INDONESIA ECONOMIC Frederico Gil Sander, QUARTERLY 09|18 Lead Economist URBANIZATION FOR ALL September 20, 2018
Today’s presentation The economy scored some wins in Q2 But global volatility has hit hard How has the government responded? What next?
THE ECONOMY SCORED SOME WINS IN Q2
GDP growth accelerated to 5.3 percent in Q2, driven by stronger consumption Gross Domestic Product (GDP) in constant prices, change from the previous year, percent; and contributions to real GDP growth, percentage points 8 5.3 5.1 6 4 2 0 -2 Private consumption Government consumption Investment Net exports Stat. discrepancy* Change in inventories -4 GDP Jun-15 Mar-16 Dec-16 Sep-17 Jun-18 Source: BPS; World Bank staff calculations 4
Income growth in mining and agriculture sectors accelerated… Gross value added at current prices (nominal terms), change from the previous year, percent 30 Agriculture Mining & Quarrying Other Industry Services 25 20 15 10 5 0 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 -5 -10 -15 -20 -25 Source: Bank Indonesia; BPS; World Bank staff calculations 5
…and headline CPI inflation remained low Prince indices, change from the previous year, percent 14 12 PPI Administered 10 8 Volatile 6 HEADLINE CPI 4 Core 2 0 -2 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Sep-18 Note: PPI stands for Producer Price Index. Only the General Non-Oil & Gas category is used as measured by wholesale PPI Source: BPS; World Bank staff calculations 6
BUT GLOBAL VOLATILITY HAS HIT HARD…
Three main sources of global volatility U.S. Federal Reserve increased the policy interest rate, set to hike it again “ Trade wars ” heightened global uncertainty, particularly due to escalating tit-for-tat trade tariffs imposed by US and China Contagion fears spread following stress in other emerging markets including Turkey 8
Indonesia has been under the microscope because of its current account deficit… Four-quarter rolling sum, percent of GDP Goods trade balance Services trade balance Income Current account balance 3 2 1 0 -1 -1.3 -1.7 -2.0 -2 -2.3 -3 -4 Source: Bank Indonesia; World Bank staff calculations 9
…and the high share of government debt held by non-residents Foreign holdings as a share of total, percent 45 37.5 40 35 30 25 Sep-12 Sep-14 Sep-16 Sep-18 Source: Ministry of Finance; World Bank staff calculations 10
HOW HAS THE GOVERNMENT RESPONDED?
Monetary policy has prioritized stability… Managing BI rate hikes Macro- Volatility Prudential Bank Indonesia (BI) raised interest rates by 125 bps Regulations BI has not defended a this year despite inflation specific exchange rate remaining within the level and allowed BI has required hedging of bank’s target range market-driven foreign currency corporate depreciation, using debt and has tried to lower record-high reserves cost of hedging accumulated in recent years to smooth volatility 12
…as has fiscal policy, with deficits narrowing despite elections in 2018 and 2019 Fiscal Balance, percent of GDP 0.0 -0.5 -1.0 -1.5 -2.0 -2.0 -2.1 -2.5 -2.5 -2.5 -2.6 -3.0 2015 2016 2017 2018 WB 2019 WB Source: Ministry of Finance; World Bank staff calculations 13
IDR depreciated with other EM currencies, and the stock market fell in-line with global equities Index: January 2018=100 110 105 JP Morgan EMCI 100 USD/IDR JCI 95 90 MSCI: EM 85 80 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Source: Bloomberg; World Bank staff calculations 14
WHAT NEXT?
