event. The

predictionofthedirectionofmovementofIndonesianeconomyisdoneby

observingthemovementorchangeindirection,whichisproducedbythe

GAMALEImodelforacertainperiodoftime.GAMALEIiscompiledonthe

basisofstringentquantitativeandqualitativetestsandusingaselectionof

certainvariables,deemedtohavetheabilitytoproducethebestprediction.

GAMALEIhastheabilitytopredicttheeconomiccycleofIndonesian

economy(GDP)withimpeccableaccuracylongbeforetheevent.Thisfar,

GAMALEImodelhasalreadyshownitsaccuracyinpredictingthedirectionof

thattheeconomycycletakes.Inthistime,GAMALEIpredictsimprovementin

theperformanceofseveralkey indicators in Indonesiawhich in turnwill

continuetofeedintobetterimprovementoftheeconomyasawhole.Inthis

edition,GAMALEIpredictsthedirectionoftheeconomycycleastheyearof

politics,2014,takesshape.

GAMALEIiscompiledfromvariousindicatorswhichmustpassthrough

stringentstatisticstests.Anindicationofimprovementintheperformance

ofcertainvariablessuchasexportstoeconomicregions(ChinaandEurope),

internationalreservesposition(fromthevantagepointofmacroeconomic),

marketcapitalization andIHSG(inrelationtocapitalmarkets),arequite

influencial in macroeconomicconditions.Nonetheless, it isworthnoting

thatothermacroeconomicindicatorscanchangequicklyinjustacoupleof

weeksinfuture.


The uniformitywith respect to the pattern of economic growth

trajectory of Indonesian economy, coupled with results of the

projectionofthedirectionofcycleofIndonesianeconomyproducedby

GAMALEImodel,generatecomprehensiveprediction.Thepredictionof

thebusiness cycle focusesondeterminingwhether, themovementof the

economic cycle fallswithin an expansion phase or contraction in several

weeksinfuture. GAMALEI2013:Q4cyclestandsintheexpansionphase

(abovethepointoforigin)althoughthereisatendencytowarddeclining.An

example:economicgrowthinIndonesiain2013:Q4basedonyear-on-year,is

showedtoincrease.However,GDPcyclethatisgeneratedbythemodelshows

adownwardtrend,albeitduringtheexpansionphase.

GAMALEIinthisfiftheditionpredictsadownwardtrendinIndonesian

economiccycle(GDP).Nonetheless,basedonthemovementandpatternof

themovement of the economyboth year-on-year and quarter-to-quarter,

portendspossibilityof slight increase ineconomicgrowth in2014:Q1. In

otherwords,ifthegovernmentdoesnottakefulladvantageofthepotential

foreconomicgrowthwhichisshowntoincreaseyear-on-yearin2013:Q4,

suchamomentumtoimprovetheperformanceoftheeconomyislikelytobe

lost.

GAMALEIinthisfifthedition,predictsadownwardtrendinIndonesian

economy(GDP). Nonetheless,basedonthemovementandpatternofthe

Figure22:GAMALeadingEconomicIndicator

GAMALEIpredictsadownwardtrendintheIndonesiaeconomycycle

-8

-6

4

6

8

⁰

²

Q5 Q7 Q5 Q7 Q5 Q7 Q5 Q7 Q5 Q7 Q5 Q7 Q5 Q7 Q5 Q7 Q5 Q7 Q5 Q7

6448 6449 644⁰ 644¹ 644² 644³ 6454 6455 6456 6457

-54

-9

4

9

54

59

64

PDBCycle(LHS) GAMALEI(RHS)

GrowthYoY(RHS,± ) GrowthQtoQ(RHS,± )


movement of the economy both year-on-year and quarter-to-quarter,

portendspossibilityof slight increase ineconomicgrowth in2014:Q1. In

otherwords,ifthegovernmentdoesnottakefulladvantageofthepotential

foreconomicgrowthwhichisshowntoincreaseyear-on-yearin2013:Q4,

suchamomentumtoimprovetheperformanceoftheeconomyislikelytobe

lost.

