Indonesia: Building on Resilience and Prospering Amid Global Economic Uncertainty 2016 Article IV Consultation Report on Indonesia John G. Nelmes IMF Senior Resident Representative for Indonesia Academic Roundtable Discussion, Jakarta, April 2017
Global Context Indonesia s Economy Key Policy Issues
Global Context
Uncertain and shifting global economic landscape
Multiple forces shaping the global outlook AEs EMs and DEs Forces Overlaid on Changing policy mix Remaining post-crisis repair Fraying globalization consensus Demographic headwinds Tepid productivity growth Rebalancing in China Tightening financial conditions Idiosyncratic shocks Demographic trends Weakening productivity growth 5
An uneven pick up in global growth Global growth: uneven pick up Commodity prices have increased Economic Growth In percent Commodity Price Index, 2005=100 8 7 World AEs 300 250 All commodities Energy Metal 6 EMs and DEs 200 5 4 3 150 100 2 50 1 2010 2012 2014 2016 2018 Source: WEO January Update 2017 0 2010M1 2012M1 2014M1 2016M1 Source: IMF Commodity Price Indices 6
Growth Projections (percent change from a year earlier) World U.S. Euro Area Asia China Japan India SE Asia 2016 3.1 1.6 1.7 5.2 6.7 0.9 6.6 4.8 Change 0.0 0.0 0.1-0.2 0.1 0.4-1.0 0.0 2017 3.4 2.3 1.6 5.3 6.5 0.8 7.2 4.8 Change 0.0 0.1 0.1 0.0 0.3 0.3-0.5-0.2 2018 3.6 2.5 1.6 5.3 6.0 0.5 7.7 5.1 Change 0.0 0.4 0.0 0.0 0.0 0.1 0.0 0.0 Note: Change is relative to the World Economic Outlook October 2016. Catatan: Perubah Sources: IMF, World Economic Outlook January 2017 Update; and IMF, World Economic Outlook October 2016. Sumber: IMF, Wo 7
Global risks are two-sided, skewed to the downside U.S. dollar strength China s transition Stronger growth in US/China Risks EM Financial Volatility Protectionism Stagnation in AEs 8
How has Indonesia s economy fared? 9
Indonesia s Economy
Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Indonesia s economy continues to perform well Commodity Share and Contribution to Real Growth (In percent, year-on-year, seasonally adjusted) 8 6 Commodities 1/ Noncommodities GDP growth Commodities (in percent of GDP, right scale) 28 27 26 Emerging Market Countries' Growth in 2016 (Percentage) 8 6 4 EMs 4 25 2 2 24 23 0-2 0 22-4 Sources: Haver Analytics; and IMF staff estimates. 1/ Includes agriculture, mining and quarrying, manufacturing coal, petroleum and gas. Source: IMF Jan 2017 WEO Update Database 11
Low inflation 9 8 7 6 5 4 3 2 Inflation Developments (In percentage points, yoy) 1 Headline Core Lower band Upper band 0 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Source: BPS, BI 12
A smaller current account deficit and rebounding trade Current Account Balance (In percent of GDP) Indonesia: Export and Import Growth (yoy, in percent) 6 4 2 Current account balance Merchandise trade balance Services and Net Income 40 30 20 Export (3mma yoy) Import (3mma yoy) 0 10 0-2 -10-4 -20-6 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Source: BI -30 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Source: BPS 13
Financial markets were buoyed in 2016 before partly reversing following the U.S. election Equity and Government Bond Inflow (In millions of U.S. dollar, cumulative since Jan 2016) 14,000 12,000 10,000 8,000 6,000 4,000 Equity Local currency government bonds Total net inflow U.S. election Exchange Rate and Government Bond Yield Movements 10.0 9.5 9.0 8.5 8.0 7.5 7.0 U.S election 14200 14000 13800 13600 13400 13200 13000 2,000 6.5 10-year (in percent) 12800 0 6.0 Exchange rate (Rp/US$, right scale) 12600-2,000 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Sources: Bloomberg L.P.; and IMF staff estimates. 5.5 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Source: Bloomberg L.P. 12400 14
IMF Projections Outlook Risks 2016 2017 2021 GDP Growth (%) 5.0 5.1 5.5 Inflation (%) 3.0 4.5 4.0 Current Account (% of GDP) Source: IMF, 2016 Article IV Consultation -2.0-2.0-2.3 Upside Stronger global growth Higher commodity prices Downside Uncertainties around U.S. policies Protectionism More volatile global financial conditions and higher interest rates Spillovers from a significant China slowdown Tax revenue shortfalls 15
Key Policy Issues
Key Ingredients of Proactive Policy Mix Fiscal Policy Monetary Policy Financial and Corporate Sector Structural Reforms 17
Fiscal Policy Growth-Enhancing Revenue and Expenditure Strategy
Near-term strength and medium-term challenges 19
Fiscal Policy: A Stronger Near-term Framework Fiscal Developments (In percent of GDP) 4 2 Overall balance Oil and gas revenue Energy subsidies (right scale) -4-2 0 0-2 2-4 2012 2013 2014 2015 2016 Est. Sources: Indonesian authorities; and IMF staff estimates and projections. 2017 Proj. 4 20
