Forecast for Indonesia

Transcription

1 Highlights Exit polls indicate that the main opposition party, the n Democratic Party of Struggle (PDI-P), won most support in this month s parliamentary elections. Even so, the PDI-P s estimated 19% share of the votes is not enough to secure a presidential nomination (which requires 2% of the votes or 2% of the seats). The party s presidential candidate, Jakarta governor Joko Widodo, may have to negotiate with other parties to form a coalition that supports him. A complex political system and high incidence of corruption mean the elections risk holding back economic progress this year. Financial markets have stabilised following bouts of overseas investor concern about emerging markets. A smaller current account deficit in Q4 helped, together with low government debt of just 2% of GDP. The IDR has recovered more than % against the US$ since the start of the year, and the stock market is up over 1%. We expect the IDR to remain around its current level for the rest of the year, supported by positive real interest rates, but there may still be some short-term instability as global markets remain quite volatile. In view of the stronger exchange rate and easing inflationary pressures, the central bank left rates on hold this month. Core inflation remains relatively low at 4.6%, and headline inflation should fall in July when last year s fuel price hike drops out of the comparison. We expect the policy interest rate to remain unchanged at 7.% for most of this year. The trade balance has improved steadily from Q4 onwards. We expect this to continue as demand from the US and Europe gradually picks up. But there are some risks from volatile commodity prices. The price of coal, s biggest export product, has fallen by more than 1% so far this year as demand from China has slowed. This has been partly offset by a 3% increase in the price of palm oil. We expect GDP growth to slow from.8% in 213 to.3% this year, reflecting the dampening effects of financial market volatility and uncertainty about the global economy. Stimulatory fiscal policy will help to buoy activity, but political uncertainty is also a concern. And if reforms are delayed, this may reduce medium-term growth prospects. Forecast for (Annual percentage changes unless specified) Domestic Demand Private Consumption Fixed Investment Stockbuilding (% of GDP) Government Consumption Exports of Goods and Services Imports of Goods and Services GDP Manufacturing Output Consumer Prices Current Balance (% of GDP) Government Budget (% of GDP) Current Account ($bn) Trade Balance ($bn) Short-Term Interest Rate (%) Exchange Rate (Rupiah per US$)

2 Forecast Overview Solid activity despite political uncertainty Parliamentary elections held earlier this month were inconclusive. Exit polls suggested that three parties won at least 1% of the vote, but no party achieved the 2% needed to nominate a candidate for the presidential election in July. This means the new government will most likely be another coalition, which may slow the decision-making process and limit the scope for reform. Despite these political uncertainties, domestic activity has maintained reasonable momentum. Retail sales rose 23.4% on the year in Q1. Lower inflation boosted consumer confidence, which reached its highest level in March since 212. Strong consumer spending should help to drive robust growth this year (private consumption accounted for almost 6% of GDP in 213). helped by greater financial market stability Financial markets have picked up across emerging markets this year, rising particularly strongly in in February as investors were encouraged by the narrowing of the current account deficit. The trade balance has been in surplus for four of the past five months (to February). Rising exports and lower imports helped the current account deficit to shrink from 3.9% of GDP in Q3 to 2% in Q4, helped by higher prices for key exports such as coal and palm oil, and stronger demand from the US. We expect the current account deficit to continue to narrow, averaging 2.6% of GDP this year compared with 3.3% last year. But the gains may be harder to achieve given commodity price volatility the coal price has fallen more than 1% since the start of the year (coal accounted for 14% of total exports in 213). Our near-term outlook for growth is driven by: Lower inflation to boost consumer spending inflation eased to 7.3% in March, having peaked at 8.2% in August. We forecast that CPI inflation will fall below the.% upper target in H2, helped by favourable base effects from July onwards, as last year s fuel price hike drops out of the comparison. Lower inflation should help private spending to maintain robust momentum this year. Public spending rising ahead of elections in July will elect a new president for the first time in ten years. Spending has risen ahead of the election. : GDP and consumer spending % year 8 7 GDP Consumer spending 2 F'cast Source: Oxford Economics / CEIC : Contributions to GDP % year 1 GDP Net exports -1-2 Domestic demand F'cast Source: Oxford Economics : CPI inflation % year 18 F'cast Source: Oxford Economics 2

