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Indonesia Economic UpdateClearing skies and the road ahead
Shubham ChaudhuriSenior EconomistWorld Bank
14 September 2009Jakarta Indonesia
The Indonesian economy through the global financial crisis, and the road ahead
Indonesia has weathered the storm wellWhy?
Clearing skies are ahead
The coming policy agenda
Indonesian economy through the crisis5 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 crisisGrowth 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)
Sources: BPS via CEIC, World Bank
0
2
4
6
8
0
1
2
3
4
Jun-02 Mar-04 Dec-05 Sep-07 Jun-09
Per cent Per cent
Year on year (RHS)
QoQ seasonally adjusted (LHS)
-60%
-30%
0%
30%
60%
90%
2005 2006 2007 2008 2009
MotorcyclesVehicles
Indonesia through the global crisis…and other indicators also show recovery
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
Sources: BPS, GAI, PLN, ICA and Astra via CEIC, Danarakesa, World Bank
-30
-20
-10
0
10
20
30
40
50
2005 2006 2007 2008 2009
I ndustrial production
Cement sales Electricity use
by industry
%
60
70
80
90
100
110
120
2005 2006 2007 2008 2009
120
140
160
180
200
220
240
BI retailsales index
(SA; RHS)
BI consumer confidence index
(LHS)
Danarakesa consumer survey (LHS)
Index Index
Indonesia through the global crisisGrowth 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
Sources: CEIC, Haver Analytics, BPS, JP Morgan, World Bank
(GDP growth, quarterly, seasonally adjusted)
-6
-4
-2
0
2
4
6
India
Chin
a
Indonesi
a
Philip
.
U.S
.
Euro
Are
a
Mala
ysi
a
Japan
Thailand
Q3 2008 Q4 2008 Q1 2009 Q2 2009%
Indonesia through the global crisisFinancial 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
Sources: JP Morgan, BI, CEIC, World Bank
(EMBI spreads on sovereign USD bonds)
0
2
4
6
8
10
12
J an 07 J ul 07 J an 08 J ul 08 J an 09 J ul 09
-80
0
80
160
240
320
400% bps
Indonesian USD bond spreads
(LHS)
Indonesian spreadsless global emerging market average (RHS) 0
3
6
9
12
15
18
21
J an08
Apr08
J ul08
Oct08
J an09
Apr09
J ul09
Indonesia
Philippines
Thailand
%(local currency 5 year bond yields)
Indonesia through the global crisisFinancial markets are stabilizing
The rupiah, and foreign exchange reserves, have stabilized
During the peak period of market volatility, the rupiah depreciated by over one-third, and foreign reserves fell sharply – before recovering
Source: BI
8,400
9,000
9,600
10,200
10,800
11,400
12,000
12,600
J an 07 J ul 07 J an 08 J ul 08 J an 09 J ul 09
30
35
40
45
50
55
60
65USDbn
IDR/USD Foreign exchange reserves
(USD bn; RHS)
Exchange rate (IDR/USD; LHS)
Indonesia through the global crisisInflation, at its low point, is still relatively high
Inflation is near its low-point
Lower food prices benefiting poorer households especially
Core inflation has fallen less
But Indonesia’s inflation remains much higher than its trading partners’
Sources: BPS, CEIC< World Bank estimates of poverty basket inflation
-4
0
4
8
12
16
20
24
-1
0
1
2
3
4
5
6
Aug-07 Feb-08 Aug-08 Feb-09 Aug-09
Per cent Per cent Food(RHS)
Inflation - monthly(LHS)
Poverty basket (RHS)
Inflation (RHS)
-5
0
5
10
15
20
-5
0
5
10
15
20
Aug-05 Aug-06 Aug-07 Aug-08 Aug-09
Per cent Per cent
Indonesia
China
Japan Thailand
India
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
Source: BPS
19.1 18.4 18.2 17.4 16.7 16.017.8
16.615.4
14.2
6.4 6.18.1
9.1
11.59.9
11.210.3
9.3 8.5 8.1
23.4
0
5
10
15
20
25
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
National poverty rate (%) Open unemployment rate%
Why has Indonesia weathered the storm so well?
