NUSANTARA REPORT NUSANTARA REPORT - Bank Indonesia

Review of Regional Economic and Finance

NUSANTARA REPORT JULI 2013

For further information, please contact: Bank Indonesia Department of Economic Research and Monetary Policy Monetary Policy Group – Regional Economic and Inflation Division Ph. 021-3818161, 3818868 Fax. 021-3452489

Laporan Nusantara

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NUSANTARA REPORT

Summary of Current Condition and Prospect of Regional Economic*) The state of the regional economy in Indonesia has indicated a moderate slowdown in the Q2 2013. It is evident that the pressure from the global economy has had an impact on the dynamics of the regional economy. In conjunction with weak global commodity prices, resources based exports mainly from the Sumatera and Eastern Indonesian regions showed no significant improvement. This condition is predicted to affect the economy in the Eastern Indonesian region, such as in East Kalimantan, Papua and West Nusa Tenggara. The continued downturn in the mining sector is expected to lower the forecast of the growth rate in the Eastern Indonesian region from previous quarter. A similar condition is also predicted for the mining regions in Sumatera, mainly Riau, South Sumatera and Bangka Belitung Islands. The growth of the Sumatera region’s economy is expected to be limited, although there are signs of improvement in palm oil export. Meanwhile, export improvement is forecasted for the West Java, East Java and Jakarta regions, due to higher demand for manufactured products. However, the indication of investment slow down is predicted to constraint the potential growth in those regions, and particularly in the Jakarta region where a lower growth rate is expected in Q2 2013. In general, regional economic growth is supported by relatively strong household consumption despite limited local government spending. Figure I.1. QI 2013 Regional Growth

*) Estimates of regional growth by Bank Indonesia Representative Ofiices

*) Bank Indonesia divides the analysis of regional economics into 4 (four) regions, each representing several provinces. Sumatera region (Aceh, North Sumatera, South Sumatera, Bengkulu, Jambi, Lampung, West Sumatera, Riau, Bangka Belitung, and Riau Islands Provinces); Jakarta (DKI Jakarta Province); Java region (West Java, Banten, Central Java, East Java, and DI Yogyakarta Provinces); Eastern Indonesian region (Bali, West Nusa Tenggara, East Nusa Tenggara, West Kalimantan, Central Kalimantan, South Kalimantan, East Kalimantan, North Sulawesi, Gorontalo, Southeast Sulawesi, Central Sulawesi, South Sulawesi, West Sulawesi, Maluku, North Maluku, Papua, and West Papua Provinces).

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NUSANTARA REPORT Inflation in many regions has increased, in line with the increase in subsidized gasoline prices on June 22, 2013. With the prolonged decision to increase gasoline price, inflation expectation also increased and has affected regional inflation. Several provinces in the Sumatera region recorded a higher inflation at the end of the second quarter, such as in West Sumatera, Bengkulu and Bangka Belitung islands. East Kalimantan and a number of provinces in the Java region also saw a spike in their inflation at the end of Q2 2013. An upward regional inflation was predominantly caused by an increase in food prices and transport costs. The food commodities that experienced a significant price increase in particular at the end of Q2 2013 among others are red chili, poultry meat and eggs. Limited supply and higher distribution costs were factors that boosted the prices of those commodities. On the other hand, there was a price correction on horticultural products, which made possible to control further increase in food inflation. In response to the inflationary pressure from food commodities, a number of initiatives and policies were introduced to maintain the adequacy of supplies and smooth flows of distribution. Coordinated policies both in the central and local level are crucial and needed to sustain the impact from increased gasoline prices. Moreover, a significant increase in property prices in many regions was also a concern in Q2 2013. High increase of property prices was predominantly took place in South Sulawesi, Bali, East Java, Jakarta and North Sumatera. The concern over increased asset prices was also related to the affordability of housing.

Figure I.2. QI 2013 Regional Inflation

External pressures from the global economy overshadow the prospect of regional growth in Q3 2013. The fact that regional exports have not yet fully recovered and there is a sign of slower investments along with second round effects from the gasoline price increase, are going to be the key factors affecting regional growth in the next quarter. Uncertainty in the global economy is still considered high and would affect the global demand for imported commodities, particularly resource based commodities. Consequently, weak global commodity prices for natural resources are expected to persist in Q3 2013, which will further limit the growth rate in the Sumatera and Eastern Indonesian regions. Hence, copper production in Papua is expected to return to the Nusantara Report |2


