Indonesia Economic Quarterly: October 1 Maintaining resilience Ndiame Diop Lead Economist & Economic Advisor, Indonesia World Bank October 15, 1 Paramadina Public Policy Institute www.worldbank.org/id www.worldbank.org/indonesia
Outline The challenge of maintaining resilience amidst global uncertainties The contrast is striking between the global economy and Indonesia: Global growth is weak and downside risks high Indonesia: growth remains strong and the economy resilient.. despite the drag of exports on growth Looking ahead, global risks remain high and to the downside The most significant manifestation of this is China Question: How can Indonesia maintain its resilience?
THE GLOBAL ECONOMY remains weak
The global economy slowed going into H... with no clear signs yet of a growth pick-up for Indonesia s s major trading partners Long term trend=1 15 Composite leading indicators China Euro Area 15 1 Japan India 1 United States 95 95 9 9 Aug-7 Aug-8 Aug-9 Aug-1 Aug-11 Aug-1 Source: OECD
Global economic growth should improve slightly going into 13 but the external environment will remain quite weak for the foreseeable future Real GDP growth year-on-year, percent 1 1 8 6 7. 3.9 3. 6. 5.1 5.6.8.3.6 16 1.6 1.3 1.5 6. 6. 3.3 3... 8 6 - - - -6 World High-income countries Developing countries 1 3 5 6 7 8 9 1 11 1 13 1 15 - -6 Source: World Bank 5
International financial market conditions have stabilized helped by more monetary policy action in the US, Japan and Euro Area Index ( June 8=1) 15 15 Emerging market equities (LHS) VIX index 175 15 15 1 75 Developed market equities (LHS) VIX index (RHS) 1 75 5 5 5 Sep-9 Mar-1 Sep-1 Mar-11 Sep-11 Mar-1 Sep-1 Source: CBOE, MSCI 6
Commodity prices generally rose in Q3...with price levels remaining high relative to a decade ago 7 6 5 3 International USD commodity prices Index Jan = 1 Index Jan = 1 Indonesia's Major Export Commodities Energy 7 6 5 3 Food 1 Metals and Minerals Jan- Jan- Jan- Jan-6 Jan-8 Jan-1 Jan-1 1 Note: Price index of Indonesia s Major Export Commodities is weighted by export shares of Coal, Gas, Palm Oil, Crude Oil, Copper and Rubber which represent % of Indonesia's exports Source: World Bank and CEIC 7
THE INDONESIAN ECONOMY has been resilient despite the headwinds 8
Indonesia s growth performance in the first half of 1 was strong outperforming its major trading partners (percentage growth, year-on-year) year) Real GDP growth year-on-year, percent 1 1 8 6 - - Indonesia Indonesia s Major Trading Partners 8 6 - - -6-6 Jun-5 Jun-6 Jun-7 Jun-8 Jun-9 Jun-1 Jun-11 Jun-1 Source: BPS and World Bank 9
Economic growth has been supported by strong domestic demand especially investment, while net exports have deteriorated Contribution to quarter-on-quarter, seasonally adjusted real GDP growth (percentage point) 3 1-1 - -3 Jun-9 Mar-1 Dec-1 Sep-11 Jun-1 3 1-1 - -3 Discrepancy Net Exports Investment Gov cons. Private cons. GDP Source: BPS via CEIC and World Bank 1
Investment growth is a notable recent feature of the economy lifting nominal investment-to-gdp to to record levels 35 Percent Investment as a share of nominal GDP Malaysia Philippines Percent 35 3 Thailand Indonesia 3 5 5 15 5Q1 6Q1 7Q1 8Q1 9Q1 1Q1 11Q1 1Q1 15 Source: BPS, CEIC and World Bank estimates 11
Recent period of high growth and low inflation stands out but real estate and property pressures will need to be watched going forward Percent 1 1 Core CPI inflation Percent 1 1 8 8 6 6 Real GDP growth Jan-3 Jan-5 Jan-7 Jan-9 Jan-11 Source: BPS, BI 1
External balances are showing the effects of weak external demand pushing down the trade balance USD billion Export value (LHS) Trade balance (LHS) Import growth 3mma yoy y (RHS) Import value (LHS) Export growth 3mma yoy (RHS) Percent 8 1-1 - - -8 Aug-8 Aug-9 Aug-1 Aug-11 Aug-1 Source: BI 13
