Indonesia Economic Quarterly June 2017 Upgraded Hans Anand Beck Acting Lead Economist, Indonesia June 15, 2017
Key Takeaways S&P upgrade acknowledged strong economic fundamentals and management. S&P returned Indonesia to investment grade credit rating after 20 years, citing strong (fiscal) fundamentals Global growth and trade is firming but remains below pre-gfc levels. 2017 economic performance continues to be broadly positive, with some temporary help from commodities. Q1 2017 Quarterly GDP growth rose on a rebound in government consumption and surging manufacturing and commodity exports. Signs of a sustained turnaround in investment and credit growth. Revenues continued their strong start to the year supported by commodities, creating space for productive public spending. Risks remain tilted to the downside, including resistance to structural reform efforts. Investing in the future is critical - to leverage the upgrade, reduce commodity dependence, and boost growth potential There is evidence that reducing Indonesia s negative investment list will boost FDI Invest in early childhood development to address inequality and increase productivity
S&P recognized strong policy and fundamentals 2017 positive performance continues, with temporary help from commodities Invest in the future to leverage the upgrade, reduce commodity dependence and boost growth potential 3
S&P recognized Indonesia s strong economic fundamentals, returning it s sovereign rating to Investment grade after 20 years. Indonesia has exhibited effective policymaking in recent years to promote sustainable public finances and balanced economic growth Indonesian authorities have taken effective expenditure and revenue measures to stabilize the country s public finances despite the terms of trade shock Indonesia's increased focus on realistic budgeting has reduced likelihood that shortfall in future revenue would widen general government deficit significantly. - Standard & Poor s BB+ BBB- 4
While Indonesia s fundamentals are strong, Indonesia will still need to compete. 2015 2016 2017f Philippines 2016e Vietnam 2016e Real GDP (Annual percent change) 4.9 5 5.2 6.8 6.2 Consumer price index (Annual percent change) 6.4 3.5 4.3 1.8 2.7 Current account balance (Percent of GDP) -2.0-1.8-1.8 0.2 3 Budget balance (Percent of GDP) -2.6-2.5-2.6-2.4-6.5 Debt (Percent of GDP) 27.4 27.9* 29.0 42.1 62.1 S&P Rating (2017) BBB- BBB BB- Source: BI: BPS; EAP Economic Update Report ; MoF; World Bank staff calculations Note: e stands for estimate; f stands for forecast; *estimated figure 5
..as the global economy begins to pick up again. growth yoy, percent 5 4 3 2 1 0-1 -2-3 2004 2006 2008 20 2012 2014 2016 (E) 2018 (F) 25 Values Volumes 20 15 5 0-5 - -15-20 Feb-04 Feb-07 Feb- Feb-13 Feb-16 Source: World Bank Global Economic Prospects June 2017 6
S&P recognized strong policy and fundamentals 2017 positive performance continues, with temporary help from commodities Invest in the future to leverage the upgrade, reduce commodity dependence and boost growth potential 7
Following the first increase in growth rates in 5 years in 2016, the trend continued in Q1 2017. Contributions to real GDP growth yoy, percentage points 8 Private consumption Investment Stat. discrepancy* Government consumption Net exports GDP 6 4 2 0-2 Mar-14 Dec-14 Sep-15 Jun-16 Mar-17 Source: BPS; World Bank staff calculations 8
There are signs of a more sustained pick up in investment 3mma growth yoy, percent, LHS; growth yoy, percent, RHS 20 Investment credit growth (RHS) 16 Cement sales 14 0 12 - -20 8-30 Capital goods import growth 6-40 Commercial Vehicle sales 4-50 2 Apr-15 Oct-15 Apr-16 Oct-16 Apr-17 Source: BI; BPS; World Bank staff calculations Note: The nominal capital goods imports is measured in percent yoy terms. All other LHS variables are measured in 3mma percent yoy terms. 9
And signs of a a pick up in broad credit growth growth yoy, percent 18 16 14 Deposit growth 12 8 Credit growth 6 4 7 Day reverse repo rate 2 Jan-15 Aug-15 Mar-16 Oct-16 May-17 Source: BI; World Bank staff calculations
