Iero no 2 year ii june 2013

INDONESIAN ECONOMIC

REVIEW AND OUTLOOK

Macroeconomic DashboardFaculty Economics and BusinessUniversitas Gadjah Mada

No 2/Year II/June 2013

Kemacetan di YogyakartaAntrian pembelian BBM

Potret kemiskinan di Indonesia

ForewordIndonesian Economic Review and Outlook (IERO) is a

quarterly bulletin which is published by the

Macroeconomic Dashboard, Department of Economics –

Faculty of Economics and Business, Universitas Gadjah

Mada (FEB-UGM) in collaboration with PT Bank

Mandiri, Tbk.

The current IERO theme is the “Indonesia Economy

becomes a hostage of the fuel,” in the midst of the large

economic pressure, shadowed by the global economy

uncertainty. In addition, the ambiguity – whether the

subsidized fuel price will rise or not – has worsened the

situation. Yet, it is a dilemma. If the fuel price goes up, the threatening high inflation will

happen. On the other hand, if the fuel price stays the same, the national financial burden

will increase at the rate that may collapse the state budget (APBN). The global condition

as well as the Indonesian dilemma upon the subsidized fuel will have negative impact

upon the Indonesian Economy. This, in fact, is match to what the GAMA Leading

Economic Indicator (GAMA LEI) has predicted.

GAMA LEI is an indicator that produced by the Macroeconomic Dashboard to forecast

the Indonesia future Economy. The GAMA LEI is proven to have an accurate prediction.

In its past editions GAMA LEI had predicted the decellaration of Indonesia Economic

Growth. Although as such upstreamed the Indonesian Government (including Bank

Indonesia) and other International organization (i.e. Asian Development Bank)

projections – which believed that Indonesia Economy would be better – yet in reality

GAMA LEI prediction was right. Hence, GAMA LEI enables the public and business

decision makers to grasp the future economy so that they can anticipate the situation.

Given such contemporary themes provided by the IERO publications, it is a hope that

public policy and business decision makers, including academia, may acquire actual

information concerning the Indonesian economy.

Enjoy reading

Prof. Dr. Sri Adiningsih, M.Sc

Head of Researcher

Macroeconomic Dashboard

Indonesian Economic Review and Outlook

Macroeconomic Dashboard Universitas Gadjah Mada

1

I. Latest Economic Developments

he Indonesia's economy, which is measured by the amount of

of Gross Domestic Product (GDP) at current prices registered Tgrowth from IDR 1,975.5 trillion in Q1 2012 to IDR 2,146.4

trillion in Q1 2013. Meanwhile, GDP at constant prices 2000 increased

from Q1 2012 amounted for IDR 633.2 trillion to IDR 662.0 trillion in

Q1 2013.

However, as predicted by GAMA LEI, the Indonesia's economic

growth in the Q1 2013 registered slight growth of just 6.02%, which

was lower than 6.29% posted in the same period in 2012 and even

lower than 6.1% in Q4 2012. This is the second time GAMA LEI has

been able to predict precisely the signs of slower economic growth.

On the contrary, predictions of the Indonesian government, pointed

to signs of stonger economic growth. Moreover, Bank Indonesia had

projected economic growth of 6.2% in the first quarter 2013 which was

atrributable to strong investment and household consumption

expenditure. Besides, GAMA LEI also succeeded to outperform

predictions of the Asian Development Bank, which pointed to growth

of 6.4 % of the Indonesian economy. The reality is that the Indonesia's

economy experienced lower growth in the Q1 2013 than predictions

of economic analysts'experts, which is commensurate with results of

GAMA LEI research that stressed the fact that the performance of the

Indonesia's economy in early 2013 would not be better than that

posted in the previous year.

Subsequently, based on industrial origin, with the exception of

Mining and Quarrying, which contracted by 0.43% (YoY), all other

sectors posted growth in Q1 2013. Meanwhile, sectors that registered

high growth in Q1 2013 on a year-on-year basis include Transport and

Communication (9.98%), followed by Financial, Ownership, and

Business Services (8.35%), also the Construction sector (7.19%).

From the vantage point of expenditure, slow economic growth in Q1

2013 was attributable to contraction in domestic demand and a

weakeaning export. Household Consumption also posted slower

growth as a result of lower purchasing power caused by high prices of

food commodities and inflation expectations that were genetared by

uncertainty that continue to surround prices of subsidized fuel prices.

Meanwhile, Government Consumption showed slow growth at the


2

Latest Economic Developments

start of the year due to the low absorption rate of government

expenditure in general and on goods, in particular. On the other

hand, investment started to slow down due to limited domestic and

international demand. Besides, as the general elections approaches,

investors are expected to go into a “wait-and-see” attittude. To that

end, slower growth in investment and consumption has induced

contraction in imports. Based on year on year figures, Household

Consumption posted in Q1 2013 grew by 5.17%, Government

Consumption registered 0.42% growth, Gross Fixed Capital

Formation grew by 5.90%, while Exports increased by 3.39%, and

imports contracted by -0.44% .

As a way forward, the government can implement a number of

policy alternatives to strengthen economic growth in the Q2 2013.

One such policy is to accelerate the state budget absorption, which

still has less contribution on Indonesia economic growth.

Additionally, it is an onus on the government to maintain consumer

confidence by ensuring that purchasing power on the general public

is not undermined as well as providing low inflation. There is also

need for the government to increase its focus on revitalizing

infrastructure which is vital for improving investment. This is an

issue that calls for urgent attention as slower investment is not only

due to insufficient incentives but also the availability of sufficient

requisite infrastructure, supporting institutions, and sound

macroeconomic conditions

Figure 1: Growth Rate of GDP at Constant Price 2000 by Industrial Origin, 2005 – 2013* (YoY, in %)

Economic Growth in Q1 2013 was merely 6.02%, the lowest growth rate over the last three years.

Source : Central Bureau of Statistics (BPS) and CEIC (2013)

0

1

2

3

4

5

6

7

8

-2

0

2

4

6

8

10

12

14

16

18

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 2013:Q1

Agriculture, Liv estock s, Forestry and Fisheries Mi ni ng and Qua rrying Ma nufac turing E lec tricity, Gas a nd Wa ter Supply Construction

Trade, Hotel and Res taurant T ra nsport and Communica tion Financia l, Ownership and Business S ervices GDP (RHS)(%) (%)



3

.Although Indonesia's economy growth continued to slow down,

the unemployment rate (TPT) by February 2013 reached 5.92%,

which represents a decrease from 6.14% in August 2012, as well as

the figures registered in February 2012 (6.32%). Nonetheless, the

decrease in unemployment rate, which is equivalent to 440,000

people, from 7.61 million in February 2012 to 7.17 million in

February 2013, is by all accounts small. This is the more so, given the

fact that the number of underemployment rose from 12.77 million in

August 2012 to 13.56 million in February 2013.

The number of economically active population in Indonesia between

February 2012 and February 2013 increased by 780,000 people, from

120.41 million people in February 2012 to 121.19 million people in

February 2013. Nonetheless, there was a decrease in labor force

participation rate of 0.45% during the same period of time (February

2012 – February 2013)

The labour force participation rate in February 2013 was 69.2%,

which represented a decrease from 69.66% in February 2012.

Nonetheless, in comparison with August 2012 figures (67.88%), the

labor force participation rate for February 2012, represented an

increase.

Based on structure of main industry, there isn't any significant

change in the main source of employment between February 2011

Figure 2 : Growth Rate of GDP at Constant Price 2000 by Expenditure, 2005 – 2013* (YoY, in %)

GDP growth slowdown in Q1 2013 due mainly to a moderation in domestic demand and investment amidst

limited recovery of the export sector

Source : Central Bureau of Statistics (BPS) and CEIC (2013)

-30

-20

-10

0

10

20

30

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 2013:Q1

CONSUMPTION EXPENDITURE : HOUSEHOLD CONSUMPTION EXPENDITURE : GOVERNMENT GROSS FIXED CAPITAL FORMATION EXPORT IMPORT(%)

Macroeconomic Dashboard Universitas Gadjah Mada4

and February 2013. Agriculture, trade, social services, and industrial

sector continued to be major sources of employment in Indonesia.

