IERO NO 2/YEAR III/JUNE 2014

INDONESIAN ECONOMICREVIEW AND OUTLOOK

Creating Economic Optimismfor New National Leadership

No 2/YEAR III/June 2014

Macroeconomic DashboardFaculty of Economics and BusinessUniversitas Gadjah Mada

Foreword

Letmehopeitisanenjoyablereading

Prof.Dr.SriAdiningsih,M.Sc

HeadofResearcher

MacroeconomicDashboard

Indonesiaisinthemidstofdemocraticprocessthatinvolves electing new national leadership. The newIndonesiangovernmentwillfacemanychallenges,theprospectsofwhichweredimedbyindicationofslowergrowthoftheeconomyinthequarterI-2014.Inlightof that, in this Quarter II-2014 edition, IndonesianEconomicReviewandOutlook(IERO)focusesonthetheme: “Creating Economic Optimism for NewNationalLeadership”.

IndonesianEconomicReviewandOutlook(IERO)isaquarterly scientific bulletin, presents and discusslatest developments in the Indonesian economy aswell as the prospects. IERO is published by the

Macroeconomic Dashboard, which is macroeconomic laboratory facility in theFaculty of Economics and Business and in collaboration with PT Bank Mandiri(Persero)Tbk.,since2012.

To predict prospects of Indonesian economy in future, the bulletin uses bothMacroeconomic Indicator Projection Consensus of economists, and Gadjah MadaLeading Economic Indicator (GAMA LEI), which is an instrument that originallyinitiatedbyMacroeconomicDashboardandisbeingimprovedineveryedition,

In this edition, the Macroeconomic Indicator Projection Consensus predictsimprovementsineconomicgrowth,inflation,andexchangerateinthequarterII-2014comparedwiththequarterI-2014.Meanwhile,GAMALEIpredictssignsofadeclineinIndonesianGrossDomesticProduct(GDP)economiccycle.Thisisthecasedespiteindications of growth that are discernible from the movement and pattern ofIndonesianeconomybasedonyear-on-yearandquarter-to-quartertrajectory.

Lastbutnotleast,itismyhopethattheanalysisthisbulletinpresentsoftenbecomesanimportantsourceofbenefitsandsecondopinionforpublicpolicydecisionmakers,businesspractitioners,researchers,academics,students,andmembersofthegeneralpublic.Wealsohopethatthemomentumwhichthe“democracyparty”hasgeneratedcan providemuch needed optimism and hope toward developing a stronger andsustainableIndonesianeconomy.

TABLE OF CONTENTS

EXECUTIVESUMMARY................................................................................................ 1

A. FISCALANDECONOMICDEVELOPMENTS

1. Thedeclineinnetexports,whichwasattributabletoslow

growthoftheeconomyanddrasticincreaseinthegovernment

expenditureingeneralandenergysubsidiesinparticular............. 4

2. Theriseofbudgetdeficitinthe2014ChangedStateBudget

Plan(RAPBNP),willbefinancedthroughtheissuingof

governmentsecurities,whichisexpectedtosupporteconomic

growth.................................................................................................................... 11

3. TheTradeBalancedeteriorationhasnotbeencounteredby

significantimprovementonthecurrentaccount................................ 17

4. Despiteregisteringimprovement,internationalreserves

positionisdevoidofquality......................................................................... 20

5. Achievementsinthelabormarketratenotyetcausefor

celebration............................................................................................................ 22

B. Achievementsinthelabormarketratenotyetcausefor

celebration

1. Pricelevelintheeconomyremainstableandunder

control.................................................................................................................... 25

2. FinancialMarketsarestillrelativelyBullish.......................................... 27

3. ThereisnosignificantchangeinMonetaryPolicy.............................. 28

C. GAMALEIANDCONSENSUSONECONOMICPROJECTIONS

1. GAMALeadingEconomicIndicator(GAMALEI)................................. 31

2. ConsensusonProjectionsofMacroeconomicIndicators................. 32

D. ASEAN:GlobalEconomicPressureandNationalInstability

ChallengingThePathwayforASEANEconomicCommunity

2015.............................................................................................................................. 34

E. CURRENTISSUE...................................................................................................... 39

F. ECONOMICOUTLOOK.......................................................................................... 42

Macroeconomic Dashboard Universitas Gadjah Mada iii

List of Terms

AEC ASEANEconomicCommunity APBN StateBudget(AnggaranPenerimaandanBelanjaNegara) ASEAN AssociationofSouthEastAsianNations BPS IndonesiaStatisticBureau bps BasisPoint CPI ConsumerPriceIndex DGB DirectorateGeneralofBudget(DJA) IDIC IndonesiaDepositInsuranceCorporation IDR IndonesianRupiah IDX JakartaCompositeIndex JPY JapaneseYen LHS LeftHandSide LPG LiquifiedPetroleumGas MoF MinistryofFinance m-t-m MonthtoMonth NSC Philippines'sNationalStatisticsCoordination PBI BankIndonesiaRegulation(PeraturanBankIndonesia) RAPBN RevisedStateBudgetPlan(RencanaAnggaran

PenerimaandanBelanjaNegaraPerubahan) RHS RightHandSide SBN GovernmentSecurities(SuratBerhargaNegara) SBSN SovereignShariaSecurities,GlobalSukuk(SuratBerharga

SyariahNegara) SUN GovernmentBond(SuratUtangNegara) TheFed TheFederalReserve TheStates UnitedStatesofAmerica USD U.S.Dollar y-o-y yearonyear y-t-d yeartodate

Indonesian Economic Review and Outlookiv

EXECUTIVE SUMMARY

IndonesianeconomicgrowthslowedduringquarterI-2014,atrendthatis

attributable to weakening performance of net exports. However,

unemploymentregisteredanimprovementasreflectedinanincreaseinthe

number of people employed in the informal sector as well as part-time

employees. Besides,workforce in agricultural sector,which is the largest

providerofemployment,registeredslightincreaseinFebruary2014.

Thegenerallevelofprices,whichinthepreviousquarterpiledpressureon

Indonesianeconomy,showedindicationsthatitwasunderrelativecontrol

during quarter II. Generally price stability has also been shored up by

harvestingseason,whichoccurredduringMarch-May2014.

Nonetheless, with respect to international trade, the performance of

Indonesianeconomyprojectedlessthanrosydevelopments.Theendofthe

protractedsurplusonthenon-oilandastradebalanceinApril2014,plunged

Indonesianeconomyintoadeficit.Inthemeantime,balanceofpaymentsin

quarter1-2014,continuedtopostasurplusalbeitslightlysmallercompared

withthatregisteredinthepreviousquarter.Thelowersurplusonbalanceof

payments posted in quarter I-2014, is attributable to the decline in the

surplusonfinancialandcapitalitemsonthecurrentaccount.

InordertosecureimplementationofStateBudget2014,thegovernmentisin

theprocessofsubmitting theRevisedStateBudgetPlan(RAPBNP)2014.

Basedonoutcomeofthe latestdeliberations intheparliamentbudgetary

commission,thegovernmentandtheparliamentreachedagreementonthe

levelofdeficitallowedin2014ofIDR241.49trillion,whichisequivalentto

2.4%ofGDP.Theriseinthebudgetdeficitisattributabletoasharpincrease

ingovernmentexpenditureandthedeclineinexpectedgovernmentrevenue

target. Thesharpincreaseislargelyasaresultofadrasticriseinenergy

subsidieswhichinturncameasaresultofrevisiononenergysubsidieswhich

wasnecessitatedbydepreciationofrupiahaswellasadeclineinliftinglevel

Macroeconomic Dashboard Universitas Gadjah Mada 1

ofcrudepetroleumoil.Inthemeantime,therewasadecreaseingovernment

revenue target which was a direct consequence of projections of lower

growthoftheeconomy.

InMarch2014,theincreaseinboththeprivateandpublicdebt,ledtoarisein

Indonesianexternaldebt.This iscauseforconcernasdepreciationofthe

rupiahifitcontinuesatitscurrentpaceposesthedangerofincreasingthe

burden on the economy. Indonesia's external debt has reachedworrying

proportionsasreflectedintheriseinthedebtserviceratio,whichregistered

asharpincreaseof52.7%inquarterIV-2013.

Meanwhile,foreignexchangereservespostedasignificantincreaseinMay

2014,whichhoweverdidnotprojectimprovementinquality.Theissuingof

government securities continues to play a big role in that regard.

Consequently, the increase in international reserves has not impacted

positivelyontheexchangerate,whichcontinuestodepreciate.Weakening

rupiahislargelyattributabletonegativemarketsentimentsthatarosefrom

anunexpectedworseningoftradedeficitoccurringatatimeofhighpolitical

uncertaintyintheleaduptoelectionofanewpresident.Besides,external

issuesthatincludetheimpactofthetaperingoffandFedFundRatepolicies

alsocontributedtoweakeningeconomicperformance.

Thatsaid,themonetaryauthoritycontinuestomaintainreferenceinterest

rate as an indication of restrictivemonetary policy. To that end, banking

industryincreasedinterestrate,bothondepositsandcredit,whichledtothe

reductionof liquidity.Consequently, Indonesiandeposit insuranceagency

(IDIC),alsohadtoraiseitsreferenceinterestrateimposedonguaranteedin

general.

AfteracloseobservationofdynamicsofIndonesianeconomy,GAMALeading

Economic Indicator predicts a decline in the Indonesian economy (GDP)

cycle.GAMALEImodelforQuarterI-2014showsachangeinthedirectionin

theeconomyfromanupwardtoadownwardtrend.Thatsaid,therearealso

signs that point toward GDP growth in the quarter II-2014, which is

discernibleforthedirectionandmovementoftheeconomyonayear-on-year

andquarter-to-quarterbasis.

Indonesian Economic Review and Outlook2


Consideringdynamicsintheregionthataremovingtowardthecominginto

force of ASEAN Economic Community (AEC) 2015, paradoxically ASEAN

economiesarefacingpressurethatisemanatingfrominternalandexternal

sources.Internaleconomicinstabilityintheregionisalreadyhavingadverse

impactontheperformanceofeconomiesintheregion,asevidencedbyslow

growthpostedbyIndonesianeconomyand2.10%contractionofThailand

economyinquarterI-2014.Thisconditionisexacerbatedbyrisinginflation

intheregion.InMay2014,ASEANonaveragepostedinflationthathovered

around3.89%(y-o-y).Withregardsexternalsector,pressureontheeconomy

is attributable to tapering off policy in United States, unstable economic

growthinEuropeanUnion,andthecoolingoftheeconomyofChina,allof

whichhavecontributedtothepersistenttradedeficitanddepreciationof

localcurrency.

