00074918.2013.850627
Bulletin of Indonesian Economic Studies
ISSN: 0007-4918 (Print) 1472-7234 (Online) Journal homepage: http://www.tandfonline.com/loi/cbie20
Survey of recent developments
Jason Allford & Moekti P. Soejachmoen
To cite this article: Jason Allford & Moekti P. Soejachmoen (2013) Survey of recent
developments, Bulletin of Indonesian Economic Studies, 49:3, 267-288, DOI:
10.1080/00074918.2013.850627
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Date: 17 January 2016, At: 23:48
Bulletin of Indonesian Economic Studies, Vol. 49, No. 3, 2013: 267–88
SURVEY OF RECENT DEVELOPMENTS
Jason Allford*
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The Treasury, Canberra
Moekti P. Soejachmoen*
TNP2K, Jakarta
SUMMARY
In the 15 years since the Asian inancial crisis, the Indonesian economy has
beneited from a stable macroeconomic policy framework and prudent macroeconomic policy settings. Economic growth has been solid, inlation has been
contained and government inances have strengthened. Indonesia weathered the
global inancial crisis better than many countries, and it subsequently beneited
from the low global interest rates resulting from highly stimulatory monetary
conditions in many advanced economies, especially the US.
In the middle of 2013, however, speculation on when the US Federal Reserve
would begin to unwind its program of quantitative easing saw global interest
rates jump. Short-term capital lowed out of Indonesia, causing the stock market
to fall, the currency to depreciate and interest rates to rise. On top of this, GDP
growth appeared to be slowing, the trade balance worsening and inlation increasing. In late September and October, the failure of the US to raise its legislated debt
ceiling led to speculation that it might fail to meet some of its debt obligations,
which fuelled inancial-market volatility.
It is yet to be seen whether the Indonesian economy and its inancial markets
are suficiently lexible to make a smooth transition to the new external reality.
The policy tools available to the government to deal with the short-term economic
challenges are limited: it introduced an economic policy package in August, and
Bank Indonesia (BI) raised oficial interest rates in August and September, following two increases earlier in the year.
These pressures from global inancial markets have drawn attention to the
need for further structural reforms in Indonesia, including those aimed at deepening inancial markets, strengthening inancial-sector supervision, freeing up
trade and encouraging competition, and maintaining the government’s revenue
base in the face of falling commodity prices. While some reforms, particularly in
inancial-sector supervision, are already in train, it may be dificult for Indonesia
to make serious gains on longer-term economic reforms before the 2014 presidential elections.
* The update on mineral taxation and regulation was contributed by Dan Devlin, also from
the Treasury, in Canberra. TNP2K = Tim Nasional Percepatan Penanggulangan Kemiskinan (National Team for the Acceleration of Poverty Reduction), Ofice of the Vice-President.
The authors thank Haryo Aswicahyono, Gavin Forte, Edimon Ginting, Anton Gunawan,
Anwar Nasution, Suahasil Nazara, Isa Rachmatawarta, Sjamsu Rahardja, Djauhari Sitorus,
Ashley Taylor, and numerous faculty members of the ANU College of Asia and the Paciic,
who bear no responsibility for any errors.
ISSN 0007-4918 print/ISSN 1472-7234 online/13/030267-22
http://dx.doi.org/10.1080/00074918.2013.850627
© 2013 Indonesia Project ANU
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268
Jason Allford and Moekti P. Soejachmoen
INTRODUCTION
This Survey covers recent economic developments in Indonesia, primarily from
June to September 2013. Economic data released in that period show a continued
slowing of GDP growth, a worsening of the balance-of-payments position and
high inlation (following the government’s decision to increase subsidised fuel
prices in June).
Much of this economic news was overshadowed, however, by increasingly
intense speculation on the 2014 presidential elections – until August, when volatile conditions in international inancial markets, related to the possible tapering
of quantitative easing in the US, brought the economy back into the headlines. By
late August the Indonesian government was under considerable pressure from
the public and from investors to respond to the disappointing economic data that
had come out in recent months. It earned a reprieve when conditions eased in
September.
This Survey looks at the response of the government and BI to this period of
inancial pressure. The government released an economic policy package in late
August, which it claimed would address a number of issues in the economy. The
central bank raised interest rates four times between June and September, as well
as introducing other measures to calm inancial markets at the height of the turbulence in August.
The government’s immediate response to deteriorating economic indicators and inancial-market pressure pointed to the need for economic reforms to
improve the economy’s lexibility in the face of external developments and to
boost its longer-run growth potential. This Survey considers two areas for reform:
irst, the progress of changes to the inancial-market supervisory arrangements
and, second, the state of policy in the mining and energy sector. Financial-market
supervision is important because the fast-growing inancial sector is extending its
reach into many parts of the Indonesian economy. Poor or inconsistent regulation
could fail to prevent poorly managed inancial institutions from disrupting the
macroeconomic environment. The need for policies that increase the eficiency
of exploration, investment and production in the mining and energy sector is reinforced by the budget’s high reliance on revenue from this sector and the vulnerabilities exposed by the fall in global commodity prices in early 2013.
POLITICAL DEVELOPMENTS
McRae (2013, in this issue) discusses the chief political developments in the leadup to Indonesia’s elections in 2014. In the wider political sphere, however, two
events need to be mentioned. In August, Indonesia’s Corruption Eradication
Commission (Komisi Pemberantasan Korupsi, KPK) arrested Rudi Rubiandini,
the head of the upstream oil and gas regulator SKK Migas, on bribery charges
related to an alleged payment from Kernel Oil, an energy company based in Singapore. SKK Migas was created in November 2012, after the Constitutional Court
dissolved its predecessor, BPMigas (Cornwell and Anas 2013: 18–19). The continuing importance of the oil and gas industry to Indonesia’s economy relies on
further investment in exploring oil reserves, particularly by foreign oil companies. The need to present a clean image to potential investors made Rudi’s arrest
disappointing to Indonesia.
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Survey of recent developments
269
A second disappointment was the KPK’s arrest in October of Akil Mochtar, the
Chief Justice of the Constitutional Court, also on corruption charges. The case
against Akil involves a ruling by the court over an electoral dispute in Kalimantan. The KPK’s investigation led to ive further arrests of people with connections
to the Golkar party, whose interests in Banten were at stake. This high-proile
case caused considerable consternation in Indonesia; the court had won general
respect for its impartial rulings since its establishment, in 1999. After Akil’s arrest,
President Yudhoyono promised to set up an independent judicial commission to
oversee the court. If this initiative is akin to his 2009 creation of a task force to
eliminate the ‘judicial maia’ (McLeod 2011: 9; Fealy 2011: 353), it may achieve
little.
Although the indictments against Rudi and Akil are still sub judice, they may
further erode conidence in public authorities and the judiciary. They may also
inluence the 2014 elections, by disadvantaging those candidates for parliament
and the presidency whom the electorate associates with parties that have been
tarred by the corruption brush, and by advantaging candidates who can articulate
an uncompromising stance on corruption.
MACROECONOMIC DEVELOPMENTS
Growth
In 2011 and 2012, Indonesia faced a combination of slow growth in advanced
economies and low global interest rates – themselves partly the result of accommodative monetary policy in advanced economies, aimed at boosting growth.
Indonesia and other emerging economies beneited from this situation, owing
to their attractiveness to investors seeking high growth and high yields. The
inlow of foreign capital supported investment and sustained economic growth,
notwithstanding the slower growth in some of Indonesia’s advanced-economy
trading partners. These effects began to unwind in the middle of 2013, as the prospect of stronger growth and higher interest rates in the US and other advanced
economies started to slow the low of portfolio investment into Indonesia (Nehru
2013: 147–9). It is possible that this transition will weigh on Indonesian economic
growth in the near future, although the net effect and the precise timing of any
impact are dificult to forecast, and growth will remain subject to many inluences.
In the year to the second quarter of 2013, Indonesia recorded GDP growth of
5.8% (table 1), down slightly from the 6.0% rate of growth recorded in the irst
quarter. This continues a gradual trend of slowing GDP growth since the fourth
quarter of 2010, when the rate peaked at 6.8%.1 In August, BI described slowing
growth as ‘part of rebalancing the domestic economy with the global economic
downturn and the impact of rising inlation’ (BI 2013a), which suggests that the
monetary authorities are comfortable with some slowing of growth to ease pressures on the balance of payments and inlation.
On the expenditure side, slowing GDP growth was explained by slower growth
in consumption and particularly investment. This was partly offset by slower
1 Historical GDP data may be revised if Statistics Indonesia changes the base year for its
national accounts. Possible changes to the national accounts are discussed in box 1.
270
Jason Allford and Moekti P. Soejachmoen
TABLE 1 Components of GDP Growth
(2000 prices; % year-on-year)
Jun-2012 Sep-2012 Dec-2012 Mar-2013 Jun-2013
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GDP
Excluding oil & gas
By expenditure
Private consumption
Government consumption
Investment
Construction
Machinery & equipment
Transport
Other
Exports
Imports
By sector
Tradables
Agriculture, livestock,
forestry & isheries
Mining & quarrying
Manufacturing
Excluding oil & gas
Non-tradables
Electricity, gas & water supply
Construction
Trade, hotels & restaurants
Transport
Communications
Financial, rental & business
services
Other services
6.4
6.9
6.2
6.9
6.1
6.7
6.0
6.7
5.8
6.4
5.2
8.6
12.5
7.3
20.9
52.9
–2.0
2.6
11.3
5.6
–2.8
9.8
7.6
11.4
25.9
9.7
–2.6
–0.2
5.4
–3.3
7.3
7.8
4.3
10.1
18.7
0.5
6.8
5.2
0.4
5.9
7.2
0.0
4.4
22.3
3.4
–0.4
5.1
2.1
4.7
6.9
–2.6
–1.4
11.6
4.8
0.6
4.6
4.7
4.2
4.2
4.0
4.0
3.3
5.2
10.1
5.3
–0.3
5.9
11.3
2.0
0.5
6.2
10.7
3.7
–0.4
5.8
9.8
3.2
–1.2
5.8
6.4
7.9
6.5
7.3
8.7
11.1
10.8
7.4
6.1
7.6
7.2
14.8
10.9
7.7
7.3
7.8
7.8
14.1
10.0
7.6
6.5
7.2
6.5
12.8
11.4
7.4
6.6
6.9
6.5
7.9
13.6
7.1
5.8
7.5
4.5
7.7
5.3
8.4
6.5
8.1
4.5
Source: CEIC Asia Database.
growth in the imported component of expenditure, while government spending
and exports were both higher.
Household consumption is a large proportion of the Indonesian economy; it
composed 55% of expenditure on GDP in current prices in the second quarter of
2013. Yet its share has fallen continuously since 2000, largely because of the sustained increase of the share of investment, from a modest 20% in 2000, to a peak of
33% in 2012, to a similar share during the irst half of 2013. Despite this historically
high proportion (Van der Eng 2009: 351), table 1 shows that the rate of growth
of real investment has slowed markedly over the past year. Growth of investment in structures remained steady, which may relect sustained investment in
residential structures and public infrastructure, rather than investment in nonresidential commercial structures. But the slowdown of investment in machinery
Survey of recent developments
271
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BOX 1 How Fast Is Indonesia’s Economy Growing?
