Indonesia: Building on Resilience and Prospering Amid Global Economic Uncertainty

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1 Indonesia: Building on Resilience and Prospering Amid Global Economic Uncertainty 2016 Article IV Consultation Report on Indonesia John G. Nelmes IMF Senior Resident Representative for Indonesia Academic Roundtable Discussion, Jakarta, April 2017

2 Global Context Indonesia s Economy Key Policy Issues

3 Global Context

4 Uncertain and shifting global economic landscape

5 Multiple forces shaping the global outlook AEs EMs and DEs Forces Overlaid on Changing policy mix Remaining post-crisis repair Fraying globalization consensus Demographic headwinds Tepid productivity growth Rebalancing in China Tightening financial conditions Idiosyncratic shocks Demographic trends Weakening productivity growth 5

6 An uneven pick up in global growth Global growth: uneven pick up Commodity prices have increased Economic Growth In percent Commodity Price Index, 2005= World AEs All commodities Energy Metal 6 EMs and DEs Source: WEO January Update M1 2012M1 2014M1 2016M1 Source: IMF Commodity Price Indices 6

7 Growth Projections (percent change from a year earlier) World U.S. Euro Area Asia China Japan India SE Asia Change Change Change Note: Change is relative to the World Economic Outlook October Catatan: Perubah Sources: IMF, World Economic Outlook January 2017 Update; and IMF, World Economic Outlook October Sumber: IMF, Wo 7

8 Global risks are two-sided, skewed to the downside U.S. dollar strength China s transition Stronger growth in US/China Risks EM Financial Volatility Protectionism Stagnation in AEs 8

9 How has Indonesia s economy fared? 9

10 Indonesia s Economy

11 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Indonesia s economy continues to perform well Commodity Share and Contribution to Real Growth (In percent, year-on-year, seasonally adjusted) 8 6 Commodities 1/ Noncommodities GDP growth Commodities (in percent of GDP, right scale) Emerging Market Countries' Growth in 2016 (Percentage) EMs Sources: Haver Analytics; and IMF staff estimates. 1/ Includes agriculture, mining and quarrying, manufacturing coal, petroleum and gas. Source: IMF Jan 2017 WEO Update Database 11

12 Low inflation Inflation Developments (In percentage points, yoy) 1 Headline Core Lower band Upper band 0 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Source: BPS, BI 12

13 A smaller current account deficit and rebounding trade Current Account Balance (In percent of GDP) Indonesia: Export and Import Growth (yoy, in percent) Current account balance Merchandise trade balance Services and Net Income Export (3mma yoy) Import (3mma yoy) Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Source: BI -30 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Source: BPS 13

14 Financial markets were buoyed in 2016 before partly reversing following the U.S. election Equity and Government Bond Inflow (In millions of U.S. dollar, cumulative since Jan 2016) 14,000 12,000 10,000 8,000 6,000 4,000 Equity Local currency government bonds Total net inflow U.S. election Exchange Rate and Government Bond Yield Movements U.S election , year (in percent) Exchange rate (Rp/US$, right scale) ,000 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Sources: Bloomberg L.P.; and IMF staff estimates. 5.5 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Source: Bloomberg L.P

15 IMF Projections Outlook Risks GDP Growth (%) Inflation (%) Current Account (% of GDP) Source: IMF, 2016 Article IV Consultation Upside Stronger global growth Higher commodity prices Downside Uncertainties around U.S. policies Protectionism More volatile global financial conditions and higher interest rates Spillovers from a significant China slowdown Tax revenue shortfalls 15

16 Key Policy Issues

17 Key Ingredients of Proactive Policy Mix Fiscal Policy Monetary Policy Financial and Corporate Sector Structural Reforms 17

18 Fiscal Policy Growth-Enhancing Revenue and Expenditure Strategy

19 Near-term strength and medium-term challenges 19

20 Fiscal Policy: A Stronger Near-term Framework Fiscal Developments (In percent of GDP) 4 2 Overall balance Oil and gas revenue Energy subsidies (right scale) Est. Sources: Indonesian authorities; and IMF staff estimates and projections Proj. 4 20

21 Low revenues constrain spending General Government Total Revenue (In Percent of GDP) General Government Total Expenditure (In percent of GDP) Personnel Subsidies Capital spending Social spending Others Est Est. Sources: Indonesian authorities; and IMF staff estimates and projections. Sources: Indonesian authorities; and IMF staff estimates and projections. 21

