Jim Brumby, Lead Economist and Sector Manager World Bank Indonesia - - PowerPoint PPT Presentation

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Jim Brumby, Lead Economist and Sector Manager World Bank Indonesia - - PowerPoint PPT Presentation

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Jim Brumby, Lead Economist and Sector Manager World Bank Indonesia Paramadina Public Policy Institute, October 4, 2013 OCTOBER 2013 IEQ LAUNCH PRESENTATION More subdued growth outlook, resulting from two major shocks to the economy and ongoing

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Jim Brumby, Lead Economist and Sector Manager World Bank Indonesia Paramadina Public Policy Institute, October 4, 2013

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OCTOBER 2013 IEQ LAUNCH PRESENTATION

More subdued growth outlook, resulting from two major shocks to the economy and ongoing adjustments Developments in Q3 show adjustments are well underway but highlight Indonesia’s macro vulnerabilities The role of good policies in this time of continuing adjustment

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  • 2

2 4 6 8 10 12

Quarterly merchandise trade balance, USD billion

Source: BI

FIRST SHOCK: TRADE SHOCK, SINCE 2011…

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…AS TERMS OF TRADE HAVE WEAKENED

  • 100

100 200 300 400 500 600 Jan-00 Jan-03 Jan-06 Jan-09 Jan-12

US Dollar price index, 2000 average = 100

Source: World Bank

Indonesia’s major export commodities Brent crude oil

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PRESSURING THE OVERALL CURRENT ACCOUNT

  • 15
  • 10
  • 5

5 10 15 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 Goods trade balance Services trade balance Income balance Current transfers Current account balance USD billion

Source: BI

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SECOND SHOCK: FINANCING COSTS

1 2 3 4 5 6 7 8 Sep-09 Apr-10 Nov-10 Jun-11 Jan-12 Aug-12 Mar-13 10-year US Treasury note Emerging market sovereign USD bonds (EMBIG) Indonesia sovereign USD bonds (EMBIG sub-index)

Source: JP Morgan

Yield, percent

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OCTOBER 2013 IEQ LAUNCH PRESENTATION

More subdued growth outlook, resulting from two major shocks to the economy and ongoing adjustments Developments in Q3 show adjustments are well underway but highlight Indonesia’s macro vulnerabilities The role of good policies in this time of continuing adjustment

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CURRENCY: RUPIAH ADJUSTING

70 75 80 85 90 95 100 105 110 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 Sep-12 Sep-13 USD/IDR Trade-weighted Inflation-adjusted trade-weighted

Index, 2010 average = 100

Source: World Bank

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MONETARY CONDITIONS: TIGHTENING

BI Overnight deposit facility rate Percent, year-on-year

Source: BI

FASBI rate New loan approvals (RHS)

  • 100
  • 50

50 100 150 200 2 4 6 8 10 Jan-06 Dec-07 Dec-09 Dec-11

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DOMESTIC DEMAND: SOFTENING

Growth yoy, percent

Source: BPS; World Bank staff calculations

Real domestic demand Imports (US Dollar, RHS)

  • 60
  • 40
  • 20

20 40 60 80 100 1 2 3 4 5 6 7 8 9 Jun-05 Oct-06 Feb-08 Jul-09 Nov-10 Apr-12

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INVESTMENT SLOWING DOWN

  • 4

4 8 12 16 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Building Foreign machinery & equip Foreign transportation Other Total Real fixed investment growth, percent

Source: World Bank

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REPEATED DOWNWARD REVISIONS

5.4 5.6 5.8 6.0 6.2 6.4 2013 2014

Average of analysts’ real GDP growth forecasts

Source: Consensus Economics

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OUTLOOK: MORE ADJUSTMENT TO COME…

October IEQ Previous (July) 2011 2012 2013p 2014p 2013p 2014p Real GDP (% change) 6.5 6.2 5.6 5.3 5.9 6.2 Consumer price index (% change) 5.4 4.3 7.3 6.7 7.2 6.7 Current account deficit (% GDP) 0.2

