Indonesia Economics Update THEE Kian Wie and Siwage Dharma Negara Economic Research Centre Indonesian Institute of Sciences (P2E LIPI) Jakarta 24 September 2010
Macroeconomic Developments Growth Balance of Payments, Monetary Policy and Inflation Capital market and exchange rate National budget and subsidies
The economy has gained its growth momentum marked by four quarters of accelerating growth % 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 6.2 5.7 5.4 4.5 4.1 4.2 Q1 Q2 Q3 Q4 Q1 Q2 2009 2010 Gross Domestic Product (GDP) GDP Excluding Oil and Gas Sources: BPS via CEIC
Government spending was disappointingly low but investment remained robust 25 20 15 19.2 17 17 % 10 10.3 5 0 5 10 15 Q1 Q2 Q3 Q4 Q1 Q2 2009 8.8 2010 9 Gross Domestic Product (GDP) Private Consumption Government Consumption Investment Sources: BPS via CEIC
Investment growth was driven by strong machinery and equipment investment 30 20 % 10 0 10 20 Q1 Q2 Q3 Q4 Q1 Q2 2009 2010 Investment a. Construction b. Machinery and Equipment c. Transportation Sources: BPS via CEIC
After the GFC, net trade growth has become negative 30 20 22.6 17.7 % 10 0 10 20 30 1.6 Q1 Q2 Q3 Q4 Q1 Q2 2009 14.7 2010 24.4 21 Exports of Goods and Services Imports of Goods and Services Sources: BPS via CEIC
Real exchange rate (REER) has increased slightly more than the nominal rate (NEER) 140 120 100 Index 80 60 40 20 0 Jan 09 Apr 09 Jul 09 Oct 09 Jan 10 Apr 10 REER NEER Sources: IMF
Non tradable sector grows faster than the tradable sector after the AFC 10 Growth of Tradables and Non-tradables Sectors (% p.a.) 5 0-5 -10 Tradables Non-tradables -15-20 -25 Dec-94 Dec-96 Dec-98 Dec-00 Dec-02 Dec-04 Dec-06 Dec-08 Dec-10
Growing concern about weak manufacturing sector growth % 35 30 25 20 15 10 5 0 5 30.3 26.6 23.7 16.3 17 17.5 Q1 Q2 Q3 Q4 Q1 Q2 2009 2010 Manufacturing Construction Trade, hotel, and restaurant Transportation Communication Sources: BPS via CEIC
Commodity exports have increased significantly: Palm Oil 2,000 1400 $ million 1,800 1,600 1,400 1,200 1,000 800 1200 1000 800 600 $ /metric ton 600 400 200 400 200 Jan 97 Jan 99 Jan 01 Jan 03 Jan 05 Jan 07 Jan 09 0 Palm oil price ($/mt) 6 per. Mov. Avg. (Palm oil exports) Sources: BPS via CEIC and World Bank
Commodity exports have increased significantly: Coal 2,000 200 1,800 180 1,600 160 $ million 1,400 1,200 1,000 800 140 120 100 80 $ /metric ton 600 60 400 40 200 20 Jan 97 Jan 99 Jan 01 Jan 03 Jan 05 Jan 07 Jan 09 Coal price ($/mt) 6 per. Mov. Avg. (Coal exports) Sources: BPS via CEIC and World Bank
While manufacturing exports seem stagnant: Textile, garments, footwear and electronics 1,400 1,200 1,000 $ million 800 600 400 200 Jan 97 Jan 99 Jan 01 Jan 03 Jan 05 Jan 07 Jan 09 6 per. Mov. Avg. (Textile, garments and footwear exports) 6 per. Mov. Avg. (Electronics exports) Sources: BPS via CEIC and World Bank
Balance of payments is in surplus and foreign reserves increase $ billion 7 6 5 4 3 2 1 0 1 2 3 76 Q1 Q2 Q3 Q4 Q1 Q2 2009 2010 90 80 70 60 50 40 30 20 10 0 $ billion Total Capital& Financial Account (LHS) Current account (LHS) Reserve assets (RHS) Sources: BI, Note
Capital market and exchange rate trends show growing investors confidence in the economy 0.00012 3,500 0.00010 3,000 $/Rp 0.00008 0.00006 0.00004 0.00002 2,500 2,000 1,500 1,000 500 Composite Index 0.00000 5 Jan 09 5 Jul 09 5 Jan 10 5 Jul 10 0 $/Rp (LHS) JSX: Index: Composite (RHS)
Inflation has increased but no sign of tightening monetary policy 14 12 12.27 10 % 8 6 4 2 0 2 Aug 09 Nov 09 Feb 10 May 10 Aug 10 CPI inflation SBI rate 30 days Real SBI rate Currency in Circulation Sources: BI
National budget has been expanding but there is still room for fiscal expansion 1,400 2.5 Rp trillion 1,200 1,000 800 600 400 200 1.3 1.6 2.1 1.7 2.0 1.5 1.0 0.5 % of GDP 2008 2009 2010 2011 Revenue (LHS) Expenditures (LHS) Deficit (% of GDP) (RHS) Sources: MoF
Energy subsidy is expensive. It is much larger than public spending on infrastructure. 250 200 Rp trillion 150 100 50 0 127 89 93 45 2008 2009 2010 2011 Fuel Electricity Non Energy Infrastructure Sources: MoF
Need strong political will to reduce current subsidy and spend more on infrastructure % of total public expenditure 25% 20% 15% 10% 5% 0% 24% 18% 15% 15% 12% 10% 8% 8% 2008 2009 2010 2011 Total Subsidies Infrastructure Sources: MoF
POLITICAL DEVELOPMENTS Declining enthusiasm for fight against corruption? Sentence remission for convicted corruptors Lapindo mudflow disaster All but forgotten, cf BP in Gulf of Mexico Establishment of the National Economic Committee and the National Innovation Committee
