INDONESIA ECONOMIC QUARTERLY Frederico Gil Sander Lead Economist - - PowerPoint PPT Presentation

INDONESIA ECONOMIC QUARTERLY CLOSING THE GAP

Frederico Gil Sander Lead Economist October 3, 2017

How is the economy doing? What to expect in 2018? Closing the gap

Growth steady amid mostly favorable conditions

4.9 4.9 5.0 4.8 4.7 4.8 5.2 4.9 5.2 5.0 4.9 5.0 5.0

• 3.0
• 1.0

1.0 3.0 5.0 7.0 Jun-14 Mar-15 Dec-15 Sep-16 Jun-17 Private consumption Government consumption Investment Net exports

• Stat. discrepancy*

GDP

Source: BPS; World Bank staff calculations. Note: * Stat. discrepancy includes changes in inventories.

GDP, change from the previous year, percent (line) and contributions to year-on-year growth, percentage points (bars)

Quality of spending improved, contributing to higher investment growth

4

January-August expenditure realizations, shares of total expenditure

Source: Ministry of Finance; World Bank staff calculations.

9.1 10.5 10.8 9.4 4.4 5.6 14.0 8.9 7.2 0.0 5.0 10.0 15.0 20.0 25.0 30.0 35.0 2015 2016 2017 Capital Expenditures Social Assistance Energy Subsidies

Total expenditure growth 7.9 percent

Commodity prices retreated following earlier gains, but export growth remained positive

5

• 10
• 8
• 6
• 4
• 2

2 4 6 8 10 Mar-14 Dec-14 Sep-15 Jun-16 Mar-17 Goods: Non-Oil & Gas Goods: Oil & Gas Services Export of Goods and Services

Exports of goods and services at constant prices, change from the previous year, percent (line), and contributions to year-on-year growth, percentage points (bars)

Source: BPS; World Bank staff calculations.

A wider current account deficit was mostly financed by higher FDI…

6

USD billion

• 15
• 10
• 5

5 10 15 20 Jun-14 Jun-15 Jun-16 Jun-17 Current account Direct investment Portfolio investment Other investment Overall balance Basic balance

Source: CEIC and BI; World Bank staff calculations.

… while financial flows were robust, reflecting a benign external environment and strong demand for EM assets

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Indonesia Emerging Markets (RHS)

• 40
• 30
• 20
• 10

10 20 30 40 50

• 4.0
• 3.0
• 2.0
• 1.0

0.0 1.0 2.0 3.0 4.0 5.0 Jan 15 Apr 15 Jul 15 Oct 15 Jan 16 Apr 16 Jul 16 Oct 16 Jan 17 Apr 17 Jul 17

Portfolio flows (debt and equity), USD billion

Source: IIF; World Bank staff calculations.

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Ada apa dengan Konsumsi?

Many reasons why private consumption should have accelerated...

Festive season of Idul Fitri, which moved to Q2 this year, usually sees a pick-up in consumption 4 million jobs created, double-digit wage growth Stable rupiah and subdued food inflation BI’s consumer confidence index relatively high

… so why did consumption remain flat? No clear answer – some hypotheses, but need more data to discern among them

• 1. Short-term adjustments to constructive reforms
• Shift in expenditures from subsidies to capital expenditures and more targeted transfers
• Increased efforts to boost tax-to-GDP ratio to resource the state to deliver more and

better services

• 2. Industrial investment and productivity growth remain sluggish
• Most jobs created were informal and recent wage growth concentrated

among top earners

• Implementation of business-environment and pro-competitive reforms has

been challenging, dampening creation of high-quality jobs

• 3. Commodity prices lost steam in Q2
• Despite substantive progress in diversifying the economy,

commodity prices still matter for Indonesia

• Lower prices in Q2 vs Q1, but recovered in Q3
• 4. Noisy data
• The shift in the Idul Fitri holiday reduced

the number of working days and may have introduced unusually large noise to the national accounts data

With some exceptions, most possible explanations point to temporary causes

Short-term pain for long-term gain: Administered price hikes are the mirror image of better expenditure composition

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Source: CEIC; World Bank staff calculations.

