Quarterly July 2015 Slower Gains Ndiam Diop Lead Economist, - - PowerPoint PPT Presentation

Ndiamé Diop Lead Economist, Indonesia July 8, 2015

Indonesia Economic Quarterly July 2015 Slower Gains

Introduction

• The government announced and

initiated ambitious policy reforms (e.g., fuel subsidy, business licensing) and infrastructure development plans (doubling of capital budget allocation in 2015).

• These raised expectations about

the results they can achieve…

• …but so far gains remain smaller

than expected.

• In this IEQ, we try to understand

why this is the case and discuss

• ptions for addressing ongoing

challenges.

Three facts about the global economy Indonesia: recent developments and near-term outlook

3

Effective policy response

Fact 1. Global growth still subdued despite recovery in the US

2.6 2.8 3.3 2 2.5 3 3.5 4 Jan'13 Jun'13 Jan'14 Jun'14 Jan'15 Jun'15

2014 2015 2016

World Bank projections for global growth in 2014, 2015 and 2016, percent

Source: World Bank Global Economic Prospects

Fact 2. Major developing countries growing below past 10-year average…

• 2

2 4 6 8 10 12 2015f 2016f 2005-2014 (excl. GFC*)

Note: *2008/9 global financial crisis period. Source: World Bank Global Economic Prospects June 2015; World Development Indicators; World Bank staff calculations

Real annual GDP growth in select countries, percent

31.5

• 7.8
• 10
• 5

5 10 15 20 25 30 35 2005-2011* 2012-2014

…China’s slowing and changing growth pattern particularly far-reaching

Chinese imports from Indonesia, average annual growth, percent

Note: * excludes 2009 global financial crisis period. Source: BPS; World Bank staff calculations

Fact 3. Commodity exporters: growth and fiscal buffers declining

• 12
• 10
• 8
• 6
• 4
• 2

2 Algeria Australia Brazil Chile Indonesia Malaysia Norway Peru Qatar Russia GDP growth Primary balance (% of GDP) Change between 2011 and 2015 in select countries, percentage points

Source: IMF World Economic Outlook; World Bank staff calculations

Indonesia: recent developments and near-term outlook Three facts about the global economy

8

Effective policy response

• 2

2 4 6 8 10 2011 2012 2013 2014 Q1 2015 Statistical discrepancy* Net exports Gross fixed capital formation Government consumption expenditure Private consumption expenditure Gross domestic product

Weaker GDP growth in Q12015, with investment still subdued…

Note: *Statistical discrepancy also includes change in inventories. Q1 2015 quarterly growth in year on year terms. Source: BPS; World Bank staff calculations

Growth yoy, percent

…and weaker private consumption growth, especially in nominal terms

2 4 6 8 10 12 14 Mar-12 Sep-12 Mar-13 Sep-13 Mar-14 Sep-14 Mar-15 Real Nominal Implicit deflator Growth yoy, percent

Source: BPS; World Bank staff calculations

Employment growth has slowed across Indonesia

• 1.5
• 1.0
• 0.5

0.0 0.5 1.0 1.5 Commodity boom (2007-2011) Post-commodity boom (2012-2014) Average annual difference in employment rates, percentage points

Source: BPS; World Bank staff calculations

Weak revenue collection has limited the fiscal space

Contributions of select revenue categories to nominal revenue growth yoy for January - May, percent

Source: Ministry of Finance; World Bank staff calculations

• 15
• 10
• 5

5 10 15 2013 2014 2015 O&G related revenues Income taxes N-O&G Consumption taxes International trade taxes Other Total revenues

• 70
• 50
• 30
• 10

10 30 50 2014 Jan-May share of total rev. Budget 2015 Jan-May share of total rev. Budget 2015 Jan-May nominal growth (yoy)

Capital budget execution challenges have further curtailed the development agenda

Source: Ministry of Finance; World Bank staff calculations

January-May realization as a share of total revised Budget, percent; nominal growth yoy, percent

Inflation remains sticky due to rising food prices

2 4 6 8 10 12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Headline Core Food Percent change, yoy

Source: BPS; World Bank staff calculations

Baseline GDP growth in 2015 has been revised down

Note: Revisions are relative to March 2015 IEQ. Source: BI; BPS; Ministry of Finance; World Bank staff projections

July 2015 IEQ

Revisions

(percentage change, unless otherwise indicated)

2014 2015p 2016p 2015 2016 Real GDP 5.0 4.7 5.5

• 0.5

0.0 Consumer prices 6.4 6.8 5.3 0.3 0.2 Current account balance (% of GDP)

• 2.9
• 2.7
• 2.9

0.3 0.3 Fiscal balance (% of GDP)

• 2.2
• 2.5
• 0.0

Main risks to outlook are firmly on the downside

External

• Foreign currency financing costs;
• Lower trend output growth in developing countries;
• A setback in the still-fragile Euro Area recovery.

