Progress on Indonesia Economy

in 5-year time frame (2007-2011)

by Sari Setiyowardhani (1106128433)

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STATEMENT OF AUTHORSHIP

I the undersigned hereby declare that the attached assignment is purely the result of my own work. No work of others that I use without citing sources. I understand that the task which I gather can be reproduced and or communicated for the purpose of detecting the existence of plagiarism. Name NPM Signature : Sari Setiyowardhani : 1106128433 :

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Foreword

It is known to the world that Indonesias economy is one of the countries that actually have the ability to grow well. After a decade of painful restructuring for banks and companies, Indonesian businesses are spending on new factories and on the country infrastructure. Annual imports of things like machinery and mechanical equipment are growing at double-digit rates. Indonesia's economic growth remained stable and was able to withstand the economic turmoil that hit the United States (U.S.) in 2008, and Europe which was started from the Greece economic downfall in the last quarter 2009. Even though there were several public fears on the global recession, and Indonesias economy was down for some times, but the economy managed to get up and survived the economic turmoil. Quoted by AntaraNews, the Executive Director of Economic Research and Monetary Policy of Bank Indonesia, Perry Warjiyo said in 2012, Compared to other countries in the world, our economic growth rank in second, right after China. Bank Indonesia officially cited that Indonesias economic growth in 2012 reached 6.3 percent, and Chinas growth was 7.8 percent. Following the fact that Indonesia is believed to have a great growth in the economy, I would like to discuss about Indonesias recent progress in economy using five-year time frame, starts from 2007 through several economic indicator. The first indicator is the Gross Domestic Product. As an aggregate measure of total economic production for a country, GDP represents the market value of all goods and services produced by the economy during the period measured, including personal consumption, government purchases, private inventories, paid-in construction costs, and the foreign trade balance (add export and deduct import). Presented quarterly, GDP is often presented on an annual percent basis. Most of the individual data sets will also be given in real terms, meaning that the data is adjusted for price changes, and is therefore net of inflation. Another good thing about GDP is that it is comprehensive and detail. Reading and understanding a GDP report of a country gives us the look on how the economic system in that country works. The second will be the capital market. This will cover the facts on investment, government securities, bonds, and other securities. The third will be the level of inflation rate through months on the five-year time lapse (2007-2011). Some people may think that inflation is bad because as the prices rise, peoples ability to purchase will falls. But actually, inflation is a sign that the economy of a country is growing. When the level of inflation is expected, or anticipated, it has a positive influence in driving the economy to go better. People are tend to work harder to get bigger wage, and then they will save the money, and hold on investment. It would eventually increase the national income.
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CHAPTER 1 Indonesia economy 2007

Marking 10 years after the huge crisis happened to Indonesia, Indonesia was finally managed to increase the economy growth to surpassed 6 percent on the year 2007.

In the GDP of 2007 calculated by industrial origin, the increasing nominal numbers on each sector were relatively small. Sector of transport and communication had the largest growth rate in the year of 2007. But, to the overall 6.3 percent growth of the economy, the contribution of transportation and communication sector was only 1 percent out of 6.3 percent. While the trade, hotel, and restaurant sector growth had the contribution of 1.4 percent out of 6.3 percent, despite the growth rate on the sector of trade, hotel, and restaurant was only 8.5 percent.

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Meanwhile, from the expenditure calculation, the highest contributor of the 2007 economic growth in Indonesia was the export. This was a good thing since exports were increasing, even though the imports were also increasing. There also was 5 percent growth in the private consumption. This was a great increase since the 2006 GDP stated that the private consumption growth were merely 3.2 percent. This was a good trend since it showed that the private purchasing power was increased. In the year of 2007, there was an increase in the matter of employment. Taken from the BPS, number of people in the labor force stated in August 2007 was 109.9 million. It was increased for about 3.6 million compared to August 2006.