22 Revenues are low compared to neighbors General Government Tax-to-GDP Ratio, 2015 (In percent) Vietnam China Thailand India Philippines Malaysia Indonesia Sources: IMF, WEO Database; and Authority data. 22

23 Higher revenues will finance important spending Illustrative Growth-Enhancing Fiscal Strategy General government, In percent of GDP Current Capital Expenditure Revenue Source: World Bank; Indonesian authorities; and IMF staff estimates. 23

24 Higher revenue possible with administration reform and removal of exemptions 24

25 Singapore Brunei Cambodia Thailand Russia Vietnam Korea Lao PDR Indonesia Malaysia Myanmar China Japan South Africa Philippines India Brazil Room to increase the VAT rate Corporate Income Tax Statutory Rate (In percent) 40 Value-Added Tax Statutory Rate (In percent) BRICS average: OECD average: OECD average: BRICS average: Sources: KPMG; IBFD; IEO; IMF staff estimates. Singapore Thailand Japan Indonesia Lao PDR Sources: KPMG; IBFD; IEO; IMF staff estimates. Cambodia Vietnam Korea Philippines South Africa China Russia Brazil 25

26 Myanmar Lao PDR Indonesia Philippines Cambodia Singapore Malaysia Brunei Vietnam Thailand Cambodia Lao PDR Singapore Philippines Indonesia Brunei Thailand Malaysia Vietnam Higher health and education spending will support higher inclusive growth Public Health Expenditure (In percent of GDP) 5 Public Education Expenditure (In percent of GDP) 7 4 EM Asia: EM Asia: Sources: World Economic Outlook; World Bank; Indonesian authorities; and IMF staff estimates. Sources: World Economic Outlook; World Bank; Indonesian authorities; and IMF staff estimates. 26

27 Indonesia Thailand Philippines Singapore Malaysia Vietnam Cambodia Myanmar Brunei Lao PDR Higher capital spending to improve productivity Public Capital Investment (In percent of GDP) EM Asia: Sources: World Economic Outlook; World Bank; Indonesian authorities; and IMF staff estimates. 27

28 Key Tax Reforms Tax Policy Tax Administration Excise tax rates on vehicle and tobacco, environmental (fuel) tax CIT: reduce exemptions and unify rates PIT: lower threshold for top rate, capitalize on amnesty declarations Remove ambiguities and inconsistencies in the tax laws Real property: replace transaction tax with real property tax VAT: Gradually raise rate, remove exemptions, simplify administration Simplify VAT filing and refund requirements Tax administration reforms Enhance risk management, extend audit coverage, and use external taxpayer information 28

29 Key Expenditure Reforms 1. Raise investment spending Investment Efficiency 6. Reduce nonpriority spending Transfers 5. Enhance the capacity of local governments 2. Raise education spending and improve efficiency Education Social 4. Consolidate social assistance programs and conditional cash transfers 3. Universal health insurance coverage Health Growth-enhancing expenditure strategy. Higher expenditure in selected areas will support inclusive growth. 29

30 Monetary and Exchange Rate Policy Maintaining Stability

31 Taking aim at inflation 31

32 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Monetary Policy: Current stance is appropriate Monetary Policy and Interbank Rates (In percent) 9 8 Inflation Developments (In percentage points, yoy) 9 8 Headline Core Lower band Upper band Interest rate corridor O/N JIBOR BI 7-day reverse repo Deposit facility Lending facility Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Sources: CEIC Data Co., Ltd.; and IMF staff estimates. Source: BPS, BI 32

33 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Continue exchange-rate flexibility Foreign Exchange Rates 8,500 9,500 10,500 11,500 12,500 13,500 Commodity Price Index, 2005= All commodities Energy Metal 14,500 Onshore rupiah per US$ 15,500 Source: Bloomberg L.P M1 2014M1 2015M1 2016M1 2017M1 Source: IMF Commodity Price Indices 33

34 Ongoing monetary operations reforms welcome 7-day Reverse Repo Reverse Requirement Averaging Monetary Operations Reforms Remove Deposit and Lending Rate Cap 34

