INDONESIA DEVELOPMENT UP DATE DECENTRALIZATION THAT DELIVERS Frederico Gil Sander, Lead Economist December 14, 2017
Recent economic developments and outlook Decentralization that delivers
How did the Indonesian econom y perform in Q3 2017?
GDP growth picked up 6 4 2 0-2 Change in inventories Stat. discrepancy Net exports Investment Government consumption Private consumption GDP Contributions to growth yoy, percentage points 8-4 Sep-14 Jun-15 Mar-16 Dec-16 Sep-17 SOURCE: BPS; WORLD BANK STAFF CALCULATIONS 4
Investment at a multi-year high Contributions to growth yoy, percentage points 7 6 5 4 3 2 1 0-1 Buildings & Structures Machine & Equipment Vehicles Other Equipments Cultivated Bio. Res. Intellectual Property Investment -2 Sep-14 Sep-15 Sep-16 Sep-17 SOURCE: BPS; WORLD BANK STAFF CALCULATIONS 5
Exports surged Contributions to growth yoy, percentage points 20 15 10 Goods: Non-Oil & Gas Services Goods: Oil & Gas Export of Goods and Services 5 0-5 -10 Sep-14 Sep-15 Sep-16 Sep-17 SOURCE: BPS; WORLD BANK STAFF CALCULATIONS 6
How important w as t he recovery in com m odity prices?
Prices for Indonesia s key commodity exports generally increas ed Index January 2016 = 100 220 Coal 180 Base Metals 140 Palm Oil 100 LNG 60 Jan-16 Jun-16 Nov-16 Apr-17 Sep-17 SOURCE: WORLD BANK; CEIC; WORLD BANK STAFF CALCULATIONS 8
Commodity tailwinds did play a role in recent economic performance Higher commodity-related exports Machinery investments possibly linked to mining Destocking linked to high exports with low production in agriculture and mining 9
But encouraging signs outside commodities Export decomposition shows important role of noncommodity manufactures (shoes, auto parts) Strong FDI inflows in sectors including wholesale and retail trade and household goods Capital expenditure by central government up 10
Ada apa dengan Konsumsi 2? Rp 11
Consumption weakened in H1, but shows signs of recovery in Q3 Qoq saar Growth Yoy Growth Percent 6 Lebaran Quarters 5.5 5 4.8 4 3 Q1 2015 Q3 2015 Q1 2016 Q3 2016 Q1 2017 Q3 2017 CEIC, WORLD BANK STAFF CALCULATIONS 12
Weakness in the first half due to transitory factors Electricity tariff hikes for 19m 900VA households Increased tax enforcement following tax amnesty program Political uncertainty 13
Recovery reflects waning of transitory factors and strong fundamentals Low unemployment (5.5% Aug 17 vs. 5.6% Aug 16) Contained inflation, especially food Stable Rupiah 14
Why the divergence with retail sales? Some indicators show an improving trend (motorcycle sales up) Increasing shift from goods to services (37 percent of non-food cash consumption) E-commerce unlikely to be a significant driver for now (still less than 2% of sales but growing fast) 15
Ou t look an d risk s
Favorable outlook 2016 2017f 2018f Real GDP Annual percent change 5.0 5.1 5.3 Consumer price index Annual percent change 3.5 3.8 3.5 Current account balance Percent of GDP -1.8-1.6-1.8 Budget balance Percent of GDP -2.5-2.7-2.2 SOURCE: BANK INDONESIA, CENTRAL BUREAU OF STATISTICS (BPS), MINISTRY OF FINANCE, WORLD BANK STAFF CALCULATIONS 17
despite a number of downside risks G3 monetary policy normalization Political season External Growth in China Domestic Loss of reform momentum Commodity prices Energy prices Geopolitical risks Weak tax collection
Key messages The Indonesian economy will accelerate m odest ly int o Q4 2017 and 2018 support ed by domestic and external engines Further acceleration in investment growth requires improvements in the business environment, infrastructure Ensuring that domestic energy prices are marketdriven will protect the space for infrastructure spending 19
Key messages The Indonesian economy will accelerate modestly into Q4 2017 and 2018 supported by domestic and external engines Further acceleration in investment growth requires improvements in the business environment, infrastructure Ensuring that domestic energy prices are marketdriven will protect the space for infrastructure spending 20
