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Bank Indonesia

Economic Research and Monetary Policy Departemen

Monetary Policy Group – Regional Economic and

Inflation Division

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Fax. 021-3452489

Review of Regional Economic and FinanceReview of Regional Economic and FinanceReview of Regional Economic and FinanceReview of Regional Economic and Finance

NUSANNUSANNUSANNUSANTARA REPORTTARA REPORTTARA REPORTTARA REPORT

N u s a n t a r a R e p o r t | 1

Review of Regional Economic and Finance

NUSANTARA REPORTNUSANTARA REPORTNUSANTARA REPORTNUSANTARA REPORT

Summary of Current Condition and Prospect of Regional Economic*)

Entering the first quarter of 2013, a number of indicators confirm an upward growth in majority of the

Indonesian regions. Higher economic growth was contributed by the Sumatera and Java regions. Meanwhile,

stable economic growth was seen in the Jakarta region, and a moderate slow down was indicated in the

Eastern Indonesian region. Hence, the extent of slower growth in the Eastern Indonesian region was not as

profound as it was expected at the previous quarter, mainly due to the improvement in export. Regional

growth was still driven by a strong domestic demand, along with a considerably high bank financing. On the

other hand, the disbursement of government expenditures tend to be limited, following the usual cycle at the

beginning of the year when government spending is low and mostly directed toward routine expenditures.

Strong domestic demand had a positive impact on the performance of the regional main sectors, particularly

manufacturing, construction, trade and tourism sectors. The current update indicates that there was an

improvement in the natural resource based export in the Sumatera region and the Eastern Indonesian region.

Higher natural resources based export is particularly expected for coal in East Kalimantan, South Kalimantan,

and South Sumatera provinces, and crude palm oil or CPO in Riau, West Sumatera, North Sumatera provinces.

Meanwhile, manufacturing export from the Java and Jakarta regions has not showed a significant increase. In

addition, relatively high uncertainty in the global economic also caused a limited improvement on regional

export and thus, restricting the acceleration of regional growth in Indonesia in Q1 2013.

Figure I.1. QI 2013 Regional Growth

*) Estimates of regional growth by Bank Indonesia Representative Ofiices

*) Bank Indonesia divide the analysis of regional economic into 4 (four) regions with each represents 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).

Range of Estimates




Inflationary pressures was high in many regions in Q1 2013 as a result of significant prices increase on food

commodities. Limited supply of several food commodities, predominantly supply of various spices, was

attributed to weather disruption that decreased the domestic production and also delayed import of

horticulture products. Inflationary pressures from rising food prices mainly occurred in the Java and Jakarta

regions. Inflation from spice products at those two regions reached 39% (mtm) in March 2013. Furthermore,

rice crop harvest season that just started at the end of Q1 2013, also resulted in a limited decrease in rice

prices. The decrease of rice prices was not enough to compensate rising inflation from other food commodities.

Foods Inflation in the Eastern Indonesian region and Sumatera region was relatively lower because of much

lower prices increase of spices product. At the same time, supply of other food commodities in the Eastern

Indonesian region was also adequate and the prices of those commodities tend to decline. In response to the

upward trend of foods inflation, the government has coordinated a number of policies at the central level to

ensure the continuity and adequacy of supply. While, local governments were to ensure a smooth distribution

of goods, in an attempt to control the continuation of rising inflation.

Regional growth in Q2 2013 is presumed to rise and in aggregate could reach 6,2% (yoy). Strong domestic

demand, coupled with sustained public optimism towards the economy, would be the key factors to support

growth in most regions. Public spending isalso predicted to rise with the plan to disburse the salary increase of

public servants in the beginning of second quarter. In addition, many regions also experienced a substantial

increase in minimum wages along with a higher non taxable incomes, which was implemented in the beginning

of 2013. Regional export is expected to gradually improved amid the fragile performance of global economy.

