June 2017 Upgraded Hans Anand Beck Acting Lead Economist, - - PowerPoint PPT Presentation

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June 2017 Upgraded Hans Anand Beck Acting Lead Economist, - - PowerPoint PPT Presentation

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Indonesia Economic Quarterly June 2017 Upgraded Hans Anand Beck Acting Lead Economist, Indonesia June 15, 2017 Key Takeaways S&P upgrade acknowledged strong economic fundamentals and management. S&P returned Indonesia to

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June 15, 2017

Indonesia Economic Quarterly June 2017 Upgraded

Hans Anand Beck Acting Lead Economist, Indonesia

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S&P upgrade acknowledged strong economic fundamentals and management.

  • S&P returned Indonesia to investment grade credit rating after

20 years, citing strong (fiscal) fundamentals

  • Global growth and trade is firming but remains below pre-GFC

levels. 2017 economic performance continues to be broadly positive, with some temporary help from commodities.

  • Q1 2017 Quarterly GDP growth rose on a rebound in

government consumption and surging manufacturing and commodity exports.

  • Signs of a sustained turnaround in investment and credit

growth.

  • Revenues continued their strong start to the year supported by

commodities, creating space for productive public spending.

  • Risks remain tilted to the downside, including resistance to

structural reform efforts. Investing in the future is critical - to leverage the upgrade, reduce commodity dependence, and boost growth potential

  • There is evidence that reducing Indonesia’s negative

investment list will boost FDI

  • Invest in early childhood development to address inequality

and increase productivity

Key Takeaways

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Invest in the future to leverage the upgrade, reduce commodity dependence and boost growth potential 2017 positive performance continues, with temporary help from commodities S&P recognized strong policy and fundamentals

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S&P recognized Indonesia’s strong economic fundamentals, returning it’s sovereign rating to Investment grade after 20 years.

“Indonesia has exhibited effective policymaking in recent years to promote sustainable public finances and balanced economic growth…” “Indonesian authorities have taken effective expenditure and revenue measures to stabilize the country’s public finances despite the terms of trade shock…” “…Indonesia's increased focus on realistic budgeting has reduced likelihood that shortfall in future revenue would widen general government deficit significantly.”

  • Standard & Poor’s

BB+ BBB-

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Source: BI: BPS; EAP Economic Update Report ; MoF; World Bank staff calculations Note: e stands for estimate; f stands for forecast; *estimated figure

While Indonesia’s fundamentals are strong, Indonesia will still need to compete….

2015 2016 2017f Philippines 2016e Vietnam 2016e Real GDP (Annual percent change) 4.9 5 5.2 6.8 6.2 Consumer price index (Annual percent change) 6.4 3.5 4.3 1.8 2.7 Current account balance (Percent of GDP)

  • 2.0
  • 1.8
  • 1.8

0.2 3 Budget balance (Percent of GDP)

  • 2.6
  • 2.5
  • 2.6
  • 2.4
  • 6.5

Debt (Percent of GDP) 27.4 27.9* 29.0 42.1 62.1 S&P Rating (2017) BBB- BBB BB-

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Source: World Bank Global Economic Prospects June 2017

growth yoy, percent

…..as the global economy begins to pick up again.

  • 3
  • 2
  • 1

1 2 3 4 5 2004 2006 2008 2010 2012 2014 2016 (E) 2018 (F)

  • 20
  • 15
  • 10
  • 5

5 10 15 20 25 Feb-04 Feb-07 Feb-10 Feb-13 Feb-16 Values Volumes

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Invest in the future to leverage the upgrade, reduce commodity dependence and boost growth potential S&P recognized strong policy and fundamentals 2017 positive performance continues, with temporary help from commodities

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Following the first increase in growth rates in 5 years in 2016, the trend continued in Q1 2017.

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2 4 6 8 Mar-14 Dec-14 Sep-15 Jun-16 Mar-17 Private consumption Government consumption Investment Net exports

  • Stat. discrepancy*

GDP

Contributions to real GDP growth yoy, percentage points

Source: BPS; World Bank staff calculations

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There are signs of a more sustained pick up in investment

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2 4 6 8 10 12 14 16

  • 50
  • 40
  • 30
  • 20
  • 10

10 20 Apr-15 Oct-15 Apr-16 Oct-16 Apr-17 Cement sales Commercial Vehicle sales Capital goods import growth Investment credit growth (RHS)

3mma growth yoy, percent, LHS; growth yoy, percent, RHS

Source: BI; BPS; World Bank staff calculations Note: The nominal capital goods imports is measured in percent yoy terms. All

  • ther LHS variables are measured in 3mma percent yoy terms.
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And signs of a a pick up in broad credit growth

