Indonesia Economic Quarterly December 2015 Reforming amid uncertainty Ndiamé Diop Lead Economist, Indonesia December 15, 2015
Introduction Coming to the end of a challenging year, unfavorable external conditions persist… … and man -made fires and haze have contributed to moderating growth. In this difficult environment considerably higher public capex disbursement has supported growth… … and seven policy packages are signaling strong reform intent. Looking to next year, sustaining the reform momentum is the best strategy for Indonesia.
Major recent economic developments Recent policy response Outlook and risks 3
Fires and haze cost IDR 221 trillion (1.9% of GDP) in just five months… Bubble size indicates total provincial disaster costs; cost in percent of provincial GDP (y-axis); area burned, thousand hectares (x-axis) 40 35 30 South Central Kalimantan 25 Kalimantan 20 West East Kalimantan 15 Kalimantan Papua Jambi 10 South 5 Sumatra Riau 0 0 100 200 300 400 500 600 700 800 -5 Note: Losses do not account for the economic benefit to those who set fires. Source: Bogor Agricultural University; BPPT; BPS; CIFOR; media reports; Ministry of Health; regional governments; World Bank staff calculations
… which is more than twice the cost of rebuilding Aceh after the tsunami… USD billion 18 16.1 16 14 12 10 8 7 6 4 2 0 2004 Aceh tsunami 2015 fires and haze Source: World Bank staff estimates
…reducing growth materially in affected provinces… Real GDP growth year on year in 2015, percent 14 Q1 Q2 Q3 12.8 12 10 8 6 4 2 0 -0.6 -2 -0.9 -4 -3.5 -6 East Kalimantan Papua Source: BPS; World Bank staff calculations
… having devastating social and environmental consequences… At least 19 deaths, 500,000 incidences of respiratory illness; IDR 2.1 trillion in immediate health costs; long-term cost likely much higher; ~4.7 million children stayed away from school (for up to 34 days in some regions) IDR 540 billion in costs due to school closures; difficult to quantify long-term impact of regular closures on graduation rates and productivity; IDR 59 trillion in biodiversity losses and loss of carbon storage
… and contributing to the growth moderation and rise in unemployment GDP growth, percent per year*; Number of net new jobs created 6.5 4,000,000 3,500,000 6.0 GDP growth 3,000,000 5.5 2,500,000 5.0 2,000,000 4.5 1,500,000 4.0 1,000,000 Job creation (RHS) 3.5 500,000 3.0 0 2010 2011 2012 2013 2014 2015 Note: Q1-Q3 data for 2015. Source: BPS; World Bank calculations
Major economic developments Recent policy response Outlook and risks 9
Higher public spending supported growth in Q3 2015 Real capital expenditure growth yoy, percent* 60 40 20 0 -20 -40 -60 Mar-13 Sep-13 Mar-14 Sep-14 Mar-15 Sep-15 Note: * Real capital expenditure is calculated using the implicit total fixed investment deflator with 2010 base from the national accounts Source: Ministry of Finance; World Bank staff calculations
Significant improvement of the composition of spending in the 2016 Budget IDR trillion Fuel subsidy Infrastructure Social assistance Health 300 250 200 150 100 50 0 2014 2015* 2016** Source: Ministry of Finance; World Bank staff calculations
Direct transfers to villages will increase substantially over five years… Total fiscal transfers to villages 200 1.6 Percent of GDP IDR trillion 180 1.4 160 1.2 140 1 120 100 0.8 80 0.6 60 0.4 40 0.2 20 0 0 2015 2016 2017 2018 2019 Source: Ministry of Finance; World Bank staff calculations
Reduction of regulatory burden and promotion of investment Number of restrictive measures on trade Seven economic policy and investments, June 2009-to date packages focusing on 250 • Passed Implemented Regulatory simplification; 200 • Support to SMEs; • 150 Minimum wage determination; 100 • Special economic zones; 50 • Tax relief. 0 Signal intention to join the Trans-Pacific Partnership (TPP) Source: Global Trade Alert (accessed 13/11/2015); World Bank staff calculations
Major economic developments Recent policy response Outlook and risks 14
Baseline outlook is unchanged, with risks to the downside December 2015 IEQ Revisions (percentage change, unless otherwise 2014 2015p 2016p 2015 2016 indicated) Real GDP 5.0 4.7 5.3 0.0 0.0 Consumer prices 6.4 6.3 4.6 -0.2 -0.6 Current account balance (% of GDP) -3.1 -2.0 -2.4 0.0 0.2 Note: Revisions are relative to October 2015 IEQ . Source: BI; BPS; World Bank staff projections
Risk 1. Global growth may disappoint once again… Real GDP growth in OECD countries, percent qoq-saar 3.0 2.5 2.0 1.5 1.0 0.5 0.0 Mar-13 Sep-13 Mar-14 Sep-14 Mar-15 Sep-15 Source: OECD; World Bank staff calculations
Risk 2. Weak revenues may constrain growth prospects IDR trillion Tax revenues Non-tax revenues Total revenues 2,000 1,822 1,762 1,650 1,800 1,600 1,400 1,100 1,200 1,000 800 600 400 200 0 2015 Revised 2015 Revised 2015 Jan-Oct 2016 Budget Budget outlook realization Source: Ministry of Finance; World Bank staff calculations
Risk 3. Impact of the village transfers Millions, LHS; IDR thousands, RHS Dana Desa disbursement, percent National-to-District (tranche I) Number of poor and near poor (LHS) District-to-Village (tranche I) Median 90% DD per capita (RHS) 30 1200 1 0.9 25 1000 0.8 0.7 20 800 0.6 15 600 0.5 0.4 10 400 0.3 0.2 5 200 0.1 0 0 0 1 2 3 4 5 6 7 8 9 10 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Source: Village Potential Statistics (PODES) 2011; National Social Note: Sample includes 314 districts and 55,469 villages. Economic Survey (SUSENAS) 2013; World Bank staff calculations Source: Ministry of Finance; Coordinating Ministry of Human Development and Culture/World Bank Diagnostic Survey, November 2015; World Bank staff calculations
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