2. ConsensusonMacroeconomicIndicatorProjections

OutcomeofconsensusshowsthatthevalueofthreekeyIndicatorsfor

Indonesia,interalia:economicgrowth,inflation,andexchangerateare

moving toward improvement from2014 to 2015. The consensuswas

achieved based on results of a survey conducted by the Macroeconomic

Dashboard team with respondents who were drawn from lecturers and

researchers in theFacultyofEconomicsandBusiness,UniversitasGadjah

Mada.

Ingeneral,realGDPgrowthin2014willnotdiffermarkedlyfrom2013.

RealGDP(y-o-y) ispredictedtogrowthwithintherangeof5.85%±

0.14%inquarterI-2014and5.86%±0.14%inquarterII-2014.Ona

yearbasis,realGDPfor2014and2015,ispredictedtogrowthwithinthe

range5.91%±0.14%and6.3%±0.3%,respectively.

TheRupiahexchangerateispredictedtoimproveandbecomemore

stablein2014.InquarterI-2014,Rupiahexchangerateispredictedwithin

therangeIDR/USD11,680±IDR/USD363.Inthefollowingquarter,rupiah

exchange rate is predicted to experience slight appreciation to the level

IDR/USD11,510±IDR/USD404.Onayearlybasis,rupiahexchangeratein

2014ispredictedtobeIDR/USD11,550±IDR/USD447andwillappreciate

in2015toIDR/USD11,130±IDR/USD589.

InflationinIndonesiain2014-2015ispredictedabove 5percent.In

2014,predictionoutcomesofIndonesianinflationshowthatitwillbewithin

therangeof5.58%±3.19%,whilein2015,inflationwillbetamedsomewhat

reaching the range of 5.22% ± 3.17%. Meanwhile, on quarterly basis,

Indonesianinflationinpredictedwithintherangeof 4.33%±3.46% and

4.25%±3.26%,inquarterI-2014andII-2014,respectively.

GAMA LEI and Consensus on Projection of The Economy


Table4:EstimationofrealGDPGrowth(y-o-y,in%)

Source:PrimaryData,calculated(2014)

Table5:EstimationofRupiahExchangeRate(IDR/USD)


Quarter-I2014 Quarter-II2014 Year2014 Year2015

Exchangerate 11.68 11.51 11.55 11.13

Range± 363 404 447 589

Table6:EstimationofInflation(y-o-y,in%)



Inflation 4.33 4.25 5.58 5.22

Range± 3.46 3.26 3.19 3.17


Growth 5.85 5.86 5.91 6.3

Range± 0.14 0.14 0.14 0.3


D. ASEAN: Registers Optimum Economic

Potential amidst Global and Regional

Economic Instability

In general, as the year 2013, came to an end, economies in ASEAN

(AssociationofSouthEastAsianNations)economicregionwereableto

registerslowereconomicgrowthhencehavenotyettoreachtheirfull

potential. Suboptimalregionaleconomy,was largelyattributable to the

performanceofIndonesiaandThailandin2013,whicharekeyplayersinthe

region,whichfellbelowthelevelachievedin2012. Basedonyearonyear

growth, in2013, Indonesia and Indonesia registeredeconomicgrowthof

5.8%and2.9%,respectively,whichwaslowerthan6.2%and6.4%,in2012,

respectively. Suchasituationiscauseforconcernconsideringthefactthat

oneoftheenginesofgrowthinAsia,ASEANonlyregisteredanaemicgrowth

of5%overthelastdecade,whichfallsfarshortofeconomicpotentialamidst

formidable economic challenges associatedwith the formation of ASEAN

EconomicCommunity2015.