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2 4 6 8 10 12 14 16 18 Jan-15 Aug-15 Mar-16 Oct-16 May-17 Deposit growth Credit growth 7 Day reverse repo rate

growth yoy, percent

Source: BI; World Bank staff calculations

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Industrial Production and manufacturing export growth is firming up, although commodities are also supporting exports.

index, LHS; growth yoy, percent, RHS

Industrial Production Index and PMI

  • 30
  • 20
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10 20 30 Mar-15 Mar-16 Mar-17 Oil and gas Coal Mining Palm oil Rubber Manufacturing Other Services Total goods exports

Exports growth

growth yoy, percent Source: BPS; Nikkei/Markit Source: CEIC and BI; World Bank staff calculation

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2 4 6 8 10 12 46 47 48 49 50 51 52 53 May-15 Nov-15 May-16 Nov-16 May-17

Manufacturing Purchasing Managers' Index (PMI) Growth of Industrial Production Index (RHS)

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Commodities are also supporting a good start to the year for revenue collection…

Contributions to growth yoy, percentage points

Non oil and gas income tax Oil and gas related revenues VAT/LGST Excises and other taxes Revenue growth

Source: Ministry of Finance; World Bank staff calculations

  • Total revenue collection increased by 17.8 percent yoy

13.6

  • 6.5
  • 6.9

17.8

  • 20
  • 10

10 20 Jan-May 2014 Jan-May 2015 Jan-May 2016 Jan-May 2017

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Source: Ministry of Finance; World Bank staff calculations

…providing space to spend, especially in more productive areas such as capital.

January-May actual expenditure growth yoy, percent

15 79 63 (32) 1.4 8.0 14.4 (12.8) (80) (60) (40) (20)

  • 20

40 60 80 100 Personnel Material Capital Energy Subsidies 2015 2016 2017

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Support from commodities is forecast to be transitory....

The Net Trade-weighted Price Index

growth yoy, percent

70 90 110 130 150 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18

2015 2016 2017 2018

Source: BPS; World Bank; World Bank staff calculations Note: Net trade-weighted price index is constructed

  • ver Indonesia’s six major export commodities.
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…and risks to growth remain tilted to the downside.

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External risks Domestic risks

Upside Downside

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S&P recognized strong policy and fundamentals 2017 positive performance continues, with temporary help from commodities Invest in the future to leverage the upgrade, reduce commodity dependence and boost growth potential

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Lifting FDI restrictions can boost physical capital and hence Indonesia’s growth potential

Inverse relationship between FDI investment policy restrictiveness and FDI inflows

FDI stock measured in current USD and FDI regulatory index

Source: World Bank staff calculations on the basis of UNCTAD, World Development Indicators and OECD data (online dataset http://stats.oecd.org/).

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And Investment in early childhood development can create the human capital the economy needs to grow.

Association between child stunting (Height-for-age Z score) and fluid intelligence (W Z-score) in later life, Indonesia

Source: Giles, Satriawan, and Witoelar, 2017 (based on IFLS data) Notes: “Fluid intelligence” assesses respondents´ general ability to think abstractly, reason, identify patterns, solve problems, and discern relationships. The Z-score is a standard measure that expresses each value by the number of standard deviations it is from the reference mean. The W-score is the score obtained from an adaptive number series test of fluid intelligence, which was normed and extensively pre-tested for the 2014 round of the IFLS. It was standardized into a Z-score for the purposes of this analysis.

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…while reducing stunting also tackles a major source of inequality.

41 48 39 42 37 39 34 32 30 29 10 20 30 40 50 60 2007 2013 Stunting Incidence (percent of under-5 population) Poorest Second Middle Fourth Richest

Stunting affects everyone, but is worse for the poor In early childhood, stunting leads to increased risk of death and illness In school-age, stunting leads to loss of IQ and poor learning outcomes In adulthood, stunting leads to increased risk

  • f NCDs and lower income levels

Source: Riskesdas

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Terima Kasih

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As global trade has rebounded, so has Indonesia’s trade performance

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Source: BPS; World Bank staff calculation Source: BPS; World Bank staff calculation

  • 10
  • 8
  • 6
  • 4
  • 2

2 4 6 8 10 Mar-14 Sep-15 Mar-17

Exports

Services Goods: Oil & Gas Goods: Non-Oil & Gas Export of Goods and Services

  • 10
  • 8
  • 6
  • 4
  • 2

2 4 6 8 10 Mar-14 Sep-15 Mar-17

Imports

Services Goods: Oil & Gas Goods: Non-Oil & Gas Import of Goods and Services

Contributions to real growth yoy, percentage points