Indonesia – Economy at Crossroad 2015

Indonesia before 2014

The past year has not been an easy one for Indonesia's slowing economy, as the global environment
generated disturbances, such as sharp falls in commodity prices, substantial uncertainty over geo-
political stresses in Eastern Europe, the Middle East and East Asia, destabilizing capital flows and
renewed doubts about major engines of growth such as the eurozone, Japan and China. 

Indonesia before 2014 arround 5 years ago, the market was very confident when every country has
face the global financial problem. Right now Indonesia has definitely change in political, and the
confidence is gone.

 Still survive from economic crisis in developed countries because of the relative dominance
of its domestic demand and continuing its current account surplus. But average economic
growth after 1997 crisis is not as high as average economic growth before 1997, while
widening income disparities tends to grow higher compared to periods before the crisis
struck at 1997.
 Domestic demand tends to decline because the purchasing power of labor is declining and
income disparity is widening, besides that current account surplus tends to narrow because
the demand of commodities from developed countries are slowing down so there must be
serious impact to the producers of Indonesia’s main export commodities. In turn they have
to reduce their production and many of them are having debt problems that potentially
create another wave of mass bankruptcy.
 Indonesia economy needs to stabilize and diversify its economy as soon as possible in order
to anticipate the slowing economic growth in developed countries by increasing its domestic
demand through industrial policies especially green industrial policy - including
environmentally friendly downstream industries, higher government spending and managing
real effective exchange rates to support domestic demand.

Indonesia Economy Data

2011 2012 2013 2014 2015

Population (million) 241 244 248 251 255

GDP per capita (USD) 3,708 3,764 3,685 3,541 3,379

GDP (USD bn) 894 920 914 890 862

Economic Growth (GDP, annual variation in %) 6.2 6.0 5.6 5.0 4.8

Consumption (annual variation in %) 5.1 5.5 5.4 5.2 5.0

Investment (annual variation in %) 8.9 9.1 5.0 4.6 5.1

 2011 2012 2013 2014 2015

Manufacturing (annual variation in %) 6.3 5.6 4.4 4.6 4.2

Retail Sales (annual variation in %) 9.0 14.5 12.9 14.5 13.3

Unemployment Rate 7.5 6.1 6.2 5.9 6.2

Fiscal Balance (% of GDP) -1.1 -1.8 -2.2 -2.1 -1.9

Public Debt (% of GDP) 21.3 21.4 22.0 24.3 27.5

Money (annual variation in %) 16.4 15.0 12.8 11.9 8.9

Inflation Rate (CPI, annual variation in %, eop) 3.8 3.7 8.1 8.4 3.4

Inflation Rate (CPI, annual variation in %) 5.3 4.0 6.4 6.4 6.4

Inflation (WPI, annual variation in %) 7.5 5.1 6.0 9.3 4.4

Policy Interest Rate (%) 6.00 5.75 7.50 7.75 7.50

Stock Market (annual variation in %) 3.2 12.9 -1.0 22.3 -12.1

Exchange Rate (vs USD) 9,068 9,638 12,170 12,385 13,788

Exchange Rate (vs USD, aop) 8,763 9,362 10,449 11,866 13,392

Current Account (% of GDP) 0.2 -2.7 -3.2 -3.1 -2.1

Current Account Balance (USD bn) 1.7 -24.4 -29.1 -27.5 -17.8

Trade Balance (USD billion) 26.1 -1.7 -4.1 -2.2 7.6

Exports (USD billion) 203 190 183 176 150

Imports (USD billion) 177 192 187 178 143

Exports (annual variation in %) 29.0 -6.6 -3.9 -3.6 -14.6

Imports (annual variation in %) 30.8 8.0 -2.6 -4.5 -19.9

International Reserves (USD) 110 113 99.4 112 106

 2011 2012 2013 2014 2015

External Debt (% of GDP) 25.2 27.4 29.1 33.0 36.0

Since the crisis in 1997, the State Budget (Anggaran Pendapatan dan Belanja Negara, abbreviated as
APBN) has been trapped in the IMF monetarist strategy which is not only reducing demand side, but
also anti-cyclical and not empowering the supply side. Although at the end the IMF has approved
deficit financing and social security program, but the APBN capacity to function as fine tuning has
weakened and the APBN so far still focuses on the routine spending rather than investment. The
absorption capacity of APBN also has become weaker. And bad buereaucracy was concerned to
cause social security program unable to reach the targeted objectives. The APBN deficit so far has
been limited by the Law not to pass the 3 percent ratio to GDP. Moreoever, the government
program has tried to reach zero percent budget deficits in 2005, which gives expectation to
compress development spending that is supposed to be beneficial to improve supply side of
economy.

