Iero no 2 year ii june 2013

No 2/Year II/June 2013

INDONESIAN ECONOMIC
REVIEW AND OUTLOOK

Potret kemiskinan di Indonesia

Antrian pembelian BBM

Kemacetan di Yogyakarta

Macroeconomic Dashboard
Faculty Economics and Business
Universitas Gadjah Mada

Foreword
Indonesian Economic Review and Outlook (IERO) is a
quarterly bulletin
which is published by the
Macroeconomic Dashboard, Department of Economics –
Faculty of Economics and Business, Universitas Gadjah
Mada (FEB-UGM) in collaboration with PT Bank
Mandiri, Tbk.
The current IERO theme is the “Indonesia Economy
becomes a hostage of the fuel,” in the midst of the large
economic pressure, shadowed by the global economy
uncertainty. In addition, the ambiguity – whether the
subsidized fuel price will rise or not – has worsened the
situation. Yet, it is a dilemma. If the fuel price goes up, the threatening high inflation will
happen. On the other hand, if the fuel price stays the same, the national financial burden
will increase at the rate that may collapse the state budget (APBN). The global condition
as well as the Indonesian dilemma upon the subsidized fuel will have negative impact
upon the Indonesian Economy. This, in fact, is match to what the GAMA Leading
Economic Indicator (GAMA LEI) has predicted.
GAMA LEI is an indicator that produced by the Macroeconomic Dashboard to forecast
the Indonesia future Economy. The GAMA LEI is proven to have an accurate prediction.
In its past editions GAMA LEI had predicted the decellaration of Indonesia Economic
Growth. Although as such upstreamed the Indonesian Government (including Bank
Indonesia) and other International organization (i.e. Asian Development Bank)
projections – which believed that Indonesia Economy would be better – yet in reality
GAMA LEI prediction was right. Hence, GAMA LEI enables the public and business
decision makers to grasp the future economy so that they can anticipate the situation.
Given such contemporary themes provided by the IERO publications, it is a hope that
public policy and business decision makers, including academia, may acquire actual
information concerning the Indonesian economy.

Enjoy reading

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

Indonesian Economic Review and Outlook

I. Latest Economic Developments

T

he Indonesia's economy, which is measured by the amount of
of Gross Domestic Product (GDP) at current prices registered
growth from IDR 1,975.5 trillion in Q1 2012 to IDR 2,146.4
trillion in Q1 2013. Meanwhile, GDP at constant prices 2000 increased
from Q1 2012 amounted for IDR 633.2 trillion to IDR 662.0 trillion in
Q1 2013.
However, as predicted by GAMA LEI, the Indonesia's economic
growth in the Q1 2013 registered slight growth of just 6.02%, which
was lower than 6.29% posted in the same period in 2012 and even
lower than 6.1% in Q4 2012. This is the second time GAMA LEI has
been able to predict precisely the signs of slower economic growth.
On the contrary, predictions of the Indonesian government, pointed
to signs of stonger economic growth. Moreover, Bank Indonesia had
projected economic growth of 6.2% in the first quarter 2013 which was
atrributable to strong investment and household consumption
expenditure. Besides, GAMA LEI also succeeded to outperform
predictions of the Asian Development Bank, which pointed to growth
of 6.4 % of the Indonesian economy. The reality is that the Indonesia's
economy experienced lower growth in the Q1 2013 than predictions
of economic analysts'experts, which is commensurate with results of
GAMA LEI research that stressed the fact that the performance of the
Indonesia's economy in early 2013 would not be better than that
posted in the previous year.
Subsequently, based on industrial origin, with the exception of
Mining and Quarrying, which contracted by 0.43% (YoY), all other
sectors posted growth in Q1 2013. Meanwhile, sectors that registered
high growth in Q1 2013 on a year-on-year basis include Transport and
Communication (9.98%), followed by Financial, Ownership, and
Business Services (8.35%), also the Construction sector (7.19%).
From the vantage point of expenditure, slow economic growth in Q1
2013 was attributable to contraction in domestic demand and a
weakeaning export. Household Consumption also posted slower
growth as a result of lower purchasing power caused by high prices of
food commodities and inflation expectations that were genetared by
uncertainty that continue to surround prices of subsidized fuel prices.
Meanwhile, Government Consumption showed slow growth at the

Macroeconomic Dashboard Universitas Gadjah Mada
1

Latest Economic Developments

Figure 1: Growth Rate of GDP at Constant Price 2000 by Industrial Origin, 2005 – 2013* (YoY, in %)
Economic Growth in Q1 2013 was merely 6.02%, the lowest growth rate over the last three years.
Agriculture, Liv estoc s, Forestry and Fishe ries
k

Mi ni ng and Qua rrying

Ma nufac turing

E lec tricity, Gas a nd Wa te r Supply

Construction

Trade, Hotel and Res taurant

(%)

T ra nsport and Communica tion

Financia l, Owne rship and Business

S ervice s

GDP (RHS)

(%)

18

8

16
7
14
6
12
5

10

8

4

6
3
4
2
2
1

0
2009:Q1

2009:Q2

2009:Q3

2009:Q4

2010:Q1

2010:Q2

2010:Q3

2010:Q4

2011:Q1

2011:Q2

2011:Q3

2011:Q4

2012:Q1

2012:Q2

-2

Source : Central Bureau of Statistics (BPS) and CEIC (2013)

start of the year due to the low absorption rate of government
expenditure in general and on goods, in particular. On the other
hand, investment started to slow down due to limited domestic and
international demand. Besides, as the general elections approaches,
investors are expected to go into a “wait-and-see” attittude. To that
end, slower growth in investment and consumption has induced
contraction in imports. Based on year on year figures, Household
Consumption posted in Q1 2013 grew by 5.17%, Government
Consumption registered 0.42% growth, Gross Fixed Capital
Formation grew by 5.90%, while Exports increased by 3.39%, and
imports contracted by -0.44% .
As a way forward, the government can implement a number of
policy alternatives to strengthen economic growth in the Q2 2013.
One such policy is to accelerate the state budget absorption, which
still has less contribution on Indonesia economic growth.
Additionally, it is an onus on the government to maintain consumer
confidence by ensuring that purchasing power on the general public
is not undermined as well as providing low inflation. There is also
need for the government to increase its focus on revitalizing
infrastructure which is vital for improving investment. This is an
issue that calls for urgent attention as slower investment is not only
due to insufficient incentives but also the availability of sufficient
requisite infrastructure, supporting institutions, and sound
macroeconomic conditions

2

2012:Q3

2012:Q4

2013:Q1
0


Figure 2 : Growth Rate of GDP at Constant Price 2000 by Expenditure, 2005 – 2013* (YoY, in %)
GDP growth slowdown in Q1 2013 due mainly to a moderation in domestic demand and investment amidst
limited recovery of the export sector
(%)

CONSUMPTION EXPEN DITURE : HOU SEHOLD

CONS UMPTI ON EX PENDITURE : GOVERNMENT

GROS S FIXED C APITAL FOR MATION

EXPORT

IMPORT

30

20

10

0
2009:Q1

2009:Q2

2009:Q3

2009:Q4

2010:Q1

2010:Q2

2010:Q3

2010:Q4

2011:Q1

2011:Q2

2011:Q3

2011:Q4

2012:Q1

2012:Q2

2012:Q3

2012:Q4

2013:Q1

-10

-20

-30

Source : Central Bureau of Statistics (BPS) and CEIC (2013)

.Although Indonesia's economy growth continued to slow down,
the unemployment rate (TPT) by February 2013 reached 5.92%,
which represents a decrease from 6.14% in August 2012, as well as
the figures registered in February 2012 (6.32%). Nonetheless, the
decrease in unemployment rate, which is equivalent to 440,000
people, from 7.61 million in February 2012 to 7.17 million in
February 2013, is by all accounts small. This is the more so, given the
fact that the number of underemployment rose from 12.77 million in
August 2012 to 13.56 million in February 2013.
The number of economically active population in Indonesia between
February 2012 and February 2013 increased by 780,000 people, from
120.41 million people in February 2012 to 121.19 million people in
February 2013. Nonetheless, there was a decrease in labor force
participation rate of 0.45% during the same period of time (February
2012 – February 2013)
The labour force participation rate in February 2013 was 69.2%,
which represented a decrease from 69.66% in February 2012.
Nonetheless, in comparison with August 2012 figures (67.88%), the
labor force participation rate for February 2012, represented an
increase.
Based on structure of main industry, there isn't any significant
change in the main source of employment between February 2011