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bps.go.id/eng/tab_s ub/view.php?kat=1 &tabel=1&daftar=1 &id_subyek=06&no tab=1

The expanding labor force was then occupied by increased numbers of employed or working people. In August 2007, the total employed population mounted by 4.5 million compared to August 2006. The inflation rates throughout the months on the year of 2007 were relatively stable at around 5 to 6 percent on the first look.

On the second look, it was noticeable that after the month of July 2007, the levels were slightly higher than it were before July 2007.

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CHAPTER 2 Indonesia economy 2008

The year 2008 was a tough time. It was the year where the economy of the one powerful country United States of America hit by a recession. In America, the crisis started in the home mortgage market, especially the market for so-called subprime mortgages, and was spreading to prime mortgages, commercial real estate, corporate junk bonds, and other forms of debt. Total losses of U.S. banks could reach as high as one-third of the total bank capital. The crisis has led to a sharp reduction in bank lending, which eventually caused a severe recession in the U.S. economy. And in the second semester of the year of 2008, the biggest investment banking in the United States called Lehmann Brothers collapsed. Even though the exposure of Indonesias banks and financial institutions to global assets were limited, the impact of the economic recession still domestically felt. Since Indonesia was a country with small open economy, this global economic turmoil led to several downturns in the economy of Indonesia. There were two types of effects that were took place to the Indonesia economic condition: direct effect, and indirect effect. First, the direct effect. The direct effect of the global economic recession was the downfall of payment balance. Due to the recession, the purchase power of public America decreased. The decreasing power of purchase affected the decreasing number of imported products from Indonesia. From here, exported products from Indonesia also decreased. In the capital market, Indonesia experienced intense pressure from the spread of the global economic recession. The value of stock issuances increased significantly at the beginning of the year, but then falls at the end of the year. Similar thing happened to the government bonds market. The government bonds market experienced pressures which then increased the yield. Eventually, the target for government bonds issuances was not accomplished. But this did not affect the APBN due to the low realization of government expenditure. The stock market performed well in the first semester of 2008, but then it went down on the second semester of 2008. External fluctuations in the financial markets triggered the slide in Composite Index. In the beginning of the year of 2008, Composite Index was 2,830. And at the end of the year of 2008, the Composite Index was 1,355. The stock trade and the Composite Index (IHSG) experienced a strong pressure which then caused the IDX to suspend all the trade on October 2008. Also on October 2008, Indonesian Capital Market and Financial Institution Supervisory Agency issued new regulations regarding buyback. The government tried to encourage BUMN to buyback through profit provision.
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This fast pace of the downfall was encouraged by not only the structure of the domestic financial market that has been integrated with global financial market, but also the high number of foreign investors invested in the stock market of Indonesia. The loss in the global financial market caused them to experienced low level of liquidity which then caused them to deleverage their investments in the financial market of Indonesia.

Comparison on total number of SBI and SBI owned by foreigners.

At the end of 2008, IDX issued another policy that mandated the reporting of stock transactions and the closing of cash market transactions to reduce huge price disparities with the regular market. To restore investor confidence, IDX requested a number of issuers to publicly expose fair information regarding the conditions of the issuer.

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Second, the indirect effect. The indirect effects from the global economic crisis to the economy of Indonesia was the decreasing percentage of economic growth level (as stated by the GDP), where when 2007 was 6.3 percent, and in 2008 was 6.1 percent.

Another thing that affected by the crisis was the inflation rate. In 2007, we see that the inflation rate maintained at below 8 percent throughout the whole year with 6.95 percent as the highest. While in 2008, the inflation rate exceeded up to 12.14 percent in the month of July of 2008.