From 2000 to 2010, the highest government income ratio to GDP has reached 20 percent in 2008;
on the other hand the lowest was 15 percent in 2000, 2009 and 2010. Meanwhile, the highest
government spending ratio to GDP has reached 21 percent in 2001 and the lowest was 16 percent in
2000 and 2010.

The State Budget focuses also on the routine expenditure rather than on investment. This causes
slow infrastructure development. The monetary policy has become more exogenous for economic
growth and job creation because they are under the policy domain of Bank of Indonesia, which
legally serves as the independent central bank. The target of central bank is inflation management
within particular limitations to protect the Rupiah exchange rate. In 2011 and 2012 there is a
tendency from Bank of Indonesia to lower its interest rate level, yet that policy still has not been
able to improve Indonesian economic growth to neutralize permanent output loss. In year 2011 the
economic growth has reached only 6.5 percent.

The world economy is still marked by economic weakening as result of the crisis in USA and EU. As
the consequence, Indonesia has to keep diversifying its export market from major importing
countries like USA, EU, Japan and China to South Africa and Latin America. The assessment to
expand the export market has been conducted by the Indonesian Minister of Trade, who has visited
Latin America countries in the early 2012. How far can the export diversification be implemented is
still being questioned considering the market capacity of importing countries are relatively small and
they also produce relatively similar products with Indonesia. Whereas Indonesia has become more
dependent to the international market, where not only export ratio to GDP but also import ratio to
GDP have increased.

What Happened During 2014 - 2015

The year just ended was rough for Indonesia. After fuel-price hikes, resulting from reductions in the
government fuel subsidy, inflation climbed to 8.4 percent at the end of year, nearly double of the 4.3
percent at the end of 2012, and real GDP growth was estimated to have fallen from 6.2 percent to
5.6 percent, according to a Standard Chartered research note.

The Indonesian rupiah, as a result of worsening fundamentals and concerns over the risk of capital
outflows triggered by the U.S. Fed tapering, weakened to 12,171 rupiahs per dollar at the end of
2013, compared to 9,793 rupiahs at the end of 2012.

January 2014 saw the implementation of a law banning mineral exports, which may cause the
potential loss of revenue of $5 billion, but since the law excludes coal, which contributes around 13
percent of Indonesia’s total exports, the impact of the ban on the nation’s overall exports should be
limited. The key change was in non-oil and gas trade, which recorded a $900 million deficit in April
after 8 continuous months of surpluses. Non-oil and gas trade has in recent months masked the
gaping structural deficit in the oil and gas sector, which remained broadly stable at $1.1 billion in
April (Indonesia runs a trade surplus in gas, the deficit comes from oil, especially refined oil
products). January’s ban on the export of unprocessed minerals may have been a factor but that did
not prevent Indonesia from running trade surpluses in February and March. April’s figures showed
exports weakened in a number of sectors, including vehicles, oils and rubber. Weaker international
commodity prices may have been a factor and the data suggest trade with the slowing Chinese
economy accounted for a large chunk of the deficit. Indonesia also ran a trade deficit with Japan and
Thailand – the latter’s economy has stalled as a result of political tensions.

Arguably of more significance is the strengthening of imports, especially in sectors such as

machinery, mechanical appliances, and electrical goods. This suggests that domestic demand, in
particular investment, is rebounding despite multiple interest rate hikes by Bank Indonesia, the
central bank, to cool the economy and reduce the country’s large current account deficit. HSBC’s
Purchasing Managers Index (PMI), which surveys managers’ views on changing output/demand,
seems to confirm this, reaching a record high in May. The PMI suggests the pick-up in new orders is
coming mainly from the domestic market, rather than for export.

