QUARTERLY 03|18 TOWARDS Lead Economist INCLUSIVE GROWTH March 27, - - PowerPoint PPT Presentation

INDONESIA ECONOMIC QUARTERLY 03|18 TOWARDS INCLUSIVE GROWTH

Frederico Gil Sander, Lead Economist March 27, 2018

Recent economic developments and

• utlook

Collecting more and spending better for inclusive growth

How is the health of the Indonesian economy?

The Indonesian economy grew slightly faster…

4

Source: BPS; World Bank staff calculations

5.1 5.2

• 4
• 2

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

• Stat. discrepancy*

Change in inventories GDP GDP growth yoy and contributions, percentage points

…as investment remains on multi-year highs thanks to higher machinery purchases

5

Source: BPS; World Bank staff calculations

• 2
• 1

1 2 3 4 5 6 7 8 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Buildings & Structures Machine & Equipment Vehicles Other Equipments Cultivated Bio. Res. Intellectual Property Investment Growth in gross fixed capital formations yoy and contributions to growth, percent

• 2

2 4 6 8 10 12 Feb-16 Aug-16 Feb-17 Aug-17 Feb-18 Headline Administered Food Core Administered price increases

Headline inflation declined in the second half of 2017…

6

Change from the previous year, percent

Source: BPS; World Bank staff calculations

1,469 1,463 1,138

• 4

3,824 191 3,593 2,610

• 3,000
• 2,000
• 1,000

1,000 2,000 3,000 4,000 5,000 2011 2012 2013 2014 2015 2016 2017 Manufacturing Agriculture, forestry and fishery Other Industry Services Total

…while labor markets remained robust

7

Net jobs created, by sector, thousands

Source: BPS; World Bank staff calculations

8

Ada apa dengan

Konsumsi 3?

What is the matter with consumption? – Part 3

Rp

Private consumption growth was slightly below its 10-year average but well above pre-2008 levels

9

Source: BPS; World bank staff calculations

2017 4.95 2001-2007 average 4.05 2008-2017 average 5.10

0.0 1.0 2.0 3.0 4.0 5.0 6.0 2001 2003 2005 2007 2009 2011 2013 2015 2017 Private consumption growth, year-on-year, percent

The effects of inflation and the Rupiah, key drivers

• f consumption, often come with a lag

10

Source: World Bank staff analysis

A depreciation in the exchange rate has a negative impact on private consumption after four quarters

Quarters since the shock Consumption growth declines 4 quarters after the depreciation Quarters since the shock

An increase in inflation has a negative effect on private consumption growth in the following quarter

Change in log difference in private consumption growth Consumption growth declines the quarter after the rise in inflation

Are debt levels too high?

In short – no

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Source: IMF Fiscal Monitor (October 2017), World Bank staff calculations

… which are expected to remain stable even under certain shocks …thanks to prudent fiscal policies that led to a decline in debt levels… Indonesia’s debt levels are among the lowest in the world...

20 25 30 35 40 2008 2010 2012 2014 2016 2018 2020 Government debt, % of GDP, under baseline and -1 std. deviation Baseline GDP Exchange rate 10 20 30 40 50 60 70 80 90 100

• 5.0
• 4.0
• 3.0
• 2.0
• 1.0

0.0 1.0 2.0 3.0 4.0 5.0 Fiscal balance (LHS) Debt (RHS)

Source: World Bank staff calculations

Indonesia

50 100 150 200 250

Debt-to-GDP (percent) Percent

At the same time, maintaining a prudent fiscal stance is warranted

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Source: ADB – Asian bonds online 39.8 5 10 15 20 25 30 35 40 45 Indonesia Korea Malaysia Thailand

Foreign holdings of local currency bonds, percent Yields on 10-year bonds, US vs. Indonesia, percent

2.26 US 2.82 7.11 Indonesia 7.02 4.89 Yield differential 4.20 1 2 3 4 5 6 7 8 Source: CEIC and World bank staff calculations