Key messages The Indonesian economy will accelerate modestly into Q4 2017 and 2018 supported by domestic and external engines Further acceleration in investment growth requires improvements in the business environment, infrastructure Ensuring that domestic energy prices are marketdriven and boosting tax collections will protect the space for higher infrastructure spending 21
Recent economic developments and outlook Decentralization that delivers
Over half of public spending in Indonesia is now conducted by subnational governments 100 90 80 70 60 50 40 30 20 10 0 Central Government Province District Percent 83.5 46.8 2000 2015 SOURCE: APBN AND SIKD DATA; WORLD BANK STAFF CALCULATIONS 23
Access to basic services has improved in the years s ince decentralization 2001 Bantaeng, South Sulawesi 2015 Improved sanitation 34% Improved water 38% Improved sanitation 65% Improved water 87% SOURCE: SUSENAS AND SIKD DATA, WORLD BANK STAFF CALCULATIONS 24
Access to basic services has improved in the years s ince decentralization 2001 Enrolment rates Junior High School: 43% Senior High School: 19% Belu, NTT 2015 Enrolment rates Junior High School: 68% Senior High School: 45% SOURCE: SUSENAS AND SIKD DATA, WORLD BANK STAFF CALCULATIONS SOURCE: SUSENAS AND SIKD DATA, WORLD BANK STAFF CALCULATIONS 25
but quality varies widely Timor Tengah Selatan: Stunting rate 70% (2013) Wakatobi, Southeast Sulawesi: Stunting rate 11% (2013) SOURCE: SUSENAS AND SIKD DATA, WORLD BANK STAFF CALCULATIONS 26
but quality varies widely Mahakam Ulu, East Kalimantan Education score 33 (2014) Langkat, North Sumatra: Education score 76 (2014) SOURCE: SUSENAS AND SIKD DATA, WORLD BANK STAFF CALCULATIONS 27
By itself, more spending does not improve outcomes SOURCE: SUSENAS AND SIKD DATA, WORLD BANK STAFF CALCULATIONS 28
Governance challenges are associated with poor performance Many high spending districts have poor audit results and poor outcomes About 43 percent of the top 5 percent of districts in terms of average spending per capita have average service access rates in the bottom 10 percent of districts (2008-2014) Only one of these districts received an unqualified opinion in both 2014 and 2015 Higher inequality is correlated with poor performance This is consistent with findings in the academic literature that inequality in cre ases th e risk of local e lite cap tu re, wh ich in tu rn is associate d with weak performance 29
The three i s of improving local s ervice delivery Central Government Incentives Local Government Information Citizens & Businesses Interaction 30
The three I s of improving local s ervice delivery Incentives for performance Local government evaluation syst em s Align performance measurements with key bottlenecks Embed independent verification mechanisms Strengthen the pole and capacity of Provinces Performance-based fiscal t ransfers Increase impact of DID through improved performance measures and allocations Increase impact of the DAK by instituting greater results orientation Assessment Capacity building Performancebased grant 31
The three I s of improving local s ervice delivery Information for both the central government and cit izens t o assess perform ance Improve availability of outcome indicators at the kabupaten, kota and desa levels Make detailed and comparable data on local government spending easily available Public availability of data creates a virtuous circle leading to better data quality 32
The three I s of improving local s ervice delivery Interaction between citizens and businesses, and local governments and service providers Enhance transparency to foster citizen engagement Provide local leaders, government agencies, citizens and firms with access to detailed information about performance and evaluation results Develop local-level indices of service delivery and the business environment This can help create a race-to-the-top in service provision and the business environment SOURCE: KPPOD 33
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