ESCAP High-level Policy Dialogue Ministry of Finance of the Republic of Indonesia International Economic Summit Eleventh Bank Indonesia Annual International Seminar Macroeconomic Policies for Sustainable Growth with Equity in East Asia 15-17 May, Yogyakarta, Indonesia Jointly organized by UN ESCAP, Ministry of Finance of the Republic of Indonesia and Bank Indonesia Session 3 Fiscal Policy for Development and its Budgetary Implications Presentation Indonesia Fiscal Policy: Stimulus in the crisis time & long term development by Bambang Brodjonegoro Head, Fiscal Office, Ministry of Finance, Indonesia May The views expressed in the paper are those of the author(s) and should not necessarily be considered as reflecting the views or carrying the endorsement of the United Nations. This paper has been issued without formal editing.
MINISTRY OF FINANCE REPUBLIC OF INDONESIA FISCAL POLICY AGENCY Indonesia Fiscal Policy: Stimulus in the crisis time & long term development ESCAP High Level Policy Dialogue & 11th Bank Indonesia Annual Seminar Yogyakarta, 15 May OUTLINE 1 2 3 2
Fiscal Stimulus: Crisis Period 2008/2009 3 Global Economic Crisis and Stimulus Package 2009 Crisis 2008 2009 Global crisis impacted to the deterioration of export and purchasing power in the domestic market. Government policies focused to increase citizen s purchasing power through fiscal stimulus. 2009 Fiscal Stimulus Package Description 2009 Allocation Realization % Real A. Tax saving 43.0 43.0 100.0 1.Reducing and simplifying the personal income tariff (35% --> 30%) 13.5 13.5 100.0 2.Increasing the income tax threshold from Rp12,6 million to Rp15,8 million 11.0 11.0 100.0 3.Reducing the corporate income tax (single tariff: 30% -> 28%) and further discount of 5% for the 18.5 18.5 100.0 listed companies 4.Fiscal tax abolishment on NPWP - - - 5.Amendment to VAT - - - Due to export slowdown, domestic consumption became the main driver of economic growth B. Tax incentive 13.3 2.8 21.4 1.VAT on cooking oil 0.8 0.8 100.0 2.VAT on biofuel 0.20 0.0 14.0 3.VAT on oil and gas exploration 2.5 1.0 40.3 4.Income tax on geothermal 0.8 0.8 100.0 5.Income tax article 21 6.5 0.2 3.2 6.Facilities on import duties 2.5 0.0 0.3 C. Non tax subsidies 17.0 14.3 84.4 i.e.- Reducing diesel oil price Rp300/litre 2.8 2.8 100.0 - Discount on eletricity tariff for industries 1.4 1.4 100.0 - Stimulus expenditure package 12.2 10.1 83.2 Total 73.3 60.2 82.1 4
Countercyclical Policy has given positive impact to economic growth through fiscal stimulus 8 7 6 5 4 3 2 1 0 6,22 6,3 Economic Growth (%, yoy) 6,25 5,28 5,27 4,6 3,94 3,1 With Dengan Stimulus 5,39 4,18 4,16 3,35 3,8 2,78 6,13 5,59 5,8 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 5 Without Tanpa Stimulus 6,89 Economic Growth (yoy) Poverty Rate Unemployment Rate 2008 2009 2010 Fiscal stimulus in 2009 had a big impact when the economy experienced a slowdown. This is indicated by economic growth higher compared without stimulus, unemployment and poverty rates declined. Lesson Learned: a. Tax cut policy would be more effective than expenditure policy. This matter is supported by Indonesia demographic profile which is dominated by young/productive generation and higher MPS (marginal propensity to spend). b. Considering high infrastructure needs, government should always improve its infrastructure expenditure. 5 Indonesia economic drivers & stimulus in the current crisis 6