Lastly,inthisedition,IEROhighlightstheimportanceofeconomicoptimism

whichthenewnationalleadershipwillbequeathonassumingreinsofpower.

Movingforward,humanresourcedevelopmentshouldbethekeynational

developmentpriority. Inhispiece,M.EdhiePurnawan,Ph.Dproposesthe

development on the three types of forces/strengths: honesty,

innovation/imagination,andnetwork.Effortstofosterthedevelopmentof

qualityIndonesians,shouldcreateroomforoptimismforIndonesiainfacing

thefuture.

Executive Summary

Indonesian Economic Review and Outlook

1. The declining in net exports has caused the economic

slowdown and significant increase generally in the

governmentexpenditureandenergysubsidiesinparticular

Indonesian economy posted steep slowdown in quarter I-2014.

Indonesian economy posted growth of 5.21% (y-o-y), in quarter I-2014,

whichrepresentedadeclinecomparedwith5.72%(y-o-y)postedinquarter

IV-2013.Moreover,economicgrowthpostedinquarterI-2014,wasfarlower

than6.03%(y-o-y),whichwasregisteredinthesameperiodintheprevious

year.

SlowereconomicgrowthpostedinquarterI-2014islargelyasaresult

ofasignificantdeclineinnetexports.Thesignificantcontractioninnet

exports,adverselyaffectedeconomicgrowthinquarterI-2014.The-0.78%

4

A. FISCAL AND ECONOMIC DEVELOPMENTS

Figure1: Indonesian GDP growth at 2000 Constant Market Prices byIndustrialOrigin,2011–2013(y-o-y,in%)

EconomicgrowthslowedinquarterI-2014largelyasaresultofcontractionintheminingsector

Notes:

PrimarySectors:Agricultural,Livestock,ForestryandFisheries;MiningandQuarrying

IndustrialSectors:Manufacturing;Electricity,GasandWaterSupply;andConstruction

ServicesSector:Trade,HotelandRestaurants;TransportandCommunication;Finance,RealEstateandBusinessServices;andServices

Source:BPSandCEIC(2014)

Macroeconomic Dashboard Universitas Gadjah Mada

(y-o-y)contractionofexportspostedinquarterI-2014,waslargeenoughto

pushnetexportsintonegativeterritory,albeit-0.66%(y-o-y)contractionin

imports.Thedeclineinnetexportsisbyandlargerattributabletoadecrease

in exports of minerals such as coal and coal concentrates, which is a

reflectionoftheperformanceoftheminingsectorthatpostedcontractionof

-0.38%(y-o-y).Thepoorperformanceoftheminingsectoris largelyasa

directconsequenceofthecomingintoforceofMiningLawNo.4/2009on

exports of unprocessed minerals with effect from 12 January 2014.

Nonetheless,sluggishgrowthofIndonesianeconomyisalsoduetopersisting

uncertaintyintheglobaleconomy,asreflectedbydeclineofeconomicgrowth

oftheeconomyofChinafrom7.7%(y-o-y)inquarterIV-2013to7.4%(y-o-y)

inquarterI-2014,whichbyimplicationadverselyaffectedtheperformance

ofIndonesianeconomy.

Slowinggovernmentconsumptionalsocontributedtotheweakeningof

economic growth. Government consumption grew by 3.58% (y-o-y) in

quarterI-2014,whichwasfarlowerthan6.45%(y-o-y)registeredinquarter

IV-2013. Meanwhile, household consumption remained unchanged in

quarter I-2014 as it posted growth of 5.41% (y-o-y) which is not much

differentfrom5.44%(y-o-y)recordedinquarterIV-2013.Nonetheless,slow

growth of net exports, government consumption and household

consumptioninquarterI-2014,wasnotsharedbyinvestmentwhichposted

5.13%(y-o-y)in thesameperiod,higherthan4.375(y-o-y)recordedin

quarterIV-2013.

5

Fiscal and Economic Developments

Figure 2: Indonesia GDP Growth at 2000 Constant Market Prices byExpenditure,2011–2013(y-o-y,in%)

Netexportsperformanceandgovernmentconsumptiondeteriorated



Basedonmonth-to-monthtrajectory,Indonesia'stradebalancemoved

fromasurplusofUSD0.67billioninMarch2014intoadeficitofUSD

1.96billioninApril2014.Thedeclinewasduetoacombinationoffactors

that includedcontractionofexportsbyUSD0.9billionandanincreasein

importsofUSD1.73billioncomparedwiththelevelinthepreviousmonth.

Thetotalvalueofexportsdeclinedbecauseofacontractioninbothoilandgas

as well as non-oil and gas exports. Meanwhile, total value of imports

increased, driven largely by imports of non-oil and gas commodities. In

general,Indonesia postedadeficitofUSD0.89billionduring's tradebalance

January-April2014period.Thatsaid,thedeficitpostedduringJanuary-April

2014 period, is smaller than USD 1.94 billion recorded during the same

periodin2013.

ObservationoftheJanuary-April2014periodshowsthattheoilandgas

tradebalancecontinuedtobeindeficit. oilandgastradeThedeficitonthe

balanceduringJanuary-April2014,wasUSD4.2billion,whichwassmallerby

USD0.3billioncomparedwiththelevelrecordedduringJanuary-April2013

period. Thedecrease in thedeficit isasresultofa lower importsduring

January-April 2014 period thatwas smaller by USD 0.4 billion than that

registeredduringthesameperiodin2013.However,signsofimprovementin

thedeficitonthe .Thisisreflectedintheleveloftheoilandgastradebalance

6

Figure3:Indonesia'sTradeBalance,April2012-April2014(USDbillion)

Indonesia'stradebalancedeteriorated



deficitinthe whichwasUSD1.06billioninApriloilandgastradebalance

2014, thatwasUSD0.29billionsmaller than the level recorded inMarch

2014. In termsofpercentage, thedeficiton theoilandgas tradebalance

showedadecreaseof21.6%.Theimprovementwasshoredupbydecreaseof

USD0.3billioninthevalueofoilandgasimports.Onamonth-to-monthbasis,

thedecline in imports of oil and gas inApril 2014,was attributable to a

decreaseinimportsofcrudeoilandoilproducts.Importsofcrudeoilposted

adecreaseof24.78%fromUSD1.42billiontoUSD1.07billion.Meanwhile,

importsofoilproductsrecordedadecreaseof0.5%fromUSD2.36billion.

Contrariwise,importsofgaspostedasteepincreaseof29.63%.

Apparentlytherelativelylongperiodofsurplus,whichwasrecordedon

theIndonesia'snonoilandgastradebalancethatistracedasfarbackas

July2013,cametoanendinApril2014astheaccountpostedadeficit.

Thedecline in theperformanceof thenon-oil andgas tradebalancewas

contrarytotheconditionthatobtainedinquarterI-2014,whichshoweda

positive trend. Since January until April 2014, the had atrade balance

surplusofUSD4.2billion,butinJune2014plungedintoadeficitofUSD0.9

billion. Overall, however, an on observing the trend on month-to-month

basis,itbecomesevidentthatthesurplusonnonoilandgastradebalance

experienced a decline of 144.58%. The steep decrease is largely due to

contractionofnon-oilandgasexportsbyUSD0.89billioninApril,whilenon-

oilandgasimportsincreasedsharplybyUSD2.03billioninMarch.

7

Figure4:Indonesia'sOilandGasTradeBalanceApril2012–April2014(USDbillion)

Thedeficitonoilandgastradebalancepostedaslightdecrease




Contractionofnon-oilandgasexportsisbyandlarge,attributabletoa

declineintheexportsofanimalorvegetablefatsandoilscommodities.

Commodity exports decreased by 45.02% in April 2014 on a month-to-

monthbasis,followedbypearls,preciousandsemipreciousstone(23.15%),

vehicles other than railway(23.15%), mineral fuels and mineral oil

products(9.78%)andelectronicmachinery,soundrecorder,tv,etc(3.75%).

As regards the destination of Indonesian non-oil exports that posted a

decline, India recorded the largestpercentage (23.93%),China (16.47%),

Thailand(17.70%),andMalaysia(10.15%).Thegrowthofnon-oilandgas

imports is by and large driven by increase in imports of nuclear reactor,

boilers,mechanicalapplianceandmachineryandelectricequipment.Import

valueofthetwoitemsabovepostedanincreaseofUSD0.36billionandUSD

0.27 billion, respectively. Meanwhile, with respect to exports, footwear

postedthelargestincreaseof29.49%.

ReturningbacktostructureofGDP,primarysectorexperiencedpretty

significant economic contraction. During quarter I-2014, the primary

sector (which comprises Agricultural, Livestock, Forestry, and Fisheries

Sector MiningandQuarryingSector)registeredgrowthof1.97%aswellas

(y-o-y),whichislowerthan3.86%(y-o-y)registeredduringquarterIV-2013.

Theconditionwaslargelyattributableto0.38%(y-o-y)contractioninthe

Mining Sector. Meanwhile, the Manufacturing Sector and Services Sector,

whichgrewby5.46%(y-o-y)and6.39%(y-o-y)respectively, lowerposted

8

Figure5:Indonesia'sNonOilandGasTradeBalanceApril2012-April2014(USDbillion)

Balanceoftradeonnon-oilandgashasplungedbackintodeficit



growththanthatregisteredinquarterIV-2013.Onthesamenote,basedon

dataobtained fromBPS, sectors thatpostedhighgrowthyearonyear in

quarter I-2014 in ascending order were Transport and Communication

Sector (10.23%), Construction Sector (6.54%), Electricity, Gas, andalso

WaterSupplySector(6.52%).

Developments of various macroeconomic indicators show marked

deviation from assumptions which were used in formulating State

Budget(APBN)2014.Thisisindeedisthemainreasonthatcompelledthe

governmenttosubmit tate udget 2014,asantheRevised S B Plan (RAPBNP)

attempt to ensure the implementation of . Without makingAPBN 2014

necessaryadjustments,therewasbigchancethatgovernmentexpenditure

couldhaveeasilyhavegonebeyondthemaximumbudgetarydeficitlimitof

3%ofGDP,whichisstipulatedunderthelaw.Moreover,itishighlylikelythat

economicgrowthandliftingofoilandgasforthefiscalyearwillbefarlower

predictions,whilegovernmentexpenditureisprojectedtoincreasesharply

as a direct consequence of rising energy subsidies and still unabated

depreciation of rupiah. That said, it isworth noting thatmacroeconomic

assumptionsfortheannualbudgetmerelyserveasguidanceinformulating

statebudget,ratherthanfixedtargetswhichthegovernmentmustachieve.