Low revenues constrain spending General Government Total Revenue (In Percent of GDP) 18 17 General Government Total Expenditure (In percent of GDP) 24 20 16 Personnel Subsidies Capital spending Social spending Others 16 12 15 8 4 14 2012 2013 2014 2015 2016 Est. 0 2012 2013 2014 2015 2016 Est. Sources: Indonesian authorities; and IMF staff estimates and projections. Sources: Indonesian authorities; and IMF staff estimates and projections. 21
Revenues are low compared to neighbors General Government Tax-to-GDP Ratio, 2015 (In percent) 20 18 16 14 12 10 8 6 4 2 0 Vietnam China Thailand India Philippines Malaysia Indonesia Sources: IMF, WEO Database; and Authority data. 22
Higher revenues will finance important spending 20 18 Illustrative Growth-Enhancing Fiscal Strategy General government, In percent of GDP Current Capital 16 14 12 10 2017 2021 2017 2021 Expenditure Revenue Source: World Bank; Indonesian authorities; and IMF staff estimates. 23
Higher revenue possible with administration reform and removal of exemptions 24
Singapore Brunei Cambodia Thailand Russia Vietnam Korea Lao PDR Indonesia Malaysia Myanmar China Japan South Africa Philippines India Brazil Room to increase the VAT rate Corporate Income Tax Statutory Rate (In percent) 40 Value-Added Tax Statutory Rate (In percent) 25 35 30 BRICS average: 27 20 OECD average: 19 25 20 OECD average: 25 15 BRICS average: 17 15 10 10 5 5 0 0 Sources: KPMG; IBFD; IEO; IMF staff estimates. Singapore Thailand Japan Indonesia Lao PDR Sources: KPMG; IBFD; IEO; IMF staff estimates. Cambodia Vietnam Korea Philippines South Africa China Russia Brazil 25
Myanmar Lao PDR Indonesia Philippines Cambodia Singapore Malaysia Brunei Vietnam Thailand Cambodia Lao PDR Singapore Philippines Indonesia Brunei Thailand Malaysia Vietnam Higher health and education spending will support higher inclusive growth Public Health Expenditure (In percent of GDP) 5 Public Education Expenditure (In percent of GDP) 7 4 EM Asia: 4.4 6 5 EM Asia: 4.8 3 4 2 3 1 2 1 0 0 Sources: World Economic Outlook; World Bank; Indonesian authorities; and IMF staff estimates. Sources: World Economic Outlook; World Bank; Indonesian authorities; and IMF staff estimates. 26
Indonesia Thailand Philippines Singapore Malaysia Vietnam Cambodia Myanmar Brunei Lao PDR Higher capital spending to improve productivity Public Capital Investment (In percent of GDP) 14 12 10 8 6 EM Asia: 5.1 4 2 0 Sources: World Economic Outlook; World Bank; Indonesian authorities; and IMF staff estimates. 27
Key Tax Reforms Tax Policy Tax Administration Excise tax rates on vehicle and tobacco, environmental (fuel) tax CIT: reduce exemptions and unify rates PIT: lower threshold for top rate, capitalize on amnesty declarations Remove ambiguities and inconsistencies in the tax laws Real property: replace transaction tax with real property tax VAT: Gradually raise rate, remove exemptions, simplify administration Simplify VAT filing and refund requirements Tax administration reforms Enhance risk management, extend audit coverage, and use external taxpayer information 28
Key Expenditure Reforms 1. Raise investment spending Investment Efficiency 6. Reduce nonpriority spending Transfers 5. Enhance the capacity of local governments 2. Raise education spending and improve efficiency Education Social 4. Consolidate social assistance programs and conditional cash transfers 3. Universal health insurance coverage Health Growth-enhancing expenditure strategy. Higher expenditure in selected areas will support inclusive growth. 29
Monetary and Exchange Rate Policy Maintaining Stability
Taking aim at inflation 31
Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Monetary Policy: Current stance is appropriate Monetary Policy and Interbank Rates (In percent) 9 8 Inflation Developments (In percentage points, yoy) 9 8 Headline Core Lower band Upper band 7 6 5 4 3 2 1 Interest rate corridor O/N JIBOR BI 7-day reverse repo Deposit facility Lending facility 7 6 5 4 3 2 1 0 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Sources: CEIC Data Co., Ltd.; and IMF staff estimates. Source: BPS, BI 32
Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Continue exchange-rate flexibility Foreign Exchange Rates 8,500 9,500 10,500 11,500 12,500 13,500 Commodity Price Index, 2005=100 250 200 150 100 All commodities Energy Metal 14,500 Onshore rupiah per US$ 15,500 Source: Bloomberg L.P. 50 0 2013M1 2014M1 2015M1 2016M1 2017M1 Source: IMF Commodity Price Indices 33
Ongoing monetary operations reforms welcome 7-day Reverse Repo Reverse Requirement Averaging Monetary Operations Reforms Remove Deposit and Lending Rate Cap 34
Financial and Corporate Sector Reinforcing the Stability Framework
How healthy? 36
