(UNTITLED)

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP86T01017R000606330001-2
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 10
• Document Creation Date: January 12, 2017
• Document Release Date: March 22, 2011
• Sequence Number: 1
• Publication Date: August 21, 1986
• Content Type: MEMO

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Central Intelligence Agency
DATE
DOC NO ~G a0/OS DIRECTORATE OF INTELLIGENCE
OIR
P & PD I 21 August 1986
Indonesian Leading Indicators:
Keeping Tabs on the Economy
Summary
Data on Indonesian overall economic activity are typically reported
from six to 18 months after the fact -- a situation that handicaps current
analysis. To help overcome this problem, we have developed an index of
economic indicators that uses more timely reported data on money supply,
prices, oil exports, import deposits, the government budget, and OECD
industrial production. We judge that these indicators provide advance
warning of turning points in the economy well before official data on
national income and output are published.
Our most recent analysis of these indicators verifies the conventional
notion that the dramatic fall in oil prices and export revenues has sent the
economy into a tailspin. Based on the indicators, we believe growth in the
first half of the year fell to about 1.5 percent. The indicators further
suggest that there will be zero or negative growth for the year, compared
with an estimated 3.5 percent in 1985.
This typescript was prepared byl (Office of East Asian Analysis,
Southeast Asia Division, Islands Branch. It was coordinated with the Office of Global
Issues. Information available as of 6 August 1986 was used in its preparation. Comments
are welcomed and may be directed to the Chief, Southeast Asia Division. 0 25X1
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Tracking a Moving Target
Tracking movements in the Indonesian economy on anything less than a yearly
basis is handicapped by a paucity of reliable and comprehensive data. Balance of
payments data, for example, are typically subject to lags of from six to 12 months, while
national income data are often 18 months old by the time they are released. Moreover,
these data are subject to numerous -- and often radical -- revisions, limiting the ability
of analysts to assess the impact of economic performance on political and social
problems and international economic relations. For Indonesia, keeping tabs on economic
developments is particularly important as parliamentary and presidential elections draw
closer and as Jakarta struggles with massive urban unemployment.
To resolve this difficulty and help improve our current analysis of the economy, we
have devised an index of leading economic indicators. We selected for analysis seven
economic variables -- all of which are reported monthly -- that directly or indirectly
reflect the ups and downs of the Indonesian economy (see Table 1). The resulting
composite index is patterned after one we devised for the Philippines, which has proved
useful in alerting analysts to near-term changes in overall economic activity and giving
them a leg up on the possible political and social effects of economic performance and
government economic policies.
The Components of the Index
The Indonesian economy is dominated by public sector expenditures -- directly
through state enterprises and indirectly through multiplier effects on the private sector --
which are funded primarily by oil tax revenues. In constructing a composite index of
overall economic activity, we chose to focus on seven measures that capture, either
directly or by proxy, the outward looking, export character of the economy. Current or
anticipated changes in Indonesia's overall economic performance are reflected in data on
oil exports, government revenues and expenditures, and industrial country demand for
Indonesia's exports. Even the money supply is sensitive to changes in the country's
external accounts, since it is directly influenced by changes in international reserves,
which reflect developments in the current and capital accounts. Indeed, to the extent that
the monetary authorities do not "sterilize" capital movements, these flows are reflected in
the general price level as well. To a lesser degree, the economy is influenced by purely
indigenous sectors, such as agriculture and private nonoil manufacturing, but we lack
adequate and timely data on the "real time" performance of these sectors.
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Table 1
Indonesian Economic Indicators: Components of the Index
Indicator Relation to National Output
Money Supply
Consumer Price Inflation
Oil Exports
Import Deposits
Represents currency, demand, and time
deposits. An increase in the money supply
accompanies an increase in economic
activity.
Price changes reflect the balance between
spending and production. As economic
activity increases, prices of goods,
services, and wages are bid up.
Oil exports, which account for 60 percent of
of total exports and 70 percent of
government revenues, account for about 30
percent of GDP.
Import guarantees act as a proxy for total
imports and reflects the demand for
productive inputs and consumption goods.
Government Revenues Public revenue reflects domestic sales and
exports, as well as personal and corporate
income. Revenue increases reflect an
increase in economic activity.
Government Expenditures The economy is dominated by public sector
expenditures which are funded primarily by
oil tax revenues -- directly through state
corporations and indirectly through
multiplier effects in the private economy.
OECD Industrial Production The economy is export driven. An increase
in overseas industrial production translates
into an increase in demand for Indonesian
goods and services.
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Several statistical procedures lead us to believe that the composite index of
economic indicators can usefully anticipate turns in the Indonesian economy in advance
of official data (see appendix for methodology). The lack of all but annual official data on
national income and product means that we cannot confirm directly the month-to-month
accuracy of our composite index, or assess whether it, or any other suitable indicators,
are leading, lagging, or concurrent. F__1
Utilizing data available through April 1986, our index nevertheless confirms the
expected dramatic decline in economic activity following the collapse of oil prices in
February and March. This is illustrated in Figures 1 and 2, which depict the path of our
composite indicator -- showing annualized monthly growth rates -- and the path of
Indonesian oil prices, respectively. Since January the drop in the price of Indonesian
crude is strongly correlated with the decline of our composite index.