Potential economic growth in the region faces both internal and

externalchallenges.Inadditiontotheglobalsituationthatcontinuestofar

below normal, volatile political stability in the region, is another major

challengefacingASEANregion. ThelatestchallengesASEANnationsface

emanate from problems in Thailand and Myanmar and dynamics in the

relations between Indonesia and Singapore.Moreover, another challenge

ASEANnationsfacetodayisinternalinnature,andrelatestotheneedtoseize

the economic opportunity which is being created by changing economic

structureofeconomies intheregion. Basedonapublicationreleasedby

ASEAN Secretariat in October 2013, therewere indications of significant

shiftsinstructuresofeconomiesinASEANregion,especiallywiththedecline

inthecontributionofagriculturalsectortoeconomiesintheregionandthe

development of service based economy. This is attributable to the

emergence of large cities that are becomingmetropolitan in naturewith

attendantgrowthanddevelopmentoffinancialservicesintheregion,aswell

asincreasingtendencyofsomeeconomiessuchasthePhilippinestobecome

importantsourceofforeignworkers.ThePhilippineswillintheforeseeable

futurereplaceIndiaasthelargestsupplierofforeignworkers.

29


Governments in ASEAN nations still face stiff obstacles in creating

sufficient job opportunities to meet the burgeoning unemployment

whichisattributabletodemographicboomand inabilitytoprovide

sufficientrequisiteinfrastructuretosupporteconomicproductivity.As

anexample,thePhilippines, Malaysia, Vietnam,Indonesia,Myanmarand

Cambodia, are countries that face high growth of productively active

populationwhilethedependencyratiosarefalling,whichwilltranslateintoa

boon for development the potential of their economies. Such economic

capital,unlessmanagedwell,byASEANgovernmentsposesthedangerof

underminingtheperformanceofeconomiesintheregion.

Philippinesregisteredthehighestgrowthintheregionin2013,posting

astaggering7.2%towardtheendof2013.Suchastaggeringgrowthwas

notonlythehighestinASEANregion,butalsothehighestinASIAingeneral.

Philippineseconomyhasachievedsuchrapideconomicgrowththankstoits

success in being rated as Investment Grade by Moody's in 2013, high

proportion of private investment and government expenditure in the

structureoftheeconomycomparedwithothereconomiesintheregion,low

proportionofexportsandimportsinGDPwhichmakesitpossibletomitigate

adverseeffectofglobaleconomicinstabilityonthedomesticeconomy.

TheachievementofeconomiesinASEANwasalsodrivenbygrowthin

CLMV countries (Cambodia, Lao PDR, Myanmar, and Viet Nam).

MembersofCLMVcountrieswereabletoregisterhighereconomicgrowth

than ASEAN+6 (initial ASEAN countries), which are considered to have

Table7:GDPGrowthinASEAN,ConstantPrice,1998–2013(y-o-y,%)

PhilippinesandCLMVarethemaindriversofeconomicgrowthintheregion

Note:Averagegrowthfor1998-1999,2000-2007,and2008-2009

Source:IMFandCEIC(2014)

30

QYYXMQYYY 2000-2007 2008-2009

Asia'sCrisis ĒÔÏ Ī ŁĮ ĆÒŇŌÔĶGlobalCrisis

BruneiDarussalam 1.25 2.24 -1.85 2.6 2.20 1.60 1.00

Cambodia 8.50 9.93 3.40 6.1 7.10 7.20 7.20

Indonesia -6.15 5.04 5.30 6.2 6.50 6.20 5.78

LaoPDR 4.25 6.75 7.65 8.1 8.00 8.10 8.00

Malaysia -0.65 5.50 1.65 7.1 5.10 5.60 6.80

Myanmar 8.35 12.88 4.35 5.3 5.40 6.30 6.50

ThePhilippines 1.25 4.89 2.65 7.6 3.90 6.50 7.20

Singapore 2.05 6.36 0.50 14.8 5.10 1.20 3.70

Thailand -3.05 5.05 0.10 7.8 -0.10 6.40 2.90

VietNam 5.30 7.64 5.80 6.8 5.9 5.00 5.42

ASEAN -1.90 5.56 3.85 8.3 4.9 5.20 5.10

COUNTRIES 2010 2011 2012 2013


economies that aremoremodern. In 2013, CLMVcountries registered

economicgrowthof6.8%onaverage,whichishigherthanaveragegrowthof

ASEAN+6nations(BruneiDarussalam,Indonesia,Malaysia,ThePhilippines,

Singapore,Thailand),whichregisteredjust 4.57%.Higheconomicgrowth

registeredbyCLMVnationsisattributabletothefacttheeconomiesstillhave

hugeunexploitedpotential,which coupledwith improvement in political

stability and strong commitment of national governments to develop

facilitiesandinfrastructurenetworks, infulfilmentoftheircommitmentto

supportregionalMasterPlanonASEANConnectivity2015.

