Indonesian Economic Review and Outlook No 1/Year I/December 2012

INDONESIAN ECONOMIC

REVIEW AND OUTLOOK

Macroeconomic DashboardFaculty of Economics and BusinessUniversitas Gadjah Mada

No 1/Year I/December 2012

ForewordIndonesian Economic Review and Outlook (IERO)

is quarterly bulletin, which is published by the

Macroeconomic Dashboard, Department of

Economic, Faculty of Economics and Business

Universitas Gadjah Mada with the collaboration of

PT. Bank Mandiri, Tbk.

The theme of this IERO edition revolves around

the uncertainty in financial markets and world

economy, which continues to cast a shadow over

the Indonesian economy in 2012. Slow global

economic growth is predicted to continue to its

adverse impact on the Indonesian economy in 2013, very much in line with the

prediction of GAMA Leading Economic Indicators (GAMA LEI).

GAMA LEI is a reference which is issued by the Macroeconomic Dashboard

predicting the condition and state of the Indonesian economy in future. The

underlying objective of GAMA LEI is to serve as a reference and guidance for policy

makers in observing future possibilities which in turn will enable them to take

policies in anticipation of such economic conditions.

In this edition, IERO discusses the theme on the economic crisis, which continues to

affect Europe. This analysis gives a comprehensive picture on the European

economic crisis and its implication on World economy in general and Indonesia in

particular.

The publication of IERO which covers both current and regular issues is expected to

serve as reference as well as becoming a source of real time information and

contextual analysis on developments of the Indonesian economy.

Wishing you an enjoyable reading

Prof. Dr. Sri Adiningsih, M.Sc

Head of Researcher

Macroeconomic Dashboard

Macroeconomic Dashboard Universitas Gadjah Mada

1

Indonesian Economic Review and Outlook

I.1 Recent Economic DevelopmentsAt the time this issue is written, the debt crisis in Europe continues to

be crucially important, as has a lot of influence on the World economy.

Economic growth in several countries which have for long become

engines that kept the rest of the world humming, are today facing

uncertainty. Amidst such global economic uncertainty, the

International Monetary Fund (IMF) predicted global economic growth

of 3.3% 2012, which is the lowest since 2009. However, IMF predicts

a slight improvement in 2013 when the world economic will register

3.6% in economic growth, which is lower than 3.8% posted in 2011.

Uncertainty which has emanated from the crisis in Europe continues

to drag down the global economy and in turn the Indonesian

economy in two ways namely trade and international finance. As an

open economy, Indonesia depends on the economic conditions that

obtain in other economies, especially with respect to imports and

exports. The implication of this is that Indonesia has high

vulnerability to slow economic growth that affects other countries.

This is apparent from the difficulty which Indonesia faces in achieving

economic growth targets set by the government. Indonesian

economy registered 6.17% in economic growth in the third quarter

2012 on year on year basis. This was lower than 6.37% posted in the

second quarter 2012. Slower economic growth in the third quarter is

a direct consequence of the impact of the crisis in Europe. Moreover,

based on IMF prediction, Indonesian GDP will register by 6% in 2012

and 6.3% in 2013, an indication that sluggish economic growth

posted in 2012 will continue through 2013.

In 2012, uncertainty in financial markets and world economy has

continued to cast a large shadow over the Indonesian economy. This

grim prediction will remain unchanged in 2013 is based on the

pessimism about the World Economy as the United States economy

remains weak, compounded by uncertainty that surrounds the future

of the European Union.

Indonesia, which showed marked resilience during the 2008/2009

financial crisis, has prepared to face challenges in 2012. The

resiliency of Indonesia's economy has been underpinned by the large

domestic market and primary commodity exports that fetched high

prices on the international market, coupled with a large informal

economy. As the year 2012 unfolded, the prices of commodities on

the international market dropped, which was attributable to weakning

demand on the international market. To that end, the domestic

market today faces a deluge of imports of products from China and

other Asian countries, which despite high growth in investment in the

economy, have reduced the pace of economic growth.

Macroeconomics Dashboard Universitas Gadjah Mada

Perkembangan Ekonomi Terkini

2

Recent Economic Development


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Consumption Expenditures: Household Consumption Expenditures: Government Exports of Goods and Services

Imports of Goods and Services Gross Fixed Capital Formation GDP (RHS)

(%)(%)

Figure 1: GDP economic growth, Indonesia in 2000 constant prices by Expenditure, 2005 – 2012 (yoy, in %)

Economic Growth, shows a downward trend, in line with sluggish growth in world economy

Source: BPS and CEIC

Figure 2: GDP Economic growth, Indonesia based on 2000 constant prices by economic sector, 2005 – 2012 (yoy, in %)From the perspective of production, Indonesian economic growth is driven by Transportation and Communications sector, Construction sector, also Financial, Ownership and Business sector.


