January 25, 2017 Key takeaways Indonesia showed resilience as - - PowerPoint PPT Presentation

January 25, 2017 Indonesia Economic Developments and Outlook

Hans Anand Beck

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

2 4 6 8 2014 2015 2016 2017 2018

Indonesia remains resilient to sluggish global growth

3

Source: World Bank Global Economic Prospects

Economic growth (Annual percentage change)

Forecasts World Indonesia Philippines East Asia ex China Malaysia Thailand

Gloomy Global Economic Growth – below 3% in current forecast period

4

Source: World Bank Global Economic Prospects; WDI

World Bank projections for global growth by date of forecast

2 2.5 3 3.5 2013 2014 2015 2016 2017 2018 Jan-15 Jun-15 Jan-16 Jun-16 Average growth (2000-2008) Actual growth

Gloomy global trade

Global import demand, fixed base 2010=100

• 6.0
• 4.0
• 2.0

0.0 2.0 4.0 6.0 Aug-14 Feb-15 Aug-15 Feb-16 Aug-16 Advanced EMEs

Source: World Bank Global Economic Prospects; WDI

85 90 95 100 105 Apr-2016 Jun-2016 Aug-2016 Oct-2016 Dec-2016 Malaysia Philippines Thailand Singapore Indonesia EMCI

Indonesia remains resilient to global financial volatility

6

Exchange rates against USD (index, April 1=100)

Source: CEIC; WB Staff Calculation

US election Brexit

Exports in the region Depend On Global Growth Outlook

(Gross exports, percent of GDP, 2015) 10 20 30 40 50 60 70 80 Cambodia Fiji Indonesia Lao PDR Malaysia Mongolia Myanmar Papua New Guinea Philippines Solomon Islands Thailand Vietnam China Emerging and dev. Asia excl. China Emerging and dev. excl. EAP European Union Japan United States

Source: World Bank Global EAP Update November 2016

But in Indonesia, Private consumption has supported growth while private investment remains subdued

8

Contributions to yoy GDP growth (percentage points)

Source: CEIC; WB Staff Calculation

• 4
• 2

2 4 6 8 10 Sep-13 Sep-14 Sep-15 Sep-16 Private consumption Government consumption Investment Net exports

• Stat. discrepancy*

GDP

The baseline expectation is that Indonesia’s economy will remain resilient and stable

9

1 Estimate; 2 Preliminary realization data; 3 Data is for August; 4 Defined as workers who

works less than 35 hours/week, as a % of total workers Source: MoF; BI; CEIC; BPS; World Bank projections

2015 2016 2017p Real GDP growth 4.8 5.11 5.3 Inflation 6.4 3.5 4.4 Current account balance (% GDP)

• 2.1
• 2.11
• 2.3

Budget balance (% GDP)

• 2.6
• 2.52
• 2.6

Government Debt (%GDP) 27.4 28.31 28.7 Unemployment (%) 6.23 5.63

• Underemployment (%)4

29.93 27.23

10

But downside risks have intensified Indonesia remains resilient Sustaining reform momentum is essential to withstand risks and promote inclusive growth

Downside risks still dominate upside risks

11

Upside Downside

External risks Domestic risks

Headwind 1 (for commodity exporters): Commodity Prices will remain low

(Index, 2010 = 100) 50 60 70 80 90 100 110 120 2014 2015 2016 2017 2018

Energy commodities

Oct-16 Apr-16 Oct-15 Apr-15 75 80 85 90 95 100 2014 2015 2016 2017 2018

Non-energy commodities

Oct-16 Apr-16 Oct-15 Apr-15

Source: World Bank Global EAP Update October 2016

Headwind 2: Global Financial Tightening Will Matter…..