High inflation inASEANeconomies isoneof themajorobstacles the

economies face in achieving optimal economic growth requisite for

making significant improvement in social welfare of their citizenry.

During2013,Indonesiawasthecountrythatregisteredthehighestinflation

in the region, leading her to fall into the category of countrieswith high

inflationintheregionsuchasLaoPDRandVietnam.Unlikeothercountries

intheregionwhichhavesucceededinputtinginflationundercontrol(below

3%),theIndonesiangovernment,LaoPDRandVietnamhavesofarfailedto

Figure23:ConsumerPriceIndex(CPI)inASEANNations,2000-2014*(y-o-y,%)

Inflationlevelthatcontinuestobehighposesathreattoeconomiesintheregion

44

46

48

4⁰

4²

54

56

58

5⁰

5²

64

6455 6456 6457 Jan©58(YoY)

BruneiDarussalam

Cambodia

LaoPDR

Malaysia

Myanmar

ThePhilippines

Singapore

Thailand

VietNam

Indonesia

*=DataforBruneiDarussalam,Cambodia,andMyanmarrelatetoDecember2013position(y-o-y).DataforIndonesia,LaoPDR.Malaysia,ThePhilippines,Singapore,Thailand,VietNamrelatedtothepositioninJanuary2014(y-o-y)

Source:Bloomberg(2014)

31

ASEAN


emulateexamplesoftheircounterpartsinredressinghighinflationintheir

economies.

The latest developments which are based on inflation figures for

January2014,releasedrecently,showthatIndonesiacontinuestohave

thehighestyearonyearinflationintheregion.IndonesiaregisteredCPI

of8.22%whichissignificantlyhigherthanLAOPDR,withthesecondhighest

inflation of (5.99%) and Viet Nam (5.45%). Inflationary pressure on

economiesintheregionshouldthereforeassumemoreimportanceamong

ASEANnationsasitsignificantlyaffectscollectivepreparationsleadingtothe

formationofASEANEconomicCommunity2015.

Thus, demographic boom phenomenon puts ASEAN Nations in a

position to register high economic growth. High growth of actively

productivepopulationcoupledwithimprovementinsocialwelfarehavethe

potential to promote high industrial and household consumption.

Nonetheless, it is regrettable thatmostof theconsumptionconstitutesof

importedwhichdonotonlyposepotentialdangertostokeexchangerate

fluctuationbutalsoincreasethelikelihoodofimportedinflation.

Capitalmarketsinregionshowmixedresults.Somecountriesregistered

drasticdeclinein2013 forexampleCambodia(-17.74%) and Thailand(-

11.58%), others registered drastic growth for example the Philippines

(62.30%)andVietNam(23.06%),whileothersrecordedslightgainssuchas

Table8:GrowthinCapitalMarketIndicesinASEAN,2009–2014(y-o-y,%)

ThePerformanceofCapitalMarketsinASEANismixed

Note:Dataforthepositionon28February2014isgrowthbasedonyear-to-Date


32

ǺÉĖÈĔËČÆĒ 2009 2010 2011 2012 2013 Feb28th2014

BruneiDarussalam

Cambodia -17.74 MQNUW

Indonesia 87.9 46.9 3 13.3 0.25 6.77

LaoPDR 35.1 3.86 3.09

Malaysia 45 19.5 0.8 10.3 10.54 -1.68

Myanmar

ThePhilippines 60.3 55.7 1.9 21.1 62.3 7.36

Singapore 64.5 10.1 -17.1 19.7 0.24 -2.01

Thailand 66.1 39.2 -0.9 35.9 -11.58 7.68

VietNam 56.6 -2.8 -20.9 7.7 23.06 16.25

DoesnothaveCapitalmarket





Indonesia,LaoPDRandSingapore.

