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January 2013




In 2012, Indonesia  was among a number of countries managing to post a fairly high economic growth amid the  financial crisis besetting mainly  world  major economies including the United States and Europe. The global crisis, however, began to bite resulting in the country's trade deficit, which is the first in 40 years. In October 2012, the country recorded a trade deficit of US$ 516 million as a resutl of shrinking exports  with a surge in imports.

Slump still hit the European and US markets in 2012  resulting in weak demand for Indonesian primary commodities such as  coal, palm oil, rubber and cacao.  Meanwhile,  swelling oil fuel subsidy weighed heavily on the country's econopmy. Growing economy has resulted in an increase in oil fuel subsidy. The condition was worse as the country's dependence on imports for oil fuels is growing  with the decline in the countyr's oil production.  Growing dependence on imports for oil and oil products  began to bite. Deficit in oil and gas sector is widening  and the deficit could not be offset by shrinking surplus in trade of non-oil/gas commodities.  The result is growing pressure on  the rupiah value.

Despite the unfavorable trend, Indonesia has become one of the  world's main  investment destinations  largely becausde  of its potential domestic market  and the fairly high economic growth as well as its improved government debt rating that has placed the country to the level of investment grade.  At the same time, Europe and the United States  as well as other Asian countries like Singapore recorded lower growth  limiting p;laces for lucrative investment.

In  2012, foreign direct investment (FDI) in  Indonesia reached US$24.56 billion  compared to US$16.21 billion  in 2010. Ventures in portfolio investments also are attractive. In the first 11 months of 2012, the Indonesian share market grew 14.5% or the best performance in Asia.

In entering 2013, expectation is higher. A number of economic indicators improved such as favorable trend recorded for the US economy marked with  improved data of  its manufacturing sector and declining unemployment.

China, which has emerged as world's economic growth driver, began to show revival and recovery in 2012. China recorded a higher economic growth in the last quarter of that year. The wortl's second largest economy  has ended the period of  more than two years of slowdown. Its Gross Domestic Product (GDP) grew 7.9%  year-on-year in the fourth quarter  of 2012 - higher than  a growth of 7.4% recorded in the third quarter of that year.

India, which  has also ranked among a few countries with the highest  economi growth amid the global economic slowdown, has continued to post a healthy growth. Other Asian countries also recorded good growth making Asia a potential market for Indonesian commodities.

Currently Indonesia, which has posted a fairly high growth amid the global economic woes, is facing a serious challange of maintaining the  trend. Indonesia has been able to ward off the impact of the world economic malaise largely thanks to its larger domestic market  and increase in the price of its primary commodities. In the second half of 2012, however,  the prices of the commodities declined on weak demand in the world market, while supplies form China continued to flood the world market.

Early 2013, the prices of primary  commodities such as crude palm oil, and rubber rose  giving rise to hope of a resurge in the  country's exports.  As was in 2012, the country's economic growth is expected to be driven by household consumption and growing investment.

In 2012, the domestic market expanded for automotive products including cars and motorcycles. In 2012, car sales hit a new record at 1,116,230 units. However, sales of motorcycles fell. Based on data from the Indonesian Association of  Motorcycle Industry (AISI), sales of motorcycles in 2012, dropped 11.2 percent to 7.141 million units  from 8.034 million units in 2011. The decline  followed the new regulation of the central bank setting the advance payment of at least 20% for the purchase of motorcycles on credit. The advance payment was too high for low income people.

The Association of Motor Vehicle Industries (Gaikindo) predicted car sales in 2013 would reach 1.1 million units  with the country's macro economic condition  has tended to improve.

Similarly, despite floods of imports of electronic goods, the countyr's electronic industry still recorded an increase in sales.  Based on data  from the Electronic Marketer Club (EMC), sales of electronic goods in the first nine months of 2012, rose 28%  to Rp21.4 trillion  from the same period in the previous year. In the whole of 2012, sales were estimated to reach Rp30 trillion, or an increase of 20% on-year.

Despite the world economic slowdown, the government  and  Bank Indonesia are optimistic setting a high growth for the economy in 2013. The government as said by the finance minister, Agus D.W. Martowardojo, has set the economic growth target at 6.5 - 6.9 % this year. In the 2013 draft state budget, the economic growth target is set at 6.8%.

Meanwhile the central bank is more conservative setting  a growth target for the economy at 6.6 -7 percent with the world's economy  expected to grow at a slower pace of 4% from 4.5%.