3


and February 2013. Agriculture, trade, social services, and industrial
sector continued to be major sources of employment in Indonesia.
The number of people employed was higher in February 2013
compared with that in February 2012. The number of people
employed increased by 790,000 people during February 2012 February 2013, with trading sector contributing 3.29%. A similar
trajectory is evident in the construction sector, which posted an
increase of 12.95% from the previous year, as was the industrial
sector, which registered an increase of 4.01% from 14.21 million
people in February 2012 to 14.78 million people in February 2013.
Nonetheless, some sectors showed a decrease in number of people
employed in February 2013 are the agricultural sector and other
sectors, which posted decrease for about 3.01% and 5.73%
respectively compared to February 2012.
A decrease in unemployment rate makes a positive contribution in
poverty reduction. Based on the latest BPS data, the number of
people categorized as poor in Indonesia was 28.59 million in
September 2012 (11.66%), which was decrease from 36.1 million
(16.66%) registered in February 2004. If compared with the number of
poor people in March 2012, the number of poor people decreased by
0.54 million.
Figure 3: The Labor Participation Rate and Unemployment Rate in Indonesia,
February 2005 – Febuary 2013 (in %)
The labor force situation in Indonesia shows improvement in number of economically active population
as well as in reducing unemployment rate, despite an increase in underemployment rate
Labour Force Participation Rate (LHS)

(%)
71

Unemployment Rate (RHS)

(%)

12

11.2
10.5

10.3

10.3

70.0

9.8

70

69.7

9.1
8.5

8.4

69

7.9
7.4

68

68.0
67.3
66.8

67.0

66.7

67.8

67.6
67.2

67.2

66.6

67.7

6.8

6.6

6
6.3

6.1

5.9

4

66.2

65
64

Source: BPS and CEIC (2013)

4

8

68.3

7.1

67.9

67
66

10
69.2

8.1

2

0


Table 1: Population 15 Years of Age and Over Who Worked by Main Industry, 2011 – 2013*
(in millions people)
Until February 2013, Agriculture, trade, social services, and indutrial sector, continued to be
the main source of employment.

Main Industry
Agriculture
Manufacturing Industry
Construction
Trade
Transportation, Storage, and
Communication
Financing
Community,
Social,
and
Personal Services
Others

2011
February
August
42.48
39.33
13.70
14.54
5.59
6.34
23.24
23.40
5.58
5.08

2012
February
August
41.20
38.88
14.21
15.37
6.10
6.79
24.02
23.16
5.20
5.00

2013
February
39.96
14.78
6.89
24.81
5.23

2.06
17.02

2.63
16.65

2.78
17.37

2.66
17.10

3.01
17.53

1.61

1.70

1.92

1.85

1.81

Source : BPS Press Release No 35/05/Th.XVI, 6 Mei 2013

However, it is worth noting that the poverty line used in September
2012 was IDR 259,520 per capita per month, which is an increase of
4.35% compared with the level used in March 2012. On closer
observation, therefore, there is no significant reduction in the number
of poor people. As an illustration, based on poverty line of IDR 259,520
per month, a family
which comprises a husband, wife, and one kid, with a single source of
income of IDR 800,000, is not categorized as poor. Nonetheless, there is
little doubt that living standard of such a family is far from decent.
Based on the area of living, the number of poor people in Indonesia
living in urban and rural areas decreased by 0.14 million (0.18%) and
0.40 million (0.42%) respectively from March 2012 to September 2012.
The number of people categorized as unemployed and poor
decreased, as income per capita in Indonesian increased from USD
3,004.9 in 2010 to USD 3,596.27 in 2012 (CEIC, 2013).
Nonetheless, such rosy condition should not induce complacency by
government, given the fact that in the not too distant future, prices of
subsidized fuels will be raised. Undoubtedly, the hiking of prices of
subsidized fuels will induce an increase in prices of gods and services
including basic commodities, and consequently contribute to an
increase in the number of poor people in Indonesia. The Indonesian
government's policies to mitigate the adverse impact of the increase in
prices of subsidized fuels on the number of poor people will involve
various compensation packages, such as a temporary direct assistance

5


Table 2 : Number and Percentage of Poor People in Indonesia, 2004 – 2012
Number of Poor people in Indonesia shows a downward trend over the last 5 years.
However, the increase in prices of subsidized fuels is likely to trigger a drastic increase
in the number of poor people
Year
Feb – 04
Feb – 05
Mar – 06
Mar – 07
Mar – 08
Mar – 09
Mar – 10
Mar – 11
Sep – 11
Mar – 12
Sep – 12

Number of Poor People in Indonesia
(in million people)
(in %)
36.1
16.66
35.1
15.97
39.3
17.75
37.17
16.58
34.96
15.42
32.53
14.15
31.02
13.33
30.02
12.49
29.89
12.36
29.13
11.96
28.59
11.66

Source : Press Release BPS No.06/01/Th.XVI, 2 January 2013

for community (BLSM), a food subsidy program (Raskin), the family
of hope scheme (PKH), and scholarships for the poor (BSM).
However, some questions marks surround the effectiveness of the
package of policies. In any event, not few people consider such
compensation packages as political ploys and patronage to the
benefit of various Ministries whose cadres assume Ministerial
portfolios.
A review of Indonesian experience in the aftermath of an increase in
fuel prices in the past can shade some light on what to expect. The
Indonesian government raised prices of subsidized fuels from IDR
1,810/liter which took effect on 1 January 2003 to IDR 4,500/liter on 1
October 2005, the policy adversely affected people's purchasing
power. The drastic drop in people's purchasing power was
attributable to an increase in the cost of public transportation.
Consequently, the number of people categorized as poor increased
drastically to 39.3 million people (17.75%) in March 2006, which
represented a significant uptick compared with 35.1 million people
(15.97%) registered in Febuary 2005. This was despite temporary
unconditional cash transfer (BLT), which the government
implemented with the intension of mitigating the impact of the
increase in prices of subsidized energy fuels on the well being of the
poor. Apparently, the surge in the number of poor categorized as
poor in the aftermath of the policy, attested to the fact that it was
potent enough to mitigate all the adverse effects of the policy on the
poor.

6


II. Monetary Development in Indonesia
A. Money Supply
In April 2013, the central bank registered an increase in the level of
money supply, M1 and M2 of IDR 836.51 trillion and IDR 3,364.12
trillion. If compared to the same period in the previous year, the level
of M1 and M2, showed an increase of 16% and 15% respectively.
The increase in money supply has a tendency of contributing to
depreciation of Rupiah and an increase in general level of prices. The
high growth in money supply contributes to high inflation as it
induces a rise in demand which if not accompanied by growth in the
real sector generates an increase in prices.

B. Inflation
The level of inflation in Indonesia showed a decrease in May 2013,
weighed down by a decrease in commodity prices. Based on BPS
data, the level of general inflation year on year in May 2013 was
5.47%, which was lower than 5.57% recorded in March 2013. The
decrease in inflation in May 2013 was in part an impact of the Policy
implemented by the Ministry of Trade, which was embodied in the
Minister of Trade regulation No. 16/M-DAG/PER/4/2013 on the
importation of Horticultural products. The thrust of the regulation
laid in its provisions that loosened restrictions on the importation of
some agricultural products which included garlic. Besides, the
Minister of Trade implemented the regulation in the wake of a note of
complaint to Word Trade Organization (WTO), issued by the United
Figure 4: Money Supply, 2009 – 2013* (in IDR Trillion)
In April 2013 M1 increased by 16% while M2 rose by 15% compared to April 2012
M1

IDR TRILYUN

M2

4000
3500
3000
2500
2000
1500
1000
500
0

Sumber : Bank Indonesia dan CEIC (2013)

5
7

Monetary Development in Indonesia

Figure 5: Inflation Rates by Component Group, 2009 – 2013* (YoY, in %)
Indonesia recorded lower annual inflation rates in the aftermath of loosening import restrictions on
agricultural products.
H E A D L IN E

(% )

C ORE

A D M IN I ST E R E D

V O L A T IL E

20

15

10

5

0

-5

-1 0


Figure 6: Inflation Rate by Expenditure Group, 2009 – 2013* (MoM, in %)
Deflation which occurred in May 2013 was attributable to a decrease in prices of processed
food and clothing
(%)

6

Food

Processed Food, Beverages, Tobacco

Housing, Electricity, Gas and Fuel

Clothing

Health

Education, Recreation and Sports

5

4

3

2

1

0

-1

-2

-3


States which complained about increasing complications and
uncertainty of Indonesian import regime, which had adverse impact
on exports of US agricultural products to Indonesia. As the US trade
representative noted (2013), “import regulations in Indonesia
violate the obligations of WTO members, including 1994
agreements on Tariffs and Trade”.
In the meantime, core inflation and volatile show a decrease from
4.12% and 12.06% recorded in April 2013 respectively to 3.99% and
12.06% respectively in April 2013.

