00074918.2014.896235
Bulletin of Indonesian Economic Studies
ISSN: 0007-4918 (Print) 1472-7234 (Online) Journal homepage: http://www.tandfonline.com/loi/cbie20
Survey of Recent Developments
Shiro Armstrong & Sjamsu Rahardja
To cite this article: Shiro Armstrong & Sjamsu Rahardja (2014) Survey of Recent Developments,
Bulletin of Indonesian Economic Studies, 50:1, 3-28, DOI: 10.1080/00074918.2014.896235
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Date: 17 January 2016, At: 23:24
Bulletin of Indonesian Economic Studies, Vol. 50, No. 1, 2014: 3–28
SURVEY OF RECENT DEVELOPMENTS
Shiro Armstrong*
The Australian National University
Sjamsu Rahardja*
World Bank
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SUMMARY
As Indonesia heads to the polls in 2014, its economy is slowing. The end of the commodities boom and the global return to more normal monetary policy has exposed some weaknesses. Exchange-rate depreciation has absorbed some of the adjustment; but structural
rigidities are still likely to limit the expansion of non-commodity sectors, and the increased
fuel-subsidy bill for imported oil is putting pressure on the current account and the budget.
The immediate focus is on demand-side consolidation to manage inlation and the currentaccount deicit.
For an economy like Indonesia’s to be overheating, and for monetary and iscal authorities to be engineering a soft landing, when growth is below 6%, points to major structural
problems. If Indonesia is to prevent the current rate of growth from becoming the new normal, there will need to be a substantial supply-side response to lift productivity, as well as a
restructuring of the economy and the introduction of policies that make the economy more
lexible in adjusting to shocks. The current economic slowdown has yet to trigger sweeping
reforms; policy coordination remains problematic as Indonesia enters a big political year.
Compared with its neighbours, Indonesia is largely on the outside of the regional production networks, and its manufacturing sector does not play into factory Asia. Now, faced
with lower commodity prices globally—and growth in non-resource sectors is critical—
the lack of a large manufacturing base appears to be a weakness. Indonesia is attracting
more foreign direct investment than ever and is climbing the global rankings of preferred
economies in which to invest, but this is occurring without improvements to its investment
environment or competitiveness. Indonesia can participate more fully in global supply
chains and increase its potential for growth by upgrading its infrastructure, improving its
investment environment, and using regional initiatives strategically to make strong commitments that reinforce its priorities for domestic reform.
In its hosting of APEC in 2013, Indonesia championed infrastructure investment where
the lack of structural reform and macroeconomic constraints are inhibiting much-needed
expansion, both in Indonesia and in the region. The positive outcome, albeit only a small
step forward for the Doha Round, at the WTO Ministerial Conference in Bali, in December,
also builds momentum for better regional and global cooperation. The priority now is for
Indonesia to commit to, and show leadership in, the Regional Comprehensive Economic
Partnership (RCEP) and the implementation of the ASEAN Economic Community.
Keywords: economic stabilisation, macroeconomics of development, policy reform, protectionism,
mineral processing
JEL classiication: D72, O11, O24, O53
* The authors are very grateful to the many interviewees in Jakarta, who shared their insights and time, and to the members of the Indonesia Study Group at ANU, who provided extensive comments. Any errors are the authors’ own. Rahardja’s views are personal and do not necessarily relect the views of the World Bank and its Board of Directors.
This article was published with errors in table 1. Please see Corrigenda (http://dx.doi.org
/10.1080/00074918.2014.922160).
ISSN 0007-4918 print/ISSN 1472-7234 online/14/0003-26
http://dx.doi.org/10.1080/00074918.2014.896235
© 2014 Indonesia Project ANU
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Shiro Armstrong and Sjamsu Rahardja
POLITICAL DEVELOPMENTS
The year 2014 is an important one politically. Parliamentary elections will be held
in April, and then in July Indonesians will directly elect their president for only the
third time. If no presidential candidate receives more than 50% of the vote, there
will be a run-off election in September. These are opportunities to entrench the
country’s democratic system. Since the fall of Soeharto, during the 1997–98 Asian
inancial crisis, Indonesia’s democratisation has become an exemplar in Southeast Asia, and decentralisation of power to regional governments has helped to
cement this process. Improvements in governance are still crystallising, but democratic Indonesia has enjoyed relative political stability and economic prosperity.
Yet corruption scandals and an ineffective coalition government have characterised President Yudhoyono’s second term (McRae 2013). The investigation of
corruption scandals by Indonesia’s Corruption Eradication Commission (Komisi
Pemberantasan Korupsi [KPK]) continues to uncover charges of corruption linked
to political igures, mostly to those from parties supporting the current government (members of the coalition secretariat).1 In addition to a bribery case involving the upstream oil and gas regulator (SKK Migas) (see Allford and Soejachmoen
2013), the investigation of Akil Mochtar, the ex-chairman of Indonesia’s Constitutional Court, has seen members of the powerful political clan of Ratu Atut
(the governor of Banten and a senior member of a party supporting the coalition)
arrested for alleged corruption and cronyism.
Among the many storylines that may play out in the parliamentary and presidential elections will be that of the Jakarta governor, Joko Widodo (known as
Jokowi). Jokowi’s popularity stems from his success as the mayor of Solo, in Central Java, and his ability to connect with voters in Jakarta and with young voters.
Half of Indonesia’s population is under 29 years of age, and up to 59 million of 190
million voters in the forthcoming elections will be young voters, from irst-time
voters (17-year-olds) to those aged 29. Jokowi holds a large lead in presidential
polling2 and is a political outsider relative to most other candidates, who come
from the political establishment or the military.
On 14 March, Jokowi was nominated by his party, the Indonesian Democratic
Party of Struggle (Partai Demokrasi Indonesia—Perjuangan [PDI–P]), in which
party leader and former president Megawati Sukarnoputri alone has the authority to choose its presidential candidate. The inancial market responded positively
to Jokowi’s nomination—the Jakarta Composite Index (the benchmark indicator
of stock prices) rose by 3.2% on the day of the announcement (Kompas, 15 Mar
2014). The question now is whether PDI–P will win the required 25% of the legislative vote or 20% of the parliamentary seats to nominate its own presidential
1. The coalition secretariat (sekretariat gabungan) consists of the Democratic Party (Partai
Demokrat), Golkar, the United Development Party (Partai Persatuan Pembangunan), the
National Awakening Party (Partai Kebangkitan Bangsa), and the Prosperous Justice Party
(Partai Keadilan Sejahtera).
2. Jokowi enjoyed 43.5% support in January (Kompas, 8 Jan 2014), while the second-placed
Prabowo, from Gerindra, attracted only 11.1%. Other polls have consistently shown Jokowi as the leading potential presidential candidate.
Survey of Recent Developments
5
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candidate, without which it may have to form a weak coalition.3 Such an outcome
could undermine the effectiveness of the new government, as it has done to that
of the current government.
There is much speculation as to what a Jokowi presidency and a PDI–P-led
government would mean for Indonesia. If Jokowi were elected, much would
depend on whom he invited to take part in his economic policy team and selected
for key economic policy positions in cabinet. Jokowi is less experienced in foreign
policy and diplomacy than Yudhoyono was when he came to power, given that
Yudhoyono became effective in diplomacy as a minister in the Wahid and Megawati presidencies.4
MACROECONOMIC DEVELOPMENTS
Economic Growth
Indonesia’s economy continues to face external pressures. The announcement
in June 2013 by the US Federal Reserve that it would start to suspend the purchase of assets, or to taper quantitative easing, has tightened external inancing
conditions for emerging markets, including Indonesia. This pressure is unlikely
to lift while the United States continues its economic recovery and the US Federal Reserve returns its monetary policy to more normal settings. These circumstances have also put pressure on the rupiah, as global portfolio investors adjust
to tighter liquidity and rebalance their exposures from emerging countries, which
are perceived to be at risk from rapid capital outlows (Allford and Soejachmoen
2013). Another source of pressure is the continued deicit in the current account.
Subdued international commodity prices have reduced Indonesia’s export revenue, around 60% of which was derived from commodity exports. That trend
seems to have reversed briely, as miners rushed out mineral exports in the last
quarter of 2013 before the export taxes and bans on unprocessed minerals were
implemented in January 2014 (see ‘Mineral Export Policies’, below). There is a
considerable negative balance in the oil and gas trade, which continues to increase
and which is putting pressure on both the current account and the government
budget, despite the adjustment to subsidised fuel prices in June 2013.
Policymakers in Bank Indonesia (BI) and the Ministry of Finance are trying
to pilot a ‘soft landing’ for the economy by, for example, adjusting BI’s policy
rate and allowing the exchange rate to absorb some of the pressures. Other
measures include relaxing import quotas on beef and some other foodstuffs. But
subdued commodity prices and the return to tighter global credit have exposed
the economy to risks, as infrastructure bottlenecks and regulatory uncertainties
overshadow growth prospects in non-commodity sectors. At a time of subdued
growth in domestic demand, Indonesia could consider ways to use this momentum to grow its non-commodity exports. After all, it is home to 55% of labour in
3. Article 9 in Law 42/2008 on Presidential Elections states that presidential and vice-presidential candidates can be nominated only by a political party or a coalition of political
parties that secure 20% of seats in the parliament or obtain 25% of votes in the parliamentary election preceding the presidential election.
4. Interviewees for this ‘Survey’ noted that PDI–P is known as a nationalist party but that
Megawati’s 2001–4 presidency was characterised by pragmatism in economic policy.
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6
Shiro Armstrong and Sjamsu Rahardja
the big four ASEAN countries (Indonesia, Malaysia, Philippines, and Thailand)
yet contributes just 17% of the non-commodity manufacturing exports of these
countries.5
GDP in 2013 grew by 5.6% and 5.7% (year-on-year) in the third and fourth
quarters, respectively, a decline from 6.2% and 6.1% in 2012. Slower growth in
the last two quarters made total GDP in 2013 grow by 5.8%, a noticeable decrease
from 6.3% in 2012. On the expenditure side, the main drag on growth in the last
six months has been the continued weakening of investment. Gross ixed capital
formation (GFCF) continued to weaken throughout 2013, as shown in table 1.
Investment spending increased by only 3.8% in the fourth quarter of 2013, compared with 7.3% in the same period of 2012. In 2013, GFCF grew by 4.2%, less than
half of the growth in 2012. The decline in investment growth was led by large
decreases in the construction, machinery and equipment, and transport sectors.
Rising interest rates and a depreciating rupiah are likely to be behind the continuing slowdown in investment in construction, which contributed 70% of total real
investment in 2013.6
Aggregate consumption spending has been relatively stable. Growth in real
private consumption in the third and fourth quarters has stood up at 5.5% and
5.3%, respectively, and resulted in annual growth at 5.3%, the same as in 2012.