Indonesia Thailand Poland Malaysia Brazil Turkey Philippines South Africa Mexico India Russia Indonesia Turkey Mexico South Africa Philippines Thailand Malaysia Brazil Poland India A sound and profitable banking sector Regulatory Capital to Risk-Weighted Assets (In percent) 25 20 15 10 5 Return on Assets (In percent) 2.5 2.0 1.5 1.0 0.5 0 0.0 Source: IMF, Financial Soundness Indicators database. Source: IMF, Financial Soundness Indicators database. 37
Non-performing loans have increased but from a low level Commercial Banks' Nonperforming Loans by Industry (In percent of total loans) 3.5 Agriculture and mining Construction and real estates 3.0 Services (incl. financial intermediaries) Others 2.5 2.0 Manufacturing Retail and accomodations Households Restructured Loans (In trillions of Indonesian rupiah) 250 200 150 1.5 100 1.0 50 0.5 0 0.0 Jan-11 Oct-11 Jul-12 Apr-13 Jan-14 Oct-14 Jul-15 Apr-16 Sources: CEIC Data Co. Ltd.; and IMF staff estimates. Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14 Source: IMF, Financial Soundness Indicators database. Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16 38
Corporate external borrowing has declined, but so has profitability Corporates: External Borrowing (In billions of U.S. dollar) 140 120 100 80 60 40 20 0 External borrowing In percent of GDP (right scale) 2010 2011 2012 2013 2014 2015 2016Q3 2016Q4 Sources: CEIC Data Co. Ltd.; and IMF staff estimates. 16 14 12 10 8 6 4 2 0 Corporates: Debt Service Capacity and Profitability (In percent) 25 20 15 10 5 Return on assets, market capitalization Debt at risk (in percent to total debt, ICR<1) 2012 2013 2014 2015 2016 Q2 Sources: Bloomberg L.P.; and IMF staff estimates. 39
Good progress in important areas Close monitoring of macro-financial linkages FSCPM Law FSCPM law introduced, implementing regulations being drafted Capital Buffer Macrofinance Countercyclical capital buffer introduced FX Hedging Corporate FX hedging regulations implemented 40
Continue financial stability reforms On Banks Closely monitor banks soundness and liquidity conditions, while enhancing interagency coordination On FSCPM Law Make the FSCPM Law fully operational Revise BI, OJK and LPS laws to clarify mandates and responsibilities 41
Financial deepening: A government priority Domestic credit to private sector In percent of GDP 180 160 140 120 100 80 60 40 20 0 China Thailand Malaysia Vietnam Brazil India Philippines Indonesia Mexico Source: World Bank Sources: IMF Staff Discussion Note 15/08; and IMF Staff estimates. 42
Structural Policy Boosting Private Investment
What is needed to increase long-term growth and equality? 44
Improving the business climate Indonesia: Ease of Doing Business Indicators 2017 (Change in Rank, points) Overall Starting a business Getting electricity Paying taxes Getting credit Trading across borders Registering property Enforcing contracts Protecting minority investors Resolving insolvency Construction permit Source: World Bank -5 0 5 10 15 20 Rank 1 21 41 61 81 101 121 141 Ease of Doing Business Rank 2017: Indonesia and Selected Regional Peers Rank Source: World Bank Singapore Malaysia Thailand Brunei China Viet Nam Indonesia Philippines India 45
Modernizing FDI regime 7 Inward FDI 2005-2015 Average, In percent of GDP 0.5 FDI Regulatory Restrictiveness Index (1=closed; 0=open) 6 5 0.4 4 0.3 3 0.2 2 1 0.1 0 Philippines Indonesia China India Thailand Malaysia Viet Nam Source: UNCTAD database, IMF World Economic Outlook 0.0 OECD - Average Source: OECD Brazil Malaysia India Indonesia China Philippines 46
Important for investment and manufacturing 47
Reforms to reduce inequality and diversify growth Gini Coefficient of Inequality: Higher is Less Equal 0.45 0.40 Expand infrastructure Streamline regulations, increase coordination with local governments Pursue trade integration and open new sectors to investment Close labor skill gaps 0.35 0.30 2005 2007 2009 2011 2013 2015 Sources: BPS 48
Summary of Recommendations Fiscal Policy Strengthen the medium-term fiscal framework through tax policy and administration reform. Improve the effectiveness and efficiency of public spending. Stand ready to deal with changes in a more volatile external environment, while maintaining exchange rate and bond yield flexibility. Monetary Policy Financial and Corporate Continue close monitoring of macro-financial vulnerabilities and actions to safeguard stability. Fully implement the FSCPM law and continue strengthening inter-agency coordination Continue improving the investment climate and expand infrastructure. Pursue trade integration and further modernize the FDI regime. Narrow the employment skills gap. Structural Reform 49
IMF/ World Bank Annual Meeting 2018 in Bali 50
Terima Kasih