The number of people employed was higher in February 2013

compared with that in February 2012. The number of people

employed increased by 790,000 people during February 2012 -

February 2013, with trading sector contributing 3.29%. A similar

trajectory is evident in the construction sector, which posted an

increase of 12.95% from the previous year, as was the industrial

sector, which registered an increase of 4.01% from 14.21 million

people in February 2012 to 14.78 million people in February 2013.

Nonetheless, some sectors showed a decrease in number of people

employed in February 2013 are the agricultural sector and other

sectors, which posted decrease for about 3.01% and 5.73%

respectively compared to February 2012.

A decrease in unemployment rate makes a positive contribution in

poverty reduction. Based on the latest BPS data, the number of

people categorized as poor in Indonesia was 28.59 million in

September 2012 (11.66%), which was decrease from 36.1 million

(16.66%) registered in February 2004. If compared with the number of

poor people in March 2012, the number of poor people decreased by

0.54 million.

Figure 3: The Labor Participation Rate and Unemployment Rate in Indonesia,

February 2005 – Febuary 2013 (in %)

The labor force situation in Indonesia shows improvement in number of economically active population

as well as in reducing unemployment rate, despite an increase in underemployment rate

Source: BPS and CEIC (2013)

68.0

66.8 66.7

66.2

66.667.0

67.3 67.267.6

67.2

67.8 67.7

70.0

68.3

69.7

67.9

69.2

10.3

11.2

10.5 10.3

9.8

9.18.5 8.4

8.17.9

7.47.1

6.8 6.66.3 6.1 5.9

0

2

4

6

8

10

12

64

65

66

67

68

69

70

71

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




5

However, it is worth noting that the poverty line used in September

2012 was IDR 259,520 per capita per month, which is an increase of

4.35% compared with the level used in March 2012. On closer

observation, therefore, there is no significant reduction in the number

of poor people. As an illustration, based on poverty line of IDR 259,520

per month, a family

which comprises a husband, wife, and one kid, with a single source of

income of IDR 800,000, is not categorized as poor. Nonetheless, there is

little doubt that living standard of such a family is far from decent.

Based on the area of living, the number of poor people in Indonesia

living in urban and rural areas decreased by 0.14 million (0.18%) and

0.40 million (0.42%) respectively from March 2012 to September 2012.

The number of people categorized as unemployed and poor

decreased, as income per capita in Indonesian increased from USD

3,004.9 in 2010 to USD 3,596.27 in 2012 (CEIC, 2013).

Nonetheless, such rosy condition should not induce complacency by

government, given the fact that in the not too distant future, prices of

subsidized fuels will be raised. Undoubtedly, the hiking of prices of

subsidized fuels will induce an increase in prices of gods and services

including basic commodities, and consequently contribute to an

increase in the number of poor people in Indonesia. The Indonesian

government's policies to mitigate the adverse impact of the increase in

prices of subsidized fuels on the number of poor people will involve

various compensation packages, such as a temporary direct assistance

Table 1: Population 15 Years of Age and Over Who Worked by Main Industry, 2011 – 2013*

(in millions people)Until February 2013, Agriculture, trade, social services, and indutrial sector, continued to be

the main source of employment.

Source : BPS Press Release No 35/05/Th.XVI, 6 Mei 2013

Main Industry 2011 2012 2013

February August February August February

Agriculture 42.48 39.33 41.20 38.88 39.96

Manufacturing Industry 13.70 14.54 14.21 15.37 14.78

Construction 5.59 6.34 6.10 6.79 6.89

Trade 23.24 23.40 24.02 23.16 24.81

Transportation, Storage, and Communication

5.58 5.08 5.20 5.00 5.23

Financing 2.06 2.63 2.78 2.66 3.01

Community, Social, and Personal Services

17.02 16.65 17.37 17.10 17.53

Others 1.61 1.70 1.92 1.85 1.81


6

for community (BLSM), a food subsidy program (Raskin), the family

of hope scheme (PKH), and scholarships for the poor (BSM).

However, some questions marks surround the effectiveness of the

package of policies. In any event, not few people consider such

compensation packages as political ploys and patronage to the

benefit of various Ministries whose cadres assume Ministerial

portfolios.

A review of Indonesian experience in the aftermath of an increase in

fuel prices in the past can shade some light on what to expect. The

Indonesian government raised prices of subsidized fuels from IDR

1,810/liter which took effect on 1 January 2003 to IDR 4,500/liter on 1

October 2005, the policy adversely affected people's purchasing

power. The drastic drop in people's purchasing power was

attributable to an increase in the cost of public transportation.

Consequently, the number of people categorized as poor increased

drastically to 39.3 million people (17.75%) in March 2006, which

represented a significant compared with 35.1 million people

(15.97%) registered in Febuary 2005. This was despite temporary

unconditional cash transfer (BLT), which the government

implemented with the intension of mitigating the impact of the

increase in prices of subsidized energy fuels on the well being of the

poor. Apparently, the surge in the number of poor categorized as

poor in the aftermath of the policy, attested to the fact that it was

potent enough to mitigate all the adverse effects of the policy on the

poor.

uptick

Table 2 : Number and Percentage of Poor People in Indonesia, 2004 – 2012

Number of Poor people in Indonesia shows a downward trend over the last 5 years.

However, the increase in prices of subsidized fuels is likely to trigger a drastic increase

in the number of poor people

Source : Press Release BPS No.06/01/Th.XVI, 2 January 2013

Year Number of Poor People in Indonesia

(in million people) (in %)

Feb – 04 36.1 16.66

Feb – 05 35.1 15.97

Mar – 06 39.3 17.75

Mar – 07 37.17 16.58

Mar – 08 34.96 15.42

Mar – 09 32.53 14.15

Mar – 10 31.02 13.33

Mar – 11 30.02 12.49

Sep – 11 29.89 12.36

Mar – 12 29.13 11.96

Sep – 12 28.59 11.66




57

II. Monetary Development in Indonesia

A. Money Supply

B. Inflation

In April 2013, the central bank registered an increase in the level of

money supply, M1 and M2 of IDR 836.51 trillion and IDR 3,364.12

trillion. If compared to the same period in the previous year, the level

of M1 and M2, showed an increase of 16% and 15% respectively.

The increase in money supply has a tendency of contributing to

depreciation of Rupiah and an increase in general level of prices. The

high growth in money supply contributes to high inflation as it

induces a rise in demand which if not accompanied by growth in the

real sector generates an increase in prices.

The level of inflation in Indonesia showed a decrease in May 2013,

weighed down by a decrease in commodity prices. Based on BPS

data, the level of general inflation year on year in May 2013 was

5.47%, which was lower than 5.57% recorded in March 2013. The

decrease in inflation in May 2013 was in part an impact of the Policy

implemented by the Ministry of Trade, which was embodied in the

Minister of Trade regulation No. 16/M-DAG/PER/4/2013 on the

importation of Horticultural products. The thrust of the regulation

laid in its provisions that loosened restrictions on the importation of

some agricultural products which included garlic. Besides, the

Minister of Trade implemented the regulation in the wake of a note of

complaint to Word Trade Organization (WTO), issued by the United

Sumber : Bank Indonesia dan CEIC (2013)

Figure 4: Money Supply, 2009 – 2013* (in IDR Trillion)

In April 2013 M1 increased by 16% while M2 rose by 15% compared to April 2012

0

500

1000

1500

2000

2500

3000

3500

4000

M1 M2IDR TRILYUN


Monetary Development in Indonesia

States which complained about increasing complications and

uncertainty of Indonesian import regime, which had adverse impact

on exports of US agricultural products to Indonesia. As the US trade

representative noted (2013), “import regulations in Indonesia

violate the obligations of WTO members, including 1994

agreements on Tariffs and Trade”.

In the meantime, core inflation and volatile show a decrease from

4.12% and 12.06% recorded in April 2013 respectively to 3.99% and

12.06% respectively in April 2013.

Figure 5: Inflation Rates by Component Group, 2009 – 2013* (YoY, in %)

Indonesia recorded lower annual inflation rates in the aftermath of loosening import restrictions on

agricultural products.