8

Transportation, Communication and Finance


Comparing to April 2013, the economy in May 2013 experienced
deflation of 0.03% which also means a decrease in the consumer price
index from 138.64 in April 2013 to 138.60 in May 2013. The deflation
is attributable to the decrease in prices of processed food category
and clothing category, these categories recorded -0.83% and -1.22% of
growth respectively in May 2013.
Despite a decrease in inflation rate, there is needed to anticipate the
potential impact of an increase in prices of subsidized energy fuels on
general level of prices. Based on Bank Indonesia predictions, the raise
in prices of fuel is projected to induce an increase inflation level to
7.76%. Based on government projections, the price of premium fuel
will be raised to IDR 6,500/liter, while solar will be raised to IDR
5,500/liter. However, there was still no information on the measures
Bank Indonesia will take to stymie the increase in inflation.

C. Interest Rate
Bank Indonesia Board of Governors meeting on 13 June 2013 decided
to increase BI rate at level 6.0%. Nonetheless in the event the
government goes a head to raise prices of subsidized fuels, there is
little doubt that Bank Indonesia will have to adjust its monetary
policy. In line with BI's decision to increase BI rate by 25 basis point
(bps), Indonesia Deposit Insurance Corporation (LPS) has also
Figure 7: Developments in the BI Rate, SBI, Bank Deposits, and Guarantee Rate,
2009 - 2013* (in %)
Along with the increase of BI rate, the maximum guarantee rate has also risen by LPS as response on
high inflation expectation as well as to maintain sound macroeconomic and stable financial system
(% )

D e p o s it R a t e 1 M o n t h

M a x G u a r a n te e 3 M o n th s

B I R a te

B a n k I n d o n e s i a C e r t if ic a t e s R a t e 9 M o n t h s

12

10

8

6

4

2

0

Source : Bank Indonesia and CEIC (2013)

9

Monetary Development in Indonesia

increase the maximum guarantee rate by 25 bps for period between
June 15, 2013 and September 14, 2013. Consequently, maximum
guarantee rate on rupiah-denominated increase at level 5.75%. LPS'
decision in increasing the maximum guarantee rate is based on the
increase of BI rate as response on high inflation expectation as well as
to maintain sound macroeconomic and stable financial system.
In the meantime, in April 2013, the level of foreign exchange reserves
increased from USD 104.80 billion to USD 107.27 billion. The increase
in the level of foreign exchange reserves is attributable to Indonesian
government policy that involved the issuing global bonds in April
2013. The government issued international bonds to the value of USD
3 billion, of which USD 1.5 Billion has 10 year maturity bearing 3.34%
coupon, and USD 1.5 billion, with 30 year maturity, bearing 4.63%
coupon.
Nonetheless, the increase in the level of foreign exchange reserves in
April 2013 still falls short of USD 124.6 billion, the record since
Indonesia gained independence, which was registered in August
2011. However, in May 2013 foreign exchange reserve decrease again
to USD 105.149 billion.
By May 2013, both domestic and external factors continued to weigh
in on the movement of the exchange rate of Rupiah. With respect to
external factors, uncertainty of economic conditions of developed
nations, and compounded by down ward revision of economic
growth projection by IMF in April 2013, continued to exert
downward pressure on Rupiah. IMF predicts that the global
economy will grow by 3.3 % in 2013, which is lower than initial
projection of 3.5%. The revision of global economic projection is an
indication that economic recovery continues be bedevilled by
uncertainty.
With respect to domestic factors, Rupiah exchange rate has been
weighed down by negative sentiments that emanated from an
increase in inflation in March 2013, attributable to obstacles that
hampered the distribution of food and uncertainties that continue to
character government policy on subsidized fuels. Foreign investors
perceive government as very uncertain in raising fuel prices, which
has contributed to undermining confidence in Rupiah. In late May

10


Figure 8: Indonesian Foreign Exchange Reserves, 2009 - 2013* (in USD Billion)
The increase in Foreign exchange reserves until April 2013 is propped up by the issuing of foreign
currency denominated global bonds by the government.
International Reserves

USD Billion

140

120

100

80

60

40

20

0

Source: Bank Indonesia and CEIC (2013)

Figure 9: The Exchange Rate of Rupiah and Share Prices, 2009 - 2013*
Uncertainty that shrouds the increase in prices of subsidized fuel, is one of the factors that has contributed
to the depreciation of Rupiah
ID X

ID X

ID R p e r U S D (R H S )

6 00 0

1 40 00

1 20 00

5 00 0

1 00 00
4 00 0
8 00 0
3 00 0
6 00 0
2 00 0
4 00 0

1 00 0

2 00 0

0

0

Source: Indonesia Stock Exchange, Bank Indonesia and CEIC (2013)

2013, the value of Rupiah depreciated by 0.82% (mtm) to IDR 9802 per
USD.
In the meantime, the movement of the composite share price index in
May 2013 shows an upward trend. The Indonesia Composite Index
(IDX) hovered around 5068, which is higher than 4453, registered at the
start of 2013 (represents an increase of 13.8%). However, the IDX is
likely to experience down ward correction once ramifications
associated with uncertainty of government policy on subsidized fuels
are factored in

11

Developments in Fiscal and Government Debt

III. Developments in Fiscal and Government Debt
A. Development in Fiscal
In Q1 2013, Indonesia posted economic growth of 6.02%, which is
lower than 6.29%, registered in the same period previous year.
Slower economic growth is by and large, attributable to low
utilization/absorption rate of the national budget, which in quarter I,
was under 10 percent. In addition, the decrease in the performance of
trade balance caused by falling commodity prices also contributed to
lower than expected economic growth in the first quarter. To that
end, it is not surprising that such conditions culminated in the
revision of macroeconomic assumptions the 2013 state budget.
The RAPBN-P 2013 contains revised macroeconomic assumptions,
which include economic growth that is revised down wards from
6.8% to 6.3%, which is attributable to uncertainty that continues to
characterize the global economy. The intension of the government to
raise prices of subsidized fuels led to an upward revision of the
assumption of inflation from 4.9% to 7.2%. Indonesia Crude Price
(ICP) was revised upward from USD 100 to USD 108, lifting of
petroleum oil was revised down wards from 900,000 barrels per day
to 840,000 barrels per day, and lifting of natural gas was revised
down ward from 1.36 million barrels to 1.24 million barrels per day.
Consumption of subsidized fuel for March 2013 had surpassed the
quota set. To that end, it is expected that the quota set in the national
budget for over all consumption of subsidized fuels will reach 48.5
million kiloliters, a quantity that is far higher than 46 million
kiloliters set in the 2013 national budget. This is the main reason that
Table 3: Revised State Budget Plan 2013
Government proposal to raise fuel prices will induce higher inflation
in the revised state budget plan

Source: Ministry of Finance (2013)

