Sector Manager and Lead Economist MARCH 2014 IEQ: INVESTMENT IN FLUX - - PowerPoint PPT Presentation

Indonesia Economic Quarterly Launch Jakarta, March 18, 2014 Jim Brumby Sector Manager and Lead Economist

MARCH 2014 IEQ: “INVESTMENT IN FLUX”

Investment in flux

Fixed investment: subdued, and risks FDI: solid, but has plateaued recently Portfolio investment: currently strong, but volatile Risks to fiscal space needed for public investment

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OUTLINE

Recent economic developments and outlook Investment in flux, amid policy uncertainties, fiscal pressures Priorities for the longer-term, and selected issues

3

GDP: WEAK INVESTMENT, STRONG NET EXPORTS

• 3
• 2
• 1

1 2 3 4 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Fixed investment Net exports

Contribution to GDP growth yoy, percent

Source: BPS; World Bank calculations

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IMPORT DEMAND HAS SOFTENED

• 12

12 24 36 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Intermediate Consumption Capital Oil & Gas Total imports Percent Contribution to yoy growth

Source: BPS; World Bank staff calculations

5

• 15
• 10
• 5

5 10 15 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 O-S-A Coal Palm oil Rubber and products Oil and gas Others percent

RAW MINERAL EXPORTS BAN BUMP IN Q4

Ores, Slags and Ashes

Source: BPS; World Bank staff calculations

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OVERALL BOP: NARROWER C/A DEFICIT…

• 16
• 12
• 8
• 4

4 8 12 16 Dec-10 Dec-11 Dec-12 Dec-13 Overall balance Net direct investment Net other capital Current account Net portfolio

Balance of payments, USD billion

Note: Basic balance = Current account balance + net FDI Source: BI; World Bank staff calculations

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…SUPPORTING THE RUPIAH OVER Q1 2014

Nominal currency index, 2011 average =100

Note: Selected EM majors is a simple average of BRL, IDN, TRY and ZAR vs. USD; USD is broad NEER index Source: JP Morgan; World Bank staff calculations

70 80 90 100 110 Jan-11 Jun-11 Nov-11 Apr-12 Sep-12 Feb-13 Jul-13 Dec-13 USD IDN Selected EM majors

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GLOBAL ECONOMY: LIKELY TO STRENGTHEN

Major trading partner GDP growth, percent

Source: World Bank staff calculations

3.5 4.0 4.1

• 2
• 1

1 2 3 4 5 6 7 8

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INDONESIA: MIXED HIGH FREQ. DATA; MORE HEADWINDS

Economic activity indicators - mixed Growth in 3-month moving avg. yoy, percent

Source: CEIC; World Bank staff calculations

Credit growth - falling Growth yoy, percent

Source: CEIC; World Bank staff calculations

• 10
• 5

5 10 15 20 25 30

• 10

10 20 30 Jan-12 Jan-13 Percent Percent Nominal (LHS) Real (LHS) Monthly nominal lending growth (RHS)

• 30
• 20
• 10

10 20 30 40 50 60 Feb-12 Aug-12 Feb-13 Aug-13 Feb-14 Motorcycles Cement sales Motor vehicles

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INDONESIA OUTLOOK: SOME MORE GROWTH MODERATION TO COME…

March IEQ Previous (Dec.) 2012 2013 2014 2015 2014p Real GDP (% change) 6.2 5.8 5.3 5.6 5.3 Consumer price index (% change) 4.3 6.9 6.2 5.2 6.7 Current account balance (USD billion)

• 24.4
• 28.5
• 24.4
• 20.2
• 22.8

Current account balance (% GDP)

• 2.8
• 3.3
• 2.9
• 2.1
• 2.6

Budget balance (% of GDP)

• 1.9
• 2.2
• 2.6

n.a.

