Indonesia Economic Quarterly Launch Jakarta, March 18, 214 Jim Brumby Sector Manager and Lead Economist
MARCH 214 IEQ: INVESTMENT IN FLUX Fixed investment: subdued, and risks Risks to fiscal space needed for public investment Investment in flux FDI: solid, but has plateaued recently Portfolio investment: currently strong, but volatile 2
OUTLINE Recent economic developments and outlook Investment in flux, amid policy uncertainties, fiscal pressures Priorities for the longer-term, and selected issues 3
GDP: WEAK INVESTMENT, STRONG NET EXPORTS 4 3 2 1-1 -2 Contribution to GDP growth yoy, percent Fixed investment Net exports -3 Dec-1 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Source: BPS; World Bank calculations 4
IMPORT DEMAND HAS SOFTENED Percent Contribution to yoy growth 36 24 Intermediate Capital Total imports Consumption Oil & Gas 12-12 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Source: BPS; World Bank staff calculations 5
RAW MINERAL EXPORTS BAN BUMP IN Q4 15 1 percent O-S-A Coal Palm oil Rubber and products Oil and gas Others 5-5 -1-15 Ores, Slags and Ashes Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Source: BPS; World Bank staff calculations 6
OVERALL BOP: NARROWER C/A DEFICIT 16 12 8 4-4 -8-12 Balance of payments, USD billion Overall balance Net other capital Net direct investment Net portfolio Current account -16 Dec-1 Dec-11 Dec-12 Dec-13 Note: Basic balance = Current account balance + net FDI Source: BI; World Bank staff calculations 7
SUPPORTING THE RUPIAH OVER Q1 214 Nominal currency index, 211 average =1 USD 11 1 9 IDN 8 Selected EM majors 7 Jan-11 Jun-11 Nov-11 Apr-12 Sep-12 Feb-13 Jul-13 Dec-13 Note: Selected EM majors is a simple average of BRL, IDN, TRY and ZAR vs. USD; USD is broad NEER index Source: JP Morgan; World Bank staff calculations 8
GLOBAL ECONOMY: LIKELY TO STRENGTHEN Major trading partner GDP growth, percent 8 7 6 5 4 3 2 1-1 -2 3.5 4. 4.1 Source: World Bank staff calculations 9
INDONESIA: MIXED HIGH FREQ. DATA; MORE HEADWINDS 6 5 4 Economic activity indicators - mixed Growth in 3-month moving avg. yoy, percent Motor vehicles 3 Credit growth - falling Growth yoy, percent Percent Nominal (LHS) Percent 3 25 3 2 Cement sales 2 Real (LHS) 2 15 1 1 1 5-1 -2 Motorcycles -3 Feb-12 Aug-12 Feb-13 Aug-13 Feb-14 Source: CEIC; World Bank staff calculations -1 Jan-12 Monthly nominal lending growth (RHS) Jan-13 Source: CEIC; World Bank staff calculations -5-1 1
INDONESIA OUTLOOK: SOME MORE GROWTH MODERATION TO COME March IEQ Previous (Dec.) 212 213 214 215 214p Real GDP (% change) 6.2 5.8 5.3 5.6 5.3 Consumer price index Current account balance Current account balance (% change) 4.3 6.9 6.2 5.2 6.7 (USD billion) -24.4-28.5-24.4-2.2-22.8 (% GDP) -2.8-3.3-2.9-2.1-2.6 Budget balance (% of GDP) -1.9-2.2-2.6 n.a. -2.1 Source: BI; BPS; Ministry of Finance; World Bank staff projections 11
AMIDST SIGNIFICANT RISKS Positive Domestic Elections lead to a stronger than expected boost to consumption, investment External Commodity prices rise Global risk appetite is stronger than expected, boosting portfolio inflows to EMEs inc. Indonesia Negative Investment weakens as downturn extends to building investment Consumption growth disappoints as income and credit effects take their toll External financing conditions tighten again Global commodity prices fall, e.g. due to slower than expected growth in China 12
