Indonesia Economic Quarterly Update Continuity amidst volatility
description
Transcript of Indonesia Economic Quarterly Update Continuity amidst volatility
Indonesia Economic Quarterly UpdateContinuity amidst volatility
Shubham ChaudhuriLead EconomistWorld Bank
23 June 2010Jakarta Indonesia
What I’ll be talking about
CONTINUITY: Indonesia’s economy continues to perform well… Quarterly GDP growth has continued in line with decade-averages Inflation continues to be subdued …and the fiscal position continues to be strong
…AMIDST VOLATILITY: Financial markets have been more volatile because of developments in
Europe …and commodity prices have continued to be volatile
…AND THE CONTINUING CHALLENGES this implies Indonesia is more exposed than many other economies to global
financial market and commodity price volatility Commodity price movements matter for Indonesia Understanding Indonesia’s high lending rates, interest spreads and NIMs
Continuity…GDP growth remains robust… Indonesia’s economy continued to grow at a trend rate in Q1, driven by
strong investment growth Economy expanded by 1.3% QoQ in Q1, or by 5.7% YoY A record drop in government consumption was offset by strong investment
and private demand growth Indonesia’s major trading partners also continued to recover in Q1
Sources: BPS via CEIC, World Bank
0
2
4
6
8
0
1
2
3
4
Mar-03 Dec-04 Sep-06 Jun-08 Mar-10
Per cent Per cent
QoQ seas. adjust (LHS)
Year on year (RHS)
Average (LHS)*
-6
-4
-2
0
2
4
6
8
-3
-2
-1
0
1
2
3
4
Mar-02 Mar-04 Mar-06 Mar-08 Mar-10
Quarterly Growth (sa, LHS)
YoY Growth (RHS)
Per cent Per cent
Indonesian GDP growth Major Trading Partner GDP growth
Continuity……and domestic indicators remain strong
Sources: CEIC, World Bank
Other economic indicators have remained stable at high levels Consumer indicators are near
record highs Industrial indicators are
strong
0
20
40
60
80
0
200
400
600
800
Apr-06 Apr-07 Apr-08 Apr-09 Apr-10
'000
Motor vehicles (RHS)
Motor cycles (LHS)
'000
110
150
190
230
60
80
100
120
Mar-06 Mar-07 Mar-08 Mar-09 Mar-10
Index Index
BI Retail sales (RHS)
BI Consumer Survey Index
(LHS)
-30
-20
-10
0
10
20
30
-30
-20
-10
0
10
20
30
Mar-07 Dec-07 Sep-08 Jun-09 Mar-10
Per cent, yoyPer cent, yoy
Cement Electricity
Industrial Production
Continuity……and mainly based on consumption and services Private consumption and services continued to contribute the most to
GDP growth…
Sources: BPS via CEIC, World Bank
-4
-2
0
2
4
-4
-2
0
2
4Q4 Q1
Percentage pont Percentage point
Priv.cons.
Investment
Gov't. cons.
Discrepency(incl. stocks)
Exports
Imports
GDP
-0.2
0.0
0.2
0.4
0.6
0.8
1.0
-0.2
0.0
0.2
0.4
0.6
0.8
1.0
Q4 Q1
Percentage point Percentage point
Agric.
Comms. &transport
Mining & construct
Manufacturing
Retail trade
Other
Continuity…...as has been the case over the last decade …Private consumption and services continued to contribute the most to
GDP growth
Sources: BPS via CEIC, World Bank
-4
0
4
8
12
-4
0
4
8
12
1993-95 2000-05 2006 2007 2008 2009
Net exportsStocks & Discrep.InvestmentGovernmentPriv ConsGDP
Percentage point Percentage point
0
2
4
6
8
0
2
4
6
8
1993-95 2000-05 2006 2007 2008 2009
Services IndustryMining AgricultureGDP
Percentage point Percentage point
Continuity…Inflation continues to track historic lows…
Though headline inflation picked up slightly in May to 4.2% YoY…
…core inflation remained near decade lows, at 3.8% in the year to May The rise in headline inflation was mainly driven by food prices, which
were the only component of CPI to grow above historical averages in the first 5 months of 2010…
…while core inflation remained low due to low capacity utilization levels and appreciation of the rupiah, which limited imported inflation
Inflation is expected to pick up in the 2nd half of 2010, as demand and credit growthcontinue to recover, and administered prices are moved closer to economic costs
Source: BPS
-4
0
4
8
12
16
-1
0
1
2
3
4
May-07 May-08 May-09 May-10
Core Inflation(RHS)
Inflation YoY(RHS)
Inflation MoM(LHS)
Per cent Per cent
Continuity……and the fiscal position remains strong
0
10
20
30
40
50
60
70
80
0
10
20
30
40
50
60
70
80
2005 2006 2007 2008 2009
Philippines
IndiaVietnam
ThailandIndonesia
Malaysia
China
Korea
Percent to GDP Percent to GDP