-1 0

-5

0

5

1 0

1 5

2 0

H E A D L IN E C O R E A D M IN I ST E R E D V O L A T IL E(% )


Figure 6: Inflation Rate by Expenditure Group, 2009 – 2013* (MoM, in %)Deflation which occurred in May 2013 was attributable to a decrease in prices of processed

food and clothing

-3

-2

-1

0

1

2

3

4

5

6 Food Processed Food, Beverages, Tobacco Housing, Electricity, Gas and Fuel Clothing Health Education, Recreation and Sports Transportation, Communication and Finance

(%)



9

Comparing to April 2013, the economy in May 2013 experienced

deflation of 0.03% which also means a decrease in the consumer price

index from 138.64 in April 2013 to 138.60 in May 2013. The deflation

is attributable to the decrease in prices of processed food category

and clothing category, these categories recorded -0.83% and -1.22% of

growth respectively in May 2013.

Despite a decrease in inflation rate, there is needed to anticipate the

potential impact of an increase in prices of subsidized energy fuels on

general level of prices. Based on Bank Indonesia predictions, the raise

in prices of fuel is projected to induce an increase inflation level to

7.76%. Based on government projections, the price of premium fuel

will be raised to IDR 6,500/liter, while solar will be raised to IDR

5,500/liter. However, there was still no information on the measures

Bank Indonesia will take to stymie the increase in inflation.

Bank Indonesia Board of Governors meeting on 13 June 2013 decided

to increase BI rate at level 6.0%. Nonetheless in the event the

government goes a head to raise prices of subsidized fuels, there is

little doubt that Bank Indonesia will have to adjust its monetary

policy. In line with BI's decision to increase BI rate by 25 basis point

(bps), Indonesia Deposit Insurance Corporation (LPS) has also

C. Interest Rate

Figure 7: Developments in the BI Rate, SBI, Bank Deposits, and Guarantee Rate,

2009 - 2013* (in %)Along with the increase of BI rate, the maximum guarantee rate has also risen by LPS as response on

high inflation expectation as well as to maintain sound macroeconomic and stable financial system

Source : Bank Indonesia and CEIC (2013)

0

2

4

6

8

1 0

1 2

D e p o s it R a t e 1 M o n th M a x G u a r a n te e 3 M o n th s B I R a te B a n k I n d o n e s i a C e r t if ic a t e s R a te 9 M o n th s( % )


10

increase the maximum guarantee rate by 25 bps for period between

June 15, 2013 and September 14, 2013. Consequently, maximum

guarantee rate on rupiah-denominated increase at level 5.75%. LPS'

decision in increasing the maximum guarantee rate is based on the

increase of BI rate as response on high inflation expectation as well as

to maintain sound macroeconomic and stable financial system.

In the meantime, in April 2013, the level of foreign exchange reserves

increased from USD 104.80 billion to USD 107.27 billion. The increase

in the level of foreign exchange reserves is attributable to Indonesian

government policy that involved the issuing global bonds in April

2013. The government issued international bonds to the value of USD

3 billion, of which USD 1.5 Billion has 10 year maturity bearing 3.34%

coupon, and USD 1.5 billion, with 30 year maturity, bearing 4.63%

coupon.

Nonetheless, the increase in the level of foreign exchange reserves in

April 2013 still falls short of USD 124.6 billion, the record since

Indonesia gained independence, which was registered in August

2011. However, in May 2013 foreign exchange reserve decrease again

to USD 105.149 billion.

By May 2013, both domestic and external factors continued to weigh

in on the movement of the exchange rate of Rupiah. With respect to

external factors, uncertainty of economic conditions of developed

nations, and compounded by down ward revision of economic

growth projection by IMF in April 2013, continued to exert

downward pressure on Rupiah. IMF predicts that the global

economy will grow by 3.3 % in 2013, which is lower than initial

projection of 3.5%. The revision of global economic projection is an

indication that economic recovery continues be bedevilled by

uncertainty.

With respect to domestic factors, Rupiah exchange rate has been

weighed down by negative sentiments that emanated from an

increase in inflation in March 2013, attributable to obstacles that

hampered the distribution of food and uncertainties that continue to

character government policy on subsidized fuels. Foreign investors

perceive government as very uncertain in raising fuel prices, which

has contributed to undermining confidence in Rupiah. In late May

Monetary Development in Indonesia



11

2013, the value of Rupiah depreciated by 0.82% (mtm) to IDR 9802 per

USD.

In the meantime, the movement of the composite share price index in

May 2013 shows an upward trend. The Indonesia Composite Index

(IDX) hovered around 5068, which is higher than 4453, registered at the

start of 2013 (represents an increase of 13.8%). However, the IDX is

likely to experience down ward correction once ramifications

associated with uncertainty of government policy on subsidized fuels

are factored in

Figure 9: The Exchange Rate of Rupiah and Share Prices, 2009 - 2013*

Uncertainty that shrouds the increase in prices of subsidized fuel, is one of the factors that has contributed

to the depreciation of Rupiah

Source: Indonesia Stock Exchange, Bank Indonesia and CEIC (2013)

0

2000

4000

6000

8000

10000

12000

14000

0

1000

2000

3000

4000

5000

6000

IDX ID R pe r U SD (R H S)ID X

Figure 8: Indonesian Foreign Exchange Reserves, 2009 - 2013* (in USD Billion)

The increase in Foreign exchange reserves until April 2013 is propped up by the issuing of foreign

currency denominated global bonds by the government.

Source: Bank Indonesia and CEIC (2013)

0

20

40

60

80

100

120

140

International ReservesUSD Billion


12

Developments in Fiscal and Government Debt

III. Developments in Fiscal and Government Debt

A. Development in Fiscal

In Q1 2013, Indonesia posted economic growth of 6.02%, which is

lower than 6.29%, registered in the same period previous year.

Slower economic growth is by and large, attributable to low

utilization/absorption rate of the national budget, which in quarter I,

was under 10 percent. In addition, the decrease in the performance of

trade balance caused by falling commodity prices also contributed to

lower than expected economic growth in the first quarter. To that

end, it is not surprising that such conditions culminated in the

revision of macroeconomic assumptions the 2013 state budget.

The RAPBN-P 2013 contains revised macroeconomic assumptions,

which include economic growth that is revised down wards from

6.8% to 6.3%, which is attributable to uncertainty that continues to

characterize the global economy. The intension of the government to

raise prices of subsidized fuels led to an upward revision of the

assumption of inflation from 4.9% to 7.2%. Indonesia Crude Price

(ICP) was revised upward from USD 100 to USD 108, lifting of

petroleum oil was revised down wards from 900,000 barrels per day

to 840,000 barrels per day, and lifting of natural gas was revised

down ward from 1.36 million barrels to 1.24 million barrels per day.

Consumption of subsidized fuel for March 2013 had surpassed the

quota set. To that end, it is expected that the quota set in the national

budget for over all consumption of subsidized fuels will reach 48.5

million kiloliters, a quantity that is far higher than 46 million

kiloliters set in the 2013 national budget. This is the main reason that

Table 3: Revised State Budget Plan 2013

Government proposal to raise fuel prices will induce higher inflation

in the revised state budget plan

Source: Ministry of Finance (2013)



13

compelled the government to implement the policy which once

coming into force will restrict the use of subsidized fuels. On the

other hand, there is need the reduction of expenditure on subsidized

fuels to ensure that the government has healthy and sound fiscal

space.

In the 2013 state budget, the allocation budget for subsidized fuel

expenditure reached IDR 193.8 trillion. This is a staggering amount of

expenditure, which is more than half of all budget allocations for all

various subsidies. The central government spent 16.7% of its

expenditure on fuel subsidies. Moreover, if combined with subsidies

on electricity, 23.8% of government expenditure was spent on

subsidies. Doubtless, budget allocation for subsidized fuels will be

higher that budget allocations because fuel consumption will

surpass the quota set in the national budget. As late as early June, the

government and DPR were still locked in deliberations on the revised

state budget plan that relates to proposed raise in prices of

subsidized energy fuels.