12


compelled the government to implement the policy which once
coming into force will restrict the use of subsidized fuels. On the
other hand, there is need the reduction of expenditure on subsidized
fuels to ensure that the government has healthy and sound fiscal
space.
In the 2013 state budget, the allocation budget for subsidized fuel
expenditure reached IDR 193.8 trillion. This is a staggering amount of
expenditure, which is more than half of all budget allocations for all
various subsidies. The central government spent 16.7% of its
expenditure on fuel subsidies. Moreover, if combined with subsidies
on electricity, 23.8% of government expenditure was spent on
subsidies. Doubtless, budget allocation for subsidized fuels will be
higher that budget allocations because fuel consumption will
surpass the quota set in the national budget. As late as early June, the
government and DPR were still locked in deliberations on the revised
state budget plan that relates to proposed raise in prices of
subsidized energy fuels.
For many sources, current budget allocation for subsidized fuels is
too large and poses a danger to sustainable fiscal. In addition, the
staggering amount spent on subsidized fuels has evoked sentiments
of injustice in the expenditure of the national budget. To illustrate the
point, government expenditure on subsidized fuels, which has been
decried for its inefficacy, and poor targeting, is higher than
government expenditure on capital goods and social contribution
which received budget allocation of just IDR 184.4 trillion and IDR
73.6 Trillion in 2013 national budget, respectively. As a comparison,
budget allocation on subsidized fuels is equivalent to the
construction of 43 Suramadu bridges, 15 MRT lines in Jakarta, or
4,845 kilometers of road tolls. Moreover, higher consumption is likely
to generate higher budget deficit, which the government will be
compelled to finance by issuing government bonds.
In relation to the proposal to raise fuel prices, the government
proposes compensation scheme for the poor. The new scheme, which
bears the name, temporary direct assistance for community (BLSM)
which is not fundamentally different from the temporary
unconditional cash transfer (BLT) was intended to distributed to the
poor for the same purpose in the past. Despite fears that the policy

13


Figure 10: Central Government Expenditure
Expenditure on Energy Subsidies is Projected to Increase in the RAPBN-P 2013
APBN 2013 (%)

RAPBN-P 2013 (%)

30
25.97

25

23.80
20.93

20

20.13
17.39
15.98

15.97 15.67

15
9.81 9.46

10

6.38 5.98

5

3.68 4.05
1.73

0
Personnel
Material
Capital
Expenditure Expenditures Expenditures

Interest
Payment

Energy
Subsidies

Non Energy
Grant
Subsidies Expenditures


may be prone to abuse in furtherance of political interests, the
government seems unwavered in its decision to implement the
compensation program.
Based on program plans, BLSM will benefit poor households, by
mitigating the adverse impact of the increase in fuel energy prices on
their consumption levels. Budget allocation for BLSM in the revised
national budget plan 2013, is put at IDR 11.6 trillion, which will be
distributed to 15.5 milion households that are categorized as very
poor (RTSM) within each receiving IDR150,000 per month for the
duration of five months. However, House of Representative – Budget
Committee decided to distribute BLSM amounted for IDR 9.3 trillion,
so that every RSTM is going to receive IDR 150,000 per month for four
months.
Tax revenues have for long become a reliable source of government
revenues. However, tax revenues for 2013 are likely to miss the target
of IDR 1,193 trillion set in the 2013 state budget to IDR 1,139.3 trillion
in the revised state budget plan for 2013. The decrease in tax
revenues is in part attributable to slow export performance and
weakening domestic economy, both of which are traceable to
uncertainty that continue to bedevil the global economy.
Table 4 depicts trajectory of tax revenues in the domestic economy by
April 2013, outside customs. In comparison with the same period of

14

2.57

0.31 0.20

Social
Assistance

Other
Expenditures


Table 4: Domestic Tax Revenues for 1 January to 30 April 2013 (in IDR Billion)
Domestic tax revenues posted an increase of 9.04% during 1 January- 30 April 2013

Source: Directorate General of Taxation (2013)

Table 5: Budget Deficit in APBN 2013 and RAPBN-P 2013 (in IDR Billion)
Budget deficit is projected to reach 2.48% of GDP


2012, tax revenues in the domestic economy increased by 9.04%
during 1 January 2013 to 30 April 2013, period. In general, income tax
revenues from oil and non oil sources, valued added tax and luxury
goods sales tax, and other taxes registered an increase during the
period, land and construction tax (PBB) is the only tax, which posted
a decrease of 59%.
To that end, serious attention need to be paid to indication of a
decrease in government revenue, which is compounded by the
widening gap between the quota of subisized fuel set in the national
budget and consumption of subsidized fuels. As a remedial measure
to avert a widening budget deficit, the revision of the 2013 national
budget was deemed imperative. In the revised national budget for
2013, the government proposed deficit target of 2.48% of GDP, which
is higher than 1.65% of GDP, initially set in 2013 state budget.
In the Nota Keuangan dan RAPBN-P 2013, it is predicted that
government revenue will decrease by IDR 41,347.7 billion (2.7%).
The budget deficit will increase due to a surge in government
expenditure to the tune of IDR 39,019.3 billion (2.3%). The widening

15


budget deficit will be financed by IDR 77,782.7 billion in domestic
financial resources, which will represent an increase from IDR
172,792.1 billion in the national budget, 2013, to IDR 250,574.8 billion.
Meanwhile, net external financing sources will decrease by IDR
2,584.3 billion, from IDR 19,454.2 billion to a deficit of IDR 16,869.8
billion. The decrease will comes as a result of retiring higher level of
foreign debt than serving the principal.

B. Developments in Government Debt
Total value of tradable government securities (SBN) outstanding by
31 May 2013 reached IDR 1,191.22 trillion, which represented an
increase of IDR 124.92 trillion, compared tradable SBN outstanding
by 30 April 2013 that registered IDR 1,066.30 trillion.
The largest composition of SBN outstanding in May 2013 is
represented by fixed rate bond, recorded for about IDR 672.39
trilliun. Meanwhile, treasury bills in May 2013 registered for about
IDR 22.47 trilliun, reflected an increase compared to the previous
month that reached IDR 21.02 trilliun. Meanwhile, the variable rate
bond has shown no significant changes from the early 2013 up to May
2013, registered stable value for about IDR 122.75 trilliun.
In general, the total value of foreign ownership of securities, in the
form of SBN and stock has increased between January and May 2013.
Foreign ownership of SBN in January 2013 recorded for about IDR
273.2 trillion, rise to IDR 302.94 trillion in May 2013. Compared to
Figure 11 : Composition of Government Securities
Fixed rate bonds continue to dominate the composition of government securities
I D R T r il li o n

G o v er n m e n t D eb t S ec u r i t i es ( S U N )

T r ea s u r y B il l s ( S P N )

G o v e r n m e n t B o n d (O N )

90 0

80 0

70 0

60 0

50 0

40 0

30 0

20 0

10 0

0

Source: Bank Indonesia, Ministry of Finance and CEIC (2013)

16

Z er o C o u p o n B o n d

F i x e d R a te B o n d

V a r i a b l e R a te B o n d


Figure 12 : Foreign Ownership of Securities
There has been an increase in foreign ownership of securities
F o re ig n O w n e rs h ip o f S B I

F o r e ig n O w n e r s h i p o f S B N

F o r e i g n O w n e r s h ip o f E q u i t i e s

T o ta l o f F o r eig n O w n er sh ip

2500

2000

1500

1000

500

0

Source: Bank Indonesia, Ministry of Finance and CEIC (2013)

May 2012, the total value of foreign ownership of SBN has increased
for IDR 78.44 trillion in May 2013.
Regarding to foreign ownership of SBI, the total value reached IDR
1.02 trillion in May 2013, shows a decrease compared to the previous
month which registered IDR 1.65 trillion. Similarly, compared to May
2012, the total value of foreign ownership of SBI in May 2013 has
decreased, amounted for IDR 0.63 trillion. The reduction is
attributable to the impact of the regulation on 6 months holding
period issued by Bank Indonesia on 13 May 2011.

