IERO NO 2/YEAR III/JUNE 2014

INDONESIAN ECONOMIC
REVIEW AND OUTLOOK
Creating Economic Optimism
for New National Leadership
No 2/YEAR III/June 2014
Macroeconomic Dashboard
Faculty of Economics and Business
Universitas Gadjah Mada

Foreword
Let me hope it is an enjoyable reading
Prof. Dr. Sri Adiningsih, M.Sc
Head of Researcher
Macroeconomic Dashboard
Indonesia is in the midst of democratic process that
involves electing new national leadership. The new
Indonesian government will face many challenges, the
prospects of which were dimed by indication of slower
growth of the economy in the quarter I-2014. In light
of that, in this Quarter II-2014 edition, Indonesian
Economic Review and Outlook (IERO) focuses on the
theme: “Creating Economic Optimism for New
National Leadership”.
Indonesian Economic Review and Outlook (IERO) is a
quarterly scientific bulletin, presents and discuss
latest developments in the Indonesian economy as
well as the prospects. IERO is published by the
Macroeconomic Dashboard, which is macroeconomic laboratory facility in the
Faculty of Economics and Business and in collaboration with PT Bank Mandiri
(Persero) Tbk., since 2012.
To predict prospects of Indonesian economy in future, the bulletin uses both
Macroeconomic Indicator Projection Consensus of economists, and Gadjah Mada
Leading Economic Indicator (GAMA LEI), which is an instrument that originally
initiated by Macroeconomic Dashboard and is being improved in every edition,
In this edition, the Macroeconomic Indicator Projection Consensus predicts
improvements in economic growth, inflation, and exchange rate in the quarter II-2014
compared with the quarter I-2014. Meanwhile, GAMA LEI predicts signs of a decline in
Indonesian Gross Domestic Product (GDP) economic cycle. This is the case despite
indications of growth that are discernible from the movement and pattern of
Indonesian economy based on year-on-year and quarter-to-quarter trajectory.
Last but not least, it is my hope that the analysis this bulletin presents often becomes
an important source of benefits and second opinion for public policy decision makers,
business practitioners, researchers, academics, students, and members of the general
public. We also hope that the momentum which the “democracy party” has generated
can provide much needed optimism and hope toward developing a stronger and
sustainable Indonesian economy.

TABLE OF CONTENTS
EXECUTIVE SUMMARY................................................................................................ 1
A. FISCAL AND ECONOMIC DEVELOPMENTS
1. The decline in net exports, which was attributable to slow
growth of the economy and drastic increase in the government
expenditure in general and energy subsidies in particular............. 4
2. The rise of budget deficit in the 2014 Changed State Budget
Plan (RAPBNP), will be financed through the issuing of
government securities, which is expected to support economic
growth.................................................................................................................... 11
3. The Trade Balance deterioration has not been countered by
significant improvement on the current account................................ 17
4. Despite registering improvement, international reserves
position is devoid of quality......................................................................... 20
5. Achievements in the labor market rate not yet cause for
celebration............................................................................................................ 22
B. Achievements in the labor market rate not yet cause for
celebration
1. Price level in the economy remain stable and under
control.................................................................................................................... 25
2. Financial Markets are still relatively Bullish.......................................... 27
3. There is no significant change in Monetary Policy.............................. 28
C. GAMA LEI AND CONSENSUS ON ECONOMIC PROJECTIONS
1. GAMA Leading Economic Indicator (GAMA LEI)................................. 31
2. Consensus on Projections of Macroeconomic Indicators................. 32
D. ASEAN: Global Economic Pressure and National Instability
Challenging The Pathway for ASEAN Economic Community
2015.............................................................................................................................. 34
E. CURRENT ISSUE...................................................................................................... 39
F. ECONOMIC OUTLOOK.......................................................................................... 42
Macroeconomic Dashboard Universitas Gadjah Mada iii

List of Terms
AEC ASEAN Economic Community
APBN State Budget (Anggaran Penerimaan dan Belanja Negara)
ASEAN Association of South East Asian Nations
BPS Indonesia Statistic Bureau
bps Basis Point
CPI Consumer Price Index
DGB Directorate General of Budget (DJA)
IDIC Indonesia Deposit Insurance Corporation
IDR Indonesian Rupiah
IDX Jakarta Composite Index
JPY Japanese Yen
LHS Left Hand Side
LPG Liquified Petroleum Gas
MoF Ministry of Finance
m-t-m Month to Month
NSC Philippines's National Statistics Coordination
PBI Bank Indonesia Regulation (Peraturan Bank Indonesia)
RAPBN Revised State Budget Plan (Rencana Anggaran
Penerimaan dan Belanja Negara Perubahan)
RHS Right Hand Side
SBN Government Securities (Surat Berharga Negara)
SBSN Sovereign Sharia Securities, Global Sukuk (Surat Berharga
Syariah Negara)
SUN Government Bond (Surat Utang Negara)
The Fed The Federal Reserve
The States United States of America
USD U.S. Dollar
y-o-y year on year
y-t-d year to date
Indonesian Economic Review and Outlookiv

EXECUTIVE SUMMARY
Indonesian economic growth slowed during quarter I-2014, a trend that is
attributable to weakening performance of net exports. However,
unemployment registered an improvement as reflected in an increase in the
number of people employed in the informal sector as well as part-time
employees. Besides, workforce in agricultural sector, which is the largest
provider of employment, registered slight increase in February 2014.
The general level of prices, which in the previous quarter piled pressure on
Indonesian economy, showed indications that it was under relative control
during quarter II. Generally price stability has also been shored up by
harvesting season, which occurred during March-May 2014.
Nonetheless, with respect to international trade, the performance of
Indonesian economy projected less than rosy developments. The end of the
protracted surplus on the non-oil and as trade balance in April 2014, plunged
Indonesian economy into a deficit. In the meantime, balance of payments in
quarter 1-2014, continued to post a surplus albeit slightly smaller compared
with that registered in the previous quarter. The lower surplus on balance of
payments posted in quarter I-2014, is attributable to the decline in the
surplus on financial and capital items on the current account.
In order to secure implementation of State Budget 2014, the government is in
the process of submitting the Revised State Budget Plan (RAPBNP) 2014.
Based on outcome of the latest deliberations in the parliament budgetary
commission, the government and the parliament reached agreement on the
level of deficit allowed in 2014 of IDR 241.49 trillion, which is equivalent to
2.4% of GDP. The rise in the budget deficit is attributable to a sharp increase
in government expenditure and the decline in expected government revenue
target. The sharp increase is largely as a result of a drastic rise in energy
subsidies which in turn came as a result of revision on energy subsidies which
was necessitated by depreciation of rupiah as well as a decline in lifting level
Macroeconomic Dashboard Universitas Gadjah Mada 1

of crude petroleum oil. In the meantime, there was a decrease in government
revenue target which was a direct consequence of projections of lower
growth of the economy.
In March 2014, the increase in both the private and public debt, led to a rise in
Indonesian external debt. This is cause for concern as depreciation of the
rupiah if it continues at its current pace poses the danger of increasing the
burden on the economy. Indonesia's external debt has reached worrying
proportions as reflected in the rise in the debt service ratio, which registered
a sharp increase of 52.7% in quarter IV-2013.
Meanwhile, foreign exchange reserves posted a significant increase in May
2014, which however did not project improvement in quality. The issuing of
government securities continues to play a big role in that regard.
Consequently, the increase in international reserves has not impacted
positively on the exchange rate, which continues to depreciate. Weakening
rupiah is largely attributable to negative market sentiments that arose from
an unexpected worsening of trade deficit occurring at a time of high political
uncertainty in the lead up to election of a new president. Besides, external
issues that include the impact of the tapering off and Fed Fund Rate policies
also contributed to weakening economic performance.
That said, the monetary authority continues to maintain reference interest
rate as an indication of restrictive monetary policy. To that end, banking
industry increased interest rate, both on deposits and credit, which led to the
reduction of liquidity. Consequently, Indonesian deposit insurance agency
(IDIC), also had to raise its reference interest rate imposed on guaranteed in
general.
After a close observation of dynamics of Indonesian economy, GAMA Leading
Economic Indicator predicts a decline in the Indonesian economy (GDP)
cycle. GAMA LEI model for Quarter I-2014 shows a change in the direction in
the economy from an upward to a downward trend. That said, there are also
signs that point toward GDP growth in the quarter II-2014, which is
discernible for the direction and movement of the economy on a year-on-year
and quarter-to-quarter basis.
Indonesian Economic Review and Outlook2

