INDONESIA ECONOMIC QUARTERLY CLOSING THE GAP Frederico Gil Sander Lead Economist October 3, 2017
How is the economy doing? What to expect in 2018? Closing the gap
Growth steady amid mostly favorable conditions GDP, change from the previous year, percent (line) and contributions to year-on-year growth, percentage points (bars) Private consumption Government consumption Investment Net exports Stat. discrepancy* GDP 7.0 5.0 5.0 4.7 4.8 5.2 4.9 5.2 5.0 4.9 4.9 4.9 4.8 5.0 5.0 3.0 1.0-1.0-3.0 Jun-14 Mar-15 Dec-15 Sep-16 Jun-17 Source: BPS; World Bank staff calculations. Note: * Stat. discrepancy includes changes in inventories.
Quality of spending improved, contributing to higher investment growth January-August expenditure realizations, shares of total expenditure 35.0 30.0 Total expenditure growth 7.9 percent 25.0 14.0 20.0 8.9 7.2 15.0 9.4 4.4 5.6 10.0 5.0 9.1 10.5 10.8 0.0 2015 2016 2017 Capital Expenditures Social Assistance Energy Subsidies Source: Ministry of Finance; World Bank staff calculations. 4
Commodity prices retreated following earlier gains, but export growth remained positive Exports of goods and services at constant prices, change from the previous year, percent (line), and contributions to year-on-year growth, percentage points (bars) 10 8 6 4 2 0-2 -4-6 -8-10 Goods: Non-Oil & Gas Goods: Oil & Gas Services Export of Goods and Services Mar-14 Dec-14 Sep-15 Jun-16 Mar-17 Source: BPS; World Bank staff calculations. 5
A wider current account deficit was mostly financed by higher FDI USD billion 20 15 Current account Direct investment Portfolio investment Other investment Overall balance Basic balance 10 5 0-5 -10-15 Jun-14 Jun-15 Jun-16 Jun-17 Source: CEIC and BI; World Bank staff calculations. 6
while financial flows were robust, reflecting a benign external environment and strong demand for EM assets Portfolio flows (debt and equity), USD billion 5.0 4.0 3.0 2.0 1.0 0.0-1.0-2.0-3.0 Indonesia Emerging Markets (RHS) 50 40 30 20 10 0-10 -20-30 -4.0 Jan 15 Apr 15 Jul 15 Oct 15 Jan 16 Apr 16 Jul 16 Oct 16 Jan 17 Apr 17 Jul 17-40 Source: IIF; World Bank staff calculations. 7
Ada apa dengan Konsumsi? 8
Many reasons why private consumption should have accelerated... Festive season of Idul Fitri, which moved to Q2 this year, usually sees a pick-up in consumption 4 million jobs created, double-digit wage growth Stable rupiah and subdued food inflation BI s consumer confidence index relatively high
so why did consumption remain flat? No clear answer some hypotheses, but need more data to discern among them 1. Short-term adjustments to constructive reforms Shift in expenditures from subsidies to capital expenditures and more targeted transfers Increased efforts to boost tax-to-gdp ratio to resource the state to deliver more and better services 2. Industrial investment and productivity growth remain sluggish Most jobs created were informal and recent wage growth concentrated among top earners Implementation of business-environment and pro-competitive reforms has been challenging, dampening creation of high-quality jobs 3. Commodity prices lost steam in Q2 Despite substantive progress in diversifying the economy, commodity prices still matter for Indonesia Lower prices in Q2 vs Q1, but recovered in Q3 With some exceptions, most possible explanations point to temporary causes 4. Noisy data The shift in the Idul Fitri holiday reduced the number of working days and may have introduced unusually large noise to the national accounts data
Short-term pain for long-term gain: Administered price hikes are the mirror image of better expenditure composition Change from the previous year, percent 14 12 10 Administered Administered price increases 8 6 4 2 0 Headline Food Core -2 Aug-15 Feb-16 Aug-16 Feb-17 Aug-17 Source: CEIC; World Bank staff calculations. 11
Bigger concern: Boosting private investments to create good jobs in industry and services Change in the number of employed workers (millions), February 2016 February 2017, by type of job and sector of employment 5.0 4.0 Unpaid family worker 3.0 Wage employed Services 2.0 1.0 0.0 Agricultural selfemployed Nonagricultural selfemployed Casual worker Agriculture 1 Industry -1.0 1 Source: Sakernas; World Bank staff calculations. 12
How is the economy doing? What to expect in 2018? Closing the gap
Smooth sailing or rough seas? 14
Real GDP growth is expected to gradually accelerate in H2 2017 and into 2018 2016 2017f 2018f Real GDP (Annual percent change) 5.0 5.1 5.3 Consumer price index (Annual percent change) 3.5 4.0 3.5 Current account balance (Percent of GDP) Source: BPS; -1.8BI; CEIC; World Bank -1.7 staff projections -1.8 Source: CEIC, BPS, World Bank staff projections. 15
More drivers of growth in the near-term Favorable global environment Waning of temporary effects on consumption Dividends from reforms and crowding-in of private investment from improved infrastructure Lower domestic lending rates
despite a number of downside risks G3 monetary policy normalization Political season External Growth in China Domestic Loss of reform momentum Geopolitical risks Commodity prices Weak investment and job creation
What will it take to accelerate growth in the long term? Build human capital, especially through investment in the early years Make it easier and more predictable for the private sector to invest Close the infrastructure gap
How is the economy doing? What to expect in 2018? Closing the gap
Indonesia s current public capital stock per person is low compared to both emerging and advanced economies Capital stock per person, constant 2010 USD 30,000 28,181 25,000 20,000 15,000 10,000 9,629 5,000 3,811 0 Advanced Emerging Indonesia Source: World Bank staff calculations using IMF (2017) data. Note: 2015 estimates. Unweighted averages were computed for 14 advanced economies and 21 emerging economies. 20
