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Bulletin of Indonesian Economic Studies
ISSN: 0007-4918 (Print) 1472-7234 (Online) Journal homepage: http://www.tandfonline.com/loi/cbie20
Survey of recent developments
Budy P. Resosudarmo & Arief A. Yusuf
To cite this article: Budy P. Resosudarmo & Arief A. Yusuf (2009) Survey of recent
developments, Bulletin of Indonesian Economic Studies, 45:3, 287-315, DOI:
10.1080/00074910903301639
To link to this article: http://dx.doi.org/10.1080/00074910903301639
Published online: 16 Nov 2009.
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Date: 18 January 2016, At: 19:40
Bulletin of Indonesian Economic Studies, Vol. 45, No. 3, 2009: 287–315
SURVEY OF RECENT DEVELOPMENTS
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Budy P. Resosudarmo*
Australian National University
Arief A. Yusuf *
Padjadjaran University, Bandung
SUMMARY
Indonesia has so far suffered a relatively mild impact from the global financial
crisis. Its economy grew at 4% in the year to June 2009, displaying a more resilient
response than some of its neighbours. Fiscal stimulus measures, deft monetary
policy and cash transfers to the poor served to soften the impact of the crisis. Parliamentary elections in April and presidential elections in July provided further
economic stimulus. Election-related spending and the stimulus measures helped
maintain formal sector employment levels and the proportion of casual employees
in the workforce. Like the cash transfers, payments by parliamentary candidates
to voters contributed to household incomes, particularly among the poor. This is
reflected in widespread declines in poverty observed in 2009. The crisis, the stimulus package, the direct cash transfers and the election campaign spending combined to create a mechanism of income redistribution in favour of the poor.
On 20 October Susilo Bambang Yudhoyono and Boediono were inaugurated as
president and vice president for 2009–14. They announced key economic targets for
2014, including 7% economic growth, 5–6% unemployment and an 8–10% poverty
level. It is crucial that the two leaders tackle important reforms – even politically
sensitive ones – that will remove obstacles to faster and more employment-friendly
growth. However, the plan for their first 100 days focuses on a series of small, politically non-sensitive reforms designed to demonstrate their commitment to, and
create momentum for, wider reform. This strategy is unlikely to create an impression that the government is serious about more substantial and essential reforms.
Nor is it likely to generate the economic impact necessary to bring the economy
closer to the government’s key economic targets.
The slow expansion of infrastructure since the 1997–98 crisis is a major obstacle
to future high and sustained economic growth. Despite some signs of improvement
in recent years, Indonesia’s rate of infrastructure investment remains far below precrisis levels. Tackling this problem should be a high priority for the government.
While pursuing ways to grow faster, Indonesia – one of the world’s largest CO2
emitters – needs to respond more vigorously to climate change. The leaders have
pledged to place climate change mitigation high on their policy agenda. Yet little
has been said about how, as one of the countries most vulnerable to climate change,
Indonesia should support her people’s adaptation to its effects. The government
needs to give high priority to adaptation and promote it at the international level.
*
The authors thank Ditya A. Nurdianto and Abdurohman for their assistance with data
collection.
ISSN 0007-4918 print/ISSN 1472-7234 online/09/030287-29
DOI: 10.1080/00074910903301639
© 2009 Indonesia Project ANU
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Budy P. Resosudarmo and Arief A. Yusuf
THE ECONOMY AND THE MAJOR EVENTS OF 2009
Four major events captured the attention of the media during 2009: the global
financial crisis (GFC), the legislative and presidential elections, the bombing of
two luxury hotels in Jakarta, and an earthquake in Padang. Each had the potential
to affect the economy significantly. As it turned out, the economy proved resilient
in the face of all of these events. The impact of the GFC began to be felt in Indonesia from mid-2008, and was still evident at the time of writing. However, the
effects of the crisis on Indonesia have been relatively mild.
Election campaigning commenced in July 2008, and campaign activity intensified noticeably from the end of 2008. The legislative and presidential elections were
held on 9 April and 8 July, respectively, and both were largely free of significant disturbance. To the extent that they affected the economy, the impact was stimulatory,
partly as a consequence of heavy spending by both the General Elections Commission (Komisi Pemilihan Umum, KPU) and the political parties, and partly because
of the calming impact of the re-election of a popular incumbent president.
The twin suicide bombings of the Marriott and Ritz–Carlton hotels in Jakarta
occurred on 17 July, little more than a week after the presidential election. After
several years with no major terrorist activity, the bombings shocked those who
had come to believe that the authorities had dealt successfully with the terrorist
threat. Nine people were killed and more than 50 injured in the blast (Tempointeraktif, 18 July 2009). The police were able to identify a number of suspects relatively quickly, and to capture or kill several of them within the next few months.
Although the bombings generated a great deal of media coverage in the following
days, they had very little economic impact. The number of tourists entering the
country in July and August 2009 was not noticeably affected, nor was the stock
market. Nevertheless there is cause for concern that foreign investors might reevaluate the risks involved in doing business in Indonesia, and perhaps decide to
stay away for several more years.
On the evening of 30 September, an earthquake measuring 7.6 on the Richter
scale devastated the city of Padang, the capital of West Sumatra province, and
surrounding areas, causing widespread loss of life and property. By mid-October
it was reported that the death toll had reached approximately 1,100 people, while
around 3,000 others had been injured. At least 135,000 houses were heavily damaged, and a further 150,000 suffered medium or mild damage (Tempointeraktif,
14 October 2009). Various local organisations quickly came to Padang to provide
support. When President Susilo Bambang Yudhoyono (SBY) gave the green light
for foreign assistance the day after the earthquake, various international organisations rushed to the city to add to the relief effort. The cost of reconstructing
Padang and smaller towns and villages nearby will be considerable, and there will
be a significant impact on the local economy. But as was the case with the Aceh
tsunami in 2004 and the Yogyakarta earthquake in 2006, the effects of Padang’s
earthquake on the national economy will be slight.
Previous surveys (Gunawan and Siregar 2009; Kuncoro, Widodo and McLeod
2009) have argued that the impact of the GFC on the national economy has been
relatively modest. Figure 1 confirms that the decline in Indonesia’s growth rate
was less severe than that of several other Asian economies. The GDP data for the
second quarter (Q2) of 2009 reveal, however, that Indonesia’s growth continued to
decelerate, albeit slightly, while every other economy shown in figure 1 managed
Survey of recent developments
289
FIGURE 1 Economic Growth Rates in Asia
(% p.a. year-on-year)
12
8
4
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0
-4
-8
China
Philippines
India
Malaysia
Indonesia
Thailand
Vietnam
-12
Mar-2008
Jun-2008
Sep-2008
Dec-2008
Mar-2009
Jun-2009
Source: CEIC Asia Database.
to reverse the decline in its growth rate. Indonesia’s growth nevertheless remained
positive, and well above that of Thailand, Malaysia and the Philippines.
A number of explanations for the relatively mild impact of the GFC have been
suggested.1 The first draws attention to the structure of the Indonesian economy,
and the fact that it is less closely connected to the global economy than those of
neighbouring countries, particularly Singapore. Only about 17% of Indonesian
output is exported, so the downturn in the US and other major economies has not
had a strong impact on Indonesia. In addition, approximately 30% of the labour
force is found in the agricultural sector, which is less affected than other sectors
by the business cycle.
A second explanation focuses on the favourable impact of government and
central bank policy responses. Since October 2008 the government has introduced
a number of regulations aimed at protecting the financial system from a potential crisis, and monetary policies have been prudent. A fiscal stimulus package
amounting to Rp 71.3 trillion was introduced early in 2009. Most of the stimulus
was in the form of tax cuts and subsidies intended to increase spending by the
private sector, complemented by an additional Rp 12.8 trillion (originally Rp 10.8
trillion) of government spending, mainly on infrastructure (Gunawan and Siregar
2009; Kuncoro, Widodo and McLeod 2009). The government also expanded its
‘social expenditures’ rapidly in the first two quarters of 2009 (figure 2).2 Another
1 The discussion here is based on a presentation by Hal Hill on ‘Southeast Asia and the
global financial crisis’ at the Australian National University on 14 October 2009.
2 Social expenditure is described as ‘all spending on transfers, in cash or in kind, to members of the population in order to protect them from social risks’ (Government Regulation
No. 21/2004). It consists of social compensation assistance, social assistance to educational
and religious institutions, and other social expenditure.
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Budy P. Resosudarmo and Arief A. Yusuf
FIGURE 2 Government Social Expenditure a
(Rp trillion /quarter)
50
40
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30
20
10
0
a
Mar-2008 Jun-2008 Sep-2008 Dec-2008 Mar-2009 Jun-2009 Sep-2009 Dec-2009
Amounts for the September and December quarters in 2009 are projections.
Source: Agency for Fiscal Policy, Ministry of Finance.
important policy was to provide to direct cash transfers (bantuan langsung tunai,
BLT) to the poor in January and February 2009, amounting to Rp 3.8 trillion. On
previous occasions these transfers were intended to compensate the poor for
increases in prices following reductions in fuel subsidies, but this time they were
used to soften the impact of the GFC on the poor (Kompas, 3 August 2009).
A third explanation for the resilience of the economy in the face of the GFC
is the stimulatory impact of the elections. Election-related spending by the government, as well as that by the political parties and the candidates themselves,
seems likely to have boosted consumption expenditure. The total budget for
the KPU was approximately Rp 47.9 trillion, of which about Rp 18.6 trillion was
included in the 2008 budget and Rp 29.3 trillion in the 2009 budget. Information on the amounts actually spent was unavailable at the time of writing, but
it seems likely that the bulk of this allocation would have been spent by the
end of July 2009. In rough terms, it could be said that the government spent
about Rp 50 trillion on the elections over a period of about one year; this may
be compared with total government expenditure of the order of Rp 1,000 trillion
in 2008. In other words, paying for the election would appear to have boosted
government spending by about 5%, assuming other expenditure was not cut
back to accommodate this.
The amount of campaign spending by individual candidates and political parties can only be very roughly estimated – much less its macroeconomic impact.
Anecdotal evidence suggests that the level of spending in support of individual
candidates for election to the national parliament was anywhere between a few
million and 5 billion rupiah, and there were more than 11,000 candidates competing for the 560 available seats (Kompas, 31 October 2008). If each candidate spent,
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Survey of recent developments
291
say, Rp 500 million, then the total of such spending would have been about Rp 5.5
trillion. In addition, more than 110,000 candidates competed for approximately
1,200 seats at the provincial level and approximately 1.5 million candidates for
about 15,700 seats at the district and municipality levels.3 Though they did not
spend as much on average as candidates at the national level, collectively the
amount spent in these campaigns would have been enormous. It is difficult to
know the extent to which this would have been a net addition to private sector
spending, however. On the one hand, individuals and firms may have sacrificed
other spending to contribute to election campaigns. On the other, they may have
cut back their normal spending because of concerns about the GFC, in which case
campaign spending would have tended to offset this.
We take the view that this election-related spending, particularly in Q1 2009,
softened the impact of the GFC on households and, together with the stimulus
package and direct cash transfers, even helped to raise the incomes of the poor.
The latter benefited directly or indirectly from the provision of goods and services for various election campaign activities, as well as from direct cash payments
made to individuals who participated in campaign activities in the hope of securing their votes.