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Agriculture, Livestocks, Forestry and Fisheries Mining and Quarrying Manufacturing

Electricity, Gas and Water Supply Construction Trade, Hotel and Restaurant

Transport and Communication Financial, Ownership and Business Services(%)

Figure 3: Unemployment in IndonesiaUnemployment in Indonesia shows a downward trend over the years

Source: BPS dan CEIC

3



The ability to maintain the achievement of a positive economic growth

(although still relatively low), during the global crisis, mainly because

of domestic aggregate, particularly Gross Fixed Capital Formation

and Household Consumption As is evident in Figure 1, from the

vantage point of expenditure, GDP growth in the third quarter 2012, is

underpinned by growth in Fixed Capital Formation which grew by

10.02 % (yoy) and Household Consumption which posted 5.68%

growth (yoy). Meawhile, Government Consumption, Exports and

Imports contracted compared with the previous period. In

comparison with the third quarter of 2011, the growth in Government

Consumption registered stood at – 3.22% (yoy), which is attributable

to the low budget absorption. By November 2012 the budget

absorption or requisition level was IDR 1,112.1 trillion or 71.8% of the

Revised National Budget 2012 of IDR 1,548.3 trillion. Meanwhile,

export of goods and services in the third quarter of 2012 decreased by

-2.78% (yoy). There is also sign of slowdown in import, which posted

contraction of -0.54% (yoy).

As regards production, as is evident in Figure 2, Transportation and

Communications sector posts the highest growth of 10.48% (yoy),

followed by Construction sector for about 7.98%, and while Financial

Services, Real Estates, and Service Industry registered 7.41%.

Meanwhile, Mining an Extraction sector posted contraction of 0.09%.

It is interesting to note that Transportation and Communications

sector, which registered 10% growth, has lowered compare to

previous periods.

Although the economy posted a decrease in economic growth, the

level of unemployment shows a decrease in August 2012 compared

with the same period in the previous year. This is reflected in a

decrease in unemployment. Open unemployment in August 2012

decreased from the rate in February 2012. In August 2012, the

number of unemployed was 7.24 million or 6.14% compared with

7.61 million or 6.32% in February 2012. Moreover, unemployment in

August 2012 was lower than unemployment in the same period in

2011, which accounted for 6.56%. The decrease in unemployment

in Indonesia is also reflected in the decrease in the work force in

August 2012. In August 2012 the percentage of workforce in

Indonesia was 67.88%, which was a decrease from 69.66% in

February 2012.

.

Developments in Monetary Indicators

4


A. Money Supply

B. Inflation

Money supply, MI and M2 shows an upward trend reaching IDR 782

trillion and IDR 3,168 trillion in October 2012 respectively, higher than

IDR 779 trillion and IDR 3,050 trillion in June 2012. This shows an

increase of 0.3% and 3.8% from June to October 2012. In terms of

year on year, MI and M2 in October 2012, constituted an increase of

17.6% and 18.3% from the values for October 2011. Nonetheless,

compared with values for September 2012, the level of MI showed a

decrease of 1.7 %.

Figure 5 shows that inflationary pressure has increased since the

beginning of 2012, which is in line with an increase in domestic

demand. Inflation level, which decreased below 4% during the

2008/2009 global financial crisis, edged upwards during April-August

2012 to 4.5%, which though decreased to 4.3% in September 2012,

moved upwards in October to 4.6%.

In November 2012, the Central Bureau of Statistics recorded inflation

level of 4.32% (yoy), which is equivalent to 3.73% for the January-

November calendar year terms. However, inflation in November

2012 which was lower than that recorded in the previous month was

still higher than the figure for November 2011, which was only 4.15%.

I.2 Developments in Monetary Indicators

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Figure 4: Money SupplyDespite M1 registering a decrease in October 2012 compared with the previous month, in general, money supply shows an upward

Source: Bank Indonesia and CEIC

5



What should be noted is that rising food prices have played a part in

an upward movement in the inflation level. The administered and

volatile inflation is calculated for about 2.70% and 5.78% on year on

year basis respectively in November 2012.

