QUARTERLY 06|18 LEARNING Lead Economist MORE, GROWING FASTER June - PowerPoint PPT Presentation

INDONESIA ECONOMIC Frederico Gil Sander, QUARTERLY 06|18 LEARNING Lead Economist MORE, GROWING FASTER June 6, 2018

Rencana untuk presentasi ini 1. Apakah saat ini perekonomian Indonesia sehat? 2. Tidak tayang di Bioskop Lebaran ini: Kejarlah Rupiah… Kau ku Tangkap Pengabdi Konsumsi

1. Apakah saat ini perekonomian Indonesia sehat?

The Indonesian economy continued to expand at a steady pace in Q1… GDP growth yoy and contributions, percentage points Private consumption Government consumption Investment Net exports 10 Stat. discrepancy* Change in inventories GDP 8 6 4 2 0 -2 -4 Mar-15 Dec-15 Sep-16 Jun-17 Mar-18 Source: BPS; World Bank staff calculations 4

…lifted by further acceleration of investment growth Growth in gross fixed capital formation yoy and contributions to growth, percent Buildings & Structures Machine & Equipment Vehicles Other Equipments Cultivated Bio. Res. Intellectual Property 8 7 6 5 4 3 2 1 0 -1 -2 Mar-15 Sep-16 Mar-18 Source: BPS; World Bank staff calculations 5

Investment- led growth is high quality growth… but is Indonesia still too tied to commodities? Higher commodity prices drives up cash flows of mining companies and investment… 40% 4% LHS: Commodity price index and RHS: contribution of investment nominal mining VA, yoy change to GDP growth (pp) 30% 3% Av 2003-12, 2.1% 20% 2% 10% 1% Av 2013-17, 1.6% 0% 0% -10% Mining Comm Invest -1% -20% -2% Source: World Bank staff; BPS 6

Mixed evidence of diversification into high-value added goods and services 10.0% 9.3% Yoy growth in gross value-added, by industry, percent 8.0% 7.4% 6.1% 6.1% 5.6% 6.0% 4.9% 4.0% 2.3% 2.6% 2.0% 0.0% Q1 2018 Q3'17-Q1'18 -2.0% -1.8% -4.0% Refinery, High-tech Commodity GVA Traditional Modern Government, Construction Low-tech chemicals, manufacturing sectors (inc. services services utilities and manufacturing rubber metals other services products manuf.) Source: World Bank staff; BPS. Note: High-tech manufacturing includes electronics, transport equipment and machinery; traditional services include wholesale & retail sales, transport & storage (except air); Modern services are financial services, information & communication, business services, real estate, air transport, health and education; Low-tech manufacturing is mostly food processing. 7

Growth expected to be firm despite rising global risks Risks to the global outlook are increasing: financial volatility has been on the rise; terms of trade deterioration; widening current account deficit; geopolitical risks, protectionism 2017 2018f Real GDP Annual percent change 5.1 5.2 Consumer price index Annual percent change 3.8 3.5 Current account balance Percent of GDP -1.7 -2.0 Budget balance Percent of GDP -2.5 -2.1 Source: Bank Indonesia, BPS, Ministry of Finance, World Bank staff projections and calculations 8

Kejarlah Rupiah… Kau ku Tangkap

Higher global volatility in 2018… Index VIX Index MOVE Index (RHS) 40 80 35 75 30 70 25 65 20 60 15 55 10 50 5 45 0 40 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Source: BPS; World Bank staff calculations 11

…has led to currency depreciation and higher yields in many emerging economies Exchange rates, year-to-date and year-on-year 10-year bond yields, basis points change from 100 8 percentage change January 1 2018 80 6 YTD 4 60 YoY 2 40 0 20 -2 0 -4 -20 -6 -8 -40 -10 -60 India Indonesia Philippines Vietnam S Korea Singapore Thailand Malaysia Japan China India Vietnam Thailand Malaysia USA Philippines Indonesia Source: JP Morgan Real Effective Exchange Rate, CPI based 2010-=100; World Bank staff calculations Source: www.investing.com; World Bank staff calculations

A sound macroeconomic policy framework provides a substantial buffer against volatility Credible monetary policy has kept real interest rates positive, anchored inflation expectations BI has accumulated reserves and signed bilateral swap agreements Macroprudential measures mitigate risk of dollar-denominated corporate debt Conservative fiscal policy limits supply of rupiah assets, CA pressure Recent policy actions signal commitment to stability 13

The Rupiah recovered some ground in recent days Index, January 2017 =100 104 102 100 98 USD/IDR 96 94 Jan-17 Jul-17 Jan-18 Jul-18 Source: CEIC, World Bank staff calculations