Whatever the impact of the elections on macroeconomic performance in the first
half of 2009, the debate more recently has been about whether the economy has
been recovering from the impact of the GFC since mid-2009. Export performance
and the resumption of foreign portfolio investment – plus the fact that other Asian
economies are beginning to bounce back – have led many to argue that Indonesia
has indeed been on the path of recovery (World Bank 2009a; Gunawan and Arman
2009). Others, including the present authors, take the more conservative position
that, while the impact of the GFC on Indonesia seems to have peaked, considerable uncertainty remains. Data for the fourth quarter will be needed to confirm
whether the economy has been on the path of recovery in the second half.
Economic growth and the sectoral outlook
The rate of quarterly year-on-year GDP growth continued its moderate decline, to
4% in Q2 2009 (table 1a). The main expenditure category contributing to this outcome was government consumption, which recorded double-digit growth rates
for the four quarters through Q2 2009. Private consumption was also important,
growing at a reasonably healthy 4.8% in the year to Q2 2009, down from a peak of
6% in the first quarter. This may be an indication that campaign spending for the
presidential election had a smaller impact on households than that for the legislative election.
The most alarming sign is the decline in the growth of investment spending,
which was only 2.7% in Q2 2009 compared with 12.0% a year earlier. Within
this category, growth of construction spending remained healthy; but growth
of investment in machinery and equipment turned strongly negative, and that
in transport fell sharply from around 40% in the second half of 2008. This does
not augur well for the future growth of various sectors, particularly manufacturing. Two factors in particular probably played an important role in inhibiting
3 There were also about 1,000 candidates competing for 132 seats in the Regional Representative Council (Dewan Perwakilan Daerah, DPD) in Jakarta.
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Budy P. Resosudarmo and Arief A. Yusuf
investment: the reduced availability of funding world-wide as a consequence of
the GFC; and the adoption of a wait-and-see approach in relation to the elections
(Bank Indonesia 2009).
Turning to GDP growth by sector, we see that non-tradables have continued
to grow far more rapidly than tradables, but also that the growth rates of both
have declined markedly from their levels in mid-2008. The manufacturing sector continues to be of significant concern, growing by only 1.8% in the year to
Q2 2009 (if petroleum and gas manufacturing are excluded). Most manufacturing sub-sectors contracted in the year to Q2 2009, except for food, beverages and
tobacco (16.8%), paper and printing (3.9%) and fertilisers, chemicals and rubber
(2.8%). Growth of the food, beverage and tobacco sub-sector has been high since
Q4 2008, reflecting the increase in household incomes caused by election campaign spending. Campaign activities also generated demand for products of the
textiles, leather products and footwear sub-sector, but export demand fell at the
same time. Since around 45% of the output of this sub-sector was exported before
the GFC, its recent growth has been relatively low. The paper and printing subsector contracted in 2008 but then began to expand in Q1 2009 – probably because
of increased use of its products for the election.
The mining sector grew somewhat more rapidly than in 2008, though much
more slowly than the economy as a whole. Its expansion mainly reflected increased
activity in Eastern Indonesia – not so much in coal production in Kalimantan, as
many observers had expected, but more as a consequence of the recovery of Freeport’s operations in Papua from a low level in the previous year (Reuters, 21 July
2009).
All components of the non-tradables sector exhibited healthy growth in the
year to Q2 2009, with the exception of trade, hotels and restaurants. The communications sector continued to grow at high double-digit rates, driven for several years by the increasing popularity of mobile phones. Utilities have also been
growing rapidly, mainly because of the expansion of city gas supply networks as
the government tries to encourage households to switch to this fuel.4 Whether this
rapid expansion can be sustained is open to doubt, however. It is not clear that
the price paid by households is sufficient to cover the full cost of supply, suggesting that the gas company (Perusahaan Gas Negara, PGN) will continue to rely on
subsidies, as is the case with the electricity supplier (Perusahaan Listrik Negara,
PLN). Eventually the government is likely to become unwilling to fund increases
in this subsidy, making continued expansion difficult.
Growth of the trade, hotels and restaurants sector has declined significantly
over the last three quarters, becoming slightly negative in Q2 2009. This has largely
been the result of negative growth in wholesale and retail trade. The hotels subsector expanded quite slowly in the year to Q2 2009 (2.8%), but restaurants output
grew rapidly (by 9.9%), probably as a consequence of the elections. The transport
sector rebounded strongly from negative growth in the latter half of 2008 to reach
6.4% in Q2 2009, owing mainly to a resurgence in air transport.
As argued in the previous survey, focusing on year-on-year growth rates at a
time when both external and internal circumstances have the potential to cause
4 For example, the government allocated approximately Rp 100 billion to expansion of the
gas distribution networks in Palembang and Surabaya (Kompas, 5 June 2009).
Survey of recent developments
293
TABLE 1a Components of GDP Growth
(2000 prices; % year on year)
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Gross domestic product
GDP excl. petroleum & gas
By expenditure
Private consumption
Government consumption
Investment
Of which:
Construction
Machinery & equipment
Transport
Other
Exports
Imports
By sector
Tradables
Agriculture, livestock,
forestry & fisheries
Mining & quarrying
Manufacturing
Excl. petroleum & gas
Non-tradables
Electricity, gas &
water supply
Construction
Trade, hotels & restaurants
Transport
Communications
Financial, rental &
business services
Services
Mar-08
Jun-08
Sep-08
Dec-08
Mar-09
Jun-09
6.2
6.7
6.4
6.9
6.4
6.9
5.2
5.6
4.4
4.8
4.0
4.4
5.7
3.6
13.7
5.5
5.3
12.0
5.3
14.1
12.2
4.8
16.4
9.1
6.0
19.2
3.4
4.8
17.0
2.7
8.0
39.6
23.4
23.4
13.6
18.0
8.1
24.3
27.8
18.5
12.4
16.1
7.6
24.5
40.6
9.5
10.6
11.0
5.7
15.7
37.0
6.6
1.8
–3.5
6.3
–8.6
9.6
–6.2
–18.7
–26.0
6.4
–11.5
3.0
–5.9
–15.7
–23.9
3.8
6.3
3.6
4.8
3.7
3.4
2.6
4.7
2.7
5.2
1.9
2.4
–1.7
4.3
4.6
–0.5
4.2
4.6
2.1
4.3
4.9
2.1
1.8
2.1
2.4
1.5
1.9
2.4
1.5
1.8
8.8
12.3
9.3
11.8
9.2
10.4
7.6
9.3
6.1
11.4
6.0
15.4
8.0
6.9
10.0
27.1
8.3
8.1
8.1
3.9
31.4
8.7
7.6
8.4
–1.1
33.3
8.6
5.7
5.6
–1.0
32.9
7.4
6.3
0.5
2.5
30.4
6.3
6.4
–0.1
6.4
26.8
5.3
5.9
6.7
7.2
6.0
6.8
7.4
Source: CEIC Asia Database.
rapid deterioration in the economy runs the risk of failing to notice significant
changes in performance. Table 1b therefore presents quarter-on-quarter growth
rates, adjusted for seasonality. On this basis, we can see that private consumption surged in Q1 2009 but then fell back to a surprisingly low level in the second quarter. The reverse is true for government consumption (not seasonally
adjusted), which has exhibited extraordinarily high volatility. As predicted by
Kuncoro, Widodo and McLeod (2009: 159), the huge decline in the first quarter
was followed by an increase almost as large in the second, providing a considerable stimulus to the economy.
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Budy P. Resosudarmo and Arief A. Yusuf
TABLE 1b Components of GDP Growth
(2000 prices; seasonally adjusted; % quarter on quarter)
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Gross domestic product
GDP excl. petroleum & gas
By expenditure
Private consumption
Government consumption
Not seasonally adjusted
Investment
Of which:
Construction
Machinery & equipment
Transport
Other
Exports
Imports
By sector
Tradables
Agriculture, livestock,
forestry & fisheries
Mining & quarrying
Manufacturing
Excl. petroleum & gas
Non-tradables
Electricity, gas &
water supply
Construction
Trade, hotels & restaurants
Transport
Communications
Financial, rental &
business services
Services
Mar-08
Jun-08
Sep-08
Dec-08
Mar-09
Jun-09
1.6
1.7
1.4
1.5
1.2
1.3
0.9
1.0
1.0
1.1
1.0
1.1
1.0
2.3
–30.5
4.1
1.4
3.6
26.1
2.1
1.3
5.0
5.6
2.0
1.1
4.1
25.6
0.6
1.9
4.4
–28.7
–0.9
0.5
3.6
23.7
0.9
0.5
12.7
5.6
–0.1
5.9
8.9
1.8
1.8
8.5
8.7
1.5
–1.3
1.6
9.6
10.7
–1.3
–1.0
–4.6
1.6
–8.0
6.5
–0.6
–4.3
–6.8
1.4
–10.9
–15.6
–5.2
–15.5
–13.8
1.6
–1.4
4.0
1.2
5.3
0.3
0.9
0.9
0.8
1.6
0.6
1.0
0.6
0.9
0.7
1.4
0.7
0.2
0.1
1.1
1.2
0.3
0.9
1.2
1.3
1.0
1.3
0.2
–0.9
–1.8
0.1
0.7
1.2
0.2
0.8
1.2
2.1
2.5
2.1
2.3
1.9
2.6
1.3
3.1
0.9
3.4
1.9
3.9
0.5
1.1
–1.1
7.0
1.9
1.8
2.7
–1.3
9.0
1.5
1.6
2.5
0.0
6.5
1.8
1.6
–0.9
1.6
7.0
2.0
1.4
–3.7
2.3
5.0
0.8
1.6
2.0
2.4
5.9
0.6
0.7
2.1
1.2
1.8
1.5
2.6
Source: CEIC Asia Database.
The quarterly figures show an improvement in all categories of investment
spending growth in the second quarter, providing some additional support to
those who argue that the economy is already recovering from the impact of the
GFC. Further evidence of this can be seen in the return to positive growth of both
exports and imports in Q2 2009, and from inspection of the merchandise trade
data. Figures 3a and 3b present monthly data for the major categories of exports
and imports, converted to three-month rolling sums, and expressed in index
form. There is a clear general pattern of decline starting from the fourth quarter of
Survey of recent developments
295
FIGURE 3a Exports
($ values, 3-month rolling sum, July 2008 = 100))
125
100
75
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Chemicals
50
Food, beverages, tobacco & live animals
Animal & vegetable oils & fats
25
Crude materials, inedible
Manufactures
0
Sep-2008
Dec-2008
Mar-2009
Jun-2009
FIGURE 3b Imports
($ values, 3-month rolling sum, July 2008 = 100)
125
100
75
Chemicals
50
Food & live animals
Machinery & transport equipment
25
Crude materials, inedible
Manufactured goods & miscellaneous articles
0
Sep-2008
Dec-2008
Mar-2009
Jun-2009
Source: CEIC Asia Database.
2008 and running through to about April 2009, with a significant and widespread
recovery subsequently. Although absolute levels remain well below their previous peaks, and continuation of the recent trend cannot be guaranteed, the outlook
here provides some grounds for optimism.
Returning to the national income accounts data in table 1b, we also find grounds
for optimism in the evidence that manufacturing (excluding petroleum and gas)
grew more rapidly than the economy as a whole in the first two quarters of 2009.
Likewise, the trade, hotels and restaurants sector bounced back in the second
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Budy P. Resosudarmo and Arief A. Yusuf
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quarter from a significant decline in the first. In short, on the basis of the most
recent quarterly and monthly data, the near-term future of the economy seems
promising. Nevertheless, we caution that it is too soon to be sure that these new
trends can be sustained.