Capital market growth in the region reflect optimism of market

practitioners about the ASEAN economies but also are wary of the

potentialvulnerabilityofthefinancialsystemsintheregion.Thedeluge

offoreigncapitalinflowwhichfallsintowhatpunditsdescribeashotmoney

poses thedangerofanalmost instantaneousdrasticwithdrawalof funds

fromeconomieswhichinturncanunderminestabilityoffinancialsystemsin

the region at a time when they are facing growth momentum. Another

potential danger to financial systems of ASEAN member nations is the

increaseinhouseholddebtwhichisattributabletorisingconsumptionof

luxuriesandcontemporarygoodsbythemiddleclass. Theincreaseinflow

capital flows toASEAN region,whichhovered aroundUSD144billion in

2013,which isnot significantlyhigher thanChina that receivedUSD121

billion.

Some investment analysts and market practitioners expressed

optimismthattheinflowofforeigncapitalintoASEANeconomieswill

notreversecourseinthenearfuture.Suchoptimismisbasedonthebelief

thatinvestorshaveyettofindabetterinvestmentdestinationthatcanoffer

as an attractive and safe an environment for their funds as long as high

uncertaintyin globaleconomypersists.Moreover,analystscontentevenif

investorsweretowithdrawaltheirfundsinaninstantinlargeamounts,the

effectontheeconomiesintheregionwillnotbeasdevastatingaswasthe

caseduringAsiafinancialcrisisin1998astheexperiencein1998havesince

ledtoimprovementinfinancialsystemregulationaswellastherelatively

highlevelofinternationalreserveswhichcanavertthedrasticplungeinthe

valueofcurrenciesintheregion.

BalanceoftradeinASEANregionisfacingpressurefromvariousangles.

Thishasmuchtodowiththeimpactofeconomicrecessionthatcontinuesto

affectWesternEuropeannationsandweakeningeconomicgrowthinChina

over the last few years,which have led to a decline in exports as global

demand tookahit. In fact tradeamongdevelopingcountrieswhichoften

offsets decline in demand in developed nations, seems impotent at the

momentgivenweakeningeconomicgrowthinBrazil-thelargesteconomyin

the South as well as problems that are bedevilling other developing

countries.

33

ASEAN


Thedeclineinthebalanceoftradeintheregionhasinturnledtothe

weakening of exchange rates of all currencies in the region against

UnitedStatesDollar(USD). Moreover,withtheongoingtaperingofthe

quantitativeeasingprogram,thepotentialforevendeeperdepreciationof

currenciesintheregionisevenhigherduetorisinginstabilityinthefinancial

marketsandcapitalmarketsintheregion.

Capital markets in ASEAN registered slight increase, as has been

discussedinanearliersection.Nonetheless,thesamecanbesaidabout

financialmarkets.Thisisreflectedinthedepreciationthatcurrentlyaffects

almostallcurrenciesintheregionduring2013.Indonesia,Rupiahsuffered

thedeepestdepreciationofthemagnitudeof26.92%andMyanmar“Kyat”

whichdepreciatedby14.93%,whicharetwokeyeconomiesintheregion

thathavenotbeenabletopreventthedepreciationoftheircurrenciesfrom

hittingtheunder10%threshold,ashasbeenachievedbyothercountriesin

theregionin2013.

34

Table6:ExchangeRateofASEANCurrenciesAgainstUSD,2009–2014(y-o-y,%)

