Transcript Indonesia Jobs Report

Indonesia Economic Quarterly
Building Momentum
Shubham Chaudhuri
Lead Economist
World Bank
8 April 2010
Jakarta Indonesia
Outline
 Indonesia’s economic momentum built through 2009
 Policy has generally supported this momentum, and near-term risks
may be smaller than they first appeared
 Strong capital inflow
 China-ASEAN FTA
 Fiscal stimulus
 Impact of windfall revenue on the Budget
 The improving near-term economic outlook allows focus to shift to
building the current momentum into the medium term
 The Government’s medium development plan (RPJMN)
 Infrastructure
 Social protection
Building momentum
Indonesia’s growth built through 2009
 Indonesia’s economy accelerated each quarter of 2009, ending the year
outpacing the past decade’s average
 Economy expanded by 4.5% in 2009
 Growth has been broad based across all components of GDP
 Indonesia’s trading partners have also recovered, supporting trade volumes
4
Per cent
Per cent 8
8
Pe cent
Per cent
8
Year on year
Year on year
(RHS)
3
6
4
4
4
0
0
2
-4
QoQ seas. adjust (LHS)
2
Average (LHS)*
1
-4
QoQ Seas. Adjust.
0
Dec-02
0
Sep-04
Jun-06
Mar-08
Dec-09
Sources: BPS via CEIC, World Bank
-8
Dec-02
-8
Sep-04
Jun-06
Mar-08
Dec-09
Building momentum
…and other domestic indicators are strong
Index
Index
 Other economic indicators have
stabilized at high levels
120
 Consumer indicators are
around record highs
100
190
80
150
60
110
 Industrial indicators are
strong
BI Retail
sales
Feb-06
800
'000
600
'000 80
Motor
cycles
(LHS)
40
Motor
vehicles
(RHS)
0
Feb-06
Feb-08
Feb-09
Feb-10
Per cent
30
20
20
10
10
0
0
-10
20
Feb-08
Feb-09
Feb-10
Sources: CEIC, World Bank
-10
Industrial production
-20
0
Feb-07
Feb-07
Per cent
60
400
200
30
230
BI Consumer
Survey Index
Electricity (industrial)
-20
Cement sales
-30
Jan-07
-30
Oct-07
Jul-08
Apr-09
Jan-10
Building momentum
Inflation has fallen to decade lows
 Headline inflation has picked up from its low point
 Core inflation has continued to fall, to decade lows of 3.6% year to
March
 Inflation picked up at the start of the year, largely because the
seasonal increases in food prices were larger than normal, and
this affected poorer households especially
 As the harvest comes in and
global growing conditions
improve, these increases should
unwind
 But inflation remains higher than
in most of Indonesia’s neighbors
 And Indonesia has delayed
passing on to consumers last
year’s recovery in global
energy prices
Source: BPS
Building momentum
Financial markets have bounced back
 Yields on Indonesian debt have returned to pre-crisis
 Spreads have narrowed further than other emerging markets
 In January, yields on five year IDR sovereigns hit their lowest level
since these bonds were first issued in 2003
 Agencies have raised their sovereign debt rating for Indonesia
1200
Basis points
Basis points
Indonesian EMBI
USD Bond Spreads
(LHS)
1000
400
300
24
Percent
Percent
21
21
18
800
18
Indonesia
200
15
600
Indonesian Spreads Less
Global EMBI Average
(RHS)
100
24
15
12
12
Philippines
400
0
9
6
200
9
Thailand
6
Malaysia
-100
3
3
United States
0
Jan-05
-200
Nov-05
Sep-06
Jul-07
May-08
Mar-09
Jan-10
Sources: BPS via CEIC, World Bank
0
Jan-08
0
Jul-08
Jan-09
Jul-09
Jan-10
Building momentum
2009 budget deficit was smaller than expected
 Revenue surged at the end of 2009, while expenditure was only a little
weaker than expected cutting the budget deficit to 1.6 per cent of GDP
 The government spent about 95 per cent of the revised Budget
 Programmatic spending was up on previous years; subsidies and interest
costs down
 The fiscal stimulus is estimated to have added as 1 percentage point to GDP
growth
Share of line ministries’ budget spent
Government tax revenues
-8
-10
Per cent
Per cent
IEQ Q2
IEQ Q3
-8
-10
-12
-12
Growth excluding the VAT payment
-14
-14
-16
-16
Realized growth
-18
-18
Jun-09
-20
Jul-09
Aug-09
Sep-09
Oct-09
Nov-09
100%
90%
90%
80%
80%
70%
70%
60%
60%
50%
50%
40%
40%
30%
30%
20%
20%
10%
10%
0%
Previous forecast
-20
100%
Dec-09
0%
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Monthly 2007
Monthly 2008
Monthly 2009
Monthly 2009
Monthly 2009
Sources: BPS via CEIC, World Bank
Cum. 2007
Cum. 2008
Cum. 2009
The Outlook
Faster growth, moderate inflation
 Outlook remains for gradual pick-up in growth
 Major trading partner growth is expected to pick up and drive
exports
 Domestic demand, particularly investment, and more export
processing activity, are expected to drive further import growth
 Inflation should slowly pick up into 2011 on solid domestic
demand and a more stable exchange rate
2009
2010
2011
Gross domestic product
(Annual per cent change)
4.5
5.6
6.2
Consumer price index
(Annual per cent change)
4.8
5.3
6.1
