L-1 Part 2 Introduction to Indonesia Case Study IMF Singapore Regional Training Institute OT 18.52 Macroeconomic Diagnostics February 26 March 2, 2018 Presenter Stephan Danninger This training material is the property of the International Monetary Fund (IMF) and is intended for use in IMF courses. Any reuse requires the permission of the IMF.
Lecture Outline I. Brief History of Indonesian Economy II. Current Economic Conditions III. Reform Road Ahead 2
Growth (a) 1960-67 1968-82 1983-96 1997-99 2000-10 2011-16 Real GDP 2.0 7.5 7.2-6.4 5.2 5.4 Real GDP per capita -0.5 4.9 5.3-7.7 4.0 4.3 Headline inflation 23.6 8.3 28.4 8.1 5.4 Population 2.5 2.4 1.7 1.3 1.2 1.3 Share of world (b) GDP (c) 0.4 1.0 1.4 1.2 1.4 2.5 Population 3.2 3.4 3.5 3.5 3.5 3.5 (a) Average annual rate (b) End of Period (c) On a purchasing power parity basis Sources: IMF; World Penn Table; World Bank I. Brief History of Indonesian Economy 1968-1982: The start of period of political stability and oil price boom 1983-1996: Start of financial reform and liberalization 1997-1999: The East Asian crisis period (worst economic and political crisis post 1970 period for Indonesia) 2000-2010: Political (democratic) reform and slow return of sustained GDP growth 2010-2016: Post global economic reform (to be assessed in this course)
Growth (a) 1960-67 1968-82 1983-96 1997-99 2000-10 2011-16 Real GDP 2.0 7.5 7.2-6.4 5.2 5.4 Real GDP per capita -0.5 4.9 5.3-7.7 4.0 4.3 Headline inflation 23.6 8.3 28.4 8.1 5.4 Population 2.5 2.4 1.7 1.3 1.2 1.3 Share of world (b) GDP (c) 0.4 1.0 1.4 1.2 1.4 2.5 Population 3.2 3.4 3.5 3.5 3.5 3.5 (a) Average annual rate (b) End of Period (c) On a purchasing power parity basis Sources: IMF; World Penn Table; World Bank Brief History of Indonesian Economy 1968-1982: The start of period of political stability and oil price boom 1983-1996: Start of financial reform and liberalization 1997-1999: The East Asian crisis period (worst economic and political crisis post 1970 period for Indonesia) 2000-2010: Political (democratic) reform and slow return of sustained GDP growth 2010-2016: Post global economic reform (to be assessed in this course)
Macroeconomic landscape pre and during 1997 East Asian Crisis Robust growth momentum accompanied by worsening CA deficit and managed IDR movement 15,0 Annual Real GDP Growth Rates 1990-2000 (in %) 3.000 CA deficit and Soft-peg exchange rate regime 0 10,0 2.500-1 5,0 2.000-2 0,0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 1.500-3 -5,0 1.000-4 -10,0 500-5 -15,0 0 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996-6 Source: IMF and CEIC IDR/USD (LHS) CA(% GDP)
Credit expansion, Inflation and NPL (1991-1997) Bank lending to private sector (% growth) Inflation rate (%) Non-performing loans as share of total loans in 1996 Corsetti, G., P. Pesenti and N. Roubini, What caused the Asian currency and financial crisis? Vol. 11, no.3, pp. 305-373
1997 East Asian Crisis: IDR experienced the most severe depreciation against the USD Thai Baht per USD Malaysian Ringgit per USD 60,0 50,0 40,0 30,0 20,0 10,0 0,0 5,00 4,50 4,00 3,50 3,00 2,50 2,00 1,50 1,00 0,50 0,00 16.000 14.000 12.000 10.000 8.000 6.000 4.000 2.000 0 Indonesian Rupiah per USD 50,00 45,00 40,00 35,00 30,00 25,00 20,00 15,00 10,00 5,00 0,00 Philippine Peso per USD
Heavy Fiscal Cost incurred during the 1997 East Asian Financial Crises Source: Laeven, Luc and Fabian Valencia, 2012, Systemic Banking Crises Database: An Update, IMF Working Papers, WP/12/163 8
Return of growth and price stability in early-mid 2000s Political stability returned in early 2000s Along with the return of growth, albeit only gradually Tighter monetary policy, along with implementation of fiscal rule (budget deficit rule) in 2003, successfully reinedin inflation (from the double-digit level at the 1997 East Asian crisis period) 7,0 6,0 5,0 4,0 3,0 14,0 12,0 10,0 8,0 6,0 2,0 4,0 1,0 2,0 0,0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 0,0 Real GDP growth (%) Inflation (%) (rhs)