For many sources, current budget allocation for subsidized fuels is

too large and poses a danger to sustainable fiscal. In addition, the

staggering amount spent on subsidized fuels has evoked sentiments

of injustice in the expenditure of the national budget. To illustrate the

point, government expenditure on subsidized fuels, which has been

decried for its inefficacy, and poor targeting, is higher than

government expenditure on capital goods and social contribution

which received budget allocation of just IDR 184.4 trillion and IDR

73.6 Trillion in 2013 national budget, respectively. As a comparison,

budget allocation on subsidized fuels is equivalent to the

construction of 43 Suramadu bridges, 15 MRT lines in Jakarta, or

4,845 kilometers of road tolls. Moreover, higher consumption is likely

to generate higher budget deficit, which the government will be

compelled to finance by issuing government bonds.

In relation to the proposal to raise fuel prices, the government

proposes compensation scheme for the poor. The new scheme, which

bears the name, temporary direct assistance for community (BLSM)

which is not fundamentally different from the temporary

unconditional cash transfer (BLT) was intended to distributed to the

poor for the same purpose in the past. Despite fears that the policy


14

may be prone to abuse in furtherance of political interests, the

government seems unwavered in its decision to implement the

compensation program.

Based on program plans, BLSM will benefit poor households, by

mitigating the adverse impact of the increase in fuel energy prices on

their consumption levels. Budget allocation for BLSM in the revised

national budget plan 2013, is put at IDR 11.6 trillion, which will be

distributed to 15.5 milion households that are categorized as very

poor (RTSM) within each receiving IDR150,000 per month for the

duration of five months. However, House of Representative – Budget

Committee decided to distribute BLSM amounted for IDR 9.3 trillion,

so that every RSTM is going to receive IDR 150,000 per month for four

months.

Tax revenues have for long become a reliable source of government

revenues. However, tax revenues for 2013 are likely to miss the target

of IDR 1,193 trillion set in the 2013 state budget to IDR 1,139.3 trillion

in the revised state budget plan for 2013. The decrease in tax

revenues is in part attributable to slow export performance and

weakening domestic economy, both of which are traceable to

uncertainty that continue to bedevil the global economy.

Table 4 depicts trajectory of tax revenues in the domestic economy by

April 2013, outside customs. In comparison with the same period of


Figure 10: Central Government Expenditure

Expenditure on Energy Subsidies is Projected to Increase in the RAPBN-P 2013


20.93

17.3915.97

9.81

23.80

3.68

0.31

6.38

1.73

20.13

15.98 15.67

9.46

25.97

4.05

0.20

5.98

2.57

0

5

10

15

20

25

30

PersonnelExpenditure

MaterialExpenditures

CapitalExpenditures

InterestPayment

EnergySubsidies

Non EnergySubsidies

GrantExpenditures

SocialAssistance

OtherExpenditures

APBN 2013 (%) RAPBN-P 2013 (%)



15

Table 4: Domestic Tax Revenues for 1 January to 30 April 2013 (in IDR Billion)

Domestic tax revenues posted an increase of 9.04% during 1 January- 30 April 2013

Source: Directorate General of Taxation (2013)

2012, tax revenues in the domestic economy increased by 9.04%

during 1 January 2013 to 30 April 2013, period. In general, income tax

revenues from oil and non oil sources, valued added tax and luxury

goods sales tax, and other taxes registered an increase during the

period, land and construction tax (PBB) is the only tax, which posted

a decrease of 59%.

To that end, serious attention need to be paid to indication of a

decrease in government revenue, which is compounded by the

widening gap between the quota of subisized fuel set in the national

budget and consumption of subsidized fuels. As a remedial measure

to avert a widening budget deficit, the revision of the 2013 national

budget was deemed imperative. In the revised national budget for

2013, the government proposed deficit target of 2.48% of GDP, which

is higher than 1.65% of GDP, initially set in 2013 state budget.

In the Nota Keuangan dan RAPBN-P 2013, it is predicted that

government revenue will decrease by IDR 41,347.7 billion (2.7%).

The budget deficit will increase due to a surge in government

expenditure to the tune of IDR 39,019.3 billion (2.3%). The widening

Table 5: Budget Deficit in APBN 2013 and RAPBN-P 2013 (in IDR Billion)

Budget deficit is projected to reach 2.48% of GDP



16

budget deficit will be financed by IDR 77,782.7 billion in domestic

financial resources, which will represent an increase from IDR

172,792.1 billion in the national budget, 2013, to IDR 250,574.8 billion.

Meanwhile, net external financing sources will decrease by IDR

2,584.3 billion, from IDR 19,454.2 billion to a deficit of IDR 16,869.8

billion. The decrease will comes as a result of retiring higher level of

foreign debt than serving the principal.

B. Developments in Government Debt

Total value of tradable government securities (SBN) outstanding by

31 May 2013 reached IDR 1,191.22 trillion, which represented an

increase of IDR 124.92 trillion, compared tradable SBN outstanding

by 30 April 2013 that registered IDR 1,066.30 trillion.

The largest composition of SBN outstanding in May 2013 is

represented by fixed rate bond, recorded for about IDR 672.39

trilliun. Meanwhile, treasury bills in May 2013 registered for about

IDR 22.47 trilliun, reflected an increase compared to the previous

month that reached IDR 21.02 trilliun. Meanwhile, the variable rate

bond has shown no significant changes from the early 2013 up to May

2013, registered stable value for about IDR 122.75 trilliun.

In general, the total value of foreign ownership of securities, in the

form of SBN and stock has increased between January and May 2013.

Foreign ownership of SBN in January 2013 recorded for about IDR

273.2 trillion, rise to IDR 302.94 trillion in May 2013. Compared to

Figure 11 : Composition of Government SecuritiesFixed rate bonds continue to dominate the composition of government securities

Source: Bank Indonesia, Ministry of Finance and CEIC (2013)

0

10 0

20 0

30 0

40 0

50 0

60 0

70 0

80 0

90 0

G ov er n m e n t D eb t S ec u r i t ies ( S U N ) T r ea s u r y B il l s ( S P N ) G o ve r n m e n t B o n d (O N ) Z er o C o u p o n B o n d F ixe d R a te B o n d V ar iab le R a te B o n dI D R T r il li o n




17

May 2012, the total value of foreign ownership of SBN has increased

for IDR 78.44 trillion in May 2013.

Regarding to foreign ownership of SBI, the total value reached IDR

1.02 trillion in May 2013, shows a decrease compared to the previous

month which registered IDR 1.65 trillion. Similarly, compared to May

2012, the total value of foreign ownership of SBI in May 2013 has

decreased, amounted for IDR 0.63 trillion. The reduction is

attributable to the impact of the regulation on 6 months holding

period issued by Bank Indonesia on 13 May 2011.

IV. International

Indonesia trade balance has deteriorated in April 2013. If in March

2013, Indonesia trade balance posted a surplus of USD 0.1 billion,

conversely the economy relapsed into a trade deficit of USD 1.6

billion in April 2013. The deterioration in trade balance is

attributable to the surge in imports by 9.6%. The rise in the value of

imports is in part as a result of a surge in non oil imports from USD 11

billion to USD 12.7 billion, meanwhile, oil imports registered a

decrease of USD 0.3 billion or 7.7%. The decrease in exports from

USD 15.02 billion to USD 14.7 billion is another factor that

contributed to the drop in the trade balance in April 2013.

Compared with the position in April 2012, Indonesian trade balance

in April 2013 has deteriorated. The trade deficit increased from USD

Figure 12 : Foreign Ownership of Securities

There has been an increase in foreign ownership of securities

Source: Bank Indonesia, Ministry of Finance and CEIC (2013)

0

5 0 0

1 0 0 0

1 5 0 0

2 0 0 0

2 5 0 0

F o r e ig n O w n e r s h ip o f S B I F o r e ig n O w n e r s h ip o f S B N F o r e ig n O w n e r s h ip o f E q u i t i e s T o t a l o f F o r e ig n O w n e r s h ip


18

International

Figure 13: Indonesia Trade Balance, January 2008 - April 2013

Indonesian Trade Balance falls into deficit once again.