The relative strength of private consumption is surprising, given that the food
CPI increased by 14% and 12% (year-on-year) in the third and fourth quarters,
respectively—higher than in 2012—which would have affected the real purchasing power of consumption of non-staple foods. Indeed, growth of non-food consumption remained relatively strong, at 6.2% and 5.9%, in the last two quarters,
consistent with BI’s Retail Sales Survey, which indicated strong growth (BI 2013b).
Growth in real government consumption spending has also picked up considerably, reaching 8.8% in the third quarter and 6.5% in the fourth. This surge in
the third quarter is likely to have been driven by the government’s temporary
cash-transfer program (Bantuan Langsung Sementara Masyarakat), used to offset
higher fuel prices, which ran until September 2013. This was an unusually high
disbursement from the government budget; its implementation involved a large
outlay on electronic ID cards and related equipment, as well as paying PT Pos, the
state-owned postal service, to administer the distribution of the transfers.
Indonesia’s strong export growth in the fourth quarter of 2013 was unexpected,
given the declining trade surplus. Real exports of goods grew by 7.4% (year-onyear), an increase from 5.3% in the third quarter. Badan Pusat Statistik (BPS)
recently revealed that nominal non-oil exports increased by 9.3% in December
(year-on-year), a contrast to the 8.4% decline in December 2012 (year-on-year)
(BPS, press release, 3 Feb 2014). The increase in exports in December created a
$1.5 billion surplus in trade, the highest since November 2011. This increase was
driven mainly by strong growth in exports of mineral ores, which suggests that
mining companies were rushing to export unprocessed ores in anticipation of
5. See the World Bank’s World Development Indicators (speciically, industry of employment for those aged 15 and over): http://data.worldbank.org/data-catalog/world-development-indicators. Export data are available at http://wits.worldbank.org/wits/. Noncommodity manufacturing is deined as Standard International Trade Classiication 5–8.
6. See World Bank (2013) for a discussion of the decline in nominal credit growth and construction investment.
Survey of Recent Developments
7
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TABLE 1 Components of GDP Growth
(2000 prices; % year-on-year)
Dec
2012
Mar
2013
Jun
2013
Sep
2013
Dec
2013
2012
2013
GDP
Excluding oil & gas
6.1
10.5
6.0
6.2
5.8
5.9
5.6
5.8
5.7
5.8
6.3
10.8
5.8
5.9
By expenditure
Private consumption
Government consumption
Investment
Construction
Machinery & equipment
Transport
Other
Exports
Imports
5.4
–3.3
7.3
7.8
4.3
10.1
6.5
0.5
6.8
5.2
0.4
5.5
6.8
0.8
1.8
11.4
3.6
0.0
5.1
2.1
4.5
6.6
–0.8
–6.6
12.5
4.8
0.5
5.5
8.8
4.5
6.2
0.6
–5.1
9.6
5.3
3.8
5.3
6.5
3.8
6.0
0.2
–13.0
12.4
7.4
–0.6
5.3
1.2
9.8
7.5
12.7
27.3
11.6
2.0
6.6
5.3
4.9
4.2
5.9
0.3
–6.0
11.1
5.3
1.2
2.1
0.6
6.3
7.0
3.7
0.1
6.0
6.9
3.3
–0.6
6.0
6.6
3.3
2.0
5.0
5.5
3.8
3.9
5.3
5.4
4.2
1.8
5.7
6.4
3.5
1.3
5.6
6.1
6.9
7.1
7.9
6.8
11.3
7.9
6.8
6.5
6.0
11.7
4.0
6.6
6.4
7.7
12.8
3.8
6.2
6.1
6.7
11.8
6.6
6.7
4.8
7.8
11.7
6.1
6.8
8.2
6.6
12.1
5.6
6.6
5.9
7.1
12.0
7.7
5.3
8.2
6.5
7.7
4.5
7.6
5.6
6.8
5.3
7.1
5.3
7.8
5.5
By sector
Tradables
Agriculture, livestock,
forestry, & isheries
Mining & quarrying
Manufacturing
Excluding oil & gas
Non-tradables
Electricity, gas, & water supply
Construction
Trade, hotels, & restaurants
Transport
Communication
Financial, rental, & business
services
Other services
Source: CEIC Asia Database.
export restrictions on such minerals coming into effect in January 2014. Import
volumes contracted in the fourth quarter, most likely because of the slowing economy and, again, the depreciating rupiah.
A relatively strong performance in the tradable sectors was the main contributor to GDP growth in 2013, with the trend in the second half the year following that in the irst half of the year (Allford and Soejachmoen 2013). Meanwhile,
the growth slowdown was noticeable in the non-tradable sectors, particularly in
construction, and trade, hotels, and restaurants, which together contributed 24%
of nominal GDP.
Monetary and Fiscal Policies
BI has demonstrated its determination to boost the credibility of its monetary
policy. It surprised many observers by hiking its policy rate ive times between
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8
Shiro Armstrong and Sjamsu Rahardja
May and December 2013, by a total of 175 basis points.7 It did so by raising the
overnight deposit facility rate incrementally, from 3.75% to 5.75%, over the seven
months. These small increases seem to have slowed growth in real money supply,
which was growing at 8.5% in May but only 4.0% in November (igure 1). These
measures have also dampened nominal credit growth—particularly outstanding
working capital, which increased by 11% between May and December 2013, compared with 13% in the same months of 2012, while outstanding consumer credit
slowed to 9% from 13% (BI 2013a, tables 1.8 and 1.10). Together, these decreases
may have lowered expectations about rising inlation in the near future. BI’s measures, coupled with the exchange rate, which was allowed to depreciate, helped to
cut the current-account deicit to 3.9% and 2.0% of GDP in the third and fourth
quarters, respectively, down from 4.5% of GDP in the second quarter. On average,
the rupiah depreciated by 21.5% in the fourth quarter against the US dollar (yearon-year), while the real effective exchange rate (REER) depreciated by 7.9%. The
depreciation in the exchange rate encouraged exports and helped to reduce non–
oil and gas imports. BI also sought to dampen growth in property loans, from
30 September, by introducing a regulation requiring larger down-payments from
loan applicants for property purchases beyond their irst property (Jakarta Post, 26
Sep 2013). This has already had an effect; the growth of loans outstanding for lats
and apartments declined sharply to just 17% in December 2013 (compared with
December 2012), down from 60% to 80% monthly growth during January–July
2013 (BI 2013a, table 1.5).
BPS announced that headline inlation, measured as percentage change in the
aggregate consumer price index, declined slightly in January 2014 but remained
high, at 8.2% (year-on-year). At the same time, food inlation was at 11.4% (yearon-year), and energy, housing, and rent inlation was at 6.6%. Also in January,
heavy rain caused looding in major rice-producing areas and along major transport routes in northern Java. Yet core inlation, which is directly inluenced by
monetary policy, fell to 4.5% (year-on-year) from 5% in December. The eruptions
in February of Mount Sinabung, in North Sumatra, and Mount Kelud, in East
Java, may make if dificult to distribute food, particularly horticultural products.
There is a risk of further inlation in food prices, given the extent of the looding
(Kompas, 10 Feb 2014).
There is also risk in the excessive tightening of monetary policy. The impact
of the interest-rate hike on dampening growth in real money supply is likely to
understate its impact on liquidity in the banking sector. Indonesia’s money market
is relatively underdeveloped, and its share of interbank claims as a proportion of
the assets of its banks is low compared with those of other countries in Asia (Loretan and Wooldridge 2008). Trading in the interbank money market has remained
relatively thin, consisting mostly of transactions with a maturity of less than one
month. The market is also segmented (IMF 2013).8 As liquidity has tightened,
7. The unexpected monetary tightening under new BI governor Agus Martowardojo is a
departure from the loose monetary policy under the previous governor, albeit in different
economic circumstances. See, for example, http://www.bloomberg.com/news/2013-1112/bank-indonesia-surprises-on-rates-in-credibility-boost-to-policy.html.
8. Uncollateralised funds have typically been more accessible to larger banks than to
smaller banks, owing to the perception among larger banks that smaller banks carry more
counterparty risk.
FIGURE 1 Bank Indonesia Rate, and Growth in Real Money Supply and
Exchange Rates, 2013
10
30
Bank Indonesia overnight deposit facility rate (%, lhs)
Real money supply (% year-on-year, rhs)
Nominal exchange rate, Rp/$ (% year-on-year, rhs)
Real effective exchange rate (% year-on-year, rhs)
9
8
7
25
20
15
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6
5
10
4
5
3
0
2
-5
1
0
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
-10
Sources: CEIC Asia Database; Bank for International Settlement; authors’ calculations.
Note: Depreciation of the nominal exchange rate is presented by positive growth; that of the real effective exchange rate is presented by negative growth.
FIGURE 2 Loan-to-Deposit Ratio and Seven-Day Interbank Call-Money Rate, 2013
(%)
10
100
Loan-to-deposit ratio (lhs)
Seven-day interbank call-money rate (rhs)
95
9
8
90
7
85
6
80
5
75
4
3
70
2
65
60
1
Jan
Feb
Mar
Source: CEIC Asia Database.
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
0
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10
Shiro Armstrong and Sjamsu Rahardja
banks have started to rely more on third-party deposits as their main source of
loans, and competition for funds has increased (BI, press release, 18 Dec 2013).
Figure 2 shows that the average loan-to-deposit ratio exceeds 90%, which suggests that banks are inding it more dificult to extend loans using less expensive
funds. Indonesia’s seven-day interbank money rate increased to 7.5% in December, and total interbank money-market transactions shrank by 22% and 38% in
November and December, respectively. The Deposit Guarantee Agency (Lembaga
Penjamin Simpanan) revealed that by November 2013 Indonesia’s eight largest
banks had increased their deposit base by 24%, while the deposit base of the
medium and smaller banks remained lat or was shrinking. Smaller banks had
already raised time-deposit interest rates, and some were willing to offer 10%–
11% annual interest rates for large customers (much higher than the 6.5%–7.0%
annual rate offered by large banks), yet they struggled to attract more deposits.
Should this continue, small banks may face an increasingly dificult situation,
because cutting credit lines to existing customers may attract non-performing
loans. Continuing to sustain loans at a higher cost of funds could reduce proitability and increase solvency risk.9
A feature of the recent monetary tightening has been the diminishing relevance
of the rupiah’s exchange rate against the US dollar. BI has defended this rate in
the past, and some analysts predicted that BI would intervene to keep the nominal exchange rate around a ‘psychological’ level of Rp 10,000–10,500 per dollar,
to avoid capital outlows.10 Yet in July 2013 the newly appointed BI governor,
Agus Martowardojo, stated publicly that BI would not try to maintain this level.
