Indonesia Economic Quarterly Launch Jakarta, March 18, 2014 Jim Brumby Sector Manager and Lead Economist
MARCH 2014 IEQ: “INVESTMENT IN FLUX” Fixed investment: subdued, and risks Investment Risks to FDI: solid, fiscal space in but has needed for plateaued public recently investment flux Portfolio investment: currently strong, but volatile 2
OUTLINE Recent economic developments and outlook Investment in flux, amid policy uncertainties, fiscal pressures Priorities for the longer-term, and selected issues 3
GDP: WEAK INVESTMENT, STRONG NET EXPORTS Contribution to GDP growth yoy, percent 4 Net exports Fixed investment 3 2 1 0 -1 -2 -3 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Source: BPS; World Bank calculations 4
IMPORT DEMAND HAS SOFTENED Percent Contribution to yoy growth Intermediate Consumption 36 Capital Oil & Gas Total imports 24 12 0 -12 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Source: BPS; World Bank staff calculations 5
RAW MINERAL EXPORTS BAN BUMP IN Q4 15 percent O-S-A Coal Palm oil Rubber and products Oil and gas Others 10 5 0 -5 -10 Ores, Slags and Ashes -15 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Source: BPS; World Bank staff calculations 6
OVERALL BOP: NARROWER C/A DEFICIT… Balance of payments, USD billion 16 Net other capital Overall balance 12 Net portfolio Net direct investment 8 4 0 -4 -8 -12 Current account -16 Dec-10 Dec-11 Dec-12 Dec-13 Note: Basic balance = Current account balance + net FDI Source: BI; World Bank staff calculations 7
…SUPPORTING THE RUPIAH OVER Q1 2014 Nominal currency index, 2011 average =100 USD 110 100 90 IDN Selected EM 80 majors 70 Jan-11 Jun-11 Nov-11 Apr-12 Sep-12 Feb-13 Jul-13 Dec-13 Note: Selected EM majors is a simple average of BRL, IDN, TRY and ZAR vs. USD; USD is broad NEER index Source: JP Morgan; World Bank staff calculations 8
GLOBAL ECONOMY: LIKELY TO STRENGTHEN Major trading partner GDP growth, percent 8 7 6 5 3.5 4.0 4.1 4 3 2 1 0 -1 -2 Source: World Bank staff calculations 9
INDONESIA: MIXED HIGH FREQ. DATA; MORE HEADWINDS Economic activity indicators - mixed Credit growth - falling Growth in 3-month moving avg. yoy, Growth yoy, percent 60 percent Motor Percent Percent 30 30 50 vehicles Nominal (LHS) 25 40 30 20 20 Cement sales 20 15 Real (LHS) 10 10 10 0 5 -10 0 0 Monthly nominal Motorcycles -20 -5 lending growth (RHS) -30 -10 -10 Feb-12 Aug-12 Feb-13 Aug-13 Feb-14 Jan-12 Jan-13 Source: CEIC; World Bank staff calculations Source: CEIC; World Bank staff calculations 10
INDONESIA OUTLOOK: SOME MORE GROWTH MODERATION TO COME… Previous March IEQ (Dec.) 2012 2013 2014 2015 2014p Real GDP (% change) 6.2 5.3 5.8 5.3 5.6 Consumer price (% change) 4.3 6.7 6.9 6.2 5.2 index Current account (USD billion) -24.4 -28.5 -24.4 -20.2 -22.8 balance Current account (% GDP) -2.8 -2.6 -3.3 -2.9 -2.1 balance Budget balance (% of GDP) -1.9 -2.2 -2.6 n.a. -2.1 Source: BI; BPS; Ministry of Finance; World Bank staff projections 11
…AMIDST SIGNIFICANT RISKS Domestic External • • Elections lead to a Commodity prices rise • stronger than expected Global risk appetite is boost to consumption, stronger than expected, Positive investment boosting portfolio inflows to EMEs inc. Indonesia • • Investment weakens as External financing downturn extends to conditions tighten again • building investment Global commodity prices • Consumption growth fall , e.g. due to slower Negative disappoints as income than expected growth in and credit effects take China their toll 12
