Indonesia Economic Quarterly: December 2012 Policies in focus

Transcription

1 Indonesia Economic Quarterly: December 212 Policies in focus Ndiame Diop Lead Economist & Economic Advisor, Indonesia World Bank December 18, 212 World Bank and The Habibie Center Joint Launch Event Intercontinental Hotel, Jakarta

2 Outline Policies in focus Global growth remains weak and the outlook is still uncertain Indonesia s economy has performed strongly so far, despite showing some strains Economic performance in 213 should be solid but will depend on policies: To respond quickly and effectively to any external shocks To support domestic investment and growth To ensure that the benefits of growth are shared 2

3 THE GLOBAL ECONOMY remains weak

4 Global economic conditions remain subdued growth in the US and China stabilized in Q3 but Japan and Europe contracted 12 1 Real GDP growth, percent f 213f Real GDP growth, percent Euro area US Japan China Indonesia Major Trading Partners Source: CEIC and World Bank -2 4

5 International financial market conditions have improved since mid-year helped by loose monetary policy in the US, Japan and Euro Area 15 Index (1 Nov 29=1) Emerging market equities (LHS) VIX index Developed market (LHS) VIX index (RHS) Jun-8 Dec-8 Jun-9 Dec-9 Jun-1 Dec-1 Jun-11 Dec-11 Jun-12 Dec-12 Source: CBOE, MSCI 5

6 Commodity prices remain under pressure Since mid-211, with rubber, coal and palm oil seeing marked declines Coal Natural gas Palm oil Rubber Copper Crude oil 28 Index Nov 27=1 Index Nov 27= Nov-7 Nov-8 Nov-9 Nov-1 Nov-11 Nov-12 Note: Australian coal, World Bank global natural gas index, Malaysia palm oil, Singapore-traded rubber, Londontraded copper, Brent crude; Source: World Bank and staff calculations 6

7 Although commodity prices more broadly remain high Price levels in nominal USD terms are still elevated on a longer view International USD commodity prices Index Jan 2 = 1 Index Jan 2 = 1 Indonesia's Major Export Commodities Energy Food 1 1 Metals and Minerals Nov- Nov-2 Nov-4 Nov-6 Nov-8 Nov-1 Nov-12 Note: Price index of Indonesia s Major Export Commodities is weighted by export shares of Coal, Gas, Palm Oil, Crude Oil, Copper and Rubber, which represent 42% of Indonesia's exports Source: World Bank and CEIC 2 7

8 THE INDONESIAN ECONOMY was a solid performer in 212 but is showing some strains 8

9 Economic growth has been supported by strong domestic demand particularly private consumption and investment Year on year GDP contributions Private cons. Gov cons. Investment 1 Percent Net Exports Discrepancy GDP Percent Sep-9 Jun-1 Mar-11 Dec-11 Sep-12-4 Source: BPS via CEIC and World Bank 9

10 However, stock levels appear to have been building National accounts data show an unusual degree of inventory accumulation 12 Percent of GDP Percent of GDP quarter sum of change in stocks (RHS) 1 Change in stocks (LHS) -4-1 Sep-2 Sep-4 Sep-6 Sep-8 Sep-1 Sep-12 Source: BPS and World Bank staff calculations 1

11 Nominal public revenue growth has slowed with VAT revenue growth still robust but non-tax revenue growth declining Nominal growth in public revenues Total, Tax Revenue (TR), and Non-Tax Revenue (NTR) 4 TR-Income (non oil & gas) TR-VAT TR-Others NTR-Non oil&gas Total Percent TR-Income oil & gas TR-Trade NTR-Oil&gas NTR-Others Percent * -2 Note: *212 data are October to October. Source: MoF and World Bank staff calculations 11

12 A trade shock has erased the trade surplus Exports contracted in 212 through October, while import growth continued 8 Percent Trade balance (RHS) Export growth Import growth USD billion * -4 Note: * 212 is comparison between January October sum and the same period in 211. Source: BPS 12

13 Overall balance of payments flows returned to a small surplus in Q3 but the basic balance remains negative due to the current account deficit Net direct investment Net portfolio Net other capital Current account Overall balance Basic balance USD billion USD billion Sep-9 Sep-1 Sep-11 Sep-12 Source: BI 13