…leading to further …creating risks to Capital outflows may tightening as growth rather than of accelerate… Government committed a financial crisis to stability… 16
2018 is not 1999, or 2013: Indonesia is in a stronger position today Taper Asian Financial September Tantrum Crisis (1998) 2018 (2013) 7.9 6.0 5.1 GDP growth (% yoy) Credit growth (% yoy) .. 23.5 8.7 Current Account Deficit (% of GDP) -2.7 -3.0 -2.3 Reserves (months of goods imports) .. 6.9 8.7 External Debt (% GDP) 62.1 32.9 33.0 Inflation (% yoy) 5.2 4.2 3.4 Note: Values refer to 12-month or 4-quarter average prior to the onset of the event Source: BPS; Bank Indonesia; CEIC; IIF 17
Solid macroeconomic framework underpins steady outlook, although downside risks increased 2017 2018f* 2019f* Real GDP Annual percent change 5.1 5.2 5.2 Annual percent change 5.0 5.1 5.1 -- Private Consumption -- Investment Annual percent change 6.2 6.8 6.8 Current Account Balance Percent of GDP -1.7 -2.4 -2.3 Consumer Price Index Annual percent change 3.8 3.4 3.7 Note: f: forecast Source: Bank Indonesia, BPS, Ministry of Finance, World Bank staff projections and calculations 18
There are risks of unintended consequences of some short-term measures for potential growth Average public capital stock per capita, 2015 USD 30,000 28,181 $1.5 trillion 25,000 needed to 20,000 close infrastructure 15,000 gap with other $1.5 trillion 9,629 to close this EMs 10,000 gap 5,000 3,811 0 Advanced Emerging Indonesia Note: 2015 estimates. Unweighted averages computed for 14 advanced economies and 21 EMs Source: World Bank staff calculations using IMF (2017) data 19
To reduce vulnerabilities and boost growth, addressing structural weaknesses is key Percent of GDP, 2013-2017 average Percent of GDP, 2013-2017 average 7 100 91.0 5.7 6 80 71.8 68.6 5 3.7 3.5 60 4 3 40 2.2 2.1 2.1 2.0 1.8 28.8 21.8 21.6 21.3 2 20 12.1 1 0 0 Source: WDI; World Bank staff calculations 20
MAKING URBANIZATION WORK FOR ALL
Urbanization can be a powerful force for economic growth and poverty reduction for all y-axis: log GDP per capita, 2016; y-axis: poverty headcount ratio at USD 3.20 per day; x-axis: urban population share, percent x-axis: urban population share, percent 12 100 Malaysia 11 80 10 China 60 9 Indonesia 40 Philippines 8 Philippines Indonesia India 20 7 Vietnam China Vietnam 6 0 0 20 40 60 80 100 0 20 40 60 80 100 Notes: GDP per capita in constant 2011 international dollars. Poverty rates for 2011-2016 (latest available). Urban population share calculated based on the Dijkstra and Poelman (2014) algorithm applied to Landscan-2012 gridded population data 22 Source: WDI, PovCalNet, World Bank staff calculations
Indonesia continues to urbanize, but the pace has normalized x-axis: initial urban share, percent; y-axis: average annual growth rate of urban share, percent 10 All IDN - historical Log. (All) 5 1980s 1990s 1970s 2000s 1950s 2010-15 1960s 0 0 10 20 30 40 50 60 70 80 90 100 -5 Source: World Bank staff calculations based on United Nations World Urbanization Prospects 2018 (https://esa.un.org/unpd/wup/) 23
Recent urbanization has occurred largely through conversion of rural areas into urban settlements Share of changes in urban population accounted by each source, percent Natural growth Re-classification Migration 100% 80% 60% 40% 20% 0% Indonesia (2000-2010) India (2001-2011) China (2000-2010) Source: Derived from figures presented in Wai-Poi et al. (2018), World Bank – DRC (2014) and Pradhan (2013) for Indonesia, China and India respectively 24
Half of the urban population currently lives in metropolitan areas Metropolitan areas can span multiple districts (‘multi - district’ metro) Urban periphery Non-metro composed of a core and periphery urban areas …or consist of a single district (‘single district metro’) Core Single Non-metro District rural areas Metros Rural periphery Source: World Bank 25
Better economic opportunities in metros helped many escape poverty and join the middle class… Share of population that is poor or vulnerable, percent Breakdown of economic class by urban classification, percent 2001 2017 70 Non-metro rural metro 60 50 Non-metro urban 40 Periphery rural 30 20 Periphery urban 10 0 Single-district metro Core metro 0% 50% 100% Middle class Aspiring middle class Vulnerable Poor Source: Lain (2018) using Susenas data from March 2016
Inequality between places declined, but disparities remain large… Consumption gap with DKI Jakarta, percent Share of households deprived in access to safe drinking water, percent 0.2 1993 70 2015 0.1 60 0.0 50 40 -0.1 30 -0.2 20 -0.3 10 -0.4 0 2002 2016 Jakarta core Jakarta periphery Other metro core Other urban periphery Single-district metro Non-metro urban Non-metro rural Rural periphery Source: Tiwari and Sadiq (2018); welfare gaps are calculated using differences in welfare ratios which Source: World Bank staff calculations using Susenas (2002, 2014, 2016) and PODES (2003, 2014) 27 represent the household’s expenditure to the contemporaneous poverty line in the region of residence data, based on Lain (2018)
Inequality within places has increased, accounting for nearly 80 percent of all inequality Total inequality, decomposed within and between districts, percent 100% 80% 60% 40% 78.1 71.2 20% 0% 2001 2017 Within Between Source: Tiwari and Sadiq (2018) 28
Recommend
More recommend