Focusing on the rupiah’s value against the dollar ignores the importance of other
regional currencies that also matter to the Indonesian economy. Instead, BI seems
to have focused on containing inlation expectations and restoring its credibility. Its commitment to an inlation target gives BI a transparent and consistent
objective.11 It also suggests the bank’s willingness to impose exchange-rate and
interest-rate measures to maintain macroeconomic stability.
Indonesia’s monetary and exchange-rate policies have absorbed some of the
burden of adjusting to new external economic conditions, as has its coordinated
iscal policy, which has remained thoughtfully conservative. In the middle of
2013, the government undertook politically dificult reforms to reduce the budget
deicit by raising subsidised fuel prices by 40%, which was set to save Rp 40 trillion (about $3.4 billion) (Allford and Soejachmoen 2013). In October 2013, the parliament approved the 2014 budget, with a projected deicit of 1.7% of GDP. But the
persistently large fuel subsidies and the shortfall in tax revenue could push the
deicit beyond the legally mandated maximum of 3%. Economic growth in 2014 is
9. Liquidity is less of a problem for larger banks, because they can attract depositors easily
and lend with relatively cheaper costs of funds. This can inluence the outcome of monetary tightening (see, for example, Kashyap and Stein 1994).
10. See, for example, http://www.bloomberg.com/news/2013-04-04/bank-indonesiawon-t-let-rupiah-breech-10-000-bca-chief-says.html.
11. Until Indonesia’s current account turned negative in the last quarter of 2012 and the
rupiah started to depreciate, BI tended to rely on what the IMF recently called ‘a combination of heavy intervention and moral suasion’ to stabilise the exchange rate (IMF 2013,
13). See Kenward (2013) for an appraisal of Indonesia’s experience with inlation targeting
since 1999.
Survey of Recent Developments
11
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BOX 1 Indonesia’s Social-Security Revolution
Indonesia introduced the National Social Security System (Sistem Jaminan Sosial
Nasional [SJSN]) in January 2014, as mandated by Law 40/2004 on Social Security.
The program consists of two components: public health insurance (Jaminan Kesehatan Masyarakat [Jamkesmas]), managed by the state’s social-security agency (Badan
Penyelenggara Jaminan Sosial [BPJS]) and titled BPJS Health; and employment insurance, managed by a new arm of BPJS and titled BPJS Manpower.
All Indonesians must participate in Jamkesmas, and will be entitled to basic health
care. Income earners and employers will contribute by paying insurance premiums,
while the government will cover these costs for poor households. The government is
targeting 176 million people, or 72% of the population, for immediate coverage. To
be effective, the program will need to address low levels of access to health services,
especially for the poor and for those in remote areas; the quality of these services; the
participation of health providers; and high out-of-pocket expenses for participants
(see, for example, Simmonds and Hort 2013).
The process of launching SJSN for employment is still underway, with BPJS Manpower set to start in June 2015. The government is transforming the current privatesector social-security provider, PT Jamsostek, into BPS Manpower, which will oversee
a program covering both the formal and the informal sectors. It is uncertain whether
BPJS Manpower will have the immediate institutional capacity to provide employment insurance, or the ability to set and enforce contribution levels for workers and
employers.
projected to be around 5.0% to 5.5%, lower than the 6.0% assumed in the budget.
Together with other increasingly unrealistic budget assumptions, including the
exchange rate, interest rate, and level of oil production, this inaccurate rate of
projected growth will soon need to be revised.
On the revenue side, the shortfall in tax revenue in the 2013 budget is a concern. Total tax revenue grew at 9% in 2013, down from 12% in the previous year
and still 10% below target for 2013. Most noticeable are the shortfalls in income
tax and value-added tax, which are, respectively, Rp 36 trillion and Rp 40 trillion
short of their 2013 targets. The government would do well to step up its efforts
at tax reform by broadening the tax base and, for example, recruiting more tax
inspectors. Another looming problem in 2014 is falling revenue from export tax
on commodities and non-tax revenues from natural resources (royalties). They
comprise up to 19% of total domestic revenues but this likely to decrease during
2014, given the decline in global commodity prices and the uncertainty about the
restrictions on exports of unprocessed minerals.
On the spending side, preliminary data suggests that the government disbursed
95% of the 2013 budget, slightly below the 96% of 2012. Nevertheless, there have
been spending improvements in several categories, such as capital and social
spending, which so far have reached 89% and 96%, respectively, of their targets.
An added challenge for the 2014 budget will be the need to cover subsidies of Rp
18 trillion for insurance-premium contributions to the new National Social Safety
Program (Sistem Jaminan Sosial Nasional), which commenced this year (box 1).
Despite a relatively high international price for crude oil, a lack of new
investment and explorations is depressing oil production far below the budget
assumption of 870 thousand barrels per day. Lower revenue from the mining sector is likely to depress total revenue in the current budget. Extrapolating these
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12
Shiro Armstrong and Sjamsu Rahardja
developments to 2014 reveals that some of the main assumptions are likely to render the 2014 budget too conservative in its forecast of spending and too optimistic
in its forecast of revenue.
With the tighter inancing conditions and perceived higher risk of capital outlows, owing to fears of a current-account deicit that Indonesia may ind dificult
to inance, and the possibility of subsequent depreciating pressure on the rupiah,
investors will demand higher yields on government bonds. So far, government
bond auctions have been highly oversubscribed, but at a higher coupon rate.
Perhaps due in part to the prospect of an increase in interest rates in the United
States (and possibly globally) and in part to Indonesia’s parliamentary elections
in April, the government seems to have issued bonds earlier than usual in the
year. By early February, the government had already raised 21% of the year’s target bond issuance (Jakarta Post, 6 Feb 2014).
The government and parliament may use the current situation as an opportunity to revisit the 2014 budget. This being an election year raises some obstacles. For one, there is the practical problem of inding a window of time in which
the government can submit a revised budget to parliament, as well as the possible reluctance on all sides of politics to champion the revision as the elections
loom. Nevertheless, a deterioration of the current iscal deicit, or other weakened
economic conditions, will be an opportunity to propose as a priority a phased
adjustment of the fuel subsidy to a lower amount per litre, and also to push for
much-needed investment in infrastructure.
Balance of Payments
The current-account deicit moderated in the third quarter of 2013, as the economy
slowed. The deicit decreased further in the fourth quarter, as the trade surplus
increased and imports fell (because of the weaker rupiah and increased non-oil
exports in the second half of 2013). Recent data from BPS show that greater natural-resource exports were the main reason for the increase in exports in December,
which created a $1.5 billion surplus in the goods trade balance.12 There was a
surge in exports of raw materials preceding the ban on unprocessed minerals that
started in January; ore shipments, for example, were 7.3% higher in December
(year-on-year). The deicit in the current account was $4 billion (2% of GDP) in the
fourth quarter, down from $10 billion (4.4% of GDP) in the second quarter. Most
of the reduction was due to a decline in non–oil and gas imports, particularly
those of capital goods and intermediate products, and stronger non–oil and gas
exports. The net result was that the balance of non–oil and gas trade increased by
149% in the fourth quarter. But imports of oil and gas remained relatively large, in
line with a 12% average increase in international crude prices. This suggests that
the volume of oil imports did not decline by much, despite higher domestic retail
prices and a slight economic slowdown. The deicit in services trade has adjusted
to a decrease in trade more broadly, particularly slower import growth. A large
part of the deicit in services trade is due to imports of transport services, which
are closely related to trade in goods.
Meanwhile, the deicit in foreign income payments remains fairly steady in the
fourth quarter, at $7.1 billion, or 3.5% of GDP. Allowing the rupiah to depreciate
12. The igure for natural-resource exports is listed under the trade classiication Harmonized System 26.
Survey of Recent Developments
13
TABLE 2 Balance of Payments
($ billion)
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Dec 2012 Mar 2013 Jun 2013 Sep 2013 Dec 2013
Current account
Exports
Non–oil & gas
Oil & gas
Imports
Non–oil & gas
Oil & gas
Merchandise trade balance
Non–oil & gas
Oil & gas
Services
Income
Current transfers
–7.8
47.1
38.5
8.6
46.3
35.3
11.0
0.8
3.2
–2.4
–3.2
–6.7
1.3
–5.9
45.2
36.8
8.5
43.6
32.3
11.3
1.6
4.5
–2.9
–2.5
–6.1
1.1
–10.0
45.6
37.6
7.9
46.3
36.1
10.2
–0.7
1.6
–2.3
–3.1
–7.1
1.0
–8.4
44.1
35.6
8.5
44.2
32.8
11.4
0.0
2.8
–2.8
–2.6
–6.7
0.9
–4.0
48.6
40.0
8.7
43.7
32.9
10.8
4.9
7.0
–2.1
–2.9
–7.1
1.1
Capital & inancial accounts
Capital account
Financial account
Direct investment
Portfolio investment
Other investment
12.1
0.0
12.1
4.1
0.2
7.7
–0.3
0.0
–0.3
3.9
2.8
–6.9
8.4
0.1
8.4
3.8
3.4
1.2
4.9
0.0
4.9
5.1
1.9
–2.1
9.2
0.0
9.2
1.6
1.8
5.9
Errors & omissions
Overall balance (change in reserves)
Foreign reserves
–1.1
–0.4
–1.0
0.9
–0.8
3.2
112.8
–6.6
104.8
–2.5
98.1
–2.6
95.7
4.4
99.4
Source: CEIC Asia Database.
led to fears that investors and multinational companies would repatriate income.
This has yet to happen, but it remains something to watch.
Foreign direct investment (FDI) into Indonesia was relatively strong in the third
quarter of 2013, at $5.1 billion. Recent data on FDI realisation from Indonesia’s
Investment Coordinating Board (Badan Koordinasi Penanaman Modal [BKPM])
suggests an increase of 17.5% in the fourth quarter (year-on-year). Net FDI in 2014
may be lower, owing to tighter external inancing conditions and delays by investors waiting for the results of the elections.
CURRENT POLICY
Intervention, Protectionism, and Distortions
The Indonesian government has not managed to use the opportunities presented
by the current economic slowdown to undo some of the protectionist trade policies
introduced in recent years.13 It still tends to intervene in markets, for example,
13. Implicit quotas on horticultural and beef imports have been relaxed, but trade policy
remains restrictive. Soesastro (1989) describes how declining terms of trade motivated signiicant economic deregulation throughout the 1980s.
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14
Shiro Armstrong and Sjamsu Rahardja
and implement policies that protect ineficient irms and industries.14 Constraints
in capacity to develop or implement good economic policy, coupled with populist
policies, have produced some economically damaging policies that contribute to
the belief that Indonesia is becoming increasingly inward-looking.
As Indonesia enters a politically important year, implementing reforms
becomes an even more complex bargaining process. All political interests—not
just opposition parties—will weigh economic costs and beneits against outcomes
in the upcoming elections. The government has made modest and incremental
reforms, but it has muddled through in its approach to sectoral development.