Considering dynamics in the region that are moving toward the coming into
force of ASEAN Economic Community (AEC) 2015, paradoxically ASEAN
economies are facing pressure that is emanating from internal and external
sources. Internal economic instability in the region is already having adverse
impact on the performance of economies in the region, as evidenced by slow
growth posted by Indonesian economy and 2.10% contraction of Thailand
economy in quarter I-2014. This condition is exacerbated by rising inflation
in the region. In May 2014, ASEAN on average posted inflation that hovered
around 3.89% (y-o-y). With regards external sector, pressure on the economy
is attributable to tapering off policy in United States, unstable economic
growth in European Union, and the cooling of the economy of China, all of
which have contributed to the persistent trade deficit and depreciation of
local currency.
Lastly, in this edition, IERO highlights the importance of economic optimism
which the new national leadership will bequeath on assuming reins of power.
Moving forward, human resource development should be the key national
development priority. In his piece, M. Edhie Purnawan, Ph.D proposes the
development on the three types of forces/strengths: honesty,
innovation/imagination, and network. Efforts to foster the development of
quality Indonesians, should create room for optimism for Indonesia in facing
the future.
Executive Summary

Indonesian Economic Review and Outlook
1. The declining in net exports has caused the economic
slowdown and significant increase generally in the
government expenditure and energy subsidies in particular
Indonesian economy posted steep slowdown in quarter I-2014.
Indonesian economy posted growth of 5.21% (y-o-y), in quarter I-2014,
which represented a decline compared with 5.72% (y-o-y) posted in quarter
IV-2013. Moreover, economic growth posted in quarter I-2014, was far lower
than 6.03% (y-o-y), which was registered in the same period in the previous
year.
Slower economic growth posted in quarter I-2014 is largely as a result
of a significant decline in net exports. The significant contraction in net
exports, adversely affected economic growth in quarter I-2014. The -0.78%
4
A. FISCAL AND ECONOMIC DEVELOPMENTS
Figure 1: Indonesian GDP growth at 2000 Constant Market Prices by
Industrial Origin, 2011 – 2013 (y-o-y, in %)
Economic growth slowed in quarter I-2014 largely as a result of contraction
in the mining sector
Notes:
Primary Sectors: Agricultural, Livestock, Forestry and Fisheries; Mining and Quarrying
Industrial Sectors: Manufacturing; Electricity, Gas and Water Supply; and Construction
Services Sector: Trade, Hotel and Restaurants; Transport and Communication; Finance, Real Estate and
Business Services; and Services
Source: BPS and CEIC (2014)

Macroeconomic Dashboard Universitas Gadjah Mada
(y-o-y) contraction of exports posted in quarter I-2014, was large enough to
push net exports into negative territory, albeit -0.66% (y-o-y) contraction in
imports. The decline in net exports is by and larger attributable to a decrease
in exports of minerals such as coal and coal concentrates, which is a
reflection of the performance of the mining sector that posted contraction of
-0.38% (y-o-y). The poor performance of the mining sector is largely as a
direct consequence of the coming into force of Mining Law No.4/2009 on
exports of unprocessed minerals with effect from 12 January 2014.
Nonetheless, sluggish growth of Indonesian economy is also due to persisting
uncertainty in the global economy, as reflected by decline of economic growth
of the economy of China from 7.7% (y-o-y) in quarter IV-2013 to 7.4% (y-o-y)
in quarter I-2014, which by implication adversely affected the performance
of Indonesian economy.
Slowing government consumption also contributed to the weakening of
economic growth. Government consumption grew by 3.58% (y-o-y) in
quarter I-2014, which was far lower than 6.45% (y-o-y) registered in quarter
IV-2013. Meanwhile, household consumption remained unchanged in
quarter I-2014 as it posted growth of 5.41% (y-o-y) which is not much
different from 5.44% (y-o-y) recorded in quarter IV-2013. Nonetheless, slow
growth of net exports, government consumption and household
consumption in quarter I-2014, was not shared by investment which posted
5.13 % (y-o-y) in the same period, higher than 4.375 (y-o-y) recorded in
quarter IV-2013.
5
Fiscal and Economic Developments
Figure 2: Indonesia GDP Growth at 2000 Constant Market Prices by
Expenditure, 2011 – 2013 (y-o-y, in %)
Net exports performance and government consumption deteriorated

Based on month-to-month trajectory, Indonesia's trade balance moved
from a surplus of USD 0.67 billion in March 2014 into a deficit of USD
1.96 billion in April 2014. The decline was due to a combination of factors
that included contraction of exports by USD 0.9 billion and an increase in
imports of USD 1.73 billion compared with the level in the previous month.
The total value of exports declined because of a contraction in both oil and gas
as well as non-oil and gas exports. Meanwhile, total value of imports
increased, driven largely by imports of non-oil and gas commodities. In
general, Indonesia posted a deficit of USD 0.89 billion during 's trade balance
January-April 2014 period. That said, the deficit posted during January-April
2014 period, is smaller than USD 1.94 billion recorded during the same
period in 2013.
Observation of the January-April 2014 period shows that the oil and gas
trade balance continued to be in deficit. oil and gas trade The deficit on the
balance during January-April 2014, was USD 4.2 billion, which was smaller by
USD 0.3 billion compared with the level recorded during January-April 2013
period. The decrease in the deficit is as result of a lower imports during
January-April 2014 period that was smaller by USD 0.4 billion than that
registered during the same period in 2013. However, signs of improvement in
the deficit on the . This is reflected in the level of the oil and gas trade balance
6
Figure 3: Indonesia'sTrade Balance, April 2012-April 2014 (USD billion)
Indonesia's trade balance deteriorated

deficit in the which was USD 1.06 billion in April oil and gas trade balance
2014, that was USD 0.29 billion smaller than the level recorded in March
2014. In terms of percentage, the deficit on the oil and gas trade balance
showed a decrease of 21.6%. The improvement was shored up by decrease of
USD 0.3 billion in the value of oil and gas imports. On a month-to-month basis,
the decline in imports of oil and gas in April 2014, was attributable to a
decrease in imports of crude oil and oil products. Imports of crude oil posted
a decrease of 24.78% from USD 1.42 billion to USD 1.07 billion. Meanwhile,
imports of oil products recorded a decrease of 0.5% from USD 2.36 billion.
Contrariwise, imports of gas posted a steep increase of 29.63%.
Apparently the relatively long period of surplus, which was recorded on
the Indonesia's non oil and gas trade balance that is traced as far back as
July 2013, came to an end in April 2014 as the account posted a deficit.
The decline in the performance of the non-oil and gas trade balance was
contrary to the condition that obtained in quarter I-2014, which showed a
positive trend. Since January until April 2014, the had a trade balance
surplus of USD 4.2 billion, but in June 2014 plunged into a deficit of USD 0.9
billion. Overall, however, an on observing the trend on month-to-month
basis, it becomes evident that the surplus on non oil and gas trade balance
experienced a decline of 144.58 %. The steep decrease is largely due to
contraction of non-oil and gas exports by USD 0.89 billion in April, while non-
oil and gas imports increased sharply by USD 2.03 billion in March.
7
Figure 4: Indonesia's Oil and Gas Trade Balance April 2012 – April 2014
(USD billion)
The deficit on oil and gas trade balance posted a slight decrease

Contraction of non-oil and gas exports is by and large, attributable to a
decline in the exports of animal or vegetable fats and oils commodities.
Commodity exports decreased by 45.02% in April 2014 on a month-to-
month basis, followed by pearls, precious and semi precious stone(23.15%),
vehicles other than railway(23.15%), mineral fuels and mineral oil
products(9.78%) and electronic machinery, sound recorder, tv, etc(3.75%).
As regards the destination of Indonesian non-oil exports that posted a
decline, India recorded the largest percentage (23.93%), China (16.47%),
Thailand (17.70%), and Malaysia (10.15%). The growth of non-oil and gas
imports is by and large driven by increase in imports of nuclear reactor,
boilers, mechanical appliance and machinery and electric equipment. Import
value of the two items above posted an increase of USD 0.36 billion and USD
0.27 billion, respectively. Meanwhile, with respect to exports, footwear
posted the largest increase of 29.49%.
Returning back to structure of GDP, primary sector experienced pretty
significant economic contraction. During quarter I-2014, the primary
sector (which comprises Agricultural, Livestock, Forestry, and Fisheries
Sector Mining and Quarrying Sector) registered growth of 1.97% as well as
(y-o-y), which is lower than 3.86% (y-o-y) registered during quarter IV-2013.
The condition was largely attributable to 0.38% (y-o-y) contraction in the
Mining Sector. Meanwhile, the Manufacturing Sector and Services Sector,
which grew by 5.46% (y-o-y) and 6.39% (y-o-y) respectively, lowerposted
8
Figure 5: Indonesia's Non Oil and Gas Trade Balance April 2012-April
2014 (USD billion)
Balance of trade on non-oil and gas has plunged back into deficit

growth than that registered in quarter IV-2013. On the same note, based on
data obtained from BPS, sectors that posted high growth year on year in
quarter I-2014 in ascending order were Transport and Communication
Sector (10.23%), Construction Sector (6.54%), Electricity, Gas, and also
Water Supply Sector (6.52%).
Developments of various macroeconomic indicators show marked
deviation from assumptions which were used in formulating State
Budget (APBN) 2014. This is indeed is the main reason that compelled the
government to submit tate udget 2014, as an the Revised S B Plan (RAPBNP)
attempt to ensure the implementation of . Without making APBN 2014
necessary adjustments, there was big chance that government expenditure
could have easily have gone beyond the maximum budgetary deficit limit of
3% of GDP, which is stipulated under the law. Moreover, it is highly likely that
economic growth and lifting of oil and gas for the fiscal year will be far lower
predictions, while government expenditure is projected to increase sharply
as a direct consequence of rising energy subsidies and still unabated
depreciation of rupiah. That said, it is worth noting that macroeconomic
assumptions for the annual budget merely serve as guidance in formulating
state budget, rather than fixed targets which the government must achieve.
Rising burden emanating from subsidies will exacerbate the state of
health of the State Budget. The value of subsidies which is expected to hover
around IDR 444.9 trillion is equivalent to 33.3% of budget allocation in
9
Table 1: Comparison of Macroeconomic Assumptions in Revised State
Budget Plan (RAPBNP)
GDP growth assumption used in Revised State Budget Plan 2014 was
revised downwards to 5.5%
Note:
* as by 11 June 2014, the parliament approved the entirety of changes effected on the macroeconomic
assumptions used in formulating Revised State Budget Plan with the exception of the rupiah exchange
rate which was revised to IDR/USD 11,600; as this piece is written, deliberations of Revised State
Budget Plan 2014 are still ongoing
Source: Ministry of Finance, Financial Note, and Revised State Budget Plan 2014

