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JAKARTA
POST, 13 Mei 2013
The economy is perhaps the only bright spot in President
Susilo Bambang Yudhoyono presidency. Among the many ugly warts which have
sprouted on the face of the country recently, the economy is the only place
where the world views us with envy, but even this is coming under question.
Gross Domestic Product (GDP) growth in the first quarter (Q1) of 2013 showed that economic growth continues to decline. The 6 percent growth in Q1 this year was the lowest since 2010. More striking is nominal GDP growth (growth at current prices), that stands at only 8.8 percent, down from 9.1 percent in Q4 of 2012.
This was the lowest nominal growth since 2004. Because of rupiah depreciation, the low nominal growth translates into a GDP per capita of US$3,563 in 2012. This means that GDP per capita was up only 1.8 percent from $3,498.
On the supply side, growth is stuttering through the decline in manufacturing, the largest component in GDP, and stagnation in mining. The stagnation in mining was expected with the implementation of the 2009 Mining Law and stringent policies that have bred uncertainties among mining companies.
A restriction on raw mineral exports obliges miners to build processing plants. There is a new divestment policy and operators have been forced to renegotiate existing contracts. In these circumstances, it is no wonder that mining companies have lost their will to invest. Growth in mining has been stalled for the last three consecutive quarters.
Even though there was a slight decline in growth, private consumption continues to be the main engine of economic growth. Government spending remained a drag, and although it has stopped contracting its contribution to growth remained negligible. This raises the question of the ability of our government to pursue counter-cyclical policies when growth slows.
Most worrying is the declining growth of investment. After peaking at 11.5 percent in December 2011, investment only grew at 5.9 percent in Q1. Other areas related to investment do not provide any more encouraging a picture either. Import of capital goods, an indicator of future increase in production capacity, has been falling since Q1 last year. Import of capital goods in Q1 of 2013 was $7.7 billion, a 20 percent drop from $9.7 billion in Q4 of 2012. This significant fall is the worst figure since June 2011.
The importance of investment in maintaining growth should not be understated. Growth cannot be maintained without high investment. Unfortunately, investment prospects face several headwinds. If subsidized fuel prices increase this year, inflation will rise, and this affects consumer purchasing power.
Inflation will also be affected, although not material, by the increase in the minimum wage, and from a planned increase in the electricity tariff. Producers, faced with reduced demand, will scale down investment. If the central bank (Bank Indonesia) tightens its monetary policies, borrowing costs for both consumers and producers will rise, further dampening consumption.
Another anxiety is weak commodity prices. If commodity prices remain weak this year, investment in the capital intensive resource sector will decline.
Another pothole on the road to recovery is regulatory uncertainty that investors in this country are all too well-acquainted with. The political free-for-all leading up to the 2014 elections will scare investors. The stakes are too high. If investment growth remains half of that in 2012, the effects will be material because, according to the World Bank, this will reduce real GDP growth by one percentage point.
Exports, which have been a drag on growth in the two previous quarters, rebounded in Q1, growing by 3.4 percent year-on-year. At a time when growth of investment and government consumption are weakening, higher growth in exports is needed to maintain current economic growth.
Unfortunately, exports are destined for weak economies. Exports to the two biggest markets, the European Union and Japan, fell sharply in Q1, by 11 percent and 9 percent respectively, a direct reflection of the state of the economy in those areas.
The EU economy is in recession, the Japanese economy is stagnant; nonetheless those areas are expected to register some small growth this year. Other export destinations such as, ASEAN, the US and China are more promising in terms of their demand.
In the first quarter, export to these countries only grew by 2 percent. Any hope for more export growth hinges on China which last year grew below its historical norm. China may pull its growth higher this year but it will not achieve the double digits of the past years. This will limit export growth in the coming years.
The government has a lot of work to do, but do they have the will to work seriously? If they don’t, then, everything will remain the same. Infrastructure development remains slow and cannot catch up with the need to maintain economic growth. Bureaucracy is dysfunctional; rules and regulations remain confusing.
