Indonesia Economic Quarterly March 2017 Staying the Course Hans - PowerPoint PPT Presentation

Indonesia Economic Quarterly March 2017 Staying the Course Hans Anand Beck Acting Lead Economist, Indonesia March 22, 2017

Key Takeaways 2016 stronger economic fundamentals despite global uncertainty  Growth was higher than previous year for first time in five years Prospects for a pick up are subject to risks and challenges  Early signs of pickup including on consumer spending, employment, revenue collection and infrastructure spending. Staying the course crucial for realizing prospects  Maintain vigilance, continue strong macro- economic management, sustain reform momentum.  Opportunity to raise competitiveness by reducing restrictiveness of service sector  Review subsidy programs (KUR)

2016 stronger fundamentals despite global uncertainty Prospects for a pick up, but subject to risks and challenges Staying the course is crucial for realizing prospects 3

Despite global headwinds, annual real growth increased in 2016, for the first time in 5 years… Contributions to GDP growth, percentage points Statistical discrepancy* Net exports Gross fixed capital formation Government consumption expenditure Private consumption expenditure Gross domestic product 8 6 4 2 0 -2 2012 2013 2014 2015 2016 2017 4

….as part of a broader strengthening of economic fundamentals 2015 2016 Real GDP (Annual percent change) 4.9 5 Consumer price (Annual percent change) 6.4 3.5 index Current account (Percent of GDP) -2.0 -1.8 balance Budget balance (Percent of GDP) -2.6 -2.5 Source: BI: BPS; MoF; World Bank staff calculations Note: 2016 actual outcome; f stands for forecast 5

Robust growth in the face of global uncertainty Prospects for a pick up, but subject to risks and challenges Staying the course crucial for realizing prospects 6

External conditions are forecast to firm up. Percent, growth 5 2015 2016e 2017f 4.2 4 3.5 3.4 3.0 3 2.7 2.7 2.7 2.7 2.3 2.1 1.8 2 1.6 1 0 World Advanced Emerging and Major Trading Economies Developing Partners excluding Economies China Source: World Bank Global Economic Prospects January 2017 7

Early shoots of consumer confidence emerging… Consumer durables leading indicators 3month ma growth yoy, percent 40 Car Sales: Passenger 20 Cement Sales 0 -20 Motorcycle Sales Car Sales: Commercial -40 Jan-15 Jan-16 Jan-17 Source: BPS; Nikkei/Markit Source: ASI; GAI; World Bank staff calculations 8

…supported by an employment rebound and real wages.  Core unemployment fell to its lowest rate since 2012 and real earnings growth appeared to strengthen significantly in 2016 1,000 25 8 900 20 800 15 7 Real median monthly income (LHS) 700 10 6 600 5 500 5 - Unemployment rate - core 400 (5) 4 300 (10) 200 Real median monthly income 3 growth (RHS) (15) 100 2 - (20) 2002 2004 2006 2008 2010 2012 2014 2016 9

Tax collection is picking up again (Jan-Feb)…  Total revenue collection increased by 8.9 percent yoy, but levels are still lower than 2014 and 2015 Contributions to annual revenue growth, Percentage Points 25 20 15 10 VAT/LGST Non oil and gas income tax 5 Oil and gas related revenues 0 Excises and other taxes -5 -10 -15 Revenue growth -20 -25 Jan-Feb 2014 Jan-Feb 2015 Jan-Feb 2016 Jan-Feb 2017 Source: Ministry of Finance; World Bank staff calculations 10

…but there is a long way to go to meet 2017 targets. IDR Trillion 1,890 2017 Inferred collection path to target 200 1,260 180 160 140 120 100 630 80 2016 actual collection 60 2017 actual collection 40 20 - - January February  Source: Ministry of Finance Data; World Bank staff calculations  Note: Target revenue path is calculated by using the average percentage monthly contributions to total revenues (2010-16) and the Budget 2017 Total Revenues target 11

Government capital spending began 2017 well.  January-February capital expenditure sustains high level achieved in 2016;  Early procurement policy continued: by mid February, a third of Ministry of Public Works budget had been contracted Jan-Feb capital expenditure outturns (IDR Trillion) 6.0 5.0 4.0 3.0 2.0 1.0 0.0 2014 2015 2016 2017 12

Exports are growing for the first time since 2013, carried by manufacturing, and commodities.... Contributions to goods exports values growth, percentage points Oil and gas Coal Mining Palm oil Rubber Manufacturing Other Total exports 20 15 10 5 0 -5 -10 Manufacturing and commodities -15 increased -20 -25 Dec-14 Dec-15 Dec-16 Source: CEIC and staff calculations 13

…supported by a positive commodities terms of trade shock, which forecasts suggest will be temporary  Energy prices forecast to surge 26 percent this year Forecast 100 Index 2011 = 100 75 50 Dec 14 Jun 15 Dec 15 Jun 16 Dec 16 2017 2018 2019 2020 Source: World Bank Pink Sheet; CEIC; World Bank (2017); World Bank Staff Calculation 14

Downside risks easing but still dominate upside Upside Downside External risks Domestic risks January IEQ risk balance 15

Robust growth in the face of global uncertainty Prospects for a pick up, but subject to risks and challenges Staying the course is crucial for realizing prospects 16

Staying the course by, for example, reforming services sector…  Indonesia is in the top decile of countries in terms of restrictions Legal Air transport Logistics freight forwarding Telecom Commercial banking Insurance Logistics cargo-handling Accounting Broadcasting Maritime transport Construction Rail freight transport Road freight transport Indonesia Logistics storage and warehouse Computer Average across Logistics customs brokerage countries Architecture Engineering 0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1 OECD Services Trade Restrictiveness Index for Indonesia 17

…to improve service sector productivity and competitiveness.  By removing barriers to Indonesia has relatively low services trade, productivity in a number of areas increased openness Indonesia Korea Malaysia Philippines Thailand would likely: 45  Improve quality 40  Reduce price for 35 30 some sectors 25  Help facilitate 20 15 introduction of new 10 services 5  Expose domestic 0 market to new knowledge 18

Review costly, regressive and untargeted subsidies like the KUR program. 5 reasons to re-consider the new KUR program’s effectiveness* Principle Reason new KUR program is not optimal x Relevance Sustainable loans access more important for MSMEs than lower interest rates x Costs Expansive coverage of KUR means higher costs x Competitive High risk market for MSME loans impeded as subsidies crowd out environment commercial lending x Equity among Regressive, as total subsidy Government pays increases linearly participants with loans size x Sustainability Current KUR interest rate deviates significantly from market rates and is not financially sustainable * Original KUR program introduced 2007; new design 19 introduced 2015

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