During 2010–12, Indonesia’s GDP in constant prices grew at an average annual rate of
6.3%. The 2014 budget expects growth of 6.3% in 2013 and 6.4% in 2014. Yet this may
not materialise if Statistics Indonesia (Badan Pusat Statistik, BPS) changes some of its
national accounting procedures in the course of 2014, as it did in 2004 (Van der Eng
2005). To calculate GDP in constant prices, for example, it may change the benchmark
year from 2000 to 2010. A retrospective application of these changes to 2010–13 may
yield a downward revision of GDP growth.
The new 2010 benchmark year requires output in all sectors of the Indonesian economy to be valued at 2010 prices (rather than 2000 prices). Current national-accounts
data reveal that the implicit price index of total GDP increased from 100 in 2000 to 315
in 2012. But prices changed at different rates across sectors. For example, the implicit
price index in construction rose to 500, isheries to 442 and government services to 487,
while for the production of services in hotels it rose only to 165, banking to 183 and
sea transport to 206.
Using a new benchmark year therefore involves reweighting the output of the different sectors of the economy. As output growth varied across sectors, the new weighting yields different rates of growth of GDP in constant prices in retrospect. Assuming
that BPS will introduce no other changes in its national accounting practices, and
using the implicit sectoral price weights for 2010 in the current national-accounts data
as a proxy, the reweighting yields a downward revision of GDP growth to an average
of 5.7% for 2010–12.
BPS does not follow the United Nations’ 1993 System of National Accounts, which
recommends ‘chain-linking’ to calculate GDP growth in constant prices. It expresses
GDP in constant prices in prices of the preceding year. It is not certain whether BPS
will do this. Again using the implicit sectoral price weights as a proxy, this procedure
may yield a retrospective downward revision of GDP growth to an average of 6.4%
for 2010–12. It may also increase year-to-year volatility in the growth rate, including
modest growth of 2.5% in 2012.
and equipment, and particularly in transport vehicles, is remarkable. The lower
level of investment in transport vehicles may be related to higher fuel prices,
which have dampened the appetite for commercial vehicles. The slowdown in
investment in machinery and equipment may be related to the substantial slowing of imports over the past year, which is consistent with the depreciation of
the rupiah relative to the US dollar from 9,734 in April to 11,404 in September (BI
2013b: table 9.6).
On an industry basis, non-tradables continue to lead output growth. Communications maintained its impressive performance, achieving a record rate of 13.6%
annual real growth over the year to June. Among tradables, the most noticeable
development was the decrease in mining output by 1.2% in the year to the second
quarter, conirming a trend that began in the third quarter of 2012. Disaggregated,
the national accounts reveal that most of this decline originated in the oil and
gas subsector. It contracted by 4.7% over the year, while other mining (excluding
quarrying) grew by just 0.7%.
The contraction in oil and gas output relects the fall that started in the 1990s
in the physical production of crude oil. In energy equivalents, gas production
exceeded oil production in 2002. Despite the existence of oil reserves in Indonesia,
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Jason Allford and Moekti P. Soejachmoen
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a lack of exploration and new investments has restricted output growth in the
mining sector. Foreign oil producers continue to be concerned about the prospects
for fair cost-recovery rules, and about the regulatory environment more generally
(Boyd et al. 2010). SKK Migas noted in July 2013 that onerous permit processes
by regional administrations, the sealing of wells and oil theft are the biggest hindrances to Indonesia’s oil production (SKK Migas 2013). The circumstances leading to the formation of SKK Migas, in 2012, and the arrest, in August 2013, of its
head may have exacerbated the concerns of oil producers.
Investment and exports
In 2012, gross inlows of foreign direct investment (FDI) reached their highest
level ever. BI’s data on FDI for the irst and second quarters of 2013 seemed to
suggest that this year’s inlows would be lower than those of 2011 and 2012. Yet
table 2 shows that quarterly inlows to June 2013 compare well with those of 2012.
At an aggregated level, they increased slightly, by 7%. But there are substantial
differences among sectors in FDI inlows. The largest sector is manufacturing,
in which FDI decreased by 12% relative to the comparable period in 2012, while
mining received $427 million of FDI, compared with a divestment of $269 million
in the irst half of 2012.
BI’s data give only a partial impression of foreign investment. Every quarter, Indonesia’s Investment Coordinating Board (Badan Koordinasi Penanaman
Modal, BKPM) aggregates data from the reports of foreign-owned irms. These
data include investments from foreign and domestic sources but exclude investments in the oil and gas and inancial sectors (Lindblad and Thee 2007: 20–1;
Nehru 2013: 147). The BKPM data in table 2 conirm that 2012 was a year of record
investment activity by foreign irms, and that investment activity by foreign irms
in the irst two quarters of 2013 was 18% higher than in the corresponding quarters in 2012. Again, the table reveals variations among sectors.
The investment trends in mining seem to contradict accumulating pessimism
in the sector. A previous Survey noted that new export-processing requirements
would reduce investment (Burke and Resosudarmo 2012: 307–8). In 2013, the
government continued to impose further requirements on domestic and foreignowned mining operations (see ‘Mineral taxation and regulation’, below, and box
2) to exert greater domestic control over the minerals industry. In addition, the
price of copper fell by 11% between January and September,2 because of concerns
about slower economic growth in China and the possibility that central banks in
the developed world will scale back their stimulus measures. Likewise, tin and
nickel prices have lost 8% and 21%, respectively, in the year to date. The investment activities of foreign-owned mining irms may slow in the remainder of 2013;
imports of capital goods in the mining sector have been falling since late last year,
which may foreshadow a fall in FDI (BKPM’s investment realisation data typically lag three to nine months behind such imports). (BKPM 2013a)
The investment data from BKPM are slightly higher than those from BI, even
though the former do not include FDI in oil and gas production or the inancial
sector. BKPM’s realisation data are based on permanent business permits (Izin
2 IMF commodity prices, available at .
Survey of recent developments
273
TABLE 2 Foreign Direct Investment by Sector, 2009–13
($ million)
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2009
Bank Indonesia
Manufacturing
Transport, storage &
communication
Mining
Trade
Agriculture & forestry
Finance
Real estate
Other
Total
BKPM
Manufacturing
Transport, storage &
communication
Mining
Trade
Agriculture & forestry
Real estate
Other
Total
2010
2011
2012
2012
2013
Q1
Q2
Q1
Q2
8,945
2,151
1,484
1,292
1,916
1,800 2,390 2,669 3,024
1,301 1,896 3,418 2,088
74 2,463 2,473 1,241
–52
286
253 1,201
148
409 1,001 1,025
–25
28
583
831
58 1,328
669 1,049
4,877 13,771 19,242 19,404
751
311
559
153
–147
385
319
4,482
736
–580
184
401
648
140
282
3,295
649
727
480
202
376
108
249
4,083
616
591
42
298
384
149
230
4,226
3,813
6,790 11,770
2,313
3,148
3,459
4,417
4,152 5,072 3,799 2,808
333 2,201 3,619 4,255
704
774
826
504
145
776 1,244 1,622
310 1,050
199
402
1,359 3,005 2,999 3,204
10,816 16,215 19,475 24,565
765
1,083
157
530
72
808
5,727
306
1,016
152
473
191
953
6,239
760
1,242
130
381
250
949
7,173
75
1,442
156
303
125
463
6,982
1,574
4,971
3,337
8,176
Sources: BI (2013b): table V.37; BKPM (2013b).
Note: Bank Indonesia data are balance-of-payment data and refer to inlows of FDI, excluding the oil
and gas sectors. They are provisional for Q1 2013 and very provisional for Q2 2013; BKPM data refer
to realised investment reported by foreign-owned irms to BKPM; they exclude FDI in oil and gas
production and the inancial sector, which is subject to the approval of and investment reporting to
the Ministry of Finance.
Usaha Tetap), issued to approved foreign and domestic investment projects that
have commenced commercial production. It deines FDI as any investment with
foreign-equity participation, no matter how small. In addition, its measures of
FDI relate to the total value of the investment in question, which includes not only
the equity contribution of, and the loans from, the foreign partner but also the
equity contribution of Indonesian partners, as well as loans from all other sources
needed to inance the investment. In other words, BKPM’s approved FDI data are
gross measures that may greatly exaggerate the inancial contribution of foreign
owners – and, indeed, of all foreign sources of inance. BI’s investment data are
based on guidelines from the IMF and the United Nations Conference on Trade
and Development, which include three internationally accepted components of
FDI: equity capital, loan capital provided by foreign principals, and the share of
re-invested earnings of foreign irms attributable to foreign principals (Lindblad
and Thee 2007).
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274
Jason Allford and Moekti P. Soejachmoen
During the irst seven months of 2013, the nominal value of Indonesia’s
goods exports was $106 billion – well below that of the corresponding periods
in 2011 ($116 billion) and 2012 ($113 billion), owing to both external and internal
pressures. Externally, economic growth in Indonesia’s most important export destinations (Japan, China, Hong Kong, Singapore, South Korea, the US, and India)
slowed considerably or failed to pick up. Economic growth in Japan and Korea in
the irst half of 2013 remained anaemic, at 0.7% and 1.8%, respectively, year-onyear. Indonesia’s second-biggest export destination, China, saw growth slip from
double-digit levels in 2010 to 7.5% year-on-year in June 2013. India also saw economic growth slow markedly, from around 10% in the irst half of 2010 to around
5% year-on-year in early 2013. Indonesia is not the only economy experiencing
a slowdown in exports, which restricts growth – so, too, are the export-oriented
economies in East Asia and the large and more protectionist economies in Latin
America. Brazil, for example, expects to grow at just 2% this year. In October,
the IMF reduced its global growth prediction for 2013 by 0.3 percentage points,
to 2.9%, and lowered its 2014 global growth expectation to just 3.6% (IMF 2013).
Hence, while global demand may now be gradually rising, its rate of growth is
unlikely to boost the Indonesian economy.
Furthermore, Indonesia’s export sector faces several domestic dificulties. The
depreciation of the rupiah has beneited those sectors producing primary commodities for export, since they depend less on imported inputs. Yet the tin-mining
sector, for example, has suffered from the consequences of changed regulatory
arrangements that attempt to increase domestic value-adding and trading, which
impeded tin exports in August and September (see box 2). For exporting manufacturers, such as those producing textiles and garments, or electronic and electrical goods, the beneits of currency depreciation have been partly offset by the
increased cost of imported inputs.
In addition, low productivity, as well as pressures caused by rising minimum
wages (Cornwell and Anas 2013: 20–7) have hurt some exporters. A survey in September by the Centre for Strategic and International Studies, in Jakarta, revealed
that rising wages could price Indonesia out of global export markets if minimumwage increases were to continue. From 2010 to 2011, wages in Indonesia rose
by 5.0% while labour productivity rose by just 3.4%, compared with China’s
respective rates of 7.2% and 10.0% (Jakarta Post, 6/9/2013).3 A proposed presidential instruction in September was intended to cap next year’s minimum-wage
increases to 5.0% above inlation for labour-intensive industries, and to 10.0%
above inlation for other industries (Jakarta Post, 15/9/2013). This announcement
was clearly intended to inluence discussions about next year’s minimum-wage
increases. Five days later, however, the government stated that the details of the
proposal were still being negotiated, and that minimum-wage increases in 2014
would not be capped, although Hidayat, the industry minister, mentioned in parliament that the increase will be below 20% (Jakarta Post, 20/9/2013).