IV. International
Indonesia trade balance has deteriorated in April 2013. If in March
2013, Indonesia trade balance posted a surplus of USD 0.1 billion,
conversely the economy relapsed into a trade deficit of USD 1.6
billion in April 2013. The deterioration in trade balance is
attributable to the surge in imports by 9.6%. The rise in the value of
imports is in part as a result of a surge in non oil imports from USD 11
billion to USD 12.7 billion, meanwhile, oil imports registered a
decrease of USD 0.3 billion or 7.7%. The decrease in exports from
USD 15.02 billion to USD 14.7 billion is another factor that
contributed to the drop in the trade balance in April 2013.
Compared with the position in April 2012, Indonesian trade balance
in April 2013 has deteriorated. The trade deficit increased from USD

17

International

Figure 13: Indonesia Trade Balance, January 2008 - April 2013
Indonesian Trade Balance falls into deficit once again.
(USD Billion)

Export

Import

Balance of Trade

25.00

20.00

15.00

10.00

5.00

0.00

-5.00

-10.00

-15.00

-20.00


0.8 billion in April 2012 to USD 1.6 billion in April 2013. Factors
attributable to the deterioration in the trade balance, among others,
include a decrease of 9.1 % in value of exports of which oil and gas
exports contracted by 32.9% and non oil and gas exports decreased by
2.4%.
In general, the performance of trade balance during January - April
2013 decreased compared to the same period in 2012. The trade
balance, which initially registered a surplus of USD 2 billion during
January – April 2012 dropped into deficit of USD 1.9 billion during
January – April 2013. The decrease in trade balance is in the main
attributable to the fall in the value of exports from USD 64.7 billion
during January – April 2012 to USD 60.1 billion in the same period in
2013. The decrease in exports indicates marked deterioration in the
competitiveness of Indonesian products in international markets and
the effect of lingering weakness in the global economy.
Indonesia trade balance continued to post a deficit in April 2013. A
trade deficit of oil and gas rose from USD 1 billion in March 2013 to
USD 1.2 billion in April 2013. The rise of deficit in Indonesia trade
balance of oil and gas was attributable to a decrease in oil and gas
exports from USD 2.9 billion in March 2013 to USD 2.4 billion in April
2013. The under performance of oil and gas exports was is in part
caused by 21.9% decrease in crude oil exports, 20.47% contraction in
oil and gas derived exports and 15.9% drop in gas exports. In the
meantime, the performance of oil and gas exports in April 2013 also
deteriorated, if compared to the same period in the previous year. The

18


Figure 14: Indonesia Oil and Gas Exports - Imports, January 2008 – April 2013
Indonesia continues to experience a trade deficit of oil and gas.
(USD B illion)

Exp ort: Oil and Ga s

Im po rt: O il a nd G as

Export

Im port

Balance of T rade: O il a nd Ga s

25

20

15

10

5

0

-5

-10

-15

-20


deficit in Indonesia trade balance of oil and gas increased from USD
0.5 billion in April 2012 to USD 1.2 billion in April 2013.
Poor performance of the oil and gas export sector is also attributable
to falling prices of Indonesian crude oil exports from USD 107.42 per
barrel in March 2013 to USD 104.19 per barrel in April 2013. The fall
in prices of Indonesian crude oil reflects the downward trend in
prices of crude oil on international commodity markets. Crude oil
prices at WTI (Nymex) dropped from USD 92.96 per barrel to USD
92.07 per barrel or prices of Brent (ICE), which decreased from USD
109.54 per barrel to USD 103.43 per barrel in the same period. The fall
in prices of petroleum oil prices is largely attaributable to an increase
in supply of crude petroleum
oil on the International market. Production of crude petroleum oil
increased from 90.83 million barrels per day in Marct 2013 to 91.26
million per day in April 2013. The production of crude oil in
Indonesia, though still below the target set in APBN 2013 (900,000)
barrels per day, increased on average to 890,000 barrels per day in Q1
2013.
Overall, the deficit in trade balance of oil and gas increased from USD
1.1 billion during January-April 2012 to USD 4.6 billion in JanuaryApril 2013. This is also attributable to an increase of 3.2% in oil and
gas imports as well as an decrease of 22.2 % in oil and gas exports.

19

International

Figure 15: Indonesia Non Oil and Gas Export - Imports, January 2008 – April 2013
The performance of Indonesia non oil and gas export-imporrts has deteriorated once again
(U S D B illio n )

E xp o r t: N o n O il a n d G a s

Im p o rt : N o n O il a n d G a s

E x p o rt

Im p o rt

B a la n ce o f T ra d e : N o n O il a n d G a s

25

20

15

10

5

0

-5

-1 0

-1 5

-2 0


In April 2013, Indonesia registered a trade deficit of USD 0.41 billion
in the non oil and gas trade sector, which followed a surplus of USD
1.1 billion in March 2013. Th rise in non oil and gas deficit was
attributable to 15.8 % in non oil and gas imports increase, which
could not be offset by an increase of 1.7% in non oil and gas exports.
Compared to the condition in April 2012, which posted a deficit of
USD 0.2 billion, the deficit in trade balance of non oil and gas in April
2013 showed a slight increase that registered USD 0.4 billion.
Worsening Indonesia trade balance of non oil and gas deficit is
largely attributable to a decrease of non oil and gas exports,
amounted for 2.4 % between April 2012 and April 2013.
Overall, the performance of non oil and gas trade balance in April
2013 showed deterioration from the same period in the previous year.
During January-April 2013, non oil and gas trade balance recorded a
surplus of US$ 2.7 billion, which was lower than the surplus of USD
3.1 billion recorded during January-April 2012 period. The decrease
of 3% in non oil and gas exports compared with the same period in
January-April 2012 is considered to be the main factor responsible for
the decline in performance.
During January – April 2013, exports of 10 categories of goods which
comprise crude petroleum oil; fats and fatty acids; machinery
/electric appliances; rubber and rubber products; machinery
/mechanical instruments; iron, kerak and iron dusts; vehicles and
components; garments; shoes; timber, wooden products contributed
62.10% of non oil and gas exports.

20


In Q1, 2013, the current account deficit showed 31 % decrease
compared with the position in the previous quarter. Indonesia
registered current account deficit of USD 5.3 billion in quarter I, 2013,
which was a significant decrease from USD 7.6 billion recorded in the
Q4 2012. The decrease in the current account deficit is attributable to
an increase in the trade surplus from USD 0.8 billion in Q4 2012 to
USD 1.6 billion in Q1 2013. To that end, improvement in the balance of
trade and income contributed to a reduction in the current account
position.
Meanwhile, the performance on the current account in Q1 2013, if
compared to Q1 2012, showed marked deterioration. The current
account deficit increased from USD 3.1 billion in Q4 2012 to USD 5.3
billion in Q1 2013. Rising current account deficit in Q1 2013 is
attributable to 57% (YoY) decrease in the trade balance of goods and
11.5% (YoY) increase in the balance of trade.
The position of capital and financial accounts in the Q1 2013 marked a
drastic deterioration. Capital and financial transactions decreased
drastically from a surplus of USD 11.9 billion in Q4 2012 to a deficit of
USD 1.4 billion in Q1 2013. The deterioration in the performance of
the capital and financial transactions is attributable to weakness in
Other investments item which moved from a surplus of USD 7.2
bilion in Q4 2012 to USD 7.7 billion in deficit, which is a direct
consequence of an increase in offshore savings by domestic banks.
The increase in the level of domestic bank foreign currency assets is a
direct response to the policy implemented by Bank Indonesia that
involved taking control of all available foreign currency to finance oil
and gas imports. To that end, the intervention by Bank Indonesia to
supply foreign currency which Pertamina needs to spend on oil and
gas imports is expected to reduce the demand for foreign currency.
The decrease in the demand for foreign currency in the domestic
economy, in turn expected to mitigate the down ward pressure on
Rupiah, thereby reducing its variability. As a response, domestic
banks found themselves with alot of excess liquidity in foreign
currency, which they deposited offshore.
Overall, the performance of capital and financial transactions, in Q1
2013, is not any better than the position in Q1 2012. In Q1 2012, capital
and financial transactions registered a surplus of USD 2.1 billion.
The main cause of the deterioration in the performance of then capital

21

International

Figure 16: Current Account, 2006:Q1 – 2013:Q1
The current account deficit has decreased once again
(U SD B illio n )

G o o d s T r a d e B a la n c e ( LH S )

S e r v ice T r a d e B a la n ce ( L H S )

I n co m e A c co u n t ( L H S )

C u r r en t T r a n s fer ( L H S )

C u r r e n t A cc o u n t ( R H S )

15

(U S $ b n )

6. 0 0

4. 0 0
10
2. 0 0
5
0. 0 0

0

-2 .0 0

-4 .0 0
-5
-6 .0 0
-10
-8 .0 0

-15

-1 0 .0 0


Figure 17: Capital and Financial Accounts, 2006: Q1 – 2013:Q1
Capital and financial accounts, which initially was in surplus, descended drastically into a deficit
(U S D B i ll io n )

D i r e c t In v e s t m e n t ( L H S )

