Transcript Indonesia through the global crisis

Indonesia Economic Update
Clearing skies and the road ahead
Shubham Chaudhuri
Senior Economist
World Bank
14 September 2009
Jakarta Indonesia
The Indonesian economy through the
global financial crisis, and the road ahead
 Indonesia has weathered the storm well
Why?
 Clearing skies are ahead
 The coming policy agenda
Indonesian economy through the crisis
5 facts
1. Growth rising
2. …and more robust than elsewhere
3. Financial markets are recovering
4. Inflation is at its low point…but remains higher than
Indonesian’s neighbors
5. Social impact has been limited
Indonesia through the global crisis
Growth has picked up from the start of 2009
 After stalling at the end of 2008, quarterly growth rates show the
economy has been recovering through the first half of 2009
 Exports have recovered faster than imports, supporting GDP
 Domestic demand remained robust, supported by election spending,
and now the government’s stimulus spending
(aggregate GDP growth)
4 Per cent
Per cent
8
Year on year (RHS)
3
6
QoQ seasonally
adjusted (LHS)
2
4
1
2
0
0
Jun-02
Mar-04
Dec-05
Sources: BPS via CEIC, World Bank
Sep-07
Jun-09
Indonesia through the global crisis
…and other indicators also show recovery
120
Index
 After the downturn of late 2008,
other indicators show conditions
picking up since the start of 2009
 Consumer confidence at record
highs
 Car & motorcycle demand
recovering
 Industrial activity has picked up
50
%
40
30
Cement
sales
Electricity use
by industry
20
-30
2005
100
(LHS)
BI retail
sales index
(SA; RHS)
2006
2007
2008
2009
200
180
80
160
70
140
Danarakesa consumer survey (LHS)
60
2005
2006
2007
2008
2009
90%
Motorcycles
Vehicles
60%
-30%
Industrial
production
220
90
0%
0
-20
BI consumer
confidence index
30%
10
-10
110
Index
240
-60%
2005
Sources: BPS, GAI, PLN, ICA and Astra via CEIC,
Danarakesa, World Bank
2006
2007
2008
2009
120
Indonesia through the global crisis
Growth has been stronger than elsewhere
 Extreme volatility in financial markets in late 2008 led to a sharp falls in real
output in most economies
 The global economy started to stabilized and recover in Q2
6
%
4
(GDP growth, quarterly, seasonally adjusted)
Q3 2008
Q4 2008
Q1 2009
Q2 2009
2
0
-2
-4
Sources: CEIC, Haver Analytics, BPS, JP Morgan, World Bank
Thailand
Japan
Malaysia
Euro Area
U.S.
Philip.
Indonesia
China
India
-6
Indonesia through the global crisis
Financial markets are stabilizing
 Yields on Indonesian debt have returned to early 2008 levels
 Spreads on Indonesian debt spiked during the financial market turbulence
with Indonesia singled out as a vulnerable country
 More volatile than elsewhere, too
 But they have subsequently recovered, and are now below global emerging
market levels
12
%
10
8
(EMBI spreads on sovereign USD bonds)
Indonesian USD
bond spreads
(LHS)
Indonesian spreads
less global emerging market average (RHS)
Jan 07 Jul 07
Jan 08 Jul 08
Indonesia
15
240
12
160
9
4
0
(local currency 5 year bond yields)
32018
6
2
40021
%
bps
Jan 09 Jul 09
80
6
0
3
-80
Philippines
Thailand
0
Jan
08
Sources: JP Morgan, BI, CEIC, World Bank
Apr
08
Jul
08
Oct
08
Jan
09
Apr
09
Jul
09
Indonesia through the global crisis
Financial markets are stabilizing
 The rupiah, and foreign
exchange reserves, have
stabilized
 During the peak period of
market volatility, the rupiah
depreciated by over onethird, and foreign reserves
fell sharply – before
recovering
IDR/
12,600
Foreign exchange reserves
USD
(USD bn; RHS)
12,000
USD
65
bn
60
11,400
55
10,800
50
10,200
Exchange rate
(IDR/USD; LHS)
45
9,600
40
9,000
35
8,400
30
Jan 07 Jul 07 Jan 08 Jul 08 Jan 09 Jul 09
Source: BI
Indonesia through the global crisis
Inflation, at its low point, is still relatively high
 But Indonesia’s inflation remains
much higher than its trading
partners’
 Inflation is near its low-point
 Lower food prices benefiting
poorer households especially
 Core inflation has fallen less
6
Per cent
Per cent
Food
(RHS)
5
24
20
4
20
Per cent
Per cent
Indonesia
15
15
16
3
Poverty
basket
(RHS)
Inflation
(RHS)
2
1
12
8
20
India
10
10
China
5
5
0
0
4
0
0
Inflation - monthly
(LHS)
-1
Aug-07
Feb-08
Aug-08
-4
Feb-09
Aug-09
Sources: BPS, CEIC< World Bank estimates of poverty basket inflation
Japan
Thailand
-5
Aug-05
-5
Aug-06
Aug-07
Aug-08
Aug-09
Indonesia through the global crisis
And the social impact limited
 National poverty fell to 14.2%
 Open unemployment also fell in the year to February
 Employment growth outpaced the increase in the workforce
 But most new jobs were informal
25
% 23.4
National poverty rate (%)
19.1
20
18.4
18.2
17.4
Open unemployment rate
16.7
17.8
16.0
16.6
15.4
15
11.5
10
6.4
6.1
1999
2000
8.1
9.1
9.9
11.2
10.3
9.3
8.5
14.2
8.1
5
Source: BPS
2009
2008
2007
2006
2005
2004
2003
2002
2001
0
Why has Indonesia weathered the storm so
well?
