Indonesia Economic Quarterly March...

March 15, 2016

Indonesia Economic Quarterly

March 2016

Private investment is essential

Ndiamé Diop

Lead Economist, Indonesia

Introduction

2015: tough but growth expected to have

bottomed out

Significant improvement in composition of

spending away from energy subsidies…

… allowing a spectacular rise in public

investment…

… and helped growth in 2015

2016: staging a firm rebound will be no small

challenge

Given pressures on export and oil and gas

fiscal revenues, private investment recovery

is essential

Private investment also critical to address

medium-term challenges

Revival of manufacturing, rise of tourism

Good quality jobs

3

How public investment helped growth

Staging a firm growth rebound in 2016

Medium-term challenges and opportunities

The budget before 2015: Close to 1/3 spent on energy subsidies

Share of average central government spending, 2012-2014, percent

Source: Ministry of Finance; World Bank staff calculations

29%

14%

4%3%

50%

Energy subsidy

Capital spending

Health

Social assistance

Other

Fuel subsidy reform: The foundation


0

50

100

150

200

250

300

2012 2013 2014 2015

Fuel subsidies Infrastructure

Public investment and growth in 2015

6

Real growth yoy, percent

Note: Capital expenditure deflated with the implicit fixed investment deflator.

Source: BPS; Ministry of Finance; World Bank staff calculations

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

-60

-40

-20

0

20

40

60

80

100

Mar-14 Sep-14 Mar-15 Sep-15

Real capital expenditure (LHS) GDP (RHS)

7

How public investment helped growth



Weak global growth and global trade: Harder to generate export revenues

8

Source: World Bank, January 2016 Global Economic Prospects

Annual growth, percent

-12

-10

-8

-6

-4

-2

0

2

4

6

8

10

12

14

2001 2003 2005 2007 2009 2011 2013 2015e 2017f

Global trade

Global GDP

Subdued household real income growth Only moderate pick up in private consumption

9

Source: BPS; World Bank staff calculations Source: BPS; World Bank staff calculations

Weaker job creation

GDP growth, percent, LHS; millions,

RHS

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

2010 2011 2012 2013 2014 2015

Job creation

GDP growth

0

2

4

6

8

10

12

Jan-15 Jul-15 Jan-16

Headline

Unprocessed food

Persistently high food price inflation,

percent

Low commodity prices Continued pressure on oil and gas fiscal revenues

10


Contributions to nominal growth yoy, percent

-15

-10

-5

0

5

10

15

20

25

2011 2012 2013 2014 2015

Oil and gas-related revenues Other Total revenues

Public investment rise in 2016Likely less dramatic than in 2015

Budget allocation for infrastructure increases, driven by transfers to SNGs and SOEs

(IDR trillion)


0

50

100

150

200

250

300

350

2014 2015 revised Budget 2016 Budget

Line ministries Non-line ministries

Transfers to SNGs Capital injection to SOEs

Private investment is essential

12

Real fixed investment growth

(percent yoy)

Note: Capital expenditure deflated with the implicit fixed investment deflator.

Source: BPS; Ministry of Finance; World Bank staff calculations

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

2013 2014 2015 2016f

Public Private

Baseline outlook

13

2015 2016f 2017f

Real GDP (annual % change) 4.8 5.1 5.3

Consumer prices (annual % change) 6.4 4.0 4.6

Current account balance (% of GDP) -2.1 -2.3 -2.5

Budget balance (% of GDP) -2.5 -2.8 n.a.

Source: BPS; World Bank staff projections

Supporting near-term growth (1)Gradual monetary easing

14

4

6

8

10

12

14

Feb-15 May-15 Aug-15 Nov-15 Feb-16

BI policy key rate

JIBOR interbank rate - 3 month

Investment lending rate

Source: BI; World Bank staff calculations

Annual growth, percent

Revenue collectionOngoing reform areas critical

15

• Reforming tax policy:

• Revisions to Income Tax and VAT Laws and the Final Tax regime for

MSMEs provide an opportunity to broaden the tax base and reduce

economic distortions.

• Strengthening tax administration:

• Ease electronic filing process for taxpayers, while making e-filing

mandatory for certain types of taxes;

• Unique taxpayer ID system;

• Improved compliance risk management and auditing processes, including

use of third-party data;

• Stronger law enforcement efforts.

• Building the underlying tax administration capacity:

• Investment in IT and data management systems.

