www.worldbank.org/id www.worldbank.org/indonesia
Indonesia Economic Quarterly: December 2012Policies in focus
Ndiame DiopLead Economist & Economic Advisor, IndonesiaWorld Bank
December 18, 2012World Bank and The Habibie Center Joint Launch Event Intercontinental Hotel, Jakarta
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OutlinePolicies in focus
Global growth remains weak and the outlook is still uncertain
Indonesia’s economy has performed strongly so far, despite showing some strains
Economic performance in 2013 should be solid but will depend on policies:
To respond quickly and effectively to any external shocks
To support domestic investment and growth
To ensure that the benefits of growth are shared
THE GLOBAL ECONOMY remains weak
4
Global economic conditions remain subdued…
Source: CEIC and World Bank
…growth in the US and China stabilized in Q3 but Japan and Europe contracted
-2
0
2
4
6
8
10
12
-2
0
2
4
6
8
10
12
Euro area US Japan China IndonesiaMajor Trading
Partners
2010 2011 2012f 2013f
Real GDP growth, percent Real GDP growth, percent
5
International financial market conditions have improved since mid-year…helped by loose monetary policy in the US, Japan and Euro Area
Source: CBOE, MSCI
0
25
50
75
100
125
150
175
50
75
100
125
150
Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12
Emerging market equities (LHS)
Developed market (LHS)
Index (1 Nov 2009=100) VIX index
VIX index (RHS)
6
Commodity prices remain under pressure
Note: Australian coal, World Bank global natural gas index, Malaysia palm oil, Singapore-traded rubber, London-traded copper, Brent crude; Source: World Bank and staff calculations
Since mid-2011, with rubber, coal and palm oil seeing marked declines
40
100
160
220
280
40
100
160
220
280
Nov-07 Nov-08 Nov-09 Nov-10 Nov-11 Nov-12
Coal Natural gas Palm oilRubber Copper Crude oil
Index Nov 2007=100 Index Nov 2007=100
0
100
200
300
400
500
600
700
0
100
200
300
400
500
600
700
Nov-00 Nov-02 Nov-04 Nov-06 Nov-08 Nov-10 Nov-12
Index Jan 2000 = 100 Index Jan 2000 = 100Indonesia's Major
Export Commodities
Food
Metals and Minerals
Energy
Although commodity prices more broadly remain high Price levels in nominal USD terms are still elevated on a longer view
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International USD commodity prices
Note: Price index of Indonesia’s Major Export Commodities is weighted by export shares of Coal, Gas, Palm Oil, Crude Oil, Copper and Rubber, which represent 42% of Indonesia's exportsSource: World Bank and CEIC
THE INDONESIAN ECONOMY was a solid performer in 2012 but is showing some strains
8
9
Economic growth has been supported by strong domestic demand
Source: BPS via CEIC and World Bank
…particularly private consumption and investment
-4
-2
0
2
4
6
8
10
-4
-2
0
2
4
6
8
10
Sep-09 Jun-10 Mar-11 Dec-11 Sep-12
Private cons. Gov cons. InvestmentNet Exports Discrepancy GDP
Percent Percent
Year on year GDP contributions
10
However, stock levels appear to have been building
Source: BPS and World Bank staff calculations
National accounts data show an unusual degree of inventory accumulation
-10
0
10
20
30
-4
0
4
8
12
Sep-02 Sep-04 Sep-06 Sep-08 Sep-10 Sep-12
4-quarter sum of change in stocks (RHS)
Change in stocks (LHS)
Percent of GDP Percent of GDP
11
Nominal public revenue growth has slowed
Note: *2012 data are October to October.