Of greatest concern is the slow progress of structural reform and the uncertainty
about when numerous new laws will be enacted.
Reform has progressed in areas in which there is clear political consensus. The
government, through BKPM, has led agencies in efforts to improve Indonesia’s
ranking in the World Bank’s Doing Business indicators.15 Similarly, the government has been trying to cut the number of days taken to issue licences and permits and to connect electricity to new businesses.16 On domestic connectivity, the
government is turning to external engagement, by building capacity and sharing
experience (see ‘APEC Success and Next Steps’, below), to encourage more effective decision-making on priority infrastructure projects by the National Committee for the Acceleration of Infrastructure Provision (Komite Kebijakan Percepatan
Penyediaan Infrastruktur), as well as to improve the regulatory environment.17
A series of new interventionist regulations give the impression of being solutions in search of market failures. In January 2014, President Yudhoyono enacted
Law 3/2014 on Industry, which clariies, in particular, the government’s responsibilities in acquiring sites for industrial development and identifying action plans
to promote industrialisation. But the industry law also conveys a bureaucracyknows-best attitude to developing manufacturing. Nehru (2013, 160–61) discusses a few salient provisions in the law, some of which could lead to regulations
that allow for unnecessary intervention in the market, create distortions that risk
protecting ineficient irms driven by vested interests,18 create more red tape for
businesses,19 and risk channelling public funds for ill-targeted government projects to support industrialisation.20 For international investors, the detailed regu-
14. Such policies are not new. The development of the automobile sector, for example, has
been hampered by highly interventionist policies (Aswicahyono, Basri, and Hill 2000).
15. See http://www.doingbusiness.org/rankings.
16. Such as domicile permits, nuisance permits, and investment licences.
17. The government is currently revising Presidential Decree 42/2005 on the National
Committee for the Acceleration of Infrastructure Provision, to streamline the committee’s
decision-making process and provide it with a secretariat and funds to conduct pre-feasibility work.
18. Article 32 on potential restrictions on the export of raw materials, article 33 on promoting domestic value addition, and article 86 on prioritising domestic products in procurement of goods and services by government agencies or projects inanced by the state
budget.
19. Article 25 on workers’ competency, article 27.2 on the use of foreign experts, and criminal investigations for violating a product’s technical speciications.
20. Article 16 on skills development and article 48 on inancing institutions.
Survey of Recent Developments
15
FIGURE 3 Domestic Price of Medium-Quality Rice in Indonesia and Thailand
(Rp ’000/kg)
8.0
7.5
Indonesia IR-64 III (Cipinang wholesale)
7.0
6.5
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6.0
Thai A-I special rice (import parity)
5.5
5.0
4.5
4.0
Jan 2013
Mar 2013
May 2013
Jul 2013
Sep 2013
Nov 2013
Jan 2014
Sources: Cipinang wholesale market; Food and Agriculture Organization of the United Nations; CEIC
Asia Database; authors’ calculations.
lations of the industry law may increase uncertainty about the rules under which
irms in Indonesia will operate (Castle 2013).
More recently, on 11 February, parliament passed a new trade law. In principle, this law will give the government far-reaching powers to use trade policy
to protect domestic producers from imports and restrict exports. The government already held many of these powers under the old legislation that this law
will replace. In addition, it remains to be seen whether the required government
regulations and ministerial decrees to implement the law will employ each of
the powers without breaking WTO commitments. Nevertheless, the passing of
the law and, in particular, the public justiications given by parliamentarians and
Deputy Trade Minister Bayu Krisnamurthi appear to underline policies of managed rather than free trade, and of protection of domestic producers (Jakarta Globe,
11 Feb 2014; Jakarta Post, 12, 13, 14 Feb 2014).
Also of concern is the abuse of quantitative import restrictions. For example, the
high-proile corruption scandal over beef import quotas which surfaced in January 2013 led to the KPK’s conviction in December that year of former Prosperous
Justice Party (Partai Keadilan Sejahtera) president Luthi Hasan Ishaaq (Jakarta
Globe, 28 Nov 2013; Jakarta Post, 10 Dec 2013). This case is just one example of the
misuse of quantitative trade restrictions where the economic rent generated by the
restrictions does not translate into government revenue but beneits private interests, particularly the holders of import licences. Another example unfolded more
recently, when the government was put in a defensive position after the news
media reported complaints from local rice traders that 16,000 tonnes of low-cost
rice from Vietnam had entered the Indonesian market, allegedly brought in by
private importers who abused legal import permits for high-quality rice (Kompas,
28 Jan 2014). The domestic price of rice in Indonesia is estimated to be 25% to 40%
higher than that of rice of similar quality produced by other countries in the region
16
Shiro Armstrong and Sjamsu Rahardja
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(igure 3). Households have to pay this higher price, and the difference between
the prices of domestic and imported rice, as well as the rent that the licensed private importers enjoy, is considerable. This problem may get worse for Indonesia,
as Thai rice traders continue to rid themselves of Thailand’s record rice stocks and
drive down international prices in the process (Jakarta Globe, 20 Feb 2014).
Mineral Export Policies
Prior to the 2009 national elections, Indonesia’s policymakers passed Law 4/2009
on Mineral and Coal Mining, which aims to increase the value of processed
natural-resource exports (Baird and Wihardja 2010). This involves adding value
to these sectors (at the cost of subtracting value from the economy as a whole)
by using very capital-intensive methods of processing raw materials. Instead of
creating the necessary infrastructure and environment to foster such activity, and
this would in effect be a large subsidy to entice smelting, the government legislated for this to occur (Burke and Resosudarmo 2012) and intervened in a market
where there is no obvious failure.
As a result, in seeking to develop a minerals processing industry, including trying to attract foreign capital for smelting plants, the government actually passed a
law that taxes the exports of some unprocessed minerals, bans the exports of others (such as unprocessed nickel and bauxite), and stipulates minimum required
levels of processing. The global shortage of nickel, in particular, was thought
likely to attract foreign investors to build smelters in Indonesia. Some investment
in nickel processing has started, such as PT Bintang Delapan’s nickel smelter in
Central Sulawesi. Other projects are set to follow, but many are still undergoing
feasibility studies or are in the design phase.
The regulations took effect on 12 January 2014. In the lead-up, the international
and domestic prices of many of these minerals did not diverge greatly, indicating that expected and actual trade lows were not substantially affected (Financial
Times, 8 Jan 2014). Many private mining companies did not invest in processing facilities during the ive-year window, because they assumed that the regulations would not be implemented effectively. They were proved right; immediately
before the law came into effect, the government was looking for loopholes in its
own policy (Jakarta Post, 20 Dec 2013).
Considerable confusion has surrounded the implementation since mid-January. President Yudhoyono initially agreed to an exemption for the copper ore of
the biggest mining irms in Indonesia, US-owned PT Freeport Indonesia and PT
Newmont Nusa Tenggara (Jakarta Globe, 12 Jan 2014). But attempts of both companies to bring their lobbying power to bear steeled the government’s resolve. It
subsequently clariied that the ban would, until 2016, take the form of an exporttax arrangement, which also covered these two companies (Jakarta Post, 30 Jan
2014). Exports of copper, iron, lead, tin, or zinc ores that are unprocessed or do
not meet the minimum processing requirements (ranging from raw materials to
concentrates of 15%–62% purity, depending on the mineral) will incur a tax of
20%–25% in 2014, increasing to 60% by the second half of 2016 (Jakarta Post, 1 Feb
2014). Nevertheless, in the course of February the Ministry of Energy and Mineral
Resources offered mining irms an opportunity to evade these export taxes by
demonstrating that they had advanced plans in place for smelter construction and
by committing to a ‘surety bond’ (Jakarta Post, 7 Feb 2014). While some companies
were willing to pay the export tax, and subsequently applied for export permits,
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Survey of Recent Developments
17
Freeport and Newmont continued to stockpile produce. More recently, Freeport
agreed with state-owned PT Aneka Tambang to study the construction of a new
copper smelter while arguing the case for reduced export taxes, and both Freeport
and Newmont are considering legal action against the Indonesian government for
infringing their existing contracts of work (Jakarta Post, 4 Mar 2014). It seems that
the wrangling over the mining export ban has yet to end.
Meanwhile, the distortions introduced by the government’s intervention in the
mining sector, even if its regulations are not fully implemented, are potentially
large and detrimental to non-energy mining. In the short term, the new regulations
will decrease exports of unprocessed minerals without offsetting new exports of
processed minerals, contributing to the deterioration of the current account and
government revenues. They will lead to a discrepancy between the domestic and
international prices of certain minerals, when stocks of produce for domestic processing accumulate as a result of insuficient processing capacity. This may lower
the domestic prices of raw minerals and may create rents for smelting companies
to exploit. The regulations have also increased uncertainty for investors, including in the non-mining sectors. Under the current tight international inancing conditions, the low-on effects of this policy for Indonesia’s balance of trade may add
to the depreciating pressure on the exchange rate, and greater exchange risk may
increase the costs of inancing operations for investors in Indonesia.
The Fraser Institute’s annual Survey of Mining Companies had already ranked
Indonesia as the least attractive country in which to do business in 2012–13
(Sailo 2013). Although these export regulations may have been politically popular domestically, in the eyes of foreign observers they have further damaged the
credibility of Indonesia’s economic policymaking and that of the government in
implementing its own policies.
Restructuring the Economy
Indonesia, like many other resource-rich economies, enjoyed high terms of trade
for almost a decade, from the early 2000s. The domination of commodities in Indonesia’s exports meant that the fall in commodity prices has contributed greatly to
the current-account deicit. Indonesia is not alone. Other emerging-market economies, some of which are rich in natural resources, such as Brazil, South Africa,
Turkey, and India, are also adjusting to more normal global circumstances (that is,
without a commodity boom and abnormally loose monetary policy in the United
States).
The consequences of this monetary policy helped to keep the rupiah strong
until mid-2013. Yet the fall in commodity prices since late 2011 has exposed some
weaknesses in the domestic economy. The appreciation of the rupiah during the
commodity boom boosted commodity exports and yielded a ballooning trade
deicit in manufacturing and other non-commodity trade (Basri and Rahardja
2011). In contrast, the depreciation in the exchange rate since mid-2013 has not
expanded exports or reduced the current-account deicit by any great amount,
because of Indonesia’s export structure, in which commodities dominate. Aside
from mineral exports, crude palm oil contributes 25% of exports, and rubber 14%.
Manufacturing exports have not yet beneited from the more competitive currency, and they decreased during December 2013.