Regional growth
Since the sectoral composition of output differs widely across the regions of Indonesia, it is of interest to look at economic performance from a regional perspective.
The impact of the GFC has been felt more strongly in Kalimantan and Sumatra than
in other regions. To illustrate this, we focus on growth data for the three quarters
to Q2 2009 in table 2. Of the seven regions shown, Papua has recorded extraordinarily rapid growth, driven largely by an astonishing expansion of output from
the dominant mining sector, but also by significant growth of manufacturing and
services. For the small and less advanced Maluku and Nusa Tenggara regions, the
impact of the GFC seems to have been relatively modest, with the former recording growth of 5.9% in the year to Q2 2009 and the latter 4.2%. Beyond these brief
observations, the following discussion focuses primarily on the four remaining
large regions: Kalimantan, Sumatra, Java–Bali and Sulawesi.
The poorest performing region most recently has been Kalimantan, whose gross
regional domestic product (GRDP) growth rate fell to 1.1% in the year to June 2009,
from 7.2% a year earlier. Sumatra too seems to have suffered significantly, with
a decline to 2.8%, from 6.1% a year before. Sulawesi’s growth rate has declined,
although from a high level in 2008. Reflecting its dominance in the economy,
growth in Java–Bali has declined to roughly the rate for Indonesia as a whole.
As was the case for non-tradables growth nationally, services growth in the
regions has been much more rapid than growth of agriculture, mining and
manufacturing: in all regions other than Papua, services continued to grow
considerably faster than GRDP. The growth of agricultural output fell to quite low
levels in Q2 2009, and became strongly negative in Kalimantan – mainly because
of negative growth of the forestry sub-sector, which is facing a decline in forest
stocks. In the case of Sumatra, both the food crop and forestry sub-sectors held
back agriculture as a whole. The slow growth of food crop output was probably not
due to the GFC, but simply reflected unusually high output levels in the previous
year; that is, the slowdown in the last three quarters was merely a movement back
toward the long-term average growth rate.
There are wide differences in the growth of mining across major regions. Mining
output has been declining in Sumatra for some time, and even more rapidly in
Sulawesi, although Q2 2009 saw a return to expansion in the latter. In Sumatra,
the negative growth was attributable mainly to declining gas production in Aceh
as the reserves there become depleted (World Bank 2009b: 1). In Kalimantan, the
decline in growth over the last three quarters reflected a fall in the performance
of the non-oil and gas mining sector, probably due to reduced demand for coal
during the GFC.
Manufacturing has been declining significantly in Kalimantan for the last three
quarters, reflecting negative growth of the wood-based industries (excluding
pulp and paper) and of oil and gas refining. The wood-based industries have been
affected by the declining availability of good-quality wood from Kalimantan’s
forests, while refinery output has fallen in response to a slowing of domestic
Survey of recent developments
297
TABLE 2 Regional Economic Growth
(2000 prices, % year on year)
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Mar-08
Jun-08
Sep-08
Dec-08
Mar-09
Jun-09
Gross regional domestic product
Kalimantan
7.2
Sumatra
5.6
Java–Bali
6.9
Maluku
5.6
Nusa Tenggara
6.9
Sulawesi
10.2
Papua
–24.2
7.2
6.1
6.6
6.8
4.3
9.2
–8.9
5.7
4.9
6.7
6.4
2.3
8.8
18.9
2.2
4.0
5.4
5.3
4.4
7.2
30.2
1.0
3.5
4.6
4.9
0.6
7.5
32.1
1.1
2.8
4.1
4.2
5.9
6.1
29.8
Agriculture
Kalimantan
Sumatra
Java–Bali
Maluku
Nusa Tenggara
Sulawesi
Papua
4.3
3.4
8.8
3.4
4.4
7.0
0.3
8.0
8.1
0.9
10.4
9.8
7.2
8.0
7.0
3.8
1.9
5.9
3.7
5.6
5.0
0.2
5.6
4.7
7.1
6.8
5.3
6.4
–2.0
4.4
6.4
6.6
4.4
8.0
5.5
–3.1
2.0
4.2
2.6
0.2
1.4
2.0
Mining
Kalimantan
Sumatra
Java–Bali
Maluku
Nusa Tenggara
Sulawesi
Papua
8.9
–0.7
5.9
15.0
7.5
13.2
–49.4
6.7
0.3
5.0
5.8
–12.1
–3.4
–31.4
5.9
–2.7
5.8
–0.3
–19.9
–1.9
37.8
1.7
–3.1
3.1
–7.3
–8.0
–5.7
62.6
–0.1
–0.4
4.2
–14.5
–32.9
–8.1
65.6
–0.5
–3.4
4.7
–14.6
5.2
0.6
63.9
Manufacturing
Kalimantan
Sumatra
Java–Bali
Maluku
Nusa Tenggara
Sulawesi
Papua
2.6
3.4
4.6
–0.6
8.5
8.9
1.2
3.4
2.0
4.8
–8.5
4.6
7.8
1.3
0.2
3.2
5.0
–5.9
5.7
6.5
4.4
–3.2
0.9
2.6
–7.7
3.9
1.9
7.8
–3.4
1.5
2.0
–1.4
11.7
3.9
12.8
–2.3
2.3
1.6
8.2
8.8
6.7
13.4
Services
Kalimantan
Sumatra
Java–Bali
Maluku
Nusa Tenggara
Sulawesi
Papua
10.7
11.0
7.8
7.5
7.8
11.8
13.0
10.4
10.0
8.8
7.7
6.5
12.7
17.5
9.5
10.0
8.7
9.4
9.0
12.9
12.7
7.8
8.2
7.1
7.3
7.3
11.1
14.1
6.6
5.8
5.7
6.1
8.6
10.3
15.1
7.1
6.2
5.5
5.4
9.3
9.4
14.0
Source: Data kindly supplied by the central statistics agency (Badan Pusat Statistik, BPS).
298
Budy P. Resosudarmo and Arief A. Yusuf
TABLE 3 Balance of Payments
($ billion per quarter)
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Average
2007
Mar-08
Jun-08
Sep-08
Dec-08
Mar-09
Jun-09
Current account
2.6
2.8
–1.0
–0.9
–0.7
2.9
3.1
Exports
Non-oil & gas
Oil & gas
29.5
23.3
6.2
34.4
26.4
8.0
37.3
27.9
9.5
38.1
28.8
9.3
29.8
24.8
5.0
24.2
20.5
3.7
27.5
23.1
4.5
Imports
Non-oil & gas
Oil & gas
21.3
16.5
4.8
26.9
21.3
5.5
31.9
23.7
8.2
32.3
25.0
7.3
25.6
22.6
3.0
17.2
15.2
2.0
18.8
16.5
2.3
8.2
7.5
5.4
5.8
4.2
7.0
8.7
6.8
1.4
5.1
2.5
4.2
1.3
3.8
2.0
2.2
2.0
5.3
1.6
6.6
2.1
Services
Income
Current transfers
–3.0
–3.9
1.3
–3.0
–3.1
1.4
–3.3
–4.5
1.4
–3.2
–4.8
1.3
–3.3
–2.9
1.3
–2.5
–2.7
1.1
–3.1
–3.7
1.2
Capital account
0.1
0.0
0.1
0.2
0.0
0.0
0.0
Financial account
Direct investment
Portfolio investment
Other investment
0.8
0.6
1.4
–1.2
–1.4
–0.3
2.0
–3.2
2.5
0.6
4.2
–2.3
0.7
0.4
–0.1
0.4
–3.4
2.1
–4.4
–1.1
1.7
1.7
1.9
–1.8
–2.4
0.0
2.0
–4.5
Errors & omissions
–0.3
–0.4
–0.2
–0.1
–0.2
–0.7
0.4
3.2
1.0
1.3
–0.1
–4.2
4.0
1.1
Merchandise trade
balance
Non-oil & gas
Oil & gas
Overall balance
Source: CEIC Asia Database.
and international demand. The growth rate of manufacturing has also slowed in
Java–Bali during the same period, and this has been a major contributor to its low
growth overall. The disappointing performance of the manufacturing sector in
Java and Sumatra was probably caused by a fall in export demand in response to
the GFC. Increased domestic consumption during the election campaigns period
was not sufficient to offset the impact of the downturn in the global economy. On
the other hand, Sumatra’s manufacturing does not seem to have been significantly
affected by the GFC, and the growth of manufacturing output has accelerated to
quite a high level in Sulawesi.
Balance of payments, capital market and exchange rate
One cause for optimism that the economy is already on the path of recovery is the
balance of payments (table 3). After three quarters of small deficits, the current
account returned to a sizeable surplus in the first two quarters of 2009. Although
exports remain well below their levels during most of 2008, the decline in average
Survey of recent developments
299
FIGURE 4 Composite Stock Price Index (CSPI) and Exchange Rate
CSPI
3,000
Rp/$
15,000
2,500
12,000
2,000
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9,000
1,500
6,000
1,000
CSPI
500
0
30-Sep-2008
3,000
Exchange rate
2-Dec-2008
5-Feb-2009
9-Apr-2009
0
12-Jun-2009 14-Aug-2009 16-Oct-2009
Source: Indonesia Stock Exchange; Pacific Exchange Rate Service.
imports in the first half of 2009 has been even greater, such that the merchandise
trade balance has been restored to its 2007 average. The values of oil and gas
exports and imports have fluctuated quite considerably in line with big swings
in world prices, but they have tended to move in the same direction, so the difference between them has been relatively stable. The recent strengthening of the
merchandise trade balance is due mainly to the non-oil and gas component: this
item was three times as large in Q2 2009 as in the last quarter of 2008. Considerable volatility is evident in the financial account, with no clear pattern emerging.
Portfolio investment, which turned negative in Q3 2008, and strongly so in the
fourth quarter, bounced back in the first half of 2009 to levels closer to those of
2007 and early 2008. Thus the large negative overall balance recorded in Q4 2008
was almost totally reversed in the next quarter.
Share prices on the Indonesian Stock Exchange Index have continued the steady
climb that began in March 2009 (though at a somewhat slower rate since August),
reflecting investor confidence in the near-term economic outlook (figure 4). The
continuous strengthening of the rupiah during the same period also suggests that
investors are willing to restore or increase their exposure to Indonesian assets.
Overall, it would appear that the business community is reasonably satisfied with
the government’s handling of macroeconomic policy, and with the outcome of the
elections. That said, Indonesia’s economic outlook for the near future still remains
somewhat uncertain. Foreign direct investment in Q2 2009 was negligible, while
other foreign investment became strongly negative. And although the balance of
payments is strong, exports are still down somewhat on the levels recorded a year
ago. Imports are even more depressed than before the onset of the GFC, although
most major categories have been on an upward trend since early in 2009. At best,
cautious optimism seems justified.
300
Budy P. Resosudarmo and Arief A. Yusuf
FIGURE 5 Monetary Policy and Inflation
(% p.a.)
20
50
CPI inflation (lhs)
16
40
SBI rate 30 days (lhs)
Real SBI rate (lhs)
12
30
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Currency in circulation (rhs)
8
20
4
10
0
0
-4
Sep-2008
Nov-2008
Jan-2009
Mar-2009
May-2009
Jul-2009
-10
Sep-2009
Source: CEIC Asia Database.