Risingburdenemanating fromsubsidieswillexacerbate thestateof

healthoftheStateBudget.Thevalueofsubsidieswhichisexpectedtohover

around IDR 444.9 trillion is equivalent to 33.3% of budget allocation in

9

Table1:ComparisonofMacroeconomicAssumptionsinRevisedStateBudgetPlan(RAPBNP)

GDPgrowthassumptionusedinRevisedStateBudgetPlan2014wasreviseddownwardsto5.5%

Note:

*asby11June2014,theparliamentapprovedtheentiretyofchangeseffectedonthemacroeconomicassumptionsusedinformulatingRevisedStateBudgetPlanwiththeexceptionoftherupiahexchangeratewhichwasrevisedtoIDR/USD11,600;asthispieceiswritten,deliberationsofRevisedStateBudgetPlan2014arestillongoing

Source:MinistryofFinance,FinancialNote,andRevisedStateBudgetPlan2014



ChangedStateBudgetPlan2014.Suchastaggeringlevel,ifcombinedwith

personnelexpenditureis55.9%.Consequently,budgetallocationforcapital

expenditureisprojectedtoexperienceadecreaseofIDR32.9trillion.

Nearly88%ofexpenditureonsubsidiesisearmarkedforenergy.Such

staggering amount is the summation of an increase in government

expenditureonsubsidiesforfuelsand iquefiedpetroleumgas(LPG)l aswell

as Theproposedb electricity. udgetallocationsforfuelsubsidiesand3kgLPG

hasincreasedtoreachIDR284.99trillionor35.2%ofbudgetallocationsin

StateBudget 2014.Meanwhile,subsidiesonelectricityisexpectedtoreach

IDR107.15trillion.Thesurgeinexpenditureislargelyduetotherevision

thathadtobemadeintheassumptionsofrupiahexchangerateagainstUS

dollarandliftingofcrudepetroleumoil.In StateBudgetPlan Revised 2014,

theexchangeofrupiahagainstUSdollarwasrevisedupwardsfromIDR/USD

10,500toIDR/USD11,600andlifting ofcrudepetroleumdecreasedfrom

870,000barrelstojust818,000barrelsperday.Meanwhile,allocationsfor

non-energysubsidiesisprojectedtoincreasebyIDR1.1trillion.Theincrease

isaneteffectoftheincreaseinallocationsoftaxsubsidiesofIDR1.8trillion

anddownwardrevisionofsubsidiesonfoodbyIDR0.7trillion.

10

Table2:SummaryofCentralGovernmentExpenditure(IDRtrillion)

Allocationsplanforsubsidiessurgedby33,%;capitalexpendituresuffereda17.9%decline

Note:

* unaudited

** DeliberationsofRevisedStateBudgetPlan2014arestillunderwaybythetimethispiecewaswritten

Source:MinistryofFinance,FinancialNoteandRevisedStateBudgetPlan2014


2. TheriseofbudgetdeficitintheStateBudgetandRevisedState

Budget Plan 2014 which financed by the issuing of

government securities is expected to boost the economic

growth

Duringdeliberationsthattranspiredon13June2014,theparliament

reached an agreement to set the budget deficit at 2.4% of GDP or

IDR241.49 trillion. The amount will constitute an increase of IDR66.1

trillionfromthedeficitthatwassetinStateBudget .Inotherwords,2014

suchadevelopmentisnotinlinewithgovernmenteffortsandplantoreduce

budgetdeficitinStateBudgetforthisfiscalyear.Itisworthnotingthatthe

actualbudgetdeficitin2013budgetwas2.2%ofGDPorIDR202.8trillion.

DeliberationsonRevisedStateBudgetPlanagreedtentativelytosetthe

levelofgovernmentrevenuesandexpendituresatIDR1,635.4trillion

andIDR1,876.8trillion,respectively.Thus,revenuetargetisexpectedto

sufferadeclineof1.9%oftotalStateBudget allocations,2014's oraccounted

for IDR 31.8 trillion. The decrease is attributable to expectations of a

11

Note:

* unaudited

** deliberationsodRevisedStateBudgetPlan2014isstillongoingwhenthispiecewaswritten

Source:MinistryofFinance,FinancialNoteandRevisedStateBudgetPlan2014

Table3:CompositionofExpenditureonSubsidies(IDRtrillion)

ProposedbudgetallocationforenergysubsidiesintheRevisedStateBudgetPlan2014constitute88.15%ofoverallexpenditureonsubsidies



significant decline in revenues from taxes and non-tax sources. In the

meantime, government budget allocations are expected to register an

increaseof12.7%,whichisIDR 211trillion.Bythetimethiswritten,there

was not any official publications on the details of approved government

revenuesandexpenditures for StateBudgetPlan2014.However,Revised

basedongovernment'spropositiontheincreaseingovernmentexpenditure

due to significant increaseon energy subsidy allocation. That said,

governmentexpenditure isproposed to register adecreaseas a resultof

cutbacksonbudgetallocationsforministriesandgovernmentinstitutions

whichisprojectedtoreachIDR98.5trillionaswellasfinancialrebalancing

fundwhichisinlinewithexpecteddecreaseingovernmentrevenuesbyIDR

8.9trillion.

Meantime,thepercentageutilizationorabsorptionofStateBudgetas

perquarterI-2014islowerthanthatregisteredinthesameperiodin

the previous fiscal year. realization of state During quarter I-2013,

expenditure hadreached16.2%oftotalbudgetexpenditurein StateBudget

2013.Onthecontrary, expenditurebyMarch2014 wasrealizationofstate

still hovering around 15.6% of total budget expenditure in State Budget

2014.Nonetheless,innominalterms, expenditure realizationofstate in2014

ishigherthanthelevelattainedinthesameperiodfor .thepreviousyear

Ontheotherhand,realizationofstaterevenuesasperquarterI-2014,

wasalreadyhigherthanthelevelattainedin2013budgetduringthe

12

Table4:SummaryofRevisedStateBudgetPlan2014,StateBudget2014,andRealizationofStateBudget2013(IDRtrillion)

Duringdeliberationson13June2014,theparliamentagreedtoraisethebudgetdeficitto2.4%ofGDP

Note:

* unaudited

** By13June2014;deliberationsofRevisedStateBudgetPlan2014werestillunderwaywhenthispiecewenttopress

Source:MinistryofFinance,FinancialNote,andRevisedStateBudgetPlan2014


sameperiod. thestateAsperquarterI-2014, revenueshadreached17.3%of

totalprojected revenues StateBudgetstate in 2014.Thisishighercompared

totherealizationofstaterevenuesinMarch2013whichpostedonly16.6%of

StateBudget2013.Tothatend,betterperformancewithrespectstorealized

budgetrevenuesatteststomarkedsuccessineffortstowardimproving and

optimizationofgovernmentrevenuesthisyear.Nonetheless,thegovernment

willhavetorevisedownwardsprojectedrevenuetargetinthe StateRevised

BudgetPlan2014.

Indonesia's external debt increased to USD 276.49 billion in March

2014. 's external ThelevelofIndonesia debtgrewby 9.2%(y-o-y)compared

to 'sexternalthesameperiodin2013.Tothatend,Indonesia debtinMarch

2014 Doubtless,theishigherthat8%(y-o-y)chartedintheprecedingmonth.

increase in debt will add more burden to the economy if theexternal

depreciationof rupiahcontinues.

The level of Indonesia's external debt in March 2014 comprised of

USD130.51billionintheexternaldebtofpublicsectorandUSD145.98

billioninprivatesectorexternaldebt.Itisapparentfromtheabovefigures

that7.2%and52.8%oftotal debtis debtexternal publicandprivateexternal

respectively.Thus,therisinglevelofprivatesector ,whichisexternaldebt

alreadylargerthan debt, seriousconcern.publicsectorexternal hastobea

Privatesector debtregisteredanincreaseof13.1%(y-o-y)inMarchexternal

2014comparedwith thegrowthof12.8%(y-o-y)posted in theprevious

month.Meanwhile,publicsector inMarch2014registeredanexternaldebt

increaseof5.1%(y-o-y),which ishigher than3.2%(y-o-y)posted in the

precedingmonth.

13

Table5:RealizationofStateRevenue&GrantandExpenditure,2013:Q1and2014:Q1

ThereisreductioninthepercentageofrealizationofstateexpenditureinState Budget 2014:Q1; meanwhile realization of state revenue in StateBudget2014:Q1showsamarkedincrease

Note:

* Valuesetintheparliamentduringtentativedeliberations;deliberationsoftheRevisedStateBudgetPlan2014werestillunderwaywhenthiseditionwenttopress

Source:MinistryofFinance,I-account(processed)



There is need for the government to pay serious attention to rising

external debt as well as take strategic measures to prevent the

exacerbationof theproblem. 'sexternalThe levelof Indonesia debthas

reachedworryingproportions.Thisisdiscerniblefromanincreaseindebt

serviceratio inquarterIV-2013,whichreached52.7%.Suchalevelofdebt

serviceratio,underscorestheurgentneedfortheIndonesiangovernmentto

makeefforts tailored to addressing debtmanagement apriority.external

Otherwise, rising debt service ratio means that most of the country's

internationalreserveswillbespentonpaying debt,tothedetrimentexternal

of financingproductiveprograms.Rising levelof debt isalso theexternal

consequenceofBankIndonesiapolicyonBIratewhichcontinuestobe7.5%.

Suchlevelofreferenceinterestinducestheprivatesectortogooffshorefor

borrowingduetolowerrates.BankIndonesiapolicytoraiseBIrateisan

indicationthattheIndonesianeconomyisexperiencing .slowdown

Indonesiancontinuestobeanattractiveeconomyforforeigninvestors.

Tothatend,theinterestofforeigninvestorsisnotonlylimitedtothecapital

market,butalsoveryevidentinthedomesticbondsmarkets.InApril2014,

foreignownershipofgovernmentbondshadreachedIDR377trillion,which

represents41%ofthevolumeofbonds andanincreaseof23.7%outstanding

from IDR 304.72 trillion recorded during the same period last year.