The Java region’s economy is foreseen to grow higher than other regions, supported by the economic growth of

East Java province. Higher growth in this region is chiefly contributed by agricultural sector with the incoming

rice crop harvest period. Moreover, the manufacturing, trade and tourism sectors is expected to grow higher in

Q2 2013, driven by strong domestic demand. To guarded the momentum of stronger regional growth, the

government spendings has to optimalized as part of the key strategy of development and it is necessary to

direct spendings on productive sectors that aim to strengthen regional competitiveness.

Figure I.2. QI 2013 Regional Inflation

Region whose foods inflation is lower than the national average foods inflation from 2009 to 2012 (7,78%)

Region whose foods inflation is higher than the national average foods inflation from 2009 to 2012 (7,78%), but lower than the

national average foods inflation in March 2013 (12,95%)

Region whose foods inflation is higher than the national average foods inflation from 2009 to 2012 (7,78%)

Note:




Inflation in many regions is predicted to be moderate in Q2 2013, supported by adequate supply of foods and

smooth distribution. In addition to the arriving harvest season in many centers of rice crop production, such as

in the Java region, the government policy to mitigate supply shock of spice products is also helpful in

controlling inflation. Nevertheless, there is a need to be cautious on inflationary risks associated the

distribution of imported goods, in particular the horticulture commodities, and also the second round of gradual

price hike in electricity in April 2013. There is also a plan to raise subsidized fuel that coul have an impact on the

costs of transportation. Inflation risks is also related to the upward trend in the inflation expectation, mainly the

expectation of traders. High inflation in the Java and Jakarta regions needs immediate respons, considering the

share of inflation from these two regions is about 64%. Therefore, it is necessary to strengthen policy

coordination that focuses on controlling regional inflation. The Inflation Controlling Team (ICT) and Regional

Inflation Controlling Team (RICT) Regional are to contribute in managing inflation at a low level through

several initiatives that will stabilize prices of goods and services.




Economic Growth

Key economic

indicators at the

regional level show

an upward tren in

the aggregate of

regional growth ...

… supported by

improvements of the

resource based

exports in a number of

regions ...

Key economic indicators at the regional level show an upward tren in the aggregate of

regional growth in Q1 2013. The economy of the Sumatera and Java regions is predicted

to grow higher than previous quarter. The Jakarta’s economy is expected to grow stably

at a high level of 6,4% (yoy). Meanwhile, growth in the Eastern Indonesian region tends

to slow down, although the declining growth in this region is more moderate from what

was expected before. The moderate downward growth in the Eastern Indonesian Island

and also in the Sumatera region was due to slight improvement in resources based

exports.

Improvements of the resource based exports is particularly for mining and agricultural

products (Figure I.1.). As an example, exports of coal from East Kalimantan, South

Kalimantan and South Sumatera provinces show a significant increase at the beginning

of 2013. This was affected by stronger demands from the Asia markets, mainly China

and India in the midst of limited supply of coal from Australia, due to flood that took

place in a number of regions. An increase in coal export was indicated by a lower

inventory level in the Taboneo transit port in South Kalimantan province that is the

main transit port for most of the coal export from Kalimantan. Hence, a relatively low

global commodities prices has resulted in a limited export growth (Figure I.2.).

Figue I.1. Regional Export Growth (Volume) Figure I.2. Contribution of Regional Export (Value)

The majority of districts in the Sumatera and Kalimantan regions recorded an increase

in crude palm oil (CPO) export at the beginning of 2013, especially for export to India.

Liaison from a number of big agricultural firms confirmed that an increase in CPO export

was an anticipation of the plan to raise imported tax of CPO by the Government of

India. This was confirmed for the first two months in 2013 from the production of one

of the largest CPO producers (Figure I.3.). In addition, the export growth momentum

was used by firms to reduce the inventory of CPO ahead of the harvest period of palm

oil in second quarter. Hence, the palm oil production growth of the whole 2013 is

predicted to be stagnant due to limited expansion of lands and concentration of

industries in increasing the capacity of their refineries.