Inflation
The rate of inflation of consumer prices has fallen steadily over the last 12 months
from over 12% to below 3% (figure 5) for the first time since 2000. Successive interest rate adjustments by Bank Indonesia (BI) have succeeded in gently lowering
the rate of growth of the money supply (represented by currency in circulation
in figure 5), resulting in the expected parallel reduction in inflation. Until very
recently, inflation was falling more rapidly than the interest rate on 30-day BI
Certificates (SBIs), so the real SBI rate has been rising steadily, peaking at almost
4% p.a. Another consequence of this deft management of monetary policy is the
already noted strengthening of the external value of the currency during the same
period. Given the sensitivity of the public to rapidly rising prices, SBY would
appear to owe a significant debt of gratitude to the central bank for bringing inflation under control in the lead-up to the presidential election.
The interesting question now is how BI will respond to its own success in
bringing inflation down to this low level. On such occasions in the past, it has
succumbed all too readily to the argument that, since inflation is low, it can afford
to reduce interest rates significantly. The predictable result has been that money
supply growth has accelerated, and the inflation rate has broken away from its
target range. BI’s skill in managing monetary policy in the face of the threat posed
by the GFC over the last year or so provides reason for optimism that this time it
will manage its interest rate instrument so as to maintain money growth at about
the 8% p.a. level achieved during the third quarter.5 If so, there should be no
difficulty in holding inflation below 5% as the incoming government settles in.
5 The sudden downturn in money growth in September 2009 does not represent a change
in approach, but rather a spike in the money supply in September 2008.
Survey of recent developments
301
TABLE 4 Composition of the Labour Force a
(%)
Category
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Unemployed
Formal sector
Casual workers
Self-employed
Unpaid family workers
Total labour force (million)
Feb-07
Aug-07
Feb-08
Aug-08
Feb-09
9.8
27.5
9.8
36.5
16.5
9.1
28.1
9.4
37.6
15.7
8.5
28.3
9.8
37.4
16.1
8.4
27.9
10.1
38.1
15.5
8.1
28.0
10.1
37.3
16.4
108.1
109.9
111.5
111.9
113.7
a
The formal sector includes permanent, paid employees and their employers; casual workers are
non-permanent employees; the self-employed are individuals working for themselves (with or without non-permanent employees and/or unpaid family workers); unpaid family workers are those
working for a family business without formal pay.
Source: BPS, National Labour Force Survey (Sakernas), 2007, 2008 and 2009.
Employment, household income and poverty
Despite the relatively modest impact of the GFC, economic growth has declined
somewhat, while the labour force has continued to grow at about 2% p.a. This has
given rise to concern about the impact of the economic slowdown on employment,
household income and poverty. Table 4 shows that unemployment continued to
decline between August 2008 and February 2009 – the period when the GFC was
having its strongest impact on Indonesia – falling from 8.4% to 8.1%. The concern
is that if the early signs of recovery turn out to have been misleading and growth
begins to decelerate again, it is still possible that the GFC could cause a reversal of
this downward trend in unemployment.
Among those working, the proportion employed in the formal sector has been
relatively steady since August 2007. It is very surprising that in the six months
to February 2009 when the economy – particularly the manufacturing sector –
was slowing down, there was no reduction in the proportion of formal sector
employees. A possible explanation is that firms were already responding to
various tax cuts and incentives in the government’s fiscal stimulus package, since
one eligibility requirement for some of those incentives was that the firm should
promote employment – that is, avoid laying off workers.
The proportion of casual workers was also steady in the year to February
2009. Employing casual workers gives employers relative flexibility, as they can
respond to an economic downturn by offering them fewer working hours per
week if necessary. It is possible also that the social infrastructure activities that
are part of the stimulus package had begun to have an impact by February 2009
through the creation of casual employment opportunities, although the size of
this part of the package was small (less than 1% of the total).
The proportion of self-employed workers fell slightly in the six months to
February 2009, returning to its level a year earlier. There was a comparable increase
in the proportion of unpaid family workers, which more than offset the small decline
in unemployment noted above. This increase perhaps gives some cause for concern,
302
Budy P. Resosudarmo and Arief A. Yusuf
TABLE 5 Household Income per Capita a
(Rp ‘000, 2008 prices)
Income per Capita
Mar-08
Mar-09
Mar-08
Mar-09
Ratio of
Change
in Income
to Initial
Income
Sumatra
Java–Bali
Nusa Tenggara
Kalimantan
Sulawesi
Maluku
Papua
557
531
414
643
498
564
703
558
543
405
697
510
591
707
356
279
245
365
278
321
327
357
294
253
376
275
313
315
–0.50***
–0.46***
–0.36***
–0.30***
–0.41***
–0.39***
–0.69***
Indonesia
538
550
302
311
–0.44***
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Urban
Rural
a
This table is built from the 2008 and 2009 Susenas panel data. Income is proxied by total monthly
household expenditure per capita in 2008 prices. Estimation was by ordinary least squares regression.
*** indicates that the coefficients are significantly different from zero at the 99% confidence level.
Source: BPS, National Socio-Economic Survey (Susenas), panel data for 2008 and 2009.
since becoming an unpaid worker in a family business might be little better than
becoming unemployed. Average returns to individuals in family enterprises are
likely to be depressed if more family members have to share the fixed or declining
amount of work available. In turn, this could raise the level of poverty.
At the national level, in both rural and urban areas, real household incomes per
capita were higher in March 2009 than a year earlier (table 5). At the regional level,
however, this was not the case everywhere. Average incomes declined in urban
areas in Nusa Tenggara, and in rural areas in Sulawesi, Maluku and Papua.
We estimated the relationship between the change in household income per
capita between 2008 and 2009 and the income level in 2008 (both in 2008 prices),
controlling for characteristics of household heads – gender, age and educational
attainment – as well as for the size of the household and whether it was in a
rural or an urban area. The estimated coefficients indicating the change in income
given the initial income are significantly negative at both the national and subnational levels (table 5). Thus the lower the income in 2008, the larger the increase
in income in the following year. This suggests that the level of poverty may have
fallen even in regions where average household incomes declined.
The national poverty figure was lower in March 2009 than a year earlier
(table 6): the GFC therefore did not increase the percentage of people living below
the poverty line set by the central statistics agency (Badan Pusat Statistik, BPS). At
the sub-national level also, poverty figures for March 2009 were lower than those
for March 2008 in all regions except Papua, where an increase in poverty in rural
areas more than offset a further decline in the already low level of urban poverty.
Based on the above observations of the dynamics of the labour market,
household incomes and poverty, we propose the following interpretation. The
Survey of recent developments
303
TABLE 6 Regional Poverty Levels a
(%)
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Rural
Urban
Total
2008
2009
2008
2009
2008
2009
Sumatra
Java–Bali
Nusa Tenggara
Kalimantan
Sulawesi
Maluku
Papua
16.0
19.7
24.4
10.7
19.3
27.2
45.4
15.0
17.7
22.4
9.1
18.3
25.9
46.3
13.6
11.4
25.4
6.8
7.6
8.7
6.7
12.2
10.6
24.6
5.1
6.7
7.5
5.9
15.1
15.0
24.7
9.1
15.7
22.1
36.6
13.9
13.7
23.0
7.5
14.8
20.9
37.1
Indonesia
18.9
17.4
11.7
10.7
15.4
14.1
a
The poverty measure is as at March of each year.
Source: BPS (2009).
stimulus measures, particularly the tax cuts and social infrastructure projects,
together with various kinds of spending related to the elections, helped to maintain
employment levels in the formal sector and the share of casual employees in the
workforce in the face of the GFC.6 In combination with the disbursement of direct
cash transfers to the poor in early 2009 and cash paid by parliamentary candidates
to voters, particularly the poor, this led average household incomes to increase
in most regions, and the increase was higher in most areas for poor people than
for the population as a whole in the year to March 2009. This is consistent with
the observation of widespread declines in poverty, except in rural Papua. On this
interpretation, the GFC, the stimulus package, the direct cash transfers to the poor,
and election campaign spending have combined to create a mechanism of income
redistribution in favour of the poor, except in rural Papua.
SBY’S FIRST 100 DAYS
Following the announcement of their election victory, President SBY and his new
vice president, Boediono, were quick to announce a set of socio-economic targets to be achieved during SBY’s second term in office (Yudhoyono and Boediono
2009). The quantitative targets for economic development and welfare improvement are as follows:
• the rate of economic growth should rise to approximately 7% annually by 2014
(the end of SBY’s second term);
• unemployment should fall to 5–6% by 2014;
• the proportion of people living in poverty should fall to 8–10% by 2014; and
• the annual inflation rate should be in the range 3–5% throughout.
6 This does not preclude the possibility that average working hours declined, particularly
in the formal sector.
304
Budy P. Resosudarmo and Arief A. Yusuf
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To achieve these targets, the president rightly emphasised the importance of
implementing sound macroeconomic policies.
In addition, the leaders specified a set of qualitative socio-economic objectives:
• to improve access to education so as to increase literacy and educational attainment more generally;
• to improve access to health care facilities so as to lower the rates of maternal
and infant mortality and increase life expectancy;
• to establish better food and energy security;
• to maintain environmental quality in both urban and rural areas;
• to develop better infrastructure; and
• to strengthen medium and small enterprises.
In thinking about the quantitative targets, it is worth recalling a similar set of
targets set by SBY for his first presidency (2004–09), none of which was achieved
(Kuncoro, Widodo and McLeod 2009). Economic growth rates approached
but never reached the 7% target (averaging 5.7%), and the period has been
categorised as one of ‘jobless growth’ (Manning and Roesad 2007), in which both
the unemployment and poverty targets were missed.
To avoid similar disappointment in SBY’s second term, his government will
need to give stronger emphasis to policies that enhance economic growth and,
in particular, encourage ‘employment-friendly’ growth. Indonesia’s experience
during the last five years with economic growth, unemployment and poverty
is shown in figure 6. With population growth of about 1.3%, it can be seen that
unemployment declined when GDP growth exceeded 5.5%. Poverty then began
to decline as growth accelerated to above 6% and unemployment fell further. On
this basis, and given that GDP growth currently is only about 4%, we argue that
reducing unemployment and poverty to levels of 5–6% and 8–10%, respectively,
by 2014 will require the achievement of 7% or higher growth much earlier than
2014, and preferably by 2010. Alternatively, the government will need to make a
greater effort to achieve growth of a kind that is more labour intensive.
In addition to setting out their overall goals for the next five years, SBY and
Boediono have focused on a strategy for the first 100 days of the new administration,
knowing from past experience that the media can be expected to devote a good
deal of attention to evaluating the government’s performance during this early
period. Accordingly, they put together a small team in August to provide basic
economic policy guidance for both the first 100 days and the next five years. The
team collaborated with various government departments and with international
donors in formulating its recommendations. Based on interviews with various
individuals who have interacted with the economic team, we understand that the
general strategy for the first 100 days will be as follows.