Indonesian economic activity for the rest of this year (and well into the foreseeable
future) will continue to be dominated by the price of oil, given the fact that Indonesia's
production capacity will remain essentially fixed at 1.5 million b/d. Without a dramatic
increase in oil prices, therefore, we do not expect a significant recovery in economic
activity. The latest OPEC agreement on production and quotas -- which expires this
November -- provides some encouragement that world oil prices might firm to around
$16 per barrel in the coming months. This could, according to our index, cause a
rebound in economic activity to around 2.5 percent annually -- still well below the 5-6
percent growth the World Bank considers necessary to employ an estimated two million
new entrants into the labor force yearly. We are not convinced, however, that this
agreement will be any more successful than previous efforts to control production. F
We believe that unless oil prices firm to their 1985 level of $25-26 per barrel,
Indonesia's short-term economic and financial difficulties will persist.* Even if oil prices
firm to $16 dollars per barrel under the latest OPEC production arrangement, tax revenues
will fall far short of the $16 billion earned in 1985. This, coupled with the government's
reduced access to overseas financing and its own resistance to deficit financing to spur
domestic economic activity, suggest that the current economic recession is a long-term
problem.
*This analysis is based on the CIA econometric model of the Indonesian economy.
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INDONESIA: COMPOSITE ECONOMIC INDICATOR
(Annualized Percent Change)
3.6
3.5
3.4
3.3-x,
3.2
3.1 -
3
2.9
2.8
2.7
2.6
2.5
2.4
2.3
2.2
2.1
2
1.9
1.8
1.7 1
1.6 -
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Appendix
Economic Indicators: Methodology
An index of economic indicators monitors the timing of business fluctuations,
determining when the balance of the individual indicators signals a turn from overall
economic contraction to expansion, or the reverse. Data on GNP or GDP are only
available on an annual basis. As a result, it is not possible to directly determine whether
or how long candidate data series lead or lag turning points in economic activity. This
renders useless conventional methods of selecting economic indicators as components of
the composite index. To circumvent this problem, we applied spectral analysis -- a
technique which allows the data to generate a mock cyclical time series -- to the
candidate time series. The results were used to determine how closely these indicators
mirrored cycles generated on the basis of annual GDP. If the periodicity of the cycles of
the candidates were the same as for the overall economy, it qualified as a component of
the composite index. Moreover, the periodograms generated also suggested whether the
candidate series were leading, lagging, or coincident with movements in real GDP. For
example, we found that real oil exports are an excellent leading indicator by two to three
quarters (see Figure 3).
Other steps taken to develop an index of leading indicators for the Indonesian
economy include:
? Building the Index. A candidate time series must reflect aggregate economic
activity. On this basis seven variables were selected for analysis (see Table 1).
Multiple regression analysis was then applied to the candidate time series in order
to determine the weights (that is, relative importance) to be assigned to each
indicator.
? Testing the Index. The lack of all but annual data on national income and product
means that we cannot confirm directly the accuracy of our composite index. In
order to test the overall accuracy of the composite index, logit analysis was
utilized. Logit analysis is an econometric technique that generates a function of
selected time series which "predicts" upturns and downturns in the economy based
upon upturns and downturns in the selected economic indicators. This analysis
suggests that our composite index is better than 80 percent effective in tracking
movements in the economy.
The index of Indonesian indicators contains several shortcomings. Only a relatively
few economic variables are available on a timely basis, and major sectors of the economy
-- such as agriculture and nonoil manufacturing -- are not well tracked by any of the
indicators. As a consequence, these sectors are not directly captured in the index. This
problem is less serious than it might appear, however, since the economy is export
driven, and the major export is oil, which is included in the index. In any event, these
indicators are probably not responsible for triggering economic turning points.
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INDONESIA: ESTIMATED PERIODOGRAMS
(MILL. RUPIAHS-DEVIATIONS FROM TREND)
69/1 71/1 73/I 75/I 77/I 79/I 81/1 83/I
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CONFIDENTIAL
Typescript: Indonesian Leading Indicators: Keeping Tabs on the Economy
Inside Distribution:
OEA/SEA/IB
OEA/SEA/ITM
Ch/OEA/SEAD
DCh/OEA/SEAD
PDB Staff (7F30)
C/NIC (7E62)
NIO/EA (7E62)
CPAS/IMC/CB (7G07)
C/PES/DDI (7F24)
DDI (7E44)
D/DCI/DDCI/Exec St (7D60)
C/DDO/IAD (3DOO)
C/DDO/EA (5DOO)
D/OEA (4F18)
Senior Review Panel (5G00)
CPAS/ILS (7G15)
OEA/NEA (4G43)
OEA/CH (4G32)
1 - Production Officer (4F48)
1 - C/EAD (5D10)
1 - D/OGI
1 - D/OGI/PIC
1 - Ch/OGI/PIC/I Branch
1 - Ch/LDA/AB
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CONFIDENTIAL
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CONFIDENTIAL
Outside Distribution:
White House:
1 - Don Gregg
1 - Robert Dean
1 - John C. Monjo
1 - Thomas A. Forbord
1 - H. Allen Holmes
1 - Joseph B. Winder
1 - Thomas P. Hamilton
1 - Charles H. Morris
1 - Henry L. Miles
1 - William C. Sherman
1 - Peter W. Rodman
1 - William Piez
1 - Morton Abramowitz
1 - Paula Causey
1 - Allen Kitchens
Treasury:
1 - Bob Anderson
1 - William McFadden
1 - Douglas P. Mulholland
1 - Barry Newman
1 - Williams Ouinn
1 - Mike O'Connor
Commerce:
1 - George Payne
1 - Byron Jackson
1 - Kent R. Stauffer
1 - Don Ryan
1 - Roger Severance
1 - Stephen Hall
1 - Linda Droker
USTR:
1 - Ron Sorini
1 - Melissa Coyle
Federal Reserve Board:
1 - Robert Emery
CONFIDENTIAL
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CONFIDENTIAL
1 - Rear Admiral James D. Cossey
1 - Brig. Gen. Philip M. Drew, USAF
1 - Don Eirich
1 - John J. Sloan
1 - Col. James Martin, USA
1 - Lt. Col. John Haseman
I - Brig. Gen. L.W. Smith, USMC
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