The government still faces some barriers to improving the business environment for foreign investment and exports, especially in customs and logistics.
3 The survey also reveals that Indonesia’s minimum wages grew by 30% between 2010
and 2013 – faster than those of any other country in Asia, and well ahead of those of China
(8%) and Vietnam (7%).
Survey of recent developments
275
FIGURE 1 Indonesia’s Trade Balance
($ billion)
4
Non-oil trade balance
Oil trade balance
Trade balance
3
2
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1
0
–1
–2
–3
Jan-2011
Jun-2011
Nov-2011
Apr-2012
Sep-2012
Feb-2013
Jul-2013
Source: CEIC Asia Database.
Waiting times at Tanjung Priok, Indonesia’s biggest port, increased from 4.8 days
to 6.4 days, or by 33%, between October 2010 and November 2012. Longer waiting
times have reduced Indonesia’s competitiveness and made it more dificult for
the country to join global, just-in-time supply chains (Cubillos and Sandee 2013).
The government could reduce delays at Tanjung Priok by, for example, increasing the number of importers with access to the prominent-partners (mitra utama,
MITA) priority lane,4 allowing more parallel processes to take place during customs clearance, providing incentives for early submission of import declarations,
and continuing to strengthen Indonesia’s National Single Window.5
Flagging exports caused Indonesia’s trade deicit to increase to $5.6 billion in
the irst seven months of 2013, before a surplus in the non–oil and gas sector in
August reduced it to $5.5 billion. Figure 1 shows that the overall trade deicit up
to July was dragged down by that of the oil and gas sector ($7.6 billion), which has
been in deicit since August 2012. In the quarter, these trade deicits contributed
to a current-account deicit of $9.8 billion, or close to 4.4% of quarterly GDP (table
3). Exports of fuel, vegetable oil and fats, machinery and mechanical equipment,
and rubber have declined in 2013 compared with 2012, while exports of minerals
and fertiliser have increased. Non–oil and gas imports were lower in 2013 than in
4 The MITA priority lane at Indonesia’s ports grants a select number of traders paperless
clearance through customs. Only around 100 traders have MITA access; most are large
companies with advanced IT systems and post-clearance auditing facilities. (Lesher 2012:
54).
5 Implemented in 2010, Indonesia’s National Single Window aims to transfer goods more
quickly across the country’s borders, by providing a single contact point for customs and
cargo procedures at each of Indonesia’s ive main ports (OECD 2012: 148).
276
Jason Allford and Moekti P. Soejachmoen
TABLE 3 Balance of Payments
($ billion)
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Jun-2012 Sep-2012 Dec-2012 Mar-2013 Jun-2013
Current account
Exports
Non–oil & gas
Oil & gas
Imports
Non–oil & gas
Oil & gas
Merchandise trade balance
Non–oil & gas
Oil & gas
Services
Income
Current transfers
–8.0
47.5
38.4
9.1
46.7
36.5
10.3
0.8
2.0
–1.2
–2.9
–6.8
0.9
–5.3
45.5
37.4
8.1
42.4
33.5
8.9
3.2
4.0
–0.8
–2.5
–6.9
0.9
–7.6
47.1
38.5
8.6
46.3
35.3
11.0
0.8
3.2
–2.4
–3.3
–6.3
1.2
–5.3
45.5
37.0
8.5
43.8
32.4
11.5
1.6
4.6
–3.0
–2.3
–5.7
1.1
–9.8
45.7
37.8
7.9
46.3
36.1
10.2
–0.6
1.7
–2.3
–3.1
–7.1
1.0
Capital & inancial accounts
Capital account
Financial account
Direct investment
Portfolio investment
Other investment
5.1
0.0
5.1
3.8
3.9
–2.5
5.9
0.0
5.9
4.5
2.5
–1.2
11.8
0.0
11.8
4.5
0.2
7.2
–1.4
0.0
–1.4
3.4
2.9
–7.7
8.2
0.0
8.2
3.3
2.5
2.3
0.1
–2.8
106.5
0.3
0.8
110.2
–1.0
3.2
112.8
0.0
–6.6
104.8
–0.8
–2.5
98.1
Errors & omissions
Overall balance (change in reserves)
Foreign reserves
Source: CEIC Asia Database
2012. Imports of machinery, mechanical equipment and vehicles were also lower in
2013, while imports of electrical equipment, iron and steel, plastics, organic chemicals, cereal, and cottons were higher. With the depreciation of the rupiah and the
increase in fuel prices weighing down imports, BI expects the current-account deicit to ease to 3.4% of GDP in the third quarter of 2013 (Jakarta Globe, 8/10/2013).
Inlation, exchange rates and monetary policy
After running at around 4.5% during 2012, inlation increased to well above 5.0%
in early 2013. This increase was mainly the result of increasing food prices, which
have been growing at double-digit rates since early 2013 (Cornwell and Anas
2013: 12; Nehru 2013: 153–4). The government’s reduction of fuel subsidies on 22
June 2013 also put further upward pressure on the CPI. The increase in fuel prices
was relected in the transport component of the CPI, which increased at a monthly
rate of 5.6% in June and 13.9% in July, before dropping back to 1.3% in August,
leaving transport prices up by 21.2% in the year to August 2013. The transport
component of the CPI has typically grown very little, owing to the set price of
subsidised fuel. The CPI had increased by 5.9% in the year to June 2013, but it
increased by 8.6% in July, following the reduction in fuel subsidies, and continued
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Survey of recent developments
277
at a similar annual level in August and September. Monthly inlation dropped to
1.1% in August and to –0.3% in September.
Neither the increase in food prices nor the increase in transport prices is the
result of strong demand growth, so there is scope for the central bank to ignore
their direct impact on inlation, although their impact on inlation expectations
will still be a consideration for monetary policy. Having left the policy rate at
5.75% since January 2012, the bank’s board elected to increase the policy rate at
meetings in June, July, August and September, by a total of 150 basis points. The
policy rate increased to 7.25%, where the board left it in October. After each of
these meetings, the board nominated controlling inlation or inlation expectations among its reasons for raising the rate. The likely inlationary effects of the
continued depreciation of the rupiah against the currencies of many of Indonesia’s major trading partners – except for Japan – also contributed to the bank’s
decisions to tighten monetary policy.
BI uses the policy rate to inluence inlation expectations, but the rate is not
linked to any instrument in the inancial market and is therefore an imperfect
measure of the bank’s stance on monetary policy (McLeod 2011: 14). In contrast,
the Bank Indonesia Certiicate (Sertiikat Bank Indonesia, SBI) rate is determined
in inancial markets. The nine-month SBI rate inched up in the course of 2013, from
4.84% in January to 6.96% in September. The growth of money supply (proxied by
currency in circulation) slowed to just 9.9% over the year to August and to an average of 13.8% during June–August. This was below the average of 14.8% over the
previous 17 months, when the real nine-month SBI was marginally positive overall
(BI 2013b: tables 1.25 and 8.1). Although the real nine-month SBI rate turned irmly
negative during July–August, owing to accelerating inlation, it seems likely that
monetary policy has a moderating effect on inlation.
Fiscal policy
President Yudhoyono presented the 2014 budget plan to parliament on 16 August.
This was largely a business-as-usual budget, containing no major spending surprises. The government forecast a 10.7% increase in revenue in 2014 and a 5.2%
increase in spending, which it estimated would lead to a fall in the budget deicit
from 2.4% of GDP in 2013 to 1.5% in 2014. If realised, this would be a considerable
tightening of iscal policy.
Indonesia offers a challenging environment for such policy. Higher inlation
and a depreciating currency suggest that tighter iscal policy may help to reduce
inlationary pressure and maintain investor conidence in Indonesia. This would
support BI’s stance on monetary policy. But tighter iscal policy would also put
downward pressure on GDP growth, which has already been slowing.
On 23 August, the government announced an economic policy package, one
of the stated aims of which was to maintain economic growth.6 On one hand, the
government’s plan to reduce the budget deicit to close to 1% of GDP is dificult to
6 The press referred to it as a stimulus package. See, in particular, ‘New stimulus package aims to spur growth’ (Jakarta Post, 24/8/13) and ‘Indonesia plans policy stimulus to
woo investors and help rupiah’ (Jakarta Globe, 23/8/13). See also ‘August’s economic policy
package’ (below, this article).
Downloaded by [Universitas Maritim Raja Ali Haji] at 23:48 17 January 2016
278
Jason Allford and Moekti P. Soejachmoen
reconcile with such a package. On the other, the package is unlikely to stimulate
growth in the near term – its measures may at best promote modest growth in the
longer term.
The combination of a tighter budget that strengthens the government’s iscal
position and measures that boost the economy’s potential for longer-term growth
is a sensible policy set. But the government’s framing of its intentions for iscal
policy – sometimes arguing that the economy needs support, sometimes arguing
that it needs to lean against inlationary and current-account pressures – is confusing and may indicate confused decision-making. It would be better for the
government to be clear that its budget strategy is focused on medium-term iscal
sustainability, that other economic measures are intended to increase the economy’s potential for supply-side growth and that monetary policy is the primary
tool of short-term demand management (if all of this is indeed the case).
Adding to the confusion were several reasons to doubt that the government will
reduce its budget deicit to the proposed level. First, some of the basic assumptions underlying the budget look too optimistic. Economic growth is assumed to
be 6.3% in 2013 and 6.4% in 2014, which seems too high. Indeed, Chatib Basri, the
Minister for Finance, lowered the government’s growth expectations for 2013 to
5.8%–5.9%, just days after the budget had been delivered (Jakarta Post, 24/8/2013),
and the central bank revised down its 2013 growth projections to 5.5%–5.9% (BI
2013c). In addition, the budget assumes the exchange rate to be 9,600 rupiah per
dollar in 2013 and 9,750 in 2014, which is well below the current rate. Second, the
forecast increase in total expenditure of only 5.2% in 2014 would be a substantial
slowing from the 15.9% expected for 2013, and would be dificult to achieve.
Third, spending on fuel subsidies depends on the demand for fuel and the
price of crude oil, factors that the government does not control. The assumed
prices for crude oil – $108 a barrel in 2013 and $106 in 2014 – are not unreasonable, but unexpected variations in these numbers may result in large swings in the
cost of fuel subsidies. This is what happened in mid-2013, when spending on fuel
subsidies tracked well above budget and threatened to push the deicit beyond
the legislated cap of 3% of GDP. In response, the government increased the price
of subsidised fuels. Yet even with these substantial increases in fuel prices, and
with the corresponding reductions in subsidies, the government’s revised budget
for 2013 still allocated more money to fuel subsidies than did the initial budget.
