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Latest Regional Economic Developments 2014:Q3
A desired economy should be stable in economic growth and inflation and shows decrease in disparity of regional economic. A stable economic growth requires policies that are favorable to economic growth for instance development of infrastructure and creation of competitive business climate. Besides, there is also need to identify the sectors in every region that have the potential to achieve high growth rates which should receive the support required to propel development in the regions.
Out of 33 provinces, 9 provinces record an increase on economic growth in 2012 to 2013. Jambi records highest growth (7.88%), DIY (5.4%), West Kalimantan (6.08%), Central Kalimantan (7.37%), Central Sulawesi (9.38%), Gorontalo (7.76%), NTB (5.92%), NTT (5.56%), and Papua (14.84%). Meanwhile, the rest of the provinces recorded decline in economic growth. It is interesting to note that some provinces that recorded high economic growth during quarter I-2014, based on year on year trajectory, recorded weakening growth. This was the case with DIY, West Kalimantan, Central Kalimantan, Central Sulawesi, NTT, and Papua. This phenomenon attests to the weak foundation of regional economies in Indonesia. Weakening in regional economy will undoubtedly have adverse impact on the national economy.
From the vantage point of quarterly growth, only 12 provinces were able to record positive growth in quarter I and II-2014. Provinces that were able to growth positively include DI Aceh (underpinned by Trading, Services, Hotel and Restaurants), Riau Islands, Lampung (manufacturing sector), DKI Jakarta (trading sector, Hotels and Restaurants; Transportation and Communications; and Services), Banten (Trading, Hotels and Restaurants), West Java (Trading, Hotels and Restaurants), Central Kalimantan (Mining and services), Bali (Agriculture and trading, Hotels and Restaurants), South East Sulawesi (Trading , Hotels, and Restaurants), NTT (Trading, Hotels and Restaurants and Services), Papua (Manufacture sector), and West Papua (Manufacture sector). It is worth noting that the rate of growth in Aceh and NTT was below national.
One of the policies that have had important influence on economic growth in the regions is the implementation of the law on Minerals. The Law on Minerals which was approved by the parliament on 16 December 2008 and was expected to contribute to valued added to mineral products in Indonesia. The law prohibits mineral commodities that follow under the regulated category to be exported in a raw material. It means that exporters are required to process of such mineral before export. The expectation was that by increasing value added of mineral commodities, the policy would have positive impact on public welfare. The policy, which has been rolled out since 12 January 2014, which was five years after its approval, has not generates expected outcomes. A lot of polemics have characterized the interlude between the approval and implementation of the law. Surprisingly many local governments are not yet ready to establish smelters and other processing facilities that are expected to process the raw minerals prior to export destinations. Consequently, the implementation of the law has led to serious disruptions in mining activities in many regions, which in turn have had adverse effect on regional economies. It gives great impact in such regions that have economies that rely heavily on mining activities such as Central Sulawesi.
The Law on Minerals has also had adverse impact on Indonesian relationship with key trading partners who have been important importers of Indonesian minerals output. During the current period of slow economic growth (which begun in 2012 and is expected to continue), any policies that impact oil and gas are likely to impact economic growth. This is especially so given the reality that in the wake of the implementation of the law on minerals, regions are required to establish requisite infrastructure for processing mineral output such as smelters so that exports of minerals have added value prior to export destination. To that end, the development of infrastructure is very vital for increasing the absorptive capacity of the economy if it is to achieve economic growth above 5%.
The high inflation in some provinces in Indonesia during quarter II-2014 are causing serious concern. This is because the 12 provinces have an inflation rate above the national average (hit 2% year-to-date from the start of the year until June 2014). The provinces are DKI Jakarta, Banten, Central Java, East Java, West Kalimantan, Central Kalimantan, South Kalimantan, Bali, Central Sulawesi, NTT, Maluku, and North Maluku.
ASEAN: Entering ASEAN Economic Community 2015 Amidsts Shadow of Challenges Hanging over The Regional Economy
Entering ASEAN Economic Community (AEC) 2015, regional economy has yet to register stable growth. In fact, some economies in the region are showing signs of increasing vulnerability arising from weak economic structure. The economic situation in ASEAN region in the quarter II-2014 is a portrayal of an economic that has mixed bag of optimism interspersed with some dose of pessimism. Some key countries in the region such as Malaysia, Philippines, Thailand, Singapore and Vietnam, despite continuing to fluctuate over time, have succeeded in registering economic growth that exceeds the expectations. Meanwhile, Indonesia as the major engine of regional economy shows signs of weakening growth as are Brunei Darussalam, Laos, Cambodia and Myanmar. They are still bedeviled by issues that relate to economic fundamentals such as the structure of the economy that suffers from sufficient diversification and rising disequilibrium that characterizes government revenue and expenditure. Consequently, economic growth which has been achieved has been short on quality which has contributed to economic contraction. Such a situation is reflected in the continuing economic vulnerability of the regional economy in the lead up to AEC 2015 amidst conditions in the world economy that has yet to achieve strong and sustainable economic growth.
Various challenges continue to bedevil regional economy in the lead up to AEC 2015. The challenges are attributable to among other factors international phenomena as well as regional factors such as the impending plan by United States Central Bank to raise interest rate by about 100-115 basis points which poses the danger to reverse the flow of capital which had flooded emerging markets back to United States in 2015, global economic situation which continues to be anaemic as reflected in the current account positions of many countries that are still in deficit, and deficit on government revenues and expenditures (budget) that exceeds 3 % in some countries in the region. Besides, a number of challenges that relate to domestic policy such as impeding plan by the government to rationalize prices of subsidized fuels in Indonesia and Malaysia, the impending plan by Malaysia to implement a new Goods and Service Tax (GST) policy in 2015, proposal of raising Value Added Tax (VAT) by 10% and salaries of civil servants by 8% in Thailand in 2015, and domestic political instability that continues to afflict Cambodia and Thailand. The above issues have the potential to derail efforts of countries in the region to achieve economic growth targets in the lead up to AEC 2015 which will come into force late 2015.
Developments in Government Finances and Fiscal 2014:Q3
The latest report on budget absorption released by the Ministry of Finance shows that in quarter II, January-June 2014, expenditure on fuel subsidies reached a staggering IDR 100.7 trillion (43.9% of the 2014 revised state budget allocation ceiling), and a drastic increase from IDR 20.0 trillion which was level of expenditure registered during the same period in quarter I-2014. Besides, the government and the national assembly reached an agreement that reduced the volume of subsidized fuel from 48 million kiloliters to 46 million kiloliters. Consequently, the government faces the risk of dealing with limited fiscal capacity to undertake development programs. Doubtless, unless there is change in fuel subsidies there is little doubt that the level of fuel subsidies will not be sufficient until the end of the year.
The decline in economic growth has had adverse impact on tax revenues. Indonesian economic growth was 5.12% (y-o-y) in quarter II-2014, which is lower than the assumption of 5.5% that underpinned the revised annual budget for 2014. Consequently, tax revenues declined as well.