Indonesia Economic Quarterly March 2015 High expectations Ndiamé Diop Lead Economist, Indonesia March 18, 2015
Introduction Ambitious economic policy reforms initiated, setting high expectations for what these could achieve: Fuel subsidies Infrastructure spending Business licensing But road from vision to reality is long: Policy and admin. reforms needed to sustainably mobilize revenues Overcoming execution constraints to absorb more and better capex Implementation of complex reforms, and consistent follow-through Reforms are vital, especially with the economy facing headwinds: Global growth is rising but commodity demand is not US Dollars: globally, becoming scarcer Possible revenue shortfall this year
Major recent developments Near-term economic outlook: relatively subdued Uncertainties 3
Recent developments: 1. China is not what it once was for Indonesia Year-on-year growth, percent 120 100 80 60 40 20 0 Total China imports China real GDP -20-40 -60 China imports from Indonesia Dec-05 Dec-08 Dec-11 Dec-14 Note: Imports in US Dollars. Source: CEIC; World Bank staff calculations
and the commodity boom is over Exports, USD billion 210 180 150 120 90 60 30 2008-09: -15.0% Total exports 2011-14: -13.4% Commodityrelated products Manufactured products 2000 2002 2004 2006 2008 2010 2012 2014 Source: World Bank
Implication: deep reforms needed to sustain growth of more than ~5.5% Year-on-year growth, percent 7.5 7.0 6.5 6.0 5.5 5.0 4.5 GDP Potential output 4.0 Dec-05 Dec-07 Dec-09 Dec-11 Dec-13 Source: BPS; World Bank staff estimates
Recent developments: 2. US Dollar strength (not Rupiah weakness) Cumulative change since June 2014, percent 10 8 6 4 2 0-2 -4-6 -8-10 Jun-14 Aug-14 Oct-14 Dec-14 Mar-15 Rupiah against all currencies and adjusting for relative prices Rupiah against all currencies Bilateral USD/IDR Note: Rupiah against all currencies, and relative-priced, measures are based on daily proxy measure of nominal, and real effective exchange, rates. Source: CEIC; BIS; World Bank staff calculations
with more US Dollar strength potentially to come US Dollar against all currencies 130 125 120 115 110 105 100 95 90 85 80 Jan-94 Jan-99 Jan-04 Jan-09 Jan-14 Source: BIS
Implications: possible shocks; working harder for scarcer dollars Relatively speaking, the Rupiah has done fine Comparing USD/IDR to past levels not meaningful other currencies, relative prices, matter but stronger USD environment does put a premium on more, and stable, net USD supply: More exports More foreign direct investment More domestic reinvestment More structural global investment portfolio allocations to Indonesia
Recent developments: 3. Revised 2015 Budget dramatic spending reallocation Percent of GDP Energy subsidies 5.0 Capital expenditure 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 2003 2005 2007 2009 2011 2013 2015 Note: 2003-2014 outturns; 2015: Revised Budget Source: Ministry of Finance
but revenue targets are over-ambitious; spending may have to be adjusted Contributions to nominal revenue growth, percentage points 30 25 20 15 10 5 Income tax O&G Income tax N-O&G VAT/LGST Excises Int'l trade taxes NRR O&G NRR N-O&G 2015 non-oil and gas revenue targets are not feasible 0-5 -10-15 Oil price impact 2011 2012 2013 2014 2015 Note: 20011-2014 outturns; 2015: Revised Budget (compared with 2014 outturn). O&G denotes oil and gas, N-O&G denotes non-oil and gas; LGST denotes luxury goods sales tax; NRR denotes natural resource revenues. Source: Ministry of Finance; World Bank staff calculations
Implications: A long way to go to implement vision of the Budget New fuel pricing system is a banner reform: Sharply reduces wasteful, regressive spending Secures fiscal sustainability Cuts fiscal risks Capex surge - uncertain: Disbursement challenges quality; timing Limited fiscal space: achieving even half of the budgeted 100% increase in capex from the 2014 outturn will be difficult Revenues: Receding commodity tide has exposed weaknesses
Major recent developments Near-term economic outlook: relatively subdued Uncertainties 13
Base case: no sharp upturn in growth March 2015 IEQ Revisions (percentage change, unless otherwise indicated) 2013 2014 2015p 2016p 2015 2016 Real GDP 5.6 5.0 5.2 5.5 0.0 0.0 Consumer prices 6.4 6.4 6.5 5.1-1.0-0.1 Current account balance (% of GDP) -3.2-3.0-3.0-3.2-0.2-0.4 Fiscal balance (% of GDP) -2.2-2.2-2.5 - -0.5 - Note: Revisions are relative to December 2014 IEQ. Source: MoF; BPS; BI; World Bank projections 14
Major recent developments Near-term economic outlook: relatively subdued Uncertainties 15
Fiscal outlook: uncertain Rupiahdenominated fuel prices Year-on-year, percent 60 40 Rupiah depreciation vs. USD ICP, USD price ICP, price in Rupiah 20 0-20 -40-60 Jan-11 Aug-11 Mar-12 Oct-12 May-13 Dec-13 Jul-14 Feb-15
Macro outlook: uncertain timing and scale of investment rebound Fixed investment has approximately halved since 2012 Weaker commodity sector investment, reduced retained earnings growth, tighter credit Base case: some rebound, helped by infrastructure spending, but timing and size is key source of forecast risk SOEs: IDR 70.4 trillion capital injection Quality and quantity of increased infrastructure spending? Private sector ready to come to the party? Business licensing reform push one stop services Strong initial momentum Complex implementation challenge
Conclusion March 2015 IEQ Contents Regular update on economic developments and the outlook Indonesia s internationally high and volatile rice price Streamlining business licensing in Indonesia The sustainable pace of GDP growth in Indonesia: a closer look Harnessing natural resources for Indonesia s development