The proposed budget for 2014 sees only a small decrease in expected spending on
subsidies (see igure 2).
Spending on the fuel subsidy not only presents problems for budget management; it is also poor-quality spending. The revised 2013 and proposed 2014
budgets (table 4) show that spending on energy subsidies (around two-thirds of
which is on fuel and one-third on electricity) remains high as a share of government expenditure, composing approximately a quarter of central-government
expenditure (total expenditure less transfers to regions) in 2013 and 2014. By way
of comparison, this amount is around one and a half times that spent directly by
the central government on education and around 15 times that spent directly on
health. With most of the beneit of the fuel subsidy going to middle- and upperincome groups, this spending is clearly regressive.7
7 See also Olivia and Gibson (2008).
TABLE 4 Budgets for 2012, 2013 and 2014
(Rp trillion)
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2012
2013
2014
Actual
Proposed
Revised
Proposed
Change
(%)
REVENUES & GRANTS
Domestic revenue
Tax
Domestic
Income tax
VAT
Other
International trade taxes
Non-tax
Natural-resource revenues
Proits of state-owned enterprises
Revenue from public-service centres
Other
Grants
1,338.3
1,332.6
980.2
930.5
464.8
337.6
4.2
49.7
352.4
226.5
30.8
1,529.7
1,525.2
1,193.0
1,134.3
584.9
423.7
6.3
58.7
332.2
197.2
33.5
1,502.0
1,497.5
1,148.4
1,099.9
538.8
423.7
5.4
48.4
349.2
203.7
36.5
73.3
5.8
78.0
4.5
85.5
4.5
1,662.5
1,661.1
1,310.2
1,256.3
591.6
518.9
6.0
53.9
350.9
198.1
37.0
24.7
91.1
1.4
10.7
10.9
14.1
14.2
9.8
22.5
11.1
11.4
0.5
–2.8
1.4
5.1
6.6
–68.9
EXPENDITURE
Central government
Personnel
Material
Capital
Interest
Subsidies
Energy
Fuel
Electricity
Non-energy
Grants expenditure
Social expenditure
Other
Transfers to regions
1,489.7
1,009.2
197.9
140.9
143.7
100.5
346.4
306.5
211.9
94.6
39.9
0.8
75.6
4.1
480.6
1,683.0
1,154.4
241.6
200.7
184.4
113.2
317.2
274.7
193.8
80.9
42.5
3.6
73.6
20.0
528.6
1,726.2
1,196.8
233.0
202.6
188.3
112.5
348.1
299.8
199.9
100.0
48.3
2.3
80.6
19.3
529.4
1,816.7
1,230.3
276.7
203.7
205.8
119.5
336.2
284.7
194.9
89.8
51.6
3.5
55.9
28.9
586.4
5.2
2.8
18.8
–1.4
6.9
6.2
–3.4
–5.1
–2.5
–10.2
6.8
52.2
–30.7
49.7
10.8
BALANCE
(% of GDP)
–151.4
–1.8
–153.3
–1.7
–224.2
–2.4
–154.2
–1.5
–31.2
–37.9
FINANCING
Domestic inancing
Foreign inancing (net)
173.3
198.4
–25.1
153.3
172.8
–19.5
224.2
241.1
–16.9
154.2
173.2
–19.1
–31.2
–28.2
13.0
BASIC ASSUMPTIONS
GDP growth (%)
Inlation (%)
Exchange rate (avg Rp/$)
SBI interest rate (avg %)
Crude oil price (avg $/barrel)
Oil production (avg ’000 barrels/day)
6.3
4.3
9,384
3.2
112.7
861
6.8
4.9
9,300
5.0
100.0
900
6.2
7.2
9,600
5.0
108.0
840
6.4
4.5
9,750
5.5
106.0
870
Source: Ministry of Finance.
Note: The change column is the difference between the 2013 revised budget and the 2014 proposed
budget. VAT = value-added tax. SBI = Sertiikat Bank Indonesia (Bank Indonesia Certiicate).
280
Jason Allford and Moekti P. Soejachmoen
FIGURE 2 Central Government Subsidies versus Spending, 2013–14
(Rp billion)
Fuel subsidy
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Electricity subsidy
Education spending
2013 revised budget
2014 proposed budget
Health spending
0
20
40
60
80
100
120
140
160
180
200
220
Source: Ministry of Finance.
The budget also provides initial funding to support Law 40/2004 on the
National Social Security System (Sistem Jaringan Sosial Nasional, SJSN), which
aims to deliver social security to all eligible citizens. In 2011, the government
enacted Law 24/2011 on the Social Security Agency (Badan Penyelenggara Jaminan Sosial, BPJS), a statutory body charged with implementing the SJSN. The
BPJS will establish a health-insurance program from 1 January 2014 (Simmonds
and Hort 2013) and a labour-insurance program from no later than 1 July 2015.
The latter will cover work-related accident insurance, old-age insurance, pensions and life insurance. There are no long-run igures available on the expected
cost of these programs, but if successful they all represent a potentially large
expense.
AUGUST’S ECONOMIC POLICY PACKAGE
In recent months, as speculation has intensiied on when the US Federal Reserve
would begin to taper its program of quantitative easing, Indonesia and other
emerging economies have absorbed pressure from inancial markets. In late
August, this pressure seemed particularly worrying. On 23 August, the Indonesian government responded with an economic policy package aimed, in part, at
quelling some of the concerns of inancial markets about Indonesia (Jakarta Post,
24/8/2013). We now know that the pressure was short-lived, but at the time there
was a sense that the situation could worsen, and the government’s response was
delivered in that context. It also suggests how the government may respond to
inancial-market pressures in future.
Indonesia had entered 2013 with an apparently healthy combination of strong
economic growth, low inlation and low interest rates. Indonesia’s growth outlook, like that of many other emerging economies, was strong relative to advanced
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Survey of recent developments
281
economies. This outlook, combined with highly accommodative monetary policy
in the US and Japan, for example, saw strong capital inlows, a corresponding rise
in the stock market and a fall in bond yields. By April 2013, the Jakarta Composite
Index had surged to record levels and 10-year government bond yields had fallen
to around 5.5% (Nehru 2013: 154–5).
Indonesia’s economic policymakers had been concerned for some time by the
risks to the economy from a probable reversal of portfolio investments once the
US and other countries began to return their monetary policy to a more normal
footing. But the dificulties in forecasting the likely timing and magnitude of those
changes in capital lows meant that there was no obvious set of policies that would
help guard against the risks.
Portfolio investment started to leave Indonesia in late May (Nehru 2013: 1545), which set in train consequences for inancial markets and the wider economy.
The uncertainty surrounding quantitative easing triggered a series of adjustments for Indonesia and brought inancial markets back onto the front page of
newspapers. The rupiah, as well as local stocks and bonds, came under heavy
selling pressure. By the end of August, the Jakarta Composite Index was almost
20% below its high for the year, in late April; the exchange rate passed 11,000
rupiah per dollar for the irst time in more than four years; and 10-year government bond yields hit 8.5%.
In this environment, the government moved to introduce an economic policy
package with four objectives: (a) to reduce the current-account deicit and support
the rupiah; (b) to sustain economic growth; (c) to maintain purchasing power and
combat inlation; and (d) to increase investment.8 The package included measures to encourage exports by providing tax breaks for export-oriented industries;
to reduce oil imports by increasing the proportion of biodiesel in diesel fuel; to
apply higher luxury taxes on some cars and branded goods; and to increase mineral exports by relaxing some regulatory hurdles, including delaying by a year
the implementation of quotas on exports of some unprocessed minerals. The
package also provided tax incentives for labour-intensive industries, to support
economic growth; relaxed import quotas on some food products, to reduce pressure on inlation; and promised to simplify licensing procedures, to encourage
investment.
At the same time, BI announced that it would give banks more lexibility in
managing their foreign exchange. The Ministry of Finance issued ministerial
decrees to relax bonded-zone regulations; eliminate the value-added tax (VAT)
on luxury goods on certain products (including on non-iction books); and delay
the payment of income tax for certain industries, on the condition that they do not
reduce their employment levels.
It was immediately clear that the policy package would do little to alleviate
inancial-market pressures or boost growth in the short term. The package did
contain a number of smaller, useful measures, however, such as the one-year
delay on quotas for raw-mineral exports and the relaxation of import quotas for
some food products – albeit measures that provide temporary relief from policies
whose aim is to restrict trade. Of the other measures, some will take time to have
8 The full text of the package can be found at the Ministry of Finance website: .
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282
Jason Allford and Moekti P. Soejachmoen
an effect, such as the tax breaks for labour-intensive industries; some will be dificult to implement, such as the increased biodiesel requirement; and some may
not have much of an effect on the economy at all, such as the removal of VAT on
non-iction books.
Financial markets were unimpressed by the government’s response to the economic situation, so eyes turned to BI. At a special board meeting on 29 August, the
bank’s governors agreed to raise the policy rate by 50 basis points. They raised it
by a further 25 basis points the following month. While the effect of movements
in the policy rate can be disputed, these rate increases suggest that the central
bank needs to be seen to be responding to inancial-market developments. At the
August meeting, the bank increased the lending-facility rate by 25 basis points,
to 7.00%, and the deposit-facility rate by 50 basis points, to 5.25%. It also cut the
holding period for SBIs from six months to one month, agreed to include Bank
Indonesia deposit certiicates as a component of secondary statutory reserves and
extended its bilateral swap arrangement with the Bank of Japan.
It is dificult to discern precisely what role the government’s policy package
and the actions of BI played in calming inancial markets. Financial market volatility eased in September, although this was due largely to reduced speculation
in the US about when the Federal Reserve would begin to taper its program of
quantitative easing, and the effect was felt by most emerging economies, not just
Indonesia. With the likelihood of volatility continuing to worry global inancial
markets in 2014, owing in part to the uncertainty about quantitative easing and to
tensions between the White House and Congress over US iscal policy, the experience of August highlights the limited tools available to the Indonesian government to combat inancial-market disturbance, and the need for a irmer resolve if
the external situation were to become seriously negative. Arguably, one of the best
things that Indonesia can do is not to stand in the way of inancial-market adjustments when the economy is under pressure. A falling exchange rate, falling stock
prices and rising bond yields are necessary adjustments that encourage investors
back into the country.
The implementation of the policy package also highlighted areas of poor cooperation between government ministries in implementing policies, such as those on
soybean. In May, Presidential Regulation 32/2013 gave the national food logistics
agency (Badan Urusan Logistik, Bulog) responsibility for stabilising prices and
distributing soybean imports. In the August economic policy package, the Ministry of Finance announced that the quota system would be changed into a pricecontrol system. But a regulation issued by the Minister for Trade on 29 August
referred to the quota system and to import licensing for 21 companies, including Bulog and cooperatives. As a result, these regulations did not help to reduce
the price of soybean or increase the availability of imported soybean to producers of tempeh and tofu. On 20 September, the Minister for Trade issued Ministerial Regulation 45/M-DAG/PER/8/2013, which eliminated import licensing;
the Minister of Finance then issued Ministerial Regulation 133/PMK.011/2013,
which eliminated the 5% import tax on soybean.