Poverty rate
(Per cent of population)
14.2
13.5
11.4
Balance of payments
(USD b n)
12.5
6.2
4.7
Budget balance
(Per cent of GDP)
-1.6
-1.3
na
Budget balance, government projection (Per cent of GDP)
-1.6
-2.1
na
Major trading partner growth
-1.0
4.3
4.0
(Annual per cent change)
Sources: BPS, CEIC, World Bank. World Bank projections
There are both risks to the outlook and
near-terms issues to consider
10/16/08
 Some risks for the outlook:
 Withdrawal of global fiscal and monetary stimulus
 Weak demand from OECD economies, as consumer and public debt
levels are addressed
 Ongoing economic reforms in the region so growth is more reliant on
domestic demand
 On top of these external risks to Indonesia’s economic outlook are
near-term issues challenging policy makers:
 Strong capital inflows into Indonesia
 Ongoing exposure of Indonesia’s budget to commodity price shocks
 Fears that the ASEAN-China FTA will have a significant impact on
domestic producers
The Outlook
…and these risks impact the outlook for Indonesia
 There are both upside potential (from policy breakthroughs and stronger
improvements in the global economy) and downside risks to the outlook
Scenarios
Annual GDP growth
7
Per cent
Low
Per cent
7
High Reference
MTP*
Credit
Export Rupiah
prices (USD/IDR)
GDP
2010
6
6
5
5
4
4
3
3
Reference
4.3
17
1.0
9400
5.6
Low
3.1
14
0.8
11000
5.0
High
4.7
18
7.2
8500
6.2
Reference
4.0
25
5.7
9400
6.2
Low
1.7
15
4.1
10000
5.6
High
4.9
31
14.8
9000
6.4
2011
2002
2004
2006
2008
Sourcse: BPS, World Bank projections
2010
The Outlook
Risks remain to the global outlook
 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 proposed revised Budget
Volatile oil prices again expanding the deficit
 The proposed revised 2010 Budget
projects a wider deficit of 2.1% of
GDP
 Mostly due to higher oil price
projections, repeating past years’
experience
 Total expenditure is expected to
increase by around 3 per cent in 2010
 Mostly due to higher energy
subsidies and transfers to
subnational governments
 Delayed reform of regulated
energy prices and higher outlook
for global oil prices are expected
to increase subsidy costs by 30%
Energy subsidies, as % of GDP
5
%
APBN
Realized
4
3
*
2
1
0
2004
* projected
2005
2006
2007
2008
2009
Sources: MoF and BPS. World Bank 2010 projections
2010
The proposed revised Budget
Volatile oil prices again expanding the deficit
 Tax revenues are expected to increase significantly as incomes recover
 With a stronger exchange rate and given past patterns, revenues may
be event stronger than projected
 There are upside risks to the government’s projections; stronger
assumptions about the economy and for revenues reduce the deficit
towards 1% of GDP
 The wider deficit can be easily financed from the 2009 financing surplus
 And the government is well-advanced on its commercial debt sales,
selling debt at sharply lower interest rates and for longer terms
Sources: BPS via CEIC, World Bank
The proposed revised Budget
Volatile revenues hinder effective budgeting
 A large spike in revenues with, eg, higher oil prices means more funds need
to be allocated to the education budget under the ’20% rule’
 Some of the problems with these ‘windfalls’ to the education budget have
been addressed:
 The Government’s early revision to the state budget reduce the risk of a
large windfall arising late this fiscal year
 The revised budget establishes an education endowment fund to help
ensure that ‘windfalls’ are managed and spent well
 Strengthening budget contingency planning in MoNE and MoRA could
also help to better manage the problem
 Windfalls for the education budget are part of a broader problem, namely,
volatility in the budget caused by energy subsidies and fluctuations in
resource revenues
Some policy challenges
Financial markets continue to rebound, bringing large capital
inflows
 USD 6.6 billion of foreign capital has flowed into Indonesian financial
assets since June 2009
 In this time the Rupiah appreciated 9%
 And the central bank has allowed its foreign exchange reserves to
grow, while ‘sterilizing’ these increases
 The cost of this sterilization is estimated to be low…so far
40
IDR trillion
USD billion
75
75000
USD million
IDR per USD
June 2009
June 2009
65000
Total Reserves
(RHS)
20
8500
9500
60
55000
0
Total Reserves
(LHS)
45
10500
45000
IDR/USD
(RHS)
-20
30
Net Foreign Capital Inflows
(LHS)
11500
35000
IDR Appreciation
-40
Jan-07
15
Jul-07
Jan-08
Jul-08
Jan-09
Jul-09
25000
Jan-10
Sources: BPS via CEIC, World Bank
Jan-07
12500
Jul-07
Jan-08
Jul-08
Jan-09
Jul-09
Jan-10
Some policy challenges
Limited impact from the ACFTA
 Cuts in tariffs on goods imported from China start in 2005 and another round
occurred on 1 January 2010.
