Indonesia Economic Developments and Outlook Hans Anand Beck January 25, 2017
Key takeaways Indonesia showed resilience as volatility returned to global financial markets Thanks to strong fundamentals and macro-fiscal management, Indonesia weathered recent volatility better than many peers: Efficiencies in the 2016 budget and a more credible 2017 budget Low inflation; a pause in accommodative monetary policy Policy packages have made it easier to do business However, risks have intensified and remain tilted to the downside External, as well as domestic risks remain Global policy uncertainty, trade deals and revenue collection This emphasizes the importance of sustaining reform momentum to mitigate risk and foster inclusive growth Fiscal reforms to spend with greater impact, and stem the decline in revenues Investment climate reforms to accelerate private investment Investing in human capital through education
Indonesia remains resilient to sluggish global growth Economic growth (Annual percentage change) 8 Philippines 6 Indonesia East Asia ex China Malaysia 4 Thailand World 2 Forecasts 0 2014 2015 2016 2017 2018 Source: World Bank Global Economic Prospects 3
Gloomy Global Economic Growth – below 3% in current forecast period World Bank projections for global growth by date of forecast 3.5 Average growth (2000-2008) 3 Actual growth 2.5 Jan-15 Jun-15 Jan-16 Jun-16 2 2013 2014 2015 2016 2017 2018 Source: World Bank Global Economic Prospects; WDI 4
Gloomy global trade Global import demand , fixed base 2010=100 6.0 4.0 Advanced 2.0 0.0 -2.0 EMEs -4.0 -6.0 Aug-14 Feb-15 Aug-15 Feb-16 Aug-16 Source: World Bank Global Economic Prospects; WDI
Indonesia remains resilient to global financial volatility Exchange rates against USD (index, April 1=100) Malaysia Philippines Thailand Singapore Indonesia EMCI 105 US election Brexit 100 95 90 85 Apr-2016 Jun-2016 Aug-2016 Oct-2016 Dec-2016 Source: CEIC; WB Staff Calculation 6
Exports in the region Depend On Global Growth Outlook China Emerging and dev. Asia excl. China Emerging and dev. excl. EAP European Union (Gross exports, percent of GDP, 2015) Japan United States 80 70 60 50 40 30 20 10 0 Cambodia Fiji Indonesia Lao PDR Malaysia Mongolia Myanmar Papua New Guinea Philippines Solomon Islands Thailand Vietnam Source: World Bank Global EAP Update November 2016
But in Indonesia, Private consumption has supported growth while private investment remains subdued Contributions to yoy GDP growth (percentage points) Private consumption Government consumption 10 Investment Net exports Stat. discrepancy* GDP 8 6 4 2 0 -2 -4 Sep-13 Sep-14 Sep-15 Sep-16 8 Source: CEIC; WB Staff Calculation
The baseline expectation is that Indonesia’s economy will remain resilient and stable 2015 2016 2017p 5.1 1 Real GDP growth 4.8 5.3 Inflation 6.4 3.5 4.4 -2.1 1 Current account balance (% GDP) -2.1 -2.3 -2.5 2 Budget balance (% GDP) -2.6 -2.6 28.3 1 Government Debt (%GDP) 27.4 28.7 6.2 3 5.6 3 Unemployment (%) - Underemployment (%) 4 29.9 3 27.2 3 - 1 Estimate; 2 Preliminary realization data; 3 Data is for August; 4 Defined as workers who 9 works less than 35 hours/week, as a % of total workers Source: MoF; BI; CEIC; BPS; World Bank projections
Indonesia remains resilient But downside risks have intensified Sustaining reform momentum is essential to withstand risks and promote inclusive growth 10
Downside risks still dominate upside risks Upside Downside External risks Domestic risks 11
Headwind 1 (for commodity exporters): Commodity Prices will remain low (Index, 2010 = 100) Non-energy commodities Energy commodities 120 100 110 95 100 90 90 80 85 70 80 60 50 75 2014 2015 2016 2017 2018 2014 2015 2016 2017 2018 Oct-16 Apr-16 Oct-16 Apr-16 Oct-15 Apr-15 Oct-15 Apr-15 Source: World Bank Global EAP Update October 2016
Headwind 2: Global Financial Tightening Will Matter….. (US$ denominated debt, percent of total (Short-term debt, percent of gross external debt) public external debt) 100 50% 45% 80 40% 35% 60 30% 25% 40 20% 15% 20 10% 5% 0 0% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 China Mongolia Malaysia Thailand Vietnam Indonesia Source: World Bank Global EAP Update November 2016