3 Nominal government spending rose by 16.3% on the year in the first two months of, up from 7% annual growth in 213. Even so, we still expect the government deficit to narrow slightly this year on lower fuel-price subsidies and higher revenues. Current account improvement relieves currency pressure the rupiah has recovered some ground this year after the current account deficit narrowed in Q We expect the deficit to continue to shrink as stronger global growth boost exports. The risks to our forecast are fairly balanced. Public spending is likely to pick up ahead of the elections in July, which could result in stronger domestic demand than we forecast; but there are also downside risks. A banking crisis in China or renewed bouts of capital flight from emerging markets would damage growth prospects. Inflation could surprise on the upside, particularly as electricity prices are due to rise in May and these higher energy prices could deter investment. But reform key to unlocking full potential We expect domestic demand to underpin robust mediumterm activity, with GDP growth recovering to reach almost 6% by 216. But there is a need for deeper reform, as evidenced by s low global ranking for infrastructure and for the ease of doing business despite its progress since the late 199s. will elect a new government and president this year. But with popular support divided among a number of political parties, the new leader may struggle to win a clear majority and a strong mandate for reform, resulting in a shakier consensus, slowing the reforms and limiting longterm growth to nearer %. Young population to drive %+ growth has many of the characteristics needed to achieve fast growth. Medium-term growth will be supported by: Large young population to support spending has the fourth largest population in the world and the working population is growing. Investment is increasingly aimed at services and consumer products to take advantage of this trend. FDI inflows to underpin overall investment in the long term FDI by companies seeking to access s huge domestic market and exploit its commodities should help to underpin growth. : Current balance US $ bn Trade balance Current account Source: Oxford Economics F'cast : Government budget balance & debt % of GDP Government balance (LHS) % of GDP 1 F'cast Source: Oxford Economics : FDI inflows US$ bn (4 quarter running total) Government debt (RHS) Source: Bank

4 Risk Assessment We expect economic risk in to fall very slightly this year as the current account deficit is set to narrow. The rupiah should stabilise around IDR11,3-11,6 against the US$ this year, following its appreciation in February. As a result, we expect trade credit risk (whether companies can repay their obligations) to fall. Over the medium term, we expect risks to fall gradually as the government implements much-needed reforms, easing the cost of doing business and reducing regulation and trade credit risk. In 212, a long-awaited land reform bill was passed, improving property rights and easing the process for property transactions (thereby facilitating various investment projects). Emerging risks Political tensions may increase in July, a new president will be elected for the first time in ten years. But with popular support divided among a number of political parties, the new leader may struggle to win a clear majority and a strong mandate for reform. Corruption remains relatively high is ranked worse than average for corruption compared with the rest of emerging Asia and other emerging markets. Indeed exit polls for the April elections suggest the votes received by the ruling Democrat party dropped sharply to less than 1%, partly due to the number of corruption cases senior party members have faced in recent years. Terrorism separatist movements remain active in but the number and the size of the attacks has dropped sharply in recent years. Key risk scenarios Capital flows out of EMs there is a risk that in the wake of the US Fed tapering, capital flows out of emerging markets might escalate sharply. Such an outcome would weaken external demand and business confidence, keeping s growth rate significantly below % for several years. China banking crisis after Japan, China is s biggest export market. Were China to suffer a banking crisis that badly affects its growth, s economy would be hit through both trade and, to a lesser extent, financial links. In this scenario, n GDP growth might slow to below 3% next year. Risk index (=no risk, 1=highest risk) World average Sovereign risk Trade credit risk Political risk Regulatory risk 63 6 GDP growth CPI inflation Current account balance Government balance Government debt External debt -1 2 Risk warnings Risk scenarios 6 Pre-election spending means growth likely to meet target Inflation easing but electricity hikes are due in May Investment needs mean high imports and persistent deficit Cutting subsidies helped but more progress needed The debt stock as a share of GDP has fallen to under 2% External debt is set to fall below 2% of GDP by 217 Impact of scenarios on risk index Maximum impact of scenarios on risk index % year Capital flows out of EMs China Banking Crisis Eurozone slumps into deflation US-led upside Impact of scenarios on GDP growth 2 Baseline US-led upside 1 China Banking Crisis Capital flows out of EMs Source : Oxford Economics 4