Th
ISSN: 0007-4918 (Print) 1472-7234 (Online) Journal homepage: http://www.tandfonline.com/loi/cbie20
Survey of recent developments
Jason Allford & Moekti P. Soejachmoen
To cite this article: Jason Allford & Moekti P. Soejachmoen (2013) Survey of recent
developments, Bulletin of Indonesian Economic Studies, 49:3, 267-288, DOI:
10.1080/00074918.2013.850627
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Date: 17 January 2016, At: 23:48
Bulletin of Indonesian Economic Studies, Vol. 49, No. 3, 2013: 267–88
SURVEY OF RECENT DEVELOPMENTS
Jason Allford*
Downloaded by [Universitas Maritim Raja Ali Haji] at 23:48 17 January 2016
The Treasury, Canberra
Moekti P. Soejachmoen*
TNP2K, Jakarta
SUMMARY
In the 15 years since the Asian inancial crisis, the Indonesian economy has
beneited from a stable macroeconomic policy framework and prudent macroeconomic policy settings. Economic growth has been solid, inlation has been
contained and government inances have strengthened. Indonesia weathered the
global inancial crisis better than many countries, and it subsequently beneited
from the low global interest rates resulting from highly stimulatory monetary
conditions in many advanced economies, especially the US.
In the middle of 2013, however, speculation on when the US Federal Reserve
would begin to unwind its program of quantitative easing saw global interest
rates jump. Short-term capital lowed out of Indonesia, causing the stock market
to fall, the currency to depreciate and interest rates to rise. On top of this, GDP
growth appeared to be slowing, the trade balance worsening and inlation increasing. In late September and October, the failure of the US to raise its legislated debt
ceiling led to speculation that it might fail to meet some of its debt obligations,
which fuelled inancial-market volatility.
It is yet to be seen whether the Indonesian economy and its inancial markets
are suficiently lexible to make a smooth transition to the new external reality.
The policy tools available to the government to deal with the short-term economic
challenges are limited: it introduced an economic policy package in August, and
Bank Indonesia (BI) raised oficial interest rates in August and September, following two increases earlier in the year.
These pressures from global inancial markets have drawn attention to the
need for further structural reforms in Indonesia, including those aimed at deepening inancial markets, strengthening inancial-sector supervision, freeing up
trade and encouraging competition, and maintaining the government’s revenue
base in the face of falling commodity prices. While some reforms, particularly in
inancial-sector supervision, are already in train, it may be dificult for Indonesia
to make serious gains on longer-term economic reforms before the 2014 presidential elections.
* The update on mineral taxation and regulation was contributed by Dan Devlin, also from
the Treasury, in Canberra. TNP2K = Tim Nasional Percepatan Penanggulangan Kemiskinan (National Team for the Acceleration of Poverty Reduction), Ofice of the Vice-President.
The authors thank Haryo Aswicahyono, Gavin Forte, Edimon Ginting, Anton Gunawan,
Anwar Nasution, Suahasil Nazara, Isa Rachmatawarta, Sjamsu Rahardja, Djauhari Sitorus,
Ashley Taylor, and numerous faculty members of the ANU College of Asia and the Paciic,
who bear no responsibility for any errors.
ISSN 0007-4918 print/ISSN 1472-7234 online/13/030267-22
http://dx.doi.org/10.1080/00074918.2013.850627
© 2013 Indonesia Project ANU
Downloaded by [Universitas Maritim Raja Ali Haji] at 23:48 17 January 2016
268
Jason Allford and Moekti P. Soejachmoen
INTRODUCTION
This Survey covers recent economic developments in Indonesia, primarily from
June to September 2013. Economic data released in that period show a continued
slowing of GDP growth, a worsening of the balance-of-payments position and
high inlation (following the government’s decision to increase subsidised fuel
prices in June).
Much of this economic news was overshadowed, however, by increasingly
intense speculation on the 2014 presidential elections – until August, when volatile conditions in international inancial markets, related to the possible tapering
of quantitative easing in the US, brought the economy back into the headlines. By
late August the Indonesian government was under considerable pressure from
the public and from investors to respond to the disappointing economic data that
had come out in recent months. It earned a reprieve when conditions eased in
September.
This Survey looks at the response of the government and BI to this period of
inancial pressure. The government released an economic policy package in late
August, which it claimed would address a number of issues in the economy. The
central bank raised interest rates four times between June and September, as well
as introducing other measures to calm inancial markets at the height of the turbulence in August.
The government’s immediate response to deteriorating economic indicators and inancial-market pressure pointed to the need for economic reforms to
improve the economy’s lexibility in the face of external developments and to
boost its longer-run growth potential. This Survey considers two areas for reform:
irst, the progress of changes to the inancial-market supervisory arrangements
and, second, the state of policy in the mining and energy sector. Financial-market
supervision is important because the fast-growing inancial sector is extending its
reach into many parts of the Indonesian economy. Poor or inconsistent regulation
could fail to prevent poorly managed inancial institutions from disrupting the
macroeconomic environment. The need for policies that increase the eficiency
of exploration, investment and production in the mining and energy sector is reinforced by the budget’s high reliance on revenue from this sector and the vulnerabilities exposed by the fall in global commodity prices in early 2013.
POLITICAL DEVELOPMENTS
McRae (2013, in this issue) discusses the chief political developments in the leadup to Indonesia’s elections in 2014. In the wider political sphere, however, two
events need to be mentioned. In August, Indonesia’s Corruption Eradication
Commission (Komisi Pemberantasan Korupsi, KPK) arrested Rudi Rubiandini,
the head of the upstream oil and gas regulator SKK Migas, on bribery charges
related to an alleged payment from Kernel Oil, an energy company based in Singapore. SKK Migas was created in November 2012, after the Constitutional Court
dissolved its predecessor, BPMigas (Cornwell and Anas 2013: 18–19). The continuing importance of the oil and gas industry to Indonesia’s economy relies on
further investment in exploring oil reserves, particularly by foreign oil companies. The need to present a clean image to potential investors made Rudi’s arrest
disappointing to Indonesia.
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Survey of recent developments
269
A second disappointment was the KPK’s arrest in October of Akil Mochtar, the
Chief Justice of the Constitutional Court, also on corruption charges. The case
against Akil involves a ruling by the court over an electoral dispute in Kalimantan. The KPK’s investigation led to ive further arrests of people with connections
to the Golkar party, whose interests in Banten were at stake. This high-proile
case caused considerable consternation in Indonesia; the court had won general
respect for its impartial rulings since its establishment, in 1999. After Akil’s arrest,
President Yudhoyono promised to set up an independent judicial commission to
oversee the court. If this initiative is akin to his 2009 creation of a task force to
eliminate the ‘judicial maia’ (McLeod 2011: 9; Fealy 2011: 353), it may achieve
little.
Although the indictments against Rudi and Akil are still sub judice, they may
further erode conidence in public authorities and the judiciary. They may also
inluence the 2014 elections, by disadvantaging those candidates for parliament
and the presidency whom the electorate associates with parties that have been
tarred by the corruption brush, and by advantaging candidates who can articulate
an uncompromising stance on corruption.
MACROECONOMIC DEVELOPMENTS
Growth
In 2011 and 2012, Indonesia faced a combination of slow growth in advanced
economies and low global interest rates – themselves partly the result of accommodative monetary policy in advanced economies, aimed at boosting growth.
Indonesia and other emerging economies beneited from this situation, owing
to their attractiveness to investors seeking high growth and high yields. The
inlow of foreign capital supported investment and sustained economic growth,
notwithstanding the slower growth in some of Indonesia’s advanced-economy
trading partners. These effects began to unwind in the middle of 2013, as the prospect of stronger growth and higher interest rates in the US and other advanced
economies started to slow the low of portfolio investment into Indonesia (Nehru
2013: 147–9). It is possible that this transition will weigh on Indonesian economic
growth in the near future, although the net effect and the precise timing of any
impact are dificult to forecast, and growth will remain subject to many inluences.
In the year to the second quarter of 2013, Indonesia recorded GDP growth of
5.8% (table 1), down slightly from the 6.0% rate of growth recorded in the irst
quarter. This continues a gradual trend of slowing GDP growth since the fourth
quarter of 2010, when the rate peaked at 6.8%.1 In August, BI described slowing
growth as ‘part of rebalancing the domestic economy with the global economic
downturn and the impact of rising inlation’ (BI 2013a), which suggests that the
monetary authorities are comfortable with some slowing of growth to ease pressures on the balance of payments and inlation.
On the expenditure side, slowing GDP growth was explained by slower growth
in consumption and particularly investment. This was partly offset by slower
1 Historical GDP data may be revised if Statistics Indonesia changes the base year for its
national accounts. Possible changes to the national accounts are discussed in box 1.
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Jason Allford and Moekti P. Soejachmoen
TABLE 1 Components of GDP Growth
(2000 prices; % year-on-year)
Jun-2012 Sep-2012 Dec-2012 Mar-2013 Jun-2013
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GDP
Excluding oil & gas
By expenditure
Private consumption
Government consumption
Investment
Construction
Machinery & equipment
Transport
Other
Exports
Imports
By sector
Tradables
Agriculture, livestock,
forestry & isheries
Mining & quarrying
Manufacturing
Excluding oil & gas
Non-tradables
Electricity, gas & water supply
Construction
Trade, hotels & restaurants
Transport
Communications
Financial, rental & business
services
Other services
6.4
6.9
6.2
6.9
6.1
6.7
6.0
6.7
5.8
6.4
5.2
8.6
12.5
7.3
20.9
52.9
–2.0
2.6
11.3
5.6
–2.8
9.8
7.6
11.4
25.9
9.7
–2.6
–0.2
5.4
–3.3
7.3
7.8
4.3
10.1
18.7
0.5
6.8
5.2
0.4
5.9
7.2
0.0
4.4
22.3
3.4
–0.4
5.1
2.1
4.7
6.9
–2.6
–1.4
11.6
4.8
0.6
4.6
4.7
4.2
4.2
4.0
4.0
3.3
5.2
10.1
5.3
–0.3
5.9
11.3
2.0
0.5
6.2
10.7
3.7
–0.4
5.8
9.8
3.2
–1.2
5.8
6.4
7.9
6.5
7.3
8.7
11.1
10.8
7.4
6.1
7.6
7.2
14.8
10.9
7.7
7.3
7.8
7.8
14.1
10.0
7.6
6.5
7.2
6.5
12.8
11.4
7.4
6.6
6.9
6.5
7.9
13.6
7.1
5.8
7.5
4.5
7.7
5.3
8.4
6.5
8.1
4.5
Source: CEIC Asia Database.
growth in the imported component of expenditure, while government spending
and exports were both higher.
Household consumption is a large proportion of the Indonesian economy; it
composed 55% of expenditure on GDP in current prices in the second quarter of
2013. Yet its share has fallen continuously since 2000, largely because of the sustained increase of the share of investment, from a modest 20% in 2000, to a peak of
33% in 2012, to a similar share during the irst half of 2013. Despite this historically
high proportion (Van der Eng 2009: 351), table 1 shows that the rate of growth
of real investment has slowed markedly over the past year. Growth of investment in structures remained steady, which may relect sustained investment in
residential structures and public infrastructure, rather than investment in nonresidential commercial structures. But the slowdown of investment in machinery
Survey of recent developments
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BOX 1 How Fast Is Indonesia’s Economy Growing?
