Post on 25-Jun-2020
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INDONESIA ECONOMIC QUARTERLY 03|18 TOWARDS
INCLUSIVE GROWTH
Frederico Gil Sander,
Lead Economist
March 27, 2018
Recent economic developments and outlook
Collecting more and spending better for inclusive growth
How is the health of the Indonesian economy?
The Indonesian economy grew slightly faster…
4Source: BPS; World Bank staff calculations
5.15.2
-4
-2
0
2
4
6
8
Dec-15 Jun-16 Dec-16 Jun-17 Dec-17
Private consumption Government consumption
Investment Net exports
Stat. discrepancy* Change in inventories
GDP
GDP growth yoy and contributions,
percentage points
…as investment remains on multi-year highs thanks to higher machinery purchases
5Source: BPS; World Bank staff calculations
-2
-1
0
1
2
3
4
5
6
7
8
Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17
Buildings & Structures Machine & Equipment Vehicles
Other Equipments Cultivated Bio. Res. Intellectual Property
Investment
Growth in gross fixed capital formations yoy and contributions to growth, percent
-2
0
2
4
6
8
10
12
Feb-16 Aug-16 Feb-17 Aug-17 Feb-18
Headline
Administered Food
Core
Administered price increases
Headline inflation declined in the second half of 2017…
6
Change from the previous year, percent
Source: BPS; World Bank staff calculations
1,469
1,463
1,138
-4
3,824
191
3,593
2,610
-3,000
-2,000
-1,000
0
1,000
2,000
3,000
4,000
5,000
2011 2012 2013 2014 2015 2016 2017
Manufacturing Agriculture, forestry and fishery Other Industry Services Total
…while labor markets remained robust
7
Net jobs created, by sector, thousands
Source: BPS; World Bank staff calculations
8
Ada apa dengan
Konsumsi3?
What is the matter with consumption? – Part 3
Rp
Private consumption growth was slightly below its 10-year average but well above pre-2008 levels
9Source: BPS; World bank staff calculations
20174.95
2001-2007 average
4.05
2008-2017 average
5.10
0.0
1.0
2.0
3.0
4.0
5.0
6.0
2001 2003 2005 2007 2009 2011 2013 2015 2017
Private consumption growth, year-on-year, percent
The effects of inflation and the Rupiah, key drivers of consumption, often come with a lag
10Source: World Bank staff analysis
A depreciation in the exchange rate has a negative impact on private consumption after four quarters
Quarters since the shock
Consumption growth declines 4
quarters after the depreciation
Quarters since the shock
An increase in inflation has a negative effect on private consumption growth in the following quarter
Change in log difference in private consumption growth
Consumption growth declines the
quarter after the rise in inflation
Are debt levels too high?
In short – no
12
Source: IMF Fiscal Monitor (October 2017), World Bank staff calculations
… which are expected to remain stable even under certain shocks
…thanks to prudent fiscal policies that led to a decline in debt levels…
Indonesia’s debt levels are among the lowest in the world...
20
25
30
35
40
2008 2010 2012 2014 2016 2018 2020
Government debt, % of GDP, under baseline and -1 std. deviation
Baseline
GDP
Exchange rate
0
10
20
30
40
50
60
70
80
90
100
-5.0
-4.0
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
Fiscal balance (LHS)
Debt (RHS)
Source: World Bank staff calculations
Indonesia
0
50
100
150
200
250 Debt-to-GDP (percent) Percent
At the same time, maintaining a prudent fiscal stance is warranted
13
Source: ADB – Asian bonds online
39.8
0
5
10
15
20
25
30
35
40
45Indonesia
Korea
Malaysia
Thailand
Foreign holdings of local currency bonds, percentYields on 10-year bonds, US vs. Indonesia, percent
2.26 US 2.82
7.11 Indonesia7.02
4.89 Yield differential
4.20
0
1
2
3
4
5
6
7
8
Source: CEIC and World bank staff calculations
Foreigners hold nearly 40 percent of Indonesian Government bonds
With Fed normalization, yield differentials are narrowing
Structural reforms will further enhance Indonesia’s borrowing capacity
14
Source: IMF Fiscal monitor and World Bank staff calculations
Note: Indonesia* simulates Indonesia’s debt/revenues ratio with a 1 percent increase in the revenue/GDP ratio
Debt-to-revenues ratio, percentCredit-to-GDP ratios as of Q3 2017, percent
Source: BIS and World Bank staff calculations
Higher revenue collections can further enhance Indonesia’s credit strength
A deeper financial sector would support growth and provider greater domestic liquidity
39.156.8 63.0
84.7
115.6
134.1
210.5
0
50
100
150
200
250
182 189 194
259 261276
326
0
50
100
150
200
250
300
350
How much should we worry about Rupiah depreciation?