Changed State Budget Plan 2014. Such a staggering level, if combined with
personnel expenditure is 55.9%. Consequently, budget allocation for capital
expenditure is projected to experience a decrease of IDR 32.9 trillion.
Nearly 88% of expenditure on subsidies is earmarked for energy. Such
staggering amount is the summation of an increase in government
expenditure on subsidies for fuels and iquefied petroleum gas (LPG) l as well
as The proposed b electricity. udget allocations for fuel subsidies and 3 kg LPG
has increasedto reach IDR 284.99 trillion or 35.2% of budget allocations in
State Budget 2014. Meanwhile, subsidies on electricity is expected to reach
IDR 107.15 trillion. The surge in expenditure is largely due to the revision
that had to be made in the assumptions of rupiah exchange rate against US
dollar and lifting of crude petroleum oil. In State Budget Plan Revised 2014,
the exchange of rupiah against US dollar was revised upwards from IDR/USD
10,500 to IDR/USD 11,600 and lifting of crude petroleum decreased from
870, 000 barrels to just 818, 000 barrels per day. Meanwhile, allocations for
non-energy subsidies is projected to increase by IDR 1.1 trillion. The increase
is a net effect of the increase in allocations of tax subsidies of IDR 1.8 trillion
and downward revision of subsidies on food by IDR 0.7 trillion.
10
Table 2: Summary of Central Government Expenditure (IDR trillion)
Allocations plan for subsidies surged by 33, %; capital expenditure suffered
a 17.9% decline
Note:
* unaudited
** Deliberations of Revised State Budget Plan 2014 are still underway by the time this piece was
written
Source: Ministry of Finance, Financial Note and Revised State Budget Plan 2014

2. The rise of budget deficit in the State Budget and Revised State
Budget Plan 2014 which financed by the issuing of
government securities is expected to boost the economic
growth
During deliberations that transpired on 13 June 2014, the parliament
reached an agreement to set the budget deficit at 2.4% of GDP or
IDR241.49 trillion. The amount will constitute an increase of IDR66.1
trillion from the deficit that was set in State Budget . In other words, 2014
such a development is not in line with government efforts and plan to reduce
budget deficit in State Budget for this fiscal year. It is worth noting that the
actual budget deficit in 2013 budget was 2.2% of GDP or IDR 202.8 trillion.
Deliberations on Revised State Budget Plan agreed tentatively to set the
level of government revenues and expenditures at IDR 1,635.4 trillion
and IDR 1,876.8 trillion, respectively. Thus, revenue target is expected to
suffer a decline of 1.9% of total State Budget allocations, 2014's or accounted
for IDR 31.8 trillion. The decrease is attributable to expectations of a
11
Note:
* unaudited
** deliberations od Revised State Budget Plan 2014 is still ongoing when this piece was written
Source: Ministry of Finance, Financial Note and Revised State Budget Plan 2014
Table 3: Composition of Expenditure on Subsidies (IDR trillion)
Proposed budget allocation for energy subsidies in the Revised State Budget
Plan 2014 constitute 88.15% of overall expenditure on subsidies

significant decline in revenues from taxes and non-tax sources. In the
meantime, government budget allocations are expected to register an
increase of 12.7%, which is IDR 211 trillion. By the time this written, there
was not any official publications on the details of approved government
revenues and expenditures for State Budget Plan 2014. However, Revised
based on government's proposition the increase in government expenditure
due to significant increaseon energy subsidy allocation. That said,
government expenditure is proposed to register a decrease as a result of
cutbacks on budget allocations for ministries and government institutions
which is projected to reach IDR 98.5 trillion as well as financial rebalancing
fund which is in line with expected decrease in government revenues by IDR
8.9 trillion.
Meantime, the percentage utilization or absorption of State Budget as
per quarter I-2014 is lower than that registered in the same period in
the previous fiscal year. realization of state During quarter I-2013,
expenditure had reached 16.2% of total budget expenditure in State Budget
2013. On the contrary, expenditure by March 2014 was realization of state
still hovering around 15.6% of total budget expenditure in State Budget
2014. Nonetheless, in nominal terms, expenditure realization of state in 2014
is higher than the level attained in the same period for .the previous year
On the other hand, realization of state revenues as per quarter I-2014,
was already higher than the level attained in 2013 budget during the
12
Table 4: Summary of Revised State Budget Plan 2014, State Budget 2014,
and Realization of State Budget 2013 (IDR trillion)
During deliberations on 13 June 2014, the parliament agreed to raise the
budget deficit to 2.4% of GDP
Note:
* unaudited
** By 13 June 2014; deliberations of Revised State Budget Plan 2014 were still underway when this
piece went to press
Source: Ministry of Finance, Financial Note, and Revised State Budget Plan 2014

same period. the state As per quarterI-2014, revenues had reached 17.3% of
total projected revenues State Budgetstate in 2014. This is higher compared
to the realization of state revenues in March 2013 which posted only 16.6% of
State Budget 2013. To that end, better performance with respects to realized
budget revenues attests to marked success in efforts toward improving and
optimization of government revenues this year.Nonetheless, the government
will have to revise downwards projected revenue target in the State Revised
Budget Plan 2014.
Indonesia's external debt increased to USD 276.49 billion in March
2014. 's external The level of Indonesia debt grew by 9.2% (y-o-y) compared
to 's external the same period in 2013. To that end, Indonesia debt in March
2014 Doubtless, the is higher that 8% (y-o-y) charted in the preceding month.
increase in debt will add more burden to the economy if the external
depreciation ofrupiah continues.
The level of Indonesia's external debt in March 2014 comprised of
USD130.51 billion in the external debt of public sector and USD145.98
billion in private sector external debt. It is apparent from the above figures
that 7.2% and 52.8% of total debt is debt external public and private external
respectively. Thus, the rising level of private sector , which is external debt
already larger than debt, serious concern. public sector external has to be a
Private sector debt registered an increase of 13.1% (y-o-y) in March external
2014 compared with the growth of 12.8% (y-o-y) posted in the previous
month. Meanwhile, public sector in March 2014 registered an external debt
increase of 5.1% (y-o-y), which is higher than 3.2% (y-o-y) posted in the
preceding month.
13
Table 5: Realization of State Revenue & Grant and Expenditure, 2013:Q1
and 2014:Q1
There is reduction in the percentage of realization of state expenditure in
State Budget 2014:Q1; meanwhile realization of state revenue in State
Budget 2014:Q1 shows a marked increase
Note:
* Value set in the parliament during tentative deliberations; deliberations of the Revised State Budget
Plan 2014 were still underway when this edition went to press
Source: Ministry of Finance, I-account (processed)