Meanwhile, in November 2012 core inflation was 0.14%, which is

equivalent to 4.40% in annual terms, slightly higher than general

inflation (Figure 5). High core inflation reflects high consumer

demand which can not be met by existing supply of goods. In light of

that, this is an issue, to which the economic authority must pay

serious attention as it poses the danger of creating an over heated

economy if not handled well.

Higher inflation level in November 2012 than the same period last

year, is reflected in the increase in indices of several expenditure

categories such as an increase of 0,23% for transport,

communications and financial services; an increase of 0,15% for

housing, electricity, water, and energy; an increase of 0.20% of

processed food , beverages, and cigarettes. Meanwhile, some

expenditure categories, which included food and clothings

experienced deflation - 0.13% and - 0.10%, respectively.

Figure 5 : Inflation level, 2009 – 2012 (yoy, in %)Need for careful handling of the problem of higher core inflation than general inflation in November 2012 to avert degenerating into “overheated economy”.

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HEADLINE CORE ADMINISTERED VOLATILE(%)

Source : BPS and CEIC

Commodities which contributed significantly to inflation in November

2012 were onions, which contributed 0.08%; rice 0.04%; beef 0.03%;

carrots 0.02%; air transport fares 0.04%.

At the start of 2012, the Indonesian Central Bank maintained the BI

rate at 6%, as an effort to maintain financial system stability and

conducive condition for domestic economic expansion amid global

economic uncertainty. However, in February 2012, in an additional

effort to promote economic growth, Bank Indonesia cut the Bank

Indonesia rate by 25 basis points from 6% to 5.75%, which is still the

applicable rate at the time of writing this edition. Other interest rates

such as interest on deposits, time deposit, and SBI have followed the

decrease of BI rate (see Figure 7).

The level of international reserves continues an upward trend and by

October 2012 stood at USD 110,297.16 million, which USD 3,794.77

million higher than USD 106,502.39 million recorded in June 2012

(see Figure 8). The increase in international reserves is attributable to

among other factors the surplus position in the balance of payments

in the third quarter 2012 as a result of a decrease in current account

deficit which in turn was due to an increase in the trade surplus that

arose from a decrease in imports, especially consumption goods, and

a surplus in Capital and Financial Accounts. The increase in inter-

national reserves should improve investor confidence as well as

protect the economy from the fallout of a deeper world recession.

C. Interest Rate

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Headline FoodProcessed Food, Beverages, Tobacco Housing, Electricity, Gas and FuelClothing HealthEducation, Recreation and Sports Transportation, Communication and Finance

Figure 6: Components of Inflation, 2009 – 2012 (yoy, in %)Rising Inflation year on year in November 2012 is attributable to an increase in prices as reflected by several expenditure categories


Developments in Monetary Indicators

7



D. Exchange Rate and Share Prices

The exchange rate of Rupiah against the US Dollar continues to

depreciate throughout 2012. The depreciation was in part attributable

to a deficit in balance of payments position recorded in the first and

second quarters of 2012, which in turn came as a result of a decline in

international reserve position and increasing uncertainty in the global

economy.

The movement of the exchange rate of Rupiah during the third

quarter 2012 though continued to depreciate but at lower rate that in

the third quarter 2011. The movement of the exchange rate of the

Rupiah during the third quarter 2012 experienced 2.26%

depreciation (qtq) to IDR 9.491 per USD from IDR 9.277 per USD

recorded in the second quarter 2012.

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Deposit Rate: 1 Month Max Guarantee : 3 Month BI Rate

Bank Indonesia Certificates Rate: 1 Month Bank Indonesia Certificates Rate: 9 Months(%)

Figure 7: Developments in BI Rate, SBI, Deposits, and Credit/Loans Rates, 2005 – 2012 (in %)Interest rate continues to be in consonance with low inflationary pressures but still under control


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Figure 8: Indonesia's International Reserve position, 2009 – 2012 (in USD Million)The increase of Indonesia's international reserve is expected to reduce weakening pressure on the Rupiah


In the meantime, in November 2012, the depreciation of Rupiah

continued hitting IDR 9,605 per USD, lower than IDR 9000 per USD at

the start of the year as well as IDR 9480 per USD in June 2012. The

depreciation of Rupiah is attributable to uncertainty which has

characterized the handling of the debt crisis and fiscal condition in

Europe, and the increase in demand for foreign exchange to pay for

increasing value of imports

Meanwhile, the Indonesian Composite Index (IDX) in 2012

strengthened. In November 2012 IDX moved within 4,276 levels,

which is an increase compared with 3,941 at the start of the year,

which constitutes 8.5% growth.