-20.00

-15.00

-10.00

-5.00

0.00

5.00

10.00

15.00

20.00

25.00

Export Import Balance of Trade(USD Billion)

0.8 billion in April 2012 to USD 1.6 billion in April 2013. Factors

attributable to the deterioration in the trade balance, among others,

include a decrease of 9.1 % in value of exports of which oil and gas

exports contracted by 32.9% and non oil and gas exports decreased by

2.4%.

In general, the performance of trade balance during January - April

2013 decreased compared to the same period in 2012. The trade

balance, which initially registered a surplus of USD 2 billion during

January – April 2012 dropped into deficit of USD 1.9 billion during

January – April 2013. The decrease in trade balance is in the main

attributable to the fall in the value of exports from USD 64.7 billion

during January – April 2012 to USD 60.1 billion in the same period in

2013. The decrease in exports indicates marked deterioration in the

competitiveness of Indonesian products in international markets and

the effect of lingering weakness in the global economy.

Indonesia trade balance continued to post a deficit in April 2013. A

trade deficit of oil and gas rose from USD 1 billion in March 2013 to

USD 1.2 billion in April 2013. The rise of deficit in Indonesia trade

balance of oil and gas was attributable to a decrease in oil and gas

exports from USD 2.9 billion in March 2013 to USD 2.4 billion in April

2013. The under performance of oil and gas exports was is in part

caused by 21.9% decrease in crude oil exports, 20.47% contraction in

oil and gas derived exports and 15.9% drop in gas exports. In the

meantime, the performance of oil and gas exports in April 2013 also

deteriorated, if compared to the same period in the previous year. The



19

deficit in Indonesia trade balance of oil and gas increased from USD

0.5 billion in April 2012 to USD 1.2 billion in April 2013.

Poor performance of the oil and gas export sector is also attributable

to falling prices of Indonesian crude oil exports from USD 107.42 per

barrel in March 2013 to USD 104.19 per barrel in April 2013. The fall

in prices of Indonesian crude oil reflects the downward trend in

prices of crude oil on international commodity markets. Crude oil

prices at WTI (Nymex) dropped from USD 92.96 per barrel to USD

92.07 per barrel or prices of Brent (ICE), which decreased from USD

109.54 per barrel to USD 103.43 per barrel in the same period. The fall

in prices of petroleum oil prices is largely attaributable to an increase

in supply of crude petroleum

oil on the International market. Production of crude petroleum oil

increased from 90.83 million barrels per day in Marct 2013 to 91.26

million per day in April 2013. The production of crude oil in

Indonesia, though still below the target set in APBN 2013 (900,000)

barrels per day, increased on average to 890,000 barrels per day in Q1

2013.

Overall, the deficit in trade balance of oil and gas increased from USD

1.1 billion during January-April 2012 to USD 4.6 billion in January-

April 2013. This is also attributable to an increase of 3.2% in oil and

gas imports as well as an decrease of 22.2 % in oil and gas exports.

Figure 14: Indonesia Oil and Gas Exports - Imports, January 2008 – April 2013

Indonesia continues to experience a trade deficit of oil and gas.


-20

-15

-10

-5

0

5

10

15

20

25

Exp ort: Oil and Gas Im po rt: O il and G as Export Im port Balance of Trade: O il and Gas(USD B illion)


20

In April 2013, Indonesia registered a trade deficit of USD 0.41 billion

in the non oil and gas trade sector, which followed a surplus of USD

1.1 billion in March 2013. Th rise in non oil and gas deficit was

attributable to 15.8 % in non oil and gas imports increase, which

could not be offset by an increase of 1.7% in non oil and gas exports.

Compared to the condition in April 2012, which posted a deficit of

USD 0.2 billion, the deficit in trade balance of non oil and gas in April

2013 showed a slight increase that registered USD 0.4 billion.

Worsening Indonesia trade balance of non oil and gas deficit is

largely attributable to a decrease of non oil and gas exports,

amounted for 2.4 % between April 2012 and April 2013.

Overall, the performance of non oil and gas trade balance in April

2013 showed deterioration from the same period in the previous year.

During January-April 2013, non oil and gas trade balance recorded a

surplus of US$ 2.7 billion, which was lower than the surplus of USD

3.1 billion recorded during January-April 2012 period. The decrease

of 3% in non oil and gas exports compared with the same period in

January-April 2012 is considered to be the main factor responsible for

the decline in performance.

During January – April 2013, exports of 10 categories of goods which

comprise crude petroleum oil; fats and fatty acids; machinery

/electric appliances; rubber and rubber products; machinery

/mechanical instruments; iron, kerak and iron dusts; vehicles and

components; garments; shoes; timber, wooden products contributed

62.10% of non oil and gas exports.

Figure 15: Indonesia Non Oil and Gas Export - Imports, January 2008 – April 2013The performance of Indonesia non oil and gas export-imporrts has deteriorated once again


-2 0

-1 5

-1 0

-5

0

5

10

15

20

25

E xp o r t: N o n O il an d G a s Im p o rt : N o n O il a n d G as E x p o rt Im p o rt B a la n ce o f Tra d e : N o n O il an d G as(U S D B ill io n )

International



21

In Q1, 2013, the current account deficit showed 31 % decrease

compared with the position in the previous quarter. Indonesia

registered current account deficit of USD 5.3 billion in quarter I, 2013,

which was a significant decrease from USD 7.6 billion recorded in the

Q4 2012. The decrease in the current account deficit is attributable to

an increase in the trade surplus from USD 0.8 billion in Q4 2012 to

USD 1.6 billion in Q1 2013. To that end, improvement in the balance of

trade and income contributed to a reduction in the current account

position.

Meanwhile, the performance on the current account in Q1 2013, if

compared to Q1 2012, showed marked deterioration. The current

account deficit increased from USD 3.1 billion in Q4 2012 to USD 5.3

billion in Q1 2013. Rising current account deficit in Q1 2013 is

attributable to 57% (YoY) decrease in the trade balance of goods and

11.5% (YoY) increase in the balance of trade.

The position of capital and financial accounts in the Q1 2013 marked a

drastic deterioration. Capital and financial transactions decreased

drastically from a surplus of USD 11.9 billion in Q4 2012 to a deficit of

USD 1.4 billion in Q1 2013. The deterioration in the performance of

the capital and financial transactions is attributable to weakness in

Other investments item which moved from a surplus of USD 7.2

bilion in Q4 2012 to USD 7.7 billion in deficit, which is a direct

consequence of an increase in offshore savings by domestic banks.

The increase in the level of domestic bank foreign currency assets is a

direct response to the policy implemented by Bank Indonesia that

involved taking control of all available foreign currency to finance oil

and gas imports. To that end, the intervention by Bank Indonesia to

supply foreign currency which Pertamina needs to spend on oil and

gas imports is expected to reduce the demand for foreign currency.

The decrease in the demand for foreign currency in the domestic

economy, in turn expected to mitigate the down ward pressure on

Rupiah, thereby reducing its variability. As a response, domestic

banks found themselves with alot of excess liquidity in foreign

currency, which they deposited offshore.

Overall, the performance of capital and financial transactions, in Q1

2013, is not any better than the position in Q1 2012. In Q1 2012, capital

and financial transactions registered a surplus of USD 2.1 billion.