There is need for the government to pay serious attention to rising
external debt as well as take strategic measures to prevent the
exacerbation of the problem. 's external The level of Indonesia debt has
reached worrying proportions. This is discernible from an increase in debt
service ratio in quarter IV-2013, which reached 52.7%. Such a level of debt
service ratio, underscores the urgent need for the Indonesian government to
make efforts tailored to addressing debt management a priority. external
Otherwise, rising debt service ratio means that most of the country's
international reserves will be spent on paying debt, to the detriment external
of financing productive programs. Rising level of debt is also the external
consequence of Bank Indonesia policy on BI rate which continues to be 7.5%.
Such level of reference interest induces the private sector to go offshore for
borrowing due to lower rates. Bank Indonesia policy to raise BI rate is an
indication that the Indonesian economy is experiencing .slowdown
Indonesian continues to be an attractive economy for foreign investors.
To that end, the interest of foreign investors is not only limited to the capital
market, but also very evident in the domestic bonds markets. In April 2014,
foreign ownership of government bonds had reached IDR 377 trillion, which
represents 41% of the volume of bonds and an increase of 23.7% outstanding
from IDR 304.72 trillion recorded during the same period last year.
Meanwhile, foreign ownership of equity in March 2014 was IDR 1,645.52
trillion, which represents a decrease of 7.1% from IDR 1, 771.25 trillion
14
Figure 6: Indonesia's External Debt, September 2011 - March 2014 (USD
billion)
Indonesian external debt showed an increase
Source: DJPU and CEIC (2014)

recorded in March 2013. Moreover, foreign ownership of Bank Indonesia
Certificates in April 2014 was put at IDR 9.9 trillion, which represents an
increase from IDR 8.26 trillion recorded in April 2013.
The presence of foreign capital has been the source of controversy on a
number of occasions. During economic slowdown, both domestic and
foreign capital is required to stave off an even deeper decline in economic
growth. However, presence of foreign capital in the economy often raises
fears from local actors who consider them as threats to the existence of local
industries. Another fear, which is increasingly becoming a real problem is the
fear that foreign capital, especially that of short term tenor, as much as it can
easily and quickly enter an economy, it can as easily and quickly exit it,
sparking off liquidity shortages, slower investment, and economic
slowdown. To that end, the Indonesian government continues to take
measures that are aimed at strengthening the domestic capital market,
deepening financial markets, which efforts are expected to increase liquidity,
widen investor base, and diversification of available instruments.
Issuing government securities (SBN), is the option which the
Indonesian government has chosen to finance domestic expenditure.
Total government securities outstanding in April 2014 was IDR 1,495.74
trillion, which represents an increase of IDR 327.83 trillion (y-o-y) (see
Figure 12). In April 2014, fixed bond was IDR 828.32 trillion, which is an rate
15
Figure 7: Foreign Ownership of Indonesian Securities, October 2011-
April 2014 (IDR Trillion)
Foreign ownership of Indonesia securities shows an increase
Source: DJPU, BI, and OJK (2014)

increase of IDR 173.47 trillion (y-o-y). Meanwhile, in April 2014, the level of
Sovereign Sharia Securities SBSN( ) was IDR 98.90 trillion, which represented
an increase of IDR 23.04 trillion (y-o-y). The positive trend is an indication
that interest in is rising, which also signals good prospects for the SBSN
development of in the domestic economy. The Islamic bond market
government has issued to reduce the budget deficit. SBSN state 2014's
Besides, the existence of is expected to attract foreign investors, SBSN
especially those who hail from the Middle East to invest in Indonesia. As by
April 2014, the level of foreign currency denominated bonds was IDR 405.96
trillion, which represented a decrease of IDR 2.95 trillion from the level
recorded in March 2014, but recorded an increase of IDR 112.53 trillion
compared to April 2013 (y-o-y). The level of government treasury bill (SPN)
posted a slight decrease of IDR 500 billon in March 2014, to the level IDR 39.8
trillion, and represented an increase of IDR 18.78 trillion (y-o-y).
The need for improving government financial management is
absolutely essential for the new government. The new government will
face formidable challenge. Nonetheless, it is fair to be optimistic considering
the fact that this is an issue that has dominated economic programs that
various contestants in the elections have proposed if they are given public
mandate to govern. This is the more so given the large budget allocation spent
on conducting the elections which is by many accounts is aimed at searching
for and identifying quality legislative and executive representatives—grew
16
Figure 8: Composition of Government Securities, November 2011 - April
2014
Government securities recorded an increase
Source: DJPU and CEIC (2014)

by 9.5% in real terms . The government allocated IDR 20.5 trillion for ¹
conducting 2014 elections, which is obviously higher than IDR 15.1 trillion in
allocated for 2009 elections (DGB-MoF, 2014). The hope is that budget
allocation for the general elections correlates positively with the quality of
representatives, who the general public elect as their representatives.
3. The Trade Balance deterioration has not been countered by
significant improvement on the current account
Compared with quarter I-2013, current account deficit shows some
slight improvement. During quarter I-2014, the current account posted a
deficit of USD 4.19 billion. Meanwhile, during quarter I-2013, the deficit on
the current account was USD 6.01 billion. A similar positive trend is
discernible on a quarter-to-quarter basis, in the performance of the current
account, which also recorded slight improvement. The deficit on the current
account posted a slight decrease of USD 0.12 billion compared with USD 4.31
billion. Improvement in the performance of current account is attributable to
the decrease in the deficit on income account and services trade balance.
The deficit on the income account and services trade balance recorded a
decrease in quarter I-2014. During quarter IV-2013, the two accounts had
deficits of USD 6.98 billion and USD 3.11 billion, respectively. In the
subsequent quarter, the deficit on the two account decreased to USD 6.49
billion and USD 2.21 billion, respectively. The decrease in the deficit on the
income account was a result of a decline in the payment of interest on public
and private debt as well as the decrease in profits for foreign direct external
investment companies. Meanwhile, the decrease in the deficit on services
trade balance was as a result of a decline of USD 0.23 billion in the deficit on
the transportation sector and an increase of USD 0.4 billion in the surplus
recorded on the travel sector.
The surplus on the goods trade balance and current transfer declined in
quarter I-2014. In comparative terms, the surplus on the two accounts
posted a decrease of 25.52% and 4.96% to reach USD 3.55 billion and USD
17
¹ In nominal terms growth as 35.8%, while Inflation from 2009 until May 2014 was 26.3%, which
translates into real growth of 9.5%

0.97 billion, respectively. The surplus on the goods trade balance decreased
as a result of a USD 3.06 billion drop in the value of non-oil exports. Besides,
the decrease in the surplus was also attributable to an increase in the deficit
on Indonesia oil trade balance. Meanwhile, the slight decrease in the 's
surplus on the current transfer account was as a result of a decline in
government revenues and worker remittances.
The surplus on the capital and financial account decreased in quarter I-
2014. The surplus on the capital and financial account decreased USD 8.85
billion in quarter IV-2013 to USD 7.83 billion in quarter I-2014. The decline in
the surplus was attributable to a deficit on the other investments. The other
investments, which initially recorded a surplus of USD 6.52 billion in quarter
IV-2013, became a deficit of USD 4.14 billion. This was largely due to the
deficit recorded on both the assets and liabilities. Assets posted a deficit of
USD 3.36 billion, while liabilities had a current account deficit of USD 0.77
billion. Nonetheless, the performance of capital and financial account shows
an improvement on a year on year basis. During quarter I-2013, capital and
financial account posted a deficit of USD 0.55 billion.
There was a surge in direct and portfolio investment during quarter I-
2014. Portfolio investments posted the largest surplus from USD 1.79 billion
in quarter IV-2013 to USD 8.97 billion in quarter I-2014. Improvement in the
performance of portfolio investment came as a result of an increase in foreign
capital flows to Indonesia that took forms of various financial instruments
18
Figure 9: Indonesia's Current Account, 2011:Q1-2014:Q1 (USD billion)
The deficit on the current account posted slight improvement
Source: Bank Indonesia and CEIC (2014)

issued by the private and public sector. By the same token, foreign direct
investment also posted an increase, reaching the level of USD 4.53 billion,
which led to an improvement in the surplus on foreign direct investment
from USD 0.53 billion to USD 2.99 billion.
The upward trend in the performance of the balance of payments seems
to have halted in quarter I-2014. This is reflected in a lower surplus in the
balance of payments than in the previous quarter. During quarter IV-2013,
the surplus on the balance of payments was USD 4.41 billion, but dropped by
53.15 % to USD 2.07 billion in quarter I-2014. The decrease in the surplus on
the balance of payments is attributable to a decline in the surplus on the
capital and financial account which failed to make any gains from
improvement in the current. However, in relative terms, the performance of
the balance of payments in quarter I-2014 shows some improvement
compared with the position in quarter I-2013. During quarter I-2013, the
balance of payments recorded a deficit of USD 6.61 billion, but by quarter I-
2014, had bounced back into a surplus. This implies that on year on year
basis, the balance of payments registered an increase of USD 8.68 billion.
19
Figure 10: Capital and Financial Account, 2011:Q1-2014:Q1 (USD
billion)
The surplus on the capital and financial account decreased

