Macroeconomic

Gross Domestic Product of Indonesia

Indonesia faced a big economic turbulence that trigger economic crisis. Indonesian currency

was pushed down with exchange value above 10.000 per US$. The GDP growth in 1998

went down to minus 13, 31%, substantially lower than the average growth rate in 1960-1971.

This happen because Asian Financial Crisis that also effect other countries such as followed

by Thailand (-8%), Malaysia (-7.4%), South Korea (-5.84%) and Philippines (-0.48%). In the

1999 Indonesia GDP raise to 0.79%, in this period Indonesia established reformation and

economic stabilization program strictly to raise the GDP growth rate.

Indonesia GDP growth rate in 2008 increased to 6,01 %, then in the middle of global

crisis GDP growth declined to 4,58 % in 2009. This condition happened because there was an

increasing of oil price in international commerce. Despite sharply falling commodity prices, a

falling stock market, higher domestic and international bond yields and a depreciating

exchange rate, Indonesia GDP growth rate recovered significantly to 6,2% in 2010 and 6,5%

in 2011, which means economic condition in this period has grown. This success was mainly

due to relatively limited importance of Indonesian exports towards the national economy,

maintained high market confidence, and sustained robust domestic consumption. Even

though the GDP has dropped to 4,58%, Indonesia could reach a low inflation rate at 2,78%,

most macroeconomistd believe that the best rate of inflation is somewhere between 0 and 3%.

Slowing economic growth in 2013 (6 percent) was caused by a combination of severe

global uncertainty due to the looming end of the Federal Reserve's monthly USD $85 billion

bond-buying program (quantitative easing) resulting in significant capital outflows from

emerging economies, and internal financial weaknesses: a record high current account deficit,

high inflation (after the government raised prices of subsidized fuels in June 2013) and a

sharply depreciating rupiah exchange rate. In order to tackle these troubles and safeguard the

country's financial stability, Indonesia's central bank raised the country's benchmark interest

rate significantly, at the expense of further economic growth. 

Composition of Indonesia GDP Aggregate Demand: Household

consumption (C), Government expenditure (G), Investment (I),Exports (E)

, Imports (IM)

Growth sources from aggregate demand side could be estimated by analyzing rate or composition

of GDP according to spending. The composition of GDP consists of household consumption (C),

investment (I), government spending (G), and net export (exports (E) subtract imports (IM)). The

rate of Indonesia aggregate demand can be seen from the figure clearly.

Overall trend, it can be clearly seen that the rate of growth of aggregate demand have a

tendency to decrease. The rate of household consumption (C) remained stable on average

5,35 %, government expenditure (G) still fluctuated, investment (I) showed a downward

trend to 8,50 %, meanwhile, exports (E) reached the lowest point in 2009 then rose rapidly to

14,92 % in 2010. Imports (IM) initially depicted a downward trend from 1961 to 2009 then

increased significantly in 2010.

Investment showed the highest rate in 2008 in 11,89%. However, in 1998- 2007 because of

economic crises investment declined to the lowest rate 1,48 %, as well in 2009 which only

rose to 3,30%. Consumption reached the lowest rate 5,34 % in 2008. Interestingly,

government spending grew positively to 4,65 % in 1998-2007, in which Indonesia suffered

from monetary crisis. In 1998-2007 all component of aggregate demand went down (except

for government expenditure). Monetary crisis in that period has hit the whole component to

the lowest point rate. Afterwards, all composition recovered strongly. For exports and

imports, overall trend illustrated the growth rate of import still higher than exports.

In the last ten years (2000-2010), we could also see the role of each composition of aggregate

demand to GDP remained stable. Consumption still contributed the highest proportion to

GDP. The second highest proportion was exports, which means that Indonesia got trade

surplus (exports higher than imports). Investment still showed a stagnant proportion to GDP;

meanwhile government spending contributed the lowest proportion. It could be concluded

that Indonesian economic still depend on the movement of consumption and this was quite

relevant to defend from economic crises, rather than rely on exports like other countries.

Money Supply

In general, the central bank noted an increase in the number of circulating M1 and M2 be

836.51% and £ 3364.12 trillion in April 2013. Compare with the same period a year earlier,

M1 and M2 increased respectively by 16% and 15%.