The main cause of the deterioration in the performance of then capital



Figure 16: Current Account, 2006:Q1 – 2013:Q1The current account deficit has decreased once again

-1 0 .0 0

-8 .0 0

-6 .0 0

-4 .0 0

-2 .0 0

0.0 0

2.0 0

4.0 0

6.0 0

-1 5

-1 0

-5

0

5

1 0

1 5

G o od s T rad e B ala nc e (LH S ) S e rv ice T rad e B ala n ce (L H S ) In co m e A c co u n t (L H S ) C u rren t T ran sfer (L H S ) C u rre nt A cc o u nt (R H S )(U SD B i ll io n ) (U S $ b n )


Figure 17: Capital and Financial Accounts, 2006: Q1 – 2013:Q1

Capital and financial accounts, which initially was in surplus, descended drastically into a deficit

- 1 0 .0 0

- 5 .0 0

0 .0 0

5 .0 0

1 0 .0 0

1 5 .0 0

- 1 0

- 5

0

5

1 0

1 5

D i r e c t In v e s t m e n t ( L H S ) P o r t fo li o In v e s tm e n t ( L H S ) O t h e r In v e s t m e n t ( L H S ) C a p it a l a n d F i n a n c i a l A c c o u n t ( R H S ) C u r r e n t A c c o u n t ( R H S )(U S D B i ll io n ) ( U S $ b n )

Gambar 18: Neraca Pembayaran Indonesia, 2006:Q1 – 2013:Q1

Neraca pembayaran yang surplus mulai defisit lagi

Sumber: Bank Indonesia dan CEIC (2013)

-1 0 .00

-5 .0 0

0 .0 0

5 .0 0

1 0 .0 0

1 5 .0 0

-1 0

-5

0

5

1 0

1 5

Cu rr e n t A ccou n t (LH S) C a p it a l an d F in a nc ia l A ccou n t (LH S) E rr o rs a n d Co m m iss io ns (LH S) B a la n ce o f Pa ym e nt (R H S)(U SD B ill ion) (U S$ b n)

International



23

and financial transactions is the increase in the deficit recorded in the

Other Investments category from USD 2 billion in Q1 2012 to USD 7.7

billion in Q1 2013.

In Q1 2013, Indonesian balance of payments position registered a

deficit of USD 6.6 billion, from a surplus of USD 3.2 billion in Q4 2012.

Weakening performance of the balance of payments in Q1 2013, is

attributable to a deficit on capital and financial transactions (USD 1.4

billion), from a surplus of USD 11.8 billion in the previous quarter.

Overall, the balance of payments position in Q1 2013 shows

deterioration from the Q1 2012. The balance of payments deficit

increased from USD 1 billion in Q1 2012 to USD 6.6 billion in Q1 2013.

Factors which contributed to weakening balance of payments in Q1

2013 include an increase in the current account deficit from USD 3.1

billion in Q1 2012 to USD 5.3 billion in Q1 2013, and poor

performance of capital and financial accounts which moved from a

surplus of USD 2.1 billion to USD 1.4 billion in deficit in quarter I-

2013.

V. GAMA Leading Economic Indicator

GAMA LEI has succeeded twice in predicting accurately and

precisely potential signs of weakening performance of the

Indonesian economy. GAMA LEI predicted economic growth

decreased, which has been shown by lowering economic growth of

6.11% and 6.01% (YoY) in Q4 2012 and Q1 2013 respectively. GAMA

LEI predictions were in stark contrast with those issued by most

economic analysts who projected higher economic growth rate. In

this edition, GAMA LEI predicts slow economic growth in Q2 2013.

The predictions are based on the fact that 2013 continues to be

characterized by higher uncertainty in the global economy, and

being a year to the general and Presidential elections, it is going to be

fraught with high political dynamics in Indonesia. As we went to

press, Indonesian economy is in the midst of uncertainty that

shrouds the direction and composition of government policy on

subsidized fuels. Expenditure on preparations for the general

elections will temporarily help to sustain economic growth.

However, the implication is the economic growth is not based on

sound economic policy. Inflation prior to and after the government


24

GAMA Leading Economic Indicator

Figure 19 : GAMA LEI Indonesia, 2000:Q1 – 2013:Q1

implements its policy to raise prices of subsidized fuels, calls for

serious attention and anticipation. Doubtless, high inflation

expectations will exert more pressure on already weakening

economic growth in coming quarters. This is the more so, given the

fact that based on GAMA LEI predictions, there is still no indication

that the downward trend which kicked in the economy in Q4 2012,

is fizzling out any time soon. The value of Rupiah is almost reaching

IDR 10,000 per USD driven by rising oil and gas imports, which in

turn is attributable to high demand for subsidized fuel. High

demand for subsidized fuels is largely attributable to the low retail

price consumers pay for it in the domestic economy. Subsidized fuels,

the higher the volume of oil and gas imports. This translates into high

demand for US dollars to pay for energy fuels, which in turn

contributes to the depreciation of Rupiah.

What this means is that unless policy makers implement concrete pro

growth policies, thereby marking a change from the prevailing

conditions, based on LEI predictions, Indonesian economy will

continue to weaken in the next quarter. This is far from expectations

of all, which is higher economic growth.

GAMA LEI is a cycle, which comprises composite a selection of

indicators that have the potential to precede Indonesian business

cycle (Indonesian Economic Review and Outlook, March 2013). The

construction of GAMA LEI is based on analyses of hundreds of

internal and external macroeconomic indicators. The selection of

macroeconomic indicators that form GAMA LEI is done under very

stringent considerations. Data on indicators is renewed every

quarter, which means that LEI that is developed continues to

improve and becomes more accurate. Based on the latest quarterly

data on Indonesian GDP for 2000-2013, indication point to highly



25

fluctuating economy. However, GAMA LEI is able to predict with

high precision, the point when the economy changes course. During

2008 global financial crisis, LEI was able to predict sigs of an economy

changing course in Q3 2007, and predicted the down turn of

Indonesian economy in Q3 2008.

Results obtained from a survey, which involved respondents drawn

from lecturers in the Faculty of Economics and Business, UGM,

yielded predictions of levels and range of principal macroeconomic

indicators that include GDP, inflation, and exchange rate of Rupiah

against US$ right from Q2 2013 to year 2014. Predictions of GDP

(YoY) indicate an economy that is still weighed down by pessimism.

Prediction of real GDP growth for the Q2 2013 and Q3 2013 were

within 6.02% ± 0.2% and 6.05% ± 0.2% range, respectively. However,

predictions of real GDP based on the latest data for 2013 and 2014,

show that the economy is expected to post growth by 6.13% ± 0.22%

and 6.19% ± 0.21%, respectively.

Meanwhile, predictions of Inflation (YoY) show an upward trend.

This is reflected in the predictions for Q2 2013 and Q3 2013, which are

5.93% and 6.12%, respectively. However, predictions for inflation for

2013 and 2014 are 5.71% and 5.66%, respectively.

Consensus on Macroeconomic Indicators Projections

Table 6 : GDP Estimation (YoY, in %)

Sources: Primary data, processed (2013)

Table 7 : Inflation Estimation (YoY, dalam %)


Table 8 : Exchange Rate Estimation (IDR per USD)



26

Current Issue

In the meantime, while the prediction of the exchange rate for Q2 2013 in

the previous edition was expected to hover around IDR 9776, in this

edition Rupiah is expected to depreciate against US dollar. The

depreciation is attributable to uncertainty facing both the domestic and

global economy. In that regard, survey results point to a depreciation in

the exchange rate to be IDR 9,837 and IDR 9,834 for Q2 2013 and Q3 2013

respectively. Meanwhile, exchange rate for 2013 and 2014 is expected to

be IDR 9,818 and IDR 9,831 respectively.

VI. Current Issue

Postponement is not a Choice; Fuel Subsidies is growing

“Time Bomb” that is Holding the Economy Hostage 1By Dr. Rimawan Pradiptyo

1 Dr. Deputy Research and Coordinator of Publication & Data Research and Training Economics

and Business (P2EB) FEB UGM

Dr. Rimawan Pradiptyo is

History Repeated

For the umpteenth time, during the reformation regime, Indonesia faces a

dilemma which is associated with reducing fuel subsidies. Various road

maps on how best to reduce fuel subsidies have been proposed since 2008,

neither of which as it turned out, were a far cry from interests of

politicians. Our collective memory is still fresh with government proposal

to regulate and control the consumption of fuels in 2010, which was

supposed to implemented in phases starting with Jakarta, and afterwards

to cover the whole country by late 2013. However, apparently the plan

failed to get off the ground due to the difficulty of acquiring requisite land

for expanding storage fuel tanks that refuelling stations faced, which was

compounded by the DPR rejection of research findings on the fuel policy

and the best policy forward , by the team that comprised three

Universities UGM-ITB-UI.

In its research report, the UGM-ITB-UI research, noted the two proposals

by bureaucrats and politicians to regulate and control the consumption of

subsidized fuels, were inefficient and ineffective. This was because the

estimates of the cost of implementing the two policies far outweighed the

benefits. Moreover, the policy posed the danger of creating horizontal

conflicts among refuelling stations and between consumers and refuelling

station operators. In fact, the policy recommendations continued, the two

programs, in implemented as designed would have the potential of

changing the venue of demonstrations from Presidential offices (Istana

Negara) and DPR/MPR premises to refuelling stations all over the

country from Sabang to Merauke.