The Rupiah depreciated in 2018, but has significantly appreciated since the taper tantrum
16Source: BIS; World Bank staff calculations
-9.0
-6.0
-3.0
0.0
3.0
6.0
9.0
12.0
15.0
18.0
21.0
Malaysia Singapore Japan Philippines China Thailand Korea Indonesia India
Real effective exchange rate (increases denote appreciation)
Columns: percent change, December 2013 – December 2017
Dots: percent change, December 2017 – February 2018
IDR moves partly reflect wider CA deficit linked to investment, and increasingly financed by FDI
17
Source: BPS; World Bank staff calculations17
-25
-20
-15
-10
-5
0
5
10
15
20
25
Dec-15 Dec-16 Dec-17
Other
Fuel
Capital
Raw materials net of fuel
Consumer goods net of fuel
Imports
Trade
19 19
22
17
4
23
-20
-15
-10
-5
0
5
10
15
20
25
30
2012 2013 2014 2015 2016 2017
Other
Financial Intermediation
Manufacturing
Mining and Quarrying
Agriculture, Hunting, and Forestry
Foreign Direct Investment, USD billionImports, yoy growth, percent
How much can growth accelerate in 2018 and 2019?
Growth is likely to remain steady over in the near-term, despite rising global risks
19
Source: Bank Indonesia, BPS, Ministry of Finance, World Bank staff calculations
2016 2017 2018f
Real GDP Annual percent change 5.0 5.1 5.3
Consumer price index Annual percent change 4.3 3.8 3.5
Current account balance Percent of GDP -1.8 -1.7 -1.9
Budget balance Percent of GDP -2.5 -2.4 -2.3
Global outlook favorable
Domestic conditions conducive
Risks of protectionism are rising; normalization of unconventional post-GFC monetary policy remains potential source of volatility
100
56 5648
100
59
94100
0
20
40
60
80
100
120
140
160
China Vietnam India Indonesia
Wages Unit Labor Costs
Accelerating growth beyond 5.5 percent in the near term will be challenging
Indonesia’s economy has capacity to grow between 5.0 – 5.5 percent based on current levels of infrastructure, skills, and productivity
20
28,181
9,629
3,811
0
5,000
10,000
15,000
20,000
25,000
30,000
Advanced Emerging Indonesia
Source: World Bank staff calculations using IMF (2017) data
Note: 2015 estimates. Unweighted averages computed for 14
advanced economies and 21 EMs
$1.5
trillion
to
close
this
gap
Source: OECD PISA
14
55
0
10
20
30
40
50
60
2012 2015
Share of students who do not meet level 2 proficiency levels
Source: UNIDO, WB staff calculations
Note: wages for finishing, weaving, and spinning of textiles
Average wages and unit labor costs, indices (China = 100)
Low wages but high costs because of low productivity
Average public capital stock per capita, 2015 USD
55 percent of 15-year-olds ‘functionally illiterate’
$1.5 trillion needed to close infrastructure gap with other EMs
So what can be done to advance Indonesia’s development in 2018, 2019 and beyond?
