Leading Economic Indicator is one of the early warning system models that can be used to predict movements in the economy in future. GAMA Leading Economic Indicator (GAMA LEI) is a model, which was developed by Macroeconomic Dashboard team, of FEB, UGM, which has the ability to carry out forecasting. Prediction results generated by GAMA LEI model have the ability to predict the direction of movements of Indonesian economy in future.  The prediction of the direction of movement of Indonesian economy is done by observing the movement or change in direction which is produced by the GAMA LEI model for a certain period of time.  GAMA LEI is compiled on the basis of stringent quantitative and qualitative tests and using a selection of certain variables, deemed to have the ability to produce the best prediction.

Figure 21: GAMA LEI Indonesia, 2000:Q1 – 2013:Q3

So far in  GAMA LEI prediction were proved right, which is another proof of the reliance of the indicator as it has succeeded in making accurate forecasts of the expected movements of Indonesian economy in four consecutive periods.  The   GAMA LEI prediction model is able to predict with high accuracy movements of Indonesian economy right from quarter IV-2012 until quarter III-2013.  GAMA LEI prediction model accurately predicted the change in the direction of movement of Indonesian economy that occurred in  quarter I-2013Q1, the same thing happened when Indonesian economy weakened in quarter II-2013 and the first three quarter of 2013. In this edition, GAMA LEI model predicts the movement of the economy by the end of 2013 and the beginning of the year of politic 2014.

In general, the movement of indicators used in compiling GAMA LEI continue to show deterioration in the economy in quarter I-2013 until quarter III-2013. GAMA LEI is compiled from various indicators which are drawn from microeconomic variables and macroeconomy which have the ability to portray the economic cycle of Indonesian economy.  With respect to macroeconomy,  the possibility of a contraction in  foreign direct investment realization variable, value of major Indonesian export  destinations  such as (China and Europe), movement in the Indonesia composite index, market capitalization  in the capital market, implies that the Indonesian economy is likely to weaken in future. Meanwhile, from with respect to microeconomics, the possibility of contraction in the household expenditure which will impact on the sale of automotives and demand for cement, are predicted to weaken the performance of Indonesian economy in future.

Results of GAMA LEI prediction incline toward a weakening economy in the future, especially toward the end of 2013 and the beginning of the year of politics in 2014.  The movement in GAMA LEI in quarter III-2013 does not show change in direction in the movement of Indonesian economy to conditions that are better than it is experiencing today. To that end, Indonesian economy is predicted to experience contraction in quarter IV-2013 and in early 2014.  If the government does not take the necessary policy action to stymie further weakening of the economy, the fact that year 2014 is a year of election will increase the burden on the government to maintain much needed economic growth.

 

Consensus on Projections of Macroeconomic Indicators

The survey predicts three key macroeconomic indicators, Indonesia, which are: economic growth, inflation, and exchange rate, which to this day, are still far from expectations. Estimated are obtained on the basis of a survey conducted by the team of Macroeconomic Dashboard members  with respondents who are drawn from lecturers and researchers in the Faculty of Economics and Business, UGM.

In general, the Indonesia real GDP growth in 2013 is lower than that in 2012.  Persisting low growth until the end of the year is attributable to external factors which is the still weak global economy. Meanwhile, internal factors that also playing a part include the deficit on the balance of trade and decline in investment.  The exchange rate of Rupiah against US dollar is predicted to continue fluctuating and is likely to continue to weaken. Fluctuations and weakening Rupiah is largely as a result of a lot of private and government external debt that will reach maturity, which will increase capital outflow. If the Federal Reserve reduces monetary expansion, this will compound the issue even further.

Beside, inflation in 2013 has been higher than the level in 2012.  The rise in inflation has increased pressure on Rupiah exchange rate against US dollar. However, inflation in 2014 is predicted to decrease.

Table 4: Estimates of GDP Growth

Source: Primary date, analysed (2013)

Table 5: Estimates of Inflation

Source : Primary Data, analysed (2013)

Table 6: Estimates of Exchange rate

Source: Primary Data, analysed (2013)

 

Economic Outlook
The Indonesian economy enters quarter III- 2013 facing serious pressure. Macroeconomic instability has grown as reflected in rising inflation and sifnigicant depreciation of Rupiah. Meanwhile, the performance of the economy in the international front is equally worrying as reflected in the deficits on both the current account   and balance of payments.  Deteriorating macroeconomic instability and lowering investment growth has weakened economic growth in quarter III-2013 precisely as Gama Leading Economic Indicator (GAMA LEI) prediected. This is in spite of various economic policies which the government and economic authorities have implemented to overcome economic instability or stimulate economic growth, respectively.

Toward the end of 2013, conditions in the domestic economy are at best bleak due the dark cloud of uncertainty which the global economy continues to cast over it, especially the possibility of tapering off policy by the US Federal Reserve. Indonesian economy which is open and recipient of a lot of short term capital flows from international markets is highly vulnerable to swings in global market conditions, especially in foreign currency. To that end, volatility of Rupiah has increased, and now hovers about IDR12000 /USD, while inflation is still high. Doubtless, GAMA LEI has been able to track such bleak conditions, as reflected in its prediction of the economy that will continue to weaken in the future. 

Rising macroeconomic instability which is compounded by bleak economic prospects pose a major threat to Indonesian economy.  This is more so because 2014 is an election year. If the elections do not go smoothly and peacefully, there is little doubt that Indonesian economy will deriorate even further.  To that end, it is imperative that Indonesia ensures than the conduct of 2014 elections is done peacefully to avert the propect of worsening economy. The hope is that  2014 elections will produce a new leader who will have the ability to institute changes that are needed on managing the economy , which will enable Indonesia to bounce back from its economic doldrums it faces today, positing strong economic growth,  which will in the long term propel Indonesia into the ranks of developed and wealthy nations. Hopefully so.