SWOT ANALYSIS of Indonesia Economy

 Indonesian Economic Strong Point (Strenght): Indonesian Economic System Threaths:

 Natural Resources Available  Exchange Rate Depreciation

 Moderate Climate  International Competition
 Human Capacity  Monetary Crisis
 Good Comodity Export  Increase Unemployment
 Hard Worker Culture  Inflation
 Low Labor Cost  Heavy Debt Burden
 Startegic Location
Indonesian Economic System Weakness : Indonesian Economic System Opportunity :

 People Mentality  Improve the situation

 Corruption and Collusion  Combating Corruption and Collusion
 Abuse of Authority  Budding Democracy
 Too easily satisfied  Urbanization
 Decentralised System of Goverment  Agribusiness development
 Language Barrier  Restructure reform of the Economic
 Over Population
 Judicial System

Strengths:

Indonesia has a wealth of natural resources and the capability to step up development of these
resources quite quickly if the government really wants to. Indonesia’s democratic system is still
young, with weak institutions, but it has survived its start-up years and has resulted in better overall
political stability, including better checks and balances, a process that enhances the likelihood of
smooth political transitions, and better, more active support from the general population. With
continued progress of the Aceh Peace Accords and significant success in counter-terrorism
operations, Indonesia has made great strides in reducing regional security risks. Indonesia is such a
strategically important country that it can count on considerable foreign government and
multilateral support – more so than any other emerging country in Southeast Asia. The US, Australia,
the EU and Japan all have strong economic and political interests in seeing Indonesia staying on its
present development course, while the country is also getting more assistance from China, India and
Korea.

Weaknesses:
Logistical shortcomings make it difficult moving goods into and out of the country as well as
internally. Corruption, excessive bureaucracy, and inadequate physical infrastructure make
Indonesia a very difficult place to do business and add significantly to operating costs. The legal
environment is uncertain and the court system cannot be relied upon. While policing is weak,
enforcement is even weaker. Investment in many sectors, from mining, oil and gas to
pharmaceuticals and security services provide examples where investment is blocked or hindered by
bad policy, often with nationalist overtones. The local education system is weak. This affects the
quality of labor available and the ability of government officials to respond to challenges, particularly
at the local level.

Opportunities:

Investors consider natural resources, banks, infrastructure and consumer goods industries to offer
some of the biggest opportunities. Education and health care will be huge growth opportunities as
more foreign involvement is allowed. Indonesia has very large geothermal resources that it is just
starting to develop. This is creating opportunities for banks and investment houses helping the
country to raise the funds needed to pay for these investments. There will also be a big market for
alternative energy technology and equipment. Jakarta is getting ready to launch a massive mass
transit development program that will create major opportunities for financial firms, construction
companies and equipment providers.

Threats:

Corruption, bureaucratic inertia, and inconsistent and unclear regulations are three of the biggest
threats foreign investors face in Indonesia. Rules can change on very short notice. Labor unions can
be unreasonable in their demands, and the legal structure does not offer employers much
protection. Weak infrastructure such as a deficient healthcare system adds to complications and
risks for expatriates living in Indonesia. Security threats, including both terrorism and crimes against
persons and property, are relatively high.

The Prospect of Indonesia Economy in 2016 and beyond

Indonesia is a large Country, Indonesai is the fourth large country in the world by population, we
have the largest muslim population, we are the third largest democracy and we are the largest
archipelago

GDP growth is set to strengthen in coming quarters. The government’s plan to ramp up
infrastructure spending has now gained traction, boosting confidence. In addition, the central bank
has eased rates over three consecutive months. As a result, both private consumption and
investment are showing signs of picking up. However, external demand remains weak. The
government has recently released a series of reform packages to streamline investment, liberalise
FDI and improve the business climate. There should be scope for further interest rate cuts in the
medium term, as inflation should remain subdued and the exchange rate firm. However, the fiscal
balance could deteriorate owing to lower commodity prices, which, in light of the 3% of GDP deficit
ceiling, may constrain future public spending. Although in line with its stage of development,
productivity levels are low in Indonesia. More needs to be done to facilitate the transformation of
the economy away from low-productivity sectors, such as agriculture, and towards manufacturing
and services. Infrastructure bottlenecks, impediments to foreign investment and inflexible labour
market regulations are barriers to greater participation in global value chains. Regulatory
uncertainty, related to overlapping central and regional jurisdictions, is also restraining private
investment.

Numero UNO Group :

1. Haryoga Aditya Wardhana

2. Herlina
3. Hetty Kusuma Waty
4. Kokoh Parlindungan
5. Yosa Arfika Naim
6. Zia Ulhaq