The Current Outline of Indonesian Economy

Transcription

1 0 September 2014 Vaasa, 25 September 2014 The Current Outline of Indonesian Economy Rizal A. Djaafara Chief Representative Bank Indonesia - London

2 Q Q Economic Growth and Fundamentals Compare Favorably to Peers 1 Indonesia continues to perform admirably versus its closest peers Indonesian GDP growth continued to remain robust with a quarterly yoy growth above 5.0% for the fourth consecutive year the most stable growth amongst its BRIC peers Indonesia is decoupling from the Fragile Five economies as the Current Account deficit continues to narrow to a more sustainable level Indonesia s robust macroeconomic fundamentals have resulted in it out-performing its peers as it becomes the third fastest growing G-20 economy in Q The economy continues to diversify from the oil & gas sector G-20 Group of Countries, First Quarter 2014 Real GDP Growth * Refers to Q ,0% 6,0% 4,0% 2,0% 0,0% (2,0%) Real GDP (yoy Growth) Source: OECD Strong and Consistent Real GDP Growth 4,8% 5,0% 5,7% 5,5% 6,3% 6,0% 4,6% 5,0% 5,7% 5,5% 5,3% 3,6% 4,6% (1.1)% 6,2% 6,5% 6,2% 5,8% 5,2% 5,1% 4.8% 4.1% 3.7% 3,6% Comparison with BRICs Countries (GDP Growth) (% yoy) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Source: Bloomberg 8,0% 6,0% 4,0% 2,0% 0,0% (2,0%) (4,0%) (6,0%) 3,6% Brazil Rusia India China Indonesia Share of GDP from Oil & Gas is Decreasing 4,9% 5,2% (5,3%) 5,7% 6,0% 4,5% 4,8% 5,0% (1,3%) 6,6% (2,9%) (3,5%) (3,1%) 6,1% 5,7% 5,5% 6,9% 6,5% 6,3% 6,0% 5,0% 4,6% (1,3%) (0,8%) 0,2% (0,5%) 6,6% 7,0% 6,9% 6,2% 6,5% 6,3% 0,8% (1,0%) 6,3% 5,8% (3,4%) (2,8%) Indonesia Peers (Baa1 - Baa3) Source: Ministry of Finance, Bank Indonesia, BPS, Moody s Peers include Brazil, Colombia, India, Peru, Philippines, South Africa, Turkey, and Vietnam Annual Growth in GDP Annual Growth in Oil & Gas GDP Source: Ministry of Finance Annual Growth in Non-Oil & Gas GDP

3 Indonesia: - Challenging time 2 Weak Global growth Uncertainty over US Monetary Policy Slow Down in Chinese Economy and other Emerging Economies

4 2013 Coordinated Policy Response 3 Structural Reforms Continuing reform on energy subsidy: Fuel price adjustment, Electricity tariff increase and mandatory use of Biodiesel Enacting land acquisition bill Improving imports system from tariff to quota system Introducing more integrated infrastructure development (MP3EI) Streamlining permit process and improving single window service for investment Debottlenecking problems in strategic investment projects such as power plant, oil, gas, mineral mining, and infrastructure projects Simplifying regulations for small and medium enterprise Requiring minimum wage to be based on a combination of Minimum living cost, Productivity and Economic condition Pre-emptive Monetary Policy Mix Boldly increasing the policy rate Allowing more flexibility on the movement of rupiah exchange rate in line with its fundamentals Launching macro-prudential measures Deepening the financial market Actively communicating the policies with the stakeholders Strengthening co-operation in regional financial safety net Fiscal Policy Providing additional budget for social protection: Conditional and Unconditional Cash Transfer, Poor Students Aid, and Additional allocation of rice for the poor. Providing tax breaks for specific industries (labor intensive & export oriented industries) to prevent layoff Imposing additional tax for luxurious and branded products. Relaxing import tax for import goods to be used for exports

5 A Pivotal Year in Politics 4 After holding 2 periods of direct elections, Indonesia extended its successful election for the national parliament and local assemblies, as well as the nation s next president, without negative impacts on the economy and violent upheavals. (Million Votes) Million Votes (58%) Red & White Coalition Vote Count Vote Count 0 Golkar Gerindra Demokrat PAN PKS PPP PDI-P PKB Nasdem Hanura PBB PKPI Provinces Provinces Vote Differences Jokowi is the first Indonesian leader who has roots in neither the military nor an established family. Jokowi offered the people to vote on the 34 new cabinet candidates through social media, with the proposal dubbed People s Choice for an Alternative Candidates. Prabowo s refusal to accept defeat and his legal challenge on Jokowi caused a month of uncertainty for voters and investors. Jokowi's was voted World's Third Best City Mayor in Jokowi's successful track record as governor of the capital Jakarta and as mayor of Surakarta in central Java has shown his willingness to see through real improvements on the ground. He is expected to replicate his local government's achievements at the national level. Nevertheless, the legal process was held sound & safe, and did not spur unnecessary jittery.