The World Bank and Asian Development Bank (ADB) also predicted a fairly  high growth for Indonesian economy. The World Bank predicted the country's economy would expand 6.3% in 2013 on assumption that  domestic consumption remains strong.  ADB predicted the  country's economy would grow 6.6 percent in 2013. 

Overview of Indonesian Economy  2012

In 2012, Indonesia's econoy grew 6.3% amid the world slowdown though declining from 6.5% in the previous year. The economic performance was relatively goods in 2012, exceeding Indian growth of 5.35%. Compared with other ASEAN member couintries Indoensia fared much better. Thailand recorded a  growth of only 2.3 percent in the first half of 2012, Vietnam 4.3 percent and  Malaysia  5.15 percent.

Huge domestic market and prudence  in financial management  had saved the country from being his by a second crisis  in 10 years.

In 2009 when the world's financial crisis struck, Indonesia's export earning shrank  by almost 15%  from US$ 138 billion  to US$116 billion. However, toward the end of that year, the condition improved  and in 2010, the country's exports rose to US$157.8 billion. In 2011 exports hit a new record crossing the US$200 billion level to US$ 203.6 billion.

In 2012, the country's exports began to slow down as a result of weak demand amid the global slump. China and India, which earlier recorded a sharp increase in growth also recorded a slow down.  In the first 10 months of 2012,  Indonesia's exports  reached US$158.66 billion or down 6.6%  from the same period in the previous year.  Meanwhile imports grew sharply. In the first 10 months fo 2012, imports were valued at US$ 159,18  billion or an increase of 9.35 % from 2011.

The increase in imports, however, indicated a revival of the manufacturing sector as imports have been dominated by industrial basic materials and capital goods. However, imports of consumer goods are also high to follow an improvement in the people's purchasing power, and free trade with China  from which imports of consumer goods with cheaper prices  surge.

The world's confidence in the country's economy is shown by growing inflow of foreign investment to the country including short term investment in the capital market.  The increase in short term investment is marked with rising share price index recorded by the Indonesian Stock Exchange. By the end of 2012, the index of Indonesian Stock Exchange (BEI) was recorded at 4,316 points, up from 3,821 points a year earlier or an increase of 12.94%.

Meanwhile, the rupiah value  fell 6.9% in 2012  from 8,779 per dollar to 9,384 per dollar. The rupiah exchange rate was still determined by the condition in the global market.  The Indonesian Central Bank, however, said the rate was still safe. The Indonesian  economic indicators also showed no causes for concern.  The rupiah fall benefits importers improving their competitiveness.

The inflows of foreign capital  contributed to  the rise in the country's foreign exchange reserves, which reached a new record at US$111.3 billion by the end of 2012. In 2009, the Indonesian foreign exchange reserves reached US$96.2 billion .

A number of international rating agencies have raised the Indonesian foreign debt rating. By the end of 2011 Indonesia was given the investment grade.  Fitch has given a rating of BBB-  or investment grade, and Moody's gave a Baa3 rating  for the country's foreign debts. In 2012, the rating agencies maintained the country's rating. Rating & Information Inc. Even raised the Indonesian rating to BBB- from BB+.

Economic Challenges  in 2013

The world economy has remained in the doldrums after the financial crisis struck in 2008. Analysts are mixed  with some predicting  immediate recovery and other remaining pessimistic. In the beginning optimism prevailed  over the policies  adopted by the European leaders in dealing with the impact of the crisis, but later  the optimism dissipated with new waves of crisis . Several bailout  attempts have failed to end the crisis. Optimism lasted only in a few months before  new crisis emerged again.

In the second half of 2012, the condition was encouraging after a new setback in the first half. However, in entering the year 2013,  the trend  reversed  with macro economic indicators  in the euro zone contracted. Hundreds of billions of US dollars have been funnelled in to help Greece recover from deep debt crisis, but failed. The virus of the crisis even spread to other countries in the region. The economny of the eruro zone countries contracted 0.1 percent  in the third qiuarter of 2012  after a contraction of 0.2 percent in the previous three months.

Similarly, recovery attemps have not yet been fully successful  in the United States. The fiscal cliff  problem  over budget cut and tax hike still beset the US economy until toward the end of 2012.

The world began to turn to China  and India  as well as Indonesia and other ASEAN countries for global economic growth drivers.  China  has suffered a setback in growth but it  still could manage a relatively strong growth of 7%.  Indonesia, which   recorded the second highest growth rate  of 6%  began to be seen as a new growth driver in Asia.

Indonesia, however, is feared to run into  a host of problems in 2013. The stumbling blocks are too big to go through to maintain a high economic growth rate. The challenegs are both internal and external

External Fcators include:
"        Sluggish progress toward recovery  of the world economy  with turbulence remaining a threat in major economies , Europe , the United States and Japan.