Redenomination of the rupiah BI foreshadows redenomination of the rupiah: Ease of transactions and simplification of bookkeeping National pride currency with too many zeros indicates history of weak monetary management! Rp new 1 = Rp old 1000 (why not 10,000 = ±$US1?) Transition period 2013 15 (both currencies circulate, freely exchangeable in both directions) From 2016, only new rupiah issued (but old rupiah can still be exchanged at the banks with new rupiah) Past history of redenomination/devaluation that caused losses to public Hence, very important to explain that redenomination is not wealth confiscation
Slow growth of manufacturing sector since Asian Financial Crisis After AFC, little investment in manufacturing sector. Why? Relocation of foreign manufacturing firms in labourintensive industries to Vietnam and other lower wage countries Exacerbated by Labour Law of 2003 (raised labour costs)? Dutch Disease effect of rapid rise in world commodity prices and consequent rupiah (real) appreciation? Booming commodity based exports have negative impact on other exports (and import substitutes, especially noncommodity manufactures)
Slow growth of manufacturing sector since Asian Financial Crisis Poor logistics (especially poor infrastructure) increase costs of inputs and transport for manufactured products One response: 1 st phase of railway construction from Jababeka Industrial Estate to Tanjung Priok port Some Good News: Indonesia s relatively low dependence on manufactured exports made it less vulnerable to GFC Manufactured exports more affected by global slowdown than primary exports But: will weak manufacturing hold back further recovery, and more rapid poverty reduction?
Worsening traffic congestion in Jakarta SBY s three suggestions: Build more flyovers, underpasses, and a Mass Rapid Transit system as in Bangkok Monorails and metros (underground trains)? Build a new capital city, like Canberra or Brasilia But these weren t built to deal with traffic congestion! Why would this succeed when Jakarta has failed? Building new capital city is extremely expensive Retain Jakarta as capital, but build a new administrative capital, like Putrajaya in Malaysia Is it realistic or desirable to separate the government sector from business/commercial/residential areas?
Worsening traffic congestion in Jakarta Current solution : Three in one rule Jockey payment is just like a toll payment, but not to government New call for strictly enforcing ban on motor vehicles using express busways But this is a predictable response when there are far too few express buses, so that busways not fully utilised Much better (partial) solution: electronic road pricing (like in Singapore) Payment goes to government; revenue can be used to improve road infrastructure Further solution: Much higher taxes on ownership of motor cars, like in Singapore, but need much better and expanded public transport Again, revenue can be ploughed back into improving infrastructure
Investment climate Indonesia s poor investment climate is still of concern to overseas operations of Japanese manufacturers (biggest foreign investors in non oil and gas sector and financial sector) Major issues mentioned in JETRO, Jakarta, annual surveys: Lack of security and social stability (mentioned by 41.7% of surveyed firms Underdeveloped infrastructure (35.4%) Unclear execution of legal system (27.1%) Difficulty in recruiting local managers (27.1%) Rising labour costs (27.1%)
100 Japanese Manufacturing Companies Planning to Maintain/Expand/Scale Back or Withdraw Operations in Medium Term (% of respondents) 80 60 40 20 0 Thailand Indonesia Malaysia Philippines Maintain present level Expand
Country rankings in Doing Business 2010 (among 183 economies surveyed) Singapore 1 Hong Kong, China 3 Thailand 12 Malaysia 23 China 89 Vietnam 93 Indonesia 122 India 133 Philippines 144
Indonesia s ranking in Doing Business 2010 (among 183 economies surveyed) Indonesia Overall Ease of Doing Business 122 Starting a business 166 Construction permits 61 Employing workers 149 Registering property 95 Getting credit 113 Protecting investors 41 Paying taxes 126 Trading across borders 45 Enforcing contracts 124 Closing business 142
Little FDI in manufacturing in Q1 2010 Agriculture 2% Mining 19% Services 61% Manufacturing 18%
Mining investment Three counterproductive obligations imposed on foreign mining companies (reflecting resource nationalism ) 1. Certain % of mining output for domestic market Equivalent to protection to local downstream manufacturers 2. After only five years of operations, foreign companies should divest 20% to State or Regional government owned enterprises Reversing the sensible, but politically unpopular, trend to privatisation Will result in rent capture by politicians, government officials and the management of SOEs 3. Foreign mining companies have to set up domestic processing facilities to increase local value added Will increase processing costs, reducing the realized value to Indonesia from these natural resources
Thank You