Meanwhile, foreignownershipofequity inMarch2014was IDR1,645.52

trillion,which represents a decrease of 7.1% from IDR 1, 771.25 trillion

14

Figure6:Indonesia'sExternalDebt,September2011-March2014(USDbillion)

Indonesianexternaldebtshowedanincrease

Source:DJPUandCEIC(2014)


recorded inMarch2013.Moreover, foreignownershipofBank Indonesia

Certificates inApril2014wasputat IDR9.9trillion,whichrepresentsan

increasefromIDR8.26trillionrecordedinApril2013.

Thepresenceofforeigncapitalhasbeenthesourceofcontroversyona

number of occasions. During economic slowdown, both domestic and

foreigncapitalisrequiredtostaveoffanevendeeperdeclineineconomic

growth.However,presenceof foreign capital in theeconomyoften raises

fearsfromlocalactorswhoconsiderthemasthreatstotheexistenceoflocal

industries.Anotherfear,whichisincreasinglybecomingarealproblemisthe

fearthatforeigncapital,especiallythatofshorttermtenor,asmuchasitcan

easily andquickly enter an economy, it can as easily andquickly exit it,

sparking off liquidity shortages, slower investment, and economic

slowdown. To that end, the Indonesian government continues to take

measures that are aimed at strengthening the domestic capital market,

deepeningfinancialmarkets,whicheffortsareexpectedtoincreaseliquidity,

wideninvestorbase,anddiversificationofavailableinstruments.

Issuing government securities (SBN), is the option which the

Indonesiangovernmenthaschosentofinancedomesticexpenditure.

Total government securities outstanding inApril 2014was IDR 1,495.74

trillion, which represents an increase of IDR 327.83 trillion (y-o-y) (see

Figure12).InApril2014,fixedbond wasIDR828.32trillion,whichisanrate

15

Figure7:ForeignOwnershipofIndonesianSecurities,October2011-April2014(IDRTrillion)

ForeignownershipofIndonesiasecuritiesshowsanincrease

Source:DJPU,BI,andOJK(2014)



increaseofIDR173.47trillion(y-o-y).Meanwhile,inApril2014,thelevelof

SovereignShariaSecurities SBSN( )wasIDR98.90trillion,whichrepresented

anincreaseofIDR23.04trillion (y-o-y).Thepositivetrendisanindication

that interest in is rising,which also signals good prospects for theSBSN

development of in the domestic economy. TheIslamic bond market

government has issued to reduce the budget deficit.SBSN state 2014's

Besides, the existence of is expected to attract foreign investors,SBSN

especiallythosewhohailfromtheMiddleEasttoinvestinIndonesia.Asby

April2014,thelevelofforeigncurrencydenominatedbondswasIDR405.96

trillion,which represented a decrease of IDR 2.95 trillion from the level

recorded inMarch2014,butrecordedan increaseof IDR112.53trillion

comparedtoApril2013(y-o-y).Thelevelofgovernment treasurybill(SPN)

postedaslightdecreaseofIDR500billoninMarch2014,tothelevelIDR39.8

trillion,andrepresentedanincreaseofIDR18.78trillion(y-o-y).

The need for improving government financial management is

absolutelyessentialforthenewgovernment.Thenewgovernmentwill

faceformidablechallenge. Nonetheless,itisfairtobeoptimisticconsidering

the fact that this is an issue thathasdominatedeconomicprograms that

variouscontestantsintheelectionshaveproposediftheyaregivenpublic

mandatetogovern.Thisisthemoresogiventhelargebudgetallocationspent

onconductingtheelectionswhichisbymanyaccountsisaimedatsearching

forandidentifyingqualitylegislativeandexecutiverepresentatives—grew

16

Figure8:CompositionofGovernmentSecurities,November2011-April2014

Governmentsecuritiesrecordedanincrease

Source:DJPUandCEIC(2014)


by 9.5% in real terms . The government allocated IDR 20.5 trillion for¹

conducting2014elections,whichisobviouslyhigherthanIDR15.1trillionin

allocated for 2009 elections (DGB-MoF, 2014). The hope is that budget

allocationforthegeneralelectionscorrelatespositivelywiththequalityof

representatives,whothegeneralpublicelectastheirrepresentatives.

3. TheTradeBalancedeteriorationhasnotbeencounteredby

significantimprovementonthecurrentaccount

Compared with quarter I-2013, current account deficit shows some

slightimprovement. Duringquarter I-2014,thecurrentaccountposteda

deficitofUSD4.19billion.Meanwhile,duringquarterI-2013,thedeficiton

the current account was USD 6.01 billion. A similar positive trend is

discernibleonaquarter-to-quarterbasis,intheperformanceofthecurrent

account,whichalsorecordedslightimprovement.Thedeficitonthecurrent

accountpostedaslightdecreaseofUSD0.12billioncomparedwithUSD4.31

billion.Improvementintheperformanceofcurrentaccountisattributableto

thedecreaseinthedeficitonincomeaccountandservicestradebalance.

Thedeficitontheincomeaccountandservicestradebalancerecordeda

decreaseinquarterI-2014.DuringquarterIV-2013,thetwoaccountshad

deficits of USD 6.98 billion and USD 3.11 billion, respectively. In the

subsequentquarter,thedeficitonthetwoaccountdecreasedtoUSD6.49

billionandUSD2.21billion,respectively.Thedecreaseinthedeficitonthe

incomeaccountwasaresultofadeclineinthepaymentofintereston public

andprivate debtaswellasthedecreaseinprofitsforforeigndirectexternal

investmentcompanies.Meanwhile, thedecrease in thedeficitonservices

trade balancewasasaresultofadeclineofUSD0.23billioninthedeficiton

thetransportationsectorandanincreaseofUSD0.4billioninthesurplus

recordedonthetravelsector.

Thesurplusonthegoodstradebalanceandcurrenttransferdeclinedin

quarter I-2014. In comparative terms, the surplus on the two accounts

postedadecreaseof25.52%and 4.96%toreachUSD3.55billionandUSD

17

¹Innominaltermsgrowthas35.8%,whileInflationfrom2009untilMay2014was26.3%,whichtranslatesintorealgrowthof9.5%



0.97billion,respectively.Thesurplusonthegoodstradebalancedecreased

asaresultofaUSD3.06billiondropinthevalueofnon-oilexports.Besides,

thedecreaseinthesurpluswasalsoattributabletoanincreaseinthedeficit

on Indonesia oil trade balance. Meanwhile, the slight decrease in the's

surplus on the current transfer account was as a result of a decline in

governmentrevenuesandworkerremittances.

ThesurplusonthecapitalandfinancialaccountdecreasedinquarterI-

2014.ThesurplusonthecapitalandfinancialaccountdecreasedUSD8.85

billioninquarterIV-2013toUSD7.83billioninquarterI-2014.Thedeclinein

thesurpluswasattributabletoadeficitontheotherinvestments.Theother

investments,whichinitiallyrecordedasurplusofUSD6.52billioninquarter

IV-2013,becameadeficitofUSD4.14billion. Thiswaslargelyduetothe

deficitrecordedonboththeassetsandliabilities.Assetspostedadeficitof

USD3.36billion,whileliabilitieshadacurrentaccountdeficitofUSD0.77

billion.Nonetheless,theperformanceofcapitalandfinancialaccountshows

animprovementonayearonyearbasis.DuringquarterI-2013,capitaland

financialaccountpostedadeficitofUSD0.55billion.

TherewasasurgeindirectandportfolioinvestmentduringquarterI-

2014.PortfolioinvestmentspostedthelargestsurplusfromUSD1.79billion

inquarterIV-2013toUSD8.97billioninquarterI-2014.Improvementinthe

performanceofportfolioinvestmentcameasaresultofanincreaseinforeign

capitalflowstoIndonesiathattookformsofvariousfinancialinstruments

18

Figure9:Indonesia'sCurrentAccount,2011:Q1-2014:Q1(USDbillion)

Thedeficitonthecurrentaccountpostedslightimprovement

Source:BankIndonesiaandCEIC(2014)


issuedby theprivateandpublic sector.By thesame token, foreigndirect

investmentalsopostedanincrease,reachingthelevelof USD4.53billion,

which led toan improvement in thesurpluson foreigndirect investment

fromUSD0.53billiontoUSD2.99billion.

Theupwardtrendintheperformanceofthebalanceofpaymentsseems

tohavehaltedinquarterI-2014.Thisisreflectedinalowersurplusinthe

balanceofpaymentsthaninthepreviousquarter.DuringquarterIV-2013,

thesurplusonthebalanceofpaymentswasUSD4.41billion,butdroppedby

53.15%toUSD2.07billioninquarterI-2014.Thedecreaseinthesurpluson

thebalanceofpayments isattributable toadecline in thesurpluson the

capital and financial account which failed to make any gains from

improvementinthecurrent.However,inrelativeterms,theperformanceof

the balance of payments in quarter I-2014 shows some improvement

comparedwiththepositioninquarterI-2013.DuringquarterI-2013,the

balanceofpaymentsrecordedadeficitofUSD6.61billion,butbyquarterI-

2014,hadbouncedback intoasurplus.This impliesthatonyearonyear

basis,thebalanceofpaymentsregisteredanincreaseofUSD8.68billion.

19


Figure10:CapitalandFinancialAccount,2011:Q1-2014:Q1(USDbillion)

Thesurplusonthecapitalandfinancialaccountdecreased



4. Despite Registering Improvement, International Reserves

PositionisDevoidofQuality

ThelevelofinternationalreservesinMay2014reachedUSD107.048

billion,whichwasanincreaseofUSD1.485billioncomparedwiththe

positioninApril2014. Theinternationalreservepositioncanfinance 6.2

months of imports, which criteriamakes it fulfill international adequacy

standard (three months of imports). Subsequently, in April 2014,

international reserves reachedUSD105.56 billion,which represented an

increaseofUSD2.97billioncomparedwiththepositioninMarch2014.The

increaseinthelevelofinternationalreservescameasaconsequenceofan

increase in oil and gas exports during April–May 2014 period and

improvement in capital flow to Indonesia inMay2014. Bank Indonesia,

throughPBINo.14/25/PBI/2012onforeignexchangerevenuederivedfrom

exportsand debtrelatedwithdrawals seemedtohaveregisteredexternal

successinforcing exporterstodeposittheirrevenuesinforeignexchange

banks. Consequently, the policy has contributed to improving Indonesian

international reserve position. Meanwhile, in March 2014, international

reservepositiondecreasedbyUSD149millionwhichrepresentsadeclineof

0.145% compared with the level registered in the previous month. The

declineintheinternationalreservepositionisattributabletoeffortsbythe

government to repay USD 2 billion of its bond obligations that reached

maturity. To that end, Bank Indonesia, expects the international reserve

20

Figure11:BalanceofPayments,2011:Q1-2014:Q1(USDbillion)

AnupwardtrendinthesurplusonthebalanceofpaymentscametoahaltinquarterI-2014



positiontodeclineinquarterII-2014.Onaseasonalbasis,quarterIIisoften

characterized by maturity of securities that require payment of interest,

dividends,androyalties.