The more amounts of money in circulation then the exchange rate will tend to weaken and

prices will rise. Growth in the money supply is high also often the cause of high inflation due

to the increase in the money supply will increase demand in the end if it is followed by the

growth in the real sector will lead to rising prices.

Inflation in Indonesia and CPI

Inflation is an increasing of price generally and continually. Inflation happened because of the

pressured from supply side (cost push inflation), demand side (demand pull inflation), and the

expectation of inflation4. Information about inflation is very important, particularly for policy

maker and firms, because it can affect income distribution. On the other hand, inflation might

influence the decision of firms to invest because of the uncertainty in price.

The level and volatility of Indonesia's inflation rate have historically been higher than in

some peer emerging nations. Whereas these other emerging countries shared inflationary

rates of between three and five percent during the period 2005 to 2013, Indonesia contained

an average annual inflation rate of around 7.5 percent in the same period.

Indonesia Inflation Rate (Annual Percentage Change on Consumer Price Index)

source: BPS

Peaks in Indonesia's inflation volatility correlate with administered price adjustments. Energy

prices (fuel and electricity) are set by the government and therefore do not float according to

market conditions, meaning that the resulting deficit has to be absorbed by subsidies. This

puts serious pressure on the government's annual budget deficit and also limits public

spending in more long-term productive matters, such as infrastructure and social

expenditures. Moreover, re-arranging energy subsidies implies political risks as social unrest

emerges inflicted by inflationary pressures. One characteristic of Indonesia is that a large

quantity of its population is clustered just above the poverty line, meaning that a relatively

minor inflationary shock can push them below that line. When the President Susilo Bambang

Yudhoyono administration decided to reduce its massive fuel subsidies in late 2005 due to the

rising international oil price, it soon led to double-digit inflation rates of between 14 and 19

percent (year on year) until October 2006.

Reduction of energy subsidies remain a top priority on the government's agenda. In early

2012, the government proposed a fuel price increase but social unrest and political opposition

in parliament made a sudden increase impossible. Eventually in June 2013, gasoline was

raised by 44 percent to IDR 6,500 (USD $0.66) and diesel by 22 percent to IDR 5,500 (USD

$0.56) per liter. But despite the 2013 price hike, a significant portion of Indonesia's fuel

prices remain subsidized and therefore various international organizations (including the

World Bank and International Monetary Fund/IMF) as well as domestic institutions (such as

Indonesia's Chamber of Commerce and Industry/Kadin) support further subsidy reductions.

In 2013 and 2014, the government has also reduced subsidies for electricity - both for

households (although exempting the poorer segments of society) and industries.

Indonesia's inflation outlook is highly influenced by the decision to further reduce these

subsidies. The World Bank estimates that a IDR 2,000 increase in fuel prices can add about

three percentage points to the level of headline inflation and can add over one percentage

point to core inflation..

Indonesia's characteristic volatile inflation rate causes a traditionally larger deviation from the

annual inflation projections of Bank Indonesia. The consequence of such inflationary

uncertainty is that it creates economic costs, such as the country's higher (domestic and

international) borrowing costs compared to its emerging market peers.

Food prices are traditionally highly volatile in Indonesia and subsequently impose a big

burden on the poorer households who live under or just above the poverty line. These

households spend more than half of their total expenditure on food items. Higher food prices

therefore cause serious poverty basket inflation which may lead to increases in the level of

poverty.

Traditional Peaks of Inflation in Indonesia

Discarding administered price adjustments, there are two traditional annual peaks of inflation

in Indonesia. The December-January period always brings higher prices due to Christmas and

New Year celebrations, while the traditional floods in January (amid a peak of the rainy

season) results in disrupted distribution channels in several regions and cities, thus causing

higher logistics costs. The second peak comes in the July-August period. Inflationary

pressures in these two months emerge as a result of the holiday period, the holy Muslim

fasting month (Ramadan), Idul Fitri celebrations and the arrival of the new school year. A

marked increase is detectable in spending on food and other consumables, accompanied by

retailers adjusting prices upwards.

Unemployment Rate in Indonesia

The unemployment rate is the ratio of the number of people who do not have a job but are

looking for one. This data is very important because it has a direct effect to the welfare of the

unemployed, and a signal that the economy may not be using some of its resources

efficiently.

