Emerging Asia Economics | 11th November 2019

EMERGING ASIA ECONOMICS FOCUS

Why we don’t trust Indonesia’s GDP data
• Indonesia’s GDP figures lack credibility – economic growth has been far too stable over the past few
years to be believable. We think a better guide to the health of the economy is our own Indonesia Activity
Tracker (IAT). This shows that economic growth has slowed sharply since the start of the year, and that
the economy is now growing at a slower pace than the official figures suggest.

• It was no surprise when last week Indonesia reported another quarter of 5% growth. Since the start of
2014, GDP growth has always been reported to be within a range of 4.7% and 5.3% y/y.

• This stability is hard to square with the number of shocks that have hit the economy over this period,
including volatile commodity prices, a sharp fall in the rupiah and an aggressive rate-tightening cycle
which has subsequently been partly reversed. In recent years growth in Indonesia according to the official
figures has been much more stable than in any other major economy.

• In order to construct the GDP figures, Indonesia’s statistical agency (BPS) starts with production data to
calculate gross value added (GVA), before adding “taxes less subsidies” to get GDP. The BPS separately
estimates an expenditure breakdown and introduces a statistical discrepancy to make the GDP figures
align with GDP as estimated via the production method. In other words, the BPS regard the production
method as the most reliable estimate of GDP, which is quite common for emerging markets.

• Part of the problem lies in the “taxes less subsidies” on products (TLS) component, which makes the GDP
growth figures exceptionally stable. Since 2014 the TLS component has had an almost perfect inverse
relationship with GVA. In other countries, the relationship is positive.

• It is of course possible that all of this is just a coincidence. But it is striking that the unusual pattern first
emerged at the time that growth in GVA slowed. It’s surely possible that the statistical agency has been
trying to massage the figures.

• The expenditure data have their own problems. The biggest issue lies with the household consumption
figures, which account for 55% of GDP. Rather than deriving the figures from household spending surveys,
consumption growth is simply extrapolated from the GDP figures. With reported GDP growth stable,
household consumption growth has been almost completely flat at 5.0% over the past few years. The
figures are of little help as a guide to the strength of consumption.

• To provide an alternative (and better) guide to the health of the economy, we have developed our own
Tracker. The IAT is constructed using low-profile monthly indicators, that are less likely to have been
meddled with by the statistical authorities. The Tracker suggests that, not only has the economy slowed
sharply in recent quarters, but that it is growing at a much weaker pace than the official figures suggest.

• Looking ahead, the official figures, for what they are worth, will probably continue to show the economy
growing at around 5% over the next few years regardless of how the economy is actually performing. In
contrast, we think the IAT will show the economy growing at a much weaker rate.

Gareth Leather, Senior Asia Economist, +44 20 7811 3916, gareth.leather@capitaleconomics.com

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Why we don’t trust Indonesia’s GDP data

Indonesia’s GDP figures lack credibility – economic Chart 2: Coefficient of Variation
growth in recent years has been far too stable to be (GDP growth, 2014–present)
believable. We think a better guide to the health of 1.0 1.0

the economy is our own Indonesia Activity Tracker 0.8 0.8

(IAT). This shows that economic growth has slowed 0.6 0.6

sharply since the start of the year, but that the 0.4 0.4
economy is now growing at a slower pace than the 0.2 0.2
official figures suggest.
0.0 0.0

Saudi

Taiwan
Hong Kong
Japan

Philippines
S Africa

Eurozone

China
Singapore
US

UK
Korea
Thailand

Hungary
Mexico

Czech

India

Indonesia
GDP growth has been too stable to believe
We have long held the view that Indonesia’s GDP
figures lack credibility, and it was no surprise when Sources: Refinitiv, Capital Economics
last week Indonesia reported another quarter of 5%
Data don’t correlate with other activity measures
growth. (See our Data Response, “Official figures
We would normally expect GDP figures to correlate
overstate health of economy”, 5th November.)
closely with other measures of activity, but this isn’t
Since the start of 2014 GDP growth has been the case in Indonesia. For example, in most countries
reported within a range of 4.7% and 5.3% y/y. (See there is a close relationship between import growth
Chart 1.) This stability is hard to square with the and overall GDP growth. Chart 3 shows the example
number of shocks that have hit the economy over this of Korea.
period, including volatile commodity prices, a sharp
fall in the rupiah and an aggressive rate-tightening Chart 3: Korea GDP & Imports Volumes (% y/y)
30 9
Imports (LHS) GDP (RHS)
cycle which has subsequently been partly reversed. 25
20
15 6
Chart 1: Indonesia GDP (% y/y)
9 9 10
5
Growth range 2008-13 3
8 8 0
-5
7 7
Growth range since 2014 -10 0
6 6 -15
-20
5 5
-25 -3
01 03 05 07 09 11 13 15 17 19
4 4
Sources: Refinitiv, Capital Economics
3 3

2 2 The relationship is not a surprise given that an

08 09 10 11 12 13 14 15 16 17 18 19
important driver of import demand is the overall
Sources: Refinitiv, Capital Economics
strength of the economy. But in the case of
Over this period growth in Indonesia according to Indonesia, there is no relationship at all between
the official figures has been much more stable than imports and GDP. (See Chart 4.)
in any other economy.
Chart 4: Indonesia GDP & Imports Volumes (% y/y)
The best way of measuring volatility is by calculating 20 Imports (LHS) GDP (RHS) 7

the coefficient of variation, which is the ratio of the 15

standard deviation to the mean. A lower coefficient 6
10
of variation corresponds to a less volatile series. The
5 5
official figures make Indonesia the most stable
economy in the world. (See Chart 2.) 0
4
-5