4. Despite Registering Improvement, International Reserves
Position is Devoid of Quality
The level of international reserves in May 2014 reached USD 107.048
billion, which was an increase of USD 1.485 billion compared with the
position in April 2014. The international reserve position can finance 6.2
months of imports, which criteria makes it fulfill international adequacy
standard (three months of imports). Subsequently, in April 2014,
international reserves reached USD 105.56 billion, which represented an
increase of USD 2.97 billion compared with the position in March 2014. The
increase in the level of international reserves came as a consequence of an
increase in oil and gas exports during April–May 2014 period and
improvement in capital flow to Indonesia in May 2014. Bank Indonesia,
through PBI No. 14/25/PBI/2012 on foreign exchange revenue derived from
exports and debt related withdrawals seemed to have registered external
success in forcing exporters to deposit their revenues in foreign exchange
banks. Consequently, the policy has contributed to improving Indonesian
international reserve position. Meanwhile, in March 2014, international
reserve position decreased by USD 149 million which represents a decline of
0.145% compared with the level registered in the previous month. The
decline in the international reserve position is attributable to efforts by the
government to repay USD 2 billion of its bond obligations that reached
maturity. To that end, Bank Indonesia, expects the international reserve
20
Figure 11: Balance of Payments, 2011:Q1 -2014:Q1 (USD billion)
An upward trend in the surplus on the balance of payments came to a halt
in quarter I-2014

position to decline in quarter II-2014. On a seasonal basis, quarter II is often
characterized by maturity of securities that require payment of interest,
dividends, and royalties.
On the other hand, since January 2014, the issuing of government
securities (SBN) also contributed to the increase in the level of
international reserves. During quarter I–2014, SBN denominated in
foreign currency increased by USD 3.05 billion. The addition meant that the
government bond (SUN) denominated in various currencies such as USD,
Japanese yen, and Euros to become USD 30.19 billion, JPY 155 billion, and
21
Table 6: Governments Bonds Denominated in Foreign Currencies and
Bilateral Loans, 2012 – 2014 (in USD billion unless stated otherwise)
The government securities denominated in USD increased by USD 3.05
billion in quarter I–2014; meanwhile, bilateral loans posted an increase of
USD 4.45 billion in April 2014
Note:
* = JPY billion
Source: DJPU and CEIC (analyzed, 2014)
Figure 12: Indonesian International Reserves (in USD billion) and
Developments in the Exchange Rate (IDR/USD), May 2011 – May 2014
Level of international reserves shows an upward trend and reached USD
107.048 billion; the depreciation of rupiah continues

Global Sukuk USD 4.15 billion. During quarter IV–2013, the level of to become
SUN denominated in reached USD 27.14 billon, USD whereas SUN
denominated in Japanese Yen reached SBSN reachedJPY 155 billion, and USD
4.15 billion. Overall, foreign portfolio investment, in the form of equity and
SUN, posted a drastic increase of USD 8.51 billion in quarter I–2014,
compared with an increase of USD 1.63 billion in quarter IV–2013.
The rise in international reserves has not led to the appreciation of
rupiah. Rupiah exchange rate by late May 2014 was IDR 11,611 per USD,
which represented a depreciation of 0.69% compared with the value in April
2014 (IDR 11,532 per USD). Meanwhile, rupiah exchange rate in April 2014
depreciated further compared with the previous month. The depreciation of
Rupiah came on the heels of negative market sentiments that arose from the
news relating to the relapse of the balance of payments into a deficit (balance
of payments position in April 2014 recorded a deficit of USD 1.96 billion)
which is coupled with the periodical pattern of debt repayment in external
quarter II. Besides, The Fed policy of gradually reducing quantitative easing
this year also has had significant impact on market practitioners. The
downward trend in the rupiah is expected to continue as The Fed is expected
to raise Fed Fund rate in 2015. Specifically, however, dynamics in Indonesian
politics this year, in which the country will conduct presidential elections
have also had adverse impact on the rupiah exchange rate in May 2014. The
year 2014 being a year of 'politics' is expected to be characterized by high
uncertainty, which for investors means that they have to seek security first as
adopt a wait and see strategy.
5. Achievements in the labor market rate not yet cause for
celebration
Indonesia registered an open unemployment rate of 5.7% in February
2014, which is the lowest in three years. According to BPS, the number of
people classified as unemployed in February 2014 was 7.15 million, which
was a decrease compared with 7.41 million registered in September 2013.
The achievement made in the labor market came on the heels of an increase in
employment in the informal sector and those working part time. he number T
of employees in the informal sector increased by 420,000 February between
2013 February 2014, which represents an annualized increase of 0.60% and
(y-o-y). Besides that, BPS data also showed that the number of part time
workers rose sharply from 22.93 million in February 2013 to 26.40 million in
22

February 2014. Despite marked improvement in the realm of
unemployment, BPS noted that most added employment in February 2014
(46.80 %) was suitable for people with primary education attainment and
below leaving only 7.49% of new employment for employees with university
education. Meanwhile, the participation rate of the work force in February
2014 was 69.17%, which was higher than 66.77% registered in August 2013.
With regards to the structure of employment in February 2014, the
contribution of agricultural sector registered a slight increase. That
said, the number of people employed in the agricultural sector in February
2014 represented a decline for the level that obtained in the previous year.
The number of people employed in the agricultural sector decreased from
41.11 million in February 2013 to 40.83 million in February 2014. However,
employment in the trade and social services sector increased. The above
developments attest to the shift in the structure of employment in Indonesia
from the agricultural sector to other sectors, especially trade, services and
industry. Nonetheless, sector Agriculture, Forestry, Hunting and Fishery
continues to be the most important provider of employment in Indonesia ,
contributing as much as 34.55% to total employment in the economy. Second
in line, based on contribution to employment in the economy in February
2014, was (21.84%), Trade Community, Social, and Personal Services
(15.64%) and (13.02%).Manufacturing Industry
23
Table 13: Labor Force Participation and Open Unemployment in
Indonesia, February 2011 – February 2014 (in %)
Unemployment rate situation registered some improvement

Table 7: Population of 15 Years of Age and Above Who Worked by Main
Industry , 2012-2014 (%)
Despite showing a downward trend, Agriculture, Forestry, Hunting, and
Fishery sector continues to be the main source of employment in Indonesia

1. Price Level in the Economy Remain Stable and Under Control
As the country entered harvesting season for food crops, inflation
trended downwards in March 2014. In March 2014, inflation was 7.32%
(y-o-y), which is lower than the level registered in the previous month. Based
on the composition of inflation in March 2014 (y-o-y), core inflation was
5.35%, inflation due to volatile prices was 5.55% and inflation of government
administered prices was 16.84%. On month-to-month basis, inflation in
March 2014 was 0.08%, declined in April 2014, a trend that continues as
reflected by a decrease of 7.25% (y-o-y) largely due to the effect of harvesting
season on commodity prices. On a year-on-year, core inflation was 5.46%,
inflation of volatile price 5.24%, and inflation of government administered
was 17%. Meanwhile, on a month-to-month trajectory, April 2014 registered
a deflation of 0.02%.
Despite the fact that harvesting season is still underway, inflation in
May 2014 trended upwards. May 2014 registered Inflation of 7.32% (y-o-
y), which is higher than 5.47% (y-o-y) registered in May 2013. In the
meantime, on a month-to-month basis, inflation in May 2014 was 0.16%.
B. MONETARY AND FINANCE SITUATION
Figure 14: Inflation, May 2011 – May 2014 (y-o-y, in %)
Inflation in May 2014 was 7.32% (y-o-y)

Based on the composition of May 2014 inflation on a year-on-year basis, core
inflation was 5.63%, volatile price inflation was 6.17%, and administered
price was 16.23%.
On a month-to-month basis, April 2014 registered a deflation of 0.02%
(m-t-m), largely due to the decline in expenditure on Food Stuff . Food
Stuff Food Stuff experienced a deflation of 1.09% (m-t-m). Some of the that
registered price decline were in 6 sub categories which included condiments
and spices (7.4%). The contribution Food Stuff's inflation accounted for -
0.22% of headline inflation in April 2014. Prices that declined in April 2014,
among others included chili pepper, rice, onions, spinach, and .water spinach
Furthermore, inflation in April 2014 was dominated by the group of Health
commodity, accounted for , group of 0.6% (m-t-m). Meanwhile based on
commodities, the i was dominated by nflation in May 2014 (month-to-month)
Health commodity which increased by 0.41%, followed by inflation on
Prepared Food, Beverage, Cigarette, and Tobacco Housing, (0.35%), and
Table 8: Inflation of Indonesia by Group of Commodities, 2011 – 2014
(2012=100, m-t-m, in %)
Foods induced deflation, inflation in May 2014 was 0.16% (m-t-m)
Note: (1) Food Stuff; (2) Prepared Food, Beverage, Cigarette, and Tobacco; (3) Housing, Water,
Electricity, Gas and Fuel; (4) Clothing; (5) Health; (6) Education, Recreation, and Sports; (7) Transport,
Communication and Financial Services

