Indonesia Economic Quarterly: December 2012 Policies in focus - PowerPoint PPT Presentation

Indonesia Economic Quarterly: December 2012 Policies in focus Ndiame Diop Lead Economist & Economic Advisor, Indonesia World Bank December 18, 2012 World Bank and The Habibie Center Joint Launch Event Intercontinental Hotel, Jakarta www.worldbank.org/id www.worldbank.org/indonesia

Outline Policies in focus  Global growth remains weak and the outlook is still uncertain  Indonesia’s economy has performed strongly so far, despite showing some strains  Economic performance in 2013 should be solid but will depend on policies:  To respond quickly and effectively to any external shocks  To support domestic investment and growth  To ensure that the benefits of growth are shared 2

THE GLOBAL ECONOMY remains weak

Global economic conditions remain subdued… …growth in the US and China stabilized in Q3 but Japan and Europe contracted Real GDP growth, percent Real GDP growth, percent 12 12 2010 2011 2012f 2013f 10 10 8 8 6 6 4 4 2 2 0 0 -2 -2 Euro area US Japan China Indonesia Major Trading Partners Source: CEIC and World Bank 4

International financial market conditions have improved since mid-year …helped by loose monetary policy in the US, Japan and Euro Area Index (1 Nov 2009=100) VIX index 150 175 Emerging market equities (LHS) 150 125 125 100 100 75 Developed market (LHS) VIX index (RHS) 50 75 25 50 0 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Source: CBOE, MSCI 5

Commodity prices remain under pressure Since mid-2011, with rubber, coal and palm oil seeing marked declines Coal Natural gas Palm oil Rubber Copper Crude oil Index Nov 2007=100 Index Nov 2007=100 280 280 220 220 160 160 100 100 40 40 Nov-07 Nov-08 Nov-09 Nov-10 Nov-11 Nov-12 Note: Australian coal, World Bank global natural gas index, Malaysia palm oil, Singapore-traded rubber, London- traded copper, Brent crude; Source: World Bank and staff calculations 6

Although commodity prices more broadly remain high Price levels in nominal USD terms are still elevated on a longer view International USD commodity prices Index Jan 2000 = 100 Index Jan 2000 = 100 700 700 Indonesia's Major Export Commodities 600 600 500 500 Energy 400 400 300 300 200 200 Food 100 100 Metals and Minerals 0 0 Nov-00 Nov-02 Nov-04 Nov-06 Nov-08 Nov-10 Nov-12 Note: Price index of Indonesia’s Major Export Commodities is weighted by export shares of Coal, Gas, Palm Oil, Crude Oil, Copper and Rubber, which represent 42% of Indonesia's exports 7 Source: World Bank and CEIC

THE INDONESIAN ECONOMY was a solid performer in 2012 but is showing some strains 8

Economic growth has been supported by strong domestic demand …particularly private consumption and investment Year on year GDP contributions Private cons. Gov cons. Investment Net Exports Discrepancy GDP Percent Percent 10 10 8 8 6 6 4 4 2 2 0 0 -2 -2 -4 -4 Sep-09 Jun-10 Mar-11 Dec-11 Sep-12 Source: BPS via CEIC and World Bank 9

However, stock levels appear to have been building National accounts data show an unusual degree of inventory accumulation Percent of GDP Percent of GDP 12 30 8 20 4-quarter sum of change in stocks (RHS) 4 10 0 0 Change in stocks (LHS) -4 -10 Sep-02 Sep-04 Sep-06 Sep-08 Sep-10 Sep-12 Source: BPS and World Bank staff calculations 10

Nominal public revenue growth has slowed …with VAT revenue growth still robust but non-tax revenue growth declining Nominal growth in public revenues – Total, Tax Revenue (TR), and Non-Tax Revenue (NTR) TR-Income (non oil & gas) TR-Income oil & gas TR-VAT TR-Trade TR-Others NTR-Oil&gas NTR-Non oil&gas NTR-Others Total Percent Percent 40 40 20 20 0 0 -20 -20 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012* 11 Note: *2012 data are October to October. Source: MoF and World Bank staff calculations

A trade shock has erased the trade surplus Exports contracted in 2012 through October, while import growth continued Trade balance (RHS) Export growth Import growth Percent USD billion 80 80 60 60 39.7 39.6 40 40 28.5 28.0 26.1 25.1 22.2 19.7 20 20 8.2 0 0 -0.5 -20 -20 -40 -40 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012* Note: * 2012 is comparison between January–October sum and the same period in 2011. Source: BPS 12