"        Worries are prevailing over fluctuations in rupiah exchange rate after Japan allowed its yen to weaken, belived to be an attempt to boost  its exports . It was feared a retaliatory measures form China could disrupt global  attempts toward recovery.

"        Sharp fluctuations  in the prices of oil anmd foodstuff  could trigger a rise in the prices of other goods  including industrial basic materials  in the country.  The nuclear crisis in Iran  will bring about a surge in the prices of oil .

Internal Factors
"        In  2012, for the first time in many years  Indonesia suffered a trade deficit with sluggish exports  and surging imports. Exports slowed  with the falling prices of primary commodities  such as crude palm oil, coal,  and rubber, the country's main export earners. Exports shrank on weak demand in the global markets  amid the big slump. Meanwhile, local  manufactured products are facing marketing difficulties in competition with cheap imported products  especially from China.
"        High energy subsidy has weakened the government financing capacity in implementing its major infrastructure projects. Improved purchasing power of the people pushed up demand for  oil fuel resulting in swelling energy subsidy in 2013. The government will face a big challenge in raising the oil fuel prices to cut subsidy  in 2013 if the price of oil in the world market  remains  around US$100 per barrel.

"        Sluggish development of infrastructure including power plants, roads, and other transport facilities  remains a big problem to be solved in 2013. Toward thye end of 2011 the government  launched Master Plan for the Acceleration  and Expansion of Indonesian Economic Development 2011-2025 with infrastructure development plan partly to start in 2012.  There  will  be a lot of stumbling blocks such as in land clearing, but  in 2013  implementation  of more infrastructure projects  would  begin in big way.

"        The year 2013 is said to be a year of politics  as the country is preparing for general elections including legislative and presidential elections in 2014.  Political parties would be busy campaigning to win the elections. The government could also be expected to fully concentrate on its duties. Members of the cabinet  which is made up of political representatives would also be distracted  from  their  duties in other sectors including in economy.

World Economic Outlook 2013

In entering the year 2013, optimism that arose with improvement of the condition in the latter part of 2012, dissipated again. A number of macro economic indicators were not as expected. The indicators showed that the euro zone economy  would contract  in the first quarter of 2013.

China and India though suffering a setback  still fared much better. Currently the two Asian giants and other emerging countries in Asia  including Indonesia  are seen as a growth driver  for the world economy in 2013.

The International Monetary Fund (IMF) predicted the world's economy would grow 3.5% in 2013  slightly higher than 3.2% in 2012 but still far below 2011's growth of 3.9%.  IMF also predicted advanced economies  in 2013  would grow only slightly by 1.4% from 1.3% in 2012. The developing economies are predicted to grow 5.5%  higher than 5.1% in 2012.

Indonesia is expected to continue to post a  fairly high growth of 6.3% in 2013 . The World Bank also  predicted Indonesia's economy  would expand by 6.3% mainly because of the strong growth of investment.

Indonesia's Economic Prospects 2012

Deficits in trade balance and  in balance of payments in 2012 caused much concern, but many still are optimistic the economic condition  would be better in 2013 than in 2012.

Among factors  expected to sustain Indonesian economic growth in 2013 :
"        High economic growth , relatively low inflation and interest rates  in the past five years  which improve the purchasing power of the people  and push up market demand; prudence in the management of state finance and minimizing deficit in balance of payments at no more than 2% of the country's GDP  and in the safe management of macro economy,  relatively political and economic stability  that  would attract investment.

"        Healthy banking system. After the country recovered from the  impact of the monetary crisis a decage ago, Bank Indonesia has strictly adopted  prudential banking principles that it was well prepared in dealing with the global financial crisis  in 2008  and going through the years  scarcely suffering   scratches.

"        Abundant natural resources. The country gained when the prices of primary commoditie shot up.

"        Huge domestic market  with relativly strong purchaisng power of the people  helping offset  a decline in exports.

"        Decrease in dependence on European and US market  with the emergence of new big market China and India  as a number of other ASEAN countries to dispose of  the country's export commodities. Indonesia could rely on more diversified markets  without awaiting the revival of the traditional markets of Europe and the United Stastes.

"        The prices of Indonesia's major commodities began to scale up toward the end of 2012  and the trend is expected to continue through 2013. Meanwhile the government has launed measures to curtb imports to redress trade balance.

Both the government and Bank Indonesia are still optimistic the country's economic condition would improve in 2013 to be better than in 2012 thanks to strong domestic demand  and growing exports. 

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