Officials are losing sight of the need for urgent action, especially when they are working with one eye on their fate in 2014. So people must realize that for the government, it is after all, business as usual. ●
Gross Domestic Product (GDP) growth in the first quarter (Q1) of 2013 showed that economic growth continues to decline. The 6 percent growth in Q1 this year was the lowest since 2010. More striking is nominal GDP growth (growth at current prices), that stands at only 8.8 percent, down from 9.1 percent in Q4 of 2012.
This was the lowest nominal growth since 2004. Because of rupiah depreciation, the low nominal growth translates into a GDP per capita of US$3,563 in 2012. This means that GDP per capita was up only 1.8 percent from $3,498.
On the supply side, growth is stuttering through the decline in manufacturing, the largest component in GDP, and stagnation in mining. The stagnation in mining was expected with the implementation of the 2009 Mining Law and stringent policies that have bred uncertainties among mining companies.
A restriction on raw mineral exports obliges miners to build processing plants. There is a new divestment policy and operators have been forced to renegotiate existing contracts. In these circumstances, it is no wonder that mining companies have lost their will to invest. Growth in mining has been stalled for the last three consecutive quarters.
Even though there was a slight decline in growth, private consumption continues to be the main engine of economic growth. Government spending remained a drag, and although it has stopped contracting its contribution to growth remained negligible. This raises the question of the ability of our government to pursue counter-cyclical policies when growth slows.
Most worrying is the declining growth of investment. After peaking at 11.5 percent in December 2011, investment only grew at 5.9 percent in Q1. Other areas related to investment do not provide any more encouraging a picture either. Import of capital goods, an indicator of future increase in production capacity, has been falling since Q1 last year. Import of capital goods in Q1 of 2013 was $7.7 billion, a 20 percent drop from $9.7 billion in Q4 of 2012. This significant fall is the worst figure since June 2011.
The importance of investment in maintaining growth should not be understated. Growth cannot be maintained without high investment. Unfortunately, investment prospects face several headwinds. If subsidized fuel prices increase this year, inflation will rise, and this affects consumer purchasing power.
Inflation will also be affected, although not material, by the increase in the minimum wage, and from a planned increase in the electricity tariff. Producers, faced with reduced demand, will scale down investment. If the central bank (Bank Indonesia) tightens its monetary policies, borrowing costs for both consumers and producers will rise, further dampening consumption.
Another anxiety is weak commodity prices. If commodity prices remain weak this year, investment in the capital intensive resource sector will decline.
Another pothole on the road to recovery is regulatory uncertainty that investors in this country are all too well-acquainted with. The political free-for-all leading up to the 2014 elections will scare investors. The stakes are too high. If investment growth remains half of that in 2012, the effects will be material because, according to the World Bank, this will reduce real GDP growth by one percentage point.
Exports, which have been a drag on growth in the two previous quarters, rebounded in Q1, growing by 3.4 percent year-on-year. At a time when growth of investment and government consumption are weakening, higher growth in exports is needed to maintain current economic growth.
Unfortunately, exports are destined for weak economies. Exports to the two biggest markets, the European Union and Japan, fell sharply in Q1, by 11 percent and 9 percent respectively, a direct reflection of the state of the economy in those areas.
The EU economy is in recession, the Japanese economy is stagnant; nonetheless those areas are expected to register some small growth this year. Other export destinations such as, ASEAN, the US and China are more promising in terms of their demand.
In the first quarter, export to these countries only grew by 2 percent. Any hope for more export growth hinges on China which last year grew below its historical norm. China may pull its growth higher this year but it will not achieve the double digits of the past years. This will limit export growth in the coming years.
The government has a lot of work to do, but do they have the will to work seriously? If they don’t, then, everything will remain the same. Infrastructure development remains slow and cannot catch up with the need to maintain economic growth. Bureaucracy is dysfunctional; rules and regulations remain confusing.
Officials are losing sight of the need for urgent action, especially when they are working with one eye on their fate in 2014. So people must realize that for the government, it is after all, business as usual. ●
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