Indonesia Economic Quarterly July 2015 Slower Gains Ndiamé Diop Lead Economist, Indonesia July 8, 2015
Introduction The government announced and initiated ambitious policy reforms (e.g., fuel subsidy, business licensing) and infrastructure development plans (doubling of capital budget allocation in 2015). These raised expectations about the results they can achieve… …but so far gains remain smaller than expected. In this IEQ, we try to understand why this is the case and discuss options for addressing ongoing challenges.
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Fact 1. Global growth still subdued despite recovery in the US World Bank projections for global growth in 2014, 2015 and 2016, percent 4 2016 3.5 3.3 2015 3 2014 2.8 2.6 2.5 2 Jan'13 Jun'13 Jan'14 Jun'14 Jan'15 Jun'15 Source: World Bank Global Economic Prospects
Fact 2. Major developing countries growing below past 10-year average… Real annual GDP growth in select countries , percent 2015f 12 2016f 10 2005-2014 (excl. GFC*) 8 6 4 2 0 -2 Note: *2008/9 global financial crisis period. Source: World Bank Global Economic Prospects June 2015; World Development Indicators; World Bank staff calculations
…China’s slowing and changing growth pattern particularly far-reaching Chinese imports from Indonesia, average annual growth, percent 35 30 25 20 31.5 15 10 5 0 -7.8 -5 -10 2005-2011* 2012-2014 Note: * excludes 2009 global financial crisis period. Source: BPS; World Bank staff calculations
Fact 3. Commodity exporters: growth and fiscal buffers declining Change between 2011 and 2015 in GDP growth select countries, percentage points Primary balance (% of GDP) Russia Qatar Peru Norway Malaysia Indonesia Chile Brazil Australia Algeria -12 -10 -8 -6 -4 -2 0 2 Source: IMF World Economic Outlook; World Bank staff calculations
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Weaker GDP growth in Q12015, with investment still subdued… Growth yoy, percent Statistical discrepancy* Net exports 10 Gross fixed capital formation Government consumption expenditure 8 Private consumption expenditure Gross domestic product 6 4 2 0 -2 2011 2012 2013 2014 Q1 2015 Note: *Statistical discrepancy also includes change in inventories. Q1 2015 quarterly growth in year on year terms. Source: BPS; World Bank staff calculations
…and weaker private consumption growth, especially in nominal terms Growth yoy, percent Real Nominal Implicit deflator 14 12 10 8 6 4 2 0 Mar-12 Sep-12 Mar-13 Sep-13 Mar-14 Sep-14 Mar-15 Source: BPS; World Bank staff calculations
Employment growth has slowed across Indonesia Average annual difference in Commodity boom (2007-2011) employment rates, percentage points Post-commodity boom (2012-2014) 1.5 1.0 0.5 0.0 -0.5 -1.0 -1.5 Source: BPS; World Bank staff calculations
Weak revenue collection has limited the fiscal space Contributions of select revenue categories to nominal revenue growth yoy for January - May, percent O&G related revenues Income taxes N-O&G 15 Consumption taxes International trade taxes 10 Other Total revenues 5 0 -5 -10 -15 2013 2014 2015 Source: Ministry of Finance; World Bank staff calculations
Capital budget execution challenges have further curtailed the development agenda January-May realization as a share of 2014 Jan-May share of total rev. Budget total revised Budget, percent; 2015 Jan-May share of total rev. Budget nominal growth yoy, percent 2015 Jan-May nominal growth (yoy) 50 30 10 -10 -30 -50 -70 Source: Ministry of Finance; World Bank staff calculations
Inflation remains sticky due to rising food prices Percent change, yoy 12 10 Food 8 Headline 6 4 Core 2 0 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Source: BPS; World Bank staff calculations
Baseline GDP growth in 2015 has been revised down July 2015 IEQ Revisions (percentage change, unless otherwise 2014 2015p 2016p 2015 2016 indicated) Real GDP 5.0 4.7 5.5 -0.5 0.0 Consumer prices 6.4 6.8 5.3 0.3 0.2 Current account balance (% of GDP) -2.9 -2.7 -2.9 0.3 0.3 Fiscal balance (% of GDP) -2.2 -2.5 - 0.0 - Note: Revisions are relative to March 2015 IEQ . Source: BI; BPS; Ministry of Finance; World Bank staff projections
Main risks to outlook are firmly on the downside External • Foreign currency financing costs; • Lower trend output growth in developing countries; • A setback in the still-fragile Euro Area recovery. Domestic Private consumption Government Fixed investment consumption • • • Sticky inflation; Revenue shortfall; Weaker business • • Fuel price uncertainty; Budget under-execution. confidence; • • Further Rupiah Subdued credit growth; • depreciation; Lower government • Lower consumer capital spending. confidence.