5 Long-Term Prospects Solid long-term growth, but reforms are key Robust consumer spending combined with favourable demographics and gradually improving exports will sustain growth. Our medium-term growth forecast of over % a year is also driven by an anticipated solid expansion of investment. Both the government and the private sector are enhancing and augmenting the country s capital stock and we expect this trend to continue. This will help to keep potential GDP growth at a healthy level over the next decade. The government has achieved a record of relatively low debt, healthy growth and moderate budget deficits. And the current account deficit is expected to narrow going forward, relieving some of the pressures on the rupiah and on inflation. Given this stable policy background and considerable catch-up potential, growth could be faster in the long term if appropriate structural reforms are implemented. Indeed, even faster total factor productivity growth could be realised if improvements to infrastructure, law enforcement and labour relations are brought in more speedily. No of workers to support each person over 6 Eurozone 223 Japan Brazil Russia China India Source : Oxford Economics/Haver Analytics Number Potential GDP and Its Components Average Percentage Growth Potential GDP*..4 Employment at NAIRU Capital Stock Total Factor Productivity *ln(potential GDP)=.6*ln(Employment at NAIRU) +.3*ln(Capital Stock)+ln(Total Factor Productivity) Long-Term Forecast for (Average annual percentage change unless otherwise stated) GDP Consumption Investment Government Consumption Exports of Goods and Services Imports of Goods and Services Unemployment (%) Consumer Prices Current Balance (% of GDP) Exchange Rate (vs US$) General Government Balance (% of GDP) Short-term Interest Rates (%) Working Population Labour Supply Participation Ratio Labour Productivity

6 Background By population, is the fourth largest country in the world with 24m people in 21 according to the UN. Java, home to the capital Jakarta, is one of the most densely inhabited regions in the world, with half of the country s population (about 12m) living on an island the size of England. is the largest archipelagic nation in the world, with 17, islands and 3 regional languages. The land is subject to numerous natural hazards, with frequent earthquakes and tsunamis, volcanoes, floods and even droughts. performed very strongly during the global recession in 28/9, growing by 4.6% in 29 and avoiding recession, unlike many of its neighbours. Moreover growth accelerated to 6.2% in 21. Political stability, combined with robust domestic demand and a lower dependence on exports helped avoid recession. Consumption comprises nearly two thirds of GDP whilst exports make up around 3% of GDP, which is significantly lower than in neighbours such as Korea, Malaysia, Thailand and Singapore where exports make up more than % of GDP. Having suffered more than all other South East Asian countries during the Asian crisis of , was the strongest performer in the region during the 28/9 global crisis. International ratings agencies have been recognising this turnaround; Fitch Ratings raised s sovereign rating to BBB- in December 211, taking the country back to investment grade status some 14 years after it lost this status. Moody s joined Fitch as the second major ratings agency to upgrade to investment grade with a sovereign rating of Baa3 in January 212. Standard & Poor s upgraded it in early April 211 to BB+, one notch below investment grade and had the rating on a positive outlook until May 213 (at which time they cut the outlook to stable). With two of the major ratings agencies having at investment grade, n bonds can be included in a wider range of investment funds, putting the economy on a par with the BRIC economies of Brazil, Russia, India and China. In the April 29 parliamentary elections, President Susilo Bambang Yudhoyono s Democratic Party won 2% of seats in parliament as opposed to the 7.% it held when he won his first term in 24. Presidential elections took place in July 29, with Yudhoyono winning a second five-year term and announcing encouraging reforms to ease the cost of doing business and to accelerate infrastructure development. Parliamentary elections were held on 9 April. Results will be made available by May 1, and each party that has won 2% of the vote or 2% of the seats will be able to nominate a candidate for the presidential elections in July. From July the newly elected president will serve a five year term with the opportunity to be elected for a second term, allowing forward planning. President Sukarno led the country from independence until 1967, when General Suharto forced him from office in a coup and established an authoritarian regime that lasted for 32 years. Widespread riots during the Asian crisis forced Suharto from office in 1998 and led to the first free elections in In the first direct presidential elections in 24, Yudhoyono won against incumbent Megawati Sukarnoputri. The economy has huge potential thanks to its natural endowments and a large population working for highly competitive wages. Its natural resources are minerals mostly oil, natural gas and coal, with some gold, silver, nickel and bauxite. Overall, oil, gas and petroleum products are the main export, accounting for about 17% of merchandise exports in 29. Increased coal production, mainly extracted in Sumatra and exported to northeast Asia, has led to being the world s third largest exporter of coal. Vast reserves of natural gas also enable to be the world s biggest exporter of liquefied natural gas (LNG). Due to its major oil reserves onshore in Sumatra and offshore from Java, joined OPEC in But a lack of investment in exploration resulted in declining production over the last ten years as fields matured; became a net importer of oil in 24 and in January 29 it suspended its membership of OPEC. Tourism is another important source of foreign exchange. Overall, remains under-developed compared with its South East Asian neighbours. In 213, GDP per head was estimated by the IMF at US$,214 (in PPP terms), compared with US$9,87 in Thailand and US$17,748 in Malaysia. Indeed, s per capita GDP is lower than China s, which reached US$9,844 in PPP terms in 213. In absolute US$ terms though, is still the third largest economy in developing Asia (with a GDP of US$874bn in 213), only surpassed by China and India (counting South Korea as an advanced economy). This gives the country increasing political influence in the region. 6