During 2010–12, Indonesia’s GDP in constant prices grew at an average annual rate of
6.3%. The 2014 budget expects growth of 6.3% in 2013 and 6.4% in 2014. Yet this may
not materialise if Statistics Indonesia (Badan Pusat Statistik, BPS) changes some of its
national accounting procedures in the course of 2014, as it did in 2004 (Van der Eng
2005). To calculate GDP in constant prices, for example, it may change the benchmark
year from 2000 to 2010. A retrospective application of these changes to 2010–13 may
yield a downward revision of GDP growth.
The new 2010 benchmark year requires output in all sectors of the Indonesian economy to be valued at 2010 prices (rather than 2000 prices). Current national-accounts
data reveal that the implicit price index of total GDP increased from 100 in 2000 to 315
in 2012. But prices changed at different rates across sectors. For example, the implicit
price index in construction rose to 500, isheries to 442 and government services to 487,
while for the production of services in hotels it rose only to 165, banking to 183 and
sea transport to 206.
Using a new benchmark year therefore involves reweighting the output of the different sectors of the economy. As output growth varied across sectors, the new weighting yields different rates of growth of GDP in constant prices in retrospect. Assuming
that BPS will introduce no other changes in its national accounting practices, and
using the implicit sectoral price weights for 2010 in the current national-accounts data
as a proxy, the reweighting yields a downward revision of GDP growth to an average
of 5.7% for 2010–12.
BPS does not follow the United Nations’ 1993 System of National Accounts, which
recommends ‘chain-linking’ to calculate GDP growth in constant prices. It expresses
GDP in constant prices in prices of the preceding year. It is not certain whether BPS
will do this. Again using the implicit sectoral price weights as a proxy, this procedure
may yield a retrospective downward revision of GDP growth to an average of 6.4%
for 2010–12. It may also increase year-to-year volatility in the growth rate, including
modest growth of 2.5% in 2012.
and equipment, and particularly in transport vehicles, is remarkable. The lower
level of investment in transport vehicles may be related to higher fuel prices,
which have dampened the appetite for commercial vehicles. The slowdown in
investment in machinery and equipment may be related to the substantial slowing of imports over the past year, which is consistent with the depreciation of
the rupiah relative to the US dollar from 9,734 in April to 11,404 in September (BI
2013b: table 9.6).
On an industry basis, non-tradables continue to lead output growth. Communications maintained its impressive performance, achieving a record rate of 13.6%
annual real growth over the year to June. Among tradables, the most noticeable
development was the decrease in mining output by 1.2% in the year to the second
quarter, conirming a trend that began in the third quarter of 2012. Disaggregated,
the national accounts reveal that most of this decline originated in the oil and
gas subsector. It contracted by 4.7% over the year, while other mining (excluding
quarrying) grew by just 0.7%.
The contraction in oil and gas output relects the fall that started in the 1990s
in the physical production of crude oil. In energy equivalents, gas production
exceeded oil production in 2002. Despite the existence of oil reserves in Indonesia,
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Jason Allford and Moekti P. Soejachmoen
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a lack of exploration and new investments has restricted output growth in the
mining sector. Foreign oil producers continue to be concerned about the prospects
for fair cost-recovery rules, and about the regulatory environment more generally
(Boyd et al. 2010). SKK Migas noted in July 2013 that onerous permit processes
by regional administrations, the sealing of wells and oil theft are the biggest hindrances to Indonesia’s oil production (SKK Migas 2013). The circumstances leading to the formation of SKK Migas, in 2012, and the arrest, in August 2013, of its
head may have exacerbated the concerns of oil producers.
Investment and exports
In 2012, gross inlows of foreign direct investment (FDI) reached their highest
level ever. BI’s data on FDI for the irst and second quarters of 2013 seemed to
suggest that this year’s inlows would be lower than those of 2011 and 2012. Yet
table 2 shows that quarterly inlows to June 2013 compare well with those of 2012.
At an aggregated level, they increased slightly, by 7%. But there are substantial
differences among sectors in FDI inlows. The largest sector is manufacturing,
in which FDI decreased by 12% relative to the comparable period in 2012, while
mining received $427 million of FDI, compared with a divestment of $269 million
in the irst half of 2012.
BI’s data give only a partial impression of foreign investment. Every quarter, Indonesia’s Investment Coordinating Board (Badan Koordinasi Penanaman
Modal, BKPM) aggregates data from the reports of foreign-owned irms. These
data include investments from foreign and domestic sources but exclude investments in the oil and gas and inancial sectors (Lindblad and Thee 2007: 20–1;
Nehru 2013: 147). The BKPM data in table 2 conirm that 2012 was a year of record
investment activity by foreign irms, and that investment activity by foreign irms
in the irst two quarters of 2013 was 18% higher than in the corresponding quarters in 2012. Again, the table reveals variations among sectors.
The investment trends in mining seem to contradict accumulating pessimism
in the sector. A previous Survey noted that new export-processing requirements
would reduce investment (Burke and Resosudarmo 2012: 307–8). In 2013, the
government continued to impose further requirements on domestic and foreignowned mining operations (see ‘Mineral taxation and regulation’, below, and box
2) to exert greater domestic control over the minerals industry. In addition, the
price of copper fell by 11% between January and September,2 because of concerns
about slower economic growth in China and the possibility that central banks in
the developed world will scale back their stimulus measures. Likewise, tin and
nickel prices have lost 8% and 21%, respectively, in the year to date. The investment activities of foreign-owned mining irms may slow in the remainder of 2013;
imports of capital goods in the mining sector have been falling since late last year,
which may foreshadow a fall in FDI (BKPM’s investment realisation data typically lag three to nine months behind such imports). (BKPM 2013a)
The investment data from BKPM are slightly higher than those from BI, even
though the former do not include FDI in oil and gas production or the inancial
sector. BKPM’s realisation data are based on permanent business permits (Izin
2 IMF commodity prices, available at .
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TABLE 2 Foreign Direct Investment by Sector, 2009–13
($ million)
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2009
Bank Indonesia
Manufacturing
Transport, storage &
communication
Mining
Trade
Agriculture & forestry
Finance
Real estate
Other
Total
BKPM
Manufacturing
Transport, storage &
communication
Mining
Trade
Agriculture & forestry
Real estate
Other
Total
2010
2011
2012
2012
2013
Q1
Q2
Q1
Q2
8,945
2,151
1,484
1,292
1,916
1,800 2,390 2,669 3,024
1,301 1,896 3,418 2,088
74 2,463 2,473 1,241
–52
286
253 1,201
148
409 1,001 1,025
–25
28
583
831
58 1,328
669 1,049
4,877 13,771 19,242 19,404
751
311
559
153
–147
385
319
4,482
736
–580
184
401
648
140
282
3,295
649
727
480
202
376
108
249
4,083
616
591
42
298
384
149
230
4,226
3,813
6,790 11,770
2,313
3,148
3,459
4,417
4,152 5,072 3,799 2,808
333 2,201 3,619 4,255
704
774
826
504
145
776 1,244 1,622
310 1,050
199
402
1,359 3,005 2,999 3,204
10,816 16,215 19,475 24,565
765
1,083
157
530
72
808
5,727
306
1,016
152
473
191
953
6,239
760
1,242
130
381
250
949
7,173
75
1,442
156
303
125
463
6,982
1,574
4,971
3,337
8,176
Sources: BI (2013b): table V.37; BKPM (2013b).
Note: Bank Indonesia data are balance-of-payment data and refer to inlows of FDI, excluding the oil
and gas sectors. They are provisional for Q1 2013 and very provisional for Q2 2013; BKPM data refer
to realised investment reported by foreign-owned irms to BKPM; they exclude FDI in oil and gas
production and the inancial sector, which is subject to the approval of and investment reporting to
the Ministry of Finance.
Usaha Tetap), issued to approved foreign and domestic investment projects that
have commenced commercial production. It deines FDI as any investment with
foreign-equity participation, no matter how small. In addition, its measures of
FDI relate to the total value of the investment in question, which includes not only
the equity contribution of, and the loans from, the foreign partner but also the
equity contribution of Indonesian partners, as well as loans from all other sources
needed to inance the investment. In other words, BKPM’s approved FDI data are
gross measures that may greatly exaggerate the inancial contribution of foreign
owners – and, indeed, of all foreign sources of inance. BI’s investment data are
based on guidelines from the IMF and the United Nations Conference on Trade
and Development, which include three internationally accepted components of
FDI: equity capital, loan capital provided by foreign principals, and the share of
re-invested earnings of foreign irms attributable to foreign principals (Lindblad
and Thee 2007).
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Jason Allford and Moekti P. Soejachmoen
During the irst seven months of 2013, the nominal value of Indonesia’s
goods exports was $106 billion – well below that of the corresponding periods
in 2011 ($116 billion) and 2012 ($113 billion), owing to both external and internal
pressures. Externally, economic growth in Indonesia’s most important export destinations (Japan, China, Hong Kong, Singapore, South Korea, the US, and India)
slowed considerably or failed to pick up. Economic growth in Japan and Korea in
the irst half of 2013 remained anaemic, at 0.7% and 1.8%, respectively, year-onyear. Indonesia’s second-biggest export destination, China, saw growth slip from
double-digit levels in 2010 to 7.5% year-on-year in June 2013. India also saw economic growth slow markedly, from around 10% in the irst half of 2010 to around
5% year-on-year in early 2013. Indonesia is not the only economy experiencing
a slowdown in exports, which restricts growth – so, too, are the export-oriented
economies in East Asia and the large and more protectionist economies in Latin
America. Brazil, for example, expects to grow at just 2% this year. In October,
the IMF reduced its global growth prediction for 2013 by 0.3 percentage points,
to 2.9%, and lowered its 2014 global growth expectation to just 3.6% (IMF 2013).
Hence, while global demand may now be gradually rising, its rate of growth is
unlikely to boost the Indonesian economy.
Furthermore, Indonesia’s export sector faces several domestic dificulties. The
depreciation of the rupiah has beneited those sectors producing primary commodities for export, since they depend less on imported inputs. Yet the tin-mining
sector, for example, has suffered from the consequences of changed regulatory
arrangements that attempt to increase domestic value-adding and trading, which
impeded tin exports in August and September (see box 2). For exporting manufacturers, such as those producing textiles and garments, or electronic and electrical goods, the beneits of currency depreciation have been partly offset by the
increased cost of imported inputs.