  • 2.8
  • 3.4
  • 2.6
  • 2.7
  • 2.1

Major trading partner GDP (% change) 3.6 3.4 3.4 3.9 3.4 4.0

Source: BI; BPS; Ministry of Finance; World Bank staff projections

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…BUT PERSPECTIVE, PLEASE

  • 6
  • 4
  • 2

2 4 6 8 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Major trading partners Indonesia

Source: World Bank

Real GDP growth, percent

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OCTOBER 2013 IEQ LAUNCH PRESENTATION

More subdued growth outlook, resulting from two major shocks to the economy and ongoing adjustments Developments in Q3 show adjustments are well underway but highlight Indonesia’s macro vulnerabilities The role of good policies in this time of continuing adjustment

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THREE R’S FOR POLICY

  • Responding, to facilitate more

near-term adjustment:

  • Monetary and fiscal policy

coordination

  • Exchange rate flexibility
  • Reducing uncertainty:
  • Contingency planning
  • Communication
  • Refocusing policies to lift

sustainable growth rate:

  • August package: follow through
  • “Quick wins” for competitiveness
  • Fiscal sector: energy subsidies,

infrastructure spending, social protection

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AUGUST PACKAGE: IMPLEMENTATION IS KEY

Relieve external balance pressures

  • Exports: tax relief for labor-intensive exporters
  • Investment: DNI; “de-bottlenecking”

Reduce inflation pressures

  • Food imports: move to price-based restrictions

Support employment

  • Bounded zones
  • Tax relief for qualifying firms in labor-intensive sectors
  • Minimum wages
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MORE MEASURES TO LIFT COMPETITIVENESS

  • Boost from weaker Rupiah provides an opportunity…
  • …but will be wasted without a supply response
  • “Quick wins” in trade facilitation can help

4.5 5.5 6.5 7.5 8.5 9.5 10.5 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13

Average container dwell time at Tanjung Priok, days

Source: Jakarta International Container Terminal (JICT)

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COSTS AND RISKS FROM ENERGY SUBSIDIES

Energy subsidy costs – baseline and with 10 percent IDR depreciation/oil price increase

Note: *World Bank projections Source: World Bank staff calculations

50 100 150 200 250 300 350 400 2009 2010 2011 2012 2013* 2014* IDR trillion Energy subsidies (Baseline) Energy subsidies (10% IDR depreciation) Energy subsidies (10% Oil price increase)

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REDIRECTING SPENDING: THE OPPORTUNITY

Spending on fuel subsidies and infrastructure, percent of GDP

*World Bank projections Source: Ministry of Finance; World Bank

1 2 3 4 5 6 7 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013* 2014* Fuel subsidy cost Total infrastructure spending (government, SOE and private)

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MORE INFRASTRUCTURE STOCK, HIGHER INCOME

3,471 180 648

  • 500

1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500 Actual 5 percent 10 percent

2011 per capita income – actual, and following higher annual infrastructure growth rate increases (USD)

Source: World Bank staff calculations

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ADDRESS THE PERSISTENT INFRASTRUCTURE GAP REALLOCATE SPENDING TOWARDS INFRASTRUCTURE SUPPORT EXTERNAL BALANCES OVER THE MEDIUM- TERM

BREAKING INTO INFRASTRUCTURE CYCLE

  • Improve domestic and external

competitiveness

  • Potential to re-orientate

import-intensity of spending

  • Enhance FDI potential (and

provide more stable financing)

  • Offset the rise in financing costs
  • Enhance sustainable growth
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MAIN MESSAGES

  • Indonesia faces greater constraints: trade shock, global liquidity
  • The economy and policy settings are adjusting:
  • Base case outlook for growth moderation and gradually narrowing current

account deficit

  • But external uncertainties still elevated and adjustment phase carries risks
  • Critical continued role for policy – 3 R’s:
  • Responding, to facilitate more near-term adjustment
  • Reducing uncertainty: contingency planning and communication to

support confidence

  • Refocusing policy efforts on lifting competitiveness and the sustainable

growth rate

  • August policy package implementation
  • Additional “quick wins”, e.g. trade facilitation
  • Continuing progress on fiscal sector reforms