6 Favorable Market Reaction 5 Jokowi s victory has sparked new optimism to the people and was also hailed as a big boost to Indonesia s democracy. The euphoria following the election result were also reflected in market performances. Optimism about the prospects of Widodo selection success triggered a favorable reaction in the Indonesian markets: Following the announcement, Jakarta Composite Index rose by 35 points to at the opening day, reached its highest at and closed at Stocks increased by one percent a day after the conclusion of the election the biggest advance since the beginning of July Rupiah climbed by one percent to a two-month high, trading at 11,555 per U.S. dollar on July 23, 2014.

7 Conducive Environment Underpinning Growth Fundamentals 6 The fundamental long term growth drivers for Indonesia haven t changed equipped with abundant natural resources, a young and technically trained workforce and a large consumer base with a fast growing spending power The largest economy in South-East Asia A large, culturally diverse, young and vibrant workforce Large consumer base with fast growing spending power Increase in infrastructure investment to improve overall efficiency According to McKinsey, Indonesia is projected to be the 7 th largest economy in the world by % average real GDP growth over the period Exports are 23.7% of GDP for the year of 2013, one of the lowest in Asia, creating low volatility in GDP Foreign direct investment grew at an average rate of 21.1% from (USD tn) 4 th most populous country in the world 66.6% of the population is of working age (1) and 68.5% were 39 years and younger as of 2012 Working population projected to grow at 0.7% compared to 0.5% CAGR for total population from A high literacy rate of more than 90% ~7mn people are expected to join the middle class each year Consumer expenditure has grown at a 12.3% CAGR from and is expected to continue at a 9.1% rate from Disposable incomes are projected to grow at 12.1% from According to McKinsey, mn people will join the consuming class by 2030 Announced an expansion of fiscal spending on infrastructure by 19.2% CAGR from 2012 to 2014 Infrastructure investments are spread over Indonesia s 6 economic corridors Encompass various sectors such as seaports, roads, railways, airports, energy and many others Government continues to align regional and national regulations to attract further private sector investors Nominal GDP Strong Growth to Continue Demographic Dividend Young Population Middle Class Households Annual Budgeted Capital Spending 0,43 0,88 1,14 Male Female ( 000) 21,980 39,340 60,740 (IDR tn) 145,1 172,4 185, E E Realized 2014 Budget Source: KPMG, Ernst and Young, Jefferies Economist Intelligence Unit, Ministry of Finance, BPS and CIA World Factbook (1) Working age defined as being between years old

8 Strong Investment Underpinned by Competitiveness and Stability 7 Investment Realization from Jan-June 2014 reached Rp222.8 trillion, an increase around 15.6% from that in the same period of The value of investment is based on investment realization report by the DDI and FDI companies (Oil and Gas, Banking, Non-Bank Financial Institution, Insurance, Leasing and SMEs are excluded). Foreign Direct Investment in leading sectors are: Mining (US$ 2.7 billion); Food Industry (US$ 2.1 billion); Transportation Warehouse and Telecommunication (US$ 1.7 billion); Food Crops & Plantation (US$ 1.1 billion); and Transport Equipment and Other Transport Industry (US$ 1.0 billion). Investment Realization Progress as of Q FDI by Sectors (Millions USD) Source: BKPM *)Revised Investment Target 2014 Strategic Planning BKPM **) Against target 2014 Source: BKPM