The fall in the exchange rate is likely to cause a supply-side response from, for
example, labour-intensive operations that can absorb unskilled labour relatively
18
Shiro Armstrong and Sjamsu Rahardja
FIGURE 4 Share of Employment by Broad Sector, 2005, 2009, and 2013
(%)
60
Agriculture, forestry, hunting, & fishery
Commercial services
Manufacturing
Community, social, & personal services
50
40
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Survey of Recent Developments
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To cite this article: Shiro Armstrong & Sjamsu Rahardja (2014) Survey of Recent Developments,
Bulletin of Indonesian Economic Studies, 50:1, 3-28, DOI: 10.1080/00074918.2014.896235
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Date: 17 January 2016, At: 23:24
Bulletin of Indonesian Economic Studies, Vol. 50, No. 1, 2014: 3–28
SURVEY OF RECENT DEVELOPMENTS
Shiro Armstrong*
The Australian National University
Sjamsu Rahardja*
World Bank
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SUMMARY
As Indonesia heads to the polls in 2014, its economy is slowing. The end of the commodities boom and the global return to more normal monetary policy has exposed some weaknesses. Exchange-rate depreciation has absorbed some of the adjustment; but structural
rigidities are still likely to limit the expansion of non-commodity sectors, and the increased
fuel-subsidy bill for imported oil is putting pressure on the current account and the budget.
The immediate focus is on demand-side consolidation to manage inlation and the currentaccount deicit.
For an economy like Indonesia’s to be overheating, and for monetary and iscal authorities to be engineering a soft landing, when growth is below 6%, points to major structural
problems. If Indonesia is to prevent the current rate of growth from becoming the new normal, there will need to be a substantial supply-side response to lift productivity, as well as a
restructuring of the economy and the introduction of policies that make the economy more
lexible in adjusting to shocks. The current economic slowdown has yet to trigger sweeping
reforms; policy coordination remains problematic as Indonesia enters a big political year.
Compared with its neighbours, Indonesia is largely on the outside of the regional production networks, and its manufacturing sector does not play into factory Asia. Now, faced
with lower commodity prices globally—and growth in non-resource sectors is critical—
the lack of a large manufacturing base appears to be a weakness. Indonesia is attracting
more foreign direct investment than ever and is climbing the global rankings of preferred
economies in which to invest, but this is occurring without improvements to its investment
environment or competitiveness. Indonesia can participate more fully in global supply
chains and increase its potential for growth by upgrading its infrastructure, improving its
investment environment, and using regional initiatives strategically to make strong commitments that reinforce its priorities for domestic reform.
In its hosting of APEC in 2013, Indonesia championed infrastructure investment where
the lack of structural reform and macroeconomic constraints are inhibiting much-needed
expansion, both in Indonesia and in the region. The positive outcome, albeit only a small
step forward for the Doha Round, at the WTO Ministerial Conference in Bali, in December,
also builds momentum for better regional and global cooperation. The priority now is for
Indonesia to commit to, and show leadership in, the Regional Comprehensive Economic
Partnership (RCEP) and the implementation of the ASEAN Economic Community.
Keywords: economic stabilisation, macroeconomics of development, policy reform, protectionism,
mineral processing
JEL classiication: D72, O11, O24, O53
* The authors are very grateful to the many interviewees in Jakarta, who shared their insights and time, and to the members of the Indonesia Study Group at ANU, who provided extensive comments. Any errors are the authors’ own. Rahardja’s views are personal and do not necessarily relect the views of the World Bank and its Board of Directors.
This article was published with errors in table 1. Please see Corrigenda (http://dx.doi.org
/10.1080/00074918.2014.922160).
ISSN 0007-4918 print/ISSN 1472-7234 online/14/0003-26
http://dx.doi.org/10.1080/00074918.2014.896235
© 2014 Indonesia Project ANU
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4
Shiro Armstrong and Sjamsu Rahardja
POLITICAL DEVELOPMENTS
The year 2014 is an important one politically. Parliamentary elections will be held
in April, and then in July Indonesians will directly elect their president for only the
third time. If no presidential candidate receives more than 50% of the vote, there
will be a run-off election in September. These are opportunities to entrench the
country’s democratic system. Since the fall of Soeharto, during the 1997–98 Asian
inancial crisis, Indonesia’s democratisation has become an exemplar in Southeast Asia, and decentralisation of power to regional governments has helped to
cement this process. Improvements in governance are still crystallising, but democratic Indonesia has enjoyed relative political stability and economic prosperity.
Yet corruption scandals and an ineffective coalition government have characterised President Yudhoyono’s second term (McRae 2013). The investigation of
corruption scandals by Indonesia’s Corruption Eradication Commission (Komisi
Pemberantasan Korupsi [KPK]) continues to uncover charges of corruption linked
to political igures, mostly to those from parties supporting the current government (members of the coalition secretariat).1 In addition to a bribery case involving the upstream oil and gas regulator (SKK Migas) (see Allford and Soejachmoen
2013), the investigation of Akil Mochtar, the ex-chairman of Indonesia’s Constitutional Court, has seen members of the powerful political clan of Ratu Atut
(the governor of Banten and a senior member of a party supporting the coalition)
arrested for alleged corruption and cronyism.
Among the many storylines that may play out in the parliamentary and presidential elections will be that of the Jakarta governor, Joko Widodo (known as
Jokowi). Jokowi’s popularity stems from his success as the mayor of Solo, in Central Java, and his ability to connect with voters in Jakarta and with young voters.
Half of Indonesia’s population is under 29 years of age, and up to 59 million of 190
million voters in the forthcoming elections will be young voters, from irst-time
voters (17-year-olds) to those aged 29. Jokowi holds a large lead in presidential
polling2 and is a political outsider relative to most other candidates, who come
from the political establishment or the military.
On 14 March, Jokowi was nominated by his party, the Indonesian Democratic
Party of Struggle (Partai Demokrasi Indonesia—Perjuangan [PDI–P]), in which
party leader and former president Megawati Sukarnoputri alone has the authority to choose its presidential candidate. The inancial market responded positively
to Jokowi’s nomination—the Jakarta Composite Index (the benchmark indicator
of stock prices) rose by 3.2% on the day of the announcement (Kompas, 15 Mar
2014). The question now is whether PDI–P will win the required 25% of the legislative vote or 20% of the parliamentary seats to nominate its own presidential
1. The coalition secretariat (sekretariat gabungan) consists of the Democratic Party (Partai
Demokrat), Golkar, the United Development Party (Partai Persatuan Pembangunan), the
National Awakening Party (Partai Kebangkitan Bangsa), and the Prosperous Justice Party
(Partai Keadilan Sejahtera).
2. Jokowi enjoyed 43.5% support in January (Kompas, 8 Jan 2014), while the second-placed
Prabowo, from Gerindra, attracted only 11.1%. Other polls have consistently shown Jokowi as the leading potential presidential candidate.
Survey of Recent Developments
5
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candidate, without which it may have to form a weak coalition.3 Such an outcome
could undermine the effectiveness of the new government, as it has done to that
of the current government.
There is much speculation as to what a Jokowi presidency and a PDI–P-led
government would mean for Indonesia. If Jokowi were elected, much would
depend on whom he invited to take part in his economic policy team and selected
for key economic policy positions in cabinet. Jokowi is less experienced in foreign
policy and diplomacy than Yudhoyono was when he came to power, given that
Yudhoyono became effective in diplomacy as a minister in the Wahid and Megawati presidencies.4
MACROECONOMIC DEVELOPMENTS
Economic Growth
Indonesia’s economy continues to face external pressures. The announcement
in June 2013 by the US Federal Reserve that it would start to suspend the purchase of assets, or to taper quantitative easing, has tightened external inancing
conditions for emerging markets, including Indonesia. This pressure is unlikely
to lift while the United States continues its economic recovery and the US Federal Reserve returns its monetary policy to more normal settings. These circumstances have also put pressure on the rupiah, as global portfolio investors adjust
to tighter liquidity and rebalance their exposures from emerging countries, which
are perceived to be at risk from rapid capital outlows (Allford and Soejachmoen
2013). Another source of pressure is the continued deicit in the current account.
Subdued international commodity prices have reduced Indonesia’s export revenue, around 60% of which was derived from commodity exports. That trend
seems to have reversed briely, as miners rushed out mineral exports in the last
quarter of 2013 before the export taxes and bans on unprocessed minerals were
implemented in January 2014 (see ‘Mineral Export Policies’, below). There is a
considerable negative balance in the oil and gas trade, which continues to increase
and which is putting pressure on both the current account and the government
budget, despite the adjustment to subsidised fuel prices in June 2013.
Policymakers in Bank Indonesia (BI) and the Ministry of Finance are trying
to pilot a ‘soft landing’ for the economy by, for example, adjusting BI’s policy
rate and allowing the exchange rate to absorb some of the pressures. Other
measures include relaxing import quotas on beef and some other foodstuffs. But
subdued commodity prices and the return to tighter global credit have exposed
the economy to risks, as infrastructure bottlenecks and regulatory uncertainties
overshadow growth prospects in non-commodity sectors. At a time of subdued
growth in domestic demand, Indonesia could consider ways to use this momentum to grow its non-commodity exports. After all, it is home to 55% of labour in
3. Article 9 in Law 42/2008 on Presidential Elections states that presidential and vice-presidential candidates can be nominated only by a political party or a coalition of political
parties that secure 20% of seats in the parliament or obtain 25% of votes in the parliamentary election preceding the presidential election.
4. Interviewees for this ‘Survey’ noted that PDI–P is known as a nationalist party but that
Megawati’s 2001–4 presidency was characterised by pragmatism in economic policy.
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6
Shiro Armstrong and Sjamsu Rahardja
the big four ASEAN countries (Indonesia, Malaysia, Philippines, and Thailand)
yet contributes just 17% of the non-commodity manufacturing exports of these
countries.5
GDP in 2013 grew by 5.6% and 5.7% (year-on-year) in the third and fourth
quarters, respectively, a decline from 6.2% and 6.1% in 2012. Slower growth in
the last two quarters made total GDP in 2013 grow by 5.8%, a noticeable decrease
from 6.3% in 2012. On the expenditure side, the main drag on growth in the last
six months has been the continued weakening of investment. Gross ixed capital
formation (GFCF) continued to weaken throughout 2013, as shown in table 1.
Investment spending increased by only 3.8% in the fourth quarter of 2013, compared with 7.3% in the same period of 2012. In 2013, GFCF grew by 4.2%, less than
half of the growth in 2012. The decline in investment growth was led by large
decreases in the construction, machinery and equipment, and transport sectors.
Rising interest rates and a depreciating rupiah are likely to be behind the continuing slowdown in investment in construction, which contributed 70% of total real
investment in 2013.6
Aggregate consumption spending has been relatively stable. Growth in real
private consumption in the third and fourth quarters has stood up at 5.5% and
5.3%, respectively, and resulted in annual growth at 5.3%, the same as in 2012.