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This increasing inflation level was triggered by the increasing of the price of world commodities, especially oil and foods. The increasing in price of oil and foods affected the price in Indonesia that was determined by the government (administered price) along with the government policy of increasing the price of subsidized fuel oil. After the month of September of 2008, the inflation level was started to decline. This was caused by the decreasing price of world commodities, foods, and energy. Another thing that caused the inflation started to decline was by the government policy of decreasing the price of solar fuel and premium fuel on December 2008, and the productions of domestic foods were relatively great. Through all the inflation in the start of the second semester of 2008, deflation of 0.04 percent was actually occurred at the beginning of the month of December 2008. This deflation was caused by the decreasing of price level on the sector of transportation, consumptions, and financial services. The successful efforts to gradually decrease the level of inflation were inseparable from the efforts of government authorities to mitigate the expected acceleration of inflation which was significantly increased after the increase in price of oil and fuel.

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CHAPTER 3 Indonesia economy 2009

Global economic was trying to recover from the earlier recession. The good thing was the recovery was moving at a fast pace. Along with the global economy recovery and improvement, Indonesia, following the global, was also recovering from the previous downfall. Various policies were created by the government and Bank Indonesia. Some policies were aimed at restoring confidence among economic agents both in the financial and non-financial sectors, overcoming the liquidity tightness in the banking system and strengthening economic growth momentum. Other policies were also implemented to maintained financial system resilience and monetary stability, in order to support sustainable economic growth. Some challenges for the Indonesia economy in the year of 2009 was the continuing pressure of global economics recession in the year of 2008. The effects were quite big on the beginning of the year 2009, where the impact of 2008 global economic recession still shadowing the economy of Indonesia. As a result, pressures continued on monetary and financial system stability in the first quarter of 2009, and economic growth remained in downward trend due to a deep contraction in exports of goods and services. In the year of 2008, the economic growth level was in 6.1 percent, while in 2009 the economic growth level was 4.5 percent in this year.

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During the year of 2009, every sector in the economy grew. The highest growth happened in the transport and communication sector. The inflation level in Indonesia on the year of 2009 was the lowest Indonesia ever noted. In the year 2009, the lowest inflation level was 2.41 percent occurred in the month of November 2009.

This number of inflation level was half of what the government had predicted before which was around 5 percent, due to the global economic crisis in the 2008. This low inflation rate was caused by the occurrence of deflation for the goods and services which the prices were controlled by the government, such as fuel and electricity. And the deflation was already occurred at the beginning of December 2008 as mentioned on the previous section. In the capital market, the potential improvement showed up during the second quarter of the year 2009. The improvement was in line with renewed short-term capital inflows fuelled by more buoyant perceptions among global financial market actors. On the second semester of the year 2009, permanent improvement occurred. Things that caused this were the continuation of short-term capital inflows from foreign investors who are buying rupiah instruments, such as stocks, government securities and SBIs. The second half of 2009 was marked as the heavy foreign buying of government securities and SBIs. This caused the raising in the foreign ownership position to 11.3 billion US dollars for government securities, and to 4.7 billion US dollars of SBIs in December 2009. Or about 41.6% increase in government securities, and 510.4% increase on SBIs at the end of the year of 2008. In addition, the financial account surplus in the second half of 2009 also resulted from the increased in direct investment, particularly residents overseas investments, which was recorded as surplus, while it was always recorded as deficit on previous periods. This surplus was generated by the issuance of foreign currency bonds by private companies operating
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through overseas subsidiaries, with the funds from these issues then channeled into loans to their parent companies in Indonesia. Said by the Acting Governor of Bank Indonesia, Darmin Nasution, Through the struggle that began in the final quarter of 2008 and beginning of 2009, we overcame that difficult year with a number of achievements that we are entitled to feel proud of. The resilience of our economy was more than satisfactory in response to wild fluctuations and widespread uncertainty in the global economy. With growth reaching 4.5% in 2009, Indonesia gained entry into an exclusive group of a few countries that managed positive growth.

