1. Contraction in government expenditure has had adverse impact on the economy
Indonesia posted slower economic growth rate in quarter II-2014. According to data released by BPS, Indonesia registered economic growth of 5.12% (y-o-y) in quarter II-2014, which is far lower than 5.76% (y-o-y) posted in the same period the previous year. Indonesian economic growth has shown a downward trend over the last several quarters, which has complicated government efforts to achieve economic growth target of 5.5% (y-o-y) in 2014. To that end, this will remain a formidable challenge for the new government.
Figure 1: Indonesian GDP growth at 2000 Constant Market Prices by Industrial Origin, 2012 – 2014 (y-o-y, in %)
Indonesian economic growth posted in quarter II-2014 was lowest in the last 3 years
Note:
Primary Sectors: Agricultural, Livestock, Forestry and Fisheries; Mining and Quarrying;
Industrial Sectors: Manufacturing; Electricity, Gas and Water Supply; and Construction
Services Sector: Trade, Hotel and Restaurants; Transport and Communication; Finance, Real Estate and Business Services; and Services
Source: BPS and CEIC (2014)
Based on economic sector, weakening economic growth in quarter II-2014 was largely attributable to the decline in the performance of the Mining and Quarrying Sector, which contracted by -0,15% (y-o-y). This was as a direct consequence of the decline in exports of coal and the impact of the implementation of Law on Minerals. Since the implementation of the Law on Mineral and Coal Mining on January 12, 2014, the Mining and Quarrying sector has suffered contraction (in quarter I-2014, Mining and Quarrying Sector contracted by -0.26% (y-o-y)). However, Primary Sectors (which comprises Agricultural, Livestock, Forestry and Mining and Quarrying Sectors) were able to post growth rate of 2.13% (y-o-y) in quarter II-2014, which is higher than 1.93% (y-o-y) registered in quarter I-2014.
The growth registered by Primary Sectors was largely attributable to the performance of the Agricultural, Livestock, Forestry and Fisheries, which posted higher growth in quarter II-2014 of 3.39% (y-o-y). This was in part, a direct consequence of the harvesting season during April-June 2014. Subsequently, the growth posted by Industrial Sector and Services Sector declined, albeit slightly. In quarter II-2014, Industrial and Services Sectors posted growth of 5.37% (y-o-y) and 6.19% (y-o-y), respectively, which represented a decline compared with growth of 5.44% (y-o-y) and 6.44% (y-o-y), registered in quarter I-2014.
Figure 2: Indonesia GDP Growth at 2000 Constant Market Prices by Expenditure, 2012 – 2014 (y-o-y, in %)
Contraction in government consumption coupled with weakening household consumption in quarter II-2014 attests to the reality that the general elections has not yet had significant impact on economic growth
Source: BPS and CEIC (2014)
In the meantime, with regards to expenditure, nearly all sectors registered weakening growth in quarter II-2014. Based on BPS data, economic growth in quarter II-2014 was propped up by household consumption, which posted stable growth (4.84%, y-o-y), which in part was attributable to the conduct of the general elections. This is reflected in the growth registered in paper industries (6.70%, y-o-y), food (11.27%, y-o-y) and beverages (2.96%, y-o-y) in quarter II-2014. Nonetheless, the conduct of the general elections did not make significant contribution to the economy, a fact that is discernible from figures on growth achieved in quarter II-2014 (5.41%, y-o-y), which fell short of that registered in quarter I-2014.
In addition, weakening economic growth was in quarter II-2014 is also attributable to the contraction of -0.71 % (y-o-y). This is very much due to the request of the Corruption Eradication Commission to delay the distribution of Social Assistance Funds in April 2014. That means that once elections were over, the government continued to strengthen efforts to cut expenditure as well as economize on expenditures of ministries and other public institutions. Besides, net exports sector continued to decline in quarter II-2014. Thus, the contraction of imports in quarter II-2014 of -5.02% (y-o-y), the sluggish performance of exports that declined by -1.04% (y-o-y), meant that balance of trade continued to deteriorate. Meanwhile, the conduct of presidential elections also contributed to uncertainty as investors adopted wait and see attitude prior to making any investment decisions. Consequently, investment in quarter II-2014 grew at a lower rate of 4.53% (y-o-y) than 5.41 % (y-o-y) registered in quarter I-2014.
2. The decline in poverty incidence has not been accompanied by decrease in regional income disparity
Table 5: Developments in Poverty Incidence and Inequality in Indonesia 2011 – 2014
Number of people categorized as poor in Indonesia has declined
Source: BPS and CEIC (2014)
In March 2014, the number of people who are categorized as poor registered a slight decline compared with the level in September 2013. The number of poor people in March 2014 was 28.28 million, which represented 11.25% of total population. Based on data released by BPS, several factors are responsible for the decline in the number of poor people in Indonesia in March 2014. Such factors include, among others, inflationary pressure which has diminished, falling prices of some basic commodities such as broiler chicken, sugar, pepper and eggs as well as improvement in farmer output which contributed to an increase of 4.52% in wages of farm workers during September 2013 to March 2014 period.
However, income disparity among provinces continues to be widened. Based on BPS publication, poverty incidence in descending order is Maluku Island and Papua (23.15%), Bali and Nusa Tenggara (14.42%), Sulawesi (11.71%), Sumatera (11.21%), Java (10.83%) and Kalimantan (6.57%). As if that is not enough, most of the poor people live in rural areas. Based on the same sources, the number of poor people in rural areas in March 2014 was 17.77 million, while urban areas were home to just 10.51 million of people categorized as poor in the same period.