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Deep reforms are needed to sustain growth of more than ~5.5% Growth yoy, percent 7 7 GDP 6 6 Potential output 5 5 4 Mar-06 Sep-07 Mar-09 Sep-10 Mar-12 Sep-13 Mar-15 Source: BPS; World Bank staff estimates
Fiscal reforms: “spend the capital budget” Central government capital spending (Nominal IDR trillion and percent of Total expenditure and of GDP) Capital Exp IDR Tn Capital Exp as % GDP Capital Exp as % Total Exp 200 12.0 11.0 180 9.1 10.0 160 9.5 9.1 140 8.5 8.1 8.0 7.7 7.7 7.4 120 100 6.0 181 80 160 140 135 4.0 60 118 40 80 76 73 2.0 64 20 1.9 1.6 1.6 1.5 1.4 1.3 1.3 1.3 1.2 - - 2007 2008 2009 2010 2011 2012 2013 2014 2015f Source: BPS, Ministry of Finance, World Bank staff calculation
Fiscal reforms: measures to collect more in the medium-term Recently adopted policies: • VAT electronic tax return submission, effective July 1; • Improvements in income tax audit strategy (e.g. focus on tax payers more likely to rely on transfer pricing), effective 2015; • Removal of luxury sales tax on certain goods to lower cost of tax administration, effective July 9. Further options to mobilize revenues: • Optimize the tax regime (e.g. revisions to sales and excise taxes for vehicles, fuels and tobacco); • Improve corporate income tax (e.g. reduce firms’ incentives to remain small); • Revise VAT exemptions to increase equity (e.g. for electricity consumption of high consuming households).
Support the rebalancing of the economy With low commodity prices, relative profitability is expected to now favor manufacturing industries and services over most commodity sectors… Policy support to businesses and investments in manufacturing and services is thus crucial: - Improve logistics services (dwell time) Facilitate firms’ access to key inputs (incl. imports) - - Speed up licensing approval process (e.g. one stop shop) - Realign sector-specific regulations with the provisions of the investment law Invest more and better in human capital to raise long- term growth
Three facts about the global economy Indonesia: recent developments and near-term outlook Effective policy response Also in this IEQ: geothermal, BOS and CAD 22
July 2015 IEQ Contents Regular update on economic developments and the outlook Indonesia’s current account deficit going forward Fuel subsidy reform : a major one but how to make it sustainable? Realizing Indonesia’s potential in geothermal . Ten years of school grant program (BOS): successes and challenges
Main takeaways “Slower gains”: Output and employment growth are weakening. Major policy initiatives are facing implementation challenges – fuel pricing, infrastructure. Indonesia is not alone in facing these challenges: EMEs worldwide are slowing down and need to confront structural constraints Indonesia is still in a good position to respond by: Expanding infrastructure spending, to the extent possible given deficit limit Following through on measures to improve revenues and the business environment Communicating in a consistent way about new policies and decisions to investors, as consistent communication reduces uncertainty. But slower gains are a sign of serious constraints and a shifting economy: Supporting a rebalancing of the economy key
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