 Structure of the economy
 Exports weighted towards
commodities and sent to a
diverse range of markets
 Low manufacturing/tech
shares and correspondingly
higher commodity shares in
trade
 But these factors are likely to
limit Indonesia's growth
prospects going forward
%
2
1
GDP growth (Sep-08 to Mar-09)
 Relatively low trade shares
overall – a large domestic
market (with the added benefit
of momentum coming in)
(producers of capital and high-tech goods
suffered larger falls in GDP)
0
Indonesia
Australia
-1
Canada
-2
-3
-4
-5
France
Spain
US
Netherlands UK
Italy
Germany
-6
Malaysia
-7
-8
Korea
Japan
Mexico
Taiwan
Thailand
-9
0
4
8
12
16
20
Medium- and high-tech manufacturing output (% GDP)
Sources: IMF, CEIC, ThomsonReuters, RBA, BPS, World Bank
24
%
Why has Indonesia weathered the storm so
well?
 Strong position coming into the crisis
 Relatively strong financial sector – with little exposure to critical
financial products
 Low corporate leverage
 Low public debt, strong fiscal position
(central government budget deficit and debt levels)
%
120
%
3.0
Deficit
100
2.5
(RHS)
80
2.0
Public debt
60
40
80.0 76.4
77.1
1.5
(LHS)
102.5
20
65.4 58.3
55.2
1.0
45.6
38.6 34.9 32.9 32.9
2008
2007
2006
2005
2004
2003
2009*
Sources: MoF and World Bank
2002
2001
2000
1999
0.0
1998
0
0.5
Why has Indonesia weathered the storm so
well?
 Proactive Government responses
 Financial market safety net response
 Expenditure stimulus plus tax cuts response
 Public finance response
(Central government budget balance and bank deposits
at the
end of the first half of each year,IDR
IDR
trillions)
IDR trillion
trillion
80
160
60
120
40
80
20
40
0
0
Fiscal Balance
Govt. deposits at BI (RHS)
-20
-40
S1 2005
S1 2006
S1 2007
Sources: Ministry of Finance and BI
S1 2008
S1 2009
The outlook: skies continuing to clear
With the outlook now for gradual recovery
 The outlook for the global economy has stabilized, and foresees a
gradual recovery in growth
 China and other developing economies are projected to lead the
recovery
 But global growth is projected to remain below the ~5% average of
recent years into the next decade
6
(Annual growth of
Indonesia’s
major export destinations)
Per
cent
Per cent
6
Forecasts
3
3
0
0
Jun-09
Sep-09
-3
-3
2001
2003
Source: World Bank
2005
2007
2009
2011
The outlook: skies continuing to clear
Commodity prices, still volatile, recovering some
of their losses
 International commodity prices are back to 2006 levels
 Outlook for some further, small recovery
100
Index
80
(Index, July 2008 peak = 100)
Indonesian
export prices
International
non-energy
60
International
energy
40
20
0
2005 2006 2007 2008 2009 2010 2011
Source: World Bank
The outlook: skies continuing to clear
What it has meant and is likely to mean for Indonesia
 Indonesia is positioned to do well, but a weaker global environment means
that growth prospects may be somewhat lower than they have been and
sustaining growth is going to take a push
 Gains in poverty reduction likely to slow
 Budget deficit may well be smaller than government’s proposed budgets,
suggesting greater scope for stimulatory spending
 Scope to lock-in current low inflation rates
2008
20092008 20102009 20112010
2011
Gross domesticGross
product
domestic product
6.1
4.3 6.1
5.4 4.3
6.0 5.4
6.0
Consumer priceConsumer
index
price index
9.8
4.7 9.8
5.6 4.7
6.5 5.6
6.5
Major trading partner
growth partner growth 2.1
Major trading
-1.8 2.1
3.3 -1.8
3.4 3.3
3.4
Poverty rate
14.215.4 13.614.2 11.5 13.6
11.5
Poverty rate
15.4
Sources: BPS, CEIC, World Bank. World Bank projections
The outlook: skies continuing to clear
But considerable global risks remain
 The medium term global challenge is to unwind the various stimuli used to
fight the downturn:
 Reducing the fiscal stimulus and developed country debt burdens is
made more difficult by aging populations and political will
 And unwinding monetary stimulus is difficult due to uncertainty around
lags (too soon and recovery suffers, too late and inflation takes off) and
the shift from goods inflation to asset price volatility
 This implies that financial markets may remain volatile for some time
(exchange rates, commodity prices, interest rates and so forth)
 Indonesia is particularly vulnerable to this volatility
 Still the volatility, and impact on the economy, is likely to be smaller
than late 2008
 And the longer term challenges
 Addressing global imbalances – improving but are still large implying
weaker world growth as OECD consumers save more and consume less
 And a difficult structural adjustment to higher world capital and energy
prices – compounded by higher carbon prices?
