URBANIZATION FOR ALL September 20, 2018 Todays presentation The - - PowerPoint PPT Presentation

INDONESIA ECONOMIC QUARTERLY 09|18 URBANIZATION FOR ALL

Frederico Gil Sander, Lead Economist September 20, 2018

Today’s presentation

The economy scored some wins in Q2 But global volatility has hit hard How has the government responded? What next?

THE ECONOMY SCORED SOME WINS IN Q2

5.1 5.3

• 4
• 2

2 4 6 8 Jun-15 Mar-16 Dec-16 Sep-17 Jun-18 Private consumption Government consumption Investment Net exports

• Stat. discrepancy*

Change in inventories GDP

GDP growth accelerated to 5.3 percent in Q2, driven by stronger consumption

4

Source: BPS; World Bank staff calculations

Gross Domestic Product (GDP) in constant prices, change from the previous year, percent; and contributions to real GDP growth, percentage points

Income growth in mining and agriculture sectors accelerated…

5

Source: Bank Indonesia; BPS; World Bank staff calculations

Gross value added at current prices (nominal terms), change from the previous year, percent

• 25
• 20
• 15
• 10
• 5

5 10 15 20 25 30 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Agriculture Mining & Quarrying Other Industry Services

• 2

2 4 6 8 10 12 14 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Sep-18 Administered HEADLINE CPI Core PPI Volatile

…and headline CPI inflation remained low

6

Note: PPI stands for Producer Price Index. Only the General Non-Oil & Gas category is used as measured by wholesale PPI Source: BPS; World Bank staff calculations

Prince indices, change from the previous year, percent

BUT GLOBAL VOLATILITY HAS HIT HARD…

Three main sources of global volatility

U.S. Federal Reserve increased the policy interest rate, set to hike it again “Trade wars” heightened global uncertainty, particularly due to escalating tit-for-tat trade tariffs imposed by US and China Contagion fears spread following stress in

• ther emerging markets including Turkey

8

Indonesia has been under the microscope because of its current account deficit…

9

Source: Bank Indonesia; World Bank staff calculations

Four-quarter rolling sum, percent of GDP

• 1.3
• 1.7 -2.0
• 2.3
• 4
• 3
• 2
• 1

1 2 3 Goods trade balance Services trade balance Income Current account balance

…and the high share of government debt held by non-residents

10

Source: Ministry of Finance; World Bank staff calculations

37.5 25 30 35 40 45 Sep-12 Sep-14 Sep-16 Sep-18

Foreign holdings as a share of total, percent

HOW HAS THE GOVERNMENT RESPONDED?

Monetary policy has prioritized stability…

12

BI rate hikes

Bank Indonesia (BI) raised interest rates by 125 bps this year despite inflation remaining within the bank’s target range

Managing Volatility

BI has not defended a specific exchange rate level and allowed market-driven depreciation, using record-high reserves accumulated in recent years to smooth volatility

Macro- Prudential Regulations

BI has required hedging of foreign currency corporate debt and has tried to lower cost of hedging

…as has fiscal policy, with deficits narrowing despite elections in 2018 and 2019

13

Source: Ministry of Finance; World Bank staff calculations

Fiscal Balance, percent of GDP

• 2.6
• 2.5
• 2.5
• 2.1
• 2.0
• 3.0
• 2.5
• 2.0
• 1.5
• 1.0
• 0.5

0.0 2015 2016 2017 2018 WB 2019 WB

IDR depreciated with other EM currencies, and the stock market fell in-line with global equities

14

Index: January 2018=100

Source: Bloomberg; World Bank staff calculations

80 85 90 95 100 105 110 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18

USD/IDR JP Morgan EMCI JCI MSCI: EM

WHAT NEXT?

Capital outflows may accelerate…

16

…creating risks to growth rather than of a financial crisis …leading to further tightening as Government committed to stability…

2018 is not 1999, or 2013: Indonesia is in a stronger position today

17

Note: Values refer to 12-month or 4-quarter average prior to the onset of the event Source: BPS; Bank Indonesia; CEIC; IIF

Asian Financial Crisis (1998) Taper Tantrum (2013) September 2018 GDP growth (% yoy) 7.9 6.0 5.1 Credit growth (% yoy) .. 23.5 8.7 Current Account Deficit (% of GDP)

• 2.7
• 3.0
• 2.3

Reserves (months of goods imports) .. 6.9 8.7 External Debt (% GDP) 62.1 32.9 33.0 Inflation (% yoy) 5.2 4.2 3.4

Solid macroeconomic framework underpins steady outlook, although downside risks increased

18

2017 2018f* 2019f* Real GDP Annual percent change 5.1 5.2 5.2

• - Private Consumption

Annual percent change 5.0 5.1 5.1

• - Investment

Annual percent change 6.2 6.8 6.8 Current Account Balance Percent of GDP

• 1.7
• 2.4
• 2.3

Consumer Price Index Annual percent change 3.8 3.4 3.7

Note: f: forecast Source: Bank Indonesia, BPS, Ministry of Finance, World Bank staff projections and calculations

There are risks of unintended consequences of some short-term measures for potential growth