On the other hand, since January 2014, the issuing of government

securities (SBN) also contributed to the increase in the level of

international reserves. During quarter I–2014, SBN denominated in

foreigncurrencyincreasedbyUSD3.05billion.Theadditionmeantthatthe

governmentbond (SUN)denominated invarious currencies suchasUSD,

Japaneseyen,andEurostobecomeUSD30.19billion,JPY155billion,and

21


Table 6: Governments Bonds Denominated in Foreign Currencies andBilateralLoans,2012–2014(inUSDbillionunlessstatedotherwise)

The government securities denominated in USD increased by USD 3.05billioninquarterI–2014;meanwhile,bilateralloanspostedanincreaseofUSD4.45billioninApril2014

Note:

* =JPYbillion

Source:DJPUandCEIC(analyzed,2014)

Figure12:IndonesianInternationalReserves(inUSDbillion)andDevelopmentsintheExchangeRate(IDR/USD),May2011–May2014LevelofinternationalreservesshowsanupwardtrendandreachedUSD107.048billion;thedepreciationofrupiahcontinues



GlobalSukuk USD4.15billion.DuringquarterIV–2013,theleveloftobecome

SUN denominated in reached USD 27.14 billon,USD whereas SUN

denominatedinJapaneseYenreached SBSNreachedJPY155billion,and USD

4.15billion. Overall,foreignportfolioinvestment,intheformofequityand

SUN, posted a drastic increase of USD 8.51 billion in quarter I–2014,

comparedwithanincreaseofUSD1.63billioninquarterIV–2013.

Therise in international reserveshasnot led to theappreciationof

rupiah.RupiahexchangeratebylateMay2014wasIDR11,611perUSD,

whichrepresentedadepreciationof0.69%comparedwiththevalueinApril

2014(IDR11,532perUSD).Meanwhile,rupiahexchangerateinApril2014

depreciatedfurthercomparedwiththepreviousmonth.Thedepreciationof

Rupiahcameontheheelsofnegativemarketsentimentsthatarosefromthe

newsrelatingtotherelapseofthebalanceofpaymentsintoadeficit(balance

ofpaymentspositioninApril2014recordedadeficitof USD1.96billion)

whichiscoupledwiththeperiodicalpatternof debtrepaymentinexternal

quarterII.Besides,TheFedpolicyofgraduallyreducingquantitativeeasing

this year also has had significant impact on market practitioners. The

downwardtrendintherupiahisexpectedtocontinueasTheFedisexpected

toraiseFedFundratein2015.Specifically,however,dynamicsinIndonesian

politics thisyear, inwhichthecountrywillconductpresidentialelections

havealsohadadverseimpactontherupiahexchangerateinMay2014.The

year2014beingayearof'politics'isexpectedtobecharacterizedbyhigh

uncertainty,whichforinvestorsmeansthattheyhavetoseeksecurityfirstas

adoptawaitandseestrategy.

5. Achievements in the labor market rate not yet cause for

celebration

Indonesiaregisteredanopenunemploymentrateof5.7%inFebruary

2014,whichisthelowestinthreeyears.AccordingtoBPS,thenumberof

peopleclassifiedasunemployedinFebruary2014was7.15 million,which

wasadecreasecomparedwith7.41millionregisteredinSeptember2013.

Theachievementmadeinthelabormarketcameontheheelsofanincreasein

employmentintheinformalsectorandthoseworkingparttime. henumberT

ofemployeesintheinformalsectorincreasedby420,000 Februarybetween

2013 February2014,whichrepresentsanannualizedincreaseof0.60%and

(y-o-y).Besides that,BPSdataalsoshowed that thenumberofpart time

workersrosesharplyfrom22.93millioninFebruary2013to26.40millionin

22


February 2014. Despite marked improvement in the realm of

unemployment,BPSnotedthatmostaddedemploymentinFebruary2014

(46.80%)wassuitableforpeoplewithprimaryeducationattainmentand

belowleavingonly7.49%ofnewemploymentforemployeeswithuniversity

education. Meanwhile,theparticipationrateoftheworkforceinFebruary

2014was69.17%,whichwashigherthan66.77%registeredinAugust2013.

With regards to the structure of employment in February 2014, the

contribution of agricultural sector registered a slight increase. That

said,thenumberofpeopleemployedintheagriculturalsectorinFebruary

2014representedadeclineforthelevelthatobtainedinthepreviousyear.

The numberofpeopleemployedintheagriculturalsectordecreased from

41.11 millioninFebruary2013to40.83millioninFebruary2014. However,

employment in the trade and social services sector increased. The above

developmentsattesttotheshiftinthestructureofemploymentinIndonesia

fromtheagriculturalsectortoothersectors,especiallytrade,servicesand

industry. Nonetheless, sectorAgriculture, Forestry, Hunting and Fishery

continuestobethemostimportantproviderofemploymentinIndonesia ,

contributingasmuchas34.55%tototalemploymentintheeconomy.Second

inline,basedoncontributiontoemploymentintheeconomyinFebruary

2014, was (21.84%), Trade Community, Social, and Personal Services

(15.64%)and (13.02%).ManufacturingIndustry

23

Table 13: Labor Force Participation and Open Unemployment inIndonesia,February2011–February2014(in%)

Unemploymentratesituationregisteredsomeimprovement




Table7:Populationof15YearsofAgeandAboveWhoWorkedbyMainIndustry,2012-2014(%)

Despite showing a downward trend, Agriculture, Forestry, Hunting, andFisherysectorcontinuestobethemainsourceofemploymentinIndonesia



1. PriceLevelintheEconomyRemainStableandUnderControl

As the country entered harvesting season for food crops, inflation

trendeddownwardsinMarch2014.InMarch2014,inflationwas7.32%

(y-o-y),whichislowerthanthelevelregisteredinthepreviousmonth.Based

on the compositionof inflation inMarch2014 (y-o-y), core inflationwas

5.35%,inflationduetovolatilepriceswas5.55%andinflationofgovernment

administered prices was 16.84%. On month-to-month basis, inflation in

March2014was0.08%,declined inApril2014,a trendthatcontinuesas

reflectedbyadecreaseof7.25%(y-o-y)largelyduetotheeffectofharvesting

seasononcommodityprices.Onayear-on-year,coreinflationwas5.46%,

inflationofvolatileprice5.24%,andinflationofgovernmentadministered

was17%.Meanwhile,onamonth-to-monthtrajectory,April2014registered

adeflationof0.02%.

Despite the fact thatharvestingseason isstillunderway, inflation in

May2014trendedupwards.May2014registeredInflationof7.32%(y-o-

y), which is higher than 5.47% (y-o-y) registered in May 2013. In the

meantime,onamonth-to-monthbasis, inflation inMay2014was0.16%.

B. MONETARY AND FINANCE SITUATION

Figure14:Inflation,May2011–May2014(y-o-y,in%)

InflationinMay2014was7.32%(y-o-y)



BasedonthecompositionofMay2014inflationonayear-on-yearbasis,core

inflationwas5.63%,volatileprice inflationwas6.17%,andadministered

pricewas16.23%.

Onamonth-to-monthbasis,April2014registeredadeflationof0.02%

(m-t-m),largelyduetothedeclineinexpenditureonFoodStuff . Food

Stuff FoodStuffexperiencedadeflationof1.09%(m-t-m).Someofthe that

registeredpricedeclinewerein6subcategorieswhichincludedcondiments

andspices(7.4%).ThecontributionFoodStuff's inflationaccounted for -

0.22%ofheadlineinflationinApril2014.PricesthatdeclinedinApril2014,

amongothersincludedchilipepper,rice,onions,spinach,and .waterspinach

Furthermore,inflationinApril2014wasdominatedbythegroupofHealth

commodity, accounted for , group of0.6% (m-t-m). Meanwhile based on

commodities,thei wasdominatedbynflationinMay2014(month-to-month)

Health commodity which increased by 0.41%, followed by inflation on

Prepared Food, Beverage, Cigarette, and Tobacco Housing, (0.35%), and

Table8:InflationofIndonesiabyGroupofCommodities,2011–2014(2012=100,m-t-m,in%)

Foodsinduceddeflation,inflationinMay2014was0.16%(m-t-m)

Note:(1)FoodStuff;(2)PreparedFood,Beverage,Cigarette,andTobacco;(3)Housing,Water,Electricity,GasandFuel;(4)Clothing;(5)Health;(6)Education,Recreation,andSports;(7)Transport,CommunicationandFinancialServices



Water,Electricity,GasandFuel FoodStuff (0.23%).Meanwhile,pricesof

continuedtoregisterdeflationaswasthecaseinthepreviousmonth,largely

attributabletothedeclineofpricesofredpepper,chili,andriceduetothe

harvestingseasonthatisstillunderway.

Ingeneral,citiesinIndonesiaexperiencedinflationinMay2014.Outof

82cities,67ofthem,registeredinflation,withPematang Siantarbeingthe

citythatregisteredthehighestinflationof1.09%(m-t-m).Thenumberof

citiesthatregisteredinflationinMay2014ishigherthan43citiesand45

citiesthatregisteredinflationinApril2014andMarch2014,respectively.On

thecontrary,15citiesregistereddeflationinMay2014,withPangkalPinang

being thecity thatexperiencedthe largestdeflationof (1.27%m-t-m). In

April2014, PangkalPinangcityregisteredthehighestinflation(1.57%m-t-

m),whileJayapurarecordedthelowestinflationinthesameperiod(-1.79%

m-t-m).Meanwhile,inMarch2014,Meraukeregisteredthehighestinflation

(1.15%m-t-m),whileTualrecordedthelowestinflation(2.43%m-t-m).