Foreigners hold nearly 40 percent of Indonesian Government bonds With Fed normalization, yield differentials are narrowing

Structural reforms will further enhance Indonesia’s borrowing capacity

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Source: IMF Fiscal monitor and World Bank staff calculations Note: Indonesia* simulates Indonesia’s debt/revenues ratio with a 1 percent increase in the revenue/GDP ratio

Debt-to-revenues ratio, percent Credit-to-GDP ratios as of Q3 2017, percent

Source: BIS and World Bank staff calculations

Higher revenue collections can further enhance Indonesia’s credit strength A deeper financial sector would support growth and provider greater domestic liquidity

39.1 56.8 63.0 84.7 115.6 134.1 210.5 50 100 150 200 250 182 189 194 259 261 276 326 50 100 150 200 250 300 350

How much should we worry about Rupiah depreciation?

The Rupiah depreciated in 2018, but has significantly appreciated since the taper tantrum

16

Source: BIS; World Bank staff calculations

• 9.0
• 6.0
• 3.0

0.0 3.0 6.0 9.0 12.0 15.0 18.0 21.0 Malaysia Singapore Japan Philippines China Thailand Korea Indonesia India Real effective exchange rate (increases denote appreciation) Columns: percent change, December 2013 – December 2017 Dots: percent change, December 2017 – February 2018

IDR moves partly reflect wider CA deficit linked to investment, and increasingly financed by FDI

17

Source: BPS; World Bank staff calculations

17

• 25
• 20
• 15
• 10
• 5

5 10 15 20 25

Dec-15 Dec-16 Dec-17

Other Fuel Capital Raw materials net of fuel Consumer goods net of fuel Imports

Trade 19 19 22 17 4 23

• 20
• 15
• 10
• 5

5 10 15 20 25 30 2012 2013 2014 2015 2016 2017

Other Financial Intermediation Manufacturing Mining and Quarrying Agriculture, Hunting, and Forestry

Foreign Direct Investment, USD billion Imports, yoy growth, percent

How much can growth accelerate in 2018 and 2019?

Growth is likely to remain steady over in the near-term, despite rising global risks

19

Source: Bank Indonesia, BPS, Ministry of Finance, World Bank staff calculations

2016 2017 2018f Real GDP Annual percent change 5.0 5.1 5.3 Consumer price index Annual percent change 4.3 3.8 3.5 Current account balance Percent of GDP

• 1.8
• 1.7
• 1.9

Budget balance Percent of GDP

• 2.5
• 2.4
• 2.3

Global outlook favorable Domestic conditions conducive Risks of protectionism are rising; normalization of unconventional post-GFC monetary policy remains potential source of volatility

100 56 56 48 100 59 94 100 20 40 60 80 100 120 140 160 China Vietnam India Indonesia Wages Unit Labor Costs

Accelerating growth beyond 5.5 percent in the near term will be challenging

Indonesia’s economy has capacity to grow between 5.0 – 5.5 percent based on current levels of infrastructure, skills, and productivity

20

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 computed for 14 advanced economies and 21 EMs

$1.5 trillion to close this gap

Source: OECD PISA

14 55 10 20 30 40 50 60 2012 2015

Share of students who do not meet level 2 proficiency levels Source: UNIDO, WB staff calculations Note: wages for finishing, weaving, and spinning of textiles Average wages and unit labor costs, indices (China = 100)

Low wages but high costs because

• f low productivity

Average public capital stock per capita, 2015 USD

55 percent of 15-year-olds ‘functionally illiterate’ $1.5 trillion needed to close infrastructure gap with other EMs

So what can be done to advance Indonesia’s development in 2018, 2019 and beyond?