NUSANTARA REPORT normal level as the rehabilitation of the on-site incident is completed. Growth in the Sumatera and Eastern Indonesian regions is also supported by a relatively strong household consumption, which will expand trade activities. The same scenario is presumed for growth trends in the Java and Jakarta regions in which a stronger domestic demand exists. Hence the dynamics of demand or consumption in those regions is also influenced by the degree of adjustment in consumer spending as consumers face higher gasoline and food prices. Meanwhile, non-building investments are expected to still be weak in Q3 2013 as manufacturing exports are not yet fully recovered. In that regards, the role of governments in optimizing their spending is critical as it becomes the strategy to accelerate growth and competitiveness of regions. Inflationary pressures in many regions are predicted to increase in Q3 2013 as a result of higher gasoline prices and increased demand during the fasting month of Ramadhan. The main sources of inflation are higher food commodities and transport costs as part of the second round effect of increased gasoline price. Inflation is expected to spike up and hit the highest level for the whole year in July 2013 before gradually decreasing at the end of Q3 2013. Inflation in the Java and Jakarta regions is presumed to be quite significant and it becomes a concern since the share of inflation from those regions is substantial and would affect the trend of national inflation. Initiatives to strengthen and intensify policy coordination among institutions both at the central and local level are needed. Coordination through Inflation Task Force at the central level of government and Regional Inflation Task Force (RITF) is to control inflation that is mostly influenced by the supply side. Cooperation and coordination at the local and regional level focuses on maintaining the availability and adequacy of supplies and also strengthening interregional trades. Besides that, there is also a contribution by local government in delaying the introduction of policies that would increase costs and inflationary pressures in 2013.

Nusantara Report is a summary of Board of Governor’s meeting with Regional Head of Representative of Bank Indonesia on July 4, 2013 in Jakarta. The quarterly Board’s meeting is to assess growth, inflation and various strategic issues in the regions as part of consideration in determining the direction of monetary policy of Bank Indonesia.

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NUSANTARA REPORT Regional Growth Economic indicators in Q2 2013 indicated a downward trend in the Indonesia’s regional economy ...

Lower growth in the Sumatera and Eastern Indonesian region is expected due to weak global commodity prices that affected resource based exports ...

Manufacturing exports in West Java, East Java and Jakarta provinces is forecasted to grow higher ...

A number of economic indicators in Q2 2013 indicated a downward trend in Indonesia’s regional economy. The slowdown of regional growth is detected in the Sumatera and Eastern Indonesian regions, which was due to limited improvement in mining exports. The latest update on mining production and export data, to a certain degree, confirms the projection of slower growth in those regions. Manufacturing exports in the Java and Jakarta regions showed a slight improvement. Exports improvement, mainly driven by exports of manufactured products, was shown in most of the provinces in those regions (Graph I.1 and I.2). Nonetheless, indication of investment slowdown in Q2 2013 is expected to constrain the growth potential in the Java and Jakarta regions. Growth in the Jakarta region in particular, is predicted to experience a moderate downturn compared to the previous quarter. Resource based exports in the Sumatera and Eastern Indonesian regions were affected by weak global commodity prices, primarily of resource based commodities such as coal, nickel and copper. In addition, there have been a number of disruptions in the production of those commodities in East Kalimantan, Papua, Nusa Tenggara and Riau provinces. One of the largest disruption in production took place in copper mining in Papua where production was stopped for several weeks (Graph I.3). Due to this development in Q2 2013, it is expected that growth in the Sumatera and Eastern Indonesian region will decrease, well below the achievement in the last quarter. On the positive side, there has been progress in exports of palm oil from the Sumatera region. Hence, only a slight improvement in mining exports is anticipated in the Sumatera region, and therefore as a whole, export improvement from this region was not quite as significant as in Q2 2013. It is forecasted that exports of several manufactured products in West Java, East Java and Jakarta provinces grew higher in Q2 2013 (Graph I.4). The indication of exports improvement was observed for textiles, processed foods and 4-wheel vehicles. Liaison contact indicated that textile exports grew as a result of increased demand as there has been a production disruption in Bangladesh. Moreover, there have been efforts and initiatives to diversify the export markets for textile in the past couple of years. An increase in global demand for manufactured products also positively affected the performance of manufacturing industries in the Java region. Domestically, relatively strong demand has influenced the production growth in the manufacture sector as a whole. Though, there was an expectation that prices of global commodities would not fully recover and that affected demand for manufactured products, such as automobiles in Sumatera and Eastern Indonesian regions.

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NUSANTARA REPORT Figure I.3. Copper Production in Papua

The outlook for domestic demand is still positive ...