OUTLINE Recent economic developments and outlook Investment in flux, amid policy uncertainties, fiscal pressures Priorities for the longer-term, and selected issues 13
INVESTMENT IN FLUX… Foreign direct investment Fixed investment Inbound FDI, rolling 4-quarter average Contributions to real growth yoy, percent Other USD 15 6 Foreign transportation billion Foreign machinery & equip Building 5 Total 10 4 5 3 2 0 1 -5 0 Dec-06 Dec-08 Dec-10 Dec-12 Dec-06 Dec-08 Dec-10 Dec-12 Source: BI; World Bank staff calculations 14
FISCAL SECTOR: REVENUES SOFT; NEW POLICY PRESSURES Deficit (RHS, % of GDP) Revenues (LHS, yoy nominal growth, %) Expenditures (LHS, yoy nominal growth, %) 45 4.5 35 3.5 25 2.5 15 1.5 5 0.5 -5 -0.5 -15 -1.5 -25 -2.5 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Note: 2013 deficit is World Bank staff projection Source: Ministry of Finance; World Bank staff calculations 15
FUEL SUBSIDY REFORM WOULD HELP Scenario 2: 50% economic price fill IDR trillion Scenario 1 (2013 again) 100 Savings 50 0 2009 2010 2011 2012 2013 -50 Expenditures -100 2014 -150 Fuel subsidy expenditure, -200 GoI -250 2014 WB -300 projection Achieving a deficit of <2.5% in 2014 looks difficult without more fuel subsidy reform 16
EXAMINING THE MINERAL EXPORT BAN Rationale GDP growth Unprocessed Increased Higher value- export ban Trade Balance domestic mineral added mineral + Export duty and Fiscal Revenues processing exports tax Job Creation Underlying assumptions • • • Higher processed exports will offset Significant processing Processing lower ore exports investment is stimulated. i.e, adds a lot of • Higher value exports will increase that smelters are financially value to viable mineral non-tax revenues • exports Processing will create more and better jobs in the sector 17
BUT IS THE MINERAL EXPORT BAN SOUND? Percent of total USD million Processed Mineral Exports 4,500 2.5% Unprocessed Mineral Exports 4,000 2.0% Share of Mineral in Total Exports 3,500 3,000 1.5% 2,500 2,000 1.0% 1,500 1,000 0.5% 500 0 0.0% Copper Nickel Tin Iron Bauxite Other Minerals Note: Data for 2013 Source: WITS database; World Bank staff calculations 18
TRADE IMPACTS Estimated impact on net trade balance USD billion 0 -1 -0.9 -2 -3 -3.0 -3.3 -4 -5 -5.3 -6 2014 2015 2016 2017 Source: World Bank 19
REVENUE IMPACTS Estimated impact on fiscal revenues (export duties and taxes, royalties and CIT) USD billion 0 -0.4 -1.1 -2 -1.8 -2.2 -4 2014 2015 2016 2017 Source: World Bank 20
OUTLINE Recent economic developments and outlook Investment in flux, amid policy uncertainties, fiscal pressures Priorities for the longer-term, and selected issues 21
AVOIDING THE TRAP THE CHALLENGE – harnessing Indonesia’s potential to generate shared prosperity, through fast productivity-driven economic growth with inclusiveness Structural policies to boost prosperity: • Closing the infrastructure gap • Closing the skills gap • Enhancing the functioning of markets Complementary areas: • Service delivery for all • Social protection • Natural disaster risk management Foundational pre-requisites: • Macro-fiscal management and managing shocks • Implementation 22
URBAN DISASTER PREPAREDNESS 23
THANK YOU March 2014 IEQ contents: Regular update on economic developments and the outlook Examining the mineral exports ban Urban disaster risks planning A taster of the forthcoming World Bank report, Avoiding the Trap On the web: http://www.worldbank.org/en/news/feature/2014/03/18/ indonesia-economic-quarterly-march-2014 24
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