9 BUILDING BLOCKS: SEIZING INDONESIA S POTENTIAL

10 Globally Competitive and a Top Investment Destination 9 Indonesia s stage of development is categorized as efficiency-driven with a strong and well balanced performance across all 12 pillars of competitiveness Indonesia is in the Top 40 of the Global Competitiveness Index ( GCI ) Rank (1) Country 2008 (2) 2013 (2) Institutions Infrastructure Macroeconomic Environtment Health and primary education Higher education and training Goods market efficiency Labor market efficiency Financial market development Technological readiness Market size Business sophistication Innovation 1 Spain Thailand Indonesia Turkey Italy South Africa Mexico Brazil Philippines Source: Global Competitiveness Index , WEF (1) Countries with sovereign ratings in the Eaa1-Baa1 category and population larger than 40 million (2) Rank among 148 countries Rank JBIC: Indonesia is the #1 Promising Country/Region for Business Development Over the Medium Term (Next 3 Years) Country / Region No. of Companies (1) (%) Percentage Share 3 1 Indonesia India Thailand China Vietnam Brazil Mexico Myanmar Russia USA Source: Japan Bank for International Cooperation ( JBIC ) FY2013 Survey Report on Overseas Business Operations of Japanese Manufacturing Companies (1) Total number of companies that responded was 488 Indonesi a Malaysia Thailand Vietnam The Economist: Indonesia is the #3 Investment Destination in Asia in 2013 China India 38,6 37,7 43,0 54,1 53,5 Source: The Economist Asia Economic Outlook Survey ,8 33,9 32,8 38,5 27,1 32,0 2,4 3,3 Increase their level of investment Still in the market, but will not invest more 0,8 20,6 2,2 25,2 26,2 18,6 16,3 0,75,0 13,9

11 Domestic Economic Adjustment Continues 10 Economic growth in Q keeps moderating to 5.12% (yoy), lower than 5.22% (yoy) from previous quarter, mainly as a result of weaker export performance of natural resource based commodities. In domestic demand, the economic slowdown is primarily attributable to a contraction in government spending due to the postponement of social assistance disbursements, coupled with sluggish non-construction investment activity. Notwithstanding, dogged household consumption in Q bolstered economic growth due to activities associated with the presidential election as well as maintained public purchasing power in line with lower inflation. The domestic economy is expected to expand in line with the previous BI projection of % in 2014, with a bias towards the lower end of the range. Economic Growth - Demand Side S e c t o r I II III IV I II Private Consumption Government Consumption (-0.7) Gross Fixed Capital Formation Exports of Goods and Services (-0.4) (-1.0) Imports of Goods and Services (-0.6) 1.2 (-0.7) (-5.0) GDP Economic Growth - Supply Side S e c t o r I II III IV I II Agriculture Mining and Quarrying (-0.6) (-0.3) (-0.2) Manufacturing Electricity, Gas, and Water Supply Construction Trade, Hotels, and Restaurant Transportation and Communication Financial, Real Estate, and Business Services GDP

12 Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Current Account Deficit Moving to Sustainable Level 11 The Republic believes current pressure on the trade balance is temporary and expects it to rebound in the future The trend of improvement in the Current Account continued in Q Although posting a higher deficit compared to the previous quarter, the Q2/2014 current account performed better than that in the same period last year Likewise, portfolio investment continues to trend positively, underscored by improvements in economic fundamentals that attracted foreign investors. The capital and financial account charted a US$14.5 billion surplus in Q2/ (1) (2) (3) Source: BPS (3 000) (6 000) (9 000) (Billion US$) (US$mm) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Direct Investment (Net FDI) Net Other Investment Trade Balance And Rebound in Financial Account Capital Flows Net Portfolio Investment Financial Account (5 000) (10 000) (15 000) Source: Bank Indonesia Gradual Recovery of the Current Account Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q Goods Services Income Current Transfers Current Account Long Run Overall Healthy BoP (2 000) (4 000) (6 000) (8 000) (10 000) (12 000) Source: Bank Indonesia Source: Bank Indonesia

13 Strong Capital Inflows Accompanied Solid Market Performance 12 Capital inflows continued to domestic financial assets, supported by well-maintained investor perception. Stock market strengthened in the midst of a slightly weakening bond market. Rising JCI & Net Foreign Buy/Sell Slightly Weakening Government Bond Yield The rupiah depreciated in August 2014, but volatility remained well maintained. The depreciation is influenced by external factors stemmed from geopolitical dynamics and domestic factors related to the wait-and-see attitude of investors concerning government future policies Less Volatile Rupiah Exchange Rate Comfortable International Reserves Relatively stable exchange rate, accompanied by strong inflows, reflected in the increasing trend of FX reserves. (US$111.2 Billion or equal to 6.3 of imports and official debt repayment)