During2013,allASEANcurrenciesdepreciatedagainstUSD

*=in2012Myanmarrevalueditscurrency

Note:Dataforthepositionon28February2014arebasedonYear-to-Dategrowth


COUNTRIES 2009 2010 2011 2012 2013 Feb28th2014

BruneiDarussalam 4.17 7.97 0 4.72 -2.48 -0.8

Cambodia -2.21 0.81 0.3 1.76 -0.33 0.25

Indonesia 14 5.79 0.36 -8.72 -26.92 4.51

LaoPDR -0.05 3.53 0.56 1.77 -2.07 0.12

Malaysia 0.59 9.17 -3.26 4.42 -8.58 0.3

Myanmar 0.32 0.16 0.48 -13360* -14.93 0.45

ThePhilippines 1.44 5.73 0.09 7.05 -9.03 -0.54

Singapore 3.45 8.57 -0.78 5.43 -3.28 0

Thailand 4.52 9.32 -6.26 4.25 -7.96 0.79

VietNam 6.7 -5.71 -7.97 2.05 -2.36 0.02


E. CURRENT ISSUE

LegislativeElectionsandHopeForChange

AkhmadAkbarSusamto

Thegenerallegislativeelections(Pileg)2014isimminent.Basedonphases

oftheconductoftheelection,whichthenationalelectionscommissionhas

released, elections for electing members of regional representatives

assembly,nationallegislativeassembly,andregionallegislativeassemblyare

slatedfor9April2014.Theelectionswillfeatureindividualcandidatesvying

forregionallegislativeassemblyseats,12politicalpartiesthatwillcontest

for seats in thenational assemblyand regional legislativeassemblies, of

which11are'old'politicalpartieswhileoneisanewpoliticalparty.

Thequestionistowhatextentshould2014generalelectionsbeexpectedto

producegood,credibleandreliablerepresentatives?Isthereanypossibility

thatthegeneralelectionsthistimearoundwillbedifferentfromprevious

episodesandserveasaninitialphaseinthedirectiontowardchangeforthe

better?

Basedonmycontention,answerstotheabovequestionsarenoteasytocome

by. ThishasnothingtodowithwhetherornotIdisagreewithpervasive

disappointment of most of the population with the performance of

representativeswhocametotheforeintheaftermathofpreviousgeneral

elections. ItisnotalsotruethatIhavestrongbeliefintheideathatchange

willoccurjustbecauseofthelargenumberofyoungvoterswhohavehigh

informationliteracythatbased on simplecalculationsareestimatedtobe

around 40 million. On the contrary, this is because answers to the two

questionsareendogenousinnature.

Likethefirstlecturethatbearsthetitle“10principlesofEconomics”,which

lecturesteachtonewstudents,thebehaviorofindividualsinaneconomy

verymuchdependsonamongothers,incentives. Thegoodperformanceor

thelackofit,ofmembersoflegislaturewhowillassumetheirrolesinthe


¹ MancurOlsonmentionsvotingaspublicgoods.Onecanstillgetthebenefitsofvotingresultsdespite choosing not to vote. However, as a consequence (corollary), there will be wellorganized special interest groupswhichwill have a greater influence inpolitical decision-making.SeeMancurOlson(1965),TheLogicofCollectiveAction:PublicGoodsandtheTheoryofGroups,Cambridge,MA,HarvardUniversityPress.

aftermathof2014generalelections,doesnotonlydependonpreferencesof

candidateswhowillbeelectedbutalsoaseriesofrewardsandpunishments,

whichthesocietycanaddresstothem,rightfromthecandidatureperiodto

fiveyearsasmembersoflegislature.

Unfortunately, society incentives has the tendency of giving thewrong

incentivestomembersofrepresentatives. Duringcandidature,membersof

thegeneralpublicarealreadycastigatingcandidateswhohavehighpotential

andhavebrillianttrackrecordsbyaccusingthemoftryingtoseizepower,

engagingindirtypoliticalpractices,andcorruption.Itisasifthemomentan

individualtakesthedecisiontoenterpolitics,allhis/hergoodpastrecords

becomenegative:Independencebecomespartisanship,objectivitybecomes

groupsubjectivityandcommonsensebecomesevil.Inlightofthat,adverse

selectiongainsground,asindividualswhoarecleanshowalotofreluctance

to join politics,while thosewho have shady characters, hence have little

reputationtolose,enterpoliticswithoutmuchado.

Polarizationtakescenterstageasthevotingdayapproaches.Onehand,isa

section of society which chooses not to vote, perhaps because there see

nothing to differentiate all candidates and political parties that are

participatinginthegeneralelections.Itisalsopossiblethatthedecisionnot

toparticipateintheelectionsismotivatedbythefeelingofdisappointment

withtheconductoflegislativeelectionswhichtothemisdevoidofhonesty

andfairness.Ontheotherhand,thereisasectionofsocietywhichbindsitself

to electing a certain candidate and certain political partywithout paying

considerationtothecharacterofeitherthecandidateorthepoliticalpartyor

both. Itisevenbetterifthechoiceisbasedonideologicalgrounds,rather

than pragmatic considerations that are based on fulfilling promises and

distribution of ill-gotten wealth and money politics, as has now become

common. Inthiscontext,whathappensisnotthecorollaryaccordingto

Mancur Olson (1965),¹ but tests and temptations for clean candidates.