… as debt remains a key source of vulnerability in several countries (Debt service as a percent of income) (Return on assets, listed firms, percent) 25 5.0 8 4.5 7 20 4.0 6 3.5 5 15 3.0 4 10 2.5 3 2.0 2 5 1.5 1 0 1.0 China Indonesia 0 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 2010 2011 2012 2013 2014 2015 Malaysia Philippines Thailand Vietnam China Malaysia Thailand Indonesia Source: World Bank Global EAP Update November 2016
Indonesia remains resilient But downside risks have intensified Sustaining reform momentum is essential to withstand risks and promote inclusive growth 15
The tax amnesty boosted revenue in 2016… • Total tax amnesty revenue was IDR 103 trillion (62% of the target) by the end of Phase 2 • Repatriated offshore foreign assets remained low at 14% of the target Tax collection (IDR trillion) Repatriated assets (IDR trillion) 200 1,000 160 800 120 600 Phase 2 80 400 Phase 1 40 200 Phase 2 Phase 1 0 0 GoI Target Realization GoI Target Realization 16 Source: Ministry of Finance; World Bank staff calculations
…but all other major revenue sources fell in 2016… Revenue (contributions to annual revenue growth, percentage points) 8 Excluding the Tax Amnesty, 6 revenue decreased by 3.7 percent in 2016. 4 2 Other 0 -2 Oil and gas related revenues Revenue Non oil and gas income tax -4 growth VAT/LGST -6 -8 Jan-Dec 2016 Jan-Dec 2016 excl Tax Amnesty* Source: Ministry of Finance; World Bank staff calculations 17
...emphasizing the need to accelerate revenue reform • VAT e-filing and e-invoicing Implemented • Formation of Tim Reformasi Perpajakan (Tax Reform Team) • Use new Tax Amnesty data to improve compliance and expand tax base • Reform VAT law (reduce exemptions, lower VAT threshold) Ongoing • Income tax law • Strengthen measures to reduce base erosion and profit shifting (BEPS) • Reform tax administration ( KUP law , business processes and IT) Source: Ministry of Finance; World Bank staff calculations 18
Fiscal credibility introduced in the 2016 revised budget has been sustained in 2017… • More achievable revenue forecasts for 2017 • Expenditure for 2017 is in line with the 2016 Revised Budget • 2017 fiscal financing needs pre-financed in December 2016 Budget (IDR trillion, LHS; % GDP RHS, inverse) 2,500 -2.7 Revenues Expenditures Budget Deficit (RHS, inverse) 2,000 -2.6 1,500 -2.5 1,000 -2.4 500 0 -2.3 Revised Budget Actual (Prelim) Budget World Bank 2016 2017 19 Source: Ministry of Finance; World Bank staff calculations
…with room for improvements to the quality of spending, particularly capital spending… Government expenditure (IDR trillion) • Capital expenditure fell by 23% in 2016: 300 • Base effect • 250 Several projects deferred • The government maintained lower 200 subsidy spending in 2016 and in the 2017 Budget, along with other 150 improvements to the quality of spending 100 • improved targeting of energy subsidies 50 • mandated higher infrastructure spending at the sub-national - level 2014 2015 2016 2017 Capital Subsidies 20 Source: Ministry of Finance; World Bank staff calculations
…and in other priority sectors Government expenditure (% GDP) Personnel (CG) Subsidies Social assistance Health Infrastructure 0 1 2 3 4 5 2016 Revised Budget 2017 approved Budget World Bank target (2020) Note: Infrastructure and social assistance data use World Bank sectoral definitions 21 Source: Ministry of Finance; World Bank staff calculations
Sustain investment climate reform momentum • The investment climate is improving - Indonesia was a top 10 reformer in the 2017 Doing Business Report • But more needs to be done, especially to meet the government’s target Doing Business rank of 30 in 2019 • Need to move beyond “quick win” reforms and implement medium -term structural reforms Target 2019 DB 2016 DB 2017 Overall ranking 106 91 30 Starting a business (days) 48 25 Getting electricity (days) 76 56 Compliance for exporting (cost, $) 170 139 Source: World Bank 22
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