Thursday, 5 June 2014


External dynamics had its notable influence on Indonesia’s economic outlook in the past 2 years. It seemed reasonable that BI revised national target growth to 5.1% - 5.5% this year, lower than the previous target of 5.5% - 5.9%.

The revised target was necessary after seeing realization of economic growth this year which was only 5.2%, lower than the estimated 5.7%. According to BI economic slowdown was due to global economy not because of low domestic consumption.

The strongest influencing factor to economy was the real sector that caused export to be hindranced because China’s economy was losing steam and lessened demand for products from Indonesia. Shrunk export was in the mining sector and commodities like coal, copper, and rubber.

The Government was planning to do the same. From the Government’s viewpoint there were 3 macro economic assumptions, i.e. economic growth, Rupiah value, and oil lifting which was rated as most pressing to be revised in APBN-P state budget 2014. As known the 3 macro economic assumption had deviated away far from the initial assumptions.

In APBN 2014, economic growth assumption was set at 6%; Rupiah value Rp10,500 per USD and oil lifting 870,000 barrel per day. Assumption of economic growth in APBN-P 2014 was axed to become 5.5% against 6% after seeing economic performance of Q-1/2014 growing only by 5.21% or below Government’s expectation.

The Government through Ministry of Finance M.Chatib Basri was expecting that export which contracted by 0.78% through the first 3 month of the year would improve, driven buy economic recovery among buyer countries which would make economic growth move up in the next quarter whereby growth target of 5,5% would be met.

Assumption of oil lifting was also revised down of 818,000 bph against the previous 870,000 bph considering that realization by March 31 was only 800,000 bph. Meanwhile the Cepu block which was expected to increase production by 135,000 bph, would not operate until November so it would not contribute anything to oil lifting target.

However Finance Minister Chatib was reluctant to assumpe Rupiah value as in might rock the boat. Gas lifting which by today’s assumption was 1.24 million bph equal to oil was also not defined. Meanwhile inflation assumption, Indonesia’s crude oil price [ICP] and 3 month State’s Treasury Document [SPN] remained unchanged.

About inflation assumption which was unchanged in spite of El Nino in the coming months, the risk was there but it was compensated by notably low inflation by early year, i.e. only 1.39% [year-to-date] by April. Even the 5.5% Inflation was already inclusive of the electricity tariff effect for subscribers in May. One thing was sure the change in macro assumption would have its effect on APBN State Budget.

One thing noteworthy was Government’s awareness that it was hard for the Government to maintain growth level at above 5.5% due to export slowdown. The change would be implemented in RAPBN-P 2014 which was planned would be forwarded to House on May 20 2014. Minister Chatib was optimistic that economic growth in the remaining 2014 would be better than growth record of Q 1/2014. The change in January-March 2014 was suppressed by extremely low export performance against bettered global economy.”

Bad export performance in Q I/20144 was but suspension of positive impact of global economic recovery on demand for Indonesian products. However they denied that downturn of export in Q-1/2014 was on account of prohibition of exporting raw mineral ore because that commodity only constituted 5.3% of total national export.

About change in inflation assumption, BI and the Government had managed to control inflation amidst global turbulence and price increase oil price on June 22 2013, the Government and BI was able to keep inflation at single digit, i.e. at 8.38%.

The brigher side of it was that increased price of subsidized oil had its positive impact on Indonesia’s fiscal condition, although the policy had its driving effect on inflation. So BI was optimistic inflation could be tamed at around 4.5% + 1%. Inflation was most sensitive to price increase oil and electricity. Unless subsidy for energy could be well managed, inflation would soar up. If fiscal condition was suppressed, it would be necessary to increase price of oil an automatically inflation would soar up.

It was right that BI and the Government must strive to stabilize economy and jack up economic growth by maintaining BI benchmark rate. It must be understood that what made bank interest high was inflation. Compared to 10 years ago, inflation control in Indonesia was better, i.e. at around 6% - in 2011 to 2012 inflation was 3.8% and 4,3% or below 5%.

By April 2014, inflation in Indonesia came to 7.25% y o y. At the Meeting of BI Board of Governors on May 8 2014 BI remained to maintain BI rate at 7.5%. The point was that monetary policy was still tight to control and to improve Indonesia’s Balance of Payment and reduce deficit in Current Transaction at 2% - 2.5% against GDP.

Reduced inflation from volatile food continued on April 2014 last where deflation was posted at 0.02% m t m or 7.25% y o y, down against inflation in March 2014 at 0.08% m t m or 7.32% y o y.

The trend of eased inflation on April 2014 was also thanks to sharp correction of food price, especially rice and some horticulture products in line with high domestic supply that came with harvest time.

In the future, BI must observe all inflation risks including the potential increase of food prices related to the El Nino effect which caused drought in some regions. Tight controlling of inflation would help to maintain monetary stability which was BI’s main task so there was no reason of BI to increase benchmark rate in the near future. (SS)  

Business New - May 23, 2014

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