Domestic

Private consumption Government consumption Fixed investment

• Sticky inflation;
• Fuel price uncertainty;
• Further Rupiah

depreciation;

• Lower consumer

confidence.

• Revenue shortfall;
• Budget under-execution.
• Weaker business

confidence;

• Subdued credit growth;
• Lower government

capital spending.

Effective policy response Three facts about the global economy

17

Indonesia: recent developments and near-term outlook

4 5 5 6 6 7 7 Mar-06 Sep-07 Mar-09 Sep-10 Mar-12 Sep-13 Mar-15 GDP Potential output Growth yoy, percent

Source: BPS; World Bank staff estimates

Deep reforms are needed to sustain growth of more than ~5.5%

Fiscal reforms: “spend the capital budget”

Central government capital spending (Nominal IDR trillion and percent of Total expenditure and of GDP) 64 73 76 80 118 140 181 135 160 1.6 1.3 1.3 1.2 1.5 1.6 1.9 1.3 1.4 8.5 7.4 8.1 7.7 9.1 9.5 11.0 7.7 9.1

• 2.0

4.0 6.0 8.0 10.0 12.0

• 20

40 60 80 100 120 140 160 180 200 2007 2008 2009 2010 2011 2012 2013 2014 2015f Capital Exp IDR Tn Capital Exp as % GDP Capital Exp as % Total Exp

Source: BPS, Ministry of Finance, World Bank staff calculation

Fiscal reforms: measures to collect more in the medium-term

Recently adopted policies:

• VAT electronic tax return submission, effective July 1;
• Improvements in income tax audit strategy (e.g. focus on tax

payers more likely to rely on transfer pricing), effective 2015;

• Removal of luxury sales tax on certain goods to lower cost of tax

administration, effective July 9. Further options to mobilize revenues:

• Optimize the tax regime (e.g. revisions to sales and excise taxes

for vehicles, fuels and tobacco);

• Improve corporate income tax (e.g. reduce firms’ incentives to

remain small);

• Revise VAT exemptions to increase equity (e.g. for electricity

consumption of high consuming households).

Support the rebalancing of the economy

• With low commodity prices, relative profitability is

expected to now favor manufacturing industries and services over most commodity sectors…

• Policy support to businesses and investments in

manufacturing and services is thus crucial:

• Improve logistics services (dwell time)
• Facilitate firms’ access to key inputs (incl. imports)
• Speed up licensing approval process (e.g. one stop

shop)

• Realign sector-specific regulations with the provisions
• f the investment law
• Invest more and better in human capital to raise long-

term growth

Also in this IEQ: geothermal, BOS and CAD Three facts about the global economy

22

Indonesia: recent developments and near-term outlook Effective policy response

July 2015 IEQ Contents

• Regular update on economic

developments and the outlook

• Indonesia’s current account

deficit going forward

• Fuel subsidy reform: a major
• ne but how to make it

sustainable?

• Realizing Indonesia’s

potential in geothermal.

• Ten years of school grant

program (BOS): successes and challenges

Main takeaways

• “Slower gains”:
• Output and employment growth are weakening.
• Major policy initiatives are facing implementation challenges – fuel pricing,

infrastructure.

• Indonesia is not alone in facing these challenges:
• EMEs worldwide are slowing down and need to confront structural

constraints

• Indonesia is still in a good position to respond by:
• Expanding infrastructure spending, to the extent possible given deficit limit
• Following through on measures to improve revenues and the business

environment

• Communicating in a consistent way about new policies and decisions to

investors, as consistent communication reduces uncertainty.

• But slower gains are a sign of serious constraints and a shifting

economy:

• Supporting a rebalancing of the economy key