Global economy is still facing downside risk... Global Economic Growth Forecast (%) WEO IMF 2012 2014 Oct'11 Jan'12 Apr'12 July'12 Oct'12 Jan'13 Apr'13 Oct'12 Jan'13 Apr'13 World 3.2 4.5 3.9 4.1 3.9 3.6 3.5 3.3 4.1 4.1 4.0 US 2.2 2.5 2.2 2.4 2.3 2.1 2.0 1.9 2.9 3.0 3.0 Europe 0.6 1.5 0.8 0.9 0.7 0.2 0.2 0.3 1.2 1.0 1.1 GDP China 7.8 9.5 8.8 8.8 8.5 8.2 8.2 8.0 8.5 8.5 8.2 India 4.0 8.1 7.3 7.3 6.5 6.0 5.9 5.7 6.4 6.4 6.2 ASEAN 5 6.1 5.8 5.6 6.2 6.1 5.8 5.5 5.9 5.7 5.7 5.5 Indonesia 6.2 6.7 n.a. 6.1 6.6 6.3 n.a. 6.3 n.a. n.a. 6.4 Trade Vol. World 2.5 6.4 5.4 5.6 5.1 4.5 3.8 3.6 5.8 5.5 5.3 1. Global economy is still facing downside risk, however is expected to rebound in the 2 nd semester of. Fiscal cliff potential impact; sluggish Europe crisis solving; China improves but still under 10%. 2. Global liquidity volatility potential Loose monetary policies in several advance economies and Eurozone. 3. Global commodity prices volatility (including oil price and Indonesia s export commodities) The consensus forecast of Indonesia's economic growth in by 6.2% Economic Forecasters ING 7.0 Danareksa Securities 6.5 Goldman Sachs Asia 6.4 Econ Intelligence Unit 6.4 BBVA 6.3 Citigroup 6.2 HSBC Economics 6.1 IHS Global Insight 6.1 Nomura 6.1 BNP Paribas 6.0 BofA Merrill Lynch 5.8 JP Morgan Chase 5.7 Credit Suisse 5.6 Consensus (average) 6.2 IMF 6.3 WorldBank 6.2 ADB 6.4 OECD 6.3 Bank Indonesia 6.2 6.6 7 Outlook of Indonesia economic growth: revised down yet still strong and stable Strong and consistent real GDP growth Even stronger real sector GDP growth excluding Oil & Gas 2008 2012 Average = 5.9% Source: Ministry of Finance, BPS Note: Figures in % yoy; medians from S&P Stable and resilient growth compared to peers Source: BPS Stable growth rate (in the last 9 quarters has grown above 6%), keeping up with India and China 5 years average growth vs. peers (%) 10.5 8.1 5.9 4.4 4.3 3.6 2.9 2.6 1.5 China Indonesia Brazil Russia Mexico Source: BPS, Bloomberg Source: BPS, Bloomberg Note: India economic growth constant price at factor cost 8
Private consumption is the main economic keydriver, supported by young and dynamic population... Private consumption driving growth (% of GDP) Dependency ratio keeps falling til 2025 2030 Rising nominal GDP per capita (US$) 90 Brazil India China Indonesia 4,000 3,563 80 70 3,000 60 2,000 50 40 1,000 30 1980 1990 2000 2010 2020 2030 2040 2050 0 2000 2002 2004 2006 2008 2010 2012 Source: BPS Source: UNPP Source: Ministry of Finance Of the 240 million people in Indonesia, over 60% of the population is under 39 years old, providing a dynamic workforce. Age 100+ Year 2010 Year 2030E Year 2050E Age 0 Source: Economic Policy Committee and European Commission, IMF, national projects 9 Investment as the second engines of growth, helping in rebalancing economic growth as external side weakens... Direct investment (US$ bn) Direct investment growth (%) Total investment (% GDP) 55 Brazil India South Korea Russia China Indonesia 50 45 40 35 30 25 20 15 10 Source: BKPM Note: IDR/US exchange rate of 9,000; USD values for convenience only Source: IMF 10
Investment in manufacturing has been growing quite rapidly, attracted by potential domestic market. Investment has also been growing across regions Bali & Nusa Tenggara 1% Banten 7% East Java 8% Kalimantan 2% Sulawesi 2% West Java 29% 2005 Sumatera 14% Jakarta Capital Territory 37% FDI by Regions FDI by Sectors Source: BKPM, processed Note: data excludes oil& gas and banking Chemical & Pharmaceutical Industry 17,4% Metal, Machinery & Electronic Industry 14.8% Motor Vehicles & Other Transport Equip. Industry 12.3% 11 Leason learned from 2008 2009, tax cut is the best stimulus for a country that rely on private consumption with demographic gift... Indonesia benefits from a well diversified economy Q1 GDP by expenditure (% of total) Q1 GDP by sector (% of total) Source: BPS economic growth key drivers: Investment and domestic consumption remain as the two main engines of growth. Domestic consumption boosters: stimulus policy by increasing Non taxable income threshold by 54%, general election, demographic dividend. Investment boosters: infrastructure programs and continued