14 Peru Indonesia Colombia Philippine s Brazil India South Africa Turkey Vietnam Q Q 2014 (1) 46,3% 39,0% 35,1% 33,0% 28,3% 26,1% 24,3% 24,0% 26,1% 25,9% 25,6% 67,8% 60,5% 55,8% 80,2% 95,1% Rev. Budget Positive Track Record of Debt Reduction in a Moderately Leveraged Economy 13 Consistent fiscal conservatism is a hallmark of Indonesia s macroeconomic management A combination of moderate leverage and consistent debt reduction provides more fiscal headroom to respond to economic shocks As a result, Indonesia has been able to maintain a lower fiscal deficit versus similar and higher rated peers (% GDP) Avg: (1.3%) (1,3%) (0,1%) Source: Ministry of Finance 2013 Domestic Credit (% GDP) Indonesia has Maintained a Sustainable Fiscal Deficit... 31,3 40,1 (1,6%) 45,4 (0,7%) 51,9 56,1 (1,1%) (1,9%) (2.3%) A Strong and Moderately Leveraged Economy 73,9 76,5 79,0 (2,4%) 104,9 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% And a Consistent Path of Govt. Debt Reduction Govt Debt to GDP Source: Moody s Statistical Handbook (1) 2012 domestic credit as a % of GDP data not available for Vietnam Source: Ministry of Finance, Moody s

15 Jan May Sep Jan May Sep Jan May Sep Jan May Sep Jan May Sep Jan May July Downward Trend on Inflation Continued 14 Strong coordination between Bank Indonesia and the Government through monetary and fiscal policies as well as real sector policies resulted in continued downward inflation trend Downward trend on inflation Stable core inflation was also supported by moderating domestic demand and well-anchored inflation expectation 20% Y-o-Y 15% 10% 5% 0% (5)% (10)% Aug 14 CPI 3.99% Administered Price 5.49% Volatile Food 1.06% Core 4.47% CPI (%, yoy) Core (%, yoy) Volatile Food (%, yoy) Administered (%, yoy) Source: Bank Indonesia Monetary Policy Review Source: BI Quarterly Consensus Forecast, Dec 2013 and September 2014 Inflation remained fundamentally under control as reflected in core inflation which has been fairly stable in the last 3 years and remained at approximately below 5%. Headline inflation in August 2014 was 0.47% (mtm) or 3.99% (yoy) vs. 0.93% (mtm) or 4.53% (yoy) July The downward trend was a result of correction in food prices, especially rice and miscellaneous horticultural commodities in line with abundant domestic supply linked to the harvest season and continuous efforts from the Government to manage food distribution. With easing pressure from subsidized fuel price adjustment, inflationary pressure are coming from expenditure side due to holiday season.

16 South Africa Indonesia India Peru Philippines Colombia Turkey Brazil tammi.12 helmi.12 maalis.12 huhti.12 touko.12 kesä.12 heinä.12 elo.12 syys.12 loka.12 marras.12 joulu.12 tammi.13 helmi.13 maalis.13 huhti.13 touko.13 kesä.13 heinä.13 elo.13 syys.13 loka.13 marras.13 joulu.13 tammi.14 helmi.14 maalis.14 huhti.14 touko.14 kesä.14 heinä.14 A Sound Financial Sector 15 Post the Asian financial crisis in 1997, Indonesia has built a stronger banking system The rapid loan growth has decelerated to a more stable and sustainable level Resilient Banking Sector Improved banking regulations and supervision are the direct result of lessons learned Consequently, financial sector vulnerabilities that were exposed in past financial crises have been addressed Today, the financial sector is characterized by a healthy funding base and low credit risk, ensuring that the sector is less susceptible to external shocks Source: Bank Indonesia Banking Statistics 2,5 2,0 1,5 1,0 0,5 0,0 GDP Growth Not Driven By Excess Liquidity 2,0 Average nominal GDP growth / M2 Growth ( ) 0,9 1,0 0,9 0,8 0,8 0,7 0,7 Source: Bank Indonesia Banking Statistics Healthy LDR Balancing Growth And Liquidity Loan-to-Deposit Ratio (%) Source: Moody s Statistical Handbook, May 2014 Source: Bank Indonesia Banking Statistics

