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Indonesia Economic Quarterly Launch
Jakarta, March 18, 2014
Jim Brumby
Sector Manager and Lead Economist
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MARCH 2014 IEQ: INVESTMENT IN FLUX
Investmentin
flux
Fixed
investment:subdued,and risks
FDI: solid,but has
plateauedrecently
Portfolioinvestment:
currentlystrong, but
volatile
Risks tofiscal spaceneeded for
publicinvestment
2
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OUTLINE
Recent economic developments and outlook
Investment in flux, amid policy uncertainties, fiscal pressures
Priorities for the longer-term, and selected issues
3
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GDP: WEAK INVESTMENT, STRONG NET EXPORTS
-3
-2
-1
0
1
2
3
4
Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13
Fixed investmentNet exports
Contribution to GDP growth yoy, percent
Source: BPS; World Bank calculations
4
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IMPORT DEMAND HAS SOFTENED
-12
0
12
24
36
Jan-12 Jul-12 Jan-13 Jul-13 Jan-14
Intermediate Consumption
Capital Oil & Gas
Total imports
Percent Contribution to yoy growth
Source: BPS; World Bank staff calculations
5
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-15
-10
-5
0
5
10
15
Jan-13 Apr-13 Jul-13 Oct-13 Jan-14
O-S-A Coal Palm oil Rubber and products Oil and gas Others
percent
RAW MINERAL EXPORTS BAN BUMP IN Q4
Ores, Slags and Ashes
Source: BPS; World Bank staff calculations
6
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OVERALL BOP: NARROWER C/A DEFICIT
-16
-12
-8
-4
0
4
8
12
16
Dec-10 Dec-11 Dec-12 Dec-13
Overall balance
Net direct investment
Net other capital
Current account
Net portfolio
Balance of payments, USD billion
Note: Basic balance = Current account balance + net FDI
Source: BI; World Bank staff calculations
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SUPPORTING THE RUPIAH OVER Q1 2014
Nominal currency index, 2011 average =100
Note: Selected EM majors is a simple average of BRL, IDN, TRY and ZAR vs. USD; USD is broad NEER index
Source: JP Morgan; World Bank staff calculations
70
80
90
100
110
Jan-11 Jun-11 Nov-11 Apr-12 Sep-12 Feb-13 Jul-13 Dec-13
USD
IDN
Selected EM
majors
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GLOBAL ECONOMY: LIKELY TO STRENGTHEN
Major trading partner GDP growth, percent
Source: World Bank staff calculations
3.54.0 4.1
-2
-1
0
1
2
3
4
5
6
7
8
9
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INDONESIA: MIXED HIGH FREQ. DATA; MORE
HEADWINDS
Economic activity indicators - mixedGrowth in 3-month moving avg. yoy,
percent
Source: CEIC; World Bank staff calculations
Credit growth - fallingGrowth yoy, percent
Source: CEIC; World Bank staff calculations
-10
-5
0
5
10
15
20
25
30
-10
0
10
20
30
Jan-12 Jan-13
Percent Percent
Nominal (LHS)
Real (LHS)
Monthly nominal
lending growth (RHS)-30
-20
-10
0
10
20
30
40
50
60
Feb-12 Aug-12 Feb-13 Aug-13 Feb-14
Motorcycles
Cement sales
Motor
vehicles
10
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INDONESIA OUTLOOK: SOME MORE GROWTH
MODERATION TO COME
March IEQPrevious
(Dec.)