investment climate improvement (national logistic system/nsw, Special Economic Zones/KEK), employment improvement. International Trade boosters: global demand recovery, Rupiah depreciation impact, and competitiveness improvement. Growth Share to Growth 2012 2012 Q1 Q2 Q3 Q4 Q1 Q1 Q2 Q3 Q4 Q1 GDP 6.3% 6.4% 6.2% 6.1% 6.0% 6.3% 6.4% 6.2% 6.1% 6.0% Private Consumption 4.9% 5.2% 5.6% 5.4% 5.2% 2.8% 2.9% 3.1% 3.0% 2.9% Govt Consumption 6.4% 8.6% 2.8% 3.3% 0.4% 0.4% 0.6% 0.2% 0.4% 0.0% Investment 10.0% 12.5% 9.8% 7.3% 5.9% 2.3% 3.0% 2.4% 1.9% 1.4% Export 8.2% 2.6% 2.6% 0.5% 3.4% 3.9% 1.3% 1.3% 0.3% 1.6% Import 8.9% 11.3% 0.2% 6.8% 0.4% 3.3% 4.3% 0.1% 2.8% 0.2% Source: BPS 12
Fiscal Incentives Policy to support investment Tax Holiday Tax Holiday is a tax facility provided for new capital invested in Pioneer Industry. It is aiming to support the development and growth accelleration of the Pioneer Industry. The Corporate Income Tax Facilities comprise of the followings: 1) Corporate income tax relief, which is provided for a minimum period of 5 to the maximum period of 10 years, commencing from the beginning of the fiscal year of commercial production. 2) Additional reduction of 50% on the corporate income tax payable for the period of 2 years commencing from the end of year the tax relief ended. This additional facility is provided as transition period s facility towards the implementation of full tax obligation period. The Pioneer Industries are: 1) Base metal industries; 2) Oil refinery and/or oil and gas sourced chemical organic industries; 3) Machinery industries; 4) Renewable resources industries; and/or 5) Telecommunication equipment industries. From 6 companies that have applied for the facilities, 2 companies have been granted.. Investment Allowance (Tax Allowance) Investment Allowance is a tax facility provided for capital investment in high priority business sectors in national scale. It is aiming to support the development and growth acceleration of the selected business sectors and/or the selected locations. The Facilities consist of the following: 1) Reduction of taxable income, amounting 30% of investment value 2) Accelerated depreciation (50% of normal case) 3) Lower tax rate of Dividend (from 20% to 10%) 4) Extended Loss Carry Forward Period (up to 10 years) Development of sectors receiving facilities: TaxAllowance GR1/2007 GR62/2008 GR52/2011 BusinessSectors 53 67 52 Business SectorsinCertainAreas 19 34 77 Total 72 101 129 77 corporations have received the facility Government Support on Infrastructure Development: 1. Master Plan for Indonesia Economic Development and Acceleration 2. Infrastructure Guarantees 3. Land Capping Fund 4. Land Revolving Fund 5. Land Acquisition Fund 6. Geothermal Fund facility 13 The Economists Wiggle Room Index: Indonesia has the second highest flexibility and cushion in terms of fiscal and monetary front compared to developing countries Egypt India Poland Brazil Vietnam Pakistan Turkey Argentina Hungary South Africa Taiwan Venezuela Czech Republic Mexico Colombia Malaysia Thailand Philippines Hong Kong Peru Russia Singapore South Korea Chile China Indonesia Saudi Arabia Room to Ease Fiscal and Monetary Policy* 85 85 85 78 78 75 75 70 70 65 62 62 60 60 55 52 50 45 38 35 30 30 25 20 18 15 15 0 10 20 30 40 50 60 70 80 90 100 In The Economist analysis towards 27 developing nations, Indonesia is placed second after Saudi Arabia as the nation with the highest flexibility and cushion on fiscal and monetary front. Indonesia s position are even above the other ASEAN countries such as Philippines, Thailand and Malaysia Inflation, foreign exchange rates, current account, deficit as well as a well managed debt are the factors that contribute to the conclusion China, Chile, S Korea, Singapore, Russia and Peru are also amongst the best in the wiggle room factor While Egypt, India, Poland, Brazil and Vietnam are considered to have limited wiggle room Source: The Economist, January2012 14