Figure I.4. Manufacturing Export - Java and Jakarta Regions

The outlook for domestic demand is still positive since demand in most regions was still relatively strong in Q2 2013 and supported regional growth. Hence, the growth contribution from domestic demand is expected to be limited. A number of indicators of domestic demand, specifically the retail sales index, consumer confidence and import of consumer goods were relatively stable based on observations in a number of major cities. Average growth of retail sales index during the month of April and May 2013 in Surabaya, Banjarmasin, Makasar and Manado were quite stable. It was only in Jakarta whee the average growth of retail sales index was lower than the previous quarter (Graph I.5). The consumer survey also indicated a fairly positive optimism by consumers in various cities, due to the confidence over stable income and availability of jobs. However, the spending level of farmers has not shown a major improvement in most provinces in Sumatera, Kalimantan and Sulawesi, primarily caused by weak agricultural commodity prices in the global market. Local government expenditures were expected to have limited in growth in Q2 2013. Thru the end of May 2013, local government funds in the national bank account was recorded at Rp192,8 trillion or 13.8% higher compared to the same position in the previous year. At the same time, the central government transfer to local governments reached Rp210,8 trillion. Referring to this data, it is predicted that realization of government spending in Q2 2013 would be lower than the past 3-year trend. The main cause for low level of local government spending was the delay in the ratification of local government 2013 budgets by the House of Representatives and local leaders’ election process.1

A slowdown in nonbuilding investments is predicted in most regions ...

A slowdown in investments is predicted in most regions, mainly due to lower nonbuilding investments in Q2 2013. While, building investments is foreseen as relatively stable. A downward trend in non-building investments was a result of uncertainty in the global economy, which drove demand and prices down. This condition is believed to be the factor that holds investors back from continuing to invest until there are signs of

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At the end of March 2013, the Ministry of Finance sanctioned the transfer of the General Allocation to 17 local governments who were late in delivering the 2013 budget to the Central Government.

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NUSANTARA REPORT substantial improvement in the global economy. The latest import data shows a decline in the imports of capital goods in most regions (Graph I.6). A relatively high demand for properties both commercial and residential in Jakarta and other big cities, such as Medan, Surabaya, Denpasar and Makasar is expected to support building investments and regional growth in general. Figure I.5. Growth of Sales Index (yoy) 70

Figure I.6. Import of Capital Goods

% yoy

150

Sumatera

%,yoy (CMA)

130

50

Jakarta

110

Jawa

90

30

KTI

70

10

50 30

(10)

10 (10)

(30)

Jakarta

Surabaya

Makassar

Banjarmasin

(50)

(30) (50) 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5

1 2 3 4 5 6 7 8 9 101112 1 2 3 4 5 6 7 8 9 101112 1 2 3 4 5 2011

2012

2011

2013

2012

2013

Bank Financing Banking intermediaries in Q2 2013 were fairly stable...

Activities of banking intermediaries in Q2 2013 were fairly stable. Credit grew on average in the range of 17% in Jakarta up to 26% in the Java region. However, credit growth in the Sumatera region reflected a slowdown (graph I.7), which was primarily caused by weak performance in the agricultural and mining sector. Other indicators of bank financing, such as the Loan to Deposit Ratio (LDR), still shows an upward trend in a majority of regions (Graph I.8).

Figure I.7. Regional Credits Growth 45

% yoy (MA 3 bln)

40

Figure I.8. Regional Loan to Deposit Ratio

Sumatera

Jakarta

Jawa

KTI

100 95

%

Sumatera

Jakarta

Jawa

KTI

35

90 30 25

85

20

80

15

75 10

70

5 1 2 3 4 5 6 7 8 9 101112 1 2 3 4 5 6 7 8 9 101112 1 2 3 4 5 2011

2012

2013

1 2 3 4 5 6 7 8 9 101112 1 2 3 4 5 6 7 8 9 101112 1 2 3 4 2011

2012

2013

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NUSANTARA REPORT Regional Inflation Inflation in a number of regions was upward in Q2 2013 as a result of an increase in prices of subsidized gasoline, which started on June 22, 2013 (Graph I.9). With the prolonged decision to increase gasoline price, inflation expectation also increased and has affected regional inflation. Several provinces in the Sumatera region recorded a higher inflation at the end of the second quarter, such as in West Sumatera, Bengkulu and Bangka Belitung islands. East Kalimantan and a number of provinces in the Java region also saw a spike in their inflation at the end of Q2 2013.

Inflation in many regions was upward in Q2 2013, due to an increase in prices of gasoline ...

An upward regional inflation was predominantly caused by an increase in food prices and transport costs. Among others food commodities that experienced a significant price increase in particular at the end of Q2 2013 were red chili, poultry meat and eggs. Limited supply and higher distribution costs were factors that boosted the price of those commodities. On the other hand, there was a price correction on horticultural products - primarily onions, which gave cause to further control increases in food inflation. In response to the inflationary pressure from food commodities, a number of initiatives and policies were introduced to maintain the adequacy of supplies and smooth flows of distribution. Coordinated policies both in the central and local level are crucial and needed to sustain the impact from increased gasoline prices. Moreover, a significant increase in property prices in many regions was also a concern in Q2 2013. High increase in property prices predominantly took place in South Sulawesi, Bali, East Java, Jakarta and North Sumatera. The concern over increased asset prices was also related to the affordability of public housing.

