Indonesia Economic Quarterly March 2016 Private investment is - - PowerPoint PPT Presentation

March 15, 2016

Indonesia Economic Quarterly March 2016 Private investment is essential

Ndiamé Diop Lead Economist, Indonesia

Introduction

2015: tough but growth expected to have bottomed out

• Significant improvement in composition of

spending away from energy subsidies…

• … allowing a spectacular rise in public

investment…

• … and helped growth in 2015

2016: staging a firm rebound will be no small challenge

• Given pressures on export and oil and gas

fiscal revenues, private investment recovery is essential Private investment also critical to address medium-term challenges

• Revival of manufacturing, rise of tourism
• Good quality jobs

3

How public investment helped growth Staging a firm growth rebound in 2016 Medium-term challenges and opportunities

The budget before 2015:

Close to 1/3 spent on energy subsidies

Share of average central government spending, 2012-2014, percent

Source: Ministry of Finance; World Bank staff calculations

29% 14% 4% 3% 50% Energy subsidy Capital spending Health Social assistance Other

Fuel subsidy reform:

The foundation

Source: Ministry of Finance; World Bank staff calculations

50 100 150 200 250 300 2012 2013 2014 2015 Fuel subsidies Infrastructure

Public investment and growth in 2015

6

Real growth yoy, percent

Note: Capital expenditure deflated with the implicit fixed investment deflator. Source: BPS; Ministry of Finance; World Bank staff calculations

2.0 2.5 3.0 3.5 4.0 4.5 5.0 5.5

• 60
• 40
• 20

20 40 60 80 100 Mar-14 Sep-14 Mar-15 Sep-15 Real capital expenditure (LHS) GDP (RHS)

7

How public investment helped growth Staging a firm growth rebound in 2016 Medium-term challenges and opportunities

Weak global growth and global trade:

Harder to generate export revenues

8

Source: World Bank, January 2016 Global Economic Prospects

Annual growth, percent

• 12
• 10
• 8
• 6
• 4
• 2

2 4 6 8 10 12 14 2001 2003 2005 2007 2009 2011 2013 2015e 2017f Global trade Global GDP

Subdued household real income growth

Only moderate pick up in private consumption

9

Source: BPS; World Bank staff calculations Source: BPS; World Bank staff calculations

Weaker job creation GDP growth, percent, LHS; millions, RHS 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 3.0 3.5 4.0 4.5 5.0 5.5 6.0 6.5 2010 2011 2012 2013 2014 2015 Job creation GDP growth 2 4 6 8 10 12 Jan-15 Jul-15 Jan-16 Headline Unprocessed food Persistently high food price inflation, percent

Low commodity prices

Continued pressure on oil and gas fiscal revenues

10

Source: Ministry of Finance; World Bank staff calculations

Contributions to nominal growth yoy, percent

• 15
• 10
• 5

5 10 15 20 25 2011 2012 2013 2014 2015 Oil and gas-related revenues Other Total revenues

Public investment rise in 2016

Likely less dramatic than in 2015

Budget allocation for infrastructure increases, driven by transfers to SNGs and SOEs (IDR trillion)

Source: Ministry of Finance; World Bank staff calculations

50 100 150 200 250 300 350 2014 2015 revised Budget 2016 Budget Line ministries Non-line ministries Transfers to SNGs Capital injection to SOEs

Private investment is essential

12

Real fixed investment growth (percent yoy)

Note: Capital expenditure deflated with the implicit fixed investment deflator. Source: BPS; Ministry of Finance; World Bank staff calculations

• 2.0
• 1.0

0.0 1.0 2.0 3.0 4.0 5.0 6.0 2013 2014 2015 2016f Public Private

Baseline outlook

13

2015 2016f 2017f

Real GDP (annual % change) 4.8 5.1 5.3 Consumer prices (annual % change) 6.4 4.0 4.6 Current account balance (% of GDP)

• 2.1
• 2.3
• 2.5

Budget balance (% of GDP)

• 2.5
• 2.8

n.a.

Source: BPS; World Bank staff projections

Supporting near-term growth (1)

Gradual monetary easing

14

4 6 8 10 12 14 Feb-15 May-15 Aug-15 Nov-15 Feb-16 BI policy key rate JIBOR interbank rate - 3 month Investment lending rate

Source: BI; World Bank staff calculations

Annual growth, percent

Revenue collection

Ongoing reform areas critical

15

• Reforming tax policy:
• Revisions to Income Tax and VAT Laws and the Final Tax regime for

MSMEs provide an opportunity to broaden the tax base and reduce economic distortions.

• Strengthening tax administration:
• Ease electronic filing process for taxpayers, while making e-filing

mandatory for certain types of taxes;

• Unique taxpayer ID system;
• Improved compliance risk management and auditing processes, including

use of third-party data;

• Stronger law enforcement efforts.
• Building the underlying tax administration capacity:
• Investment in IT and data management systems.