Put forward a bold “policy sambal” to radically open the economy and bring in investments and jobs Invest in quality of life: improve people’s lives and build long-term foundations for inclusive growth

21

Recent economic developments and

• utlook

Collecting more and spending better for inclusive growth

Collecting more and spending better are key drivers

• f inclusive economic growth

23

Spending Effectively Spending More on Priority Sectors Spending Differently Collecting more… …and better INCLUSIVE GROWTH Spending Better

Health, education, urban infrastructure, connectivity, social assistance

The quality of spending has improved as expenditures shifted towards priority areas for inclusive growth…

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28% 6% 0% 5% 10% 15% 20% 25% 30% 2014 2015 2016* 2017* Infrastructure Health Education Social protection Energy subsidies Percent of Central Government spending excluding transfers to subnational governments

Source: Ministry of Finance, World Bank staff calculations Note: 2014-2015 refer to actual spending, 2016 and 2017 are budgeted. Infrastructure only includes line ministry spending and does not include below the line capital injections to SOEs.

…but Indonesia still needs to spend more in some areas...

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1.4 0.6 2.4

2.3 1.1 4.9

1 2 3 4 5 6

Health Social assistance Infrastructure, incl. housing

Current level of spending Estimates of needed level of spending

Source: World Bank staff calculations

Percent of GDP

…by further reallocating expenditures away from poorly targeted subsidies…

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4.0 1.2 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 50 100 150 200 250 300 350 400 450 Fuel Electricity Food Fertilizer Other non-energy subsidies Total subsidies (% GDP)

Source: Ministry of Finance, World Bank staff calculations

IDR trillion Percent of GDP

…and increasing revenue collections

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Malaysia Peru Philippines South Africa Indonesia Thailand Singapore

10 20 30 40 50 60

8 9 10 11 12

General government revenue, percent of GDP, 2016

Source: IMF Fiscal Monitor, World Bank staff calculations

Log GDP per capita in 2011 PPP

Excises – consider higher tobacco, vehicle, and environmental excises (such as taxes on plastic bags) to incentivize good behavior and raise revenues VAT – lower threshold and reduce exemptions for greatest bang-for- the-buck Income tax – lower threshold and simplify the tax code to get more individuals in the tax net Tax administration – improve IT systems and HR to boost compliance

Revenues are well below what would be expected given Indonesia’s income level, constraining expenditures

In education, Indonesia can spend better to improve quality for all children

Dramatically reduce stunting through coordinated interventions Invest in quality early childhood education for all Indonesian children Launch a presidential initiative on education quality focusing on improving learning outcomes Investments in education build a legacy for future growth – and parents care about their children today and will recognize the Government’s efforts

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Spending better, but also spending more, is needed in the health sector

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JKN is very popular with Indonesians, but faces a chronic deficit  Increase investments in primary health care, promotive and preventive interventions, particularly for vulnerable populations living in rural and remote locations

Indonesia, 1.08 2 4 6 8 10 12 General Government spending on health, percent of GDP Source: WDI

Spending on health is among the lowest in the world

Emphasize quality over numbers in social assistance

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The move of social assistance spending from subsidies to direct transfers has been positive... ...but after a large expansion in the PKH, focus should be on ensuring all eligible families are reached by the program and on increasing benefits

➢ IDR 1 of spending in higher benefits leads to more poverty reduction than the same IDR 1 spent on new beneficiaries

Share of beneficiaries by consumption decile, percent

Despite improvements, many poor households do not receive PKH, while some richer households do

Source: SUSENAS and World Bank staff calculations

0% 5% 10% 15% 20% 25% 30% 35% 1 2 3 4 5 6 7 8 9 10 2010 2014 2017

Spending and revenue policies influence inclusive growth in the long-term, but also today’s distribution

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• 0.12
• 0.10
• 0.08
• 0.06
• 0.04
• 0.02

0.00

Change in Gini coefficient from market to disposable income, points

Source: Commitment to Equity, latest comparable data available

TERIMA KASIH THANK YOU

Questions? fgilsander@Worldbank.org