Indonesia Economic Quarterly March 2017 Staying the Course Hans Anand Beck Acting Lead Economist, Indonesia March 22, 2017
Key Takeaways 2016 stronger economic fundamentals despite global uncertainty Growth was higher than previous year for first time in five years Prospects for a pick up are subject to risks and challenges Early signs of pickup including on consumer spending, employment, revenue collection and infrastructure spending. Staying the course crucial for realizing prospects Maintain vigilance, continue strong macroeconomic management, sustain reform momentum. Opportunity to raise competitiveness by reducing restrictiveness of service sector Review subsidy programs (KUR)
2016 stronger fundamentals despite global uncertainty Prospects for a pick up, but subject to risks and challenges Staying the course is crucial for realizing prospects 3
Despite global headwinds, annual real growth increased in 2016, for the first time in 5 years Contributions to GDP growth, percentage points 8 Statistical discrepancy* Gross fixed capital formation Private consumption expenditure Net exports Government consumption expenditure Gross domestic product 6 4 2 0-2 2012 2013 2014 2015 2016 2017 4
.as part of a broader strengthening of economic fundamentals 2015 2016 Real GDP (Annual percent change) 4.9 5 Consumer price index (Annual percent change) 6.4 3.5 Current account balance (Percent of GDP) -2.0-1.8 Budget balance (Percent of GDP) -2.6-2.5 Source: BI: BPS; MoF; World Bank staff calculations Note: 2016 actual outcome; f stands for forecast 5
Robust growth in the face of global uncertainty Prospects for a pick up, but subject to risks and challenges Staying the course crucial for realizing prospects 6
External conditions are forecast to firm up. Percent, growth 5 4 3 2 2.7 2.3 2.7 2.1 2015 2016e 2017f 3.5 3.4 1.6 1.8 4.2 2.7 2.7 3.0 1 0 World Advanced Economies Emerging and Developing Economies Major Trading Partners excluding China Source: World Bank Global Economic Prospects January 2017 7
Early shoots of consumer confidence emerging Consumer durables leading indicators 3month ma growth yoy, percent 40 Car Sales: Passenger 20 Cement Sales 0-20 Motorcycle Sales Car Sales: Commercial -40 Jan-15 Jan-16 Jan-17 Source: BPS; Nikkei/Markit Source: ASI; GAI; World Bank staff calculations 8
supported by an employment rebound and real wages. Core unemployment fell to its lowest rate since 2012 and real earnings growth appeared to strengthen significantly in 2016 8 1,000 900 25 20 7 6 5 Unemployment rate - core 800 700 600 500 400 Real median monthly income (LHS) 15 10 5-4 300 (5) 3 200 100 Real median monthly income growth (RHS) (10) (15) 2 2002 2004 2006 2008 2010 2012 2014 2016 - (20) 9
Tax collection is picking up again (Jan-Feb) Total revenue collection increased by 8.9 percent yoy, but levels are still lower than 2014 and 2015 25 20 15 Contributions to annual revenue growth, Percentage Points 10 5 0-5 VAT/LGST Non oil and gas income tax Oil and gas related revenues Excises and other taxes -10-15 -20-25 Revenue growth Jan-Feb 2014 Jan-Feb 2015 Jan-Feb 2016 Jan-Feb 2017 Source: Ministry of Finance; World Bank staff calculations 10
but there is a long way to go to meet 2017 targets. IDR Trillion 1,890 2017 Inferred collection path to target 1,260 630-2016 actual collection 2017 actual collection 200 180 160 140 120 100 80 60 40 20 - January February Source: Ministry of Finance Data; World Bank staff calculations Note: Target revenue path is calculated by using the average percentage monthly contributions to total revenues (2010-16) and the Budget 2017 Total Revenues target 11
Government capital spending began 2017 well. January-February capital expenditure sustains high level achieved in 2016; Early procurement policy continued: by mid February, a third of Ministry of Public Works budget had been contracted Jan-Feb capital expenditure outturns (IDR Trillion) 6.0 5.0 4.0 3.0 2.0 1.0 0.0 2014 2015 2016 2017 12
Exports are growing for the first time since 2013, carried by manufacturing, and commodities... Contributions to goods exports values growth, percentage points 20 15 10 5 0-5 -10-15 -20-25 Oil and gas Coal Mining Palm oil Rubber Manufacturing Other Total exports Dec-14 Dec-15 Dec-16 Manufacturing and commodities increased Source: CEIC and staff calculations 13
supported by a positive commodities terms of trade shock, which forecasts suggest will be temporary Energy prices forecast to surge 26 percent this year 100 Forecast Index 2011 = 100 75 50 Dec 14 Jun 15 Dec 15 Jun 16 Dec 16 2017 2018 2019 2020 Source: World Bank Pink Sheet; CEIC; World Bank (2017); World Bank Staff Calculation 14
Downside risks easing but still dominate upside Upside Downside External risks Domestic risks January IEQ risk balance 15
Robust growth in the face of global uncertainty Prospects for a pick up, but subject to risks and challenges Staying the course is crucial for realizing prospects 16
Staying the course by, for example, reforming services sector Indonesia is in the top decile of countries in terms of restrictions Legal Air transport Logistics freight forwarding Telecom Commercial banking Insurance Logistics cargo-handling Accounting Broadcasting Maritime transport Construction Rail freight transport Road freight transport Logistics storage and warehouse Computer Logistics customs brokerage Architecture Engineering Indonesia Average across countries 0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1 OECD Services Trade Restrictiveness Index for Indonesia 17
to improve service sector productivity and competitiveness. By removing barriers to services trade, increased openness would likely: Improve quality Reduce price for some sectors Help facilitate introduction of new services Expose domestic market to new knowledge 45 40 35 30 25 20 15 10 5 0 Indonesia has relatively low productivity in a number of areas Indonesia Korea Malaysia Philippines Thailand 18
Review costly, regressive and untargeted subsidies like the KUR program. 5 reasons to re-consider the new KUR program s effectiveness* Principle Reason new KUR program is not optimal Relevance x Sustainable loans access more important for MSMEs than lower interest rates Costs x Expansive coverage of KUR means higher costs Competitive environment Equity among participants x x High risk market for MSME loans impeded as subsidies crowd out commercial lending Regressive, as total subsidy Government pays increases linearly with loans size Sustainability x Current KUR interest rate deviates significantly from market rates and is not financially sustainable * Original KUR program introduced 2007; new design introduced 2015 19
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