• 2.1

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

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…AMIDST SIGNIFICANT RISKS

Domestic External Positive

• Elections lead to a

stronger than expected boost to consumption, investment

• Commodity prices rise
• Global risk appetite is

stronger than expected, boosting portfolio inflows to EMEs inc. Indonesia Negative

• Investment weakens as

downturn extends to building investment

• Consumption growth

disappoints as income and credit effects take their toll

• External financing

conditions tighten again

• Global commodity prices

fall, e.g. due to slower than expected growth in China

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OUTLINE

Recent economic developments and outlook Investment in flux, amid policy uncertainties, fiscal pressures Priorities for the longer-term, and selected issues

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INVESTMENT IN FLUX…

1 2 3 4 5 6 Dec-06 Dec-08 Dec-10 Dec-12 USD billion

Source: BI; World Bank staff calculations

• 5

5 10 15 Dec-06 Dec-08 Dec-10 Dec-12 Other Foreign transportation Foreign machinery & equip Building Total

Foreign direct investment Inbound FDI, rolling 4-quarter average Fixed investment Contributions to real growth yoy, percent 14

FISCAL SECTOR: REVENUES SOFT; NEW POLICY PRESSURES

• 2.5
• 1.5
• 0.5

0.5 1.5 2.5 3.5 4.5

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• 15
• 5

5 15 25 35 45 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Deficit (RHS, % of GDP) Revenues (LHS, yoy nominal growth, %) Expenditures (LHS, yoy nominal growth, %)

Note: 2013 deficit is World Bank staff projection Source: Ministry of Finance; World Bank staff calculations

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FUEL SUBSIDY REFORM WOULD HELP

• 300
• 250
• 200
• 150
• 100
• 50

50 100 2009 2010 2011 2012 2013 2014

Fuel subsidy expenditure, GoI

Savings Expenditures

Scenario 1 (2013 again) Scenario 2: 50% economic price fill 2014 WB projection Achieving a deficit of <2.5% in 2014 looks difficult without more fuel subsidy reform IDR trillion 16

EXAMINING THE MINERAL EXPORT BAN

Unprocessed export ban + Export duty and tax Increased domestic mineral processing Higher value- added mineral exports GDP growth Trade Balance Fiscal Revenues Job Creation

• Significant processing

investment is stimulated. i.e, that smelters are financially viable

• Processing

adds a lot of value to mineral exports

• Higher processed exports will offset

lower ore exports

• Higher value exports will increase

non-tax revenues

• Processing will create more and

better jobs in the sector

Rationale Underlying assumptions

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BUT IS THE MINERAL EXPORT BAN SOUND?

0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500 Copper Nickel Tin Iron Bauxite Other Minerals Percent of total USD million Processed Mineral Exports Unprocessed Mineral Exports Share of Mineral in Total Exports

Note: Data for 2013 Source: WITS database; World Bank staff calculations

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TRADE IMPACTS

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• 5.3
• 3.3
• 3.0
• 0.9
• 6
• 5
• 4
• 3
• 2
• 1

2014 2015 2016 2017 USD billion

Estimated impact on net trade balance

Source: World Bank

REVENUE IMPACTS

• 0.4
• 1.1
• 1.8
• 2.2
• 4
• 2

2014 2015 2016 2017 USD billion

Estimated impact on fiscal revenues (export duties and taxes, royalties and CIT)

Source: World Bank

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OUTLINE

Recent economic developments and outlook Investment in flux, amid policy uncertainties, fiscal pressures Priorities for the longer-term, and selected issues

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AVOIDING THE TRAP

THE CHALLENGE –harnessing Indonesia’s potential to generate shared prosperity, through fast productivity-driven economic growth with inclusiveness

• Structural policies to boost prosperity:
• Closing the infrastructure gap
• Closing the skills gap
• Enhancing the functioning of markets
• Complementary areas:
• Service delivery for all
• Social protection
• Natural disaster risk management
• Foundational pre-requisites:
• Macro-fiscal management and managing shocks
• Implementation

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URBAN DISASTER PREPAREDNESS

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THANK YOU

March 2014 IEQ contents:

• Regular update on economic

developments and the outlook

• Examining the mineral exports ban
• Urban disaster risks planning
• A taster of the forthcoming World

Bank report, Avoiding the Trap

On the web: http://www.worldbank.org/en/news/feature/2014/03/18/ indonesia-economic-quarterly-march-2014 24