The relative strength of private consumption is surprising, given that the food
CPI increased by 14% and 12% (year-on-year) in the third and fourth quarters,
respectively—higher than in 2012—which would have affected the real purchasing power of consumption of non-staple foods. Indeed, growth of non-food consumption remained relatively strong, at 6.2% and 5.9%, in the last two quarters,
consistent with BI’s Retail Sales Survey, which indicated strong growth (BI 2013b).
Growth in real government consumption spending has also picked up considerably, reaching 8.8% in the third quarter and 6.5% in the fourth. This surge in
the third quarter is likely to have been driven by the government’s temporary
cash-transfer program (Bantuan Langsung Sementara Masyarakat), used to offset
higher fuel prices, which ran until September 2013. This was an unusually high
disbursement from the government budget; its implementation involved a large
outlay on electronic ID cards and related equipment, as well as paying PT Pos, the
state-owned postal service, to administer the distribution of the transfers.
Indonesia’s strong export growth in the fourth quarter of 2013 was unexpected,
given the declining trade surplus. Real exports of goods grew by 7.4% (year-onyear), an increase from 5.3% in the third quarter. Badan Pusat Statistik (BPS)
recently revealed that nominal non-oil exports increased by 9.3% in December
(year-on-year), a contrast to the 8.4% decline in December 2012 (year-on-year)
(BPS, press release, 3 Feb 2014). The increase in exports in December created a
$1.5 billion surplus in trade, the highest since November 2011. This increase was
driven mainly by strong growth in exports of mineral ores, which suggests that
mining companies were rushing to export unprocessed ores in anticipation of
5. See the World Bank’s World Development Indicators (speciically, industry of employment for those aged 15 and over): http://data.worldbank.org/data-catalog/world-development-indicators. Export data are available at http://wits.worldbank.org/wits/. Noncommodity manufacturing is deined as Standard International Trade Classiication 5–8.
6. See World Bank (2013) for a discussion of the decline in nominal credit growth and construction investment.
Survey of Recent Developments
7
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TABLE 1 Components of GDP Growth
(2000 prices; % year-on-year)
Dec
2012
Mar
2013
Jun
2013
Sep
2013
Dec
2013
2012
2013
GDP
Excluding oil & gas
6.1
10.5
6.0
6.2
5.8
5.9
5.6
5.8
5.7
5.8
6.3
10.8
5.8
5.9
By expenditure
Private consumption
Government consumption
Investment
Construction
Machinery & equipment
Transport
Other
Exports
Imports
5.4
–3.3
7.3
7.8
4.3
10.1
6.5
0.5
6.8
5.2
0.4
5.5
6.8
0.8
1.8
11.4
3.6
0.0
5.1
2.1
4.5
6.6
–0.8
–6.6
12.5
4.8
0.5
5.5
8.8
4.5
6.2
0.6
–5.1
9.6
5.3
3.8
5.3
6.5
3.8
6.0
0.2
–13.0
12.4
7.4
–0.6
5.3
1.2
9.8
7.5
12.7
27.3
11.6
2.0
6.6
5.3
4.9
4.2
5.9
0.3
–6.0
11.1
5.3
1.2
2.1
0.6
6.3
7.0
3.7
0.1
6.0
6.9
3.3
–0.6
6.0
6.6
3.3
2.0
5.0
5.5
3.8
3.9
5.3
5.4
4.2
1.8
5.7
6.4
3.5
1.3
5.6
6.1
6.9
7.1
7.9
6.8
11.3
7.9
6.8
6.5
6.0
11.7
4.0
6.6
6.4
7.7
12.8
3.8
6.2
6.1
6.7
11.8
6.6
6.7
4.8
7.8
11.7
6.1
6.8
8.2
6.6
12.1
5.6
6.6
5.9
7.1
12.0
7.7
5.3
8.2
6.5
7.7
4.5
7.6
5.6
6.8
5.3
7.1
5.3
7.8
5.5
By sector
Tradables
Agriculture, livestock,
forestry, & isheries
Mining & quarrying
Manufacturing
Excluding oil & gas
Non-tradables
Electricity, gas, & water supply
Construction
Trade, hotels, & restaurants
Transport
Communication
Financial, rental, & business
services
Other services
Source: CEIC Asia Database.
export restrictions on such minerals coming into effect in January 2014. Import
volumes contracted in the fourth quarter, most likely because of the slowing economy and, again, the depreciating rupiah.
A relatively strong performance in the tradable sectors was the main contributor to GDP growth in 2013, with the trend in the second half the year following that in the irst half of the year (Allford and Soejachmoen 2013). Meanwhile,
the growth slowdown was noticeable in the non-tradable sectors, particularly in
construction, and trade, hotels, and restaurants, which together contributed 24%
of nominal GDP.
Monetary and Fiscal Policies
BI has demonstrated its determination to boost the credibility of its monetary
policy. It surprised many observers by hiking its policy rate ive times between
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8
Shiro Armstrong and Sjamsu Rahardja
May and December 2013, by a total of 175 basis points.7 It did so by raising the
overnight deposit facility rate incrementally, from 3.75% to 5.75%, over the seven
months. These small increases seem to have slowed growth in real money supply,
which was growing at 8.5% in May but only 4.0% in November (igure 1). These
measures have also dampened nominal credit growth—particularly outstanding
working capital, which increased by 11% between May and December 2013, compared with 13% in the same months of 2012, while outstanding consumer credit
slowed to 9% from 13% (BI 2013a, tables 1.8 and 1.10). Together, these decreases
may have lowered expectations about rising inlation in the near future. BI’s measures, coupled with the exchange rate, which was allowed to depreciate, helped to
cut the current-account deicit to 3.9% and 2.0% of GDP in the third and fourth
quarters, respectively, down from 4.5% of GDP in the second quarter. On average,
the rupiah depreciated by 21.5% in the fourth quarter against the US dollar (yearon-year), while the real effective exchange rate (REER) depreciated by 7.9%. The
depreciation in the exchange rate encouraged exports and helped to reduce non–
oil and gas imports. BI also sought to dampen growth in property loans, from
30 September, by introducing a regulation requiring larger down-payments from
loan applicants for property purchases beyond their irst property (Jakarta Post, 26
Sep 2013). This has already had an effect; the growth of loans outstanding for lats
and apartments declined sharply to just 17% in December 2013 (compared with
December 2012), down from 60% to 80% monthly growth during January–July
2013 (BI 2013a, table 1.5).
BPS announced that headline inlation, measured as percentage change in the
aggregate consumer price index, declined slightly in January 2014 but remained
high, at 8.2% (year-on-year). At the same time, food inlation was at 11.4% (yearon-year), and energy, housing, and rent inlation was at 6.6%. Also in January,
heavy rain caused looding in major rice-producing areas and along major transport routes in northern Java. Yet core inlation, which is directly inluenced by
monetary policy, fell to 4.5% (year-on-year) from 5% in December. The eruptions
in February of Mount Sinabung, in North Sumatra, and Mount Kelud, in East
Java, may make if dificult to distribute food, particularly horticultural products.
There is a risk of further inlation in food prices, given the extent of the looding
(Kompas, 10 Feb 2014).
There is also risk in the excessive tightening of monetary policy. The impact
of the interest-rate hike on dampening growth in real money supply is likely to
understate its impact on liquidity in the banking sector. Indonesia’s money market
is relatively underdeveloped, and its share of interbank claims as a proportion of
the assets of its banks is low compared with those of other countries in Asia (Loretan and Wooldridge 2008). Trading in the interbank money market has remained
relatively thin, consisting mostly of transactions with a maturity of less than one
month. The market is also segmented (IMF 2013).8 As liquidity has tightened,
7. The unexpected monetary tightening under new BI governor Agus Martowardojo is a
departure from the loose monetary policy under the previous governor, albeit in different
economic circumstances. See, for example, http://www.bloomberg.com/news/2013-1112/bank-indonesia-surprises-on-rates-in-credibility-boost-to-policy.html.
8. Uncollateralised funds have typically been more accessible to larger banks than to
smaller banks, owing to the perception among larger banks that smaller banks carry more
counterparty risk.
FIGURE 1 Bank Indonesia Rate, and Growth in Real Money Supply and
Exchange Rates, 2013
10
30
Bank Indonesia overnight deposit facility rate (%, lhs)
Real money supply (% year-on-year, rhs)
Nominal exchange rate, Rp/$ (% year-on-year, rhs)
Real effective exchange rate (% year-on-year, rhs)
9
8
7
25
20
15
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6
5
10
4
5
3
0
2
-5
1
0
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
-10
Sources: CEIC Asia Database; Bank for International Settlement; authors’ calculations.
Note: Depreciation of the nominal exchange rate is presented by positive growth; that of the real effective exchange rate is presented by negative growth.
FIGURE 2 Loan-to-Deposit Ratio and Seven-Day Interbank Call-Money Rate, 2013
(%)
10
100
Loan-to-deposit ratio (lhs)
Seven-day interbank call-money rate (rhs)
95
9
8
90
7
85
6
80
5
75
4
3
70
2
65
60
1
Jan
Feb
Mar
Source: CEIC Asia Database.
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
0
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10
Shiro Armstrong and Sjamsu Rahardja
banks have started to rely more on third-party deposits as their main source of
loans, and competition for funds has increased (BI, press release, 18 Dec 2013).
Figure 2 shows that the average loan-to-deposit ratio exceeds 90%, which suggests that banks are inding it more dificult to extend loans using less expensive
funds. Indonesia’s seven-day interbank money rate increased to 7.5% in December, and total interbank money-market transactions shrank by 22% and 38% in
November and December, respectively. The Deposit Guarantee Agency (Lembaga
Penjamin Simpanan) revealed that by November 2013 Indonesia’s eight largest
banks had increased their deposit base by 24%, while the deposit base of the
medium and smaller banks remained lat or was shrinking. Smaller banks had
already raised time-deposit interest rates, and some were willing to offer 10%–
11% annual interest rates for large customers (much higher than the 6.5%–7.0%
annual rate offered by large banks), yet they struggled to attract more deposits.
Should this continue, small banks may face an increasingly dificult situation,
because cutting credit lines to existing customers may attract non-performing
loans. Continuing to sustain loans at a higher cost of funds could reduce proitability and increase solvency risk.9
A feature of the recent monetary tightening has been the diminishing relevance
of the rupiah’s exchange rate against the US dollar. BI has defended this rate in
the past, and some analysts predicted that BI would intervene to keep the nominal exchange rate around a ‘psychological’ level of Rp 10,000–10,500 per dollar,
to avoid capital outlows.10 Yet in July 2013 the newly appointed BI governor,
Agus Martowardojo, stated publicly that BI would not try to maintain this level.
Focusing on the rupiah’s value against the dollar ignores the importance of other
regional currencies that also matter to the Indonesian economy. Instead, BI seems
to have focused on containing inlation expectations and restoring its credibility. Its commitment to an inlation target gives BI a transparent and consistent
objective.11 It also suggests the bank’s willingness to impose exchange-rate and
interest-rate measures to maintain macroeconomic stability.