Water, Electricity, Gas and Fuel Food Stuff (0.23%). Meanwhile, prices of
continued to register deflation as was the case in the previous month, largely
attributable to the decline of prices of red pepper, chili, and rice due to the
harvesting season that is still underway.
In general, cities in Indonesia experienced inflation in May 2014. Out of
82 cities, 67 of them, registered inflation, with Pematang Siantar being the
city that registered the highest inflation of 1.09% (m-t-m). The number of
cities that registered inflation in May 2014 is higher than 43 cities and 45
cities that registered inflation in April 2014 and March 2014, respectively. On
the contrary, 15 cities registered deflation in May 2014, with Pangkal Pinang
being the city that experienced the largest deflation of (1.27% m-t-m). In
April 2014, Pangkal Pinang city registered the highest inflation (1.57% m-t-
m), while Jayapura recorded the lowest inflation in the same period (-1.79%
m-t-m). Meanwhile, in March 2014, Merauke registered the highest inflation
(1.15% m-t-m), while Tual recorded the lowest inflation (2.43% m-t-m).
2. Financial Markets are Still Relatively Bullish
The performance of Indonesia Composite Index (IDX) continues to its
upward trend in May 2014. At the close of trading session in May 2014, IDX
was 4,894, which represents an improvement of 1.11% compared with the
level registered in the previous month. In fact, in May 2014, IDX reached
5,031. The value of 5,000 on the IDX constitutes the psychological level for
investors as it is regarded as a benchmark for new share prices which will
impact market practitioners. At the closure of the trading session in April
2014, IDX registered a value of 4,840, which an increase of 1.51% is
compared with the level recorded in the previous month. Intensive activity of
IDX within the green level is indicative of rising investor confidence in the
current economic condition and economic prospects of Indonesian economy
amidst the year of politics. At a more fundamental level, the resurgence of
investor confidence in Indonesian economy reflects investor perception that
Indonesian economic fundamentals have improved. In quarter I–2014
foreign investors carried out net buy of IDR 24.62 trillion, which is higher
than the level made in quarter IV–2013 of IDR 11.11 trillion.
In the bonds market, the movement of government bond yield by the
end of May 2014 showed a downward trend shedding 12 bps to 8.21%.
Nonetheless, as has been the case in previous months, the movement of the
SUN SUN yield follows movement and fluctuation of inflation. Thus, the yield
27
Monetary and Finance Situation

has shown since January 2014 a downward trend , changed course in May
2014, largely as a consequence of higher inflation that was registered in May
2014 compared with the level in April 2014. During the previous months,
inflation slowed slightly, which in turn induced a downward trend in SUN
yield. The yield on SUN in late April 2014 was 8.09%, which is lower than the
level registered in March 2014 (8.21%).
3. There is No Significant Change in Monetary Policy
The Indonesia Deposit Insurance Corporation (IDIC) has decided to
raise its guaranteed intreset rate by 25 basis points (bps) to 7.75% in
May 2014. The increase in interest rate constitutes an attempt to ensure than
deposits of bank customers are guaranteed. Meanwhile, the upward trend in
bank interest rate continues. Liquidity in Indonesian banking in domestic
assets is tending towards becoming restrictive. This is a consequence of BI
restrictive monetary policy which is reflected in keeping BI rate at 7.5%. IDIC
p the 'solicy will be in effect until September 2014. Meanwhile IDIC
guaranteed for March-April 2014 remained unchanged at 7.5%.interest rate
Interest rate on time deposits continues to be high, higher than the rate
that is applicable on guaranteed deposits. Interest rate on time deposits
28
Figure 15: The Movement of Indonesia Composite Index (IDX) and 10
Years Government Bond Yield, May 2011 – May 2014 (%)
IDX continues the upward trend; meanwhile, SUN yield was 8.21% in late
May 2014
Source: IDX, CEIC, and Bloomberg (2014)

for one month maturity was 8.1% in April 2014. This is an indication that
Indonesian Banking sector is experiencing restrictive liquidity condition,
which is attributable to slower growth in broad money (M2). The slackening
of M2 is as a result of low realization of government expenditure and decline
in credit growth. As has become the practice, the realization/absorption of
government expenditure is initially slow at the outset but picks up pace
toward the end of the fiscal year. By quarter I–2014, government
consumption grew by a mere 3.6% (y-o-y), which is lower than the level
registered in quarter IV–2013 which grew by 6.4% (y-o-y). Interest rate on
credit has risen since January 2014. This is showed by the trend in interest
rate on credit which in February 2014 rose to 12.51%, and in March was
12.53%, while in April 2014 it reached 12.56%.
Restrictive monetary policy in May 2014 continues in line with the
inflation targeting policy and efforts to improve balance of payments
position. This is reflected in outcomes of Bank Indonesia governors council
meeting convened on May 12, 2014, which decided to leave BI rate
unchanged at 7.5%. The decision was taken after factoring in inflation that is
under control, the downward trend shown by the deficit on the current
account, optimism that is exuding from financial markets condition, domestic
29
Figure 16: Developments in IDIC's Guaranteed Interest Rate and Time
Deposits, 2011 – 2014* (%)
The IDIC's guaranteed interest rate increased by 25 bps, meanwhile the
time deposits' interest rate for 1 month is above BI rate and IDIC's
guaranteed interest rate
Catatan:
* = April 2014 (time deposit) and May 2014 (guaranteed interest rate)
Source: Indonesia Deposit Insurance Corporation, Bank Indonesia and CEIC (2014)
Monetary and Finance Situation

demand which continues to offset contraction, and economic prospects of
Indonesian and global economy that are gradually improving. Nonetheless,
Indonesian economy continues to face a number of risks, which among other
factors , include: uncertainty that continues to cast a large shadow on the
economy emanating from the impact of tapering off policy and expected plan
to raise FED Fund Rate in 2015; decline in the value exports attributable to
the weakening of the economy of China which one of Indonesia's key trading
partners; and domestic inflation which is expected to rise due to possibility of
bad weather in the event of El Nino occurrence and government plan to raise
prices of some services that fall under the category of prices administered
(basic electricity rates and LPG 12 kg price).
30
Figure 17: Developments in BI Rate, May 2011 – May 2014 (%)
Bank Indonesia left BI rate unchanged at 7.5% in May 2014

1. GAMA Leading Economic Indicator (GAMA LEI)
Leading Economic Indicator is one of early warning system models that
predicts the movement and direction of the economy in future. GAMA
Leading Economic Indicator (GAMA LEI) is a model developed by the
Macroeconomic Dashboard at the FEB UGM. Turning points and movements
in the GAMA LEI graphed is used to predict the direction of the Indonesian
economy over some period in future. GAMA LEI analysis is based on
quantitative and qualitative methods that generate and produce the best
prediction.
The compilation of GAMA LEI uses various indicators which have been
subjected to robust statistical tests. The performance of a variable such as
investment, automobiles sales, exports and international reserves are
analyzed from both macro perspective such as market capitalization and IDX
of the capital market which have significant influence on the economy.
Nonetheless, it is worth noting that some macroeconomic indicators are
likely to change any time in future.
GAMA LEI is able to make an accurate prediction of the cycle of the
Indonesian economy sometime back prior to the event. The prediction
which GAMA LEI makes has proved its efficacy in predicting the direction of
the cycle of Indonesian economy. The decline in the performance of some key
economic indicators in Indonesian economy have led to the weakening of
economic growth in 2014:Q1 compared with 2013:Q4. In this edition, GAMA
LEI predicts the fluctuation of the economy in 2014, which has been
designated as the year of politics, especially so in the lead up to the
forthcoming presidential elections in July.
The variety of patterns in Indonesian economic growth and projection
of the cycle of the Indonesian economy in GAMA LEI model has the
ability to produce a comprehensive prediction. The prediction of the
business cycle places a lot of emphasis on the movement of the economic
cycle in the direction toward either expansion or contraction for some time in
future. GAMA LEI 2014:Q1 cycle lies at the expansion phase (falls above 100),
31
C. GAMA LEI AND CONSENSUS ON
ECONOMIC PROJECTIONS

albeit signs of declining. As an example: Indonesian economic growth in
2014:Q1 (year-on-year) increased, but the GDP cycle generated by the model
shows a downward trend that is still within the expansion phase.
Outcomes of GAMA LEI prediction in this edition points to a downward
trend in the economic cycle of Indonesian GDP. GAMA LEI model in
2014:Q1 shows downward trend in the economy. The downward movement
of GAMA LEI generates prediction that shows a decline in the cycle of
Indonesia GDP in 2014:Q2. The revelry and garland that is characterizing the
year of politics, which will reach its crescendo in the lead up to the
presidential elections in July, 2014, should instill hope and optimism in the
Indonesian economy. It is the hope that the next government will have the
knack to take advantage of the current momentum to protect, or even
improve, the economic performance in 2014:Q1.
2. Consensus on Projections of Macroeconomic Indicators
The outcome of consensus on three principal macroeconomic
indicators for Indonesian economy--economic growth, inflation, and
exchange rate--showed a trend toward improvement from 2014 to
2015. The consensus was obtained after a survey that was conducted by
Macroeconomic Dashboard team with respondents who were drawn from
lecturers and researchers at FEB UGM.
32
Figure 18: GAMA Leading Economic Indicator
GAMA LEI predicts a downward trend in the cycle of Indonesian economy