In addition, low productivity, as well as pressures caused by rising minimum
wages (Cornwell and Anas 2013: 20–7) have hurt some exporters. A survey in September by the Centre for Strategic and International Studies, in Jakarta, revealed
that rising wages could price Indonesia out of global export markets if minimumwage increases were to continue. From 2010 to 2011, wages in Indonesia rose
by 5.0% while labour productivity rose by just 3.4%, compared with China’s
respective rates of 7.2% and 10.0% (Jakarta Post, 6/9/2013).3 A proposed presidential instruction in September was intended to cap next year’s minimum-wage
increases to 5.0% above inlation for labour-intensive industries, and to 10.0%
above inlation for other industries (Jakarta Post, 15/9/2013). This announcement
was clearly intended to inluence discussions about next year’s minimum-wage
increases. Five days later, however, the government stated that the details of the
proposal were still being negotiated, and that minimum-wage increases in 2014
would not be capped, although Hidayat, the industry minister, mentioned in parliament that the increase will be below 20% (Jakarta Post, 20/9/2013).
The government still faces some barriers to improving the business environment for foreign investment and exports, especially in customs and logistics.
3 The survey also reveals that Indonesia’s minimum wages grew by 30% between 2010
and 2013 – faster than those of any other country in Asia, and well ahead of those of China
(8%) and Vietnam (7%).
Survey of recent developments
275
FIGURE 1 Indonesia’s Trade Balance
($ billion)
4
Non-oil trade balance
Oil trade balance
Trade balance
3
2
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1
0
–1
–2
–3
Jan-2011
Jun-2011
Nov-2011
Apr-2012
Sep-2012
Feb-2013
Jul-2013
Source: CEIC Asia Database.
Waiting times at Tanjung Priok, Indonesia’s biggest port, increased from 4.8 days
to 6.4 days, or by 33%, between October 2010 and November 2012. Longer waiting
times have reduced Indonesia’s competitiveness and made it more dificult for
the country to join global, just-in-time supply chains (Cubillos and Sandee 2013).
The government could reduce delays at Tanjung Priok by, for example, increasing the number of importers with access to the prominent-partners (mitra utama,
MITA) priority lane,4 allowing more parallel processes to take place during customs clearance, providing incentives for early submission of import declarations,
and continuing to strengthen Indonesia’s National Single Window.5
Flagging exports caused Indonesia’s trade deicit to increase to $5.6 billion in
the irst seven months of 2013, before a surplus in the non–oil and gas sector in
August reduced it to $5.5 billion. Figure 1 shows that the overall trade deicit up
to July was dragged down by that of the oil and gas sector ($7.6 billion), which has
been in deicit since August 2012. In the quarter, these trade deicits contributed
to a current-account deicit of $9.8 billion, or close to 4.4% of quarterly GDP (table
3). Exports of fuel, vegetable oil and fats, machinery and mechanical equipment,
and rubber have declined in 2013 compared with 2012, while exports of minerals
and fertiliser have increased. Non–oil and gas imports were lower in 2013 than in
4 The MITA priority lane at Indonesia’s ports grants a select number of traders paperless
clearance through customs. Only around 100 traders have MITA access; most are large
companies with advanced IT systems and post-clearance auditing facilities. (Lesher 2012:
54).
5 Implemented in 2010, Indonesia’s National Single Window aims to transfer goods more
quickly across the country’s borders, by providing a single contact point for customs and
cargo procedures at each of Indonesia’s ive main ports (OECD 2012: 148).
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Jason Allford and Moekti P. Soejachmoen
TABLE 3 Balance of Payments
($ billion)
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Jun-2012 Sep-2012 Dec-2012 Mar-2013 Jun-2013
Current account
Exports
Non–oil & gas
Oil & gas
Imports
Non–oil & gas
Oil & gas
Merchandise trade balance
Non–oil & gas
Oil & gas
Services
Income
Current transfers
–8.0
47.5
38.4
9.1
46.7
36.5
10.3
0.8
2.0
–1.2
–2.9
–6.8
0.9
–5.3
45.5
37.4
8.1
42.4
33.5
8.9
3.2
4.0
–0.8
–2.5
–6.9
0.9
–7.6
47.1
38.5
8.6
46.3
35.3
11.0
0.8
3.2
–2.4
–3.3
–6.3
1.2
–5.3
45.5
37.0
8.5
43.8
32.4
11.5
1.6
4.6
–3.0
–2.3
–5.7
1.1
–9.8
45.7
37.8
7.9
46.3
36.1
10.2
–0.6
1.7
–2.3
–3.1
–7.1
1.0
Capital & inancial accounts
Capital account
Financial account
Direct investment
Portfolio investment
Other investment
5.1
0.0
5.1
3.8
3.9
–2.5
5.9
0.0
5.9
4.5
2.5
–1.2
11.8
0.0
11.8
4.5
0.2
7.2
–1.4
0.0
–1.4
3.4
2.9
–7.7
8.2
0.0
8.2
3.3
2.5
2.3
0.1
–2.8
106.5
0.3
0.8
110.2
–1.0
3.2
112.8
0.0
–6.6
104.8
–0.8
–2.5
98.1
Errors & omissions
Overall balance (change in reserves)
Foreign reserves
Source: CEIC Asia Database
2012. Imports of machinery, mechanical equipment and vehicles were also lower in
2013, while imports of electrical equipment, iron and steel, plastics, organic chemicals, cereal, and cottons were higher. With the depreciation of the rupiah and the
increase in fuel prices weighing down imports, BI expects the current-account deicit to ease to 3.4% of GDP in the third quarter of 2013 (Jakarta Globe, 8/10/2013).
Inlation, exchange rates and monetary policy
After running at around 4.5% during 2012, inlation increased to well above 5.0%
in early 2013. This increase was mainly the result of increasing food prices, which
have been growing at double-digit rates since early 2013 (Cornwell and Anas
2013: 12; Nehru 2013: 153–4). The government’s reduction of fuel subsidies on 22
June 2013 also put further upward pressure on the CPI. The increase in fuel prices
was relected in the transport component of the CPI, which increased at a monthly
rate of 5.6% in June and 13.9% in July, before dropping back to 1.3% in August,
leaving transport prices up by 21.2% in the year to August 2013. The transport
component of the CPI has typically grown very little, owing to the set price of
subsidised fuel. The CPI had increased by 5.9% in the year to June 2013, but it
increased by 8.6% in July, following the reduction in fuel subsidies, and continued
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Survey of recent developments
277
at a similar annual level in August and September. Monthly inlation dropped to
1.1% in August and to –0.3% in September.
Neither the increase in food prices nor the increase in transport prices is the
result of strong demand growth, so there is scope for the central bank to ignore
their direct impact on inlation, although their impact on inlation expectations
will still be a consideration for monetary policy. Having left the policy rate at
5.75% since January 2012, the bank’s board elected to increase the policy rate at
meetings in June, July, August and September, by a total of 150 basis points. The
policy rate increased to 7.25%, where the board left it in October. After each of
these meetings, the board nominated controlling inlation or inlation expectations among its reasons for raising the rate. The likely inlationary effects of the
continued depreciation of the rupiah against the currencies of many of Indonesia’s major trading partners – except for Japan – also contributed to the bank’s
decisions to tighten monetary policy.
BI uses the policy rate to inluence inlation expectations, but the rate is not
linked to any instrument in the inancial market and is therefore an imperfect
measure of the bank’s stance on monetary policy (McLeod 2011: 14). In contrast,
the Bank Indonesia Certiicate (Sertiikat Bank Indonesia, SBI) rate is determined
in inancial markets. The nine-month SBI rate inched up in the course of 2013, from
4.84% in January to 6.96% in September. The growth of money supply (proxied by
currency in circulation) slowed to just 9.9% over the year to August and to an average of 13.8% during June–August. This was below the average of 14.8% over the
previous 17 months, when the real nine-month SBI was marginally positive overall
(BI 2013b: tables 1.25 and 8.1). Although the real nine-month SBI rate turned irmly
negative during July–August, owing to accelerating inlation, it seems likely that
monetary policy has a moderating effect on inlation.
Fiscal policy
President Yudhoyono presented the 2014 budget plan to parliament on 16 August.
This was largely a business-as-usual budget, containing no major spending surprises. The government forecast a 10.7% increase in revenue in 2014 and a 5.2%
increase in spending, which it estimated would lead to a fall in the budget deicit
from 2.4% of GDP in 2013 to 1.5% in 2014. If realised, this would be a considerable
tightening of iscal policy.
Indonesia offers a challenging environment for such policy. Higher inlation
and a depreciating currency suggest that tighter iscal policy may help to reduce
inlationary pressure and maintain investor conidence in Indonesia. This would
support BI’s stance on monetary policy. But tighter iscal policy would also put
downward pressure on GDP growth, which has already been slowing.
On 23 August, the government announced an economic policy package, one
of the stated aims of which was to maintain economic growth.6 On one hand, the
government’s plan to reduce the budget deicit to close to 1% of GDP is dificult to
6 The press referred to it as a stimulus package. See, in particular, ‘New stimulus package aims to spur growth’ (Jakarta Post, 24/8/13) and ‘Indonesia plans policy stimulus to
woo investors and help rupiah’ (Jakarta Globe, 23/8/13). See also ‘August’s economic policy
package’ (below, this article).
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278
Jason Allford and Moekti P. Soejachmoen
reconcile with such a package. On the other, the package is unlikely to stimulate
growth in the near term – its measures may at best promote modest growth in the
longer term.
The combination of a tighter budget that strengthens the government’s iscal
position and measures that boost the economy’s potential for longer-term growth
is a sensible policy set. But the government’s framing of its intentions for iscal
policy – sometimes arguing that the economy needs support, sometimes arguing
that it needs to lean against inlationary and current-account pressures – is confusing and may indicate confused decision-making. It would be better for the
government to be clear that its budget strategy is focused on medium-term iscal
sustainability, that other economic measures are intended to increase the economy’s potential for supply-side growth and that monetary policy is the primary
tool of short-term demand management (if all of this is indeed the case).
Adding to the confusion were several reasons to doubt that the government will
reduce its budget deicit to the proposed level. First, some of the basic assumptions underlying the budget look too optimistic. Economic growth is assumed to
be 6.3% in 2013 and 6.4% in 2014, which seems too high. Indeed, Chatib Basri, the
Minister for Finance, lowered the government’s growth expectations for 2013 to
5.8%–5.9%, just days after the budget had been delivered (Jakarta Post, 24/8/2013),
and the central bank revised down its 2013 growth projections to 5.5%–5.9% (BI
2013c). In addition, the budget assumes the exchange rate to be 9,600 rupiah per
dollar in 2013 and 9,750 in 2014, which is well below the current rate. Second, the
forecast increase in total expenditure of only 5.2% in 2014 would be a substantial
slowing from the 15.9% expected for 2013, and would be dificult to achieve.
Third, spending on fuel subsidies depends on the demand for fuel and the
price of crude oil, factors that the government does not control. The assumed
prices for crude oil – $108 a barrel in 2013 and $106 in 2014 – are not unreasonable, but unexpected variations in these numbers may result in large swings in the
cost of fuel subsidies. This is what happened in mid-2013, when spending on fuel
subsidies tracked well above budget and threatened to push the deicit beyond
the legislated cap of 3% of GDP. In response, the government increased the price
of subsidised fuels. Yet even with these substantial increases in fuel prices, and
with the corresponding reductions in subsidies, the government’s revised budget
for 2013 still allocated more money to fuel subsidies than did the initial budget.