0 10 20 30 40 50 60
2005
2006
2007
2008
2009External Debt/GDP
Domestic Debt/GDP
Percent
Indonesia
…with Indonesia continuing to set a global record pace in reducing its public debt-to-GDP ratio
Continuity……with continuing modest budget deficits…
Sources: BPS via CEIC, World Bank
The revised 2010 budget approved by the DPR targets a deficit of 2.1% of GDP
0 50 100 150 200 250 300 350
Personal
Materials
Capital
Int. payments
Subsidies
Social
Others
Transfers
Revised
Proposed Revised
Budget
2010 budget revision (IDR Tln)
Continuity……which may come in even lower than targeted…
Sources: BPS via CEIC, World Bank
Alternative projections of revenue and projected weaker disbursement suggest the budget deficit will be significantly smaller than current government projections, about 1.0% of GDP in 2010 and as low as 0.4% in 2011 The pickup in commodity prices is likely
to support slightly stronger government revenue growth in 2010
The choice of price measure for nominal growth (deflator versus CPI) has a significant impact on revenue projections
By the end of Q1 2010, only 5 percent of allocated capital expenditure has been spent compared with 10 percent in 2009
-5
0
5
10
15
20
25
30
35
-5
0
5
10
15
20
25
30
35
2001 2003 2005 2007 2009 2011
Per cent Per cent
Tax revenue growth
Nom. economic growth (GDP deflator)
Nominal economic growth (CPI)
Forecasts
0
5
10
15
20
25
Personal Materials Capital Int. payments
Subsidies Social Others Total CG Transf. Total
2008 2009 2010
Q1 actual spending vs revised budget (APBN-P) (%)
Continuity……if we use the GDP deflator as a price gauge
Nominal GDP calculated using the GDP deflator instead of CPI leads to significant reductions in the budget deficit The national accounts implicit price deflators offer a broader measure of prices than
the CPI The relationship between the CPI and economy-wide prices in Indonesia weakened
after 2004, largely due to an acceleration in investment prices that was not captured by the CPI…
…but was captured by the GDP deflator, which as a result has a closer correlation with overall prices in Indonesia
As a result, using the GDP deflator rather than CPI improves the forecast of government tax revenues
- 2.5
- 2.0
- 1.5
- 1.0
- 0.5
0.0
- 2.5
- 2.0
- 1.5
- 1.0
- 0.5
0.0
WB projections with slower (CPI) inflation WB projections APBN projections
Per cent of GDP Per cent of GDP
2010 2011
Continuity….The outlook remains broadly positive
Sources: BPS, CEIC, World Bank. World Bank projections
Outlook remains for gradual pick-up in growth Continued strong private domestic demand and investment are
expected to drive growth, offsetting any drag from imports outpacing exports
A slowdown in major trading partner growth should not impact Indonesia too much
Inflation is expected to accelerate in second half of 2010 on solid domestic demand, credit growth, a more stable exchange rate and rising commodity prices
2009 2010 2011Gross domestic product (Annual per cent change) 4.5 5.9 6.2
Consumer price index (Annual per cent change) 4.8 5.1 6.3
Balance of payments (USD bn) 12.5 6.1 5.1
Budget balance (Per cent of GDP) 1.6 1.0 0.4
Major trading partner growth (Annual per cent change) -0.9 5.0 4.3
…amidst volatilityDownside Risks have Increased
External factors have increased risks to the outlook… Weak demand from OECD economies due to debt crisis could slow
down recovery in Indonesia’s MTPs Increased risk aversion due to debt crisis could increase financial
market volatility and capital outflows Ongoing commodity price volatility could affect real economy
forecasts and the budget
…some of which call for the immediate attention of policy makers: Addressing large capital inflows and outflows Implementing policies to reduce vulnerability to commodity price
shocks
…amidst volatilityCapital outflows pushed markets down in May
Indonesian equities and bonds weakened in May due to large capital outflows that also put the rupiah under pressure Increased risk aversion due to European events triggered $5.7bn of net
foreign capital outflows in May, 90% of this in SBI sales The JCI fell by 5.5% on the month, yields on five year IDR sovereigns rose
by 50 basis points, and Indonesian EMBI USD bond spreads widened by 100 basis points.