The emphasis will be on quickly implementing several small reform projects
that are not politically sensitive. The focus will be on ‘low-hanging fruit’, so as to
ensure success and demonstrate to the general public and the rest of the world
that the new government is serious about conducting reform. By generating these
quick success stories, the government hopes to create a perception that it has
the will and the capacity to tackle reform more generally. It believes that such
perceptions matter: that the positive impact resulting from these small reform
projects is likely to create a snowball effect, making it easier
ISSN: 0007-4918 (Print) 1472-7234 (Online) Journal homepage: http://www.tandfonline.com/loi/cbie20
Survey of recent developments
Budy P. Resosudarmo & Arief A. Yusuf
To cite this article: Budy P. Resosudarmo & Arief A. Yusuf (2009) Survey of recent
developments, Bulletin of Indonesian Economic Studies, 45:3, 287-315, DOI:
10.1080/00074910903301639
To link to this article: http://dx.doi.org/10.1080/00074910903301639
Published online: 16 Nov 2009.
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Date: 18 January 2016, At: 19:40
Bulletin of Indonesian Economic Studies, Vol. 45, No. 3, 2009: 287–315
SURVEY OF RECENT DEVELOPMENTS
Downloaded by [Universitas Maritim Raja Ali Haji] at 19:40 18 January 2016
Budy P. Resosudarmo*
Australian National University
Arief A. Yusuf *
Padjadjaran University, Bandung
SUMMARY
Indonesia has so far suffered a relatively mild impact from the global financial
crisis. Its economy grew at 4% in the year to June 2009, displaying a more resilient
response than some of its neighbours. Fiscal stimulus measures, deft monetary
policy and cash transfers to the poor served to soften the impact of the crisis. Parliamentary elections in April and presidential elections in July provided further
economic stimulus. Election-related spending and the stimulus measures helped
maintain formal sector employment levels and the proportion of casual employees
in the workforce. Like the cash transfers, payments by parliamentary candidates
to voters contributed to household incomes, particularly among the poor. This is
reflected in widespread declines in poverty observed in 2009. The crisis, the stimulus package, the direct cash transfers and the election campaign spending combined to create a mechanism of income redistribution in favour of the poor.
On 20 October Susilo Bambang Yudhoyono and Boediono were inaugurated as
president and vice president for 2009–14. They announced key economic targets for
2014, including 7% economic growth, 5–6% unemployment and an 8–10% poverty
level. It is crucial that the two leaders tackle important reforms – even politically
sensitive ones – that will remove obstacles to faster and more employment-friendly
growth. However, the plan for their first 100 days focuses on a series of small, politically non-sensitive reforms designed to demonstrate their commitment to, and
create momentum for, wider reform. This strategy is unlikely to create an impression that the government is serious about more substantial and essential reforms.
Nor is it likely to generate the economic impact necessary to bring the economy
closer to the government’s key economic targets.
The slow expansion of infrastructure since the 1997–98 crisis is a major obstacle
to future high and sustained economic growth. Despite some signs of improvement
in recent years, Indonesia’s rate of infrastructure investment remains far below precrisis levels. Tackling this problem should be a high priority for the government.
While pursuing ways to grow faster, Indonesia – one of the world’s largest CO2
emitters – needs to respond more vigorously to climate change. The leaders have
pledged to place climate change mitigation high on their policy agenda. Yet little
has been said about how, as one of the countries most vulnerable to climate change,
Indonesia should support her people’s adaptation to its effects. The government
needs to give high priority to adaptation and promote it at the international level.
*
The authors thank Ditya A. Nurdianto and Abdurohman for their assistance with data
collection.
ISSN 0007-4918 print/ISSN 1472-7234 online/09/030287-29
DOI: 10.1080/00074910903301639
© 2009 Indonesia Project ANU
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Budy P. Resosudarmo and Arief A. Yusuf
THE ECONOMY AND THE MAJOR EVENTS OF 2009
Four major events captured the attention of the media during 2009: the global
financial crisis (GFC), the legislative and presidential elections, the bombing of
two luxury hotels in Jakarta, and an earthquake in Padang. Each had the potential
to affect the economy significantly. As it turned out, the economy proved resilient
in the face of all of these events. The impact of the GFC began to be felt in Indonesia from mid-2008, and was still evident at the time of writing. However, the
effects of the crisis on Indonesia have been relatively mild.
Election campaigning commenced in July 2008, and campaign activity intensified noticeably from the end of 2008. The legislative and presidential elections were
held on 9 April and 8 July, respectively, and both were largely free of significant disturbance. To the extent that they affected the economy, the impact was stimulatory,
partly as a consequence of heavy spending by both the General Elections Commission (Komisi Pemilihan Umum, KPU) and the political parties, and partly because
of the calming impact of the re-election of a popular incumbent president.
The twin suicide bombings of the Marriott and Ritz–Carlton hotels in Jakarta
occurred on 17 July, little more than a week after the presidential election. After
several years with no major terrorist activity, the bombings shocked those who
had come to believe that the authorities had dealt successfully with the terrorist
threat. Nine people were killed and more than 50 injured in the blast (Tempointeraktif, 18 July 2009). The police were able to identify a number of suspects relatively quickly, and to capture or kill several of them within the next few months.
Although the bombings generated a great deal of media coverage in the following
days, they had very little economic impact. The number of tourists entering the
country in July and August 2009 was not noticeably affected, nor was the stock
market. Nevertheless there is cause for concern that foreign investors might reevaluate the risks involved in doing business in Indonesia, and perhaps decide to
stay away for several more years.
On the evening of 30 September, an earthquake measuring 7.6 on the Richter
scale devastated the city of Padang, the capital of West Sumatra province, and
surrounding areas, causing widespread loss of life and property. By mid-October
it was reported that the death toll had reached approximately 1,100 people, while
around 3,000 others had been injured. At least 135,000 houses were heavily damaged, and a further 150,000 suffered medium or mild damage (Tempointeraktif,
14 October 2009). Various local organisations quickly came to Padang to provide
support. When President Susilo Bambang Yudhoyono (SBY) gave the green light
for foreign assistance the day after the earthquake, various international organisations rushed to the city to add to the relief effort. The cost of reconstructing
Padang and smaller towns and villages nearby will be considerable, and there will
be a significant impact on the local economy. But as was the case with the Aceh
tsunami in 2004 and the Yogyakarta earthquake in 2006, the effects of Padang’s
earthquake on the national economy will be slight.
Previous surveys (Gunawan and Siregar 2009; Kuncoro, Widodo and McLeod
2009) have argued that the impact of the GFC on the national economy has been
relatively modest. Figure 1 confirms that the decline in Indonesia’s growth rate
was less severe than that of several other Asian economies. The GDP data for the
second quarter (Q2) of 2009 reveal, however, that Indonesia’s growth continued to
decelerate, albeit slightly, while every other economy shown in figure 1 managed
Survey of recent developments
289
FIGURE 1 Economic Growth Rates in Asia
(% p.a. year-on-year)
12
8
4
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0
-4
-8
China
Philippines
India
Malaysia
Indonesia
Thailand
Vietnam
-12
Mar-2008
Jun-2008
Sep-2008
Dec-2008
Mar-2009
Jun-2009
Source: CEIC Asia Database.
to reverse the decline in its growth rate. Indonesia’s growth nevertheless remained
positive, and well above that of Thailand, Malaysia and the Philippines.
A number of explanations for the relatively mild impact of the GFC have been
suggested.1 The first draws attention to the structure of the Indonesian economy,
and the fact that it is less closely connected to the global economy than those of
neighbouring countries, particularly Singapore. Only about 17% of Indonesian
output is exported, so the downturn in the US and other major economies has not
had a strong impact on Indonesia. In addition, approximately 30% of the labour
force is found in the agricultural sector, which is less affected than other sectors
by the business cycle.
A second explanation focuses on the favourable impact of government and
central bank policy responses. Since October 2008 the government has introduced
a number of regulations aimed at protecting the financial system from a potential crisis, and monetary policies have been prudent. A fiscal stimulus package
amounting to Rp 71.3 trillion was introduced early in 2009. Most of the stimulus
was in the form of tax cuts and subsidies intended to increase spending by the
private sector, complemented by an additional Rp 12.8 trillion (originally Rp 10.8
trillion) of government spending, mainly on infrastructure (Gunawan and Siregar
2009; Kuncoro, Widodo and McLeod 2009). The government also expanded its
‘social expenditures’ rapidly in the first two quarters of 2009 (figure 2).2 Another
1 The discussion here is based on a presentation by Hal Hill on ‘Southeast Asia and the
global financial crisis’ at the Australian National University on 14 October 2009.
2 Social expenditure is described as ‘all spending on transfers, in cash or in kind, to members of the population in order to protect them from social risks’ (Government Regulation
No. 21/2004). It consists of social compensation assistance, social assistance to educational
and religious institutions, and other social expenditure.
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Budy P. Resosudarmo and Arief A. Yusuf
FIGURE 2 Government Social Expenditure a
(Rp trillion /quarter)
50
40
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30
20
10
0
a
Mar-2008 Jun-2008 Sep-2008 Dec-2008 Mar-2009 Jun-2009 Sep-2009 Dec-2009
Amounts for the September and December quarters in 2009 are projections.
Source: Agency for Fiscal Policy, Ministry of Finance.
important policy was to provide to direct cash transfers (bantuan langsung tunai,
BLT) to the poor in January and February 2009, amounting to Rp 3.8 trillion. On
previous occasions these transfers were intended to compensate the poor for
increases in prices following reductions in fuel subsidies, but this time they were
used to soften the impact of the GFC on the poor (Kompas, 3 August 2009).
A third explanation for the resilience of the economy in the face of the GFC
is the stimulatory impact of the elections. Election-related spending by the government, as well as that by the political parties and the candidates themselves,
seems likely to have boosted consumption expenditure. The total budget for
the KPU was approximately Rp 47.9 trillion, of which about Rp 18.6 trillion was
included in the 2008 budget and Rp 29.3 trillion in the 2009 budget. Information on the amounts actually spent was unavailable at the time of writing, but
it seems likely that the bulk of this allocation would have been spent by the
end of July 2009. In rough terms, it could be said that the government spent
about Rp 50 trillion on the elections over a period of about one year; this may
be compared with total government expenditure of the order of Rp 1,000 trillion
in 2008. In other words, paying for the election would appear to have boosted
government spending by about 5%, assuming other expenditure was not cut
back to accommodate this.
The amount of campaign spending by individual candidates and political parties can only be very roughly estimated – much less its macroeconomic impact.
Anecdotal evidence suggests that the level of spending in support of individual
candidates for election to the national parliament was anywhere between a few
million and 5 billion rupiah, and there were more than 11,000 candidates competing for the 560 available seats (Kompas, 31 October 2008). If each candidate spent,
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Survey of recent developments
291
say, Rp 500 million, then the total of such spending would have been about Rp 5.5
trillion. In addition, more than 110,000 candidates competed for approximately
1,200 seats at the provincial level and approximately 1.5 million candidates for
about 15,700 seats at the district and municipality levels.3 Though they did not
spend as much on average as candidates at the national level, collectively the
amount spent in these campaigns would have been enormous. It is difficult to
know the extent to which this would have been a net addition to private sector
spending, however. On the one hand, individuals and firms may have sacrificed
other spending to contribute to election campaigns. On the other, they may have
cut back their normal spending because of concerns about the GFC, in which case
campaign spending would have tended to offset this.
We take the view that this election-related spending, particularly in Q1 2009,
softened the impact of the GFC on households and, together with the stimulus
package and direct cash transfers, even helped to raise the incomes of the poor.
The latter benefited directly or indirectly from the provision of goods and services for various election campaign activities, as well as from direct cash payments
made to individuals who participated in campaign activities in the hope of securing their votes.