 The cuts in January were relatively small and follow gradual reduction; higher
tariffs remain on some ‘sensitive’ goods
 Few traders are using the lower rates available under the agreement
 …suggesting this round of tariff reductions is likely to have a small impact
 The agreement offers large potential benefits to Indonesia
 Since tariff reductions began in 2005, Indonesia’s exports to China have
increased by almost 70%
 The agreement
also promises
lower prices for
Indonesian
consumers and
producers, and
better access to
China's markets
Sources: MoF
Agriculture
Chemicals
E. Machinery
Fish
Leather, Rubber, Footwear
Other Manufacturing
Metals
Minerals
NE Machinery
Petroleum
Textiles & Clothing
Transport Equipment
Wood, Pulp, Paper, Furniture
Average
2004
11.9
6.5
6.8
4.7
8.7
7.3
9.8
5.1
2.6
5.0
10.8
28.7
4.7
9.9
2005
10.5
6.5
6.8
0.1
8.7
7.3
8.9
6.0
2.6
3.2
10.8
28.7
4.7
9.6
2006
9.6
6.5
6.8
0.1
8.7
7.3
8.9
6.0
2.6
3.2
10.8
28.7
4.7
9.5
2007
9.4
5.4
4.6
0.2
7.3
5.5
6.5
5.0
2.0
1.2
7.6
18.8
4.3
6.4
2008
9.4
5.4
4.6
0.2
7.3
5.5
6.5
5.0
2.0
1.2
7.6
18.9
4.3
6.4
2009
6.9
2.4
2.1
0.1
4.3
2.2
3.2
1.9
0.8
1.2
4.3
18.5
1.1
3.8
2010
6.8
1.5
0.5
0.1
3.5
0.6
1.7
1.2
0.3
1.2
1.6
18.4
0.4
2.9
2011
6.8
1.5
0.5
0.1
3.5
0.6
1.7
1.2
0.3
1.2
1.6
18.4
0.4
2.9
2012
6.7
1.2
0.4
0.0
3.0
0.2
1.3
1.1
0.2
1.2
1.1
18.1
0.0
2.6
Realizing the development agenda
 The improving economic environment allows Indonesia to shift
focus to the medium term development issues
 Indonesia is poised for government-catalyzed and private
sector- driven investment and growth with the right policy
improvements for the investment climate and complementary
public investments
 The Government focuses on these issues in its new medium
term development agenda (RPJMN)
 The improved economic environment allows Indonesia to spend
more on its 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 and
infrastructure investments
10/16/08
Realizing the development agenda
Accelerating investment climate reforms and attacking
coordination problems
 More aggressive stance toward facilitating domestic and foreign investment:
 Foreign direct investment levels are relatively low; these investments are
far less footloose than short-term inflows into capital markets
 Lower entry barriers, including the time and cost to start a business, the
Negative List
 Lower operating costs with a focus on actionable steps to improve
logistics,
Foreign direct investment as % of GDP, 2004-2008
 Improve trade facilitation
7
%
through the National Single
6
Window
5
 and control the proliferation
of non-tariff barriers that raise 4
costs and reduce
3
competitiveness
2
1
Philipp's
India
Indonesia
Sources: UNCTAD, World Bank
China
Malaysia
Thailand
0
Vietnam
 Solution for Coordination:
Regulatory Reform Commission
Realizing the development agenda
…supporting investment growth
 As China rebalances from investment to consumption-led growth,
Indonesia will want to spur investment and net exports
Contributions to annual average growth, 2003-2008
%
12
10
Net exports
8
6
Investment
4
Private
consumpt'n
Total growth
2
0
Source: World Bank
China
India
Indonesia
-2
10/16/08
Realizing the development agenda
Policies need to support economy-wide growth
 Sectors with the greatest reforms grew faster last decade
 Service sectors, many deregulated at the start of the decade, have
been growing much faster than the rest of the economy
 Telecoms, retailing and domestic airlines all experienced rapid
growth
 But partly the reflects that other sectors, especially mining and
manufacturing have not been doing as well
%
10
(average annual growth)
Agriculture, mining & manufacturing
Services
8
6
4
2
0
2000-02
Source: BPS via CEIC
2002-05
2005-09
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 Quarterly
Building Momentum
Shubham Chaudhuri
Lead Economist
World Bank
8 April 2010
Jakarta Indonesia
10/16/08
Slides not used
10/16/08
These development items are consistent
with the Government’s development plan
 The Government’s 11 priorities;
 i) Bureaucracy and governance reform,
 ii) Education,
 iii) Health,
 iv) Poverty reduction,
 v) Food security, vi) Infrastructure,
 vii) Investment and business climate,
 viii) Energy,
 ix) Environment and disaster management,
 x) Least developed, frontier, outer, and post conflict areas,
xi) culture, creativity, and technological innovation.