2. FinancialMarketsareStillRelativelyBullish

TheperformanceofIndonesiaCompositeIndex(IDX)continuestoits

upwardtrendinMay2014.AtthecloseoftradingsessioninMay2014,IDX

was4,894,whichrepresentsanimprovementof1.11%comparedwiththe

levelregisteredinthepreviousmonth. Infact, inMay2014,IDXreached

5,031.Thevalueof5,000ontheIDXconstitutesthepsychologicallevelfor

investorsasitisregardedasabenchmarkfornewsharepriceswhichwill

impactmarketpractitioners.AttheclosureofthetradingsessioninApril

2014, IDX registered a value of 4,840, which an increase of 1.51% is

comparedwiththelevelrecordedinthepreviousmonth.Intensiveactivityof

IDX withinthegreenlevelisindicativeofrisinginvestorconfidenceinthe

currenteconomicconditionandeconomicprospectsofIndonesianeconomy

amidsttheyearofpolitics. Atamorefundamentallevel,theresurgenceof

investorconfidenceinIndonesianeconomyreflectsinvestorperceptionthat

Indonesian economic fundamentals have improved. In quarter I–2014

foreigninvestorscarriedoutnetbuyof IDR24.62trillion, whichishigher

thanthelevelmadeinquarterIV–2013ofIDR11.11trillion.

Inthebondsmarket,themovementofgovernmentbondyieldbythe

endofMay2014showedadownwardtrendshedding12bpsto8.21%.

Nonetheless,ashasbeenthecaseinpreviousmonths,themovementofthe

SUN SUNyieldfollowsmovementandfluctuationofinflation.Thus,the yield

27

Monetary and Finance Situation


hasshown sinceJanuary2014adownwardtrend ,changedcourseinMay

2014,largelyasaconsequenceofhigherinflationthatwasregisteredinMay

2014comparedwiththelevelinApril2014.Duringthepreviousmonths,

inflationslowedslightly,whichinturninducedadownwardtrendinSUN

yield.TheyieldonSUNinlateApril2014was8.09%,whichislowerthanthe

levelregisteredinMarch2014(8.21%).

3. ThereisNoSignificantChangeinMonetaryPolicy

The Indonesia Deposit Insurance Corporation (IDIC) has decided to

raiseitsguaranteedintresetrateby25basispoints(bps)to7.75%in

May2014.Theincreaseininterestrateconstitutesanattempttoensurethan

depositsofbankcustomersareguaranteed.Meanwhile,theupwardtrendin

bank interestratecontinues.Liquidity in Indonesianbanking indomestic

assetsistendingtowardsbecomingrestrictive.ThisisaconsequenceofBI

restrictivemonetarypolicywhichisreflectedinkeepingBIrateat7.5%.IDIC

p the 'solicy will be in effect until September 2014. Meanwhile IDIC

guaranteed forMarch-April2014remainedunchangedat7.5%.interestrate

Interestrateontimedepositscontinuestobehigh,higherthantherate

thatisapplicableonguaranteeddeposits.Interestrateontimedeposits

28

Figure15:TheMovementofIndonesiaCompositeIndex(IDX)and10YearsGovernmentBondYield,May2011–May2014(%)

IDXcontinuestheupwardtrend;meanwhile,SUNyieldwas8.21%inlateMay2014

Source:IDX,CEIC,andBloomberg(2014)


foronemonthmaturitywas8.1%inApril2014.Thisisanindicationthat

Indonesian Banking sector is experiencing restrictive liquidity condition,

whichisattributabletoslowergrowthinbroadmoney(M2).Theslackening

ofM2isasaresultoflowrealizationofgovernmentexpenditureanddecline

increditgrowth.Ashasbecomethepractice,therealization/absorptionof

government expenditure is initially slow at the outset but picks up pace

toward the end of the fiscal year. By quarter I–2014, government

consumptiongrewbyamere3.6%(y-o-y),which is lower than the level

registeredinquarterIV–2013whichgrewby6.4%(y-o-y).Interestrateon

credithasrisensinceJanuary2014.Thisisshowedbythetrendininterest

rateoncreditwhich inFebruary2014roseto12.51%,and inMarchwas

12.53%,whileinApril2014itreached12.56%.

Restrictive monetary policy in May 2014 continues in line with the

inflationtargetingpolicyandeffortstoimprovebalanceofpayments

position.ThisisreflectedinoutcomesofBankIndonesiagovernorscouncil

meeting convened on May 12, 2014, which decided to leave BI rate

unchangedat7.5%.Thedecisionwastakenafterfactoringininflationthatis

under control, the downward trend shown by the deficit on the current

account,optimismthatisexudingfromfinancialmarketscondition,domestic

29

Figure16:DevelopmentsinIDIC'sGuaranteedInterestRateandTimeDeposits,2011–2014*(%)

TheIDIC'sguaranteedinterestrateincreasedby25bps,meanwhilethetimedeposits'interestratefor1monthisaboveBIrateandIDIC'sguaranteedinterestrate

Catatan:

* =April2014(timedeposit)andMay2014(guaranteedinterestrate)

Source:IndonesiaDepositInsuranceCorporation,BankIndonesiaandCEIC(2014)

Monetary and Finance Situation


demandwhichcontinuestooffsetcontraction,andeconomicprospectsof

Indonesianandglobaleconomythataregraduallyimproving. Nonetheless,

Indonesianeconomycontinuestofaceanumberofrisks,whichamongother

factors,include: uncertaintythatcontinuestocastalargeshadowonthe

economyemanatingfromtheimpactoftaperingoffpolicyandexpectedplan

toraiseFEDFundRatein2015;declineinthevalueexportsattributableto

theweakeningoftheeconomyofChinawhichoneofIndonesia'skeytrading

partners;anddomesticinflationwhichisexpectedtoriseduetopossibilityof

badweatherintheeventofElNinooccurrenceandgovernmentplantoraise

pricesofsomeservicesthatfallunderthecategoryof pricesadministered

(basicelectricityratesandLPG12kgprice).

30

Figure17:DevelopmentsinBIRate,May2011–May2014(%)

BankIndonesialeftBIrateunchangedat7.5%inMay2014



1. GAMALeadingEconomicIndicator(GAMALEI)

LeadingEconomicIndicatorisoneofearlywarningsystemmodelsthat

predictsthemovementanddirectionoftheeconomyinfuture.GAMA

Leading Economic Indicator (GAMA LEI) is a model developed by the

MacroeconomicDashboardattheFEBUGM.Turningpointsandmovements

intheGAMALEIgraphedisusedtopredictthedirectionoftheIndonesian

economy over some period in future. GAMA LEI analysis is based on

quantitative and qualitativemethods that generate and produce the best

prediction.

ThecompilationofGAMALEIusesvariousindicatorswhichhavebeen

subjectedtorobuststatisticaltests.Theperformanceofavariablesuchas

investment, automobiles sales, exports and international reserves are

analyzedfrombothmacroperspectivesuchasmarketcapitalizationandIDX

of the capital market which have significant influence on the economy.

Nonetheless, it is worth noting that somemacroeconomic indicators are

likelytochangeanytimeinfuture.

GAMALEI is able tomakean accuratepredictionof the cycle of the

Indonesianeconomysometimebackpriortotheevent.Theprediction

whichGAMALEImakeshasproveditsefficacyinpredictingthedirectionof

thecycleofIndonesianeconomy.Thedeclineintheperformanceofsomekey

economic indicators inIndonesianeconomyhave ledtotheweakeningof

economicgrowthin2014:Q1comparedwith2013:Q4.Inthisedition,GAMA

LEI predicts the fluctuation of the economy in 2014, which has been

designated as the year of politics, especially so in the lead up to the

forthcomingpresidentialelectionsinJuly.

ThevarietyofpatternsinIndonesianeconomicgrowthandprojection

of the cycle of the Indonesian economy in GAMA LEI model has the

ability to produce a comprehensive prediction. The prediction of the

businesscycleplacesalotofemphasisonthemovementoftheeconomic

cycleinthedirectiontowardeitherexpansionorcontractionforsometimein

future.GAMALEI2014:Q1cycleliesattheexpansionphase(fallsabove100),

31

C. GAMA LEI AND CONSENSUS ON

ECONOMIC PROJECTIONS


albeit signs of declining. As an example: Indonesian economic growth in

2014:Q1(year-on-year)increased,buttheGDPcyclegeneratedbythemodel

showsadownwardtrendthatisstillwithintheexpansionphase.

OutcomesofGAMALEIpredictioninthiseditionpointstoadownward

trend in the economic cycle of Indonesian GDP. GAMA LEI model in

2014:Q1showsdownwardtrendintheeconomy.Thedownwardmovement

of GAMA LEI generates prediction that shows a decline in the cycle of

IndonesiaGDPin2014:Q2.Therevelryandgarlandthatischaracterizingthe

year of politics, which will reach its crescendo in the lead up to the

presidentialelectionsinJuly,2014,shouldinstillhopeandoptimisminthe

Indonesianeconomy.Itisthehopethatthenextgovernmentwillhavethe

knack to take advantage of the current momentum to protect, or even

improve,theeconomicperformancein2014:Q1.

2. ConsensusonProjectionsofMacroeconomicIndicators

The outcome of consensus on three principal macroeconomic

indicators for Indonesian economy--economic growth, inflation, and

exchange rate--showed a trend toward improvement from 2014 to

2015.Theconsensuswasobtainedaftera survey thatwasconductedby

MacroeconomicDashboardteamwithrespondentswhoweredrawnfrom

lecturersandresearchersatFEBUGM.

32

Figure18:GAMALeadingEconomicIndicator

GAMALEIpredictsadownwardtrendinthecycleofIndonesianeconomy


Ingeneral,realGDPgrowth(y-o-y)inquarterII-2014ispredictedto

increasecomparedwithrealGDPgrowthregisteredinquarterI-2014.

RealGDP(y-o-y)ispredictedtogrowby5.46%±0.37%inquarterII-2014

and5.47%±0.42%inquarterIII-2014. Onayearonyearbasis,realGDP

growthin2014and2015ispredictedtobe5.63%±0.48%and6.0%±0.6%.

Inflation in Indonesian in 2014-2015 is predicted to exceed seven

percent.In2014,outcomeofpredictionindicatedthatinflationinIndonesia

willbe7.88%±1.38%.In2015,inflationispredictedtodeclineto7.36%±

1.82%.Meanwhile,onaquarteronquarterbasis,inflationinIndonesiain

quarterII-2014andIII-2014ispredictedtohoveraround7.42%±1.56%and

7.90%±1.59%.