OUTLINE Recent economic developments and outlook Investment in flux, amid policy uncertainties, fiscal pressures Priorities for the longer-term, and selected issues 13
INVESTMENT IN FLUX Foreign direct investment Inbound FDI, rolling 4-quarter average Fixed investment Contributions to real growth yoy, percent 6 5 USD billion 15 1 Other Foreign transportation Foreign machinery & equip Building Total 4 3 5 2 1 Dec-6 Dec-8 Dec-1 Dec-12 Source: BI; World Bank staff calculations -5 Dec-6 Dec-8 Dec-1 Dec-12 14
FISCAL SECTOR: REVENUES SOFT; NEW POLICY PRESSURES Deficit (RHS, % of GDP) Revenues (LHS, yoy nominal growth, %) 45 35 25 15 5-5 -15-25 Expenditures (LHS, yoy nominal growth, %) 23 24 25 26 27 28 29 21 211 212 213 4.5 3.5 2.5 1.5.5 -.5-1.5-2.5 Note: 213 deficit is World Bank staff projection Source: Ministry of Finance; World Bank staff calculations 15
FUEL SUBSIDY REFORM WOULD HELP IDR trillion 1 5 Scenario 2: 5% economic price fill Scenario 1 (213 again) Savings -5-1 -15-2 -25-3 29 21 211 212 213 Fuel subsidy expenditure, GoI 214 WB projection 214 Expenditures Achieving a deficit of <2.5% in 214 looks difficult without more fuel subsidy reform 16
EXAMINING THE MINERAL EXPORT BAN Rationale Unprocessed export ban + Export duty and tax Increased domestic mineral processing Higher valueadded mineral exports GDP growth Trade Balance Fiscal Revenues Job Creation Underlying assumptions Significant processing investment is stimulated. i.e, that smelters are financially viable Processing adds a lot of value to mineral exports Higher processed exports will offset lower ore exports Higher value exports will increase non-tax revenues Processing will create more and better jobs in the sector 17
BUT IS THE MINERAL EXPORT BAN SOUND? 4,5 4, 3,5 3, 2,5 2, 1,5 1, 5 USD million Processed Mineral Exports Percent of total 2.5% Unprocessed Mineral Exports Share of Mineral in Total Exports 2.% 1.5% 1.%.5% Copper Nickel Tin Iron Bauxite Other Minerals Note: Data for 213 Source: WITS database; World Bank staff calculations.% 18
TRADE IMPACTS Estimated impact on net trade balance USD billion -1 -.9-2 -3-4 -3.3-3. -5-6 Source: World Bank -5.3 214 215 216 217 19
REVENUE IMPACTS Estimated impact on fiscal revenues (export duties and taxes, royalties and CIT) USD billion -.4-1.1-2 -1.8-2.2-4 214 215 216 217 Source: World Bank 2
OUTLINE Recent economic developments and outlook Investment in flux, amid policy uncertainties, fiscal pressures Priorities for the longer-term, and selected issues 21
AVOIDING THE TRAP THE CHALLENGE harnessing Indonesia s potential to generate shared prosperity, through fast productivity-driven economic growth with inclusiveness Structural policies to boost prosperity: Closing the infrastructure gap Closing the skills gap Enhancing the functioning of markets Complementary areas: Service delivery for all Social protection Natural disaster risk management Foundational pre-requisites: Macro-fiscal management and managing shocks Implementation 22
URBAN DISASTER PREPAREDNESS 23
THANK YOU March 214 IEQ contents: Regular update on economic developments and the outlook Examining the mineral exports ban Urban disaster risks planning A taster of the forthcoming World Bank report, Avoiding the Trap On the web: http://www.worldbank.org/en/news/feature/214/3/18/ indonesia-economic-quarterly-march-214 24