8


Figure 9: The Exchange Rate and Share Prices, 2009 – 2012Pressure from global markets continue to induce depreciation of the exchange rate of the Rupiah during 2012


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I.3 Developments in Government FinancesOn 23 October 2012, the National Assembly appoved the State

Budget (APBN) for 2013. Changes in assumptions used in drawing

up the national budget for 2013 compared with those that

underpinned the State Budget 2012-Revised are shown in Tabel 1.

APBN 2012 APBN-P 2012 APBN 2013

Economic Growth (%) 6.7 6.5 6.8

Inflation (%) yoy 5.3 6.8 4.9

Exchange Rate (IDR/USD) 8800 9000 9800

3 Month - SBI/SPN Rate (%) 6 5 5

Oil Price (USD/barrel) 90 105 100

Oil Lifting (barrel/day) 950000 930000 900000

Gas Lifting (barrel/day) - - 1,360,000

Table 1: APBN 2012 and 2013

Source: Ministry of Finance

Developments in Goverment Finances

9



Considering the current economic conditions of the Indonesian

economy and developments in the global economy, the assumptions

above seem to be too optimistic. Given the high uncertainty that

continues to cast a shadow above the global economy, and

predictions are pointing to slower economic growth than initially

projected, the assumption on Indonesian economic growth in 2013 is

too high.

By sector, expenditure on energy subsidies receives most public

attention and interest. In the approved national budget for 2013,

budget allocation for energy subsidy constitutes the largest item of

government expenditure of 27.8 % of the total budget. Second in

terms of size the central government expenditure is the proposed

expenditure on civil servants (amounting to 21.2%). In descending

order, expenditure on capital expenditure follows (17%), goods

expenditure (14%), foreign debt serving (9.9%), social expenditure

(5.2%) and other expenditure items (4.2%).

It is thus, apparent that the 2013 state budget will not have significant

impact on the Indonesian economy. Expenditure on subsidies and

government employees takes almost 50 percent of government

expendtiture. Out of total of IDR 274.7 trillion to be spent on energy

subsidies, IDR 41.4 trillion will be spent on non energy subsidies. The

item of energy subsidies is divided further into two, which is IDR

193.8 trillion for gasoline/fuels and energy and IDR 80.9 trillion for

electricity.

Based on information that was provided by the Directorate General

National Treasury -Ministry of Finance, by 14 November 2012, the

disbursment of the revised national budget for 2012 was IDR 1,112.1

trillion, which is 71.8% of the total amount (IDR 1,548.3 trillion). Total

central government expenditure stood at IDR 717.993 trillion, which

is equivalent to 67.1 % of total amount IDR 1, 069.5 trillion, and the

transfer of IDR 394.1 trillion to the local governments, which is

equivalent to 82.3% of IDR 478.776 trillion of the budget allocation for

the purpose.

In light of the assumptions used in formulating the state budget for

2013, is evident that the Indonesian government has high

optimistism that 2013 will be better than 2012.


10

In general, the value of Indonesian foreign debt registers an increase

in the third quarter 2012 compared with the second quarter. The ratio

of foreign debt to GDP increases as a result of both an increase in the

volume of debt and depreciation of Rupiah. The total value of

Indonesian foreign debt in the third quarter 2012, was USD 243.910

billion, consisting of USD 115.03 billion (government debt) and USD

123.27 billion (private sector debt).

The value of foreign debt for the private sector increased by USD

2,520 million in the third quarter 2012 compared with the same period

in the previous year. Meanwhile, the value of foreign debt in the third

quarter 2012 registered an increase of USD 2,075 million in the third

quarter from USD 112,962million for the same period in 2011.

In light of that, the ratio of total foreign debt to increased from 17% in

the second quarter 2012 to 25.7% in the third quarter 2012. That said,

it is worth noting that the ratio of government foregn debt to GDP was

12.12 % in October 2012.

The ratio of government debt to GDP shows a downward trend. By

October 2012, the level of Government debt was IDR 1,844 trillion

I.4 Developments in Fiscal Policy

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

(Percent)(USD MN)

Total External Debt (LHS) Private External Debt (LHS)

Government External Debt (LHS) Total External Debt Ratio to GDP (RHS)

Figure 10: Components of Government, and Private Sector Foreign DebtGovernment, and Privatec secor Foreign Debt, and ratio of foreign Debt to GDP show an upward trend.