Theexchangerateofrupiahispredictedtoappreciateandwilltrend

toward becoming more stable in 2014. This is despite the current

exchangeratethathoversaroundIDR/USD11,000.InquarterII-2014the

exchange rate of rupiah is predicted to hover around IDR/USD 11,563 ±

IDR/USD349. In the following quarter the exchange ratewill appreciate

slightlytothelevelIDR/USD11,553±IDR/USD390.Meanwhile,onayearon

yearbasis,theexchangerateofrupiahin2014ispredictedtobeIDR/USD

11,366±IDR/USD479andisprojectedtoappreciatein2015tothelevelof

IDR/USD11,072±IDR/USD316.

33

Table9:EstimatesofRealGDPgrowth(y-o-y,in%)

Source:Primarydata;processed(2014)

Table10:EstimatesofInflation(y-o-y,in%)


Table11:EstimatesofExchangerateofRupiah(IDR/USD)


Gama LEI and Consensus on Economic Projections


AstheincomingofASEANEconomicCommunity(AEC)2015,apressure

emanatingfromtheglobaleconomyisstillovershadowingeconomies

intheregion.SinceTheFedconsiderstheUSeconomyalreadygaintheir

momentumofstability,itthendecidedtoimplementthetaperingoffpolicy

which constitutes a restrictive monetary policy. Consequently, the policy

'driesup'capitalflowfromtheUStoASEANeconomies,whichinturnhasled

todeeperdepreciationof localcurrenciesthathasbeenexperiencedover

recently(IndonesianRupiahexchangerateisexpectedtohoveraroundanew

equilibriumlevel).Meanwhile,EuropeanUnionwhichhastoacertainextent

beenabletoovercometheworstpartofthecrisisisstillaccompaniedbythe

variation of economy performance among economies in the region.

Economic growth in European Union has yet in turn support domestic

consumer demand growth for global goods, including ASEAN products.

While China, as the prominent trading partner for ASEAN economies is

currently undergoing 'cooling' phase of growth, impacting on the

performanceofinternationaltradeofASEANeconomies.

National Instability is becoming formidable challenge in affecting

economicperformanceinASEANeconomies.Instabilitythathappenedin

ASEAN economies takes into various forms such as political challenges,

economicchallengesandsecuritychallenges.Theimpactofnaturaldisaster

thatstruckthePhilippinesin2013,theremovalofvarioussubsidyschemes

andadoptionofvarioussocialsecuritypoliciesinregioneconomies,political

transitions that is underway in Indonesia, political crisis that occur in

Thailand,implementationofsharialawinBruneiDarussalam,openmilitary

conflictsbetweenVietNamandChina,disputesoverIslandsinSouthChina

SeabetweenChinaandsixmembernationsofASEANandtheslowpaceof

infrastructuredevelopmentaresomeoftheexamples.Someoftheexamples

citedaboveattesttothefactthattheregion'suncertaintywillbeafuture

seriouschallengethatASEANeconomieswillfaceiftheyareseriouslyaiming

tomaintaintheeconomicmomentumthatiscurrentlyunderway.National

stabilityisanessentialaspectforASEANeconomiestokeepglobalinvestor

interest in investing into the national manufacturing sector. Nurturing

political stability, economic stability and global public confidence is an

importantpaperworksforASEANeconomiesamidstvariouschallengesthat

arerootedintheincreasinglyintensivenationalinstability.

34

D. ASEAN:

Global Economic Pressure and National Instability

Challenging The Pathway for ASEAN Economic

Community 2015


Maintainingcompetitivenessamidstglobaluncertaintyanddomestic

instabilityiscrucialfortheregiontowardAEC2015.Competitivenessis

vitaltoensurethateconomiesintheregionhaverequisitereadinesstoenter

AEC 2015. Amidst various challenges, both external and internal, the

government must have the ability to enhance and even building their

economiescompetitivenesssothatwhentheAEC2015takeintoforce,every

parts of the society have the ability and capacity to reap the attendant

benefits.

ASEANeconomieshaveyetregisteroptimaleconomicgrowth.During

quarterI-2014,ASEANeconomiesregisteredslowergrowththanexpected.

Thisisduetothefactthatthelevelofeconomicgrowthrecordedisfarbelow

itspotential.IndonesiaasthelargesteconomyinASEANregionregistered

slower economic growth. Thailand as the second largest economy in the

regionistheonlyeconomiesinASEANthatregisteredeconomiccontraction

forquarterI-2014(-2.10%),largelybecauseofpoliticaldynamicsthathave

beenroilingthecountry.SingaporeandVietNam,despiteregisteringsound

economic growth, are still having growth below their target. In general,

MalaysiaandPhilippinescontinues tobe thekeydriversofeconomies in

ASEAN.

Indonesiaas“engine”ofeconomiesinASEANregionregisteredslower

economicgrowth.InquarterI-2014,Indonesiaregisteredeconomicgrowth

of 5.21% (y-o-y) or 5.56%without take into account PetroleumandGas

sector. Nonetheless, economic growth in Indonesia in quarter IV-2013

35

ASEAN

Table12:GDPGrowthinASEANEconomies,ConstantPrice,1998–Q12014(y-o-y,%)

Growthrecordedinthelowerlevelthanwhatithasachievedinpreviousyears

Note:averagegrowthfor1998-1999,2000-20007,and2008-2009periods

DataforQ1-2014:BruneiDarussalam,Cambodia,LaosandMyanmarwerenotavailable

Source:IMFandCEIC(2014)


(5.72%),fellshortofthegovernmenttarget(5.8%).Slowereconomicgrowth

based on y-o-y is largely attributable to the adverse impact of the

implementationofthenewLawonMineralswhichaffectedmineraltrades

withkeypartnerssuchasUnitedStatesandJapan.Infact,theadverseimpact

ofexportscouldnotbeoffsettedbythedemocracyeuphoria,i.e.legislative

electionsinApril2014.Nonethelessstrongdomesticconsumerconsumption

which is shored up by rising middle income class has so far shielded

Indonesianeconomyfromexperiencingevendeepercontraction.

Philippinescontinuestoregisterthehighesteconomicgrowthinthe

region.Despitehavingtodealwiththeeffectsofadevastatingearthquake

andHaiyansupertyphoonin2013,whichhaveunderminedtheperformance

ofPhilippineseconomyfromattainingitspotential,Philippineswasableto

register economic growth of 5.7% (y-o-y) in quarter I-2014. Economic

growthwhichPhilippinesregisteredinquarterI-2014,rankedtheeconomy

asthethirdfastestgrowinginAsia,behindChinaandMalaysia,whichposted

economic growth of 7.4% and 6.2%, respectively. The success of the

Philippinesinmaintainingthemomentumoftheeconomyintheaftermathof

thedisaster,thatspeciallydevastatedalotintotheirinfrastructureandtheir

prominentcoconutindustry,layinitsabilitytoemphasizethedevelopment

on their services sector. According to Philippines National Statistics

Coordination (NSC), the growth of the services sector in quarter I-2014

succeededtorecordedgrowthof3.8%,whichwashigherthangrowthrates

inindustryandagricultureconsecutivelyof1.8%and0.1%.

36

Table13:ConsumerPriceIndex(CPI)ASEANEconomies,2000-2014*(y-o-y,%)

Theriseinpricesofkeypublicgoodsandobstructiononregionallogisticswasthemajorfactorsbehindpersistinghighinflationintheregion

Note:

* =DataforBruneiDarussalam,Cambodia,Laos,andMyanmar,areasApril2014(y-o-y).DataforIndonesia,Malaysia,Philippines,Singapore,Thailand,andVietNamareasMay2014(y-o-y)

Source:Bloomberg(2014)


Reduction of various subsidy schemes has led into high inflation

pressureintheregion.Theadverseimpactofthereductioningovernment

subsidiesonenergyfuels in Indonesiaandalsoenergyfuelsandsugar in

Malaysiain2013,contributedtohighinflationthatthetwonationsatthe

beginningof2014.Apparentlythecutbackonsubsidieshasnotsucceededto

prevent the growth of domestic consumer consumption which in turn

leadingtohighinflationinanumberofcountriesinASEANeconomies.

Politicalinstabilityalsocontributetothesoaringofgeneralpricesin

theregion.ThepoliticalcrisisinThailand,compoundedbyrisingpolitical

tensioninSouthChinaSeaarealsocontributingtothegeneralincreasein

prices of goods. Thailand,which is one of the transit countries formany

productsfromChinaintheregion,isfacingdistributionproblems,whichare

attributabletotheneedtoavoidtransportationviaSouthChinaSeaaswellas

internalpoliticalstalematethathasbedeviledthenationoverthelastfew

months.Theabovesituationhascreatedobstaclesintheregionallogistics

whichinturnhasstokedgeneralrisingpricesofgoods.

Investmentinformsofsharesisstillsourceofattractionforinvestorsto

ASEAN.Unlikeothermacroeconomicindicators,theperformanceofcapital

marketsinASEANeconomies,continuestobebuoyant.InquarterI-2014,

capital markets indices in three ASEAN nations registered double digit

growth:Indonesia(14.5%),Philippines(12.87%)andVietNam(11.37%),

evenThailandwhichiscurrentlyfacingapoliticalcrisiswasabletoregister

9.10%growth.CapitalmarketportfolioinASEANmembereconomies,which

withtheexceptionofIndo-Chinacountries,whichisdominatedbyprivate

sector enterprises indirectly indicates that in general global investors

37

ASEAN

Table14:CapitalMarketsIndexinASEANEconomies,2009-2014(y-o-y,%)

ASEANeconomies continues tobea favoritedestination for capitalmarketinflow

Note:Datafor2Januaryand30May2014areonyeartodatebasis



perceiveonASEANisstillasahighlypromisingregionforprivatebusiness.

AsquarterI-2014,thepaceofappreciationofcurrenciesintheregion

hasbeenbelowexpectations. Thepaceof currency appreciation in the

regionhasnotbeenabletooffsetthesteepdepreciationthataffectedthe

values of currencies during the whole year of 2013. Even further for

currenciesofCambodia,LaosandVietNamthevaluecontinuetodeteriorate.

Thissituationisanindicationthatinvestorsperceiveeconomicprospectsin

ASEAN economies are not yet as promising as necessary to provide the

requiredreturnoninvestmentinforeignexchangemarketintheregion.

The tapering off policy by the US and trade deficits which some

economiesintheregionhaveexperienced,havehadnegativeimpacton

exchangeratesofcurrenciesintheregion.Thetaperingoffpolicywhichis

beingimplementedbyTheFedintheUS,hasincreasedpositivesentiments

toward holding United States Dollars, which as a result has undermined

valuesofcurrenciesintheASEANeconomies.Theplantoraiseinterestratein

thebankingsectorintheUS,whichisanelementinthetaperingoffpolicy,has

inducedvariousinvestorstotransfertheirinvestmentportfoliosoutfrom

developing economies. The situation has been exacerbated by persisting

weakness in internationaltrade.Consequently,manyeconomies inregion

continue to suffer from rising trade deficits. Thus, various issues and

condition affecting the global economy lately, have contributedmuch too

underminingvalueofcurrenciesofASEANeconomies.