• 2

2 4 6 8 10 12 14 Aug-15 Feb-16 Aug-16 Feb-17 Aug-17 Headline Administered Food Core Administered price increases

Change from the previous year, percent

Agriculture Industry Services

1

Bigger concern: Boosting private investments to create good jobs in industry and services

12

Source: Sakernas; World Bank staff calculations.

Change in the number of employed workers (millions), February 2016 – February 2017, by type of job and sector of employment

Agricultural self- employed Non- agricultural self- employed Wage employed Casual worker Unpaid family worker

• 1.0

0.0 1.0 2.0 3.0 4.0 5.0 1

How is the economy doing? What to expect in 2018? Closing the gap

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Smooth sailing or rough seas?

Real GDP growth is expected to gradually accelerate in H2 2017 and into 2018

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Source: BPS; BI; CEIC; World Bank staff projections

2016 2017f 2018f Real GDP (Annual percent change) 5.0 5.1 5.3 Consumer price index (Annual percent change) 3.5 4.0 3.5 Current account balance (Percent of GDP)

• 1.8
• 1.7
• 1.8

Source: CEIC, BPS, World Bank staff projections.

More drivers of growth in the near-term…

Favorable global environment Waning of temporary effects on consumption Dividends from reforms and crowding-in of private investment from improved infrastructure Lower domestic lending rates

… despite a number of downside risks

External G3 monetary policy normalization Growth in China Commodity prices Geopolitical risks Domestic Political season Loss of reform momentum Weak investment and job creation

What will it take to accelerate growth in the long term?

Build human capital, especially through investment in the early years Make it easier and more predictable for the private sector to invest

Close the infrastructure gap

How is the economy doing? What to expect in 2018? Closing the gap

Indonesia’s current public capital stock per person is low compared to both emerging and advanced economies…

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28,181 9,629 3,811 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 were computed for 14 advanced economies and 21 emerging economies.

Capital stock per person, constant 2010 USD

74 113 390 415 1,500 200 400 600 800 1,000 1,200 1,400 1,600 Capital expenditures (2012-16) Total infrastructure spending (2015-19) if 1/5 of all new Government revenues in 2018-19 allocated to infrastructure Total infrastructure spending (2015-19) if all new Government revenues in 2018-19 allocated to infrastructure RPJMN target for infrastructure spending (2015-19) Estimated gap with

• ther emerging

economies (stock)

… and even if Government manages to collect more, public resources are not sufficient to meet infrastructure needs

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USD billions

Source: World Bank staff estimates using Central Government audited accounts and projections; World Bank staff calculations using IMF (2017) data.

To close the gap, private investment in infrastructure will need to ramp up significantly

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15 28 22 21 31 19 45 33 22 19 9 37 10 20 30 40 50 60 70 80 90 100 Realized infrastructure investment, 2006-2010 Realized infrastructure investment, 2011-2015 RPJMN target scenario, 2015-2019 Central Government Subnational Government SOEs Private

Share of total investment in core infrastructure, percent

Source: Audited accounts of Central and Subnational Governments, SOE balance sheets, World Bank Private Participation in Infrastructure (PPI) database. Notes: Uses methodology from World Bank (2015) and AIPEG (2017) for 2013-2016 SOE

• estimates. For subnational government, 2015-2016 data refers to budgeted amounts.

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What will it take to close the gap?