During the course of Suharto's New Order, economic development added many new jobs to

Indonesia's job market, thereby pushing down the national unemployment rate. Particularly

the industry and services sectors saw major increases in its employment shares towards

national employment, at the expense of the agriculture sector. The graph clearly illustrates

that the unemployment rate remained stable from 1986 to 1993 at average 2,71 %. The Asian

Financial Crisis that erupted in the late 1990s, however, reversed these developments

temporarily and caused the country's unemployment rate to reach over 20 percent, with

underemployment rising equally rapidly.

More than a decade of macroeconomic growth has succeeded in pushing Indonesia's

unemployment rate into a steady downward trend. But, as around two million Indonesians

enter the labor force each year, it will be a challenge for the Indonesian government to

stimulate job creation so that the labor market can absorb this group of annual newcomers.

The table below indicates Indonesia's unemployment rate in recent years. It shows a steady

downward trend.

A characteristic of Indonesia is the unemployment rate is highest for people between the age

of 15 and 24, far above the country's national average. Freshly graduated students from

universities, vocational schools and secondary schools have difficulties finding their place in

the national workforce. Almost half of Indonesia's total number of workers possess a primary

school degree only.

Even though economic growth declining, the unemployment rate until February 2013 until

5,92% or declining with unemployment rate in February 2012 which is 6,32%. This decline

actually not really big, only around 440 thousand people from 7,61 million people from

February 2012 become 7,17 million people on February 2013.

From the labor force rate from February 2012 to February 2013 there are 780 thousand labor

force in Indonesia, where in February 2012 labor force is 120,41 million while in February

2013 it increase become 121,19 million people.

Poverty in Indonesia

In line with the decline in the unemployment rate in Indonesia, also reduced the number of

poor people. Based on the latest data from the BPS, the poor in Indonesia in September 2012

as many as 28.59 million people (11.7%) lower than in February 2004, which reached 36.1

million people (16.7%). When compared with the number of poor people in March 2012,

then during the next term decline in the number of poor population of 0.54 million people.

However, keep in mind that the poverty line used in September 2012 amounted to Rp

259.520 per capita per month, an increase of 4.35% compared to March 2012, if we critically

examined it, it did not indicate poor population decreased. As an illustration, based on the

poverty line was set at Rp 259 520 per month, meaning a family that has one child with a

single income of Rp 80,000 per month is not said to be poor. In fact, it is clear that family life

is certainly very improper.

Between the mid-1960s and 1996, when Indonesia was under the rule of Suharto's New Order

government, the country witnessed a significant decline in poverty - both urban and rural -

due to robust economic growth and efficient pro-poor programs. During the Suharto period

the number of Indonesians that lived below the poverty line eased from over half of the total

population to 11 percent. However, when the Asian Financial Crisis hit in the late 1990s it

had a devastating impact on poverty alleviation, causing the poverty rate to slip back from 11

to 19.9 percent in late 1998, meaning that much of the New Order's accomplishments had

been reversed. 

The following graph provides poverty figures

Source: BPS

The graph above shows a steady decline in national poverty. However, the Indonesian

government applies rather easy terms and conditions regarding the definition of the poverty

line, resulting in a more positive picture than reality. In 2013 the Indonesian government

defined the poverty line at a monthly per capita income of 292,951 rupiah. This amount

equals approximately USD $25 and, thus, indicates a very low standard of living, even for

Indonesian standards. But if we apply the poverty threshold as is used by the World Bank,

which classifies the percentage of the Indonesian population living on less than USD $1.25 a

day as poor, the percentages in the table above will rise by a couple of percentage points.

Moreover, according to the World Bank, when taking into account the percentage of the

Indonesian population that lives on less than USD $2 a day, the figure for 2009 rises to 50.6

percent of the population. This shows that a large proportion of the Indonesian population is

in fact near poor. More recent reports in Indonesian media assert that around a quarter of

Indonesians (which translates to around 60 million people) are currently near poor.

In recent years, Indonesian poverty numbers have shown a steady downward trend. It is

assumed, however, that in the future this downward trend will continue at a slower pace.

Most of the Indonesians that rose out of poverty in recent years, were those that lived just

below the poverty line. This means it took less effort to push them out of poverty. But as this

group is slowly narrowing in number, it is now the bottom base of Indonesia's poverty that

needs to be alleviated. This will be more complicated and thus results in slowing rates of

poverty reduction.

