GAMA Leading Economic Indicator (GAMA LEI)
Leading Economic Indicator is one of early warning system models that predicts the movement and direction of the economy in future. GAMA Leading Economic Indicator (GAMA LEI) is a model developed by the Macroeconomic Dashboard at the FEB UGM. Turning points and movements in the GAMA LEI graphed is used to predict the direction of the Indonesian economy over some period in future. GAMA LEI analysis is based on quantitative and qualitative methods that generate and produce the best prediction.
The compilation of GAMA LEI uses various indicators which have been subjected to robust statistical tests. The performance of a variable such as investment, automobiles sales, exports and international reserves are analyzed from both macroperspective such as market capitalization and IDX of the capital market which have significant influence on the economy. Nonetheless, it is worth noting that some macroeconomic indicators are likely to change any time in future.
GAMA LEI is able to make an accurate prediction of the cycle of the Indonesian economy sometime back prior to the event. The prediction which GAMA LEI makes has proved its efficacy in predicting the direction of the cycle of Indonesian economy. The decline in the performance of some key economic indicators in Indonesian economy have led to the weakening of economic growth in 2014:Q1 compared with 2013:Q4. In this edition, GAMA LEI predicts the fluctuation of the economy in 2014, which has been designated as the year of politics, especially so in the lead up to the forthcoming presidential elections in July.
The variety of patterns in Indonesian economic growth and projection of the cycle of the Indonesian economy in GAMA LEI model has the ability to produce a comprehensive prediction. The prediction of the business cycle places a lot of emphasis on the movement of the economic cycle in the direction toward either expansion or contraction for some time in future. GAMA LEI 2014:Q1 cycle lies at the expansion phase (falls above 100), albeit signs of declining. As an example: Indonesian economic growth in 2014:Q1 (year-on-year) increased, but the GDP cycle generated by the model shows a downward trend that is still within the expansion phase.
Figure 1: GAMA Leading Economic Indicator
GAMA LEI predicts a downward trend in the cycle of Indonesian economy
Outcomes of GAMA LEI prediction in this edition points to a downward trend in the economic cycle of Indonesian GDP. GAMA LEI model in 2014:Q1 shows downward trend in the economy. The downward movement of GAMA LEI generates prediction that shows a decline in the cycle of Indonesia GDP in 2014:Q2. The revelry and garland that is characterizing the year of politics, which will reach its crescendo in the lead up to the presidential elections in July, 2014, should instill hope and optimism in the Indonesian economy. It is the hope that the next government will have the knack to take advantage of the current momentum to protect, or even improve, the economic performance in 2014:Q1.
Consensus on Projections of Macroeconomic Indicators
The outcome of consensus on three principal macroeconomic indicators for Indonesian economy–economic growth, inflation, and exchange rate–showed a trend toward improvement from 2014 to 2015. The consensus was obtained after a survey that was conducted by Macroeconomic Dashboard team with respondents who were drawn from lecturers and researchers at FEB UGM.
In general, real GDP growth (y-o-y) in quarter II-2014 is predicted to increase compared with real GDP growth registered in quarter I-2014. Real GDP (y-o-y) is predicted to grow by 5.46% ± 0.37% in quarter II-2014 and 5.47% ± 0.42% in quarter III-2014. On a year on year basis, real GDP growth in 2014 and 2015 is predicted to be 5.63% ± 0.48% and 6.0% ± 0.6%.
Inflation in Indonesian in 2014-2015 is predicted to exceed seven percent. In 2014, outcome of prediction indicated that inflation in Indonesia will be 7.88% ± 1.38%. In 2015, inflation is predicted to decline to 7.36% ± 1.82%. Meanwhile, on a quarter on quarter basis, inflation in Indonesia in quarter II-2014 and III-2014 is predicted to hover around 7.42% ± 1.56% and 7.90% ± 1.59%.
The exchange rate of rupiah is predicted to appreciate and will trend toward becoming more stable in 2014. This is despite the current exchange rate that hovers around IDR/USD 11,000. In quarter II-2014 the exchange rate of rupiah is predicted to hover around IDR/USD 11,563 ± IDR/USD 349. In the following quarter the exchange rate will appreciate slightly to the level IDR/USD 11,553 ± IDR/USD 390. Meanwhile, on a year on year basis, the exchange rate of rupiah in 2014 is predicted to be IDR/USD 11,366 ± IDR/USD 479 and is projected to appreciate in 2015 to the level of IDR/USD 11,072 ± IDR/USD 316.
Table 1: Estimates of Real GDP growth (y-o-y, in %)
Source: Primary data; analyzed (2014)
Table 2: Estimates of Inflation (y-o-y, in %)
Source: Primary Data; analyzed (2014)
Table 3: Estimates of Exchange rate of Rupiah (IDR/USD)
Source: Primary Data; analyzed (2014)
Economic Outlook
By the time this piece came to press, Indonesian economy was still following an upward trend, albeit with some indicators were posing worrying signs. Indicators on Indonesia competitiveness continue to be low which as reflected by the depreciation of rupiah, which has not stimulated improvement in exports to any significant degree. Consequently, the value of imports has surged, which has not been offset by significant increase in exports, led to a decline in net exports. Besides, Bank Indonesia has so far not implemented any drastic monetary policy that would have helped in improving the performance of the economy. This is because any monetary policies that are directed toward improving the position on the trade account, current account, and balance of payments, must also be supported by government policies.
Meanwhile, other indicators show rising financial burden on government finances due to the projection of lower revenues than target and rising fuel subsidies. As per the latest deliberations on 13 June 2014 between the budgeting commission of the parliament and the government, a decision was reached to raise the budget deficit to 2.4% of GDP, which is expected to be financed by issuing SBN (government securities) of IDR 72 trillion. What is interesting is that despite the fact that the burden for fuel subsidies is still large due to rising cost of imported fuels, budget allocation for subsidies is reduced in the Revised Budget Plan 2014 from IDR 285 trillion to IDR 246.49 trillion. Consequently, the new government will have to bequeath a carry over a staggering burden of subsidies of IDR 46.26 trillion.
GAMA LEI has been able to ‘capture’ developments of various economic indicators in Indonesian economy to predict a decline in the cycle of the country’s GDP in the near future. Nonetheless, it is worth noting that the decline in economic cycle is not as a result of slower economic growth per se. This is because economic cycle excludes factors that are volatile. To that end, the consensus reached on the direction of the economy points to continuing economic growth (y-o-y) in quarter II-2014, with signs of acceleration in the future.
That said, the projection of the decline in GDP cycle should be cause for concern, hence an issue that will call for serious attention for policy makers. Policy makers should not be confined to considering technical aspects, but equally important, need also to be open and unequivocal in order to earn public trust. Last but not least, the relative success in conducting the legislative elections has prevented the Indonesian economy from plunging into instability. Such a condition should be maintained as the country prepares for presidential elections on July 9, 2014. The importance of economic stability can be overemphasized given the fact that it is not by ensuring that economic growth continues unhampered that public expectations of high, and fair and sustainable social welfare can be achieved.