7 Data & Forecasts Key Indicators: Percentage changes on a year earlier unless otherwise stated Industrial Private CPI Food Wholesale Exports Imports Trade Production Sector Price Price US$ US$ balance Loans (US$ mn) Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Financial Indicators: Percentage changes on a year earlier unless otherwise stated 1m discount Money Exchange Exchange Exchange Share Reserves Imports rate Supply rate rate rate price (total) cover % (M2) Rupiah/ Rupiah/$ Rupiah/Yen JAKCOMP US$ Bn months Mar avg. 974 avg Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar

8 INDONESIA TABLE 1 SUMMARY ITEMS Annual Percentage Changes, Unless Otherwise Specified CONSUMERS TOTAL TOTAL REAL INDUSTRIAL UNEMPLOY- AVERAGE WHOLE COMPETIT- PRODUCER CONSUMER EXPENDITURE FINAL FIXED GDP PRODUCTION MENT RATE EARNINGS ECONOMY IVENESS PRICES PRICES EXPENDITURE INVESTMENT (%) PRODUCT- (28=1) IVITY (C) (TFE) (IF) (GDP) (IP) (UP) (ER) (GDP/ET) (WCR) (PPI) (CPI) YEARS BEGINNING Q I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV COPYRIGHT (C), OXFORD ECONOMICS INDONESIA TABLE 2 SUMMARY ITEMS TRADE CURRENT CURRENT GOVERNMENT GOVERNMENT SHORT-TERM SPREAD REAL EQUILIBRIUM EXCHANGE BALANCE ACCOUNT ACCOUNT FINANCIAL FINANCIAL INTEREST OVER US SHORT-TERM EXCHANGE RATE PER ($ BN) ($ BN) (% OF GDP) BALANCE BALANCE RATE SHORT-TERM INTEREST RATE PER US (RUP BN) (% OF GDP) RATE RATE US DOLLAR DOLLAR (BVI$/ (BCU$/ (BCUR%) (GB) (GB*1 (RSH) (RSH - (Note 1) (RXEQUIL) (RXD) YEARS BEGINNING Q I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV Note 1 : REAL INTEREST RATE = Nominal interest rate (RSH) - % change in CPI COPYRIGHT (C), OXFORD ECONOMICS 8

9 Long-Term Forecast for Annual percentage changes unless otherwise specified GDP Consumption Investment Government Consumption Exports of Goods and Services Imports of Goods and Services Unemployment (%) Consumer Prices Current Balance (% of GDP) Exchange Rate (per $) General Government Balance (% of GDP) Short-term Interest Rates (%) Working Population Labour Supply Participation Ratio (%) Labour productivity Employment Output gap (% of potential GDP)

10 Key Facts Politics Head of state: President Susilo Bambang YUDHOYONO Head of government: President Susilo B YUDHOYONO Political system: Presidential democracy Date of next presidential election: July Date of next legislative election: 219 Currency: n Rupiah (IDR), floating exchange rate Long-term economic & social development * GDP per capita (US$) Inflation (%) Population (mn) Urban population (% of total) Life expectancy (years) Source : Oxford Economics & World Bank Structure of GDP by output * 212 or latest 211 available year Agriculture 14.7% Source : CIA Factbook Industry 47.2% Location : Southeastern Asia, archipelago between the Indian Services 38.1% Ocean and the Pacific Source : World Bank (CIA Factbook) Long-term sovereign credit ratings & outlook Corruption perceptions index 213 Foreign currency Local currency Score Fitch BBB- (Stable) BBB- (Stable) Developed economies (average) 74. Moody's Baa3 (Stable) Baa3 (Stable) Emerging economies (average) 37.3 S&P BB+ (Stable) BB+ (Stable) 32. Emerging Asia 34.7 Structural economic indicators * Current account (US$ billion) Trade balance (US$ billion) FDI (US$ billion) Debt service (US$ billion) Debt service (% of exports) External debt (% of GDP) Source: Transparency International Scoring system 1 = highly clean, = highly corrupt Composition of goods & services exports, 212 Manufactures 32.1% Other goods exports.3% Oil production ( bpd) Oil consumption ( bpd) Source : Oxford Economics / World Bank / EIA Destination of goods' exports (212) Japan 1.9% China 11.4% European Union (27) 9.% Singapore 9.% Korea, Republic of 7.9% Source : WTO Source : WTO Fuels and mining products 3.7% Agricultural products 21.3% Transportation 1.8% Travel 4.% Other commercial services 4.9% 1