² AnthonyDowns(1957),AnEconomicTheoryofDemocracy,NewYork,HarperandRow.

Convincingsomemembersofsocietywhoarecriticaltodesist fromtheir

stance of not voting in the general elections is no simple task, while

persuading some section of society that votes on the basis of pragmatic

considerations is not also a mean feat. The choice then is to follow the

pragmaticroot,whichincludesshoweringpotentialvoterswithpromisesto

distributeill-gottenwealth andmoneypoliticsorelseonelosesoutinthe

contest for people's votes. This is the more so given the representative

systemthatcharacterizeslegislativeinstitutionswhichisbasedproportional

representation rather than representation of plurality,makes votes from

smallpoliticalpartiesandcandidatesveryimportant.

Ingeneral,oncemembersofthelegislatureareanointed,andassumetheir

offices,theevaluationofthegeneralpublicabouttheirperformancebecomes

unduly overgeneralized. Formostmembers of society,whatever people's

representativesdo inparliament is consideredasbad. Thus, there isno

differencebetweenmembersofthelegislaturewhoarecleanandthosewho

arelessso,ortousethelocalterm,'rotten'. Nodifferenceismadebetween

oneissueandanother,betweenonepolicyandanotherpolicy. “Essentially

they are all bad.” To that end,wrong incentives take shape, as clean and

diligent representatives do not get the rewards, rather punishments are

metedouttotheminthesamewayasthoserepresentativesthatarenotclean

andperformpoorly.

Incentiveswhichrepresentativesgetfromsocietycanbewrongbecauseof

pervasiverationalapathyandrationalignorance.Rationalapathyreflectsthe

tendencytoignoreissuesandshowresignationtodifficultsituationthatis

considered extremely difficult to change. Meanwhile, rational ignorance

relatestothetendencyofnotwantingtoknow,becauseonedoesnotyet

knowanddoesnotwanttomakeeffortstoknow(Down,1957).²

Theonlywayincentivesthatsocietygivestopeople'srepresentativescanbe

changed is by willingness to pay sacrifice as well as paying attention,

collecting information and differentiating between clean and tainted

people'srepresentatives.Ontheelectionsday,registeredvoterscansome

contributionbymakingslightsacrificebyelectingthebestcandidates.Inany

Current Issue


case,nationalelectionscommissionregulationsondeterminingcandidates

whoqualifytobecomeelectedasourrepresentatives basedonthemost

votesacquiredstillenablesustochoosecarefullyandmeticulouslybetween

candidateswhoarecleanandthosethatarenot,evenwithinthesameparty.

After elected representatives are anointed and assume their offices, we

shoulddesistfromengaginginunnecessarilyvitrioliccriticismoflegislative

assemblymembers,andwhenevertheydotherightthing,thereisnothing

wrongifweshowerthemwithsomepraiseandplauditsfordoingtheirwork.

Despite the fact that it is not easy to make distinction between good

performingmembersofthelegislatureandthosethatarenot,creatingthat

differencewillprovideastrongandrightincentivethatwillemboldenthem

intheirfuturework.

Tothatend,goingbacktothequestionthatwasposedatthebeginningofthis

pieceontheextenttowhich2014legislativeelectionswillbetheinitialphase

towardchange,theanswerthereforedependsonoutattitude!Theproblemis

thatarewereadytochangeourattitude?