The outlook: skies continuing to clear
…and these risks impact the outlook for Indonesia
 There is both upside potential (from policy breakthroughs) and downside
risks (from more adverse global environment) to the base outlook
(Annual GDP growth)
7
Per cent
High
Per cent
Low
(Poverty rate)
7
Reference
6
6
5
5
4
4
3
3
2001
2003
2005
2007
Sourcse: BPS, World Bank projections
2009
2011
2008
2009
2010
2011
Reference projection
15..4
14.2
13.6
11.5
High scenario
15..4
14.2
13.9
11.8
Low scenario
15..4
14.2
13.4
11.3
Looking ahead to accelerating growth
Rising or floating
Per-capita real GDP grow th trajectories
(constant 2000 USD)
1600
Indonesia
"rising"
Thailand
(1979 to 1993)
1200
Philippines
(1993 to 2006)
Indonesia
"floating"
800
400
Indonesia
(1978 to 2007)
Source: World Bank
2014
2012
2010
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
0
Realizing the development agenda
 Indonesia is poised for government-catalyzed and private sectordriven investment and growth with the right policy
improvements for the investment climate and complementary
public investments
 …and Indonesia has to put in place a social protection system
appropriate for an emerging middle-income economy
 Indonesia can afford to spend more on these development
priorities
 Indonesia’s fiscal and debt position is strong…
 …and there are resources to be had if energy subsidies are
redirected towards targeted social spending
A big push on infrastructure – a two part
strategy
 Indonesia is ready for and needs some breakthroughs:
 Easing transport and logistics bottlenecks and connecting and
integrating Indonesia’s domestic markets and regions:
 Backbone infrastructure: Trans-Java highway (trans Sumatra too?)
 This could change global perceptions (Indonesia as a BRIC?) while
being desirable in its own right
 While delivering a big push at the local level by:
 Building world-class cities by investing in urban infrastructure (mass
transport, housing, water and sanitation) in the key cities that drive
Indonesian competitiveness
 Revitalizing PDAMs to provide water and sanitation to Indonesia’s
citizens (and especially a growing middle class)
 But this will require providing resources and changing incentives –
including through performance linked matching grants to Local
Governments for roads/water/sanitation
Accelerating investment climate reforms and
attacking coordination problems
 Take a more aggressive stance toward facilitating domestic and
foreign investment including
 Lower entry barriers, including the time and cost to start a
business, the Negative List (maintaining the positive
improvements in the 2007 revision while relaxing restrictions in
key sectors)
 Lower operating costs with a focus on actionable steps to
improve logistics,
 Improve trade facilitation (replacing paper copies with a single
electronic document and approval) through the National Single
Window
 and control the proliferation of non-tariff barriers that raise
costs and reduce competitiveness
 To solve difficult coordination problems success here might
require a Regulatory Reform Commission with a broad mandate
and authority to balance interests, address policy, coordination
and implementation issues
…and the sectors with major reforms have
experienced accelerating growth
 Service sectors, many deregulated at the start of the decade, have been
growing much faster than the rest of the economy
 Partly this reflects the fact that telecoms, retailing and domestic airlines
all experienced rapid growth
 But partly that other sectors, especially mining and manufacturing have
not been doing as well
10
%
8
(average annual growth)
Agriculture, mining &
manufacturing
Services
6
4
2
0
2000-02
Sources: BPS and World Bank
2002-04
2004-08
10/16/08
Putting in place a Social Protection System
Consistent with Middle Income Status
 Opportunities and Challenges
 Indonesia has the resources and institutional capacity to
develop effective social protection systems
 as demographic and epidemiological challenges mount
 Key elements
 Build proven and successful social assistance and poverty
alleviation programs (PNPM, BOS, BLT,…) into a
comprehensive social assistance program
 Lay the groundwork for a future National Health Insurance
System that is clear, feasible and affordable
 And put in place a grand bargain between employers and
workers on severance pay that provides worker’s security
without discouraging job creation
10/16/08
But all of this will require a bigger push on
institutional and civil service reforms
 Replicate models of institutional reform underway (at the
Ministry of Finance – especially Tax and Treasury) in other
institutions with significant contact with the public—Customs,
BPOM, Manpower, Trade and Industry…
 Complement ongoing bureaucracy reforms at the institution
level with a modernized regulatory framework and central
institutional set-up for civil service policy making, regulation and
management
 Improve compensation, recruiting and promotion but link it to
accountability
 Allowing fit for function institutions (not one size fits all)
Indonesia Economic and Policy Update:
Clearing Skies
Shubham Chaudhuri
Senior Economist
World Bank
14 September 2009
Jakarta Indonesia