Indonesia Economic Quarterly March 2016 Private investment is - PowerPoint PPT Presentation

Indonesia Economic Quarterly March 2016 Private investment is essential Ndiamé Diop Lead Economist, Indonesia March 15, 2016

Introduction 2015: tough but growth expected to have bottomed out  Significant improvement in composition of spending away from energy subsidies…  … allowing a spectacular rise in public investment…  … and helped growth in 2015 2016 : staging a firm rebound will be no small challenge  Given pressures on export and oil and gas fiscal revenues, private investment recovery is essential Private investment also critical to address medium-term challenges  Revival of manufacturing, rise of tourism  Good quality jobs

How public investment helped growth Staging a firm growth rebound in 2016 Medium-term challenges and opportunities 3

The budget before 2015: Close to 1/3 spent on energy subsidies Share of average central government spending, 2012-2014, percent Energy subsidy 29% Capital spending Health Social assistance 50% Other 14% 4% 3% Source: Ministry of Finance; World Bank staff calculations

Fuel subsidy reform : The foundation Fuel subsidies Infrastructure 300 250 200 150 100 50 0 2012 2013 2014 2015 Source: Ministry of Finance; World Bank staff calculations

Public investment and growth in 2015 Real growth yoy, percent Real capital expenditure (LHS) GDP (RHS) 100 5.5 80 5.0 60 4.5 40 4.0 20 3.5 0 3.0 -20 2.5 -40 -60 2.0 Mar-14 Sep-14 Mar-15 Sep-15 Note: Capital expenditure deflated with the implicit fixed investment deflator. Source: BPS; Ministry of Finance; World Bank staff calculations 6

How public investment helped growth Staging a firm growth rebound in 2016 Medium-term challenges and opportunities 7

Weak global growth and global trade: Harder to generate export revenues Annual growth, percent 14 Global trade 12 10 8 6 4 2 0 -2 Global GDP -4 -6 -8 -10 -12 2001 2003 2005 2007 2009 2011 2013 2015e 2017f Source: World Bank, January 2016 Global Economic Prospects 8

Subdued household real income growth Only moderate pick up in private consumption Weaker job creation Persistently high food price inflation, GDP growth, percent, LHS; millions, percent RHS 12 6.5 4.0 Unprocessed food 3.5 6.0 10 3.0 5.5 GDP growth 8 2.5 5.0 2.0 6 4.5 Headline 1.5 4 4.0 1.0 Job creation 3.5 2 0.5 3.0 0.0 0 2010 2011 2012 2013 2014 2015 Jan-15 Jul-15 Jan-16 Source: BPS; World Bank staff calculations Source: BPS; World Bank staff calculations 9

Low commodity prices Continued pressure on oil and gas fiscal revenues Contributions to nominal growth yoy, percent Oil and gas-related revenues Other Total revenues 25 20 15 10 5 0 -5 -10 -15 2011 2012 2013 2014 2015 Source: Ministry of Finance; World Bank staff calculations 10

Public investment rise in 2016 Likely less dramatic than in 2015 Budget allocation for infrastructure increases, driven by transfers to SNGs and SOEs (IDR trillion) Line ministries Non-line ministries Transfers to SNGs Capital injection to SOEs 350 300 250 200 150 100 50 0 2014 2015 revised Budget 2016 Budget Source: Ministry of Finance; World Bank staff calculations

Private investment is essential Real fixed investment growth (percent yoy) Public Private 6.0 5.0 4.0 3.0 2.0 1.0 0.0 -1.0 -2.0 2013 2014 2015 2016f Note: Capital expenditure deflated with the implicit fixed investment deflator. Source: BPS; Ministry of Finance; World Bank staff calculations 12

Baseline outlook 2015 2016f 2017f Real GDP (annual % change) 4.8 5.1 5.3 Consumer prices (annual % change) 6.4 4.0 4.6 Current account balance (% of GDP) -2.1 -2.3 -2.5 Budget balance (% of GDP) -2.5 -2.8 n.a. Source: BPS; World Bank staff projections 13

Supporting near-term growth (1) Gradual monetary easing Annual growth, percent 14 Investment lending rate 12 10 JIBOR interbank rate - 3 month 8 BI policy key rate 6 4 Feb-15 May-15 Aug-15 Nov-15 Feb-16 Source: BI; World Bank staff calculations 14