Mobilizing the private sector for infrastructure development requires addressing four major challenges

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SOE dominance hinders private sector interest Difficulties in identifying, selecting and preparing viable projects More certainty for laws and regulations Limited long-term domestic currency financing for infrastructure

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Mispricing of tariffs, uncertainty regarding tariff setting and revisions Overlapping, often inconsistent regulations (~158 laws and regulations related to PPP) Delays in

• btaining

permits and approvals

E.g. in February 2015 the Constitutional Court invoked Law 07/2004 on Water Resources due to a broad reading of Article 33  Implication: Private sector not allowed to operate water distribution networks E.g. In the water sector, average tariffs paid by consumers is USD 0.28 per m3 – partly explains insufficient interest of private sector operators Interviews with investors indicate that the permits regime is still cumbersome despite efforts to establish a one-stop integrated services center and a fast-track online system

• 1. More certainty in laws and regulations  fewer delays and

cancellations

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Ability for GCA to conduct rigorous assessment could be improved Procurement regulations and remuneration caps prevent GCAs from hiring qualified external consultants Due to staffing and budget constraints, Bappenas cannot make up for relative lack of project preparation by GCAs Coordination could be enhanced among mechanisms to allocate projects to different Government support instruments (viability gap, availability payments etc.)

• 2. Challenges in identifying, selecting and preparing viable

projects  lack of ‘bankable’ projects for the market

New project proposal

• riginates from

GCA Bappenas screens project proposals and Outline Business Cases (OBCs) MoF decides which projects receive viability gap funding and endorses financing schemes Trilateral meeting between Bappenas, MoF and GCA to review and finalize budget submission

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5 10 15 20 25 500 1,000 1,500 2,000 2,500 Revenues Profits Revenues (% GDP) Profits (% GDP)

IDR trillions, LHS; Percent of GDP , RHS

• SOEs account for about a third of core

infrastructure spending, but have not always delivered infrastructure efficiently: declining revenues and flat profits as percent of GDP

• Crowding out:
• Electricity – Only 9 percent of installed

generation capacity by private power utilities and captive generation

• Transport – Private sector only accounts for 33

percent in total length of completed roads, less than 15 percent of roads under construction/awarded/assigned

• SOEs benefit from direct assignment and access to

cheaper sources of financing

Source: Ministry of SOEs and press reports, World Bank staff calculations.

• 3. SOEs play an important role in boosting infrastructure stock, but

their dominance also crowds out private sector investment

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0.52 0.81 0.92 0.96 1.07 1.14 1.75 0.00 0.20 0.40 0.60 0.80 1.00 1.20 1.40 1.60 1.80 2.00 Mandiri, 15 BRI, 14 BCA, 11 BNI, 8

Other (IDR1- 10tr), 3

Other (IDR 10-50tr), 16 Other (>IDR 50tr), 23 BII/Maybank , 3 BTN, 3 CIMB Niaga, 4

Ratio of banking assets to GDP

Source: World Bank, IMF.

Share of total banking assets, %

• 4. Small, concentrated banking sector limits availability of

infrastructure financing…

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Deposit and savings 28.1 Mutual fund 6.0 Bond and sukuk 21.5 Government bonds 23.2 Shares 12.1 Land and buildings 5.6 Other 35

Share of pension fund investments, percent

Source: OJK (July 2017), World Bank staff calculations.

• 4. …and domestic institutional investors are mostly focused on

short-term gains

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Now is the time to act to attract more private investments in infrastructure

One-belt-one road: USD275 billion in South and SE Asia Global interest rates going up as monetary policy is finally heading towards normalization Low levels of indebtedness create space for prudent expansion of PPP guarantees

TERIMA KASIH

THANK YOU

While improving recently, quality of infrastructure is perceived to be lower than in ASEAN peers

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Source: World Bank staff calculations using World Economic Forum Global Competitiveness Report data Note: ASEAN is the unweighted average of Malaysia, Singapore, Thailand and Philippines; BRICS is the unweighted average of Brazil, Russia, India, China, South Africa

(indices of infrastructure quality; 1(worst) to 7(best) points)

3 3.5 4 4.5 5 5.5 6 Overall infrastructure Roads Railroad Ports Air transport Electricity supply Indonesia (2016-17) Indonesia (2017-18) ASEAN