Deepening the financial sector will provide further resilience against external volatility Foreigners hold nearly 40 percent of A deeper financial sector would support Indonesian Government bonds growth and provider greater domestic liquidity Foreign holdings of local currency gov’t bonds, percent Credit-to-GDP ratios as of Q3 2017, percent 45 39.8 250 Indonesia Korea 40 Malaysia Thailand 210.5 35 200 30 150 134.1 25 115.6 20 100 84.7 15 63.0 56.8 10 39.1 50 5 0 0 Source: BIS and World Bank staff calculations Source: ADB – Asian bonds online 15

Perception colored by slump in retail sales, which provide a partial view of private consumption Retail sales and private consumption in Consumption has been shifting to services the national accounts decoupled and foods prepared outside the home Retail sales growth, yoy, LHS; private consumption Percent of household expenditure growth, yoy, RHS Goods (except prepared foods) 66% 25 6 70% Services Prepared foods, incl. food outside home 60% 5.5 20 Private consumption 47% 44% 50% 5 15 40% 4.5 42% 40% 10 30% 4 27% Retail sales 20% Retail sales 4 quarter 14% 5 moving average 3.5 10% 13% 0 3 7% 0% Q12011 Q32011 Q12012 Q32012 Q12013 Q32013 Q12014 Q32014 Q12015 Q32015 Q12016 Q32016 Q12017 Q32017 Q12018 Source: CEIC, ; World bank staff calculations Source: Bank Indonesia, BPS; World bank staff calculations 17

Private consumption growth has generally followed potential GDP growth… ...especially in recent years, consistent with sound monetary, exchange rate and fiscal policies Yoy growth, percent 8 7 6 5 4 3 2 Real private consumption growth GDP growth (HP-filtered) 1 0

Consumption responds to fiscal and monetary policies, but effect is small and imbalances could emerge Vertical axis: Change in private consumption growth, percentage points Horizontal axis: Number of quarters Sample period: 2000Q4 2018Q1

To accelerate consumption growth sustainably, the focus needs to be on unlocking supply-side constraints Fiscal/monetary stimulus + Flat potential GDP growth  possibly higher GDP and consumption growth in the short-term … …but macroeconomic imbalances ( inflation, CA deficit) Higher potential GDP growth through structural reforms  higher long-term GDP growth  higher consumption growth Policy implications ➢ Continue to avoid short-term measures that could build imbalances and undermine macroeconomic stability ➢ Focus on policies to alleviate supply-side bottlenecks: closing the infrastructure, human capital and productivity gaps

Learning more, growing faster

Indonesia has made great progress in closing ‘quantity’ gaps in education... Enrollment rates and years of schooling are up... ...especially for poorer Indonesians Average years of schooling working age population Share enrolled, percent 9 Quintile 1 Quintile 2 Quintile 3 8 Quintile 4 Quintile 5 90 7 80 6 70 60 5 50 4 40 3 30 2 20 1 10 0 0 1990 1995 2000 2005 2010 2015 2002 2006 2012 2017 Source: Barro and Lee (2013, SUSENAS Source: SUSENAS, various years 22

Modest improvements in quality have also been made… Harmonized learning outcome index Y-axis: change in enrollment, percentage points 110 410 TUR 405 80 400 IDN 50 395 LUX MEX 390 BRA ESP 20 URY NZL DNK KOR USA 385 AUS NOR NLD IRL ITA CAN ISL THA PRT FRA CHE BEL 380 JPN -10 GRC FIN GBR SWE AUT DEU HUN CZE MAC TUN 375 HKG POL -40 SVK 370 RUS LVA 365 -70 1990 1995 2000 2005 2010 2015 -40 -20 0 20 40 Change in Math Test points Source: Altinok et al (2018) Note: The HLO is constructed for 163 countries, it has a mean of 500 and a standard Source: World Bank estimates based on PISA scores in 2003 and 2015 (OECD, 2004; OECD, 2016) deviation of 30.

…but large gaps remain: 55% of Indonesians are functionally illiterate… Share of the population by level of achievement and country, percentage points INDONESIA VIETNAM OECD Source: Source: World Bank estimates based on data from PISA 2015 (OECD, 2016) Note: Students with achievement level below 2 in PISA achievement scale are considered functionally illiterate 24

…and progress has been faster among higher - income students PISA math score, points 450 2015 425 400 375 2003 350 325 -4 -3 -2 -1 0 Index socio economic conditions Source: World Bank estimates based on data from PISA 2003 and 2015 (OECD, 2004; OECD, 2016) Note: Index of socioeconomic conditions measure family economic background including family assets, education levels, among others

Closing the learning gap with OECD countries will take much longer for poor students Number of years to catch up to OECD average PISA scores based on current growth rate in Indonesian PISA scores Mathematics Reading Science 20 33 62 Richest quintile 50 69 134 Average 136 190 484 Poorest quintile Source: World Bank staff calculations