An upward regional inflation was predominantly caused by an increase in food prices and transport costs …

A number of initiatives have been taken by the Regional Inflation Controlling Team (RICT) …

In response to increasing inflationary pressures, a number of initiatives have been taken by the Regional Inflation Controlling Team (RICT) to prevent a further surge in prices of basic needs. Besides monitoring closely the prices of food commodities, RICT has also focused its coordination efforts to strengthen the adequacy of domestic supplies ahead of the upcoming month of Ramadhan where demand typically rises. Due to the importance of the issue, The Ministry of Internal Affairs has encouraged local government leaders to take steps in controlling the impact of an increase in gasoline prices and also to support the distribution of social safety funds for the poor.

Figure I.9. Regional Inflation (yoy) 11.00

% yoy

National

Sumatera

Jakarta

Java

Figure I.10. Regional Inflation by Group Commodities Foodstuf 10.00 8.00 6.00 4.00 2.00 0.00 (2.00)

Transportation

Eastern Indonesia Regional

9.00

6.31 7.00

SUMATERA

Housing

Health

5.30

3.00

10.00

Education

Average 2008-2012 Quarter II 2013

Clothing

Foodstuf 15.00 Transportation

Housing

Health

Clothing

Foodstuf 15.00

JAVA

JAKARTA Processed Food

10.00

Transportation

5.00

5.00

0.00

0.00

(5.00)

1.00

Processed Food

0.00

Education

5.67

10.00

Transportation

5.00

5.83

5.00

Foodstuf 15.00

EASTERN IND REGION

Processed Food

Processed Food

(5.00)

Education

Housing

Education

Housing

1 2 3 4 5 6 7 8 91011121 2 3 4 5 6 7 8 91011121 2 3 4 5 6 7 8 91011121 2 3 4 5 6 7 8 91011121 2 3 4 5 6 (1.00) 2009

2010

2011

Source: Central Bureau of Statistics

2012

2013

Health

Clothing

Health

Clothing

Source: Central Bureau of Statistics

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NUSANTARA REPORT Prospect of Regional Economic The dynamics of global economy overshadow the prospect of regional growth in Q3 2013 ...

The role of governments in optimizing spending is critical ...

High inflationary pressures is still expected in Q3 2013 ...

Inflation in the Java and Jakarta regions is pressumed to be quite significant …

External pressures from the global economy overshadow the prospect of regional growth in Q3 2013. The fact that regional exports have not yet fully recovered and there is a sign of slower investments along with second round effects from the gasoline price increase, are going to be key factors affecting regional growth in the next quarter. Uncertainty in the global economy is still considered high and can affect the global demand for imported commodities, particularly resource based commodities. Consequently, weak global commodity prices for natural resources are expected to persist in Q3 2013, which will further limit the growth rate in the Sumatera and Eastern Indonesian regions. However, copper production in Papua is expected to return to normal levels as the rehabilitation of on-site incidents are completed. Growth in the Sumatera and Eastern Indonesian regions is also supported by relatively strong household consumption, which will expand trade activities. The same scenario is presumed for growth trends in the Java and Jakarta regions in which a stronger domestic demand exists. Hence the dynamics of demand or consumption in those regions is also influenced by the degree of adjustment in consumer spending as consumers face higher gasoline and food prices. Meanwhile, nonbuilding investments are expected to still be weak in Q3 2013 as manufacturing exports have not yet fully recovered. In that regards, the role of governments in optimizing spending is critical as it becomes the strategy to accelerate growth and competitiveness of regions. High inflationary pressures is still expected in Q3 2013 as demand increases along with the coming of Ramadhan and celebrations during Ied Fitr. The main sources of inflation are higher food commodities and transport costs as part of the second round effect of increased gasoline prices. Inflation is expected to spike up and hit the highest levels in the year before gradually decreasing at the end of Q3 2013. Among several risk factors that potentially drove inflation even higher than what it is initially expected, an increase of public transport tariff on average of 27.9% and volatility of food prices as a result of government policies are the two mostly concerned risk factors. Inflation in the Java and Jakarta regions is pressumed to be quite significant and is a concern since the share of inflation from those regions is substantial and would affect the trend of national inflation. Initiatives to strengthen and intensify policy coordination among institutions both at the central and local level are needed. Coordination through the National Inflation Task Force at the central government level and RICT is to control inflation that is mostly influenced by the supply side. Cooperation and coordination at the local and regional level focuses on maintaining the availability and adequacy of supplies and also strengthening interregional trades. Besides that, there is also a contribution by the local government in delaying the introduction of policies that would increase costs and inflationary pressures in 2013.

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