Source : BPS, Bank Indonesia, and CEIC

Developments in Fiscal Policy

11



or 21.58% of GDP, represented a decrease of 2.7% from the debt

ratio of 24.3% recorded in 2011. By the end of 2012, though the level

of government debt is expected to continue to rise, the fact that GDP

will rise at an ever faster rate, means that the downward trend of ratio

of government debt will continue.

The value of government securities (SBN) in November 2012 was

IDR 1,375,326 billion, which was higher than the level of outstanding

government secutities of IDR 1,314,131 billion in June 2012. Fixed

rate bonds contributed the largest percentage, with IDR 624,879

billion. Treasury securities showed a downward trend in October

2012, with a decrease of IDR 25,820 billion from IDR 8,280 billion

registered at the start of the year 2012. Variable rate government

bonds also showed a decrease. On the contrary, fixed coupon

government bonds showed an upward trend. In October 2012, the

value of fixed coupon bonds increased by IDR 26,977 billion from the

previous month to reach IDR 619,887 billion, which is an increase of

IDR 94,926 billion from the value registered at the start of the year

2012. Shariah bonds as well as foreign currency denominated bonds

also registered an increase.

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Government Debt (LHS) Government Debt Ratio to GDP (RHS)

Figure 11: Government Debt The ratio of Indonesian government debt to GDP shows a downward trend

Source: Ministry of Finance and CEIC

12


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Fixed Rate (LHS) Variable Rate Bonds (LHS)SBSN Fixed Rate Coupon (LHS) Foreign Currency Denom inated (LHS)Zero Coupon (Bonds) (RHS) Treasury Bills (RHS)SBN Outstanding (RHS)

Figure 12: Composition of Government Securities

Fixed coupon bonds show an upward trend.

Source : Bank Indonesia, Ministry of Finance and CEIC

The total value of portfolio securities, which consist of government

bonds, equity, and bank Indonesia certificates, shows an upward

trend. In October 2012, the total value of securities in hands of foregn

entities was IDR 1,721.37 trillion, which was an increase of IDR 48.98

trilion from the previous month, but at an increase of IDR 172.16 trilion

from the start of 2012. The value also represented an increase of IDR

227.188 trillion from October 2011. The value of foreign ownership of

equity stood at IDR 1,470.3 trillion, which was an increase of IDR

41.172 trillion from IDR 1,429.158 trilion posted in the previous

month, and an increase of IDR 226.838 trillion from IDR 1,243.492

trilion posted in October 2011. Meanwhile, lately foreign ownership of

government bonds though registered a decrease recently, in general

shows an upward trend. The value of foreign ownership of

government bonds was IDR 250.33 trillion in October 2012, which

was an increase of IDR 9.3 trilion from the IDR 14.36 trilion posted at

the start of the year 2012, and an increase of IDR 30.55 trilion from

October 2011. In the meantime, there is a decrease in foreign

ownership of Bank Indonesia certificates (SBI). In October 2012, the

Developments in Fiscal Policy

13



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Foreign Ownership of SBI Foreign Ownership of Government Bonds

Foreign Ownership of Equity Total Foreign Ownership

Figure 13: Foreign Ownership of SecuritiesTotal Value of Foreign Onwership of equity, Bank Indonesia Certificates (SBI), and Bonds shows an upward trend

Source : BAPPEPAM, Bank Indonesia, and CEIC

value of foreign ownership of SBI was IDR 710 billion, which

represented a decrease from IDR 1.540 trillion registered in the

previous month , and a decrease of IDR 6.930 trilion posted at the

start of the year 2012, and a decrease of IDR 30.2 trilion from the

valued posted in October 2011. The main cause of the decrease was

the implementation of the six months holding period, which is the

minimum period allowed for holders of SBI prior to making

transactions with other parties. The regulation, which came in effect

on 13 May 2011, initially set the minimum holding period to one

month (28 calendar days) but later prolonged to 6 months (182

calendar days).

On the performance of international trade, Indonesia registers a

deficit in October 2012, which came as a result of a decrease of

1.45% in the value of exports which stood at USD 15, 667.3 million

from the value for the previous month. The decrease in value of

exports is by and large, attributable to 3.42 % drop in non oil exports in

October 2012 from the figure posted for September 2012. The value

of exports decreased both in trems of monthly figures and yearly

figures (January-October 2012). The value of Indonesian exports

I.5 International

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International

Figure 14: Indonesia Trade BalanceIndonesia Trade Balance falls back into a deficit in October 2012


was USD 158,664.3 million for January-October 2012, which was a

decrease of 6.62% from USD 169,183.5 million recorded in the same

period in 2011. This is an indication that the weakening global

economy continue to have adverse impact on Indonesian exports.