Structure of the economy
Relatively low trade shares overall – a large domestic market (with the added benefit of momentum coming in)
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
Sources: IMF, CEIC, Thomson-Reuters, RBA, BPS, World Bank
-9
-8
-7
-6
-5
-4
-3
-2
-1
0
1
2
0 4 8 12 16 20 24Medium- and high-tech manufacturing output (% GDP)
GD
P g
row
th (
Sep-0
8 t
o M
ar-
09
)
Japan
Australia
Taiwan
Malaysia
Germany
Korea
Mexico Thailand
Spain
Italy
Netherlands
Canada
France
UKUS
Indonesia
%
%
(producers of capital and high-tech goods suffered larger falls in GDP)
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
Sources: MoF and World Bank
77.1
102.580.0
58.338.6 32.9
76.455.2
45.6
34.9 32.9
65.4
0
20
40
60
80
100
120
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009*
0.0
0.5
1.0
1.5
2.0
2.5
3.0% %
Deficit (RHS)
Public debt (LHS)
(central government budget deficit and debt levels)
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 trillions)
Sources: Ministry of Finance and BI
-20
0
20
40
60
80
S1 2005 S1 2006 S1 2007 S1 2008 S1 2009
-40
0
40
80
120
160
Fiscal Balance Govt. deposits at BI (RHS)
IDR trillion IDR trillion
The outlook: skies continuing to clearWith the outlook now for gradual recovery
Source: World Bank
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
-3
0
3
6
2001 2003 2005 2007 2009 2011
-3
0
3
6
Jun-09 Sep-09
Forecasts
Per cent Per cent
(Annual growth ofIndonesia’s major export destinations)
0
20
40
60
80
100
2005 2006 2007 2008 2009 2010 2011
I nternational energy
International non-energy
Indonesian export prices
Index
The outlook: skies continuing to clearCommodity prices, still volatile, recovering some of their losses International commodity prices are back to 2006 levels
Outlook for some further, small recovery
(Index, July 2008 peak = 100)
Source: World Bank
The outlook: skies continuing to clearWhat it has meant and is likely to mean for Indonesia
Sources: BPS, CEIC, World Bank. World Bank projections
2008 2009 2010 2011
Gross domestic product 6.1 4.3 5.4 6.0
Consumer price index 9.8 4.7 5.6 6.5
Major trading partner growth 2.1 -1.8 3.3 3.4
Poverty rate 15.4 14.2 13.6 11.5
2008 2009 2010 2011
Gross domestic product 6.1 4.3 5.4 6.0
Consumer price index 9.8 4.7 5.6 6.5
Major trading partner growth 2.1 -1.8 3.3 3.4
Poverty rate 15.4 14.2 13.6 11.5
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
The outlook: skies continuing to clearBut 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
3
4
5
6
7
3
4
5
6
7
2001 2003 2005 2007 2009 2011
High Low Reference
Per cent Per cent
(Annual GDP growth)
There is both upside potential (from policy breakthroughs) and downside risks (from more adverse global environment) to the base outlook
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
(Poverty rate)
Sourcse: BPS, World Bank projections
Looking ahead to accelerating growthRising or floating
Per-capita real GDP grow th trajectories(constant 2000 USD)
Indonesia (1978 to 2007)
Indonesia"floating"
Philippines (1993 to 2006)
Indonesia"ris ing"
Thailand (1979 to 1993)
0
400
800
1200
1600
19
78
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
20
06
20
08
20
10
20
12
20
14
Source: World Bank
Realizing the development agenda
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
…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
0
2
4
6
8
10
2000-02 2002-04 2004-08
Agriculture, mining &manufacturingServices
%
Sources: BPS and World Bank
(average annual growth)
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)
10/16/08
Indonesia Economic and Policy Update:Clearing Skies
Shubham ChaudhuriSenior EconomistWorld Bank
14 September 2009Jakarta Indonesia