QUARTERLY 03|18 TOWARDS Lead Economist INCLUSIVE GROWTH March 27, - PowerPoint PPT Presentation

INDONESIA ECONOMIC Frederico Gil Sander, QUARTERLY 03|18 TOWARDS Lead Economist INCLUSIVE GROWTH March 27, 2018

Recent economic developments and outlook Collecting more and spending better for inclusive growth

How is the health of the Indonesian economy?

The Indonesian economy grew slightly faster… Private consumption Government consumption GDP growth yoy and contributions, percentage points Investment Net exports 8 Stat. discrepancy* Change in inventories 5.1 GDP 5.2 6 4 2 0 -2 -4 Dec-15 Jun-16 Dec-16 Jun-17 Dec-17 Source: BPS; World Bank staff calculations 4

…as investment remains on multi -year highs thanks to higher machinery purchases Growth in gross fixed capital formations yoy and contributions to growth, percent Buildings & Structures Machine & Equipment Vehicles 8 Other Equipments Cultivated Bio. Res. Intellectual Property 7 Investment 6 5 4 3 2 1 0 -1 -2 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Source: BPS; World Bank staff calculations 5

Headline inflation declined in the second half of 2017… Change from the previous year, percent 12 Administered price increases 10 8 Administered Food 6 Headline 4 Core 2 0 -2 Feb-16 Aug-16 Feb-17 Aug-17 Feb-18 Source: BPS; World Bank staff calculations 6

…while labor markets remained robust Net jobs created, by sector, thousands 5,000 2,610 3,824 4,000 3,593 1,463 3,000 -4 2,000 1,138 191 1,000 1,469 0 -1,000 -2,000 Manufacturing Agriculture, forestry and fishery Other Industry Services Total -3,000 2011 2012 2013 2014 2015 2016 2017 Source: BPS; World Bank staff calculations 7

Ada apa dengan Konsumsi 3 ? Rp What is the matter with consumption? – Part 3 8

Private consumption growth was slightly below its 10-year average but well above pre-2008 levels Private consumption growth, year-on-year, percent 2017 6.0 4.95 5.0 2008-2017 4.0 average 5.10 3.0 2001-2007 average 4.05 2.0 1.0 0.0 2001 2003 2005 2007 2009 2011 2013 2015 2017 Source: BPS; World bank staff calculations 9

The effects of inflation and the Rupiah, key drivers of consumption, often come with a lag A depreciation in the exchange rate has a negative An increase in inflation has a negative effect on impact on private consumption after four quarters private consumption growth in the following quarter Change in log difference in private consumption growth Consumption growth declines the Consumption growth declines 4 quarter after the rise in inflation quarters after the depreciation Quarters since the shock Quarters since the shock Source: World Bank staff analysis 10

Are debt levels too high?

In short – no Indonesia’s debt levels are …thanks to prudent fiscal … which are expected to among the lowest in the remain stable even under policies that led to a decline in world... debt levels … certain shocks Percent 250 Debt-to-GDP (percent) 5.0 100 Government debt, % of GDP, under baseline 40 and -1 std. deviation 4.0 90 Fiscal balance (LHS) 200 3.0 80 Debt (RHS) Baseline 35 2.0 70 150 GDP 1.0 60 Exchange rate Indonesia 0.0 50 100 30 -1.0 40 -2.0 30 50 -3.0 20 25 0 -4.0 10 -5.0 0 20 2008 2010 2012 2014 2016 2018 2020 Source: IMF Fiscal Monitor (October 2017), World Bank staff calculations Source: World Bank staff calculations 12

At the same time, maintaining a prudent fiscal stance is warranted Foreigners hold nearly 40 percent of With Fed normalization, yield Indonesian Government bonds differentials are narrowing Yields on 10-year bonds, US vs. Indonesia, percent Foreign holdings of local currency bonds, percent 45 8 39.8 Indonesia Indonesia 7.11 7.02 40 7 Korea 35 Malaysia 6 30 Thailand 4.89 Yield 5 differential 25 4.20 4 20 3 15 US 2.82 2.26 2 10 5 1 0 0 Source: CEIC and World bank staff calculations Source: ADB – Asian bonds online 13

Structural reforms will further enhance Indonesia’s borrowing capacity Higher revenue collections can further enhance A deeper financial sector would support growth Indonesia’s credit strength and provider greater domestic liquidity Credit-to-GDP ratios as of Q3 2017, percent Debt-to-revenues ratio, percent 250 350 326 210.5 300 276 200 261 259 250 194 150 189 134.1 200 182 115.6 150 100 84.7 63.0 100 56.8 39.1 50 50 0 0 Source: IMF Fiscal monitor and World Bank staff calculations Source: BIS and World Bank staff calculations Note: Indonesia* simulates Indonesia’s debt/revenues ratio with a 1 percent increase in the revenue/GDP ratio 14

How much should we worry about Rupiah depreciation?