Meanwhile, the value of Indonesian imports reached USD 17,214.3

million in October 2012, which represents an increase of 12.16%

from the value recorded in the previous month. The increase in the

value of imports is attributable to a rise of 11.1% and 3.53 % in the

value of non oil and oil imports, respectively. As a result of an

increase in the value of imports and a decrease in the value of

exports, Indonesia experienced a trade deficit of USD 1,547 million in

October 2012. The Indonesian balance of trade position for January-

October 2012 period, in cumulative terms, posted a deficit of USD

516.17 million.

The value of oil and gas exports in October 2012 was USD 2,988.6

million, which represented an increase of 7.87% from USD 2,770.5

million in September 2012. The increase in the value of oil exports of

31.09%, and natural gas of 7.84% and crude oil of 0.8% from the

September to October 2012, induced a rise in the value of oil and gas

exports. However, the increase in the value of oil and gas exports

during January - October 2012 was rather weak as it represented a

decrease of 8.23% from the value recorded during the same period in

the previous year.

15



Figure 15: Oil and Gas Exports and ImportsWeakening global markets have impacted on Indonesian oil and gas exports


Meanwhile, the value of oil and gas exports increased by 11.48%,

from USD 3,443 million in September 2012 to USD 3,838.1 million in

October 2012. The increase in the value of oil and gas imports in

October 2012, is largely attributable to an increase in crude oil and

natural gas imports of 37.86% and 10.01%, respectively. The trade

balance in oil and gas products posted a deficit of USD 849.50 million

in October 2012. In cumulative terms, the trade balance in oil and gas

products registered a deficit of USD 3,159.26 million for January-

October 2012 period.

The trade balance in non oil and gas decreases once again in

October 2012, as a deficit of USD 697.5 million, which followed a

surplus of USD 1,222.07 million in September 2012. This contributed

to a decrease of 3.42 % in the value of non oil and gas exports from

USD 13,127.6 million in September 2012 to USD 12,678.7 million in

October 2012. The decrease in non oil and gas exports during

January-October 2012, by sector, was attributable to a decrease of

5.30% in large Industry exports, and a drop of 9.53 % in mining and

others, compared with the same period in 2011. Nonetheless,

agricultural exports continued to register growth of 10.54 % during

January-October 2012 period, compared with the same period in

2011.

16


International

On the contrary, the value of Indonesian non oil and gas imports

registered an increase from USD 11,905.6 million in September 2012

to USD 13,376.2 million in October 2012. The increase in non oil and

gas imports in October 2012 was largely attributable to imports of

raw materials from some key trading partners such as China and

Japan, which was 12.05% higher than in September 2012 and

contributed 73.04% during January - October 2012 period.

A deficit in current accounts decreased in line with slower economic

growth of Indonesian economy. The decrease in current accounts

deficit from USD 7,687 million in the second quarter 2012 to USD

5,336 million in the third quarter 2012, was largely as a result of

improvement in the performance of trade balance which recorded a

surplus of USD 817 million in second quarter 2012 that increased to

USD 3,039 million in the third quarter 2012, as the value of imports

decreased. Meanwhile, Indonesian current account in the third

quarter 2012 registed a sharp decrease compared with the same

period in 2011. In the third quarter 2012, Indonesian current accounts

posted a deficit of USD 5,336 million, which much in contrast to

surplus of USD 766 million registered in same period in 2011.

The capital and financial accounts position worsened in the third

quarter 2012. The surplus in capital and financial accounts increased

from USD 5,054 million in the second quarter 2012 to USD 5,959

million in the third quarter 2012. In fact, capital and financial acounts

in the third quarter 2012 represented a sharp increase from the

position recorded during the same period in 2011. Indonesian capital

and financial accounts, which showed a deficit of USD 3,293 million in

the third quarter 2011, moved a surplus of USD 5,959 million in the

third quarter 2012. The surplus in capital and financial accounts was

attributable to an increase in direct investments and portfolio

investments. The increase in the direct investment surplus which stod

at USD 2,119 million in the third quarter 2011, rose to USD 3,583

million in the third quarter 2012. Meanwhile, portfolio investment,

which showed a deficit of USD 4,649 million, became a surplus of

USD 3,846 million. The increase in inflow of foreign funds attests to

the positive sentiments of foreign investors about the domestic

economy.