17 Masterplan for Acceleration and Expansion of Indonesia Economic Development (MP3EI) 16 Sumatera Corridor Central of Production and Manufacture of National Natural and Energy Resources" Kalimantan Corridor Central of Production and Manufacture of National Mining and Energy Resources" Sulawesi Corridor ' Central of Production and Manufacture of National Agriculture, Plantation, Fishery, and Nickel Mining'' Papua Maluku Corridor Central of Development of National Food, Fishery, Energy, and Mining Java Corridor Supporting the National Service and Industry" Source: Coordinating Ministry for Economic Affairs, 2011 Bali - Nusa Tenggara Corridor ' Gate of Tourism and Supporting Provider of National Food and Agriculture'' MP3EI initiatives strategic : Encourage a large scale investment realization in 22 main economic activities Synchronization of national action plan to revitalize the real sector performance The development of center of excellence in 6 (six) economic corridors Main strategy of MP3EI: Economic potential development through economic corridor Strengthening the national connectivity Strengthening national human resources capability and science and technology

18 MACROECONOMIC AND MONETARY POLICY DIRECTION

19 Global Risks 18 Global Growth Spill-Over and Spill-Back China s Slower Economic Growth Uncertainty of Fed s Policy Normalization Challenges Global downside scenario (covering uneven pace of AE economic growth recovery, Slower economic growth in EMs, & financial turmoil) exposed Indonesia to the risk of a slower economic growth >3,75% against WEO IMF baseline. Spill over from advance market to emerging market may occur at least through 4 path, as follow: trade, commodity prices, global financial system, and neighborhood effect. Growth in China s property sector is still weak, potentially affecting efforts to rebalance the economy. Risks stemming from the property sector may affect the financial system (shadow banking) in addition to growth (investment). Other risks may also arise from economic growth disparity among region in China. Although structural problems remain as highlighted by Yellen in 16 July 2014, there is a possibility FFR will increase earlier if the recovery in the employment sector occured sooner than expected. This is reinforced by Yellen statement in FOMC July which is slightly hawkish, and the indication of the end of tapering in Oct 2014 according to FOMC minutes in June (released 9 July) Emerging Markets Vulnerability Indonesian economic condition improves supported by lower inflationary pressure, improving international reserves, and worsening condition of other EMs. Nonetheless, the potential of an economic growth slow down in other EM countries may increase Indonesian s vulnerability to global risk aversion. Higher Inflationary Pressure Up side risk in the 2 nd half-2014 potentially arise from an increase in the upper tariff for air transportation. In addition, risk may also arise from food price related to the possibility of lack of supply of raskin at the end of the year and the increase of El Nino intensity to strong level. The continued reduction in the supply of subsidized fuel to the gas station to keep the quota in 2014.

20 Domestic Global Medium Term Challenges and Fiscal Policies 19 The Government of Indonesia is well aware of the global and domestic challenges, these concerns are addressed in the future policy Challenges Main Issues Future Policy Global Growth Uncertainties Global Liquidity Volatility in Commodity Prices ASEAN Economic Community Productivity & Competitiveness Infrastructure development Industry revitalization Human capital, Technology and Innovation Improvement Growth acceleration through Productivity, Capacity and Business Competitiveness improvements Manage economic stability and sustainability Price Stabilization Food &Energy Sustainability Domestic economy as a part of global value chain Inequality and Welfare Improvement Improve people welfare and reduce inequality Financial Market Stability External Balance Inclusive growth Social Security Provide sustainable Fiscal (Budget) Condition Growth Acceleration Poverty and Inequality Fiscal Sustainability Sustainability Food and energy sustainability Exchange Rate Fiscal Sustainability Economic Growth of 5.5% - 6.0% Unemployment Rate 5.5%-5.7% Poverty Rate 9%-10%

21 Monetary Policy Stance 20 On Sept 11, 2014, BI decided to hold the BI Rate at 7.50%, with Lending Facility rate and Deposit Facility rate each kept at 7.50% and 5.75%, respectively. The policy is consistent with ongoing efforts to guide inflation back towards its target corridor of 4.5±1% in 2014 and 4.0±1% in 2015, as well as reduce the current account deficit to a more sustainable level. Bank Indonesia will continue to strengthen the monetary and macroprudential policy mix as well as implement structural policies to boost domestic economy while also managing the external debt, in particular corporate external debt. BI will also increase coordination efforts with the Government in terms of inflation control and the current account deficit order to shore up the economic rebalancing process.

22 Macroeconomic Projections: More Balanced Growth Prospect in Although global economy is still projected to have down side risks, Indonesia economic stability in 2014 would be maintained, supported by moderate economic growth, well anchored inflation within its target, as well as a healthier current account deficit Projection World GDP Advanced Countries United States Euro Zone Japan Emerging and Developing Economies China India Other Emerging Market Countries

23 22 Thank You BUILDING ON STRONGER FOUNDATIONS September 2014