Hence, manufacturing

exports from the Java

and Jakarta regions

have not improved

significantly ...

Manufacturing exports from the Java and Jakarta regions have not improved

significantly amid weak global demand (Figue I.4.). Nevertheless, in the midst of slowing

manufacturing export, export on food and beverage, textile, furniture and shoes

products have shown a slight increase as a result of diversification strategy. Liaison

discussions also confirmed that firms also have improved the quality of their products

as part of the strategy to boost export. The development of manufacturing industry

was primarily supported by strong domestic demand. Government’s policy to provide

incentive structures for firms and industries, such as an incentive to develop low cost

green car (LCGC), is expected to accelerate growth and development of the

manufacturing industries.

Figure I.3. Palm Oil and CPO Production Figure I.4. Contribution of Export Manufacture in the Java

and Jakarta Regions

Strong domestic

demand supported

growth in most

regions ...

... yet, there was an

indication of slowing

non building

investsments …

The strength of domestic demand in supporting the economy was indicated in almost all

regions, as reflected by the sales index in several big cities in Indonesia. Big cities in Java,

particularly Jakarta and Surabaya, recorded a sales index in January and February 2013

that were higher than the same period last year (Figure I.5.). This phenomenon was also

shown in a number of big cities outside of Java, such as Makassar, Banjarmasin, and

Manado. One of the factors for strengthening sales in the urban area was rising incomes

along with buying powers of Indonesian urban societies, that in some extent was also

influenced by a significant increase in minimum wage. A substantial increase of minimum

wage beginning in 2013 was particularly in the Java and Jakarta regions. Furthermore,

government’s policy to increase non taxable incomes and relatively stable consumer

confidence also played a role in rising incomes. Yet, buying powers of farmers in the

Sumatera and Eastern Indonesian region were relatively low due to the prices drop in

agricultural commodities (Figure I.6.).

Investments were projected to grow strong, particularly in the building investment

components. The strength of building investments was identified from cement

consumption in most regions, except the Sumatera region, that grew at a high level.

Prospect of strong demand for properties has pushed the properties development to a

high level in several big cities, including their periphery area (suburbs), such as in Jakarta.

Survey by international institutions even put Jakarta into spotlight as the first




investments destination for properties in the Asia Pasific regions1. Meanwhile, there was

an indication of slowing non building investsments in the Java and Jakarta regions. The

tendency of lower non building investments should be given attention, considering it

related to manufacturing sector. Imports of capital goods in many regions were dropped

as firms and industries tend to delay expansion or capital investments, following the

uncertainty in the global economy.

Figure I.5. Growth of Sales Index (yoy) Figure I.6. Farmers’ Incomes Index

Bank Financing

Bank financing grew

fairly high, in line

with strong growth

...

In line with a relatively strong economic growth, bank financing also grew fairly high in

Q1 2013. Until February 2013, credit growth (yoy) is recorded in the 21% range in

Jakarta and 26% in Eastern Indonesian Region. Credits for working capital and

consumption in particular, were managed to grow higher. Furthermore, credit growth

by sectors shows that credits in the trade sector was reasonably high in the Java and

Jakarta regions. While, credits in the agricultural and manufacture sectors grew in the

Sumatera region. In the Eastern Indonesian Region, increased credits were recorded in

the agricultural and mining sectors.

Figure I.7. Regional Credits Growth Figure I.8. Contribution of Regional Credits Growth

1 Emerging Trend in Real Estate Asia Pacific 2013, PwC and Urban Land Institute




Regional Inflation

Headline (CPI)

inflation in many

regions inched up ...