20 40 60 80 100 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 China Mongolia Malaysia Thailand Vietnam Indonesia 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% (US$ denominated debt, percent of total public external debt) (Short-term debt, percent of gross external debt)

Source: World Bank Global EAP Update November 2016

… as debt remains a key source of vulnerability in several countries

1 2 3 4 5 6 7 8 2010 2011 2012 2013 2014 2015 China Indonesia Malaysia Philippines Thailand Vietnam (Debt service as a percent of income) (Return on assets, listed firms, percent) 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 5 10 15 20 25 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 China Malaysia Thailand Indonesia

Source: World Bank Global EAP Update November 2016

15

Sustaining reform momentum is essential to withstand risks and promote inclusive growth But downside risks have intensified Indonesia remains resilient

16

Source: Ministry of Finance; World Bank staff calculations

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

Repatriated assets (IDR trillion) Tax collection (IDR trillion)

200 400 600 800 1,000 GoI Target Realization 40 80 120 160 200 GoI Target Realization

Phase 2 Phase 2 Phase 1 Phase 1

17

Source: Ministry of Finance; World Bank staff calculations

…but all other major revenue sources fell in 2016…

Other

• 8
• 6
• 4
• 2

2 4 6 8 Jan-Dec 2016 Jan-Dec 2016 excl Tax Amnesty*

Excluding the Tax Amnesty, revenue decreased by 3.7 percent in 2016.

Revenue (contributions to annual revenue growth, percentage points)

Non oil and gas income tax Oil and gas related revenues VAT/LGST

Revenue growth

18

Source: Ministry of Finance; World Bank staff calculations

...emphasizing the need to accelerate revenue reform

• VAT e-filing and e-invoicing
• Formation of Tim Reformasi Perpajakan (Tax

Reform Team)

Implemented

• Use new Tax Amnesty data to improve

compliance and expand tax base

• Reform VAT law (reduce exemptions, lower

VAT threshold)

• Income tax law
• Strengthen measures to reduce base

erosion and profit shifting (BEPS)

• Reform tax administration (KUP law,

business processes and IT)

Ongoing

• 2.7
• 2.6
• 2.5
• 2.4
• 2.3

500 1,000 1,500 2,000 2,500 Revised Budget Actual (Prelim) Budget World Bank Revenues Expenditures Budget Deficit (RHS, inverse) 2016 2017

19

Source: Ministry of Finance; World Bank staff calculations

• 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

Fiscal credibility introduced in the 2016 revised budget has been sustained in 2017…

Budget (IDR trillion, LHS; % GDP RHS, inverse)

20

Source: Ministry of Finance; World Bank staff calculations

• Capital expenditure fell by 23% in

2016:

• Base effect
• Several projects deferred
• The government maintained lower

subsidy spending in 2016 and in the 2017 Budget, along with other improvements to the quality of spending

• improved targeting of energy

subsidies

• mandated higher infrastructure

spending at the sub-national level

Government expenditure (IDR trillion)

…with room for improvements to the quality of spending, particularly capital spending…

• 50

100 150 200 250 300 2014 2015 2016 2017 Capital Subsidies

…and in other priority sectors

21

Government expenditure (% GDP)

Note: Infrastructure and social assistance data use World Bank sectoral definitions Source: Ministry of Finance; World Bank staff calculations

1 2 3 4 5 Infrastructure Health Social assistance Subsidies Personnel (CG) 2016 Revised Budget 2017 approved Budget World Bank target (2020)

22

Source: World Bank

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

Overall ranking 106 91 Starting a business (days) 48 25 Getting electricity (days) 76 56

Compliance for exporting (cost, $) 170 139

DB 2016 DB 2017

30

Target 2019

…and sustain education reforms

Increased education spending—mostly on teacher salaries—has improved access:

• Student teacher ratios are now some of the lowest in the world – further improvement is unlikely to

improve learning outcomes The challenge now is to improve the quality of education:

• While PISA scores have slightly improved overall, Indonesia remains behind its peers

A video study provides useful evidence for reforms

• The national curriculum emphasizes student-centered learning (involving less teacher lecturing and

more interactive learning), but most teachers have not picked-up this approach

• Teachers that do use student-centered approaches achieve better learning outcomes

23

340 360 380 400 420

2000 2006 2009 2012 2015 2000 2006 2009 2012 2015 2000 2006 2009 2012 2015 Math Reading Science

Program for International Student Assessment (PISA) scores

Key reforms Improve teacher deployment and allocation Enhanced teacher performance evaluation and training Increased spending on areas with the highest returns like early childhood development

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