Source: MoF and World Bank staff calculations
Nominal growth in public revenues – Total, Tax Revenue (TR), and Non-Tax Revenue (NTR)
…with VAT revenue growth still robust but non-tax revenue growth declining
-20
0
20
40
-20
0
20
40
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012*
PercentPercent
TR-Income (non oil & gas) TR-Income oil & gasTR-VAT TR-TradeTR-Others NTR-Oil&gasNTR-Non oil&gas NTR-OthersTotal
12
A trade shock has erased the trade surplus
Note: * 2012 is comparison between January–October sum and the same period in 2011. Source: BPS
Exports contracted in 2012 through October, while import growth continued
28.5 25.1 28.039.7 39.6
8.219.7 22.2 26.1
-0.5
-40
-20
0
20
40
60
80
-40
-20
0
20
40
60
80
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012*
USD billionPercentTrade balance (RHS) Export growth Import growth
13
Overall balance of payments flows returned to a small surplus in Q3
Source: BI
…but the basic balance remains negative due to the current account deficit
-12
-8
-4
0
4
8
12
16
-12
-8
-4
0
4
8
12
16
Sep-09 Sep-10 Sep-11 Sep-12
Net direct investment Net portfolio Net other capitalCurrent account Overall balance Basic balance
USD billion USD billion
14
Our baseline projection continues to be for solid growth in 2013 Thanks to still-solid domestic demand and a slight external growth recovery
2010 2011 2012 2013
Real GDP growth (percent) 6.2 6.5 6.1 6.3
CPI inflation (percent)* 6.3 4.1 4.4 5.4
Budget balance (percent of GDP)** -0.6 -1.1 -2.2 -1.7
Major trading partner growth (percent) 6.8 3.6 3.3 3.6
Notes: * CPI inflation is Q4 on Q4. World Bank projections except for **Budget balance, which is Government revised Budget (2012) and approved Budget (2013)
15
But there are external risks to the outlook……and these are mostly to the downside
Euro Area: ECB action has reduced financial crisis risk but not eliminated
risk of renewed intensification of sovereign funding and banking sector challenges
US “fiscal cliff”: World Bank assumes 1 percent fiscal drag for the US in 2013... …but “worst case” could shave 4 to 5 percent off US GDP in
2013
China: World Bank (October 2012) projects 7.7 percent growth in 2012
and 8.1 percent in 2013 Risk of further slowdown
Additional uncertainty: Impact of renewed global monetary easing on portfolio flows
and commodity prices
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Projections assume that strong investment growth will continue
Note: Price index of Indonesia’s Major Export Commodities is weighted by export shares of Coal, Gas, Palm Oil, Crude Oil, Copper and Rubber which represent 42% of Indonesia's exports
Source: World Bank and CEIC
…but there is no room for complacency on this given commodity prices and exports
-12
-6
0
6
12
18
-60
-30
0
30
60
90
Nov-04 Nov-06 Nov-08 Nov-10 Nov-12
PercentPercent
Investment (RHS)
Exports
Indonesia commodity export price basket
17
FDI has held up well and maintaining it will be crucial
Source: BKPM
…for external financing and for investment growth
0
2
4
6
8
0
2
4
6
8
Sep-09 Sep-10 Sep-11 Sep-12
Primary Sector Secondary Sector
Tertiary Sector Mining
Total
USD billion USD billion
POLICIES WILL BE IN FOCUS in 2013 and will need to guard against the multiple risks to growth
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Regulatory Policies:
Reducing further uncertainties in business and investment regulations will help investment and support growth
Labor Policies:
A more comprehensive approach to balancing the interests of all stakeholders in the labor market
Public Spending:
Improving the quality of spending across functional and geographical areas
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Priority areas for policy to maintain growth in 2013…emphasizing clarity, inclusiveness and quality
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Labor market policies
Source: World Bank Doing Business, 2013, and press and regulations for 2013 Note: Indonesia minimum wages based onDKI Jakarta (assuming USD exchange rate in 2013 is IDR 9,500); other countries based on the minimum wage in major citiesor the capital region. These wages are not adjusted for productivity differences across countries
Minimum wages
Minimum wage levels in 2013 may be a concern and the process could be improved
0
50
100
150
200
250
300
0
50
100
150
200
250
300
2007 2008 2009 2010 2011 2012 2013
USDUSD
China Indonesia
Malaysia
Philippines
ThailandVietnam
21
Improving spending quality is a key policy priority, across functions…
Source: MoF and World Bank staff calculations
Strong increase in capital spending is positive but subsidy spending is a challenge
0
100
200
300
400
0
100
200
300
400
Personnel Material Capital Social Subsidy
IDR TrillionIDR Trillion2011 - Outcome 2012 WB Projection 2013 Budget
22
…and improving spending results across space is also a challenge
Notes: Index varies from 0 to 1 with higher value indicating higher supply readinessSource: PODES (Potensi Desa) 2011 and the Village Infrastructure Census and Report
The geographical dimension (see VIC results on service delivery across Indonesia)
Composite Index of Education Supply Readiness
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Indonesia’s policy choices are critical in maintaining economic progress Summary
To recap: Indonesia’s policies will be in focus in 2013
Indonesia has already equipped itself with sound crisis responses mechanisms but further efforts may be needed
In light of the rapid transformation of the demand side of the economy, facilitating the supply response will be key
Investment remains strong but the tailwinds are weakening
Keeping investment growth going requires: …further accelerating investments by reducing regulatory
uncertainties for business and enhancing the policy framework… …finding an inclusive and comprehensive approach to labor market
policies …and enhancing the quality of public spending to boosting public
investment in growth-enhancing areas and social protection.
www.worldbank.org/id www.worldbank.org/indonesia
Thank you
Indonesia Economic Quarterly December 2012 Policies in focus also includes special topics on: Minimum wages Jakarta’s flood risks and mitigation efforts Indonesia’s natural disaster reconstruction experience Results of the recent Village Infrastructure Census