Indonesia’s monetary and exchange-rate policies have absorbed some of the
burden of adjusting to new external economic conditions, as has its coordinated
iscal policy, which has remained thoughtfully conservative. In the middle of
2013, the government undertook politically dificult reforms to reduce the budget
deicit by raising subsidised fuel prices by 40%, which was set to save Rp 40 trillion (about $3.4 billion) (Allford and Soejachmoen 2013). In October 2013, the parliament approved the 2014 budget, with a projected deicit of 1.7% of GDP. But the
persistently large fuel subsidies and the shortfall in tax revenue could push the
deicit beyond the legally mandated maximum of 3%. Economic growth in 2014 is
9. Liquidity is less of a problem for larger banks, because they can attract depositors easily
and lend with relatively cheaper costs of funds. This can inluence the outcome of monetary tightening (see, for example, Kashyap and Stein 1994).
10. See, for example, http://www.bloomberg.com/news/2013-04-04/bank-indonesiawon-t-let-rupiah-breech-10-000-bca-chief-says.html.
11. Until Indonesia’s current account turned negative in the last quarter of 2012 and the
rupiah started to depreciate, BI tended to rely on what the IMF recently called ‘a combination of heavy intervention and moral suasion’ to stabilise the exchange rate (IMF 2013,
13). See Kenward (2013) for an appraisal of Indonesia’s experience with inlation targeting
since 1999.
Survey of Recent Developments
11
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BOX 1 Indonesia’s Social-Security Revolution
Indonesia introduced the National Social Security System (Sistem Jaminan Sosial
Nasional [SJSN]) in January 2014, as mandated by Law 40/2004 on Social Security.
The program consists of two components: public health insurance (Jaminan Kesehatan Masyarakat [Jamkesmas]), managed by the state’s social-security agency (Badan
Penyelenggara Jaminan Sosial [BPJS]) and titled BPJS Health; and employment insurance, managed by a new arm of BPJS and titled BPJS Manpower.
All Indonesians must participate in Jamkesmas, and will be entitled to basic health
care. Income earners and employers will contribute by paying insurance premiums,
while the government will cover these costs for poor households. The government is
targeting 176 million people, or 72% of the population, for immediate coverage. To
be effective, the program will need to address low levels of access to health services,
especially for the poor and for those in remote areas; the quality of these services; the
participation of health providers; and high out-of-pocket expenses for participants
(see, for example, Simmonds and Hort 2013).
The process of launching SJSN for employment is still underway, with BPJS Manpower set to start in June 2015. The government is transforming the current privatesector social-security provider, PT Jamsostek, into BPS Manpower, which will oversee
a program covering both the formal and the informal sectors. It is uncertain whether
BPJS Manpower will have the immediate institutional capacity to provide employment insurance, or the ability to set and enforce contribution levels for workers and
employers.
projected to be around 5.0% to 5.5%, lower than the 6.0% assumed in the budget.
Together with other increasingly unrealistic budget assumptions, including the
exchange rate, interest rate, and level of oil production, this inaccurate rate of
projected growth will soon need to be revised.
On the revenue side, the shortfall in tax revenue in the 2013 budget is a concern. Total tax revenue grew at 9% in 2013, down from 12% in the previous year
and still 10% below target for 2013. Most noticeable are the shortfalls in income
tax and value-added tax, which are, respectively, Rp 36 trillion and Rp 40 trillion
short of their 2013 targets. The government would do well to step up its efforts
at tax reform by broadening the tax base and, for example, recruiting more tax
inspectors. Another looming problem in 2014 is falling revenue from export tax
on commodities and non-tax revenues from natural resources (royalties). They
comprise up to 19% of total domestic revenues but this likely to decrease during
2014, given the decline in global commodity prices and the uncertainty about the
restrictions on exports of unprocessed minerals.
On the spending side, preliminary data suggests that the government disbursed
95% of the 2013 budget, slightly below the 96% of 2012. Nevertheless, there have
been spending improvements in several categories, such as capital and social
spending, which so far have reached 89% and 96%, respectively, of their targets.
An added challenge for the 2014 budget will be the need to cover subsidies of Rp
18 trillion for insurance-premium contributions to the new National Social Safety
Program (Sistem Jaminan Sosial Nasional), which commenced this year (box 1).
Despite a relatively high international price for crude oil, a lack of new
investment and explorations is depressing oil production far below the budget
assumption of 870 thousand barrels per day. Lower revenue from the mining sector is likely to depress total revenue in the current budget. Extrapolating these
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12
Shiro Armstrong and Sjamsu Rahardja
developments to 2014 reveals that some of the main assumptions are likely to render the 2014 budget too conservative in its forecast of spending and too optimistic
in its forecast of revenue.
With the tighter inancing conditions and perceived higher risk of capital outlows, owing to fears of a current-account deicit that Indonesia may ind dificult
to inance, and the possibility of subsequent depreciating pressure on the rupiah,
investors will demand higher yields on government bonds. So far, government
bond auctions have been highly oversubscribed, but at a higher coupon rate.
Perhaps due in part to the prospect of an increase in interest rates in the United
States (and possibly globally) and in part to Indonesia’s parliamentary elections
in April, the government seems to have issued bonds earlier than usual in the
year. By early February, the government had already raised 21% of the year’s target bond issuance (Jakarta Post, 6 Feb 2014).
The government and parliament may use the current situation as an opportunity to revisit the 2014 budget. This being an election year raises some obstacles. For one, there is the practical problem of inding a window of time in which
the government can submit a revised budget to parliament, as well as the possible reluctance on all sides of politics to champion the revision as the elections
loom. Nevertheless, a deterioration of the current iscal deicit, or other weakened
economic conditions, will be an opportunity to propose as a priority a phased
adjustment of the fuel subsidy to a lower amount per litre, and also to push for
much-needed investment in infrastructure.
Balance of Payments
The current-account deicit moderated in the third quarter of 2013, as the economy
slowed. The deicit decreased further in the fourth quarter, as the trade surplus
increased and imports fell (because of the weaker rupiah and increased non-oil
exports in the second half of 2013). Recent data from BPS show that greater natural-resource exports were the main reason for the increase in exports in December,
which created a $1.5 billion surplus in the goods trade balance.12 There was a
surge in exports of raw materials preceding the ban on unprocessed minerals that
started in January; ore shipments, for example, were 7.3% higher in December
(year-on-year). The deicit in the current account was $4 billion (2% of GDP) in the
fourth quarter, down from $10 billion (4.4% of GDP) in the second quarter. Most
of the reduction was due to a decline in non–oil and gas imports, particularly
those of capital goods and intermediate products, and stronger non–oil and gas
exports. The net result was that the balance of non–oil and gas trade increased by
149% in the fourth quarter. But imports of oil and gas remained relatively large, in
line with a 12% average increase in international crude prices. This suggests that
the volume of oil imports did not decline by much, despite higher domestic retail
prices and a slight economic slowdown. The deicit in services trade has adjusted
to a decrease in trade more broadly, particularly slower import growth. A large
part of the deicit in services trade is due to imports of transport services, which
are closely related to trade in goods.
Meanwhile, the deicit in foreign income payments remains fairly steady in the
fourth quarter, at $7.1 billion, or 3.5% of GDP. Allowing the rupiah to depreciate
12. The igure for natural-resource exports is listed under the trade classiication Harmonized System 26.
Survey of Recent Developments
13
TABLE 2 Balance of Payments
($ billion)
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Dec 2012 Mar 2013 Jun 2013 Sep 2013 Dec 2013
Current account
Exports
Non–oil & gas
Oil & gas
Imports
Non–oil & gas
Oil & gas
Merchandise trade balance
Non–oil & gas
Oil & gas
Services
Income
Current transfers
–7.8
47.1
38.5
8.6
46.3
35.3
11.0
0.8
3.2
–2.4
–3.2
–6.7
1.3
–5.9
45.2
36.8
8.5
43.6
32.3
11.3
1.6
4.5
–2.9
–2.5
–6.1
1.1
–10.0
45.6
37.6
7.9
46.3
36.1
10.2
–0.7
1.6
–2.3
–3.1
–7.1
1.0
–8.4
44.1
35.6
8.5
44.2
32.8
11.4
0.0
2.8
–2.8
–2.6
–6.7
0.9
–4.0
48.6
40.0
8.7
43.7
32.9
10.8
4.9
7.0
–2.1
–2.9
–7.1
1.1
Capital & inancial accounts
Capital account
Financial account
Direct investment
Portfolio investment
Other investment
12.1
0.0
12.1
4.1
0.2
7.7
–0.3
0.0
–0.3
3.9
2.8
–6.9
8.4
0.1
8.4
3.8
3.4
1.2
4.9
0.0
4.9
5.1
1.9
–2.1
9.2
0.0
9.2
1.6
1.8
5.9
Errors & omissions
Overall balance (change in reserves)
Foreign reserves
–1.1
–0.4
–1.0
0.9
–0.8
3.2
112.8
–6.6
104.8
–2.5
98.1
–2.6
95.7
4.4
99.4
Source: CEIC Asia Database.
led to fears that investors and multinational companies would repatriate income.
This has yet to happen, but it remains something to watch.
Foreign direct investment (FDI) into Indonesia was relatively strong in the third
quarter of 2013, at $5.1 billion. Recent data on FDI realisation from Indonesia’s
Investment Coordinating Board (Badan Koordinasi Penanaman Modal [BKPM])
suggests an increase of 17.5% in the fourth quarter (year-on-year). Net FDI in 2014
may be lower, owing to tighter external inancing conditions and delays by investors waiting for the results of the elections.
CURRENT POLICY
Intervention, Protectionism, and Distortions
The Indonesian government has not managed to use the opportunities presented
by the current economic slowdown to undo some of the protectionist trade policies
introduced in recent years.13 It still tends to intervene in markets, for example,
13. Implicit quotas on horticultural and beef imports have been relaxed, but trade policy
remains restrictive. Soesastro (1989) describes how declining terms of trade motivated signiicant economic deregulation throughout the 1980s.
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14
Shiro Armstrong and Sjamsu Rahardja
and implement policies that protect ineficient irms and industries.14 Constraints
in capacity to develop or implement good economic policy, coupled with populist
policies, have produced some economically damaging policies that contribute to
the belief that Indonesia is becoming increasingly inward-looking.
As Indonesia enters a politically important year, implementing reforms
becomes an even more complex bargaining process. All political interests—not
just opposition parties—will weigh economic costs and beneits against outcomes
in the upcoming elections. The government has made modest and incremental
reforms, but it has muddled through in its approach to sectoral development.
Of greatest concern is the slow progress of structural reform and the uncertainty
about when numerous new laws will be enacted.