35 Financial and Corporate Sector Reinforcing the Stability Framework

36 How healthy? 36

37 Indonesia Thailand Poland Malaysia Brazil Turkey Philippines South Africa Mexico India Russia Indonesia Turkey Mexico South Africa Philippines Thailand Malaysia Brazil Poland India A sound and profitable banking sector Regulatory Capital to Risk-Weighted Assets (In percent) Return on Assets (In percent) Source: IMF, Financial Soundness Indicators database. Source: IMF, Financial Soundness Indicators database. 37

38 Non-performing loans have increased but from a low level Commercial Banks' Nonperforming Loans by Industry (In percent of total loans) 3.5 Agriculture and mining Construction and real estates 3.0 Services (incl. financial intermediaries) Others Manufacturing Retail and accomodations Households Restructured Loans (In trillions of Indonesian rupiah) Jan-11 Oct-11 Jul-12 Apr-13 Jan-14 Oct-14 Jul-15 Apr-16 Sources: CEIC Data Co. Ltd.; and IMF staff estimates. Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14 Source: IMF, Financial Soundness Indicators database. Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16 38

39 Corporate external borrowing has declined, but so has profitability Corporates: External Borrowing (In billions of U.S. dollar) External borrowing In percent of GDP (right scale) Q3 2016Q4 Sources: CEIC Data Co. Ltd.; and IMF staff estimates Corporates: Debt Service Capacity and Profitability (In percent) Return on assets, market capitalization Debt at risk (in percent to total debt, ICR<1) Q2 Sources: Bloomberg L.P.; and IMF staff estimates. 39

40 Good progress in important areas Close monitoring of macro-financial linkages FSCPM Law FSCPM law introduced, implementing regulations being drafted Capital Buffer Macrofinance Countercyclical capital buffer introduced FX Hedging Corporate FX hedging regulations implemented 40

41 Continue financial stability reforms On Banks Closely monitor banks soundness and liquidity conditions, while enhancing interagency coordination On FSCPM Law Make the FSCPM Law fully operational Revise BI, OJK and LPS laws to clarify mandates and responsibilities 41

42 Financial deepening: A government priority Domestic credit to private sector In percent of GDP China Thailand Malaysia Vietnam Brazil India Philippines Indonesia Mexico Source: World Bank Sources: IMF Staff Discussion Note 15/08; and IMF Staff estimates. 42

43 Structural Policy Boosting Private Investment

44 What is needed to increase long-term growth and equality? 44

45 Improving the business climate Indonesia: Ease of Doing Business Indicators 2017 (Change in Rank, points) Overall Starting a business Getting electricity Paying taxes Getting credit Trading across borders Registering property Enforcing contracts Protecting minority investors Resolving insolvency Construction permit Source: World Bank Rank Ease of Doing Business Rank 2017: Indonesia and Selected Regional Peers Rank Source: World Bank Singapore Malaysia Thailand Brunei China Viet Nam Indonesia Philippines India 45

46 Modernizing FDI regime 7 Inward FDI Average, In percent of GDP 0.5 FDI Regulatory Restrictiveness Index (1=closed; 0=open) Philippines Indonesia China India Thailand Malaysia Viet Nam Source: UNCTAD database, IMF World Economic Outlook 0.0 OECD - Average Source: OECD Brazil Malaysia India Indonesia China Philippines 46

47 Important for investment and manufacturing 47

48 Reforms to reduce inequality and diversify growth Gini Coefficient of Inequality: Higher is Less Equal Expand infrastructure Streamline regulations, increase coordination with local governments Pursue trade integration and open new sectors to investment Close labor skill gaps Sources: BPS 48

49 Summary of Recommendations Fiscal Policy Strengthen the medium-term fiscal framework through tax policy and administration reform. Improve the effectiveness and efficiency of public spending. Stand ready to deal with changes in a more volatile external environment, while maintaining exchange rate and bond yield flexibility. Monetary Policy Financial and Corporate Continue close monitoring of macro-financial vulnerabilities and actions to safeguard stability. Fully implement the FSCPM law and continue strengthening inter-agency coordination Continue improving the investment climate and expand infrastructure. Pursue trade integration and further modernize the FDI regime. Narrow the employment skills gap. Structural Reform 49

50 IMF/ World Bank Annual Meeting 2018 in Bali 50

51 Terima Kasih

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