The rupiah weakened by 1.8% against the USD
8,000
9,000
10,000
11,000
12,000
13,000-55,000
-35,000
-15,000
5,000
25,000
45,000
Jan-07 Mar-08 Apr-09 May-10
Net Foreign Capital Inflows (LHS)
IDR/USD (RHS)
IDR Appreciation
IDR billion IDR per USD
-45000
-30000
-15000
0
15000
30000
45000
0
15000
30000
45000
60000
75000
90000
Jan-07 Mar-08 Apr-09 May-10
IDR billion IDR billion
Foreign holdings of SBI outstanding (LHS)
Net Foreign Purchases of SBI (RHS)
…amidst volatilityFinancial markets vulnerable to capital outflows
After a record month of $4bn of net capital inflows in April, May’s $5.7bn in net capital outflows demonstrated Indonesia’s vulnerability to volatile capital flows Compared to late 2008, Indonesia’s financial markets are more exposed now to
a sudden reversal of capital flows due to the high percentage of foreign holdings of equities, bonds and SBIs
Reserves fell by $4bn in May as BI bought rupiah to smooth out exchange rate volatility caused by capital outflows
90% of the outflows were SBI sales; new BI policies may help stem some of this going forward
0 100 200
Total FX Reserves
Short-Term Debt*
Corporate External ST Debt*
Foreign Holdings of Stocks
Foreign Holdings of Bonds
Capital Inflows in prior 12 months Sept
2008
May 2010
USDbn
* For 2010, short-term debt and corporate external short term debt reflect March numbers
...and the reserves cushion is deeper
Financial sector is more vulnerable to a sudden reversal of capital flows
...but short term external leverage is little changed
8500
9500
10500
11500
1250020000
40000
60000
80000
Jan-07 Nov-07 Sep-08 Jul-09 May-10
IDR/USD (RHS)Total Reserves
(LHS)
IDR Appreciation
USD million IDR per USD
…and some challenges this implies Indonesia particularly exposed to global volatility
Open capital account, relatively large presence of non-resident investors in local financial markets
Importance of commodity prices for Indonesia’s economy
Reasons Annual
1. Share of aggregate value added 26%
2. Share of total exports 63%
3. Share of GDP 14%
4. Share of total imports 34%
5. Share of GDP 6%
6. CPI weight (raw foods, h/hold energy) 48%
7. Poverty Basket CPI 74%
8. Share of total Government revenues 23%
9. Share of tax revenues 8%
10. Market capitlisation of Commodity shares on IDX* 18%
0
10
20
30
40
50
60
70
0
10
20
30
40
50
60
70Per cent Per cent
Share (%) of commodities in exports
…and some policy challenges Real economy, budget vulnerable to commodity price shocks
Volatility of commodity prices affects real economy and price forecasts in Indonesia as well as budget projections consider 3 scenarios of commodity price shocks on the economy (+30%,
+15% and -15%) We found commodity price movements have a large impact on prices, and a
more subdued impact on the real economy The poverty rate declined slightly with an increase in commodity prices
Sources: World Bank
-15% Baseline 15% 30% -15% Basline 15% 30%
Exports 14.3 15.0 15.6 16.2 10.5 11.1 11.7 12.3
Imports 18.7 18.3 17.9 17.5 11.9 11.6 11.4 11.2
Trade Balance 14.3 14.2 13.6 13.2 16.7 13.2 9.1 5.3
GDP 5.8 5.9 6.0 6.1 6.1 6.2 6.4 6.5
GDP Deflator 9.3 9.3 9.9 10.2 11.5 12.2 13.2 13.9
Nominal GDP 15.7 15.9 16.5 16.9 18.3 19.2 20.4 21.3
CPI 5.0 5.1 5.3 5.5 6.0 6.3 6.5 6.7
Core inflation 4.2 4.3 4.5 4.7 5.8 6.0 6.1 6.3
Poverty CPI 6.5 6.8 7.1 7.4 6.8 7.2 7.5 7.8
Poverty rate 13.2 13.0 12.9 12.8 12.4 12.2 12.0 11.9
2010 2011
…and some policy challengesHigh lending rates, NIMs may stifle investment
Indonesia has the highest NIMs in the region, driven by high lending rates High deposit-side competition but low
lending competition for banks in Indonesia leads to high deposit and lending rates, as well as NIMs
High and volatile historical inflation and bond yields increase the risk premium lenders charge on loans
Micro-level inefficiencies such as high operating costs combined with the non-competitive market structure may also contribute to higher NIMs
A deeper financial sector with a more competitive market structure, lower inflation volatility, improved corporate reporting, and higher bank-level efficiency could help reduce rates and NIMs going forward
2
6
10
14
18
2
4
6
8
10
Jan-06 Nov-06 Sep-07 Jul-08 May-09 Mar-10
Lending Rates (RHS)
Net Interest Margin (LHS)
Deposit Rates (RHS)
Percent Percent
BI Policy Rate (RHS)
0 5 10 15 20
CPI
5yr yield
Deposit Rate
Lending Rate
Indonesia
Philippines
Thailand
Malaysia
2006-2010 Average
Percent
Indonesia Economic Quarterly UpdateContinuity amidst volatility
Shubham ChaudhuriLead EconomistWorld Bank
23 June 2010Jakarta Indonesia