Business environment Further reforms could tip investor confidence

• Reducing or removing minimum capital and reserve requirements for

setting up logistics service providers – too high and hinder competition

• Clarifying the roles of port authorities and port operators in port

development and management – lack of clarity has led to severe

underinvestment in port infrastructure

• Regulatory review mechanism is needed to take stock of existing

business, investment and trade regulations (e.g. NTMs), cancel ones that are

conflicting and unnecessary, and reject or approve new regulations

• Establishing an up-to-date, comprehensive depository of

licensing/regulatory requirements that can be accessed online - there is

no list of requirements that firms needs to comply with

17

How Public Investment Helped Growth



China 1990 China 2005

China 2014

Indonesia 1990

Indonesia 2005

Indonesia 2014

Malaysia 1990

Malaysia 2005

Malaysia 2014

Thai 1990

Thailand2005

Thailand 2014

10

15

20

25

30

35

40

0 5,000 10,000 15,000 20,000 25,000

Source: World Development Indicators, World Bank

Manufacturing has prematurely retracted due to

commodity boom

Manufacturing as percentage of GDP (y axis), GDP per capita (x axis), PPP

(constant 2011 int USD)

Source: Calculation based on CEIC data

Unit labor costs in manufacturing, 2012 =100

80

90

100

110

120

130

140

150

2011 2012 2013 2014

Indonesia Malaysia

Thailand Vietnam

Philippines

Worker productivity is low despite wage advantage

0

100

200

300

400

500

600

700

800

900

2005 2007 2009 2011 2013

China IndonesiaMalaysia PhilippinesThailand Vietnam

Real wages (real 2012 USD)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

Self-employed/employers in agriculture

Unpaid family worker in agriculture

Self-employed/employers in nonagriculture

Unpaid family worker in non agriculture

Casual workers in agriculture

Casual workers in non agriculture

Domestic, security and cleaning workers

Employees paid below Minimum Wage

Employees paid at least the MinimumWage

Source: World Bank calculations based on BPS, Sakernas data

Percent of workers in different types of work

Sluggish manufacturing growth and low productivity

have reduced the quality of jobs…

Source: World Bank calculations based on BPS, Sakernas data

Poor quality of jobs keeps many around the poverty line

• 75 percent of poor households fail to

definitely move out of poverty or

vulnerability over a three-year period.

• A large number of workers are not

safe and secure from poverty due to

their type of job

• The quality of jobs in manufacturing is

typically better – more formal and

higher value

• China lifted 680 million people

between 1992 and 2012 by focusing

on manufacturing growth

Status in 2010 of households who were poor

in 2008 (percent)

0

20

40

60

80

100Moved out ofpoverty andvulnerability

Moved out ofpoverty butremainvulnerable

Moved out ofpoverty butfall back in

Always Poor

…and kept many people vulnerable

Source: UN-COMTRADE, HS4 digits and OECD industrial code

Share to total exports, percent

0

2

4

6

8

10

12

0

3

6

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

Industrial acid oils Footwears

Wood furniture Textiles&garments

Palm oil prod (rhs) Playwood (rhs)

0.0

0.5

1.0

1.5

2.0

2.5

3.0

0.0

0.3

0.6

0.9

1.2

1.5

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

Gold Tin, not alloyedRubber tires Petrol products (rhs)Refined copper

Medium –Low–tech exportsLow –tech exports

Medium-term strategy:Identify promising industries (1)

Identify promising industries, “to avoid shooting in the dark”

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1990 1994 1998 2002 2006 2010 2014

Insulated cable fiber

Cars

Automotive spareparts

Bulldozers,excav, & parts

Parts of motorcycles

Saturated monohydric alcohols

0.0

0.1

0.1

0.2

0.2

0.3

0.3

0

1

2

3

4

5

6

1990 1994 1998 2002 2006 2010 2014

Office & comp equip

Radio, TV & com equip

Aerospace (RHS)

Drug & medicine (RHS)

High –tech exportsMedium–high -tech exports

Share to total exports, percent

Source: UN-COMTRADE, HS4 digits and OECD industrial code

Medium-term strategy:Identify promising industries (2)

Medium-term strategy:Key reforms

24

• Implement cross-cutting reforms to create an supportive policy

environment for all firms in all sectors

• Progress on labor laws and regulations dialogue and reform crucial (e.g.

severance pay creating a lose-lose outcome)

• Recognize that export growth and industrialization will be driven by a few

industries: policy focus and attention to most promising branches is

key

• For promising sectors:

─ Facilitate agglomeration/ clustering

─ Actively weed out entry barriers

─ Actively attract FDI and joint ventures in these industries

─ Public-private partnerships to close skills gaps (training, specific schools, etc.)

Also in the March 2016 IEQ

Beyond the 10 economic policy

packages

How to address constraints to growth in

logistics, trade, investment climate and

financial markets

Sustainable energy development

Aligning pricing, regulations and

investment policies can help Indonesia’s

transition to a more sustainable energy

path

Public support for action on inequality

A majority of Indonesians think that

inequality is too high and urge

government action to reduce it

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