Policies to Address and Mitigate Crisis 1 2 3 4 5 1 2 Pre-emptive measures Implementing Crisis Management Protocol Implementing Bond Stabilization Framework Enhancing coordination between government institutions and continuous dialogue with market participants Swap facility arrangements based on international cooperation Chiang Mai Initiative Multilateralization Fiscal Buffers to prevent and mitigate crisis Deferred Drawdown Option facility Specific articles in the State Budget Law that provide flexibility for Government to take quick mitigation action if necessary, with Parliament approval that has to be given within 24 hours Bond Stabilization Framework Buyback of government bonds by the DMO from the state budget Potential purchase of government bonds by State Owned Enterprises Purchase of government bonds by the Treasury office and Indonesia Investment Agency Purchase of government bonds by the DMO from accumulated cash surplus Financial System Stability Coordination Forum (FKSSK) Financial System Stability Coordination Forum (FKSSK) will closely monitor developments in the financial sector to prevent and mitigate crisis possibility. FKSSK is consisted Minister of Finance (coordinator), Governor of Bank Indonesia, Chairman of the Board Commissioners Indonesia Financial services Agency (OJK) and Chairman of the Board of Commissioner Indonesia Deposit Insurance (LPS). FKSSK activities: 1.Exchange of data and information whether conducted on a regular basis or for special needs. 2.Evaluation, surveillance/general analysis, policy recommendation in order to maintain financial system stability as well as follow-up monitoring. 3.Simulation and Evaluation of the National Crisis Management Protocol. 4.Human Resource Capacity Development in collaboration with several international agencies for several areas of knowledge / skills related to Financial Stability System. 15 Fiscal Policy to Promote Sustainable & Inclusive Development 16
Prudent and sustainable fiscal policy management... Indonesia Fiscal Deficit (%) 2012E deficit comparison (% GDP) 0-0.2-0.4-0.6-0.8-1 -1.2-1.4-1.6-1.8-2 -0.5 8 years average 0.99% -0.9-1.3-0.1-1.6-0.7-1.1-1.8-1.7 2005 2006 2007 2008 2009 2010 2011 2012 Budget Indonesia Debt to GDP ratio Debt to GDP ratio comparison (%) Source: Ministry of Finance, IMF 17 State budget is directed to improve priority areas to unleash the optimum potential of demographic dividend.. 70 60 50 40 Food Security (Rp billion) 39.7 46.7 47.9 54.6 60.2 65.2 Education (Rp billion) 30 20 23.3 10 0 2007 2008 2009 2010 2011 2012 Infrastructure Budget (Rp billion) Poverty Reduction Budget (Rp billion) 18
Social assistance program target enhances significantly... 2007 Jamkesmas (Health care program) 2007 86,4 mil of people PNPM (Community empowerment program) Rural 76,4 mil of people 752 Regencies 2008 10.922 Regencies PKH (conditional cash transfer for poor households) 2007 2.4 mn of very poor HH Scholarship for poor students 720 thds of very poor HH 3,6 mn 14,2 mn 19 Budget has been contributing in lifting up people wellbeing.. Poverty Level Unemployment Rate State budget is designed under the framework of pro growth, pro job and pro poor.. Poverty and unemployment rates have been consistently declining... 20
The challenge is... room for further expansion is still huge as mandatory spending and subsidy remain high... Central Government Expenditures (Rp Trillion, 2005 ) Other Social Grants Interest Payment Capital Material Personnel 184.4 200.7 Increased allocation of central government expenditure towards more productive uses 2005 Budget Source: Ministry of Finance 21 Thank You 22