Managing growth and inflation during post-2008 GFC Amidst volatile global financial and commodity markets, domestic demand became the primary drivers of growth; Headline inflation has significantly been influenced by the commodity price and subsidy policy
II Current Economic Conditions
The economy performs well. Private consumption provides steady growth support
with exports and investment now also picking up. Source: CEIC and Bank Mandiri
Systemic financial risks contained, but critical vulnerabilities Credit quality remains low Legacy of recent credit boom-let Source: CEIC
Balance of Payment: Strengthened as exports have increased Recent improvement in current account Improving non-oil and gas trade balance Source: CEIC
Capital flow volatility at very low levels until just recently (2018)
Financial sector: Quantitative easing in US and Europe and regional equity markets 1000 900 800 Stock Market Indices (Jan 2005 = 100) China India Indonesia Thailand Korea Malaysia Vietnam 700 600 500 400 300 200 100 0 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14 Jan-16 Source: Bloomberg L.P. 17
Financial sector: EM Local Debt Markets have become more globalized with increased foreign participation since the GFC (% of Total Holdings) 45 40 JP ID KR MY TH 35 30 25 20 15 10 5 0 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 Source: Asian Bonds Online 18
Announcement of Tapering in May 2013 was a stress test for EM Bond Markets Cumulative Net Inflow of Fund dedicated to EM Bonds (In USD billions) 200 Taper Tantrum 180 160 Blend Currency Hard Currency Local Currency 140 120 100 80 60 40 20 0-20 Jan-04 Dec-04 Nov-05 Oct-06 Sep-07 Aug-08 Jul-09 Jun-10 May-11 Apr-12 Mar-13 Feb-14 Jan-15 Source: EPFR Global 19
Declining Volatility of Regional Currencies (Aug 2014 = 100, Local Currency/USD) 95 100 105 110 115 120 125 130 Depreciation of Local Currency against USD 135 140 145 CNY SGD THB MYR INR IDR PHP VND Source: Bloomberg L.P.
III. Reform Road Ahead
Socio-economic challenges: the big picture Remember Demographics: rising working age population High youth unemployment rate: need to generate well-paying jobs!
Selected key recent policy initiatives and reforms to support growth momentum Infrastructure push Fiscal (cut in subsidy) & Tax amnesty and reform Reform packages to improve ease of doing business
Public infrastructure push while maintaining. Low public investment spending relative to ASEAN majors
.while aiming to contain the budget deficit. Budget 2018 - reduction in the fiscal deficit to 2.2 percent of GDP - Increase in revenue: 0.8 percentage points above the projected 2017 outturn - (tax compliance) Source: Ministry of Finance, Indonesia
Tax Amnesty (1)
Tax Amnesty (2)
Tax Amnesty Asset Declaration as of December 2016 (based on Asset Declaration Letter (SPH)) ----#1 Source: Ministry of Finance & Bank Mandiri
Tax Amnesty Revenue as of December 2016 (based on Asset Declaration Letter (SPH)) ----#2 Source: Ministry of Finance & Bank Mandiri
Following the landmark 2015 fuel subsidy reform, the government has announced 14 economic policy packages (since September 2015) to: Improving business climate Streamline regulations and support private sector investment Reforms on the wage setting The country has moved 15 positions (to 91 st position) in the World Bank s Doing Business ranking in 2016
Indonesia Bringing it all together 2017 IMF staff report Overarching socioeconomic policy goals the country is in a favorable position to address its socioeconomic challenges. The government s to achieve higher sustainable and inclusive growth will help create jobs for the young and growing population. faster economic growth, requires diversifying the economy away from agriculture and towards industry and services, Policies Increasing potential growth requires a self-reinforcing fiscal-structural reform package that mobilizes revenues to finance developments pending (infrastructure, education, health, and targeted transfers), and supports structural reforms to the product, labor, and financial markets.
Thank you