2012 2013 2014 2015 2014pReal GDP (% change) 6.2 5.8 5.3 5.6 5.3Consumer priceindex (% change) 4.3 6.9 6.2 5.2 6.7Current account
balance(USD billion) -24.4 -28.5 -24.4 -20.2 -22.8
Current account
balance (% GDP) -2.8 -3.3 -2.9 -2.1 -2.6Budget balance (% of GDP) -1.9 -2.2 -2.6 n.a. -2.1
Source: BI; BPS; Ministry of Finance; World Bank staff projections
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AMIDST SIGNIFICANT RISKS
Domestic External
Positive
Electionslead to astronger than expected
boost to consumption,
investment
Commodity prices rise Global risk appetite is
stronger than expected,
boosting portfolio inflows
to EMEs inc. Indonesia
Negative
Investment weakens as
downturn extends to
building investment
Consumption growth
disappoints as incomeand credit effects take
their toll
External financing
conditions tighten again
Global commodity prices
fall, e.g. due to slower
than expected growth inChina
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OUTLINE
Recent economic developments and outlook
Investment in flux, amid policy uncertainties, fiscal pressures
Priorities for the longer-term, and selected issues
13
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INVESTMENT IN FLUX
0
1
2
3
4
5
6
Dec-06 Dec-08 Dec-10 Dec-12
USDbillion
Source: BI; World Bank staff calculations
-5
0
5
10
15
Dec-06 Dec-08 Dec-10 Dec-12
OtherForeign transportation
Foreign machinery & equip
Building
Total
Foreign direct investment
Inbound FDI, rolling 4-quarter average
Fixed investment
Contributions to real growth yoy, percent
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FISCAL SECTOR:
REVENUES SOFT; NEW POLICY PRESSURES
-2.5
-1.5
-0.5
0.5
1.5
2.5
3.5
4.5
-25
-15
-5
5
15
25
35
45
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Deficit (RHS, % of GDP)Revenues (LHS, yoy nominal growth, %)
Expenditures (LHS, yoy nominal growth, %)
Note: 2013 deficit is World Bank staff projection
Source: Ministry of Finance; World Bank staff calculations
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FUEL SUBSIDY REFORM WOULD HELP
-300
-250
-200
-150
-100
-50
0
50
100
2009 2010 2011 2012 2013
2014
Fuel subsidy
expenditure,
GoI
Savings
Expenditures
Scenario 1 (2013 again)
Scenario 2: 50% economic price fill
2014 WB
projection
Achieving a deficit of
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EXAMINING THE MINERAL EXPORT BAN
Unprocessedexport ban
+ Export duty and
tax
Increaseddomestic mineral
processing
Higher value-added mineral
exports
GDP growth
Trade Balance
Fiscal Revenues
Job Creation
Significant processing
investment is stimulated. i.e,that smelters are financially
viable
Processing
adds a lot ofvalue to
mineral
exports
Higher processed exports will offset
lower ore exports Higher value exports will increase
non-tax revenues
Processing will create more and
better jobs in the sector
Rationale
Underlying assumptions
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BUT IS THE MINERAL EXPORT BAN SOUND?
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
Copper Nickel Tin Iron Bauxite Other Minerals
Percent of totalUSD million Processed Mineral Exports
Unprocessed Mineral Exports
Share of Mineral in Total Exports
Note: Data for 2013
Source: WITS database; World Bank staff calculations
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TRADE IMPACTS
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-5.3
-3.3-3.0
-0.9
-6
-5
-4
-3
-2
-1
0
2014 2015 2016 2017
USD billion
Estimated impact on net trade balance
Source: World Bank
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REVENUE IMPACTS
-0.4
-1.1
-1.8
-2.2
-4
-2
0
2014 2015 2016 2017
USD billion
Estimated impact on fiscal revenues (export duties and taxes, royalties and CIT)
Source: World Bank
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AVOIDING THE TRAPTHE CHALLENGEharnessing Indonesias potential to generate shared prosperity,
through fast productivity-driven economic growth withinclusiveness
Structural policies to boost prosperity:
Closing the infrastructure gap
Closing the skills gap
Enhancing the functioning of markets
Complementary areas:
Service delivery for all
Social protection
Natural disaster risk management
Foundational pre-requisites:
Macro-fiscal management and managing shocks
Implementation
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URBAN DISASTER
PREPAREDNESS
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THANK YOU
March 2014 IEQ contents:
Regular update on economicdevelopmentsand the outlook
Examining the mineral exports ban
Urban disaster risks planningA taster of the forthcoming World
Bank report,Avoiding the Trap
On the web:
http://www.worldbank.org/en/news/feature/2014/03/18/
indonesia-economic-quarterly-march-2014
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