Finance minister Chatib Basri said that the Indonesian government should revise its outlook for GDP growth in 2014 from 6.4% (mentioned in the 2014 State Budget) to about 6.0%. A more realistic outlook, which is in line with the current global and domestic financial context, is needed. Global uncertainty due to the possible ending of the Federal Reserve's quantitative easing program has resulted in capital outflows from emerging markets, including Indonesia. Various countries, developed and emerging ones, have lowered outlooks for 2014 GDP growth.

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According to Finance minister Chatib Basri, the Indonesian government expects the country's gross domestic product (GDP) to have grown by 6.1 percent in the first six months of 2013. This forecast falls short of the government's 6.3 percent GDP growth assumption in the state budget (APBN). Basri stated that the lower outcome is due to global factors, such as slowing economic growth in China and India. But the government's assumption is more optimistic than the forecast of the central bank, which expects growth between 5.1 and 5.9 percent.

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Indonesia's minister of Economy, Ir. M. Hatta Rajasa, stated that the government of Indonesia intends to realize economic growth of at least 6.2 percent in the second quarter of 2013 in order to remain on track for 6.3 percent growth for full year 2013. Although he reminded that it will take hard effort to realize this target, his message contained more optimism than Finance minister Chatib Basri's statement earlier this week who sees 6.0 percent of economic growth as the limit in Q2-2013.

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Today, former head of the Indonesia Investment Coordinating Board (BKPM), Chatib Basri, will be installed as Indonesia's Finance minister after former Finance minister Agus Martowardojo resigned to become Governor at Indonesia's central bank (Bank Indonesia) for the period 2013 to 2018. Basri, who underwent a fit-and-proper test at the State Palace yesterday, has limited time to exercise his influence as a policy maker as President Yudhoyono's United Indonesia Cabinet II will end its term in mid-2014.

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Analysts expect that Indonesia's central bank (Bank Indonesia) will maintain its benchmark interest rate at 5.75 percent in tomorrow's meeting (14/05/13). This rate, a historic low rate for Indonesia, has been in force since February 2012. The central bank's deposit facility (Fasbi) is also expected to be kept at 4 percent. The position of Governor of Bank Indonesia - currently held by Darmin Nasution - will be taken over at the end of this month by Agus Martowardojo.

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The government of Indonesia has revised the macroeconomic assumptions that are stated in the State Budgets (APBN) of 2013 and 2014 after a meeting with the budgetary body of the House of Representatives (Badan Anggaran DPR) on Wednesday (28/08). It is the third time that the 2013 State Budget has been revised in order to put it more in line with recent global developments. As the government was also too optimistic when drafting the 2014 Budget, it felt the need for a revision (only 12 days after the announcement of the Budget).

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Most of us who were hoping for a limited weakening of Indonesia's benchmark stock index (IHSG) today (27/08) were to be disappointed. Instead of a limited decline, the IHSG fell 3.71 percent to 3,967.84 points. Market participants are concerned about both the global and domestic economy, thus pulling money out from Indonesia. The weakening rupiah and weak stock index openings in Europe (due to tensions in Syria) pushed the IHSG further down into red territory. Foreign investors were again net sellers of Indonesian assets.

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Analysts expect that Indonesia's benchmark stock index (IHSG) will end mixed today (20/08) after yesterday's large plunge amid heavy market concerns. Yesterday, the index dropped 5.58 percent to 4,313.52 points, the lowest since October 2011. Indonesia posted a current account deficit in the second quarter of 2013, while Thailand entered into a recession. The MSCI Emerging Market index¹, which includes both countries, fell 1.4 percent to a six-week low. Below a short overview of factors that caused negative sentiments on Indonesia's market.

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The government of Indonesia has the ambition to reduce Indonesia's unemployment rate to about 5.7 percent in 2014. This ambition was pronounced by Armida Alisjahbana, the minister of National Development Planning. According to the latest data released by Statistics Indonesia, the country's unemployment rate currently stands at 5.92 percent. The minister stressed that the unemployment target of 6 percent that was set in Indonesia's National Medium Term Development Plan to be reached in 2014, has already been achieved.

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Growth of Gross Fixed Capital Formation (GFCF) in Indonesia has continued to slow down in the first six months of 2013. In the first quarter of 2013, GFCF rose 5.78 percent but in the second quarter the pace fell to 4.67 percent. These results are much lower than last year's quarterly growth rates as can be seen in the table below. In fact, the growth rate in Q2-2013 constitutes the lowest growth rate in the last 13 quarters. In Q2-2013, all sectors experienced weakening investments except for domestic machinery and equipment.

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Investment realization in Indonesia grew 30.2 percent to IDR 192.8 trillion (USD $19.8 billion) in the first six months of 2013 (compared to the same period last year). This result implies that 49.4 percent of the investment target for full 2013 has been achieved. The Indonesia Investment Coordinating Board (BKPM) aims to collect IDR 390.3 trillion in investments this year. This target is divided in domestic direct investment (DDI) of IDR 117.7 trillion and foreign direct investment (FDI) of IDR 272.6 trillion.

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Realization of Indonesia's budget deficit in the first half of 2013 reached IDR 54.5 trillion (USD $5.5 billion) or 0.58 percent of the country's gross domestic product (GDP). The figure is still well below the target that is set in the revised state budget of 2013, namely IDR 224.2 trillion (USD $22.6 billion) or 2.38 percent of GDP. As a percentage of GDP, the outcome of the deficit in the first half of 2013 was lower than that in the first half of 2012. However, if we compare it with the years 2010 and 2011, the budget deficit in the first half of 2013 is high.

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The slowing pace of investments has made the Indonesian government decide to revise down its forecast for economic growth in the second quarter of 2013. Minister of Finance, M. Chatib Basri, believes that GDP growth will not exceed the six percent threshold in Q2-2013. He explained that there are a number of factors that refrain the government from setting a higher growth assumption. These factors include ailing exports, non-optimal government spending, and diminishing gross fixed capital investment.

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In the revised state budget, Indonesia's government has lowered its forecast for tax revenue in 2013. Originally, the government expected to receive IDR 1,193.0 trillion (USD $122.4 billion) but the figure has been tuned down to IDR 1,139.3 trillion (USD $116.9 billion). Minister of Finance Chatib Basri stated that the forecast for tax revenue has been revised down by IDR 55.1 trillion, while the figure for export duties has been raised by IDR 1.4 trillion. Indonesia's tax-to-GDP ratio in 2013 has been changed to 12.11 percent from 12.87 percent.

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Although Indonesia’s government stresses the need to relieve pressure on the state budget (by raising the price of subsidized fuel next month), it plans to allocate an additional IDR 16.1 trillion (USD $1.65 billion) to this year’s fuel subsidy budget. The additional allocation, which covers fuel, LPG and vegetable fuels, will raise government expenditure on fuel subsidies to IDR 209.9 trillion (USD $21.50 billion) from the IDR 193.8 trillion drafted in the original 2013 state budget (APBN 2013). Total energy subsidies will grow to IDR 309.9 trillion this year.

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