F. Economic Outlook

As the year 2014 begun, Indonesian macroeconomic condition which

registeredsomestabilitycontinuestofacepotentialinstabilityasaresultof

the tapering off policy implemented by US Federal reserve as well as

weakeningeconomicgrowthinChina,JapanandIndia,andtheemergencyof

anotherhotspotcreatedbyprobleminUkraine.Thisisthemoreso,giventhe

fact that the current level of international reserves is to a large extent

underpinnedbygovernmentglobalbondissuingtothetuneofUSD4billion

inJanuary2014.Thesamecanbesaidabouteconomicgrowthwhichhas

registeredslightperformanceinquarterIV-2013of5.72%,continuestoface

formidablechallengesandthreatsthatarediscerniblefromthechangein

surplusinthebalanceoftradeingoodsaccountinOctober–December2013,

intoadeficit,whichislargelyattributabletogovernmentpolicythatforbids

exportsofunprocessedmineralsaswellastherisingdeficitontheoilandgas

tradeaccount.Thisiscoupledwithadeclineinthesurplusonthenon-oiland

gastradeaccountinJanuary2014.Thisisthemoreconcerningconsidering

thefactthatinvestmentgrowthfaceddownwardpressureinquarterIV2013

intherun-uptothegeneralelections.Thisisdespitethefactthatgrowthin

theprocessingindustrialsectorshowssignsofimproving.Theconductofthe

elections will also increase consumption expenditure, which in turn will

strengthendemand.

Thus,variouseconomicandpoliticaldevelopmentsinIndonesiaarelikelyto

continue toposepotential economic instability in future. Inotherwords,

despitethefactthatGAMALEIpredictsslighteconomicgrowth,Indonesian

economystillfacespotentialvolatility.Thatsaid,theprocessandoutcomeof

the general elections will make a great extent influence conditions of

Indonesianeconomyinthefuture.Intheconductofgeneralelectionsgoes

smoothly, safely, and peacefully, and elections produce people's

representativeswhoarecredibleandhavetheabilitytomakeimprovements

in Indonesia, there is a lot of hope that macroeconomic instability will

39


diminish, and economic growth will increase significantly as investment

growthwillpickuppace.Tothatend, letusprayforaflawless,safeand

peaceful conduct of 2014 general elections as well as produce

representatives who will have the ability to introduce and make

improvementsinIndonesia.Thatway,theeconomywillgrowanddevelop,

paving way for the emergence of a just, socially wealthy and advanced

Indonesia.Let'shopeso.


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INDONESIAN ECONOMIC REVIEW AND OUTLOOK

MACROECONOMIC DASHBOARD TEAM

MACROECONOMIC DASHBOARD

FAKULTAS EKONOMIKA DAN BISNIS

UNIVERSITAS GADJAH MADA

Prof. Dr. Sri Adiningsih, M.Sc.Head of Researcher

[email protected]

+62 274 548 517 ext 373

Prof. Dr. Samsubar Saleh, M.Soc. Sc.Senior Researcher

[email protected]

+62 274 548 517 ext 373

Rosa Kristiadi, M.CommResearcher

[email protected]

+62 274 548 517 ext 373

Reinardus Adhiputra Suryandaru, S.E.Junior Researcher

[email protected]

+62 274 548 517 ext 373

Ade FebriadyResearch Assistant

[email protected]

+62 274 548 517 ext 373

Zira Brenda WirantiResearch Assistant

[email protected]

+62 274 548 517 ext 373

Prof. Dr. Tri Widodo, M.Ec.Dev.Senior Researcher

[email protected]

+62 274 548 517 ext 373

Muhammad Ryan Sanjaya, MIntDevEc.Researcher

[email protected]

+62 274 548 517 ext 373

Galih Adhidharma, S.E.Junior Researcher

[email protected]

+62 274 548 517 ext 373

Ganendra WidigdyaResearch Assistant

[email protected]

+62 274 548 517 ext 373

Traheka Erdyas BimanatyaResearch Assistant

[email protected]

+62 274 548 517 ext 373

Mohammad Rizki HutomoResearch Assistant, Web Developer, and Layout

[email protected]

+62 274 548 517 ext 373

thPertamina Tower Building 4 fl. Room 4.1

Jl. Humaniora No. 1 Bulaksumur, Yogyakarta 55281

Phone: +62 274 548 517 ext 373

Email: [email protected]

Website: www.macroeconomicdashboard.com

IERO NO 1/YEAR III/MARCH 2014

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Transcript of IERO NO 1/YEAR III/MARCH 2014