In general, real GDP growth (y-o-y) in quarter II-2014 is predicted to
increase compared with real GDP growth registered in quarter I-2014.
Real GDP (y-o-y) is predicted to grow by 5.46% ± 0.37% in quarter II-2014
and 5.47% ± 0.42% in quarter III-2014. On a year on year basis, real GDP
growth in 2014 and 2015 is predicted to be 5.63% ± 0.48% and 6.0% ± 0.6%.
Inflation in Indonesian in 2014-2015 is predicted to exceed seven
percent. In 2014, outcome of prediction indicated that inflation in Indonesia
will be 7.88% ± 1.38%. In 2015, inflation is predicted to decline to 7.36% ±
1.82%. Meanwhile, on a quarter on quarter basis, inflation in Indonesia in
quarter II-2014 and III-2014 is predicted to hover around 7.42% ± 1.56% and
7.90% ± 1.59%.
The exchange rate of rupiah is predicted to appreciate and will trend
toward becoming more stable in 2014. This is despite the current
exchange rate that hovers around IDR/USD 11,000. In quarter II-2014 the
exchange rate of rupiah is predicted to hover around IDR/USD 11,563 ±
IDR/USD 349. In the following quarter the exchange rate will appreciate
slightly to the level IDR/USD 11,553 ± IDR/USD 390. Meanwhile, on a year on
year basis, the exchange rate of rupiah in 2014 is predicted to be IDR/USD
11,366 ± IDR/USD 479 and is projected to appreciate in 2015 to the level of
IDR/USD 11,072 ± IDR/USD 316.
33
Table 9: Estimates of Real GDP growth (y-o-y, in %)
Source: Primary data; processed (2014)
Table 10: Estimates of Inflation (y-o-y, in %)
Table 11: Estimates of Exchange rate of Rupiah (IDR/USD)
Gama LEI and Consensus on Economic Projections

As the incoming of ASEAN Economic Community (AEC) 2015, a pressure
emanating from the global economy is still overshadowing economies
in the region. Since The Fed considers the US economy already gain their
momentum of stability, it then decided to implement the tapering off policy
which constitutes a restrictive monetary policy. Consequently, the policy
'dries up' capital flow from the US to ASEAN economies, which in turn has led
to deeper depreciation of local currencies that has been experienced over
recently (Indonesian Rupiah exchange rate is expected to hover around a new
equilibrium level). Meanwhile, European Union which has to a certain extent
been able to overcome the worst part of the crisis is still accompanied by the
variation of economy performance among economies in the region.
Economic growth in European Union has yet in turn support domestic
consumer demand growth for global goods, including ASEAN products.
While China, as the prominent trading partner for ASEAN economies is
currently undergoing 'cooling' phase of growth, impacting on the
performance of international trade of ASEAN economies.
National Instability is becoming formidable challenge in affecting
economic performance in ASEAN economies. Instability that happened in
ASEAN economies takes into various forms such as political challenges,
economic challenges and security challenges. The impact of natural disaster
that struck the Philippines in 2013, the removal of various subsidy schemes
and adoption of various social security policies in region economies, political
transitions that is underway in Indonesia, political crisis that occur in
Thailand, implementation of sharia law in Brunei Darussalam, open military
conflicts between Viet Nam and China, disputes over Islands in South China
Sea between China and six member nations of ASEAN and the slow pace of
infrastructure development are some of the examples. Some of the examples
cited above attest to the fact that the region's uncertainty will be a future
serious challenge that ASEAN economies will face if they are seriously aiming
to maintain the economic momentum that is currently underway. National
stability is an essential aspect for ASEAN economies to keep global investor
interest in investing into the national manufacturing sector. Nurturing
political stability, economic stability and global public confidence is an
important paperworks for ASEAN economies amidst various challenges that
are rooted in the increasingly intensive national instability.
34
D. ASEAN:
Global Economic Pressure and National Instability
Challenging The Pathway for ASEAN Economic
Community 2015

Maintaining competitiveness amidst global uncertainty and domestic
instability is crucial for the region toward AEC 2015. Competitiveness is
vital to ensure that economies in the region have requisite readiness to enter
AEC 2015. Amidst various challenges, both external and internal, the
government must have the ability to enhance and even building their
economies competitiveness so that when the AEC 2015 take into force, every
parts of the society have the ability and capacity to reap the attendant
benefits.
ASEAN economies have yet register optimal economic growth. During
quarter I-2014, ASEAN economies registered slower growth than expected.
This is due to the fact that the level of economic growth recorded is far below
its potential. Indonesia as the largest economy in ASEAN region registered
slower economic growth. Thailand as the second largest economy in the
region is the only economies in ASEAN that registered economic contraction
for quarter I-2014 (-2.10%), largely because of political dynamics that have
been roiling the country. Singapore and Viet Nam, despite registering sound
economic growth, are still having growth below their target. In general,
Malaysia and Philippines continues to be the key drivers of economies in
ASEAN.
Indonesia as “engine” of economies in ASEAN region registered slower
economic growth. In quarter I-2014, Indonesia registered economic growth
of 5.21% (y-o-y) or 5.56% without take into account Petroleum and Gas
sector. Nonetheless, economic growth in Indonesia in quarter IV-2013
35
ASEAN
Table 12: GDP Growth in ASEAN Economies, Constant Price, 1998–Q1 2014
(y-o-y, %)
Growth recorded in the lower level than what it has achieved in previous
years
Note: average growth for 1998-1999, 2000-20007, and 2008-2009 periods
Data for Q1-2014: Brunei Darussalam, Cambodia, Laos and Myanmar were not available
Source: IMF and CEIC (2014)

(5.72%), fell short of the government target (5.8%). Slower economic growth
based on y-o-y is largely attributable to the adverse impact of the
implementation of the new Law on Minerals which affected mineral trades
with key partners such as United States and Japan. In fact, the adverse impact
of exports could not be offsetted by the democracy euphoria, i.e. legislative
elections in April 2014. Nonetheless strong domestic consumer consumption
which is shored up by rising middle income class has so far shielded
Indonesian economy from experiencing even deeper contraction.
Philippines continues to register the highest economic growth in the
region. Despite having to deal with the effects of a devastating earthquake
and Haiyan super typhoon in 2013, which have undermined the performance
of Philippines economy from attaining its potential, Philippines was able to
register economic growth of 5.7% (y-o-y) in quarter I-2014. Economic
growth which Philippines registered in quarter I-2014, ranked the economy
as the third fastest growing in Asia, behind China and Malaysia, which posted
economic growth of 7.4% and 6.2%, respectively. The success of the
Philippines in maintaining the momentum of the economy in the aftermath of
the disaster, that specially devastated a lot into their infrastructure and their
prominent coconut industry, lay in its ability to emphasize the development
on their services sector. According to Philippines National Statistics
Coordination (NSC), the growth of the services sector in quarter I-2014
succeeded to recorded growth of 3.8%, which was higher than growth rates
in industry and agriculture consecutively of 1.8% and 0.1%.
36
Table 13: Consumer Price Index (CPI) ASEAN Economies, 2000-2014* (y-
o-y, %)
The rise in prices of key public goods and obstruction on regional logistics
was the major factors behind persisting high inflation in the region
Note:
* = Data for Brunei Darussalam, Cambodia, Laos, and Myanmar, are as April 2014 (y-o-y). Data for
Indonesia, Malaysia, Philippines, Singapore, Thailand, and Viet Nam are as May 2014 (y-o-y)
Source: Bloomberg (2014)

Reduction of various subsidy schemes has led into high inflation
pressure in the region. The adverse impact of the reduction in government
subsidies on energy fuels in Indonesia and also energy fuels and sugar in
Malaysia in 2013, contributed to high inflation that the two nations at the
beginning of 2014. Apparently the cutback on subsidies has not succeeded to
prevent the growth of domestic consumer consumption which in turn
leading to high inflation in a number of countries in ASEAN economies.
Political instability also contribute to the soaring of general prices in
the region. The political crisis in Thailand, compounded by rising political
tension in South China Sea are also contributing to the general increase in
prices of goods. Thailand, which is one of the transit countries for many
products from China in the region, is facing distribution problems, which are
attributable to the need to avoid transportation via South China Sea as well as
internal political stalemate that has bedeviled the nation over the last few
months. The above situation has created obstacles in the regional logistics
which in turn has stoked general rising prices of goods.
Investment in forms of shares is still source of attraction for investors to
ASEAN. Unlike other macroeconomic indicators, the performance of capital
markets in ASEAN economies, continues to be buoyant. In quarter I-2014,
capital markets indices in three ASEAN nations registered double digit
growth: Indonesia (14.5%), Philippines (12.87%) and Viet Nam (11.37%),
even Thailand which is currently facing a political crisis was able to register
9.10% growth. Capital market portfolio in ASEAN member economies, which
with the exception of Indo-China countries, which is dominated by private
sector enterprises indirectly indicates that in general global investors
37
ASEAN
Table 14: Capital Markets Index in ASEAN Economies, 2009-2014 (y-o-y, %)
ASEAN economies continues to be a favorite destination for capital market
inflow
Note: Data for 2 January and 30 May 2014 are on year to date basis

perceive on ASEAN is still as a highly promising region for private business.
As quarter I-2014, the pace of appreciation of currencies in the region
has been below expectations. The pace of currency appreciation in the
region has not been able to offset the steep depreciation that affected the
values of currencies during the whole year of 2013. Even further for
currencies of Cambodia, Laos and Viet Nam the value continue to deteriorate.
This situation is an indication that investors perceive economic prospects in
ASEAN economies are not yet as promising as necessary to provide the
required return on investment in foreign exchange market in the region.
The tapering off policy by the US and trade deficits which some
economies in the region have experienced, have had negative impact on
exchange rates of currencies in the region. The tapering off policy which is
being implemented by The Fed in the US, has increased positive sentiments
toward holding United States Dollars, which as a result has undermined
values of currencies in the ASEAN economies. The plan to raise interest rate in
the banking sector in the US, which is an element in the tapering off policy, has
induced various investors to transfer their investment portfolios out from
developing economies. The situation has been exacerbated by persisting
weakness in international trade. Consequently, many economies in region
continue to suffer from rising trade deficits. Thus, various issues and
condition affecting the global economy lately, have contributed much too
undermining value of currencies of ASEAN economies.
38
Table 15: Exchange Rate of ASEAN Currencies Against USD, 2009-2014
(y-o-y, %)
Appreciation of currencies in the region has not been as fast as expected
Note:
Data for 30 May 2014 is Year to Date growth
The sign (+) depicts appreciation of currency, while (-) depicts depreciation of currency
* = in 2012 Myanmar experienced revaluation of her currency