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CHAPTER 4 Indonesia economy 2010

Another global economy problem occurred in the year 2010. The recovery of global economy that started in 2009 went on slower pace because of the Europe crisis. Started from fourth quarter of 2009, Greece economic performance experienced downfall. And the economic problem spread across European Union countries. Nevertheless, debt crisis in some European countries and high unemployment rate in advanced countries led to a weakening of the global economic recovery. But, economic recovery in emerging countries continued strong, reflecting an imbalance in the speed of the recovery between advanced and emerging economies of countries. The speed up of global economic growth caused the commodities price to increase. World demand for oil increased and triggered significant increase in oil prices. Thoroughly, the increased in global commodity price and global demand led to a rise in global inflation. From the global inflation, the effect that took place to the economically emerging countries was a higher inflation. In Indonesia, the highest inflation level exceeded the targeted level. Inflation level reached 6.96 percent in the month of December 2010, while the targeted level by Bank Indonesia and the government was about 5 percent.

The cause of this increasing inflation level was because the increasing level of price of foods, due to weather uncertainties. The weather uncertainties cause the agricultural sector to decrease the productions. The most famous agricultural and economic problem in 2010 was the price of sembako (primary foods). Another thing that intrigued the increased level of price was the increasing level of price of crude oil in the world market. Domestically, the increased price
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of crude oil increased the price of cooking oil, which until now also still included in primary life need. With all those increases in level of price, inflation level in the group of food increased to 2.81 percent in the month of December 2010.

Below is the list and level of inflation on commodities in Indonesia.

As we can see, that the commodity that highly contributed on the level of inflation was the price of rice which was 1.29 percent. Price of rice was followed by price of electricity which was 0.36 percent, and price of red chili which was 0.32 percent. The economic growth showed on GDP of 2010 was 6.1 percent. There was an increase in growth of economy.

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The highest level in the economic growth was still transportation and communication sector. But a significant rise was occurred to the manufacturing sector, whereas in the 2009 was merely 2.2 percent, and in the 2010 was 4.5 percent.

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CHAPTER 5 Indonesia economy 2011

In the year 2011, the global economic recovery once again slowed down by the effect of the worsened debt crisis in the European Union, and the slow pace of economic recovery in the United States of America. This economic problem not only affected the advanced economies, but also the emerging market economies. But even though with many pessimistic events occurred on the global economy, Indonesia remained cool and showed the world that the economy of Indonesia is strong enough to not to be affected by the global economic turmoil. Instead of a downfall, Indonesia economy managed to rise in the year 2011. At the edge of the year 2010, many economists believed that the Indonesian economic in the year 2011 would be better than in the year of 2010. The government already stated that the growth of economy will be around 6.4 percent. And it did.

Indonesia managed the economy growth level to the level of 6.5 percent. The highest level of growth still happened in the sector of transport and communication, and the manufacturing sector reached its highest growth rate in the last five years, which was 6.2 percent in 2011. High

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domestic and external demand, added by the increasing conducive investment climate improved business optimism in the manufacturing sector. The increasing in economic growth caused the employment condition to rise as well. Reported by BPS, open unemployment rates dropped from 7.1 percent in 2010 to 6.6 percent in 2011.

The increasing level of employment was caused by improvement in the manufacturing sector. And the improving manufacturing sector, which absorbed and still absorbs many formally employed and highly educated workers was supported by the improvement in the formal sector with more sustainable economic structure. Following the trend in 2010, inflation started with a high level on the early months of 2011. The level was exceeding the 7 percent.

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At the first quarter of 2011, high inflation occurred in group of foods and primary needs following the year 2010. But actually, the expected inflation was also high. This was the government policy to rationalize the usage of subsidized fuel. After that, the inflation level keeps declining because of the harvesting season. The decrease in inflation level was supported by the deflation in group of food that took place during the February-April period in 2011.