P o r t f o li o In v e s tm e n t ( L H S )

O t h e r In v e s t m e n t ( L H S )

C a p it a l a n d F i n a n c i a l A c c o u n t ( R H S )

C u rre n t A c co u n t (R H S )

(U S $ b n )

15

1 5 .0 0

10

1 0 .0 0

5

5 .0 0

0

0 .0 0

-5

- 5 .0 0

-1 0

- 1 0 .0 0


Gambar 18: Neraca Pembayaran Indonesia, 2006:Q1 – 2013:Q1
Neraca pembayaran yang surplus mulai defisit lagi
(U S D B illio n )

C u rr e n t A c c ou n t (L H S )

C a p it a l an d F in a nc ia l A c c ou n t (L H S )

E rr o rs a n d C o m m iss io ns ( L H S )

B a la n c e o f Pa y m e nt (R H S )

(U S $ b n )

15

1 5 .0 0

10

1 0 .0 0

5

5 .0 0

0

0 .0 0

-5

-5 .0 0

-1 0

Sumber: Bank Indonesia dan CEIC (2013)

22

-1 0 . 00


and financial transactions is the increase in the deficit recorded in the
Other Investments category from USD 2 billion in Q1 2012 to USD 7.7
billion in Q1 2013.
In Q1 2013, Indonesian balance of payments position registered a
deficit of USD 6.6 billion, from a surplus of USD 3.2 billion in Q4 2012.
Weakening performance of the balance of payments in Q1 2013, is
attributable to a deficit on capital and financial transactions (USD 1.4
billion), from a surplus of USD 11.8 billion in the previous quarter.
Overall, the balance of payments position in Q1 2013 shows
deterioration from the Q1 2012. The balance of payments deficit
increased from USD 1 billion in Q1 2012 to USD 6.6 billion in Q1 2013.
Factors which contributed to weakening balance of payments in Q1
2013 include an increase in the current account deficit from USD 3.1
billion in Q1 2012 to USD 5.3 billion in Q1 2013, and poor
performance of capital and financial accounts which moved from a
surplus of USD 2.1 billion to USD 1.4 billion in deficit in quarter I2013.

V. GAMA Leading Economic Indicator
GAMA LEI has succeeded twice in predicting accurately and
precisely potential signs of weakening performance of the
Indonesian economy. GAMA LEI predicted economic growth
decreased, which has been shown by lowering economic growth of
6.11% and 6.01% (YoY) in Q4 2012 and Q1 2013 respectively. GAMA
LEI predictions were in stark contrast with those issued by most
economic analysts who projected higher economic growth rate. In
this edition, GAMA LEI predicts slow economic growth in Q2 2013.
The predictions are based on the fact that 2013 continues to be
characterized by higher uncertainty in the global economy, and
being a year to the general and Presidential elections, it is going to be
fraught with high political dynamics in Indonesia. As we went to
press, Indonesian economy is in the midst of uncertainty that
shrouds the direction and composition of government policy on
subsidized fuels. Expenditure on preparations for the general
elections will temporarily help to sustain economic growth.
However, the implication is the economic growth is not based on
sound economic policy. Inflation prior to and after the government

23

GAMA Leading Economic Indicator

Figure 19 : GAMA LEI Indonesia, 2000:Q1 – 2013:Q1

implements its policy to raise prices of subsidized fuels, calls for
serious attention and anticipation. Doubtless, high inflation
expectations will exert more pressure on already weakening
economic growth in coming quarters. This is the more so, given the
fact that based on GAMA LEI predictions, there is still no indication
that the downward trend which kicked in the economy in Q4 2012,
is fizzling out any time soon. The value of Rupiah is almost reaching
IDR 10,000 per USD driven by rising oil and gas imports, which in
turn is attributable to high demand for subsidized fuel. High
demand for subsidized fuels is largely attributable to the low retail
price consumers pay for it in the domestic economy. Subsidized fuels,
the higher the volume of oil and gas imports. This translates into high
demand for US dollars to pay for energy fuels, which in turn
contributes to the depreciation of Rupiah.
What this means is that unless policy makers implement concrete pro
growth policies, thereby marking a change from the prevailing
conditions, based on LEI predictions, Indonesian economy will
continue to weaken in the next quarter. This is far from expectations
of all, which is higher economic growth.
GAMA LEI is a cycle, which comprises composite a selection of
indicators that have the potential to precede Indonesian business
cycle (Indonesian Economic Review and Outlook, March 2013). The
construction of GAMA LEI is based on analyses of hundreds of
internal and external macroeconomic indicators. The selection of
macroeconomic indicators that form GAMA LEI is done under very
stringent considerations. Data on indicators is renewed every
quarter, which means that LEI that is developed continues to
improve and becomes more accurate. Based on the latest quarterly
data on Indonesian GDP for 2000-2013, indication point to highly

24


fluctuating economy. However, GAMA LEI is able to predict with
high precision, the point when the economy changes course. During
2008 global financial crisis, LEI was able to predict sigs of an economy
changing course in Q3 2007, and predicted the down turn of
Indonesian economy in Q3 2008.

Consensus on Macroeconomic Indicators Projections
Results obtained from a survey, which involved respondents drawn
from lecturers in the Faculty of Economics and Business, UGM,
yielded predictions of levels and range of principal macroeconomic
indicators that include GDP, inflation, and exchange rate of Rupiah
against US$ right from Q2 2013 to year 2014. Predictions of GDP
(YoY) indicate an economy that is still weighed down by pessimism.
Prediction of real GDP growth for the Q2 2013 and Q3 2013 were
within 6.02% ± 0.2% and 6.05% ± 0.2% range, respectively. However,
predictions of real GDP based on the latest data for 2013 and 2014,
show that the economy is expected to post growth by 6.13% ± 0.22%
and 6.19% ± 0.21%, respectively.
Meanwhile, predictions of Inflation (YoY) show an upward trend.
This is reflected in the predictions for Q2 2013 and Q3 2013, which are
5.93% and 6.12%, respectively. However, predictions for inflation for
2013 and 2014 are 5.71% and 5.66%, respectively.
Table 6 : GDP Estimation (YoY, in %)

Sources: Primary data, processed (2013)

Table 7 : Inflation Estimation (YoY, dalam %)


Table 8 : Exchange Rate Estimation (IDR per USD)


25

Current Issue

In the meantime, while the prediction of the exchange rate for Q2 2013 in
the previous edition was expected to hover around IDR 9776, in this
edition Rupiah is expected to depreciate against US dollar. The
depreciation is attributable to uncertainty facing both the domestic and
global economy. In that regard, survey results point to a depreciation in
the exchange rate to be IDR 9,837 and IDR 9,834 for Q2 2013 and Q3 2013
respectively. Meanwhile, exchange rate for 2013 and 2014 is expected to
be IDR 9,818 and IDR 9,831 respectively.

VI. Current Issue
Postponement is not a Choice; Fuel Subsidies is growing
“Time Bomb” that is Holding the Economy Hostage
By Dr. Rimawan Pradiptyo1
History Repeated
For the umpteenth time, during the reformation regime, Indonesia faces a
dilemma which is associated with reducing fuel subsidies. Various road
maps on how best to reduce fuel subsidies have been proposed since 2008,
neither of which as it turned out, were a far cry from interests of
politicians. Our collective memory is still fresh with government proposal
to regulate and control the consumption of fuels in 2010, which was
supposed to implemented in phases starting with Jakarta, and afterwards
to cover the whole country by late 2013. However, apparently the plan
failed to get off the ground due to the difficulty of acquiring requisite land
for expanding storage fuel tanks that refuelling stations faced, which was
compounded by the DPR rejection of research findings on the fuel policy
and the best policy forward , by the team that comprised three
Universities UGM-ITB-UI.
In its research report, the UGM-ITB-UI research, noted the two proposals
by bureaucrats and politicians to regulate and control the consumption of
subsidized fuels, were inefficient and ineffective. This was because the
estimates of the cost of implementing the two policies far outweighed the
benefits. Moreover, the policy posed the danger of creating horizontal
conflicts among refuelling stations and between consumers and refuelling
station operators. In fact, the policy recommendations continued, the two
programs, in implemented as designed would have the potential of
changing the venue of demonstrations from Presidential offices (Istana
Negara) and DPR/MPR premises to refuelling stations all over the
country from Sabang to Merauke.
1