27

To that end, the joint research team of UGM-ITB-UI researchers, proposed

a decrease of reduction of fuel subsidies through a gradual increase of

subsidized fuel prices by IDR 500, which should be implemented overtime

(for instance once every 6-12 months) until the price of Premium fuel

reaches the free market price. The phased reduction of subsidized fuels,

should be go hand in hand with the implementation of a subsidy

compensation program, targeting poor families. The proposed increase of

IDR 500/liter , was considered to be the right figure, which would

accommodate both the interests of the economy and politicians. However,

the government rejected policy proposal out of hand and the coalition of

political parties in government failed to support and advocate for the

implementation of the policy.

During early 2012, the rising burden of subsidized fuels on government

finances came into the limelight once again. And once again, the

government requested three a team of researchers drawn from three

Universities (Unpad-ITB-UI) to conduct a research on the policy of

subsidies. The research team proposed that the price of Premium should be

raised by Rp1500/liter, which received stiff opposition from various

elements in country, especially University students , manifested in

demonstrations staged in various cities in the country. The spate of

demonstrations against the policy programs was attributable to the fact that

policy recommendation to raise premium fuel by IDR 1500/liter failed to

take into account political repercussion which is often associated with

hiking fuel prices. To that end, the increase of IDR 1500/liter, which Upad-

ITB-UI team proposed, was higher than IDR 500/liter and gradual reduction

of fuel subsidies that UGM-ITB-UI team recommended.

Once again, in 2012, the ruling party showed its reluctance to raise fuel

prices, and eventually fuel prices remained intact. In the meantime, the

intensity of discussions on the prospects of raising fuel prices with no data

set to effect the policy, created inflation expectations among economic

agents, especially traders. This assertion is very much in line with research

findings by Pradiptyo et al. (2010) , which showed that the expectation of a

potential increase in fuel prices is the main source of information traders use

in forming inflation expectations.

Since February 2013, the burden of fuel subsidies on the government budget

came into the spotlight, once again. The Budget deficit for 2011 and 2012

was 1.1% and 1.84% of GDP, respectively, but still lower that maximum

limit of 3% of GDP. This year, the budget deficit will rise to 3.38% of GDP if

the policy on reducing fuel subsidies is not implemented. What is also worth


Current Issue

28

noting is that Indonesia has been a net importer of petroleum oil since 2004.

This means an increase in the consumption of subsidized fuels will translate

into heavier burden on the balance of payments due to higher import 2volumes and value of Pertamax fuel .

Thus, the recurrence of the fuel subsidy problem over the last three years ,

does not mean serious measures to deal with it, are easy to come any time

soon. Nonetheless, what is apparent from the pattern of efforts to deal with

the problem is the significant shift in policy from relying on hard evidence

(reality) to anecdotal evidence (myths).

The subsidized fuel policy, despite being touted as tailored to support low

income earners, is by and large, to the benefit of middle and high income

consumers. Consumption of subsidized fuels constitutes compensated

consumption phenomenon, which means that the government has to meet

the demand for fuel consumption by anybody, and for any activity. This

means that the government pays all the quantity /volume of subsidized

fuels, which Pertamina oil Tanks fill into refuelling stations.

The compensated consumption phenomenon can be described in the 3following way. Imagine if you have a credit card which has no higher limit .

Then, give that credit card to a teenager, who in the morning, revels in going 4to the highest upscale shopping Mall in this county . You inform the

teenager that he has the right to buy anything, regardless of price, as all the

purchases using the credit will be on your account. At night, as the Mall

closes its doors, you pick up the teenager and you ask him to hand over all

the receipts for all the purchases he/she has made during the day. Is there any

person on this planet earth who can guess with precision the value of the

purchases the teenager has made during his/her shopping binge all day

round? The answer is definitely in the negative. To that end, the above

illustration attests to the complexity and magnitude of the problem which

bureaucrats face in estimating the ever rising consumption of subsidized

fuels. Therefore, it is not surprising that every year, estimating the quantity

of subsidized fuel to be consumed is very difficult, which is why the quota

set in the budget always turns out to be lower than the quantity consumed.

Essentially, what are the factors that influence the increase in consumption of

subsidized fuels? Several factors influence the rising consumption of

Fuel Subsidies is increasingly becoming a Time Bomb

2. On the international market, RON 92 is the Minimum standard for fuels which is equivalent to Pertamax. Thus,

to bridge the gap between domestic demand and domestic production, the government imports Pertamax. 3 This type of credit card is black and has short account number, not as long as those on ordinary credit cards. It is

only a few individuals who can own such credit cards4 In some Malls in Jakarta, Luxury vehicles such as Ferarri, Porsche and Jaguar are on Sale. The credit card does

not a maximum limit, makes it possible for one to purchase such luxurious vehicles .



29

subsidized fuels . These include: 1) increase in economic activities

attributable to economic growth; 2) rising international fuel prices; 3)

appreciation of foreign currencies; 4) shift of consumption from Pertamax to

premium; 5) increase in black market activities to meet the demand for

industries; and 6) smuggling of subsidized fuels to other countries.

Of all the six factors that influence the increase in demand for subsidized

fuels, it is only economic growth, which is the endogenous factor that the

government can exercise control, while the other five factors are

exogenous, over which the government has little, if any control. This means

that, raising prices of subsidized fuels is the only leverage the government

has to control the rising fuel subsidies as other determinants are not in

government purview, rather the international market, behaviour of the

general public in consuming subsidized fuels, and agents in black markets

and subsidized fuel smuggling networks. In other words, leaving the policy

on subsided fuel prices as it is, tantamount to relegating the determination

and formation of the national budget to foreign elements and subsidized

fuel smuggling rings. Thus, the question, one should poses is where does

this fit in the commitment of this country to determine and exercise decision

making on issues of sustainable economic development in an independent

manner ?

It is not farfetched, to describe the rising burden of fuel subsidies on

government finances, as time bomb which is growing over time and unless

handled in time, will explode anytime. In light of that, considering the

adverse impact of subsidized fuels on the national budget and burden on the

economy, silence is not a commendable solution to resolve this complex

problem. Moreover, rising consumption of subsidized fuels increases the

vulnerability of the economy arising from surging imports of Pertamax,

which in turn will lead to higher pressure on the balance of payments and

exchange of Rupiah against other currencies.

The problem becomes the more complex simply because subsidized fuels is

available everywhere, and everyone has easy access to it. There is little

doubt that with higher purchasing power, the general public has better

means to consume fuel, which is why the demand for subsidized fuels is

higher among middle and high income earners than is the case with low 5income earners. A lot of research showed hard evidence that subsidized

fuels contribute to worsening income disparity. Data obtained from The

Ministry of Energy and Mineral resources shows that the proportion of

consumption of subsidized fuel by category of users and region: 1) vehicle

owners (53%) compared with motorcycle owners (47%); 2) Java and Bali


Current Issue

30

population (59%); 3) land transportation (89%). Meanwhile based on

Ministry of Finance (2008) sources, 25% of high income households

consume 77% of subsidized fuels; middle income households consume

25%; and low income households just 15% of subsidized subsidies.

Facts attest to the reality that the black market and smuggling networks of

subsidized fuels determine the volume of subsidized fuel consumed and

by extension, amount of money spent on subsidized fuels. Consequently,

the higher the magnitude of subsidies on fuels the government spends, the

more lucrative it becomes to perpetrators of subsidized fuels smuggling

and black market in subsidized fuels.

The above facts, provide eloquent testimony to the fact that subsidized

fuels , by and large, suffers from poor targeting of its intended beneficiaries.

In light of that, it is not far fetched to say that any effort to maintain the

current level of subsidies on fuels amounts to protecting subsidies which

are largely enjoyed by middle and high income earners, as well as

perpetrators of subsidized fuel smuggling and black market operators.