Whatever the impact of the elections on macroeconomic performance in the first
half of 2009, the debate more recently has been about whether the economy has
been recovering from the impact of the GFC since mid-2009. Export performance
and the resumption of foreign portfolio investment – plus the fact that other Asian
economies are beginning to bounce back – have led many to argue that Indonesia
has indeed been on the path of recovery (World Bank 2009a; Gunawan and Arman
2009). Others, including the present authors, take the more conservative position
that, while the impact of the GFC on Indonesia seems to have peaked, considerable uncertainty remains. Data for the fourth quarter will be needed to confirm
whether the economy has been on the path of recovery in the second half.
Economic growth and the sectoral outlook
The rate of quarterly year-on-year GDP growth continued its moderate decline, to
4% in Q2 2009 (table 1a). The main expenditure category contributing to this outcome was government consumption, which recorded double-digit growth rates
for the four quarters through Q2 2009. Private consumption was also important,
growing at a reasonably healthy 4.8% in the year to Q2 2009, down from a peak of
6% in the first quarter. This may be an indication that campaign spending for the
presidential election had a smaller impact on households than that for the legislative election.
The most alarming sign is the decline in the growth of investment spending,
which was only 2.7% in Q2 2009 compared with 12.0% a year earlier. Within
this category, growth of construction spending remained healthy; but growth
of investment in machinery and equipment turned strongly negative, and that
in transport fell sharply from around 40% in the second half of 2008. This does
not augur well for the future growth of various sectors, particularly manufacturing. Two factors in particular probably played an important role in inhibiting
3 There were also about 1,000 candidates competing for 132 seats in the Regional Representative Council (Dewan Perwakilan Daerah, DPD) in Jakarta.
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292
Budy P. Resosudarmo and Arief A. Yusuf
investment: the reduced availability of funding world-wide as a consequence of
the GFC; and the adoption of a wait-and-see approach in relation to the elections
(Bank Indonesia 2009).
Turning to GDP growth by sector, we see that non-tradables have continued
to grow far more rapidly than tradables, but also that the growth rates of both
have declined markedly from their levels in mid-2008. The manufacturing sector continues to be of significant concern, growing by only 1.8% in the year to
Q2 2009 (if petroleum and gas manufacturing are excluded). Most manufacturing sub-sectors contracted in the year to Q2 2009, except for food, beverages and
tobacco (16.8%), paper and printing (3.9%) and fertilisers, chemicals and rubber
(2.8%). Growth of the food, beverage and tobacco sub-sector has been high since
Q4 2008, reflecting the increase in household incomes caused by election campaign spending. Campaign activities also generated demand for products of the
textiles, leather products and footwear sub-sector, but export demand fell at the
same time. Since around 45% of the output of this sub-sector was exported before
the GFC, its recent growth has been relatively low. The paper and printing subsector contracted in 2008 but then began to expand in Q1 2009 – probably because
of increased use of its products for the election.
The mining sector grew somewhat more rapidly than in 2008, though much
more slowly than the economy as a whole. Its expansion mainly reflected increased
activity in Eastern Indonesia – not so much in coal production in Kalimantan, as
many observers had expected, but more as a consequence of the recovery of Freeport’s operations in Papua from a low level in the previous year (Reuters, 21 July
2009).
All components of the non-tradables sector exhibited healthy growth in the
year to Q2 2009, with the exception of trade, hotels and restaurants. The communications sector continued to grow at high double-digit rates, driven for several years by the increasing popularity of mobile phones. Utilities have also been
growing rapidly, mainly because of the expansion of city gas supply networks as
the government tries to encourage households to switch to this fuel.4 Whether this
rapid expansion can be sustained is open to doubt, however. It is not clear that
the price paid by households is sufficient to cover the full cost of supply, suggesting that the gas company (Perusahaan Gas Negara, PGN) will continue to rely on
subsidies, as is the case with the electricity supplier (Perusahaan Listrik Negara,
PLN). Eventually the government is likely to become unwilling to fund increases
in this subsidy, making continued expansion difficult.
Growth of the trade, hotels and restaurants sector has declined significantly
over the last three quarters, becoming slightly negative in Q2 2009. This has largely
been the result of negative growth in wholesale and retail trade. The hotels subsector expanded quite slowly in the year to Q2 2009 (2.8%), but restaurants output
grew rapidly (by 9.9%), probably as a consequence of the elections. The transport
sector rebounded strongly from negative growth in the latter half of 2008 to reach
6.4% in Q2 2009, owing mainly to a resurgence in air transport.
As argued in the previous survey, focusing on year-on-year growth rates at a
time when both external and internal circumstances have the potential to cause
4 For example, the government allocated approximately Rp 100 billion to expansion of the
gas distribution networks in Palembang and Surabaya (Kompas, 5 June 2009).
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TABLE 1a Components of GDP Growth
(2000 prices; % year on year)
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Gross domestic product
GDP excl. petroleum & gas
By expenditure
Private consumption
Government consumption
Investment
Of which:
Construction
Machinery & equipment
Transport
Other
Exports
Imports
By sector
Tradables
Agriculture, livestock,
forestry & fisheries
Mining & quarrying
Manufacturing
Excl. petroleum & gas
Non-tradables
Electricity, gas &
water supply
Construction
Trade, hotels & restaurants
Transport
Communications
Financial, rental &
business services
Services
Mar-08
Jun-08
Sep-08
Dec-08
Mar-09
Jun-09
6.2
6.7
6.4
6.9
6.4
6.9
5.2
5.6
4.4
4.8
4.0
4.4
5.7
3.6
13.7
5.5
5.3
12.0
5.3
14.1
12.2
4.8
16.4
9.1
6.0
19.2
3.4
4.8
17.0
2.7
8.0
39.6
23.4
23.4
13.6
18.0
8.1
24.3
27.8
18.5
12.4
16.1
7.6
24.5
40.6
9.5
10.6
11.0
5.7
15.7
37.0
6.6
1.8
–3.5
6.3
–8.6
9.6
–6.2
–18.7
–26.0
6.4
–11.5
3.0
–5.9
–15.7
–23.9
3.8
6.3
3.6
4.8
3.7
3.4
2.6
4.7
2.7
5.2
1.9
2.4
–1.7
4.3
4.6
–0.5
4.2
4.6
2.1
4.3
4.9
2.1
1.8
2.1
2.4
1.5
1.9
2.4
1.5
1.8
8.8
12.3
9.3
11.8
9.2
10.4
7.6
9.3
6.1
11.4
6.0
15.4
8.0
6.9
10.0
27.1
8.3
8.1
8.1
3.9
31.4
8.7
7.6
8.4
–1.1
33.3
8.6
5.7
5.6
–1.0
32.9
7.4
6.3
0.5
2.5
30.4
6.3
6.4
–0.1
6.4
26.8
5.3
5.9
6.7
7.2
6.0
6.8
7.4
Source: CEIC Asia Database.
rapid deterioration in the economy runs the risk of failing to notice significant
changes in performance. Table 1b therefore presents quarter-on-quarter growth
rates, adjusted for seasonality. On this basis, we can see that private consumption surged in Q1 2009 but then fell back to a surprisingly low level in the second quarter. The reverse is true for government consumption (not seasonally
adjusted), which has exhibited extraordinarily high volatility. As predicted by
Kuncoro, Widodo and McLeod (2009: 159), the huge decline in the first quarter
was followed by an increase almost as large in the second, providing a considerable stimulus to the economy.
294
Budy P. Resosudarmo and Arief A. Yusuf
TABLE 1b Components of GDP Growth
(2000 prices; seasonally adjusted; % quarter on quarter)
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Gross domestic product
GDP excl. petroleum & gas
By expenditure
Private consumption
Government consumption
Not seasonally adjusted
Investment
Of which:
Construction
Machinery & equipment
Transport
Other
Exports
Imports
By sector
Tradables
Agriculture, livestock,
forestry & fisheries
Mining & quarrying
Manufacturing
Excl. petroleum & gas
Non-tradables
Electricity, gas &
water supply
Construction
Trade, hotels & restaurants
Transport
Communications
Financial, rental &
business services
Services
Mar-08
Jun-08
Sep-08
Dec-08
Mar-09
Jun-09
1.6
1.7
1.4
1.5
1.2
1.3
0.9
1.0
1.0
1.1
1.0
1.1
1.0
2.3
–30.5
4.1
1.4
3.6
26.1
2.1
1.3
5.0
5.6
2.0
1.1
4.1
25.6
0.6
1.9
4.4
–28.7
–0.9
0.5
3.6
23.7
0.9
0.5
12.7
5.6
–0.1
5.9
8.9
1.8
1.8
8.5
8.7
1.5
–1.3
1.6
9.6
10.7
–1.3
–1.0
–4.6
1.6
–8.0
6.5
–0.6
–4.3
–6.8
1.4
–10.9
–15.6
–5.2
–15.5
–13.8
1.6
–1.4
4.0
1.2
5.3
0.3
0.9
0.9
0.8
1.6
0.6
1.0
0.6
0.9
0.7
1.4
0.7
0.2
0.1
1.1
1.2
0.3
0.9
1.2
1.3
1.0
1.3
0.2
–0.9
–1.8
0.1
0.7
1.2
0.2
0.8
1.2
2.1
2.5
2.1
2.3
1.9
2.6
1.3
3.1
0.9
3.4
1.9
3.9
0.5
1.1
–1.1
7.0
1.9
1.8
2.7
–1.3
9.0
1.5
1.6
2.5
0.0
6.5
1.8
1.6
–0.9
1.6
7.0
2.0
1.4
–3.7
2.3
5.0
0.8
1.6
2.0
2.4
5.9
0.6
0.7
2.1
1.2
1.8
1.5
2.6
Source: CEIC Asia Database.
The quarterly figures show an improvement in all categories of investment
spending growth in the second quarter, providing some additional support to
those who argue that the economy is already recovering from the impact of the
GFC. Further evidence of this can be seen in the return to positive growth of both
exports and imports in Q2 2009, and from inspection of the merchandise trade
data. Figures 3a and 3b present monthly data for the major categories of exports
and imports, converted to three-month rolling sums, and expressed in index
form. There is a clear general pattern of decline starting from the fourth quarter of
Survey of recent developments
295
FIGURE 3a Exports
($ values, 3-month rolling sum, July 2008 = 100))
125
100
75
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Chemicals
50
Food, beverages, tobacco & live animals
Animal & vegetable oils & fats
25
Crude materials, inedible
Manufactures
0
Sep-2008
Dec-2008
Mar-2009
Jun-2009
FIGURE 3b Imports
($ values, 3-month rolling sum, July 2008 = 100)
125
100
75
Chemicals
50
Food & live animals
Machinery & transport equipment
25
Crude materials, inedible
Manufactured goods & miscellaneous articles
0
Sep-2008
Dec-2008
Mar-2009
Jun-2009
Source: CEIC Asia Database.
2008 and running through to about April 2009, with a significant and widespread
recovery subsequently. Although absolute levels remain well below their previous peaks, and continuation of the recent trend cannot be guaranteed, the outlook
here provides some grounds for optimism.
Returning to the national income accounts data in table 1b, we also find grounds
for optimism in the evidence that manufacturing (excluding petroleum and gas)
grew more rapidly than the economy as a whole in the first two quarters of 2009.