Public Debt of Indonesia

Indonesia's public debt as a share of its gross domestic product (GDP) has shown a

significant improvement since the Asian Financial Crisis erupted in the late 1990s. From over

150 percent of GDP in 1998, Indonesia's external debt declined to around 28 percent in 2013.

This represents a healthy condition compared to many developed countries that are currently

in trouble to ease public debt. Similarly, Indonesia's external debt as a percentage of its

exports has shown an impressive decline as well; from 179.7 percent in 2004 to 97.4 percent

in 2011. These numbers measure the government's ability to make future payments on its

debt, thus positively affecting Indonesia's borrowing costs, government bond yields and

international credit ratings when this debt is as low as in the case of Indonesia. This

development is particularly due to the prudent fiscal policy approach of the Indonesian

government and compliance with fiscal rules that set limits on the upper level of debt.

The Indonesian government's external debt consists of bilateral and multilateral loans, export

credit facilities, commercial loans, leasing and government securities (SBN) owned by non-

residents, issued on both foreign and domestic markets. Government securities consist of

government debt securities (SUN) and government Islamic securities (SBSN). Government

debt securities consist of government bonds due more than 12 months and Treasury Bills

(SPN) due less than or 12 months. Government Islamic Securities consist of both long-term

security (Ijarah Fixed Rate/IFR) and Global Sukuk.

Largest Contributors to Indonesian Government Debt

 Bilateral Loans            31.4%

 SBN (non-resident)            22.4%

 Multilateral Loans            20.2%

 Bonds            18.4%

Source: Bank Indonesia (BI)

As of July 2012 around 40 percent of this public debt is borrowed in US dollars and

approximately 28 percent in Japanese Yen. Indonesia borrows mostly from other countries;

countries that act as creditor account for three thirds of total Indonesian public debt. Most

important creditor countries are Japan and the United States. International organizations

provide around 25 percent of Indonesia's debt, of which the World Bank, the Asian

Development Bank and the International Monetary Fund are the largest contributors. Around

93 percent of Indonesia's government debt constitutes long term debt, meaning that the debt

is due at least one year after the date of indebtedness.

Although in absolute terms Indonesia's government debt has grown by approximately USD

48 billion between 2006 and 2012 (a number which includes debt held by the Central Bank),

as a percentage of GDP it has fallen significantly since the end of the Asian Financial Crisis.

Only sharp nominal depreciation in late 2008 as well as in early 2009 temporarily led to an

increase in the external debt to GDP ratio. The IMF forecasts a further moderate decline in

public debt due to rupiah appreciation, falling interest rates, and robust economic growth.

Future energy subsidy reduction and tax administration reforms in combination with strong

economic growth will support a further decline in public debt. Due to the persistent global

economic turmoil, Indonesia's debt to GDP ratio increased a little in the first half of 2012 to

27.3 percent according to Bank Indonesia.

Indonesian Debt to GDP Ratio 2008–2013

Bagan 1 Source: Internation Monetary Fund

Macroeconomic shocks will only have a limited impact on Indonesia's public debt ratio.

Standard stress tests suggest that even under severe shocks from contingent liabilities, sharp

exchange rate movements and higher interest rates, the debt ratio is likely to remain modest.

Fiscal contingent liabilities amounting to 10 percent of GDP could raise public sector debt to

30 percent of GDP by 2016. Currency depreciation of 30 percent would raise the debt ratio to

about 25 percent of GDP. And an increase in real interests rates would have a smaller effect

with the debt ratio reaching around 23 percent of GDP by 2015. Other macroeconomic

shocks will likely have more limited impacts than the ones mentioned above.

References1. http://www.indonesia-investments.com/finance/macroeconomic-indicators/

poverty/item3012. http://www.indonesia-investments.com/finance/macroeconomic-indicators/

unemployment/item2553. http://www.indonesia-investments.com/finance/macroeconomic-indicators/gross-

domestic-product-of-indonesia/item2534. http://www.indonesia-investments.com/finance/macroeconomic-indicators/

inflation-in-indonesia/item2545. www.bps.go.id6. www.bi.go.id7. A, Rustan. Assesing Macroeconomic Development in Indonesian