The shrinking trade surplus has pulled the current account into deficit with deficits on the income and services sub-accounts also remaining sizable Goods trade balance Income balance Services trade balance Current transfers 15 USD billion USD billion 15 1 1 5 5-5 -5-1 -1-15 -15 Jun-7 Jun-8 Jun-9 Jun-1 Jun-11 Jun-1 Source: BI 1
Overall balance of payments flows have turned negative as the current account has moved into deficit Net direct investment Net portfolio Net other capital Current account Overall balance USD billion USD billion 16 16 1 1 8 8 - - -8-8 -1-1 Jun-9 Dec-9 Jun-1 Dec-1 Jun-11 Dec-11 Jun-1 Source: BI 15
Highlighting the need to support stable capital inflows with FDI holding up well so far 9 8 7 6 USD billion Primary Sector Tertiary Sector Aggregate Secondary Sector Mining 9 8 7 6 5 5 3 3 1 1 Jun-7 Jun-8 Jun-9 Jun-1 Jun-11 Jun-1 Source: BKPM 16
Shrinking current account balances are being seen elsewhere particular in economies also with high levels of commodity exports Current account balances relative to GDP Percent 1 1 1 8 6 - - 11 Q3 11 Q 1 Q1 1 Q China Indonesia Korea, Rep. Malaysia Philippines Thailand Percent 1 1 1 8 6 - Source: Haver Analytics, BI and World Bank staff calculations 17
WILL ECONOMIC GROWTH REMAIN ROBUST? Yes, but there are multiple risks to Indonesia s continued resilience 1 8
Our baseline projection is continued strong economic growth with GDP growth in the 6.-6.5 percent range through the end of 13 1 11 1 13 Real GDP growth (percent) 6. 6.5 6.1 6.3 CPI inflation (percent)* 6.3.1.9 5.1 Budget balance (percent of GDP)** -.7-1.1 -. -1.6 Major trading partner growth (percent) 6.8 3.1 3.3 3.6 Notes: * CPI inflation is Q on Q. World Bank projections except for *Budget balance, which is Government revised Budget (1) and proposed Budget (13) 19
But there are risks to the outlook and these remain dominated by external factors and are to the downside Euro Area: ECB action has reduced financial crisis risk but not eliminated risk of renewed intensification of sovereign funding and banking sector challenges US fiscal cliff : World Bank assumes 1 percent fiscal drag for the US in 13... but worst case could shave up to 5 percent off US GDP in 13 China: World Bank projects 7.7 percent growth in 1 and 8.1 percent in 13 Risk of further slowdown Additional uncertainty: Impact of renewed global monetary easing on portfolio flows and commodity prices
Further external shocks would be felt through the trade channel Indonesia s s commodity exposure is relatively high Share (%) of commodity in country s total exports (by value) in 11 IDN JPN KOR MYS SGP THA VNM* Agriculture, Foods & Tobacco 1 3.5. 3.5 19.8 3.5 5. 5.7 Mining & Bulk Commodities 13.6 1.3. 1.1.9 1.3 7.5 Mineral Fuels 3 31.3.. 1...6 9. Total Commodities 68.3 18.7 3.7 3.9 8. 38.. Manufacturing 31. 8.1 76. 55.8 71. 6.9 57. of which: Capital & Transport 5 7.5 5.8 37.9 16.7 3.5 8.9 1.8 Other.3 1...3..7. Note: Aggregated using two digits ISIC Rev.3 code (ISIC3). 1. ISIC3 1-5, 15-16, 5;. ISIC3 1-1, 3, 6-8; 3. ISIC3 1-11;. ISIC3 17-,,3-33,36; 5. ISIC3 9-31, 3-35 Source: COMTRADE via WITS 1
And shocks could also be felt through the financial channel Indonesia is exposed to changes in portfolio investor sentiment Sep 8 Non-resident SBI holdings May 1 Sep 11 Non-resident local gov. securities holdings July 1 Non-resident equity holdings Short-term external debt* Total FX Reserves 5 5 75 1 15 15 175 USD billion Source: BI, KSEI and CEIC, * Data is for end-may 1 for short term debt
and could spill over into domestic demand with investment tending to be linked to international commodity prices Index (Dec =1) 3 Year-on-year growth, percent % Real investment growth in Indonesia (RHS) USD international commodity price index (LHS) 15% 1% 1 5% Dec- Dec-5 Dec-6 Dec-7 Dec-8 Dec-9 Dec-1 Dec-11 % Source: CEIC and World Bank 3