What follows is my perspective and point of view pertaining to the title of this
piece. The author will as much as possible avoid citations that abstract this
writing from ideas that are espoused by the author and desist from padding
that may obfuscate the original idea.
Developing the Indonesian economy that exudes optimism, lies in
concentration efforts on developing its human resources. I divide human
resources into two aspects. , , which emphasizes First hardworking ethos
efforts to maintain economic stability. By working hard, an individual is able
to obtain sufficient income to fulfill needs and requirements, which in turn
augurs well for economic stability at the aggregate level. , developing Secondly
human resources by optimizing right side of the brain. This requires doing
work with . Personal innovation, creativity and productivity leap
development capacity, in general, has reached just 25%. This leaves 75% of
personal development capacity, which is still in underutilized, hence can be
tapped to enhance national productivity. This is why we have to take
measures as much as we can to increase value added from human resources
in order for the economy to attain growth rates that are above average.
Why should the focus be on this aspect of human resources? This is because it
is this resource which constitutes the center of gravity and lynch pin of the
national economy. Endowed with hard working human resources, there is
enhanced capacity to manage other factors of production such as capital,
land, and technology in such a manner that increases value added.
Contrariwise, under condition of weak human resources, value added from
the three factors of production can be as fast.
Developing a leap in value added in human resources also means developing
a competitive economy. This can be initiated by developing three types of
39
E. Current Issue
Inspiring Economic Optimism to the Upcoming National Leader
Muhammad Edhie PURNAWAN, PhD²
² The author is the Deputy Dean, FEB UGM (Faculty of Economics and Business, Universitas Gadjah
Mada) for Research, Collaboration, Alumni and Social Concerns

strengths. The first strength is . The second strength is honesty
innovation/imagination networks, and the third strength is . Equipped
with the three strengths, Indonesia will be able to achieve a competitive, high
growth, and confident nation in facing advanced nations. The elucidation of
the three strengths follows below.
First, the strength in honesty. This strength is the foundation of developing all
kinds of human resources. Developing honesty strength will put the
foundation of the economy on a sound footing, which will not be vulnerable to
earthquake shocks, storm gusts, and other natural disasters. Thus, without
honesty strength as its foundation, the structure of the economy, though
seemingly splendid and invincible, will be susceptible to collapse with ease.
To that end, there should never be an argument that espouses the notion that
honesty can be delayed for honesty is the mother of all good deeds.
Secondly, innovation/imagination strength. Just imagine two phenomena
below. The first is the event of South Korea's phenomenon. Based on annals of
history, this country has been able to achieve huge leap in value added thanks
to emphasis the country has made on innovations in semiconductor
technology. The founding fathers of this country formulated a grand design
for the semiconductor as the cornerstone of its industrial development.
Today, we bear witness to the reality that semiconductor innovations have
made achieved rapid advancement becoming the engine that supports the
gargantuan telecommunications such as Samsung and LG and spectacular
automotive industry such as Hyundai, Daewoo and Kia. The major secret that
explains the success they have achieved lies their ability to acculturate huge
leaps in innovation strengths. The second is the Steve Jobs' technopreneur
phenomenon. Equipped with USD 10 as cost of production, an iPhone is sold
at USD 400 in US. What this means is that, innovation makes possible a leap in
imagination that creates USD 390 in value added, and not sweating profusely.
This type of intelligence can never be emulated by just collecting knowledge,
rather fostered through the development of imaginative capabilities. An old
adage of Einstein said that “imagination is more important than knowledge.
For knowledge is limited to all we now know and understand, while
imagination embraces the entire world, and all there ever will be to know and
understand.”
Upon achieving honesty and cementing that with innovation in making use of
imagination capabilities, the third strength is network. Network strength is
very crucial to economic development. Equipped with this strength, a nation
40

is not only known or famous, but also becomes a good friend for many. To
become a good friend, calls for good interpersonal skills. Inculcating pattern
of thinking that appreciates others is the key pre condition for developing a
wide network. History has over centuries proved that good relations among
humankind have the ability to propel an individual and institution to higher
levels of advancement. To that end, good networking is an absolute condition
for making a huge leap in economic valued added. And always remember:
there will never be a bird that flies for a long distance across national
boundaries by only relying on its wings alone, without its friends.
* * *
Based on my observation of the two presidential candidates in the
forthcoming presidential elections (Prabowo vs Jokowi), my suggestion is
that the two should focus and enthusiasm on efforts to increase human value
added injected into the Indonesian economy. The way forward can begin
through crafting a basic paradigm and concept, which can serve as
foundation for making huge leap in value added, after which process the
search for techniques and mechanisms to implementing thereof, and
eventually contribute to accelerating the engine of Indonesian economy.
Absence of paradigm and concept and visualization of how to achieve value
added is rooted in the paucity of capable human resources in this nation.
National leaders should not only become the father of central gravity, but
must also have major ideas that can propel the economy forward through
major leaps that creates solutions to problems that have for long hampered
sustainable increase in value added by human resources. In light of that, the
key to all gates of development lie in the country's human resources and
efforts that can foster a major leap in value added for Indonesian economy.
Final note: Please fasten your safety belt. We are going to accelerate the
Indonesian economic growth >>> full-speed!
Insya Allah.
41
Current Issue

By the time this piece came to press, Indonesian economy was still following
an upward trend, albeit with some indicators were posing worrying signs.
Indicators on Indonesia competitiveness continue to be low which as
reflected by the depreciation of rupiah, which has not stimulated
improvement in exports to any significant degree. Consequently, the value of
imports has surged, which has not been offset by significant increase in
exports, led to a decline in net exports. Besides, Bank Indonesia has so far not
implemented any drastic monetary policy that would have helped in
improving the performance of the economy. This is because any monetary
policies that are directed toward improving the position on the trade account,
current account, and balance of payments, must also be supported by
government policies.
Meanwhile, other indicators show rising financial burden on government
finances due to the projection of lower revenues than target and rising fuel
subsidies. As per the latest deliberations on 13 June 2014 between the
budgeting commission of the parliament and the government, a decision was
reached to raise the budget deficit to 2.4% of GDP, which is expected to be
financed by issuing SBN (government securities) of IDR 72 trillion. What is
interesting is that despite the fact that the burden for fuel subsidies is still
large due to rising cost of imported fuels, budget allocation for subsidies is
reduced in the Revised Budget Plan 2014 from IDR 285 trillion to IDR 246.49
trillion. Consequently, the new government will have to bequeath a carry over
a staggering burden of subsidies of IDR 46.26 trillion.
GAMA LEI has been able to 'capture' developments of various economic
indicators in Indonesian economy to predict a decline in the cycle of the
country's GDP in the near future. Nonetheless, it is worth noting that the
decline in economic cycle is not as a result of slower economic growth per se.
This is because economic cycle excludes factors that are volatile. To that end,
the consensus reached on the direction of the economy points to continuing
economic growth (y-o-y) in quarter II-2014, with signs of acceleration in the
future.
F. Economic Outlook

That said, the projection of the decline in GDP cycle should be cause for
concern, hence an issue that will call for serious attention for policy makers.
Policy makers should not be confined to considering technical aspects, but
equally important, need also to be open and unequivocal in order to earn
public trust. Last but not least, the relative success in conducting the
legislative elections has prevented the Indonesian economy from plunging
into instability. Such a condition should be maintained as the country
prepares for presidential elections on July 9, 2014. The importance of
economic stability can be overemphasized given the fact that it is not by
ensuring that economic growth continues unhampered that public
expectations of high, and fair and sustainable social welfare can be achieved.
Economic Outlook

MACROECONOMIC DASHBOARD
FACULTY OF ECONOMICS AND BUSINESS
UNIVERSITAS GADJAH MADA
Prof. Dr. Sri Adiningsih, M.Sc.
Head of Researcher
sadining@ugm.ac.id
+62 274 548 517 ext 373
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Senior Researcher
samsubar@ugm.ac.id
+62 274 548 517 ext 373
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m.ryan.sanjaya@ugm.ac.id
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INDONESIAN ECONOMIC REVIEW AND OUTLOOK
MACROECONOMIC DASHBOARD TEAM
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Jl. Humaniora No. 1 Bulaksumur, Yogyakarta 55281
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Website: www.macroeconomicdashboard.com

IERO NO 2/YEAR III/JUNE 2014

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