The Rupiah depreciated in 2018, but has significantly appreciated since the taper tantrum Real effective exchange rate (increases denote appreciation) 21.0 Columns: percent change, December 2013 – December 2017 Dots: percent change, December 2017 – February 2018 18.0 15.0 12.0 9.0 6.0 3.0 0.0 -3.0 -6.0 -9.0 Malaysia Singapore Japan Philippines China Thailand Korea Indonesia India Source: BIS; World Bank staff calculations 16

IDR moves partly reflect wider CA deficit linked to investment, and increasingly financed by FDI Imports, yoy growth, percent Foreign Direct Investment, USD billion 25 30 20 23 25 22 15 19 19 20 17 10 Trade 15 5 10 0 4 5 -5 Other 0 Fuel -10 Other -5 Capital Financial Intermediation -15 -10 Raw materials net of fuel Manufacturing Mining and Quarrying -20 Consumer goods net of fuel -15 Agriculture, Hunting, and Forestry Imports -25 -20 Dec-15 Dec-16 Dec-17 2012 2013 2014 2015 2016 2017 Source: BPS; World Bank staff calculations 17 17

How much can growth accelerate in 2018 and 2019?

Growth is likely to remain steady over in the near-term, despite rising global risks Global outlook favorable Domestic conditions conducive Risks of protectionism are rising; normalization of unconventional post-GFC monetary policy remains potential source of volatility 2016 2017 2018f Real GDP Annual percent change 5.0 5.1 5.3 Consumer price index Annual percent change 4.3 3.8 3.5 Current account balance Percent of GDP -1.8 -1.7 -1.9 Budget balance Percent of GDP -2.5 -2.4 -2.3 Source: Bank Indonesia, BPS, Ministry of Finance, World Bank staff calculations 19

Accelerating growth beyond 5.5 percent in the near term will be challenging Indonesia’s economy has capacity to grow between 5.0 – 5.5 percent based on current levels of infrastructure, skills, and productivity Low wages but high costs because $1.5 trillion needed to close 55 percent of 15-year-olds infrastructure gap with other EMs of low productivity ‘functionally illiterate’ Share of students Average wages and unit labor 160 30,000 28,181 60 55 who do not meet costs, indices (China = 100) Average public 140 level 2 proficiency capital stock per 25,000 50 Wages Unit Labor Costs levels capita, 2015 USD 120 100 100 100 20,000 40 94 100 2012 2015 80 15,000 30 59 $1.5 56 56 9,629 60 48 trillion 10,000 20 to 14 40 3,811 close 5,000 10 this 20 gap 0 0 0 Advanced Emerging Indonesia China Vietnam India Indonesia Source: World Bank staff calculations using IMF (2017) data Note: 2015 estimates. Unweighted averages computed for 14 Source: UNIDO, WB staff calculations advanced economies and 21 EMs Source: OECD PISA Note: wages for finishing, weaving, and spinning of textiles 20

So what can be done to advance Indonesia’s development in 2018, 2019 and beyond? Put forward a bold “ policy sambal ” to radically open the economy and bring in investments and jobs Invest in quality of life: improve people’s lives and build long-term foundations for inclusive growth 21

Recent economic developments and outlook Collecting more and spending better for inclusive growth

Collecting more and spending better are key drivers of inclusive economic growth INCLUSIVE GROWTH Health, education, urban infrastructure, connectivity, social assistance Spending More on Spending Effectively Priority Sectors Spending Better …and better Spending Collecting more… Differently 23

The quality of spending has improved as expenditures shifted towards priority areas for inclusive growth… Percent of Central Government spending excluding transfers to subnational governments 30% 28% Infrastructure Health 25% Education Social protection Energy subsidies 20% 15% 10% 6% 5% 0% 2014 2015 2016* 2017* Source: Ministry of Finance, World Bank staff calculations Note: 2014-2015 refer to actual spending, 2016 and 2017 are budgeted. Infrastructure only includes line ministry spending and does not include below 24 the line capital injections to SOEs.

…but Indonesia still needs to spend more in some areas... Percent of GDP Current level of spending Estimates of needed level of spending 6 4.9 5 4 3 2.4 2.3 2 1.4 1.1 1 0.6 0 Health Social assistance Infrastructure, incl. housing Source: World Bank staff calculations 25

…by further reallocating expenditures away from poorly targeted subsidies… Fuel Electricity Percent of GDP IDR trillion Food Fertilizer 450 4.5 4.0 Other non-energy subsidies Total subsidies (% GDP) 400 4.0 350 3.5 300 3.0 250 2.5 200 2.0 1.2 150 1.5 100 1.0 50 0.5 0 0.0 Source: Ministry of Finance, World Bank staff calculations 26