MAINTAINING RESILIENCE in Indonesia in an uncertain global environment will not be easy
Maintaining resilience has multiple dimensions. And all these dimensions i are important t Crisis management protocol in place (capacity of the fiscal and financial market authorities to act quickly) Ability to promptly implement countercyclical fiscal policies Maintaining fiscal room & contingent financing Pre-agreement on swift Parliament approval of spending and financing re-adjustment if external risks materialize Efficient spending execution and absorption Quality of spending improvement Support FDI to meet larger external financing needs Reducing regulatory uncertainties to maintain high level of investment growth (esp. if commodity prices fall) 5
Strong debt dynamics give Indonesia fiscal space against more shocks following an impressive track record of debt reduction Percent of GDP Percent of GDP 1 8 6 Indonesia Brazil China India Malaysia Philippines 1 8 6 Source: IMF Fiscal Monitor April 1, MoF, BPS. Note: All data from IMF except Indonesia from World Bank staff calculations 6
And public deficit is currently low both in absolute terms and relative to many major economics around the globe Projected fiscal balance in 1 for selected economies Percent of GDP Percent of GDP - - - - -6-6 -8-8 -1-1 -1-1 Source: IMF Fiscal Monitor Database October 1 except * Indonesia is MoF Semester I projection 7
Improving spending quality will be important going forward high subsidy spending raises risks and constrains development spending Central government spending on: Percent of GDP 5 Energy subsidies Personnel Capital Social Percent of GDP 5 3 3 1 1 8 9 1 11 1 Budget 1 GoI 13 revised Semester I proposed Budget report proj. Budget Source: MoF and World Bank 8
As well as securing high quality external funding FDI into Indonesia remains relatively low versus regional peers Foreign direct investment, net inflows Percent of GDP 6 1993-1997 1998-5 3-7 8-11 3 1-1 - Percent of GDP 1 8 6 - Note: * data not available for 11 Source: World Bank World Development Indicators 9
And reducing regulatory uncertainties emphasizing clarity, consistency and certainty Pi Private investment tis a forward-looking dl activity it and involves sunk cost; thus uncertainty is a deterrent to investment Indonesia s success in boosting investment partially reflects success in establishing a stable macroeconomic framework (fiscal fundamentals and low inflation) Reducing further uncertainties in the business and investment regulations will help investments and support resilience And strengthening the policy framework will support Indonesia s development objectives 3
Maintaining resilience amidst global uncertainty Summary To recap: What does it takes for Indonesia to maintain resilience in the current weak global context? Indonesia has already equipped itself with sound mechanisms to remain resilient but further efforts may be needed In light of the rapid transformation of the demand side of the economy, facilitating the supply response will be key in furthering resilience This requires further accelerating investments by reducing regulatory uncertainties for business and enhancing the policy framework emphasizing clarity, consistency and certainty and enhancing the quality of public spending to boosting public investment in growth-enhancing areas and social protection. 31
Thank you Indonesia Economic Quarterly October 1 Maintaining resilience also includes special topics on: Recent trends of manufacturing exports Spending dynamics: The proposed 13 Budget Trends dsand ddrivers esof public cpeso personnel e expenditure Higher education reform www.worldbank.org/id www.worldbank.org/indonesia