Overall balance of payments flows returned to a small surplus in Q3 …but the basic balance remains negative due to the current account deficit Net direct investment Net portfolio Net other capital Current account Overall balance Basic balance USD billion USD billion 16 16 12 12 8 8 4 4 0 0 -4 -4 -8 -8 -12 -12 Sep-09 Sep-10 Sep-11 Sep-12 Source: BI 13

Our baseline projection continues to be for solid growth in 2013 Thanks to still-solid domestic demand and a slight external growth recovery 2010 2011 2012 2013 Real GDP growth (percent) 6.2 6.5 6.1 6.3 CPI inflation (percent)* 6.3 4.1 4.4 5.4 Budget balance (percent of GDP)** -0.6 -1.1 -2.2 -1.7 Major trading partner growth (percent) 6.8 3.6 3.3 3.6 Notes: * CPI inflation is Q4 on Q4. World Bank projections except for **Budget balance, which is Government revised Budget (2012) and approved Budget (2013) 14

But there are external risks to the outlook… …and these are mostly to the downside  Euro Area:  ECB action has reduced financial crisis risk but not eliminated risk of renewed intensification of sovereign funding and banking sector challenges  US “fiscal cliff”:  World Bank assumes 1 percent fiscal drag for the US in 2013...  …but “worst case” could shave 4 to 5 percent off US GDP in 2013  China:  World Bank (October 2012) projects 7.7 percent growth in 2012 and 8.1 percent in 2013  Risk of further slowdown  Additional uncertainty:  Impact of renewed global monetary easing on portfolio flows and commodity prices 15

Projections assume that strong investment growth will continue …but there is no room for complacency on this given commodity prices and exports Percent Percent 90 18 Investment (RHS) 60 12 30 6 0 0 Exports -30 -6 Indonesia commodity export price basket -60 -12 Nov-04 Nov-06 Nov-08 Nov-10 Nov-12 Note: Price index of Indonesia’s Major Export Commodities is weighted by export shares of Coal, Gas, Palm Oil, Crude Oil, Copper and Rubber which represent 42% of Indonesia's exports 16 Source: World Bank and CEIC

FDI has held up well and maintaining it will be crucial …for external financing and for investment growth USD billion USD billion 8 8 Primary Sector Secondary Sector Tertiary Sector Mining 6 6 Total 4 4 2 2 0 0 Sep-09 Sep-10 Sep-11 Sep-12 Source: BKPM 17

POLICIES WILL BE IN FOCUS in 2013 and will need to guard against the multiple risks to growth 1 8

Priority areas for policy to maintain growth in 2013 …emphasizing clarity, inclusiveness and quality  Regulatory Policies:  Reducing further uncertainties in business and investment regulations will help investment and support growth  Labor Policies:  A more comprehensive approach to balancing the interests of all stakeholders in the labor market  Public Spending:  Improving the quality of spending across functional and geographical areas 19

Labor market policies Minimum wage levels in 2013 may be a concern and the process could be improved Minimum wages USD USD 300 300 Malaysia 250 250 200 200 Philippines 150 150 Indonesia China 100 100 Thailand Vietnam 50 50 0 0 2007 2008 2009 2010 2011 2012 2013 Source: World Bank Doing Business, 2013, and press and regulations for 2013 Note: Indonesia minimum wages based on DKI Jakarta (assuming USD exchange rate in 2013 is IDR 9,500); other countries based on the minimum wage in major cities or the capital region. These wages are not adjusted for productivity differences across countries 20

Improving spending quality is a key policy priority, across functions… Strong increase in capital spending is positive but subsidy spending is a challenge 2011 - Outcome 2012 WB Projection 2013 Budget IDR Trillion IDR Trillion 400 400 300 300 200 200 100 100 0 0 Personnel Material Capital Social Subsidy Source: MoF and World Bank staff calculations 21

…and improving spending results across space is also a challenge The geographical dimension (see VIC results on service delivery across Indonesia) Composite Index of Education Supply Readiness Notes: Index varies from 0 to 1 with higher value indicating higher supply readiness 22 Source: PODES (Potensi Desa) 2011 and the Village Infrastructure Census and Report