Business environment

Further reforms could tip investor confidence

• Reducing or removing minimum capital and reserve requirements for

setting up logistics service providers – too high and hinder competition

• Clarifying the roles of port authorities and port operators in port

development and management – lack of clarity has led to severe underinvestment in port infrastructure

• Regulatory review mechanism is needed to take stock of existing

business, investment and trade regulations (e.g. NTMs), cancel ones that are conflicting and unnecessary, and reject or approve new regulations

• Establishing an up-to-date, comprehensive depository of

licensing/regulatory requirements that can be accessed online - there is no list of requirements that firms needs to comply with

17

How Public Investment Helped Growth Staging a firm growth rebound in 2016 Medium-term challenges and opportunities

China 1990 China 2005 China 2014 Indonesia 1990 Indonesia 2005 Indonesia 2014 Malaysia 1990 Malaysia 2005 Malaysia 2014 Thai 1990 Thailand2005 Thailand 2014

10 15 20 25 30 35 40 5,000 10,000 15,000 20,000 25,000

Source: World Development Indicators, World Bank

Manufacturing has prematurely retracted due to commodity boom

Manufacturing as percentage of GDP (y axis), GDP per capita (x axis), PPP (constant 2011 int USD)

Source: Calculation based on CEIC data

Unit labor costs in manufacturing, 2012 =100 80 90 100 110 120 130 140 150 2011 2012 2013 2014 Indonesia Malaysia Thailand Vietnam Philippines

Worker productivity is low despite wage advantage

100 200 300 400 500 600 700 800 900 2005 2007 2009 2011 2013 China Indonesia Malaysia Philippines Thailand Vietnam Real wages (real 2012 USD)

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Self-employed/employers in agriculture Unpaid family worker in agriculture Self-employed/employers in non agriculture Unpaid family worker in non agriculture Casual workers in agriculture Casual workers in non agriculture Domestic, security and cleaning workers Employees paid below Minimum Wage Employees paid at least the Minimum Wage

Source: World Bank calculations based on BPS, Sakernas data

Percent of workers in different types of work

Sluggish manufacturing growth and low productivity have reduced the quality of jobs…

Source: World Bank calculations based on BPS, Sakernas data

Poor quality of jobs keeps many around the poverty line

• 75 percent of poor households fail to

definitely move out of poverty or vulnerability over a three-year period.

• A large number of workers are not

safe and secure from poverty due to their type of job

• The quality of jobs in manufacturing is

typically better – more formal and higher value

• China lifted 680 million people

between 1992 and 2012 by focusing

• n manufacturing growth

Status in 2010 of households who were poor in 2008 (percent)

20 40 60 80 100 Moved out of poverty and vulnerability Moved out of poverty but remain vulnerable Moved out of poverty but fall back in Always Poor

…and kept many people vulnerable

Source: UN-COMTRADE, HS4 digits and OECD industrial code

Share to total exports, percent 2 4 6 8 10 12 3 6 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 Industrial acid oils Footwears Wood furniture Textiles&garments Palm oil prod (rhs) Playwood (rhs) 0.0 0.5 1.0 1.5 2.0 2.5 3.0 0.0 0.3 0.6 0.9 1.2 1.5 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 Gold Tin, not alloyed Rubber tires Petrol products (rhs) Refined copper Medium –Low–tech exports Low –tech exports

Medium-term strategy:

Identify promising industries (1)

Identify promising industries, “to avoid shooting in the dark”

0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6 1990 1994 1998 2002 2006 2010 2014 Insulated cable fiber Cars Automotive spareparts Bulldozers,excav, & parts Parts of motorcycles Saturated monohydric alcohols 0.0 0.1 0.1 0.2 0.2 0.3 0.3 1 2 3 4 5 6 1990 1994 1998 2002 2006 2010 2014 Office & comp equip Radio, TV & com equip Aerospace (RHS) Drug & medicine (RHS)

High –tech exports Medium–high -tech exports Share to total exports, percent

Source: UN-COMTRADE, HS4 digits and OECD industrial code

Medium-term strategy:

Identify promising industries (2)

Medium-term strategy:

Key reforms

24

• Implement cross-cutting reforms to create an supportive policy

environment for all firms in all sectors

• Progress on labor laws and regulations dialogue and reform crucial (e.g.

severance pay creating a lose-lose outcome)

• Recognize that export growth and industrialization will be driven by a few

industries: policy focus and attention to most promising branches is key

• For promising sectors:

─ Facilitate agglomeration/ clustering ─ Actively weed out entry barriers ─ Actively attract FDI and joint ventures in these industries ─ Public-private partnerships to close skills gaps (training, specific schools, etc.)

Also in the March 2016 IEQ

Beyond the 10 economic policy packages

• How to address constraints to growth in

logistics, trade, investment climate and financial markets Sustainable energy development

• Aligning pricing, regulations and

investment policies can help Indonesia’s transition to a more sustainable energy path Public support for action on inequality

• A majority of Indonesians think that

inequality is too high and urge government action to reduce it