-10 3
2011 2012 2013 2014 2015 2016 2017 2018 2019
Sources: Refinitiv, Capital Economics

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How are the GDP figures constructed? Since 2014 the TLS component has had an almost
In order to construct the GDP figures Indonesia’s perfect inverse relationship with GVA. Chart 6 shows
statistical agency (BPS) starts with the production that any increase or decrease in GVA’s contribution
series to calculate gross value added (GVA), and then to GDP growth over this period has been offset by an
add “taxes less subsidies” to get GDP. The BPS then opposite move in the contribution from TLS.
separately estimates an expenditure breakdown and
This inverse relationship is unusual. Normally, when
introduces a statistical discrepancy to make the
GVA increases, more taxes are paid on products (and
figures align with GDP as estimated via the
the taxes paid on products usually exceed the
production method. In other words, the BPS regard
subsidies provided by governments on these
the production method as the most reliable estimate
products). In most emerging markets, there is a
of GDP, which is quite common for emerging
positive relationship between TLS and GVA. (See
markets.
Chart 7.)
Looking at the production breakdown, while some of
the components do exhibit a fair amount of volatility, Chart 7: Correlation Coefficient
(GVA & TLS, 2014-latest)
most sectors are unusually stable. This is 1.0 1.0
Higher number
demonstrated by Chart 5 below, which shows the 0.8 coresponds to closer 0.8
0.6 correlation 0.6
coefficient of variation for each major sector of the 0.4 0.4
0.2 0.2
economy. More important, however, is that each of 0.0 0.0
the different sectors net out, so that growth in overall -0.2 -0.2
-0.4 -0.4
GVA is much less volatile than the individual sectors. -0.6 -0.6
-0.8 -0.8
-1.0 -1.0
Chart 5: Coefficient of Variation
(GDP growth, 2014 – latest)
0.8 0.8
0.7 0.7 Sources: Refinitiv, Capital Economics
0.6 0.6
0.5 0.5
0.4 0.4
It is of course possible this is just a coincidence. But
0.3 0.3 it’s striking that this issue started to occur at the time
0.2 0.2
0.1 0.1
that growth in GVA slowed. It’s surely possible that
0.0 0.0 the statistical agency has been trying to massage the
Finance

Real estate
Health
Auto.

Accom.
Agri.

Water

GDP
Transport
IT

Business
Manu.
Education
Public admin.

GVA
Construction

Other
Electricity

figures.
Expenditure data have their own problems
Sources: Refinitiv, Capital Economics The expenditure data have their own issues. One is
that imports and exports are deflated by an exchange
Another concern we have is with the “taxes less
rate index, not the price of goods and services that
subsidies” on products (TLS) component, which
are imported and exported.
makes the GDP growth figures exceptionally stable.
Our biggest concern, however, is with the household
Chart 6: Gross Value Added & Taxes Less Subsidies consumption figures, which accounts for 55% of
Contribution to y/y GDP Growth (%-points)
7 -2
GDP. Rather than calculating the consumption
GVA (LHS)
figures from household spending surveys,
Taxes Less Subsidies (Inv., RHS)
6 -1 consumption growth is simply extrapolated from the
GDP figures (as measured via the production
5 0 method).
With reported GDP growth stable, household
4 1
consumption growth has been almost completely flat
3 2 at 5.0% over the past few years and is of little use as
11 12 13 14 15 16 17 18 19
a guide to the strength of consumption. Consumption
Sources: Refinitiv, Capital Economics
figures from other countries show much more
cyclicality. (See Chart 8.)

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Chart 8: Private Consumption (% y/y)
8 8
Indonesia Philippines Korea
7 7
6 6
5 5
4 4
3 3
2 2
1 1
0 0
2011 2012 2013 2014 2015 2016 2017 2018 2019
Source: Refinitiv
An alternative measure of activity
To provide an alternative (and better) guide to the
health of the economy, we have developed our
Indonesia Activity Tracker (IAT), which is
constructed using low-profile monthly indicators,
that are less likely to have been meddled with by the
statistical authorities.
The IAT suggests that not only has the economy
slowed sharply in recent quarters, but that it is
growing at a much weaker pace than the official
figures suggest. It also indicates that while there have
been points over the past few years where growth has
reached nearly 6%, for Jokowi’s first term as a whole,
growth came in well below the government’s 7.0%
target. (See Chart 9.)
Emerging Asia Economics Focus
Chart 9: Indonesia GDP & Activity Tracker (% y/y)
9 9
Indonesia Activity Tracker
8 8
Indonesia GDP
7 7
6 6
5 5
4 4
3 3
06 07 08 09 10 11 12 13 14 15 16 17 18 19
Sources: Refinitiv, Capital Economics
The performance of the IAT fits closely with what has
happened to other key economic indicators. For
example, the Tracker shows a sharp slowdown in
activity in 2014-15, the period when commodity
prices slumped. The IAT also points to a pickup in
economic growth last year, a period when the world
economy was also growing more strongly.
What to expect next for the coming year
The official figures, for what they are worth, will
probably continue to show the economy growing at
around 5% in 2020 regardless of how the economy
is really performing. In contrast, we think growth
according to the IAT will be much lower. (See our
Focus, “What to expect from Jokowi 2.0?”, 15th
October.)
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