19

Note: 2015 estimates. Unweighted averages computed for 14 advanced economies and 21 EMs Source: World Bank staff calculations using IMF (2017) data

28,181 9,629 3,811 5,000 10,000 15,000 20,000 25,000 30,000 Advanced Emerging Indonesia

$1.5 trillion to close this gap

$1.5 trillion needed to close infrastructure gap with other EMs

Average public capital stock per capita, 2015 USD

To reduce vulnerabilities and boost growth, addressing structural weaknesses is key

20

Percent of GDP, 2013-2017 average

5.7 3.7 3.5 2.2 2.1 2.1 2.0 1.8 1 2 3 4 5 6 7 91.0 71.8 68.6 28.8 21.821.621.3 12.1 20 40 60 80 100

Percent of GDP, 2013-2017 average

Source: WDI; World Bank staff calculations

MAKING URBANIZATION WORK FOR ALL

Urbanization can be a powerful force for economic growth and poverty reduction for all

y-axis: log GDP per capita, 2016; x-axis: urban population share, percent

Philippines China India Indonesia Malaysia Vietnam 6 7 8 9 10 11 12 20 40 60 80 100 Vietnam Philippines Indonesia China 20 40 60 80 100 20 40 60 80 100

y-axis: poverty headcount ratio at USD 3.20 per day; x-axis: urban population share, percent

22

Notes: GDP per capita in constant 2011 international dollars. Poverty rates for 2011-2016 (latest available). Urban population share calculated based on the Dijkstra and Poelman (2014) algorithm applied to Landscan-2012 gridded population data Source: WDI, PovCalNet, World Bank staff calculations

Indonesia continues to urbanize, but the pace has normalized

Source: World Bank staff calculations based on United Nations World Urbanization Prospects 2018 (https://esa.un.org/unpd/wup/)

23

1950s 1960s 1970s 1980s 1990s 2000s 2010-15

• 5

5 10 10 20 30 40 50 60 70 80 90 100 All IDN - historical

• Log. (All)

x-axis: initial urban share, percent; y-axis: average annual growth rate of urban share, percent

Recent urbanization has occurred largely through conversion of rural areas into urban settlements

0% 20% 40% 60% 80% 100% Indonesia (2000-2010) India (2001-2011) China (2000-2010) Natural growth Re-classification Migration

Source: Derived from figures presented in Wai-Poi et al. (2018), World Bank – DRC (2014) and Pradhan (2013) for Indonesia, China and India respectively

24

Share of changes in urban population accounted by each source, percent

Half of the urban population currently lives in metropolitan areas

Urban periphery

Core

Rural periphery

Single District Metros

Metropolitan areas can span multiple districts (‘multi-district’ metro) composed of a core and periphery …or consist of a single district (‘single district metro’)

Non-metro urban areas Non-metro rural areas

Source: World Bank

25

Better economic opportunities in metros helped many escape poverty and join the middle class…

Source: Lain (2018) using Susenas data from March 2016

Share of population that is poor or vulnerable, percent 0% 50% 100% Core Single-district metro Periphery urban Periphery rural Non-metro urban Non-metro rural Middle class Aspiring middle class Vulnerable Poor Breakdown of economic class by urban classification, percent

10 20 30 40 50 60 70 2001 2017

metro metro

• 0.4
• 0.3
• 0.2
• 0.1

0.0 0.1 0.2 1993 2015

Inequality between places declined, but disparities remain large…

10 20 30 40 50 60 70 2002 2016

Jakarta core Jakarta periphery Other metro core Other urban periphery Single-district metro Non-metro urban Non-metro rural Rural periphery

Share of households deprived in access to safe drinking water, percent

Source: World Bank staff calculations using Susenas (2002, 2014, 2016) and PODES (2003, 2014) data, based on Lain (2018)

27

Source: Tiwari and Sadiq (2018); welfare gaps are calculated using differences in welfare ratios which represent the household’s expenditure to the contemporaneous poverty line in the region of residence

Consumption gap with DKI Jakarta, percent

Inequality within places has increased, accounting for nearly 80 percent of all inequality

71.2 78.1 0% 20% 40% 60% 80% 100% 2001 2017 Within Between

Source: Tiwari and Sadiq (2018)

28

Total inequality, decomposed within and between districts, percent

Urbanization can work for all Indonesians using the 3 Cs

Converge & Expand

• Expand services to ensure all Indonesians have equitable

access to good quality basic services regardless of location

Connect & Integrate

• Facilitate mobility of goods, people, businesses and ideas so

that gains of urbanization are spread

Customize & Target

• Help groups of people (e.g. those with disabilities, women,

elderly) and places (e.g. remote areas and islands) that may lag behind

Implementing the 3 Cs require capacity, coordination and resources

Capacity

• Strengthen limited

local government capacity to plan, develop and manage local investments in infrastructure

Coordination

• Coordination at the

sectoral and inter- governmental levels is key

• For example, multi-

district metros require provinces to step-up their role

Resources

• Revamp inter-

governmental transfers

• Boost own-source

revenue collection of local governments

• Create prudent but

flexible framework for local government borrowing

TERIMA KASIH THANK YOU

Questions? fgilsander@Worldbank.org