Put forward a bold “policy sambal” to radically open the economy and bring in investments and jobs
Invest in quality of life: improve people’s lives and build long-term foundations for inclusive growth
21
Recent economic developments and outlook
Collecting more and spending better for inclusive growth
Collecting more and spending better are key drivers of inclusive economic growth
23
Spending Effectively Spending More on
Priority Sectors
Spending
Differently
Collecting
more…
…and better
INCLUSIVE GROWTH
Spending
Better
Health, education, urban
infrastructure, connectivity,
social assistance
The quality of spending has improved as expenditures shifted towards priority areas for inclusive growth…
24
28%
6%
0%
5%
10%
15%
20%
25%
30%
2014 2015 2016* 2017*
Infrastructure Health
Education Social protection
Energy subsidies
Percent of Central Government spending excluding transfers to subnational governments
Source: Ministry of Finance, World Bank staff calculations
Note: 2014-2015 refer to actual spending, 2016 and 2017 are budgeted. Infrastructure only includes line ministry spending and does not include below
the line capital injections to SOEs.
…but Indonesia still needs to spend more in some areas...
25
1.4
0.6
2.42.3
1.1
4.9
0
1
2
3
4
5
6
Health Social assistance Infrastructure, incl. housing
Current level of spending Estimates of needed level of spending
Source: World Bank staff calculations
Percent of GDP
…by further reallocating expenditures away from poorly targeted subsidies…
26
4.0
1.2
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
0
50
100
150
200
250
300
350
400
450
Fuel Electricity
Food Fertilizer
Other non-energy subsidies Total subsidies (% GDP)
Source: Ministry of Finance, World Bank staff calculations
IDR trillion Percent of GDP
…and increasing revenue collections
27
Malaysia
Peru
Philippines
South Africa
Indonesia Thailand
Singapore
0
10
20
30
40
50
60
8 9 10 11 12
General government revenue, percent of GDP, 2016
Source: IMF Fiscal Monitor, World Bank staff calculations
Log GDP per capita in 2011 PPP
Excises – consider higher tobacco, vehicle, and environmental excises (such as taxes on plastic bags) to incentivize good behavior and raise revenues
VAT – lower threshold and reduce exemptions for greatest bang-for-the-buck
Income tax – lower threshold and simplify the tax code to get more individuals in the tax net
Tax administration – improve IT systems and HR to boost compliance
Revenues are well below what would be expected given Indonesia’s income level, constraining expenditures
In education, Indonesia can spend better to improve quality for all children
Dramatically reduce stunting through coordinated interventions
Invest in quality early childhood education for all Indonesian children
Launch a presidential initiative on education quality focusing on improving learning outcomes
Investments in education build a legacy for future growth – and parents care about their children today and will recognize the Government’s efforts
28
Spending better, but also spending more, is needed in the health sector
29
JKN is very popular with Indonesians, but faces a chronic deficit
Increase investments in primary health care, promotive and preventive interventions, particularly for vulnerable populations living in rural and remote locations
Indonesia, 1.08
0
2
4
6
8
10
12 General Government spending on health, percent of GDP
Source: WDI
Spending on health is among the lowest in the world
Emphasize quality over numbers in social assistance
30
The move of social assistance spending from subsidies to direct transfers has been positive...
...but after a large expansion in the PKH, focus should be on ensuring all eligible families are reached by the program and on increasing benefits➢ IDR 1 of spending in higher benefits
leads to more poverty reduction than the same IDR 1 spent on new beneficiaries
Share of beneficiaries by consumption decile, percent
Despite improvements, many poor households do not receive PKH, while some richer households do
Source: SUSENAS and World Bank staff calculations
0%
5%
10%
15%
20%
25%
30%
35%
1 2 3 4 5 6 7 8 9 10
2010 2014 2017
Spending and revenue policies influence inclusive growth in the long-term, but also today’s distribution
31
-0.12
-0.10
-0.08
-0.06
-0.04
-0.02
0.00
Change in Gini coefficient from market to disposable income, points
Source: Commitment to Equity, latest comparable data available
TERIMA KASIHTHANK YOU
Questions?fgilsander@Worldbank.org