14 Our baseline projection continues to be for solid growth in 213 Thanks to still-solid domestic demand and a slight external growth recovery Real GDP growth (percent) CPI inflation (percent)* Budget balance (percent of GDP)** Major trading partner growth (percent) Notes: * CPI inflation is Q4 on Q4. World Bank projections except for **Budget balance, which is Government revised Budget (212) and approved Budget (213) 14

15 But there are external risks to the outlook and these are mostly to the downside Euro Area: ECB action has reduced financial crisis risk but not eliminated risk of renewed intensification of sovereign funding and banking sector challenges US fiscal cliff : World Bank assumes 1 percent fiscal drag for the US in but worst case could shave 4 to 5 percent off US GDP in 213 China: World Bank (October 212) projects 7.7 percent growth in 212 and 8.1 percent in 213 Risk of further slowdown Additional uncertainty: Impact of renewed global monetary easing on portfolio flows and commodity prices 15

16 Projections assume that strong investment growth will continue but there is no room for complacency on this given commodity prices and exports 9 Percent Percent 18 6 Investment (RHS) Exports -3 Indonesia commodity export price basket Nov-4 Nov-6 Nov-8 Nov-1 Nov-12-6 Note: Price index of Indonesia s Major Export Commodities is weighted by export shares of Coal, Gas, Palm Oil, Crude Oil, Copper and Rubber which represent 42% of Indonesia's exports 16 Source: World Bank and CEIC

17 FDI has held up well and maintaining it will be crucial for external financing and for investment growth 8 USD billion Primary Sector Secondary Sector USD billion 8 6 Tertiary Sector Total Mining Sep-9 Sep-1 Sep-11 Sep-12 Source: BKPM 17

18 POLICIES WILL BE IN FOCUS in 213 and will need to guard against the multiple risks to growth 1 8

19 Priority areas for policy to maintain growth in 213 emphasizing clarity, inclusiveness and quality Regulatory Policies: Reducing further uncertainties in business and investment regulations will help investment and support growth Labor Policies: A more comprehensive approach to balancing the interests of all stakeholders in the labor market Public Spending: Improving the quality of spending across functional and geographical areas 19

20 Labor market policies Minimum wage levels in 213 may be a concern and the process could be improved 3 USD Minimum wages USD 3 25 Malaysia Philippines China Indonesia Thailand Vietnam Source: World Bank Doing Business, 213, and press and regulations for 213 Note: Indonesia minimum wages based on DKI Jakarta (assuming USD exchange rate in 213 is IDR 9,5); other countries based on the minimum wage in major cities or the capital region. These wages are not adjusted for productivity differences across countries 2

21 Improving spending quality is a key policy priority, across functions Strong increase in capital spending is positive but subsidy spending is a challenge Outcome 212 WB Projection 213 Budget IDR Trillion IDR Trillion Personnel Material Capital Social Subsidy Source: MoF and World Bank staff calculations 21

22 and improving spending results across space is also a challenge The geographical dimension (see VIC results on service delivery across Indonesia) Composite Index of Education Supply Readiness Notes: Index varies from to 1 with higher value indicating higher supply readiness Source: PODES (Potensi Desa) 211 and the Village Infrastructure Census and Report 22

23 Indonesia s policy choices are critical in maintaining economic progress Summary To recap: Indonesia s policies will be in focus in 213 Indonesia has already equipped itself with sound crisis responses mechanisms but further efforts may be needed In light of the rapid transformation of the demand side of the economy, facilitating the supply response will be key Investment remains strong but the tailwinds are weakening Keeping investment growth going requires: further accelerating investments by reducing regulatory uncertainties for business and enhancing the policy framework finding an inclusive and comprehensive approach to labor market policies and enhancing the quality of public spending to boosting public investment in growth-enhancing areas and social protection. 23

24 Thank you Indonesia Economic Quarterly December 212 Policies in focus also includes special topics on: Minimum wages Jakarta s flood risks and mitigation efforts Indonesia s natural disaster reconstruction experience Results of the recent Village Infrastructure Census