and even if Government manages to collect more, public resources are not sufficient to meet infrastructure needs USD billions 1,600 1,500 1,400 1,200 1,000 800 600 400 200 0 74 113 Capital expenditures (2012-16) Total infrastructure spending (2015-19) if 1/5 of all new Government revenues in 2018-19 allocated to infrastructure 390 415 Total infrastructure spending (2015-19) if all new Government revenues in 2018-19 allocated to infrastructure RPJMN target for infrastructure spending (2015-19) Estimated gap with other emerging economies (stock) Source: World Bank staff estimates using Central Government audited accounts and projections; World Bank staff calculations using IMF (2017) data. 21
To close the gap, private investment in infrastructure will need to ramp up significantly Share of total investment in core infrastructure, percent Central Government Subnational Government SOEs Private 100 90 80 70 60 50 40 30 20 10 0 19 45 21 15 Realized infrastructure investment, 2006-2010 9 33 31 37 22 19 28 22 Realized infrastructure investment, 2011-2015 RPJMN target scenario, 2015-2019 Source: Audited accounts of Central and Subnational Governments, SOE balance sheets, World Bank Private Participation in Infrastructure (PPI) database. Notes: Uses methodology from World Bank (2015) and AIPEG (2017) for 2013-2016 SOE estimates. For subnational government, 2015-2016 data refers to budgeted amounts. 22
What will it take to close the gap? 23
Mobilizing the private sector for infrastructure development requires addressing four major challenges More certainty for laws and regulations Difficulties in identifying, selecting and preparing viable projects SOE dominance hinders private sector interest Limited long-term domestic currency financing for infrastructure 24
1. More certainty in laws and regulations fewer delays and cancellations Mispricing of tariffs, uncertainty regarding tariff setting and revisions Delays in obtaining permits and approvals E.g. In the water sector, average tariffs paid by consumers is USD 0.28 per m 3 partly explains insufficient interest of private sector operators Overlapping, often inconsistent regulations (~158 laws and regulations related to PPP) Interviews with investors indicate that the permits regime is still cumbersome despite efforts to establish a one-stop integrated services center and a fast-track online system E.g. in February 2015 the Constitutional Court invoked Law 07/2004 on Water Resources due to a broad reading of Article 33 Implication: Private sector not allowed to operate water distribution networks 25
2. Challenges in identifying, selecting and preparing viable projects lack of bankable projects for the market New project proposal originates from GCA Bappenas screens project proposals and Outline Business Cases (OBCs) MoF decides which projects receive viability gap funding and endorses financing schemes Trilateral meeting between Bappenas, MoF and GCA to review and finalize budget submission Ability for GCA to conduct rigorous assessment could be improved Procurement regulations and remuneration caps prevent GCAs from hiring qualified external consultants Due to staffing and budget constraints, Bappenas cannot make up for relative lack of project preparation by GCAs Coordination could be enhanced among mechanisms to allocate projects to different Government support instruments (viability gap, availability payments etc.) 26
3. SOEs play an important role in boosting infrastructure stock, but their dominance also crowds out private sector investment IDR trillions, LHS; Percent of GDP, RHS Revenues 2,500 Revenues (% GDP) Profits Profits (% GDP) 25 SOEs account for about a third of core infrastructure spending, but have not always delivered infrastructure efficiently: declining revenues and flat profits as percent of GDP 2,000 1,500 1,000 500 0 Source: Ministry of SOEs and press reports, World Bank staff calculations. 20 15 10 5 0 Crowding out: Electricity Only 9 percent of installed generation capacity by private power utilities and captive generation Transport Private sector only accounts for 33 percent in total length of completed roads, less than 15 percent of roads under construction/awarded/assigned SOEs benefit from direct assignment and access to cheaper sources of financing 27
4. Small, concentrated banking sector limits availability of infrastructure financing 2.00 1.80 1.60 1.40 1.20 1.00 0.80 0.60 0.40 Ratio of banking assets to GDP 0.92 0.96 0.81 0.52 1.07 1.14 1.75 Share of total banking assets, % BTN, 3 BII/Maybank, 3 Other (>IDR 50tr), 23 CIMB Niaga, 4 Mandiri, 15 BRI, 14 0.20 0.00 BCA, 11 Other (IDR 10-50tr), 16 Other (IDR1-10tr), 3 BNI, 8 Source: World Bank, IMF. 28
4. and domestic institutional investors are mostly focused on short-term gains Share of pension fund investments, percent Land and buildings 5.6 Other 35 Shares 12.1 Deposit and savings 28.1 Mutual fund 6.0 Government bonds 23.2 Bond and sukuk 21.5 Source: OJK (July 2017), World Bank staff calculations. 29
Now is the time to act to attract more private investments in infrastructure One-belt-one road: USD275 billion in South and SE Asia Global interest rates going up as monetary policy is finally heading towards normalization Low levels of indebtedness create space for prudent expansion of PPP guarantees 30
TERIMA KASIH THANK YOU
While improving recently, quality of infrastructure is perceived to be lower than in ASEAN peers (indices of infrastructure quality; 1(worst) to 7(best) points) 6 5.5 5 4.5 4 3.5 Indonesia (2016-17) Indonesia (2017-18) ASEAN 3 Overall infrastructure Roads Railroad Ports Air transport Electricity supply Source: World Bank staff calculations using World Economic Forum Global Competitiveness Report data Note: ASEAN is the unweighted average of Malaysia, Singapore, Thailand and Philippines; BRICS is the unweighted average of Brazil, Russia, India, China, South Africa 32