Kadin Indonesia predicts that the Indonesian economy will grow in the range of 5.2 to 5.8 percent in 2014. As in January 2014, Indonesia's Ministry of Finance Chatib Basri predicted that Indonesia's economic growth for full year 2013 is estimated at 5.7 percent, it thus implies that Kadin Indonesia believes that economic growth will slow in 2014. The official GDP growth figure for 2013 will be released by Statistics Indonesia on 5 February 2014.

Indonesia's Economic Growth 2009–2013 (annual percentage change):

 Year    Quarter I
   Quarter II    Quarter III    Quarter IV    Full Year
 2013        6.05        5.83         5.62            -         5.7¹
 2012        6.29        6.36         6.16         6.11         6.2
 2011        6.45        6.52         6.49         6.50         6.5
 2010        5.99        6.29         5.81         6.81         6.1
 2009        4.60         4.37         4.31         4.58         4.6

¹ forecast
Source: Statistics Indonesia (BPS)

What makes Kadin Indonesia believe that Indonesia's economic expansion will further slow in 2014? This assumption is based on unfavorable economic conditions that harm the country's stability. Firstly, the current inflation rate is high, at 8.38 percent (yoy) at end-2013. The most important reason for this high inflation rate is the rise in (subsidized) fuel prices (implemented by the government in June 2013). The Ministry of Finance, however, is optimistic that inflation will decline in the months ahead. Since September 2013, the pace of the country's inflation has been under control although the impact of floods brings inflationary pressures in January 2014. This January, inflation may rise about 1.0 percent (mtm).

2013    Inflation
January      1.03%
February      0.75%
March      0.63%
April     -0.10%
May     -0.03%
June      1.03%
July      3.29%
August      1.12%
September     -0.35%
October      0.09%
November      0.12%
December      0.55%
Total      8.38%
    2008   2009   2010   2011   2012   2013
(annual percent change)
   9.8    4.8    5.1    5.4    4.3    8.4

Source: Statistics Indonesia

Secondly, the higher interest rate environment. In the past seven months, Indonesia's central bank (Bank Indonesia) raised its benchmark interest rate (BI rate) several times. Currently, the BI rate stands at 7.5 percent. This is in sharp contrast with the period 2005 to 2012 when the BI rate showed a declining trend. When interest rates continue to rise, domestic business players start to worry. Many entrepreneurs ultimately delay new investments or business expansion due to the high interest rate.

Thirdly, ballooning foreign debt. The budget deficit of 2014 is projected at IDR 254 trillion (USD $20.8 billion). This deficit is financed by foreign debt and thus will result in a significant increase of foreign debt. Indonesia's State budget (APBN) is still burdened by fuel and electricity subsidies. Kadin Indonesia believes that the fuel subsidies are not appropriate. Subsidy spending should be allocated to infrastructure development as this constitutes a long-term solution to economic bottlenecks. Moreover, several analysts argue that it is in fact the middle class that benefits most of the fuel subsidies instead of the poorer segments of Indonesian society.

Fourthly, the condition of Indonesia's current account deficit has decreased since 2011. In 2011, the country posted a small surplus of USD $1.7 billion, but then in 2012 the balance turned into a deficit of USD $24.2 billion. In 2012, this deficit was somewhat relieved by a surplus in the capital and financial accounts which increased to USD $24.9 billion. Last year, however, Indonesia had to cope with serious capital outflows amid the looming end of the Federal Reserve's quantitative easing program, while the current account deficit reached a record high of USD $9.9 billion in the second quarter. Indonesia's trade balance is not in good shape considering that imports of oil and gas are high, while non-oil exports are low. The latest information from the Ministry of Trade (in early January) said that the trade balance recorded a deficit of about USD $5.6 billion during the period January to November 2013.

Indonesia's Trade Balance 2013 (in billion US Dollar):

2013                              Export                              Import
Month   Oil & Gas   Non Oil & Gas   Total   Oil & Gas
  Non Oil & Gas   Total
January       2,66          12,72   15,38       3,97          11,48   15,45
February       2,57          12,45   15,02       3,64          11,67   15,31
March       2,93          12,09   15,02       3,90          10,99   14,89
April       2,45          12,31   14,76       3,63          12,83   16,46
May       2,92          13,21   16,13       3,43          13,23   16,66
June       2,80          11,96   14,76       3,53          12,11   15,64
July       2,28          12,81   15,09       4,14          13,28   17,42
August       2,72          10,36   13,08       3,67           9,34   13,01
September       2,41          12,29   14,70       3,72          11,79   15,51
October       2,72          12,99   15,70       3,47          12,20   15,67
November       2,75          13,18   15,93       3,94          11,21   15,15
Jan-Nov      29,21         136,36  165,57       41,0         130,13  171,17

Source: Statistics Indonesia

Despite this gloomy forecast for economic growth in Indonesia, many entrepreneurs remain optimistic that things will soon improve. There exists hope that the new president (with his new cabinet) can foster a more stable economy with GDP growth figures of about 6.5 percent. Indonesia's legislative election is scheduled for 9 April 2014 and the presidential election for 9 July 2014.

The Indonesian Chamber of Commerce and Industry (Kadin Indonesia) is an umbrella organization of the Indonesian business chambers and associations. It fosters and develops the skills, activities and interests of Indonesia in the areas of state-owned companies (BUMN), cooperatives, and private businesses. Kadin is privately financed, hence an independent agency that aims to realize economic development and to provide a healthy and orderly national business climate.

Further Reading:

Analysis: What Caused Indonesia's Slowing Economic Growth in 2013
Floods, LPG and Electricity Tariffs Impact on Indonesia's January Inflation
Indonesia's Trade and Inflation Data Cause Positive Start of the Year