Revenue collection Ongoing reform areas critical • Reforming tax policy: • Revisions to Income Tax and VAT Laws and the Final Tax regime for MSMEs provide an opportunity to broaden the tax base and reduce economic distortions. • Strengthening tax administration: • Ease electronic filing process for taxpayers, while making e-filing mandatory for certain types of taxes; • Unique taxpayer ID system; • Improved compliance risk management and auditing processes, including use of third-party data; • Stronger law enforcement efforts. • Building the underlying tax administration capacity: • Investment in IT and data management systems. 15

Business environment Further reforms could tip investor confidence • Reducing or removing minimum capital and reserve requirements for setting up logistics service providers – too high and hinder competition • Clarifying the roles of port authorities and port operators in port development and management – lack of clarity has led to severe underinvestment in port infrastructure • Regulatory review mechanism is needed to take stock of existing business, investment and trade regulations (e.g. NTMs), cancel ones that are conflicting and unnecessary, and reject or approve new regulations • Establishing an up-to-date, comprehensive depository of licensing/regulatory requirements that can be accessed online - there is no list of requirements that firms needs to comply with

How Public Investment Helped Growth Staging a firm growth rebound in 2016 Medium-term challenges and opportunities 17

Manufacturing has prematurely retracted due to commodity boom Manufacturing as percentage of GDP (y axis), GDP per capita (x axis), PPP (constant 2011 int USD) 40 Thailand2005 35 China 1990 China 2005 Thailand 2014 Malaysia 2005 China 2014 30 Thai 1990 Indonesia 2005 Malaysia 1990 Malaysia 2014 25 Indonesia 2014 20 Indonesia 1990 15 10 0 5,000 10,000 15,000 20,000 25,000 Source: World Development Indicators, World Bank

Worker productivity is low despite wage advantage Real wages (real 2012 USD) Unit labor costs in manufacturing, 2012 =100 China Indonesia Indonesia Malaysia Malaysia Philippines Thailand Vietnam Thailand Vietnam 150 900 Philippines 800 140 700 130 600 120 500 400 110 300 100 200 90 100 0 80 2005 2007 2009 2011 2013 2011 2012 2013 2014 Source: Calculation based on CEIC data

Sluggish manufacturing growth and low productivity have reduced the quality of jobs… Percent of workers in different types of work 100% Self-employed/employers in agriculture 90% 80% Unpaid family worker in agriculture 70% Self-employed/employers in non agriculture 60% Unpaid family worker in non agriculture 50% Casual workers in agriculture 40% 30% Casual workers in non agriculture 20% Domestic, security and cleaning workers 10% Employees paid below Minimum Wage 0% 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Employees paid at least the Minimum Wage Source: World Bank calculations based on BPS, Sakernas data

… and kept many people vulnerable Poor quality of jobs keeps many around the poverty line • Status in 2010 of households who were poor 75 percent of poor households fail to in 2008 (percent) definitely move out of poverty or vulnerability over a three-year period. 100 Moved out of • A large number of workers are not poverty and safe and secure from poverty due to vulnerability their type of job 80 • The quality of jobs in manufacturing is Moved out of typically better – more formal and poverty but higher value 60 remain • China lifted 680 million people vulnerable between 1992 and 2012 by focusing Moved out of on manufacturing growth poverty but 40 fall back in Always Poor 20 0 Source: World Bank calculations based on BPS, Sakernas data

Medium-term strategy: Identify promising industries (1) Identify promising industries, “to avoid shooting in the dark” Share to total exports, percent Low – tech exports Medium – Low – tech exports Gold Tin, not alloyed Industrial acid oils Footwears Rubber tires Petrol products (rhs) Wood furniture Textiles&garments Refined copper Palm oil prod (rhs) Playwood (rhs) 6 12 1.5 3.0 10 2.5 1.2 8 2.0 0.9 3 6 1.5 0.6 4 1.0 0.3 2 0.5 0 0 0.0 0.0 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 Source: UN-COMTRADE, HS4 digits and OECD industrial code

Medium-term strategy: Identify promising industries (2) Share to total exports, percent Medium – high -tech exports High – tech exports Insulated cable fiber Office & comp equip Cars Radio, TV & com equip Automotive spareparts Aerospace (RHS) 1.6 6 0.3 Bulldozers,excav, & parts Drug & medicine (RHS) Parts of motorcycles 1.4 5 0.3 Saturated monohydric alcohols 1.2 4 0.2 1.0 0.8 3 0.2 0.6 2 0.1 0.4 1 0.1 0.2 0.0 0 0.0 1990 1994 1998 2002 2006 2010 2014 1990 1994 1998 2002 2006 2010 2014 Source: UN-COMTRADE, HS4 digits and OECD industrial code