17




Figure 17: Current Accounts Improvement in the balance of payments stimulated better performance in current accounts

Indonesia balance of payments posted a suplus of USD 834 million in

the third quarter 2012, which was an improvement on the

performance in the third quarter 2011, which registered a deficit. The

surplus in balance of payments was attributable to a decrease in the

current accounts deficit and an increase in the surplus in the capital

and financial accounts. Indonesia registered a deficit of USD 5,336

million on its current accounts in the third quarter 2012, which

however an improvement on the deficit of USD 7,687 million posted

in the third quarter in 2011. Improvement in current accounts was

Figure 16: Non oil and gas Exports and ImportsTrade Balance in non oil and gas relapsed into a deficit in October 2012


18


International

largely a consequence of a surplus in trade balance registered in third

quarter 2012. The same is also evident in the third quarter 2012, capital

and financial accounts posted an increase of 17.92% compared with

the second quarter 2012. Indonesia recorded a surplus of USD 5,960

million on its capital and financial accounts position in the third quarter

2012, which was largest so far. Improvement in the surplus balance of

payments, contributed much to an increase in the level of international

reserves that reached USD 110,172 million by late September.

Source : Bank Indonesia and CEIC

Figure 18: Capital and Financial AccountsDevelopments in the Domestic Economy led to improvement in Capital and Financial Account


Figure 19: Indonesia Balance of PaymentsIndonesia Posted a Balance of Payments surplus in the third quarter 2012

19



I.6 GAMA Leading Economic Indicator

Indonesian business circle, which uses the quarterly GDP data for

2000-2012 shows a modestly fluctuating circle. The movement

business GDP circle is predicted using Leading Economic Indicator

(LEI), which has the ability to predict the resumption point from the

business economic circle

Gama LEI is able to predict the point at which the economy changes

course during the 2008 global financial crisis, which was the third

quarter of 2007, which was followed by the change for the worse in

course of GDP in mid 2008. Subsequently, Gama LEI predicts with

high accuracy the recovery of GDP at the start of 2009, which is

followed by improvement in PDB circle in late 2009.

Gama LEI in the third quarter 2011 started showing signs of changing

course, presaging period of impending slow growth. Gama LEI

signals in the third quarter 2012 point to a change for the better,

slower path of decreasing. This shows that GDP circle will avoid

sharp contraction and it regains stability. In light of that, economic

practitioners must be ready to determine the right strategy and policy

needed to support the economy in future.

-2

-1.5

-1

-0.5

0

0.5

1

1.5

2

2.5

3

GDP Cycles Leading Indicator

Figure 20 : Leading Economic Indicators and Indonesia GDP Business Cycles

20


I.7 Current Issue : The Economic Crisis in Europe: Continues

By Prof. Dr. Sri Adiningsih, M.Sc. and Rosa Kristiadi M.Comm

European economic crisis which begun in 2010 shows no signs of

abating. The ongoing economic crisis in the Eurozone region is

attributable to the large public debt , which started to emerge in 2000,

reflected in a significant increase in the ratio of government debt. In

2000, the ratio of government debt for Greece was just 77% of GDP,

but in 2012 it had surged to 170%. IMF predicts that Greece debt ratio

will rise above 180% in 2013, due to the widening budget deficit. Such

a condition is very much in contrast to Maastricht Treaty rules that

impose maximum limit of 60% on the country's debt to GDP ratio and

a deficit of 3 % of GDP. The theory is that economic uncertainty in the

regional economy is unavoidable if the two ratios go beyond the

maximum limits imposed

To aggravate the situation, the debt crisis has now spread to other

countries in the European Region such as Ireland, Portugal, Italy,

Spain, and even France. Ireland today has a ratio of government debt

to GDP of 103%, which is in contrast to 36% in 2000. Portugal, which

in 2012 had a debt ratio of 113%, based on IMF predictions will surge

to 119% in 2013. Consequently, the large debt overhang facing

Eurozone countries such as Greece, Portugal, and Ireland, has

hampered their capacity to repay their debt obligations, causing an

economic crisis in the European economic region.

Eurozone leadership has taken some measures tailored to

overcoming the debt crisis. One of the key policy measures was the

formation of the European Stability Mechanism (ESM) on 27

September 2012, which was been charged with the task of providing

bailout funds to members of the Eurozone that face financial

difficulties, facilitated by the Troika (International Monetary Fund,

European Central Bank and the European Comission). In addition,

Eurozone countries reached agreement on increasing money in

bailout fund from 500 billion Euros to 800 Euros or about USD

1trillion. The standby fund is aimed at not only assisting Eurozone

members that face financial crisis such as Greece, Ireland, and

Portugal to overcome such a problem, but also anticipated members

that may need bailout funds from ESM.