Dr. Dr. Rimawan Pradiptyo is Deputy Research and Coordinator of Publication & Data Research and Training Economics
and Business (P2EB) FEB UGM

26


To that end, the joint research team of UGM-ITB-UI researchers, proposed
a decrease of reduction of fuel subsidies through a gradual increase of
subsidized fuel prices by IDR 500, which should be implemented overtime
(for instance once every 6-12 months) until the price of Premium fuel
reaches the free market price. The phased reduction of subsidized fuels,
should be go hand in hand with the implementation of a subsidy
compensation program, targeting poor families. The proposed increase of
IDR 500/liter , was considered to be the right figure, which would
accommodate both the interests of the economy and politicians. However,
the government rejected policy proposal out of hand and the coalition of
political parties in government failed to support and advocate for the
implementation of the policy.
During early 2012, the rising burden of subsidized fuels on government
finances came into the limelight once again.
And once again, the
government requested three a team of researchers drawn from three
Universities (Unpad-ITB-UI) to conduct a research on the policy of
subsidies. The research team proposed that the price of Premium should be
raised by Rp1500/liter, which received stiff opposition from various
elements in country, especially University students , manifested in
demonstrations staged in various cities in the country. The spate of
demonstrations against the policy programs was attributable to the fact that
policy recommendation to raise premium fuel by IDR 1500/liter failed to
take into account political repercussion which is often associated with
hiking fuel prices. To that end, the increase of IDR 1500/liter, which UpadITB-UI team proposed, was higher than IDR 500/liter and gradual reduction
of fuel subsidies that UGM-ITB-UI team recommended.
Once again, in 2012, the ruling party showed its reluctance to raise fuel
prices, and eventually fuel prices remained intact. In the meantime, the
intensity of discussions on the prospects of raising fuel prices with no data
set to effect the policy, created inflation expectations among economic
agents, especially traders. This assertion is very much in line with research
findings by Pradiptyo et al. (2010) , which showed that the expectation of a
potential increase in fuel prices is the main source of information traders use
in forming inflation expectations.
Since February 2013, the burden of fuel subsidies on the government budget
came into the spotlight, once again. The Budget deficit for 2011 and 2012
was 1.1% and 1.84% of GDP, respectively, but still lower that maximum
limit of 3% of GDP. This year, the budget deficit will rise to 3.38% of GDP if
the policy on reducing fuel subsidies is not implemented. What is also worth

27

Current Issue

noting is that Indonesia has been a net importer of petroleum oil since 2004.
This means an increase in the consumption of subsidized fuels will translate
into heavier burden on the balance of payments due to higher import
volumes and value of Pertamax fuel2.
Thus, the recurrence of the fuel subsidy problem over the last three years ,
does not mean serious measures to deal with it, are easy to come any time
soon. Nonetheless, what is apparent from the pattern of efforts to deal with
the problem is the significant shift in policy from relying on hard evidence
(reality) to anecdotal evidence (myths).
Fuel Subsidies is increasingly becoming a Time Bomb
The subsidized fuel policy, despite being touted as tailored to support low
income earners, is by and large, to the benefit of middle and high income
consumers. Consumption of subsidized fuels constitutes compensated
consumption phenomenon, which means that the government has to meet
the demand for fuel consumption by anybody, and for any activity. This
means that the government pays all the quantity /volume of subsidized
fuels, which Pertamina oil Tanks fill into refuelling stations.
The compensated consumption phenomenon can be described in the
following way. Imagine if you have a credit card which has no higher limit3.
Then, give that credit card to a teenager, who in the morning, revels in going
to the highest upscale shopping Mall in this county4. You inform the
teenager that he has the right to buy anything, regardless of price, as all the
purchases using the credit will be on your account. At night, as the Mall
closes its doors, you pick up the teenager and you ask him to hand over all
the receipts for all the purchases he/she has made during the day. Is there any
person on this planet earth who can guess with precision the value of the
purchases the teenager has made during his/her shopping binge all day
round? The answer is definitely in the negative. To that end, the above
illustration attests to the complexity and magnitude of the problem which
bureaucrats face in estimating the ever rising consumption of subsidized
fuels. Therefore, it is not surprising that every year, estimating the quantity
of subsidized fuel to be consumed is very difficult, which is why the quota
set in the budget always turns out to be lower than the quantity consumed.
Essentially, what are the factors that influence the increase in consumption of
subsidized fuels? Several factors influence the rising consumption of
2.

On the international market, RON 92 is the Minimum standard for fuels which is equivalent to Pertamax. Thus,
to bridge the gap between domestic demand and domestic production, the government imports Pertamax.
This type of credit card is black and has short account number, not as long as those on ordinary credit cards. It is
only a few individuals who can own such credit cards
4
In some Malls in Jakarta, Luxury vehicles such as Ferarri, Porsche and Jaguar are on Sale. The credit card does
not a maximum limit, makes it possible for one to purchase such luxurious vehicles .

3

28


subsidized fuels . These include: 1) increase in economic activities
attributable to economic growth; 2) rising international fuel prices; 3)
appreciation of foreign currencies; 4) shift of consumption from Pertamax to
premium; 5) increase in black market activities to meet the demand for
industries; and 6) smuggling of subsidized fuels to other countries.
Of all the six factors that influence the increase in demand for subsidized
fuels, it is only economic growth, which is the endogenous factor that the
government can exercise control, while the other five factors are
exogenous, over which the government has little, if any control. This means
that, raising prices of subsidized fuels is the only leverage the government
has to control the rising fuel subsidies as other determinants are not in
government purview, rather the international market, behaviour of the
general public in consuming subsidized fuels, and agents in black markets
and subsidized fuel smuggling networks. In other words, leaving the policy
on subsided fuel prices as it is, tantamount to relegating the determination
and formation of the national budget to foreign elements and subsidized
fuel smuggling rings. Thus, the question, one should poses is where does
this fit in the commitment of this country to determine and exercise decision
making on issues of sustainable economic development in an independent
manner ?
It is not farfetched, to describe the rising burden of fuel subsidies on
government finances, as time bomb which is growing over time and unless
handled in time, will explode anytime. In light of that, considering the
adverse impact of subsidized fuels on the national budget and burden on the
economy, silence is not a commendable solution to resolve this complex
problem. Moreover, rising consumption of subsidized fuels increases the
vulnerability of the economy arising from surging imports of Pertamax,
which in turn will lead to higher pressure on the balance of payments and
exchange of Rupiah against other currencies.
The problem becomes the more complex simply because subsidized fuels is
available everywhere, and everyone has easy access to it. There is little
doubt that with higher purchasing power, the general public has better
means to consume fuel, which is why the demand for subsidized fuels is
higher among middle and high income earners than is the case with low
income earners. A lot of research5 showed hard evidence that subsidized
fuels contribute to worsening income disparity. Data obtained from The
Ministry of Energy and Mineral resources shows that the proportion of
consumption of subsidized fuel by category of users and region: 1) vehicle
owners (53%) compared with motorcycle owners (47%); 2) Java and Bali

29

Current Issue

population (59%); 3) land transportation (89%). Meanwhile based on
Ministry of Finance (2008) sources, 25% of high income households
consume 77% of subsidized fuels; middle income households consume
25%; and low income households just 15% of subsidized subsidies.
Facts attest to the reality that the black market and smuggling networks of
subsidized fuels determine the volume of subsidized fuel consumed and
by extension, amount of money spent on subsidized fuels. Consequently,
the higher the magnitude of subsidies on fuels the government spends, the
more lucrative it becomes to perpetrators of subsidized fuels smuggling
and black market in subsidized fuels.
The above facts, provide eloquent testimony to the fact that subsidized
fuels , by and large, suffers from poor targeting of its intended beneficiaries.
In light of that, it is not far fetched to say that any effort to maintain the
current level of subsidies on fuels amounts to protecting subsidies which
are largely enjoyed by middle and high income earners, as well as
perpetrators of subsidized fuel smuggling and black market operators.
This argument, therefore debunks the assumption that raising prices of
subsidized fuel energy epitomizes betrayal of the people and aggravate
their destitution. Abundant evident indicate that rich, are the beneficiaries
of the most of the subsidized fuels in comparison with the poor. To that
end, any policy that stresses commitment to maintain higher subsidized on
fuels undermines efforts to promote justice and fairness for all, as the
beneficiaries are largely those who are rich and not the poor.
Pradiptyo and Sahadewo (2012) conducted a laboratory-based survey on
335 households in Yogyakarta, comprising those who do not own any
vehicles and those who have more than one vehicle. Research results
indicated that respondents who do not own any motor vehicle whatsoever,
who are categorized as poor, readily accepted and receptive to the idea to
raise fuel prices , compared with respondents who own vehicles. For
respondents who do not own any vehicle, reducing subsidies on fuels
gradually was not considered a problem as long as the relocation of
subsidies was channelled to specific subsidy programs ( for instance
vaccine, infrastructure and transportation) , which generate direct benefits
to households. On the contrary, respondents who own vehicles were not
bothered by the way the relocation of subsidies which arise from reduction
in subsidized fuels was done, as long as the reduction of subsidies was
carried out gradually. In light of that, one can draw the inference that high
income households who enjoy the lion's share of subsidized fuels,
5