38

Table15:ExchangeRateofASEANCurrenciesAgainstUSD,2009-2014(y-o-y,%)

Appreciationofcurrenciesintheregionhasnotbeenasfastasexpected

Note:

Datafor30May2014isYeartoDategrowth

Thesign(+)depictsappreciationofcurrency,while(-)depictsdepreciationofcurrency

* =in2012Myanmarexperiencedrevaluationofhercurrency



Whatfollowsismyperspectiveandpointofviewpertainingtothetitleofthis

piece. Theauthorwillasmuchaspossibleavoidcitationsthatabstractthis

writingfromideasthatareespousedbytheauthoranddesistfrompadding

thatmayobfuscatetheoriginalidea.

Developing the Indonesian economy that exudes optimism, lies in

concentration efforts ondeveloping its human resources. I dividehuman

resources into twoaspects. , ,whichemphasizesFirst hardworkingethos

effortstomaintaineconomicstability.Byworkinghard,anindividualisable

toobtainsufficientincometofulfillneedsandrequirements,whichinturn

augurswellforeconomicstabilityattheaggregatelevel. ,developingSecondly

humanresourcesbyoptimizingrightsideofthebrain.Thisrequiresdoing

work with . Personalinnovation, creativity and productivity leap

developmentcapacity,ingeneral,hasreachedjust25%.Thisleaves75%of

personaldevelopmentcapacity,whichisstillinunderutilized,hencecanbe

tapped to enhance national productivity. This is why we have to take

measuresasmuchaswecantoincreasevalueaddedfromhumanresources

inorderfortheeconomytoattaingrowthratesthatareaboveaverage.

Whyshouldthefocusbeonthisaspectofhumanresources?Thisisbecauseit

isthisresourcewhichconstitutesthecenterofgravityandlynchpinofthe

nationaleconomy.Endowedwithhardworkinghumanresources,thereis

enhancedcapacity tomanageother factorsofproductionsuchas capital,

land, and technology in such a manner that increases value added.

Contrariwise,underconditionofweakhumanresources,valueaddedfrom

thethreefactorsofproductioncanbeasfast.

Developingaleapinvalueaddedinhumanresourcesalsomeansdeveloping

acompetitiveeconomy. Thiscanbeinitiatedbydevelopingthreetypesof

39

E. Current Issue

InspiringEconomicOptimismtotheUpcomingNationalLeader

MuhammadEdhiePURNAWAN,PhD²

²TheauthoristheDeputyDean,FEBUGM(FacultyofEconomicsandBusiness,UniversitasGadjahMada)forResearch,Collaboration,AlumniandSocialConcerns


strengths. The first strength is . The second strength ishonesty

innovation/imagination networks, and the third strength is . Equipped

withthethreestrengths,Indonesiawillbeabletoachieveacompetitive,high

growth,andconfidentnationinfacingadvancednations.Theelucidationof

thethreestrengthsfollowsbelow.

First,thestrengthinhonesty.Thisstrengthisthefoundationofdevelopingall

kinds of human resources. Developing honesty strength will put the

foundationoftheeconomyonasoundfooting,whichwillnotbevulnerableto

earthquakeshocks,stormgusts,andothernaturaldisasters. Thus,without

honesty strength as its foundation, the structure of the economy, though

seeminglysplendidandinvincible,willbesusceptibletocollapsewithease.

Tothatend,thereshouldneverbeanargumentthatespousesthenotionthat

honestycanbedelayedforhonestyisthemotherofallgooddeeds.

Secondly, innovation/imagination strength. Just imagine two phenomena

below.ThefirstistheeventofSouthKorea'sphenomenon.Basedonannalsof

history,thiscountryhasbeenabletoachievehugeleapinvalueaddedthanks

to emphasis the country has made on innovations in semiconductor

technology.Thefoundingfathersofthiscountryformulatedagranddesign

for the semiconductor as the cornerstone of its industrial development.

Today,webearwitnesstotherealitythatsemiconductorinnovationshave

madeachievedrapidadvancementbecomingtheenginethatsupportsthe

gargantuantelecommunicationssuchasSamsungandLGandspectacular

automotiveindustrysuchasHyundai,DaewooandKia.Themajorsecretthat

explainsthesuccesstheyhaveachievedliestheirabilitytoacculturatehuge

leapsin innovationstrengths.ThesecondistheSteveJobs'technopreneur

phenomenon.EquippedwithUSD10ascostofproduction,aniPhoneissold

atUSD400inUS.Whatthismeansisthat,innovationmakespossiblealeapin

imaginationthatcreatesUSD390invalueadded,andnotsweatingprofusely.

Thistypeofintelligencecanneverbeemulatedbyjustcollectingknowledge,

ratherfosteredthroughthedevelopmentofimaginativecapabilities.Anold

adageofEinsteinsaidthat“imaginationismoreimportantthanknowledge.

For knowledge is limited to all we now know and understand, while

imaginationembracestheentireworld,andallthereeverwillbetoknowand

understand.”

Uponachievinghonestyandcementingthatwithinnovationinmakinguseof

imaginationcapabilities,thethirdstrengthisnetwork.Networkstrengthis

verycrucialtoeconomicdevelopment.Equippedwiththisstrength,anation

40


isnotonlyknownorfamous,butalsobecomesagoodfriendformany.To

becomeagoodfriend,callsforgoodinterpersonalskills.Inculcatingpattern

ofthinkingthatappreciatesothersisthekeypreconditionfordevelopinga

widenetwork.Historyhasovercenturiesprovedthatgoodrelationsamong

humankindhavetheabilitytopropelanindividualandinstitutiontohigher

levelsofadvancement.Tothatend,goodnetworkingisanabsolutecondition

formakingahugeleapineconomicvaluedadded.Andalwaysremember:

there will never be a bird that flies for a long distance across national

boundariesbyonlyrelyingonitswingsalone,withoutitsfriends.

***

Based on my observation of the two presidential candidates in the

forthcomingpresidentialelections(Prabowovs Jokowi),mysuggestion is

thatthetwoshouldfocusandenthusiasmoneffortstoincreasehumanvalue

added injected into the Indonesian economy.Theway forward canbegin

through crafting a basic paradigm and concept, which can serve as

foundation formakinghuge leap in value added, afterwhichprocess the

search for techniques and mechanisms to implementing thereof, and

eventually contribute to accelerating the engine of Indonesian economy.

Absenceofparadigmandconceptandvisualizationofhowtoachievevalue

added isrooted inthepaucityofcapablehumanresources inthisnation.

Nationalleadersshouldnotonlybecome thefatherofcentralgravity, but

mustalsohavemajorideasthatcanpropeltheeconomyforwardthrough

majorleapsthatcreatessolutionstoproblemsthathaveforlonghampered

sustainableincreaseinvalueaddedbyhumanresources.Inlightofthat,the

key toall gatesofdevelopment lie in thecountry'shumanresourcesand

effortsthatcanfosteramajorleapinvalueaddedforIndonesianeconomy.

Final note: Please fasten your safety belt. We are going to accelerate the

Indonesianeconomicgrowth>>>full-speed!

InsyaAllah.

41

Current Issue


Bythetimethispiececametopress,Indonesianeconomywasstillfollowing

anupwardtrend,albeitwithsomeindicatorswereposingworryingsigns.

Indicators on Indonesia competitiveness continue to be low which as

reflected by the depreciation of rupiah, which has not stimulated

improvementinexportstoanysignificantdegree.Consequently,thevalueof

imports has surged, which has not been offset by significant increase in

exports,ledtoadeclineinnetexports.Besides,BankIndonesiahassofarnot

implemented any drastic monetary policy that would have helped in

improvingtheperformanceoftheeconomy.Thisisbecauseanymonetary

policiesthataredirectedtowardimprovingthepositiononthetradeaccount,

current account, and balance of payments, must also be supported by

governmentpolicies.

Meanwhile, other indicators showrising financialburdenongovernment

financesduetotheprojectionoflowerrevenuesthantargetandrisingfuel

subsidies. As per the latest deliberations on 13 June 2014 between the

budgetingcommissionoftheparliamentandthegovernment,adecisionwas

reachedtoraisethebudgetdeficitto2.4%ofGDP,whichisexpectedtobe

financedbyissuingSBN(governmentsecurities)ofIDR72trillion.Whatis

interestingisthatdespitethefactthattheburdenforfuelsubsidiesisstill

largeduetorisingcostofimportedfuels,budgetallocationforsubsidiesis

reducedintheRevisedBudgetPlan2014fromIDR285trilliontoIDR246.49

trillion.Consequently,thenewgovernmentwillhavetobequeathacarryover

astaggeringburdenofsubsidiesofIDR46.26trillion.

GAMALEI has been able to 'capture' developments of various economic

indicators in Indonesian economy topredict a decline in the cycle of the

country'sGDP in thenear future.Nonetheless, it isworthnoting that the

declineineconomiccycleisnotasaresultofslowereconomicgrowthperse.

Thisisbecauseeconomiccycleexcludesfactorsthatarevolatile.Tothatend,

theconsensusreachedonthedirectionoftheeconomypointstocontinuing

economicgrowth(y-o-y)inquarterII-2014,withsignsofaccelerationinthe

future.

F. Economic Outlook


That said, the projection of the decline inGDP cycle should be cause for

concern,henceanissuethatwillcallforseriousattentionforpolicymakers.

Policymakersshouldnotbeconfinedtoconsideringtechnicalaspects,but

equally important,needalsotobeopenandunequivocal inordertoearn

public trust. Last but not least, the relative success in conducting the

legislativeelectionshaspreventedtheIndonesianeconomyfromplunging

into instability. Such a condition should be maintained as the country

prepares for presidential elections on July 9, 2014. The importance of

economic stability canbeoveremphasized given the fact that it is not by

ensuring that economic growth continues unhampered that public

expectationsofhigh,andfairandsustainablesocialwelfarecanbeachieved.

Economic Outlook

MACROECONOMIC DASHBOARD

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UNIVERSITAS GADJAH MADA

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

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Economy & Finance

IERO NO 2/YEAR III/JUNE 2014