Likewise, the trade, hotels and restaurants sector bounced back in the second
296
Budy P. Resosudarmo and Arief A. Yusuf
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quarter from a significant decline in the first. In short, on the basis of the most
recent quarterly and monthly data, the near-term future of the economy seems
promising. Nevertheless, we caution that it is too soon to be sure that these new
trends can be sustained.
Regional growth
Since the sectoral composition of output differs widely across the regions of Indonesia, it is of interest to look at economic performance from a regional perspective.
The impact of the GFC has been felt more strongly in Kalimantan and Sumatra than
in other regions. To illustrate this, we focus on growth data for the three quarters
to Q2 2009 in table 2. Of the seven regions shown, Papua has recorded extraordinarily rapid growth, driven largely by an astonishing expansion of output from
the dominant mining sector, but also by significant growth of manufacturing and
services. For the small and less advanced Maluku and Nusa Tenggara regions, the
impact of the GFC seems to have been relatively modest, with the former recording growth of 5.9% in the year to Q2 2009 and the latter 4.2%. Beyond these brief
observations, the following discussion focuses primarily on the four remaining
large regions: Kalimantan, Sumatra, Java–Bali and Sulawesi.
The poorest performing region most recently has been Kalimantan, whose gross
regional domestic product (GRDP) growth rate fell to 1.1% in the year to June 2009,
from 7.2% a year earlier. Sumatra too seems to have suffered significantly, with
a decline to 2.8%, from 6.1% a year before. Sulawesi’s growth rate has declined,
although from a high level in 2008. Reflecting its dominance in the economy,
growth in Java–Bali has declined to roughly the rate for Indonesia as a whole.
As was the case for non-tradables growth nationally, services growth in the
regions has been much more rapid than growth of agriculture, mining and
manufacturing: in all regions other than Papua, services continued to grow
considerably faster than GRDP. The growth of agricultural output fell to quite low
levels in Q2 2009, and became strongly negative in Kalimantan – mainly because
of negative growth of the forestry sub-sector, which is facing a decline in forest
stocks. In the case of Sumatra, both the food crop and forestry sub-sectors held
back agriculture as a whole. The slow growth of food crop output was probably not
due to the GFC, but simply reflected unusually high output levels in the previous
year; that is, the slowdown in the last three quarters was merely a movement back
toward the long-term average growth rate.
There are wide differences in the growth of mining across major regions. Mining
output has been declining in Sumatra for some time, and even more rapidly in
Sulawesi, although Q2 2009 saw a return to expansion in the latter. In Sumatra,
the negative growth was attributable mainly to declining gas production in Aceh
as the reserves there become depleted (World Bank 2009b: 1). In Kalimantan, the
decline in growth over the last three quarters reflected a fall in the performance
of the non-oil and gas mining sector, probably due to reduced demand for coal
during the GFC.
Manufacturing has been declining significantly in Kalimantan for the last three
quarters, reflecting negative growth of the wood-based industries (excluding
pulp and paper) and of oil and gas refining. The wood-based industries have been
affected by the declining availability of good-quality wood from Kalimantan’s
forests, while refinery output has fallen in response to a slowing of domestic
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297
TABLE 2 Regional Economic Growth
(2000 prices, % year on year)
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Mar-08
Jun-08
Sep-08
Dec-08
Mar-09
Jun-09
Gross regional domestic product
Kalimantan
7.2
Sumatra
5.6
Java–Bali
6.9
Maluku
5.6
Nusa Tenggara
6.9
Sulawesi
10.2
Papua
–24.2
7.2
6.1
6.6
6.8
4.3
9.2
–8.9
5.7
4.9
6.7
6.4
2.3
8.8
18.9
2.2
4.0
5.4
5.3
4.4
7.2
30.2
1.0
3.5
4.6
4.9
0.6
7.5
32.1
1.1
2.8
4.1
4.2
5.9
6.1
29.8
Agriculture
Kalimantan
Sumatra
Java–Bali
Maluku
Nusa Tenggara
Sulawesi
Papua
4.3
3.4
8.8
3.4
4.4
7.0
0.3
8.0
8.1
0.9
10.4
9.8
7.2
8.0
7.0
3.8
1.9
5.9
3.7
5.6
5.0
0.2
5.6
4.7
7.1
6.8
5.3
6.4
–2.0
4.4
6.4
6.6
4.4
8.0
5.5
–3.1
2.0
4.2
2.6
0.2
1.4
2.0
Mining
Kalimantan
Sumatra
Java–Bali
Maluku
Nusa Tenggara
Sulawesi
Papua
8.9
–0.7
5.9
15.0
7.5
13.2
–49.4
6.7
0.3
5.0
5.8
–12.1
–3.4
–31.4
5.9
–2.7
5.8
–0.3
–19.9
–1.9
37.8
1.7
–3.1
3.1
–7.3
–8.0
–5.7
62.6
–0.1
–0.4
4.2
–14.5
–32.9
–8.1
65.6
–0.5
–3.4
4.7
–14.6
5.2
0.6
63.9
Manufacturing
Kalimantan
Sumatra
Java–Bali
Maluku
Nusa Tenggara
Sulawesi
Papua
2.6
3.4
4.6
–0.6
8.5
8.9
1.2
3.4
2.0
4.8
–8.5
4.6
7.8
1.3
0.2
3.2
5.0
–5.9
5.7
6.5
4.4
–3.2
0.9
2.6
–7.7
3.9
1.9
7.8
–3.4
1.5
2.0
–1.4
11.7
3.9
12.8
–2.3
2.3
1.6
8.2
8.8
6.7
13.4
Services
Kalimantan
Sumatra
Java–Bali
Maluku
Nusa Tenggara
Sulawesi
Papua
10.7
11.0
7.8
7.5
7.8
11.8
13.0
10.4
10.0
8.8
7.7
6.5
12.7
17.5
9.5
10.0
8.7
9.4
9.0
12.9
12.7
7.8
8.2
7.1
7.3
7.3
11.1
14.1
6.6
5.8
5.7
6.1
8.6
10.3
15.1
7.1
6.2
5.5
5.4
9.3
9.4
14.0
Source: Data kindly supplied by the central statistics agency (Badan Pusat Statistik, BPS).
298
Budy P. Resosudarmo and Arief A. Yusuf
TABLE 3 Balance of Payments
($ billion per quarter)
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Average
2007
Mar-08
Jun-08
Sep-08
Dec-08
Mar-09
Jun-09
Current account
2.6
2.8
–1.0
–0.9
–0.7
2.9
3.1
Exports
Non-oil & gas
Oil & gas
29.5
23.3
6.2
34.4
26.4
8.0
37.3
27.9
9.5
38.1
28.8
9.3
29.8
24.8
5.0
24.2
20.5
3.7
27.5
23.1
4.5
Imports
Non-oil & gas
Oil & gas
21.3
16.5
4.8
26.9
21.3
5.5
31.9
23.7
8.2
32.3
25.0
7.3
25.6
22.6
3.0
17.2
15.2
2.0
18.8
16.5
2.3
8.2
7.5
5.4
5.8
4.2
7.0
8.7
6.8
1.4
5.1
2.5
4.2
1.3
3.8
2.0
2.2
2.0
5.3
1.6
6.6
2.1
Services
Income
Current transfers
–3.0
–3.9
1.3
–3.0
–3.1
1.4
–3.3
–4.5
1.4
–3.2
–4.8
1.3
–3.3
–2.9
1.3
–2.5
–2.7
1.1
–3.1
–3.7
1.2
Capital account
0.1
0.0
0.1
0.2
0.0
0.0
0.0
Financial account
Direct investment
Portfolio investment
Other investment
0.8
0.6
1.4
–1.2
–1.4
–0.3
2.0
–3.2
2.5
0.6
4.2
–2.3
0.7
0.4
–0.1
0.4
–3.4
2.1
–4.4
–1.1
1.7
1.7
1.9
–1.8
–2.4
0.0
2.0
–4.5
Errors & omissions
–0.3
–0.4
–0.2
–0.1
–0.2
–0.7
0.4
3.2
1.0
1.3
–0.1
–4.2
4.0
1.1
Merchandise trade
balance
Non-oil & gas
Oil & gas
Overall balance
Source: CEIC Asia Database.
and international demand. The growth rate of manufacturing has also slowed in
Java–Bali during the same period, and this has been a major contributor to its low
growth overall. The disappointing performance of the manufacturing sector in
Java and Sumatra was probably caused by a fall in export demand in response to
the GFC. Increased domestic consumption during the election campaigns period
was not sufficient to offset the impact of the downturn in the global economy. On
the other hand, Sumatra’s manufacturing does not seem to have been significantly
affected by the GFC, and the growth of manufacturing output has accelerated to
quite a high level in Sulawesi.
Balance of payments, capital market and exchange rate
One cause for optimism that the economy is already on the path of recovery is the
balance of payments (table 3). After three quarters of small deficits, the current
account returned to a sizeable surplus in the first two quarters of 2009. Although
exports remain well below their levels during most of 2008, the decline in average
Survey of recent developments
299
FIGURE 4 Composite Stock Price Index (CSPI) and Exchange Rate
CSPI
3,000
Rp/$
15,000
2,500
12,000
2,000
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9,000
1,500
6,000
1,000
CSPI
500
0
30-Sep-2008
3,000
Exchange rate
2-Dec-2008
5-Feb-2009
9-Apr-2009
0
12-Jun-2009 14-Aug-2009 16-Oct-2009
Source: Indonesia Stock Exchange; Pacific Exchange Rate Service.
imports in the first half of 2009 has been even greater, such that the merchandise
trade balance has been restored to its 2007 average. The values of oil and gas
exports and imports have fluctuated quite considerably in line with big swings
in world prices, but they have tended to move in the same direction, so the difference between them has been relatively stable. The recent strengthening of the
merchandise trade balance is due mainly to the non-oil and gas component: this
item was three times as large in Q2 2009 as in the last quarter of 2008. Considerable volatility is evident in the financial account, with no clear pattern emerging.
Portfolio investment, which turned negative in Q3 2008, and strongly so in the
fourth quarter, bounced back in the first half of 2009 to levels closer to those of
2007 and early 2008. Thus the large negative overall balance recorded in Q4 2008
was almost totally reversed in the next quarter.
Share prices on the Indonesian Stock Exchange Index have continued the steady
climb that began in March 2009 (though at a somewhat slower rate since August),
reflecting investor confidence in the near-term economic outlook (figure 4). The
continuous strengthening of the rupiah during the same period also suggests that
investors are willing to restore or increase their exposure to Indonesian assets.
Overall, it would appear that the business community is reasonably satisfied with
the government’s handling of macroeconomic policy, and with the outcome of the
elections. That said, Indonesia’s economic outlook for the near future still remains
somewhat uncertain. Foreign direct investment in Q2 2009 was negligible, while
other foreign investment became strongly negative. And although the balance of
payments is strong, exports are still down somewhat on the levels recorded a year
ago. Imports are even more depressed than before the onset of the GFC, although
most major categories have been on an upward trend since early in 2009. At best,
cautious optimism seems justified.
300
Budy P. Resosudarmo and Arief A. Yusuf
FIGURE 5 Monetary Policy and Inflation
(% p.a.)
20
50
CPI inflation (lhs)
16
40
SBI rate 30 days (lhs)
Real SBI rate (lhs)
12
30
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Currency in circulation (rhs)
8
20
4
10
0
0
-4
Sep-2008
Nov-2008
Jan-2009
Mar-2009
May-2009
Jul-2009
-10
Sep-2009
Source: CEIC Asia Database.