The proposed budget for 2014 sees only a small decrease in expected spending on
subsidies (see igure 2).
Spending on the fuel subsidy not only presents problems for budget management; it is also poor-quality spending. The revised 2013 and proposed 2014
budgets (table 4) show that spending on energy subsidies (around two-thirds of
which is on fuel and one-third on electricity) remains high as a share of government expenditure, composing approximately a quarter of central-government
expenditure (total expenditure less transfers to regions) in 2013 and 2014. By way
of comparison, this amount is around one and a half times that spent directly by
the central government on education and around 15 times that spent directly on
health. With most of the beneit of the fuel subsidy going to middle- and upperincome groups, this spending is clearly regressive.7
7 See also Olivia and Gibson (2008).
TABLE 4 Budgets for 2012, 2013 and 2014
(Rp trillion)
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2012
2013
2014
Actual
Proposed
Revised
Proposed
Change
(%)
REVENUES & GRANTS
Domestic revenue
Tax
Domestic
Income tax
VAT
Other
International trade taxes
Non-tax
Natural-resource revenues
Proits of state-owned enterprises
Revenue from public-service centres
Other
Grants
1,338.3
1,332.6
980.2
930.5
464.8
337.6
4.2
49.7
352.4
226.5
30.8
1,529.7
1,525.2
1,193.0
1,134.3
584.9
423.7
6.3
58.7
332.2
197.2
33.5
1,502.0
1,497.5
1,148.4
1,099.9
538.8
423.7
5.4
48.4
349.2
203.7
36.5
73.3
5.8
78.0
4.5
85.5
4.5
1,662.5
1,661.1
1,310.2
1,256.3
591.6
518.9
6.0
53.9
350.9
198.1
37.0
24.7
91.1
1.4
10.7
10.9
14.1
14.2
9.8
22.5
11.1
11.4
0.5
–2.8
1.4
5.1
6.6
–68.9
EXPENDITURE
Central government
Personnel
Material
Capital
Interest
Subsidies
Energy
Fuel
Electricity
Non-energy
Grants expenditure
Social expenditure
Other
Transfers to regions
1,489.7
1,009.2
197.9
140.9
143.7
100.5
346.4
306.5
211.9
94.6
39.9
0.8
75.6
4.1
480.6
1,683.0
1,154.4
241.6
200.7
184.4
113.2
317.2
274.7
193.8
80.9
42.5
3.6
73.6
20.0
528.6
1,726.2
1,196.8
233.0
202.6
188.3
112.5
348.1
299.8
199.9
100.0
48.3
2.3
80.6
19.3
529.4
1,816.7
1,230.3
276.7
203.7
205.8
119.5
336.2
284.7
194.9
89.8
51.6
3.5
55.9
28.9
586.4
5.2
2.8
18.8
–1.4
6.9
6.2
–3.4
–5.1
–2.5
–10.2
6.8
52.2
–30.7
49.7
10.8
BALANCE
(% of GDP)
–151.4
–1.8
–153.3
–1.7
–224.2
–2.4
–154.2
–1.5
–31.2
–37.9
FINANCING
Domestic inancing
Foreign inancing (net)
173.3
198.4
–25.1
153.3
172.8
–19.5
224.2
241.1
–16.9
154.2
173.2
–19.1
–31.2
–28.2
13.0
BASIC ASSUMPTIONS
GDP growth (%)
Inlation (%)
Exchange rate (avg Rp/$)
SBI interest rate (avg %)
Crude oil price (avg $/barrel)
Oil production (avg ’000 barrels/day)
6.3
4.3
9,384
3.2
112.7
861
6.8
4.9
9,300
5.0
100.0
900
6.2
7.2
9,600
5.0
108.0
840
6.4
4.5
9,750
5.5
106.0
870
Source: Ministry of Finance.
Note: The change column is the difference between the 2013 revised budget and the 2014 proposed
budget. VAT = value-added tax. SBI = Sertiikat Bank Indonesia (Bank Indonesia Certiicate).
280
Jason Allford and Moekti P. Soejachmoen
FIGURE 2 Central Government Subsidies versus Spending, 2013–14
(Rp billion)
Fuel subsidy
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Electricity subsidy
Education spending
2013 revised budget
2014 proposed budget
Health spending
0
20
40
60
80
100
120
140
160
180
200
220
Source: Ministry of Finance.
The budget also provides initial funding to support Law 40/2004 on the
National Social Security System (Sistem Jaringan Sosial Nasional, SJSN), which
aims to deliver social security to all eligible citizens. In 2011, the government
enacted Law 24/2011 on the Social Security Agency (Badan Penyelenggara Jaminan Sosial, BPJS), a statutory body charged with implementing the SJSN. The
BPJS will establish a health-insurance program from 1 January 2014 (Simmonds
and Hort 2013) and a labour-insurance program from no later than 1 July 2015.
The latter will cover work-related accident insurance, old-age insurance, pensions and life insurance. There are no long-run igures available on the expected
cost of these programs, but if successful they all represent a potentially large
expense.
AUGUST’S ECONOMIC POLICY PACKAGE
In recent months, as speculation has intensiied on when the US Federal Reserve
would begin to taper its program of quantitative easing, Indonesia and other
emerging economies have absorbed pressure from inancial markets. In late
August, this pressure seemed particularly worrying. On 23 August, the Indonesian government responded with an economic policy package aimed, in part, at
quelling some of the concerns of inancial markets about Indonesia (Jakarta Post,
24/8/2013). We now know that the pressure was short-lived, but at the time there
was a sense that the situation could worsen, and the government’s response was
delivered in that context. It also suggests how the government may respond to
inancial-market pressures in future.
Indonesia had entered 2013 with an apparently healthy combination of strong
economic growth, low inlation and low interest rates. Indonesia’s growth outlook, like that of many other emerging economies, was strong relative to advanced
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Survey of recent developments
281
economies. This outlook, combined with highly accommodative monetary policy
in the US and Japan, for example, saw strong capital inlows, a corresponding rise
in the stock market and a fall in bond yields. By April 2013, the Jakarta Composite
Index had surged to record levels and 10-year government bond yields had fallen
to around 5.5% (Nehru 2013: 154–5).
Indonesia’s economic policymakers had been concerned for some time by the
risks to the economy from a probable reversal of portfolio investments once the
US and other countries began to return their monetary policy to a more normal
footing. But the dificulties in forecasting the likely timing and magnitude of those
changes in capital lows meant that there was no obvious set of policies that would
help guard against the risks.
Portfolio investment started to leave Indonesia in late May (Nehru 2013: 1545), which set in train consequences for inancial markets and the wider economy.
The uncertainty surrounding quantitative easing triggered a series of adjustments for Indonesia and brought inancial markets back onto the front page of
newspapers. The rupiah, as well as local stocks and bonds, came under heavy
selling pressure. By the end of August, the Jakarta Composite Index was almost
20% below its high for the year, in late April; the exchange rate passed 11,000
rupiah per dollar for the irst time in more than four years; and 10-year government bond yields hit 8.5%.
In this environment, the government moved to introduce an economic policy
package with four objectives: (a) to reduce the current-account deicit and support
the rupiah; (b) to sustain economic growth; (c) to maintain purchasing power and
combat inlation; and (d) to increase investment.8 The package included measures to encourage exports by providing tax breaks for export-oriented industries;
to reduce oil imports by increasing the proportion of biodiesel in diesel fuel; to
apply higher luxury taxes on some cars and branded goods; and to increase mineral exports by relaxing some regulatory hurdles, including delaying by a year
the implementation of quotas on exports of some unprocessed minerals. The
package also provided tax incentives for labour-intensive industries, to support
economic growth; relaxed import quotas on some food products, to reduce pressure on inlation; and promised to simplify licensing procedures, to encourage
investment.
At the same time, BI announced that it would give banks more lexibility in
managing their foreign exchange. The Ministry of Finance issued ministerial
decrees to relax bonded-zone regulations; eliminate the value-added tax (VAT)
on luxury goods on certain products (including on non-iction books); and delay
the payment of income tax for certain industries, on the condition that they do not
reduce their employment levels.
It was immediately clear that the policy package would do little to alleviate
inancial-market pressures or boost growth in the short term. The package did
contain a number of smaller, useful measures, however, such as the one-year
delay on quotas for raw-mineral exports and the relaxation of import quotas for
some food products – albeit measures that provide temporary relief from policies
whose aim is to restrict trade. Of the other measures, some will take time to have
8 The full text of the package can be found at the Ministry of Finance website: .
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Jason Allford and Moekti P. Soejachmoen
an effect, such as the tax breaks for labour-intensive industries; some will be dificult to implement, such as the increased biodiesel requirement; and some may
not have much of an effect on the economy at all, such as the removal of VAT on
non-iction books.
Financial markets were unimpressed by the government’s response to the economic situation, so eyes turned to BI. At a special board meeting on 29 August, the
bank’s governors agreed to raise the policy rate by 50 basis points. They raised it
by a further 25 basis points the following month. While the effect of movements
in the policy rate can be disputed, these rate increases suggest that the central
bank needs to be seen to be responding to inancial-market developments. At the
August meeting, the bank increased the lending-facility rate by 25 basis points,
to 7.00%, and the deposit-facility rate by 50 basis points, to 5.25%. It also cut the
holding period for SBIs from six months to one month, agreed to include Bank
Indonesia deposit certiicates as a component of secondary statutory reserves and
extended its bilateral swap arrangement with the Bank of Japan.
It is dificult to discern precisely what role the government’s policy package
and the actions of BI played in calming inancial markets. Financial market volatility eased in September, although this was due largely to reduced speculation
in the US about when the Federal Reserve would begin to taper its program of
quantitative easing, and the effect was felt by most emerging economies, not just
Indonesia. With the likelihood of volatility continuing to worry global inancial
markets in 2014, owing in part to the uncertainty about quantitative easing and to
tensions between the White House and Congress over US iscal policy, the experience of August highlights the limited tools available to the Indonesian government to combat inancial-market disturbance, and the need for a irmer resolve if
the external situation were to become seriously negative. Arguably, one of the best
things that Indonesia can do is not to stand in the way of inancial-market adjustments when the economy is under pressure. A falling exchange rate, falling stock
prices and rising bond yields are necessary adjustments that encourage investors
back into the country.
The implementation of the policy package also highlighted areas of poor cooperation between government ministries in implementing policies, such as those on
soybean. In May, Presidential Regulation 32/2013 gave the national food logistics
agency (Badan Urusan Logistik, Bulog) responsibility for stabilising prices and
distributing soybean imports. In the August economic policy package, the Ministry of Finance announced that the quota system would be changed into a pricecontrol system. But a regulation issued by the Minister for Trade on 29 August
referred to the quota system and to import licensing for 21 companies, including Bulog and cooperatives. As a result, these regulations did not help to reduce
the price of soybean or increase the availability of imported soybean to producers of tempeh and tofu. On 20 September, the Minister for Trade issued Ministerial Regulation 45/M-DAG/PER/8/2013, which eliminated import licensing;
the Minister of Finance then issued Ministerial Regulation 133/PMK.011/2013,
which eliminated the 5% import tax on soybean.
Th