Headline (CPI) inflation in many regions inched up in Q1 2013, driven by inflationary

pressure from volatile food commodities. The Java and Jakarta regions experienced

the highest increase in headline inflation, even higher than the same period in the last

three years. With share of inflation close to 64%, a fairly significant increase of inflation

in those region has put risk on inflation target of 4,5%±1 in 2013. Foods inflation was

driven by price hike in spices products, mainly onions and shallots that took place in

almost all regions. In the Java and Jakarta regions, inflation from spices products was

recorded at 39% (mtm) in March 2013. Factors that drove inflation upward were,

among others, inadequacy of supplies due to weather condition that affected

domestic production and also problems with imported food products, mainly

horticultural commodities. Government’s policy to limit imported horticultural

products and also to introduce a new permit process had an impact on supplies.

In response to the upward trend in inflationary pressures in food commodities, the

Government both at the central and regional level have taken a step to strengthen

domestic supplies. A number of initiatives and coordinations have been managed by

the Regional Inflation Controlling Team (RCIT) to prevent further price surge. In

addition, RCIT also monitored closely the distribution of food commodities along with

improving public information on food prices as part of an effort to manage inflation

expectations.

Figure I.9. Regional Inflation (yoy)

Figure I.10. Inflation of Food Commodities

Source: Central Bureau of Statistics Source: Central Bureau of Statistics




Prospect of Regional Economic

Regional growth is

expected to improve

in Q2 2013 ...

The economy of

Jakarta is projected

to grow by 6,4% ...

The Sumatera and

Eastern Indonesian

region is expected to

grow by 6,1% and

6,4% respectively....

... growth in Q2

2013 is supported by

strong domestic

demand and slight

improvement in

export ...

An upward economic growth is foreseen in a number of regions in Q2 2013. Aggregate

regional growth is projected in the range of 6,2% (yoy). Economy in the Java region is

predicted to grow higher than other regions, contributed by growth in the agricultural

sector with the incoming harvest period and also strong domestic demand. This will

have a positive effect on the growth of industrial manufacturing, trade and tourism

sectors in the Java region. In addition, the majority of regions (except Jakarta) expect a

positive impact from the local election spending throughout 2013 on their economic

growth.

In the metropolitan region Jakarta, economy is forecast to grow by 6,4% (yoy) Q2 2013

with a support from strong trade activites. Higher household and government

consumptions become the key factor of increased trade activities. The construction,

transportation and communication, services sectors are also projected to increase,

which among others, is driven by spending ahead of the national election 2014. Building

investments is in the upward trend with the development of commercial properties and

infrastructure projects. This has a significant impact on the construction sector. On the

other hand, the industrial manufacturing sector is predicted to have a limited growth in

Q2 2013.

Economic growth in the Sumatera and Eastern Indonesian region is projected to grow

fairly high due to increased production of natural resources based sector and also

higher exports. Q2 2013 GDP growth in the Sumatera and Eastern Indonesian region is

forecast at 6,1% and 6,4% respectively. Besides a higher global demand, there is also

increased domestic demand as the need for energy grows. The operation of several

power generator centers in 2013 as part of the 10.000 MW energy development project

nationwide, is also a factor that will increase the demand for coals.

In general, the state of regional economy is expected to improve in Q2 2013 with a

strong domestic demand and gradual improvement in the global economy, particularly

the economy of the main trading partners, such as China and India. A higher global

demand for natural resource commodities will support regional exports to grow.

Domestic demand has a potential to grow higher in many of the regions because of the

macroeconomic and high level of confidence and expectation towards the economy.

Moreover, government spendings to support economic development is also predicted

to be higher in Q2 2013 than in Q1 2013.

Investments are to expand, primarily in the building investment sector. While, the non-

building investment sector tends to slow down. The downward trend of non-building

investment is related to the adjustments made by firms, in response to increased costs

of production as a result of rising minimum wage, price of raw materials and energy.

For the whole 2013, gradual improvement in the global economy will contribute to the

acceleration of growth in many Indonesian regions. The aggregate regional growth is

projected in the range of 6,2%-6,6% (yoy) in 2013. A higher growth is forecast for 2014,

in which regional growth is expected in the range of 6,6-7,0% (yoy).

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