Industrial Production and manufacturing export growth is firming up, although commodities are also supporting exports. Industrial Production Index and PMI Exports growth index, LHS; growth yoy, percent, RHS growth yoy, percent 53 52 Growth of Industrial Production Index (RHS) 12 30 20 Oil and gas Mining Rubber Other Total goods exports Coal Palm oil Manufacturing Services 51 8 50 49 48 47 0 Manufacturing Purchasing Managers' Index (PMI) 46-2 May-15 Nov-15 May-16 Nov-16 May-17 Source: BPS; Nikkei/Markit 6 4 2 0 - -20-30 Mar-15 Mar-16 Mar-17 Source: CEIC and BI; World Bank staff calculation 11
Commodities are also supporting a good start to the year for revenue collection Total revenue collection increased by 17.8 percent yoy Contributions to growth yoy, percentage points 20 17.8 0 13.6 Excises and other taxes VAT/LGST Oil and gas related revenues Non oil and gas income tax - -6.5-6.9 Revenue growth -20 Jan-May 2014 Jan-May 2015 Jan-May 2016 Jan-May 2017 Source: Ministry of Finance; World Bank staff calculations 12
providing space to spend, especially in more productive areas such as capital. January-May actual expenditure growth yoy, percent 2015 2016 2017 0 80 60 79 63 40 20-15 1.4 8.0 14.4 (20) (40) (60) (80) (32) (12.8) Personnel Material Capital Energy Subsidies Source: Ministry of Finance; World Bank staff calculations 13
Support from commodities is forecast to be transitory... The Net Trade-weighted Price Index growth yoy, percent 150 130 2016 2017 1 2015 2018 90 70 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Source: BPS; World Bank; World Bank staff calculations Note: Net trade-weighted price index is constructed over Indonesia s six major export commodities. 14
and risks to growth remain tilted to the downside. Upside Downside External risks Domestic risks 15
S&P recognized strong policy and fundamentals 2017 positive performance continues, with temporary help from commodities Invest in the future to leverage the upgrade, reduce commodity dependence and boost growth potential 16
Lifting FDI restrictions can boost physical capital and hence Indonesia s growth potential Inverse relationship between FDI investment policy restrictiveness and FDI inflows FDI stock measured in current USD and FDI regulatory index Source: World Bank staff calculations on the basis of UNCTAD, World Development Indicators and OECD data (online dataset http://stats.oecd.org/). 17
And Investment in early childhood development can create the human capital the economy needs to grow. Association between child stunting (Height-for-age Z score) and fluid intelligence (W Z-score) in later life, Indonesia Source: Giles, Satriawan, and Witoelar, 2017 (based on IFLS data) Notes: Fluid intelligence assesses respondents general ability to think abstractly, reason, identify patterns, solve problems, and discern relationships. The Z-score is a standard measure that expresses each value by the number of standard deviations it is from the reference mean. The W-score is the score obtained from an adaptive number series test of fluid intelligence, which was normed and extensively pre-tested for the 2014 round of the IFLS. It was standardized into a Z-score for the purposes of this analysis. 18
while reducing stunting also tackles a major source of inequality. 60 Stunting Incidence (percent of under-5 population) Stunting affects everyone, but is worse for the poor In early childhood, stunting leads to increased risk of death and illness In school-age, stunting leads to loss of IQ and poor learning outcomes In adulthood, stunting leads to increased risk of NCDs and lower income levels 50 40 30 20 41 39 37 34 48 42 39 32 30 29 0 2007 2013 Poorest Second Middle Fourth Richest Source: Riskesdas 19
Terima Kasih 20
As global trade has rebounded, so has Indonesia s trade performance Contributions to real growth yoy, percentage points 8 6 Exports Services Goods: Oil & Gas Goods: Non-Oil & Gas Export of Goods and Services 8 6 Imports Services Goods: Oil & Gas Goods: Non-Oil & Gas Import of Goods and Services 4 4 2 2 0 0-2 -2-4 -4-6 -6-8 -8 - Mar-14 Sep-15 Mar-17 - Mar-14 Sep-15 Mar-17 Source: BPS; World Bank staff calculation Source: BPS; World Bank staff calculation 21