GAMA LEI has succeeded twice in predicting accurately and precisely potential signs of weakening performance of the Indonesian economy. GAMA LEI predicted economic growth decreased, which has been shown by lowering economic growth of 6.11% and 6.01% (YoY) in Q4 2012 and Q1 2013 respectively. GAMA LEI predictions were in stark contrast with those issued by most economic analysts who projected higher economic growth rate. In this edition, GAMA LEI predicts slow economic growth in Q2 2013.

 

Figure 19 : GAMA LEI Indonesia, 2000:Q1 – 2013:Q1

 

The predictions are based on the fact that 2013 continues to be characterized by higher uncertainty in the global economy, and being a year to the general and Presidential elections, it is going to be fraught with high political dynamics in Indonesia.   As we went to press, Indonesian economy is in the midst of uncertainty that shrouds the direction and composition of government policy on subsidized fuels. Expenditure on preparations for the general elections will temporarily help to sustain economic growth. However, the implication is the economic growth is not based on sound economic policy. Inflation prior to and after the government implements its policy to raise prices of subsidized fuels, calls for serious attention and anticipation. Doubtless, high inflation expectations will exert more pressure on already weakening economic growth in coming quaters. This is the more so, given the fact that based on GAMA LEI predictions, there is still no indication that the downward trend which kicked in the economy in Q4 2012, is fizzling out any time soon. The value of Rupiah is almost reaching IDR 10,000 per USD driven by rising oil and gas imports, which in turn is attributable to high demand for subsidized fuel. High demand for subsidized fuels is largely attributable to the low retail price consumers pay for it in the domestic economy. Subsidized fuels, the higher the volume of oil and gas imports. This translates into high demand for US dollars to pay for energy fuels, which in turn contributes to the depreciation of Rupiah.

 

What this means is that unless policy makers implement concrete pro growth policies, thereby marking a change from the prevailing conditions, based on LEI predictions, Indonesian economy will continue to weaken in the next quarter. This is far from expectations of all, which is higher economic growth.

 

GAMA LEI is a cycle, which comprises composite a selection of indicators that have the potential to precede Indonesian business cycle (Indonesian Economic Review and Outlook, March 2013). The construction of GAMA LEI is based on analyses of hundreds of internal and external macroeconomic indicators. The selection of macroeconomic indicators that form GAMA LEI is done under very stringent considerations. Data on indicators is renewed every quarter, which means that LEI that is developed continues to improve and becomes more accurate. Based on the latest quarterly data on Indonesian GDP for 2000-2013, indication point to highly fluctuating economy. However, GAMA LEI is able to predict with high precision, the point when the economy changes course. During 2008 global financial crisis, LEI was able to predict sigs of an economy changing course in Q3 2007, and predicted the down turn of Indonesian economy in Q3 2008.

 

Consensus on Macroeconomic Indicators Projections

Results obtained from a survey, which involved respondents drawn from lecturers in the Faculty of Economics and Business, UGM, yielded predictions of levels and range of principal macroeconomic indicators that include GDP, inflation, and exchange rate of Rupiah against US$ right from Q2 2013 to year 2014. Predictions of GDP (YoY) indicate an economy that is still weighed down by pessimism. Prediction of real GDP growth for the Q2 2013 and Q3 2013 were within 6.02% ± 0.2% and 6.05% ± 0.2% range, respectively. However, predictions of real GDP based on the latest data for 2013 and 2014, show that the economy is expected to post growth by 6.13% ± 0.22% and 6.19% ± 0.21%, respectively.

 

Meanwhile, predictions of Inflation (YoY) show an upward trend. This is reflected in the predictions for Q2 2013 and Q3 2013, which are 5.93% and 6.12%, respectively. However, predictions for inflation for 2013 and 2014 are 5.71% and 5.66%, respectively.

 

In the meantime, while the prediction of the exchange rate for Q2 2013 in the previous edition was expected to hover around IDR 9776, in this edition Rupiah is expected to depreciate against US dollar. The depreciation is attributable to uncertainty facing both the domestic and global economy. In that regard, survey results point to a depreciation in the   exchange rate to be IDR 9,837 and IDR 9,834 for Q2 2013 and Q3 2013 respectively. Meanwhile, exchange rate for 2013 and 2014 is expected to be IDR 9,818 and IDR 9,831 respectively.

 

Table 6 : GDP Estimation (YoY, in %)

Sources: Primary data, processed (2013)

 

Table 7 : Inflasi Estimation (YoY, dalam %)

Sources: Primary data, processed (2013)

 

Table 8 : Exchange Rate Estimation (IDR per USD)

Sources: Primary data, processed (2013)

 

 

Economic Outlook

 

Indonesian economy in Q2 2013, encountered many internal and external challenges, which increased macroeconomic instability. The realm of decision making is plagued by political intrigue, which explains the procrastination the government has shown in its decision to increase prices of subsidized fuel prices, and eventually setting the date of Mid June 2013 (latest limit for latest IERO edition). It is no wonder the delay has generated uncertainty in the economy, as it amounts to holding the economy hostage. Such condition, tantamount to “a growing time bomb” as Dr. Rimawan Pradiptyo has succinctly stated in this edition. This is the more so, considering the increasingly hot political economy in Indonesia, amidst the global economy, which is facing uncertainty concerning quantitative easing monetary policy by the central bank in United States and Japan, and shroud of uncertainty that hovers over European economy, have all contributed negatively to Indonesian economy. As is that was not enough, the World Bank, revised down the global economic growth projection for   2013 from 2.4% in January 2013 to 2.2% in June 2013; the growth of the economy of China which has become the main growth engine of the global economy, was revised downwards from 8.4% to 7.7%; while projection of economic growth for Indonesia were revised downwards from 6.3% to 6.2%.

 

 

 

Amidst growing uncertainty in the domestic and global economy, GAMA Leading Economic Indicators predicts contraction in economic growth in the short term. To that end, the contraction in the economy is projected to continue, which is a continuation of GAMA LEI’s projections that were proved correct over the past two quarters in succession. The same applies to the consensus of members of Faculty in the Faculty of Economics and Business, UGM, with respect to projections of key macroeconomic indicators, which were very much in line with GAMA LEI predictions that Indonesian economy is projected to contract , due to rising economic instability and slowdown in economic growth. There is little doubt, if such conditions continue for long, have the potential to endanger Indonesian economic development. As way forward, there is need for the government to take decision on the subsidized fuels which will go a long way curbing current uncertainty and speculation and attendant adverse effects on the economy. Besides, all relevant economic authorities should in the short term put more emphasis on efforts to preserve macroeconomic stability,   which should prevent rising political tensions from degenerating into macroeconomic instability and deterioration of the economy.