Inflation
The rate of inflation of consumer prices has fallen steadily over the last 12 months
from over 12% to below 3% (figure 5) for the first time since 2000. Successive interest rate adjustments by Bank Indonesia (BI) have succeeded in gently lowering
the rate of growth of the money supply (represented by currency in circulation
in figure 5), resulting in the expected parallel reduction in inflation. Until very
recently, inflation was falling more rapidly than the interest rate on 30-day BI
Certificates (SBIs), so the real SBI rate has been rising steadily, peaking at almost
4% p.a. Another consequence of this deft management of monetary policy is the
already noted strengthening of the external value of the currency during the same
period. Given the sensitivity of the public to rapidly rising prices, SBY would
appear to owe a significant debt of gratitude to the central bank for bringing inflation under control in the lead-up to the presidential election.
The interesting question now is how BI will respond to its own success in
bringing inflation down to this low level. On such occasions in the past, it has
succumbed all too readily to the argument that, since inflation is low, it can afford
to reduce interest rates significantly. The predictable result has been that money
supply growth has accelerated, and the inflation rate has broken away from its
target range. BI’s skill in managing monetary policy in the face of the threat posed
by the GFC over the last year or so provides reason for optimism that this time it
will manage its interest rate instrument so as to maintain money growth at about
the 8% p.a. level achieved during the third quarter.5 If so, there should be no
difficulty in holding inflation below 5% as the incoming government settles in.
5 The sudden downturn in money growth in September 2009 does not represent a change
in approach, but rather a spike in the money supply in September 2008.
Survey of recent developments
301
TABLE 4 Composition of the Labour Force a
(%)
Category
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Unemployed
Formal sector
Casual workers
Self-employed
Unpaid family workers
Total labour force (million)
Feb-07
Aug-07
Feb-08
Aug-08
Feb-09
9.8
27.5
9.8
36.5
16.5
9.1
28.1
9.4
37.6
15.7
8.5
28.3
9.8
37.4
16.1
8.4
27.9
10.1
38.1
15.5
8.1
28.0
10.1
37.3
16.4
108.1
109.9
111.5
111.9
113.7
a
The formal sector includes permanent, paid employees and their employers; casual workers are
non-permanent employees; the self-employed are individuals working for themselves (with or without non-permanent employees and/or unpaid family workers); unpaid family workers are those
working for a family business without formal pay.
Source: BPS, National Labour Force Survey (Sakernas), 2007, 2008 and 2009.
Employment, household income and poverty
Despite the relatively modest impact of the GFC, economic growth has declined
somewhat, while the labour force has continued to grow at about 2% p.a. This has
given rise to concern about the impact of the economic slowdown on employment,
household income and poverty. Table 4 shows that unemployment continued to
decline between August 2008 and February 2009 – the period when the GFC was
having its strongest impact on Indonesia – falling from 8.4% to 8.1%. The concern
is that if the early signs of recovery turn out to have been misleading and growth
begins to decelerate again, it is still possible that the GFC could cause a reversal of
this downward trend in unemployment.
Among those working, the proportion employed in the formal sector has been
relatively steady since August 2007. It is very surprising that in the six months
to February 2009 when the economy – particularly the manufacturing sector –
was slowing down, there was no reduction in the proportion of formal sector
employees. A possible explanation is that firms were already responding to
various tax cuts and incentives in the government’s fiscal stimulus package, since
one eligibility requirement for some of those incentives was that the firm should
promote employment – that is, avoid laying off workers.
The proportion of casual workers was also steady in the year to February
2009. Employing casual workers gives employers relative flexibility, as they can
respond to an economic downturn by offering them fewer working hours per
week if necessary. It is possible also that the social infrastructure activities that
are part of the stimulus package had begun to have an impact by February 2009
through the creation of casual employment opportunities, although the size of
this part of the package was small (less than 1% of the total).
The proportion of self-employed workers fell slightly in the six months to
February 2009, returning to its level a year earlier. There was a comparable increase
in the proportion of unpaid family workers, which more than offset the small decline
in unemployment noted above. This increase perhaps gives some cause for concern,
302
Budy P. Resosudarmo and Arief A. Yusuf
TABLE 5 Household Income per Capita a
(Rp ‘000, 2008 prices)
Income per Capita
Mar-08
Mar-09
Mar-08
Mar-09
Ratio of
Change
in Income
to Initial
Income
Sumatra
Java–Bali
Nusa Tenggara
Kalimantan
Sulawesi
Maluku
Papua
557
531
414
643
498
564
703
558
543
405
697
510
591
707
356
279
245
365
278
321
327
357
294
253
376
275
313
315
–0.50***
–0.46***
–0.36***
–0.30***
–0.41***
–0.39***
–0.69***
Indonesia
538
550
302
311
–0.44***
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Urban
Rural
a
This table is built from the 2008 and 2009 Susenas panel data. Income is proxied by total monthly
household expenditure per capita in 2008 prices. Estimation was by ordinary least squares regression.
*** indicates that the coefficients are significantly different from zero at the 99% confidence level.
Source: BPS, National Socio-Economic Survey (Susenas), panel data for 2008 and 2009.
since becoming an unpaid worker in a family business might be little better than
becoming unemployed. Average returns to individuals in family enterprises are
likely to be depressed if more family members have to share the fixed or declining
amount of work available. In turn, this could raise the level of poverty.
At the national level, in both rural and urban areas, real household incomes per
capita were higher in March 2009 than a year earlier (table 5). At the regional level,
however, this was not the case everywhere. Average incomes declined in urban
areas in Nusa Tenggara, and in rural areas in Sulawesi, Maluku and Papua.
We estimated the relationship between the change in household income per
capita between 2008 and 2009 and the income level in 2008 (both in 2008 prices),
controlling for characteristics of household heads – gender, age and educational
attainment – as well as for the size of the household and whether it was in a
rural or an urban area. The estimated coefficients indicating the change in income
given the initial income are significantly negative at both the national and subnational levels (table 5). Thus the lower the income in 2008, the larger the increase
in income in the following year. This suggests that the level of poverty may have
fallen even in regions where average household incomes declined.
The national poverty figure was lower in March 2009 than a year earlier
(table 6): the GFC therefore did not increase the percentage of people living below
the poverty line set by the central statistics agency (Badan Pusat Statistik, BPS). At
the sub-national level also, poverty figures for March 2009 were lower than those
for March 2008 in all regions except Papua, where an increase in poverty in rural
areas more than offset a further decline in the already low level of urban poverty.
Based on the above observations of the dynamics of the labour market,
household incomes and poverty, we propose the following interpretation. The
Survey of recent developments
303
TABLE 6 Regional Poverty Levels a
(%)
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Rural
Urban
Total
2008
2009
2008
2009
2008
2009
Sumatra
Java–Bali
Nusa Tenggara
Kalimantan
Sulawesi
Maluku
Papua
16.0
19.7
24.4
10.7
19.3
27.2
45.4
15.0
17.7
22.4
9.1
18.3
25.9
46.3
13.6
11.4
25.4
6.8
7.6
8.7
6.7
12.2
10.6
24.6
5.1
6.7
7.5
5.9
15.1
15.0
24.7
9.1
15.7
22.1
36.6
13.9
13.7
23.0
7.5
14.8
20.9
37.1
Indonesia
18.9
17.4
11.7
10.7
15.4
14.1
a
The poverty measure is as at March of each year.
Source: BPS (2009).
stimulus measures, particularly the tax cuts and social infrastructure projects,
together with various kinds of spending related to the elections, helped to maintain
employment levels in the formal sector and the share of casual employees in the
workforce in the face of the GFC.6 In combination with the disbursement of direct
cash transfers to the poor in early 2009 and cash paid by parliamentary candidates
to voters, particularly the poor, this led average household incomes to increase
in most regions, and the increase was higher in most areas for poor people than
for the population as a whole in the year to March 2009. This is consistent with
the observation of widespread declines in poverty, except in rural Papua. On this
interpretation, the GFC, the stimulus package, the direct cash transfers to the poor,
and election campaign spending have combined to create a mechanism of income
redistribution in favour of the poor, except in rural Papua.
SBY’S FIRST 100 DAYS
Following the announcement of their election victory, President SBY and his new
vice president, Boediono, were quick to announce a set of socio-economic targets to be achieved during SBY’s second term in office (Yudhoyono and Boediono
2009). The quantitative targets for economic development and welfare improvement are as follows:
• the rate of economic growth should rise to approximately 7% annually by 2014
(the end of SBY’s second term);
• unemployment should fall to 5–6% by 2014;
• the proportion of people living in poverty should fall to 8–10% by 2014; and
• the annual inflation rate should be in the range 3–5% throughout.
6 This does not preclude the possibility that average working hours declined, particularly
in the formal sector.
304
Budy P. Resosudarmo and Arief A. Yusuf
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To achieve these targets, the president rightly emphasised the importance of
implementing sound macroeconomic policies.
In addition, the leaders specified a set of qualitative socio-economic objectives:
• to improve access to education so as to increase literacy and educational attainment more generally;
• to improve access to health care facilities so as to lower the rates of maternal
and infant mortality and increase life expectancy;
• to establish better food and energy security;
• to maintain environmental quality in both urban and rural areas;
• to develop better infrastructure; and
• to strengthen medium and small enterprises.
In thinking about the quantitative targets, it is worth recalling a similar set of
targets set by SBY for his first presidency (2004–09), none of which was achieved
(Kuncoro, Widodo and McLeod 2009). Economic growth rates approached
but never reached the 7% target (averaging 5.7%), and the period has been
categorised as one of ‘jobless growth’ (Manning and Roesad 2007), in which both
the unemployment and poverty targets were missed.
To avoid similar disappointment in SBY’s second term, his government will
need to give stronger emphasis to policies that enhance economic growth and,
in particular, encourage ‘employment-friendly’ growth. Indonesia’s experience
during the last five years with economic growth, unemployment and poverty
is shown in figure 6. With population growth of about 1.3%, it can be seen that
unemployment declined when GDP growth exceeded 5.5%. Poverty then began
to decline as growth accelerated to above 6% and unemployment fell further. On
this basis, and given that GDP growth currently is only about 4%, we argue that
reducing unemployment and poverty to levels of 5–6% and 8–10%, respectively,
by 2014 will require the achievement of 7% or higher growth much earlier than
2014, and preferably by 2010. Alternatively, the government will need to make a
greater effort to achieve growth of a kind that is more labour intensive.
In addition to setting out their overall goals for the next five years, SBY and
Boediono have focused on a strategy for the first 100 days of the new administration,
knowing from past experience that the media can be expected to devote a good
deal of attention to evaluating the government’s performance during this early
period. Accordingly, they put together a small team in August to provide basic
economic policy guidance for both the first 100 days and the next five years. The
team collaborated with various government departments and with international
donors in formulating its recommendations. Based on interviews with various
individuals who have interacted with the economic team, we understand that the
general strategy for the first 100 days will be as follows.
The emphasis will be on quickly implementing several small reform projects
that are not politically sensitive. The focus will be on ‘low-hanging fruit’, so as to
ensure success and demonstrate to the general public and the rest of the world
that the new government is serious about conducting reform. By generating these
quick success stories, the government hopes to create a perception that it has
the will and the capacity to tackle reform more generally. It believes that such
perceptions matter: that the positive impact resulting from these small reform
projects is likely to create a snowball effect, making it easier