This argument, therefore debunks the assumption that raising prices of

subsidized fuel energy epitomizes betrayal of the people and aggravate

their destitution. Abundant evident indicate that rich, are the beneficiaries

of the most of the subsidized fuels in comparison with the poor. To that

end, any policy that stresses commitment to maintain higher subsidized on

fuels undermines efforts to promote justice and fairness for all, as the

beneficiaries are largely those who are rich and not the poor.

Pradiptyo and Sahadewo (2012) conducted a laboratory-based survey on

335 households in Yogyakarta, comprising those who do not own any

vehicles and those who have more than one vehicle. Research results

indicated that respondents who do not own any motor vehicle whatsoever,

who are categorized as poor, readily accepted and receptive to the idea to

raise fuel prices , compared with respondents who own vehicles. For

respondents who do not own any vehicle, reducing subsidies on fuels

gradually was not considered a problem as long as the relocation of

subsidies was channelled to specific subsidy programs ( for instance

vaccine, infrastructure and transportation) , which generate direct benefits

to households. On the contrary, respondents who own vehicles were not

bothered by the way the relocation of subsidies which arise from reduction

in subsidized fuels was done, as long as the reduction of subsidies was

carried out gradually. In light of that, one can draw the inference that high

income households who enjoy the lion's share of subsidized fuels, 5 See Ministry of Finance (2008), World Bank (2010)



31

showed higher reluctance to accept the policy proposal to reduce fuel

subsidies than low income households.

According to Pradiptyo (2012a,b), corrupt individuals enjoy subsidies in

Indonesia as the maximum sentence they face based on Law on Corruption

is very low. Based on sentences passed out by MA during 2001-2012

period, the explicit cost of corruption hovers around Rp 168.19 trillion,

meanwhile, the financial value of the sentences was just Rp 15.09 trillion

(constant 2012 prices). To that end, members of society foot the difference

between the values Rp.153.1 trillion. In other words, members of the general

public subsidized corrupt individuals.

This makes the circle of people's suffering, especially those with middle and

low incomes, complete. Ideally, subsidies should be given to

disadvantaged members of society who earn low incomes, which is

contrary to the reality in Indonesia. The policy of subsidized fuel energy is

huge boon for high income earners, subsidized fuel smugglers and black

market agents. On the other hand, thanks to loopholes in the anti

corruption Law, obedient tax payers have ended up subsidizing corruptors ,

who are in the main middle and high income earners.

The burden of fuel subsidies on the economy can be minimized if the

government, and political parties in particular have strong commitment to

enhance the independence of the economy in the policies it makes.

Nonetheless, efforts toward that direction, are often undermined by short

term political interests. In 2005 the government raised prices of Premium

fuels by 160%, but in 2008 as the general elections in 2009 approached, the

government reduced prices of Premium fuels to the current level IDR 4500.

It should worth noting that in addition to the lack of commitment by the

ruling political party coalition, political interests contributed much to

rejection by DPR, policy recommendations on dealing with rising fuel

subsidies, which UGM-ITB-UI team made in 2011. The same was at work in

2012. As this piece is written, government indecisiveness to reduce

subsidies, is attributable to political bickering and differences among

political parties in Senayan. The potential danger lies in the fact were the

current state of procrastination to continue, the government may fail to take

this opportunity and momentum to reduce fuel subsidies.

Let us calculate the value of subsidies which the government could have

saved, had the government implemented policy recommendation of UGM-

Keep the Momentum


Current Issue

32

ITB-UI research team, of gradually raising the price of premium fuel by IDR

500/liter (for example every 1 April)? If the policy was implemented was

2011, the price of Premium fuel at the pump would no longer be IDR

4500/liter but IDR 6000/liter. If the policy was implemented, taking into

consideration that elasticity of premium is -0,16, and assuming that Solar

(diesel) also has the same elasticity, and the government did not implement

any other policy on subsidized fuels by December 2013, total amount of

subsidies which the government would saved would be IDR 134.23 trillion.

Meanwhile, if the government goes ahead with its plan to raise prices of

subsidized Premium fuel and Solar by IDR 6000/liter, the policy of gradually

increasing fuel prices by IDR 500/liter since 2011 would have saved IDR

97,42 trillion.

Let us compare the value of government expenditure on subsidies saved with

the government subsidies on fertilizers and food stuffs , which in 2013

budget is IDR 17.2 trillion and IDR 16.2 trillion, respectively. Operational

cost of UGM is just IDR 2 trillion per year , and it is the largest University in

Indonesian, with a student population of 52,000, right from three year

diploma to Doctorate level. Let us assume that operational cost of running

the University is increased to Rp3 trillion per year in order to finance

requisite expenditure on facilities and infrastructure tailored to scaling up the

quality of education service provision to such a level that enables UGM to

compete with Universities in the developed world. Based on this scenario, it

is only IDR 30 trillion per year, that is required to transform 10 best

Universities which have the same level and scale as UGM in Indonesia to

provide free education right from D3 to S3! Just imagine by spending just

IDR 30 trillion per year , 520 000 students in the best Universities in Indonesia

would be able to undergo education free of charge! This is the minimum

cost, which the Indonesian economy is paying due to procrastination of

policy makers in this country.

March, April, and May, is the best time for the government to increase prices

of subsidized fuels. This is based on the trajectory of inflation over the years,

which is lowest in April and ratchets up in May. To that end, the two months

provide the right time to reduce fuel subsidies as the impact on inflation is

likely to be the smallest.

However, current government plan is to increase prices of subsidized fuels in

June, which is not ideal given the fact that the fasting month of Ramadhan is

around the corner. Nonetheless, the rising budget deficit and worsening

balance of payments, mean that the government can no longer delay the

policy of raising the prices of subsidized fuels this time around.



33

VII. Economic Outlook

Indonesian economy in Q2 2013, encountered many internal and external

challenges, which increased macroeconomic instability. The realm of

decision making is plagued by political intrigue, which explains the

procrastination the government has shown in its decision to increase prices

of subsidized fuel prices, and eventually setting the date of Mid June 2013

(latest limit for latest IERO edition). It is no wonder the delay has generated

uncertainty in the economy, as it amounts to holding the economy hostage.

Such condition, tantamount to “a growing time bomb” as Dr. Rimawan

Pradiptyo has succinctly stated in this edition. This is the more so,

considering the increasingly hot political economy in Indonesia, amidst the

global economy, which is facing uncertainty concerning quantitative easing

monetary policy by the central bank in United States and Japan, and

shroud of uncertainty that hovers over European economy, have all

contributed negatively to Indonesian economy. As is that was not enough,

the World Bank, revised down the global economic growth projection for

2013 from 2.4% in January 2013 to 2.2% in June 2013; the growth of the

economy of China which has become the main growth engine of the global

economy, was revised downwards from 8.4% to 7.7%; while projection of

economic growth for Indonesia were revised downwards from 6.3% to

6.2%.

Amidst growing uncertainty in the domestic and global economy, GAMA

Leading Economic Indicators predicts contraction in economic growth in

the short term. To that end, the contraction in the economy is projected to

continue, which is a continuation of GAMA LEI's projections that were

proved correct over the past two quarters in succession. The same applies

to the consensus of members of Faculty in the Faculty of Economics and

Business, UGM, with respect to projections of key macroeconomic

indicators, which were very much in line with GAMA LEI predictions that

Indonesian economy is projected to contract , due to rising economic

instability and slowdown in economic growth. There is little doubt, if such

conditions continue for long, have the potential to endanger Indonesian

economic development. As way forward, there is need for the government

to take decision on the subsidized fuels which will go a long way curbing

current uncertainty and speculation and attendant adverse effects on the

economy. Besides, all relevant economic authorities should in the short

term put more emphasis on efforts to preserve macroeconomic stability,

which should prevent rising political tensions from degenerating into

macroeconomic instability and deterioration of the economy.

INDONESIAN ECONOMIC REVIEW AND OUTLOOKMACROECONOMIC DASHBOARD TEAM

MACROECONOMIC DASHBOARDFAKULTAS EKONOMIKA dan BISNIS

UNIVERSITAS GADJAH MADAth

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

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

Website : www.macroeconomicdashboard.com

,S.E.

S.E.

+62 274 548517 ext 373

Documents

Iero no 2 year ii june 2013