Current Issue

21



Another policy that was implemented in order to overcome debt crisis

in Europe, was the imposing of haircut on Greek government bonds

for the private sector. Banks and insurance reached an agreement

that in effect reduced the value of their Greek government bonds by

50%. The reduction in the value of Greek debt obligations to the

private sector was not only important from the vantage point of saving

the country from the possibility of default, but also the entire

European region.

Direct recapitalization of banks, was another measure which

European Union leadership took. The troubled banking sector of any

country within the Eurozone, could receives direct bail out fund from

European bailout fund. To that end, the Eurozone reached an

agreement that in effect will unify the supervision of banks in member

countries. That way, the bailout of banks in Eurozone member

countries will not add to the already large government debt.

Additionally, the Greece bailout fund amounting to USD 56 billion

finally approve by IMF and Eurozone's minister of finance after going

through a long debate. The Eurozone leader hopes that their policies

will be able to protect Greece as well as Eurozone from further crisis.

Nonetheless, the still large public debt in European member

countries and sluggish progress of economic reforms, have reduced

the impact of the realization of the desired effect on the economy. On

the contrary, worsening economic conditions in some European

Union member countries has induced credit rating agencies

downgraded government debt for some Eurozone member nations.

Moody's rating of Germany government debt, though confirmed its

0

20

40

60

80

100

120

140

160

180

200

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Belgium France Germany Greece Ireland Italy Portugal Spain(%)

Figure 21: Ratio of Government Debt to GDP in some Countries within the European Union region,

2000 – 2013 (in %)

Source: IMF WEO, October 2012

22


AAA rating, slapped a negative outlook. Meanwhile, recently, S&P

downgraded Greek government debt to Selective Dafault. The

above developments underscore the fact that economic crisis in

Europe is still raging.

Thus, developments in Europe to this day, have not yet to produce

sufficient confidence that the European crisis will be overcome any

time soon. Various efforts have been made to overcome the

economic crisis which has been roiling Europe since 2010, but as yet

certainty of the European Union remain as elusive as ever. This is

compounded by the slow pace of economic reforms. As if all the

above problems are not worrying enough, there are signs that United

Kingdom may exit the European Union. However, what underscores

is that the only way European union will be to solve all the host of

problems it faces today. To that end, there is little doubt that

uncertainty emanating from European Union will to a large continue

to influence the direction and pace of the world economy in 2013.

Economic Outlook

I.8. Economic Outlook

The Indonesian economy will continue to show resilience amidst the

repercussions of the European economic crisis on the global

economy in 2013. However, economic uncertainty in Europe which

is showing signs of intensifying have in 2012 led to a decrease in

economic growth of China and India, economies which were virtually

unaffected by the 2008 global financial crisis. Such a development

will eventually have negative repercussions on Indonesian economy.

Financial markets, which are the main transmission through which

global economy uncertainty affects the Indonesian economy, will

continue to be an important source of vulnerability in 2013. Large

volume of portfolio inflow in 2012, will continue in 2013, along with its

attendant uncertainty, would become source of vulnerability. The

same applies to international trade, which showed weaknesses in

2012, will follow the same pattern in 2013. In light of that, the

Indonesian economy in 2013 will continue to rely on the domestic

economy such consumption. Growth in investment , though initially

posted robust performance in 2012, is predicted to become sluggish

in 2013. Developments in the non tradable sector such as

Transportation and Communications, Construction, and Financial

Services, Real Estate and Company Services are expected to face

pressure and difficulties. To that end, GAMA LEI in its previous

chapter predicted that Indonesian economy growth in 2013 will not

23



much different to the growth in 2012 within the range of 6-6.5%. To

that end, the expectation in 2013 the economic authority will have to

implement policies that will ensure that macroeconomic and

financial markets stability, which conditions are needed to ensure

investment and business climate remains sound. In addition,

economic stimulus policies will be needed to stave off the adverse

impact of global economic uncertainty on the Indonesian economy.

Gradual reducing of fuel subsidies is one of the options that can be

taken, and funds saved in the process transferred to developing

infrastructure which will go a long way in enhancing the

competitiveness of Indonesian products on the international market.

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Documents

Indonesian Economic Review and Outlook No 1/Year I/December 2012