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Conclusion

Since the year of 2007 up to 2011, the biggest contribution in Indonesia GDP based by industrial origin has been the sector of manufacturing industry. Though the number may vary, but it is still the biggest contributor. This showing that the manufacturing industry of Indonesia had been improved and still improving up until now. It is said that the manufacturing industry is the main support of industrial development of a country. And Indonesia managed to develop its manufacturing industry. Increasing in the growth rate of manufacturing sector is a result of the increasing demand from domestic public, particularly the demand on metals, foods, chemicals, and automotive spare parts. Domestic demand seems as not affected by the global financial crisis and grew by 6.4 percent in the first half of 2012. Investment and consumption also still grow despite all the crisis happened in the world. It is reported by the BKPM (Indonesia Investment Coordinating Board) in 2012, that the investment activities by the foreign investors were keep on increasing. Reported by BKPM, on the second quarter of 2012, the foreign investment activities reached up to $1.2 billion, which was increased by 62 percent from the previous year. Many big companies of textiles, clothing, and footwear who located their factories in China were expected to move their manufactory operations to Indonesia because of the increase in labor costs in China. Numbers of Japanese automotive companies were also planning to expand their network of suppliers to Indonesia, and it is expected to increase the profit of Indonesias automotive industry. Quoted by the worldbank.org, The World Bank Country Director for Indonesia, Stefan Koeberle said, Indonesia could potentially boost its global market share in manufacturing, create millions of new jobs and facilitate structural transformation. But riding on the back of domestic and international demand is not enough. To improve overall competitiveness and sustain growth, the government and private sector need to overcome the main challenges in the manufacturing sector.1

World Bank. The World Bank. 10 October 2012. <http://www.worldbank.org/in/news/pressrelease/2012/10/10/indonesia-manufacturing-sector-picks-up-pace>.

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References:

ANTARA news. ANTARANEWS.com. 12 October 2012. <http://www.antaranews.com/berita/338313/pertumbuhan-ekonomi-indonesia-nomor-dua-dunia>. Bank Indonesia. 2007 Economic Report on Indonesia. Jakarta: Bank Indonesia, 2008. . 2008 Economic Report on Indonesia. Jakarta: Bank Indonesia, 2009. . 2009 Economic Report on Indonesia. Jakarta: Bank Indonesia, 2010. . 2010 Economic Report on Indonesia. Jakarta: Bank Indonesia, 2011. . 2011 Economic Report on Indonesia. Jakarta: Bank Indonesia, 2012. Barnes, Ryan. Investopedia. Unspecified year. <http://www.investopedia.com/university/releases/gdp.asp>. Chairil, Haidi, Prima. "Inflasi dan Kenaikan Harga Beras." February 2011. Website Resmi Kementerian Sekretariat Negara Republik Indonesia. <http://www.setneg.go.id/index.php?option=com_content&task=view&id=5171&Itemid=29>. Ibnu Purna, Hamidi, Prima. "Perekonomian Indonesia Tahun 2008 Tengah Krisis Keuangan Global." May 2009. Website Kementrian Sekretariat Negara Republik Indonesia. <http://www.setneg.go.id/index.php?option=com_content&task=view&id=3698&Itemid=29>. Moseley, Fred. ISR. March 2009. <http://www.isreview.org/issues/64/feat-moseley.shtml>. "Press Release." 2008, 2009, 2010, 2011, 2012, 2013. Badan Pusat Statistik. <http://www.bps.go.id/eng/aboutus.php?news=1&nl=1>. Sindonews.com. OkeZone. June 2012. <http://jakarta.okezone.com/read/2012/06/20/452/650253/investor-asing-puas-investasi-diindonesia>. Susanto, Heri. "Kenapa Ekonomi Indonesia 2011 Lebih Baik?" January 2011. VivaNews. <http://bisnis.news.viva.co.id/news/read/197136-kenapa-ekonomi-indonesia-2011-lebih-baik->. World Bank. The World Bank. 10 October 2012. <http://www.worldbank.org/in/news/pressrelease/2012/10/10/indonesia-manufacturing-sector-picks-up-pace>.

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