See Ministry of Finance (2008), World Bank (2010)

30


showed higher reluctance to accept the policy proposal to reduce fuel
subsidies than low income households.
According to Pradiptyo (2012a,b), corrupt individuals enjoy subsidies in
Indonesia as the maximum sentence they face based on Law on Corruption
is very low. Based on sentences passed out by MA during 2001-2012
period, the explicit cost of corruption hovers around Rp 168.19 trillion,
meanwhile, the financial value of the sentences was just Rp 15.09 trillion
(constant 2012 prices). To that end, members of society foot the difference
between the values Rp.153.1 trillion. In other words, members of the general
public subsidized corrupt individuals.
This makes the circle of people's suffering, especially those with middle and
low incomes, complete.
Ideally, subsidies should be given to
disadvantaged members of society who earn low incomes, which is
contrary to the reality in Indonesia. The policy of subsidized fuel energy is
huge boon for high income earners, subsidized fuel smugglers and black
market agents. On the other hand, thanks to loopholes in the anti
corruption Law, obedient tax payers have ended up subsidizing corruptors ,
who are in the main middle and high income earners.
Keep the Momentum
The burden of fuel subsidies on the economy can be minimized if the
government, and political parties in particular have strong commitment to
enhance the independence of the economy in the policies it makes.
Nonetheless, efforts toward that direction, are often undermined by short
term political interests. In 2005 the government raised prices of Premium
fuels by 160%, but in 2008 as the general elections in 2009 approached, the
government reduced prices of Premium fuels to the current level IDR 4500.
It should worth noting that in addition to the lack of commitment by the
ruling political party coalition, political interests contributed much to
rejection by DPR, policy recommendations on dealing with rising fuel
subsidies, which UGM-ITB-UI team made in 2011. The same was at work in
2012. As this piece is written, government indecisiveness to reduce
subsidies, is attributable to political bickering and differences among
political parties in Senayan. The potential danger lies in the fact were the
current state of procrastination to continue, the government may fail to take
this opportunity and momentum to reduce fuel subsidies.
Let us calculate the value of subsidies which the government could have
saved, had the government implemented policy recommendation of UGM-

31

Current Issue

ITB-UI research team, of gradually raising the price of premium fuel by IDR
500/liter (for example every 1 April)? If the policy was implemented was
2011, the price of Premium fuel at the pump would no longer be IDR
4500/liter but IDR 6000/liter. If the policy was implemented, taking into
consideration that elasticity of premium is -0,16, and assuming that Solar
(diesel) also has the same elasticity, and the government did not implement
any other policy on subsidized fuels by December 2013, total amount of
subsidies which the government would saved would be IDR 134.23 trillion.
Meanwhile, if the government goes ahead with its plan to raise prices of
subsidized Premium fuel and Solar by IDR 6000/liter, the policy of gradually
increasing fuel prices by IDR 500/liter since 2011 would have saved IDR
97,42 trillion.
Let us compare the value of government expenditure on subsidies saved with
the government subsidies on fertilizers and food stuffs , which in 2013
budget is IDR 17.2 trillion and IDR 16.2 trillion, respectively. Operational
cost of UGM is just IDR 2 trillion per year , and it is the largest University in
Indonesian, with a student population of 52,000, right from three year
diploma to Doctorate level. Let us assume that operational cost of running
the University is increased to Rp3 trillion per year in order to finance
requisite expenditure on facilities and infrastructure tailored to scaling up the
quality of education service provision to such a level that enables UGM to
compete with Universities in the developed world. Based on this scenario, it
is only IDR 30 trillion per year, that is required to transform 10 best
Universities which have the same level and scale as UGM in Indonesia to
provide free education right from D3 to S3! Just imagine by spending just
IDR 30 trillion per year , 520 000 students in the best Universities in Indonesia
would be able to undergo education free of charge! This is the minimum
cost, which the Indonesian economy is paying due to procrastination of
policy makers in this country.
March, April, and May, is the best time for the government to increase prices
of subsidized fuels. This is based on the trajectory of inflation over the years,
which is lowest in April and ratchets up in May. To that end, the two months
provide the right time to reduce fuel subsidies as the impact on inflation is
likely to be the smallest.
However, current government plan is to increase prices of subsidized fuels in
June, which is not ideal given the fact that the fasting month of Ramadhan is
around the corner. Nonetheless, the rising budget deficit and worsening
balance of payments, mean that the government can no longer delay the
policy of raising the prices of subsidized fuels this time around.

32


VII. Economic Outlook
Indonesian economy in Q2 2013, encountered many internal and external
challenges, which increased macroeconomic instability. The realm of
decision making is plagued by political intrigue, which explains the
procrastination the government has shown in its decision to increase prices
of subsidized fuel prices, and eventually setting the date of Mid June 2013
(latest limit for latest IERO edition). It is no wonder the delay has generated
uncertainty in the economy, as it amounts to holding the economy hostage.
Such condition, tantamount to “a growing time bomb” as Dr. Rimawan
Pradiptyo has succinctly stated in this edition. This is the more so,
considering the increasingly hot political economy in Indonesia, amidst the
global economy, which is facing uncertainty concerning quantitative easing
monetary policy by the central bank in United States and Japan, and
shroud of uncertainty that hovers over European economy, have all
contributed negatively to Indonesian economy. As is that was not enough,
the World Bank, revised down the global economic growth projection for
2013 from 2.4% in January 2013 to 2.2% in June 2013; the growth of the
economy of China which has become the main growth engine of the global
economy, was revised downwards from 8.4% to 7.7%; while projection of
economic growth for Indonesia were revised downwards from 6.3% to
6.2%.
Amidst growing uncertainty in the domestic and global economy, GAMA
Leading Economic Indicators predicts contraction in economic growth in
the short term. To that end, the contraction in the economy is projected to
continue, which is a continuation of GAMA LEI's projections that were
proved correct over the past two quarters in succession. The same applies
to the consensus of members of Faculty in the Faculty of Economics and
Business, UGM, with respect to projections of key macroeconomic
indicators, which were very much in line with GAMA LEI predictions that
Indonesian economy is projected to contract , due to rising economic
instability and slowdown in economic growth. There is little doubt, if such
conditions continue for long, have the potential to endanger Indonesian
economic development. As way forward, there is need for the government
to take decision on the subsidized fuels which will go a long way curbing
current uncertainty and speculation and attendant adverse effects on the
economy. Besides, all relevant economic authorities should in the short
term put more emphasis on efforts to preserve macroeconomic stability,
which should prevent rising political tensions from degenerating into
macroeconomic instability and deterioration of the economy.

33

INDONESIAN ECONOMIC REVIEW AND OUTLOOK
MACROECONOMIC DASHBOARD TEAM

S.E.

,S.E.

+62 274 548517 ext 373

MACROECONOMIC DASHBOARD
FAKULTAS EKONOMIKA dan BISNIS
UNIVERSITAS GADJAH MADA
th
Pertamina Tower Building 4 fl. Room 4.1
Jl. Humaniora No. 1 Bulaksumur, Yogyakarta 55281
Phone : +62 274 548 517 ext 373
Email : iero@macroeconomicdashboard.com
Website : www.macroeconomicdashboard.com

Iero no 2 year ii june 2013

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