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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
2
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
0
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
4
IMPORT DEMAND HAS SOFTENED
-12
0
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
0
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
6
OVERALL BOP: NARROWER C/A DEFICIT…
-16
-12
-8
-4
0
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
7
…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
8
GLOBAL ECONOMY: LIKELY TO STRENGTHEN
Major trading partner GDP growth, percent
Source: World Bank staff calculations
3.5 4.0 4.1
-2
-1
0
1
2
3
4
5
6
7
8
9
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
0
5
10
15
20
25
30
-10
0
10
20
30
Jan-12 Jan-13
Percent Percent
Nominal (LHS)
Real (LHS)
Monthly nominal
lending growth (RHS) -30
-20
-10
0
10
20
30
40
50
60
Feb-12 Aug-12 Feb-13 Aug-13 Feb-14
Motorcycles
Cement sales
Motor
vehicles
10
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
11
…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
12
OUTLINE
Recent economic developments and outlook
Investment in flux, amid policy uncertainties, fiscal pressures
Priorities for the longer-term, and selected issues
13
INVESTMENT IN FLUX…
0
1
2
3
4
5
6
Dec-06 Dec-08 Dec-10 Dec-12
USD billion
Source: BI; World Bank staff calculations
-5
0
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
-25
-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
15
FUEL SUBSIDY REFORM WOULD HELP
-300
-250
-200
-150
-100
-50
0
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
17
BUT IS THE MINERAL EXPORT BAN SOUND?
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
Copper Nickel Tin Iron Bauxite OtherMinerals
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
18
TRADE IMPACTS
19
-5.3
-3.3 -3.0
-0.9
-6
-5
-4
-3
-2
-1
0
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
0
2014 2015 2016 2017
USD billion
Estimated impact on fiscal revenues (export duties and taxes, royalties and CIT)
Source: World Bank
20
OUTLINE
Recent economic developments and outlook
Investment in flux, amid policy uncertainties, fiscal pressures
Priorities for the longer-term, and selected issues
21
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
22
URBAN DISASTER PREPAREDNESS
23
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
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