Reform has progressed in areas in which there is clear political consensus. The
government, through BKPM, has led agencies in efforts to improve Indonesia’s
ranking in the World Bank’s Doing Business indicators.15 Similarly, the government has been trying to cut the number of days taken to issue licences and permits and to connect electricity to new businesses.16 On domestic connectivity, the
government is turning to external engagement, by building capacity and sharing
experience (see ‘APEC Success and Next Steps’, below), to encourage more effective decision-making on priority infrastructure projects by the National Committee for the Acceleration of Infrastructure Provision (Komite Kebijakan Percepatan
Penyediaan Infrastruktur), as well as to improve the regulatory environment.17
A series of new interventionist regulations give the impression of being solutions in search of market failures. In January 2014, President Yudhoyono enacted
Law 3/2014 on Industry, which clariies, in particular, the government’s responsibilities in acquiring sites for industrial development and identifying action plans
to promote industrialisation. But the industry law also conveys a bureaucracyknows-best attitude to developing manufacturing. Nehru (2013, 160–61) discusses a few salient provisions in the law, some of which could lead to regulations
that allow for unnecessary intervention in the market, create distortions that risk
protecting ineficient irms driven by vested interests,18 create more red tape for
businesses,19 and risk channelling public funds for ill-targeted government projects to support industrialisation.20 For international investors, the detailed regu-
14. Such policies are not new. The development of the automobile sector, for example, has
been hampered by highly interventionist policies (Aswicahyono, Basri, and Hill 2000).
15. See http://www.doingbusiness.org/rankings.
16. Such as domicile permits, nuisance permits, and investment licences.
17. The government is currently revising Presidential Decree 42/2005 on the National
Committee for the Acceleration of Infrastructure Provision, to streamline the committee’s
decision-making process and provide it with a secretariat and funds to conduct pre-feasibility work.
18. Article 32 on potential restrictions on the export of raw materials, article 33 on promoting domestic value addition, and article 86 on prioritising domestic products in procurement of goods and services by government agencies or projects inanced by the state
budget.
19. Article 25 on workers’ competency, article 27.2 on the use of foreign experts, and criminal investigations for violating a product’s technical speciications.
20. Article 16 on skills development and article 48 on inancing institutions.
Survey of Recent Developments
15
FIGURE 3 Domestic Price of Medium-Quality Rice in Indonesia and Thailand
(Rp ’000/kg)
8.0
7.5
Indonesia IR-64 III (Cipinang wholesale)
7.0
6.5
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6.0
Thai A-I special rice (import parity)
5.5
5.0
4.5
4.0
Jan 2013
Mar 2013
May 2013
Jul 2013
Sep 2013
Nov 2013
Jan 2014
Sources: Cipinang wholesale market; Food and Agriculture Organization of the United Nations; CEIC
Asia Database; authors’ calculations.
lations of the industry law may increase uncertainty about the rules under which
irms in Indonesia will operate (Castle 2013).
More recently, on 11 February, parliament passed a new trade law. In principle, this law will give the government far-reaching powers to use trade policy
to protect domestic producers from imports and restrict exports. The government already held many of these powers under the old legislation that this law
will replace. In addition, it remains to be seen whether the required government
regulations and ministerial decrees to implement the law will employ each of
the powers without breaking WTO commitments. Nevertheless, the passing of
the law and, in particular, the public justiications given by parliamentarians and
Deputy Trade Minister Bayu Krisnamurthi appear to underline policies of managed rather than free trade, and of protection of domestic producers (Jakarta Globe,
11 Feb 2014; Jakarta Post, 12, 13, 14 Feb 2014).
Also of concern is the abuse of quantitative import restrictions. For example, the
high-proile corruption scandal over beef import quotas which surfaced in January 2013 led to the KPK’s conviction in December that year of former Prosperous
Justice Party (Partai Keadilan Sejahtera) president Luthi Hasan Ishaaq (Jakarta
Globe, 28 Nov 2013; Jakarta Post, 10 Dec 2013). This case is just one example of the
misuse of quantitative trade restrictions where the economic rent generated by the
restrictions does not translate into government revenue but beneits private interests, particularly the holders of import licences. Another example unfolded more
recently, when the government was put in a defensive position after the news
media reported complaints from local rice traders that 16,000 tonnes of low-cost
rice from Vietnam had entered the Indonesian market, allegedly brought in by
private importers who abused legal import permits for high-quality rice (Kompas,
28 Jan 2014). The domestic price of rice in Indonesia is estimated to be 25% to 40%
higher than that of rice of similar quality produced by other countries in the region
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Shiro Armstrong and Sjamsu Rahardja
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(igure 3). Households have to pay this higher price, and the difference between
the prices of domestic and imported rice, as well as the rent that the licensed private importers enjoy, is considerable. This problem may get worse for Indonesia,
as Thai rice traders continue to rid themselves of Thailand’s record rice stocks and
drive down international prices in the process (Jakarta Globe, 20 Feb 2014).
Mineral Export Policies
Prior to the 2009 national elections, Indonesia’s policymakers passed Law 4/2009
on Mineral and Coal Mining, which aims to increase the value of processed
natural-resource exports (Baird and Wihardja 2010). This involves adding value
to these sectors (at the cost of subtracting value from the economy as a whole)
by using very capital-intensive methods of processing raw materials. Instead of
creating the necessary infrastructure and environment to foster such activity, and
this would in effect be a large subsidy to entice smelting, the government legislated for this to occur (Burke and Resosudarmo 2012) and intervened in a market
where there is no obvious failure.
As a result, in seeking to develop a minerals processing industry, including trying to attract foreign capital for smelting plants, the government actually passed a
law that taxes the exports of some unprocessed minerals, bans the exports of others (such as unprocessed nickel and bauxite), and stipulates minimum required
levels of processing. The global shortage of nickel, in particular, was thought
likely to attract foreign investors to build smelters in Indonesia. Some investment
in nickel processing has started, such as PT Bintang Delapan’s nickel smelter in
Central Sulawesi. Other projects are set to follow, but many are still undergoing
feasibility studies or are in the design phase.
The regulations took effect on 12 January 2014. In the lead-up, the international
and domestic prices of many of these minerals did not diverge greatly, indicating that expected and actual trade lows were not substantially affected (Financial
Times, 8 Jan 2014). Many private mining companies did not invest in processing facilities during the ive-year window, because they assumed that the regulations would not be implemented effectively. They were proved right; immediately
before the law came into effect, the government was looking for loopholes in its
own policy (Jakarta Post, 20 Dec 2013).
Considerable confusion has surrounded the implementation since mid-January. President Yudhoyono initially agreed to an exemption for the copper ore of
the biggest mining irms in Indonesia, US-owned PT Freeport Indonesia and PT
Newmont Nusa Tenggara (Jakarta Globe, 12 Jan 2014). But attempts of both companies to bring their lobbying power to bear steeled the government’s resolve. It
subsequently clariied that the ban would, until 2016, take the form of an exporttax arrangement, which also covered these two companies (Jakarta Post, 30 Jan
2014). Exports of copper, iron, lead, tin, or zinc ores that are unprocessed or do
not meet the minimum processing requirements (ranging from raw materials to
concentrates of 15%–62% purity, depending on the mineral) will incur a tax of
20%–25% in 2014, increasing to 60% by the second half of 2016 (Jakarta Post, 1 Feb
2014). Nevertheless, in the course of February the Ministry of Energy and Mineral
Resources offered mining irms an opportunity to evade these export taxes by
demonstrating that they had advanced plans in place for smelter construction and
by committing to a ‘surety bond’ (Jakarta Post, 7 Feb 2014). While some companies
were willing to pay the export tax, and subsequently applied for export permits,
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Survey of Recent Developments
17
Freeport and Newmont continued to stockpile produce. More recently, Freeport
agreed with state-owned PT Aneka Tambang to study the construction of a new
copper smelter while arguing the case for reduced export taxes, and both Freeport
and Newmont are considering legal action against the Indonesian government for
infringing their existing contracts of work (Jakarta Post, 4 Mar 2014). It seems that
the wrangling over the mining export ban has yet to end.
Meanwhile, the distortions introduced by the government’s intervention in the
mining sector, even if its regulations are not fully implemented, are potentially
large and detrimental to non-energy mining. In the short term, the new regulations
will decrease exports of unprocessed minerals without offsetting new exports of
processed minerals, contributing to the deterioration of the current account and
government revenues. They will lead to a discrepancy between the domestic and
international prices of certain minerals, when stocks of produce for domestic processing accumulate as a result of insuficient processing capacity. This may lower
the domestic prices of raw minerals and may create rents for smelting companies
to exploit. The regulations have also increased uncertainty for investors, including in the non-mining sectors. Under the current tight international inancing conditions, the low-on effects of this policy for Indonesia’s balance of trade may add
to the depreciating pressure on the exchange rate, and greater exchange risk may
increase the costs of inancing operations for investors in Indonesia.
The Fraser Institute’s annual Survey of Mining Companies had already ranked
Indonesia as the least attractive country in which to do business in 2012–13
(Sailo 2013). Although these export regulations may have been politically popular domestically, in the eyes of foreign observers they have further damaged the
credibility of Indonesia’s economic policymaking and that of the government in
implementing its own policies.
Restructuring the Economy
Indonesia, like many other resource-rich economies, enjoyed high terms of trade
for almost a decade, from the early 2000s. The domination of commodities in Indonesia’s exports meant that the fall in commodity prices has contributed greatly to
the current-account deicit. Indonesia is not alone. Other emerging-market economies, some of which are rich in natural resources, such as Brazil, South Africa,
Turkey, and India, are also adjusting to more normal global circumstances (that is,
without a commodity boom and abnormally loose monetary policy in the United
States).
The consequences of this monetary policy helped to keep the rupiah strong
until mid-2013. Yet the fall in commodity prices since late 2011 has exposed some
weaknesses in the domestic economy. The appreciation of the rupiah during the
commodity boom boosted commodity exports and yielded a ballooning trade
deicit in manufacturing and other non-commodity trade (Basri and Rahardja
2011). In contrast, the depreciation in the exchange rate since mid-2013 has not
expanded exports or reduced the current-account deicit by any great amount,
because of Indonesia’s export structure, in which commodities dominate. Aside
from mineral exports, crude palm oil contributes 25% of exports, and rubber 14%.
Manufacturing exports have not yet beneited from the more competitive currency, and they decreased during December 2013.
The fall in the exchange rate is likely to cause a supply-side response from, for
example, labour-intensive operations that can absorb unskilled labour relatively
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Shiro Armstrong and Sjamsu Rahardja
FIGURE 4 Share of Employment by Broad Sector, 2005, 2009, and 2013
(%)
60
Agriculture, forestry, hunting, & fishery
Commercial services
Manufacturing
Community, social, & personal services
50
40
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