Indonesia Economic Quarterly, July 214 Hard choices Ndiamé Diop Lead Economist
The new administration will face major near-term challenges Fiscal pressures Economic growth Poverty and inequality reduction External pressures Ending extreme poverty and achieving shared prosperity? OR Persistent pockets of extreme poverty and many Indonesians left behind? Hard choices 2
International backdrop High-income economy growth is strengthening (manufacturing PMI, +5=expansion) 6 58 56 54 52 5 48 46 44 Jan-11 Oct-11 Jul-12 Apr-13 Jan-14 Source: Markit US Euro area Japan 12 11 1 but most global commodity prices, except oil, continue to decline (index, January 212 = 1, 3mma) 9 8 7 6 Brent oil Copper Coal Palm oil Rubber 5 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Source: World Bank Hard choices 3
Economic growth - Will Indonesia return to 6% growth? (annual growth, percent) 8 7 6 5 4 3 2 1 East Asia Pacific (excl. China & Indonesia) Indonesia Forecast -1 21 23 25 27 29 211 213 215 Source: BPS; World Bank staff calculations Hard choices 4
Fiscal risks are building up steeply 23 18 13 8 Significantly weaker revenue growth has added to expenditure-side pressures (contributions to overall nominal revenue growth, percentage points) All other revenues Intl. trade taxes Oil and gas revenues (tax and non-tax) Income tax (non-oil and gas) and contributed to a substantial rise in government financing needs (IDR trillion) 5 4 3 2 1 Fiscal deficit Debt payments 3-2 211 212 213 Source: Ministry of Finance; World Bank staff calculations Hard choices 29 21 211 212 213 214 (1) 214 (2) Note: 214 (1) is initial Budget (APBN), (2) is revised Budget (RAPBN-P) Source: Ministry of Finance; World Bank staff calculations 5
External balance still in focus despite macro stabilizing measures After successful macro stabilization, focus now on weak exports (export and import USD values, yoy growth, 3mma) 5 4 3 2 1-1 Imports Exports -2 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Source: CEIC; World Bank staff calculations which have been hit by ongoing commodity sector challenges (contributions to export value growth yoy, percentage points) 1 5-5 -1-15 Non commodities Commodities -2 Mar-12 Sep-12 Mar-13 Sep-13 Mar-14 Source: CEIC; World Bank staff calculations Hard choices 6
Moderate pace of growth expected to continue July IEQ Previous (March IEQ) 212 213 214p 215p 214p 215p Real GDP (% change) 6.2 5.8 5.2 5.6 5.3 5.6 Consumer price index (% change) 4.3 6.9 5.8 4.9 6.2 5.2 Current account balance (% of GDP) -2.8-3.3-2.9-2.4-2.9-2.1 Budget balance (% of GDP) -1.9-2.2-2.8 n.a. -2.6 n.a. Source: BI; BPS; Ministry of Finance; World Bank staff projections Hard choices 7
Assessing the hard policy choices ahead Addressing nearterm macro challenges Reinvigorating growth Fiscal pressures External pressures AFFECTS THE CAPACITY TO DELIVER ON KEY STRUCTURAL REFORMS: - SUPPLY-SIDE REFORMS Infrastructure Skills Functioning of markets - REFORMS TO ENSURE SHARED PROSPERITY Local access to services Social protection Management of disaster risks & resilience and achieve key development outcomes Faster poverty reduction Reduced inequality FISCAL REFORMS Redirecting spending Mobilizing revenue Hard choices 8
Inequality is a growing problem in Indonesia Inequality on the rise in recent years and increasing faster in Indonesia than in its neighbors (percent, LHS; percentage points, RHS) (199-211 annual average change in Gini coefficient, percentage points) 25 2 Inequality (Gini coefficient, RHS) 5 4.8.6.4 15 3.2 1 Official poverty rate (LHS) 2. -.2 5 GDP (LHS) 2 23 26 29 212 Note: Poverty rates are March BPS estimates; 214 GDP growth: World Bank projection Source: BPS; World Bank staff calculations Hard choices 1 -.4 China Indonesia Laos India Vietnam Cambodia Philippines Malaysia Thailand Source: Kanbur, Rhee and Zhuang, 214, Inequality in Asia and the Pacific ; World Bank staff calculations 9
Why does inequality matter for Indonesia? Inequality can slow down economic growth Preliminary research comparing districts in Indonesia indicates that high levels of inequality hurt growth. Inequality slows down poverty reduction If all households received growth equally, poverty would have fallen from 17.4 percent in 23 to percent by 21. Inequality can trigger conflict and social tension Districts with Gini coefficients of 4 experienced 6 percent more conflict than districts with Gini coefficients of 2. The majority of Indonesians believe that the country is more unequal than they d like it to be Hard choices 1
What is causing the rise in inequality? Children are born with unequal opportunities (lack of access, percent) Decile 1, urban No proper sanitation No clean drinking water 16-18 year olds not enrolled Not fully immunized Unskilled birth attendant Decile 1, rural Returns from jobs favor the rich and well-educated (wage and consumption premiums compared to workers with primary education, percent) 12 1 8 6 4 2 23 2 4 6 8 1 Source: Susenas; DHS; World Bank staff calculations Hard choices Worker Wage Household Source: Sakernas; Susenas; World Bank staff calculations 11
What is causing the rise in inequality? The rich benefit from greater returns to capital (annual change in real terms, percent) 1 8 6 4 2-2 -4 Real formal wages Real informal wages Real JCI price return The poor are more vulnerable to shocks to their income All households face risks, for example health, cost of living shocks, and natural disasters, that can affect their income The rich have access to more efficient coping mechanisms to respond to shocks (savings, insurance, good jobs, etc.); the poor often do not -6-8 22 24 26 28 21 212 The poor are less able to take risks to increase their income Source: Indonesia Stock Exchange; BPS; Sakernas; World Bank staff calculations Hard choices 12
What can be done to address rising inequality? 83% of Indonesians believe it is urgent for the new government to tackle inequality Distribution: improve spending and taxation policies (for example, eliminate regressive fuel subsidies, enhance tax compliance) Opportunities: increase poor households access to high quality education and health Mobility: support labor mobility for high-quality job creation Safety nets: adequate and well-targeted, to reduce the vulnerability of the poor to shocks Hard choices 13
Thank you July 214 IEQ Contents: Regular update on economic developments and the outlook New purchasing power parity-adjusted estimates of Indonesia s economy Inequality is growing in Indonesia and it matters for policy El Niño, forest fires and haze: the imperatives for concrete action On the web: http://www.worldbank.org/en/news/feature/214/7/21/indonesiaeconomic-quarterly-july-214