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Half-yearly Indonesia Economic Update and Outlook. William E. Wallace Lead Economist, World Bank Indonesia 10 December 2008. Overview. The Indonesian economy coming in strong… Growth at post-crisis highs Strong fiscal position Inflation waning Banking sector ratios are healthy - PowerPoint PPT Presentation
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Half-yearly Indonesia EconomicUpdate and Outlook
William E. Wallace
Lead Economist, World Bank Indonesia
10 December 2008
Overview
The Indonesian economy coming in strong…
- Growth at post-crisis highs
- Strong fiscal position
- Inflation waning
- Banking sector ratios are healthy
Turmoil in global finance has affected Indonesia’s markets
Global developments cloud Indonesia’s economic outlook
- Drop in commodity prices hitting export values, incomes and investment
- Slower global growth dragging down manufactured exports
- Tighter domestic credit pressures domestic demand
Overview
Commodity prices boom
…and bust
Int’l financial market turmoil
Global economic downturn
Impacts domestic economy
IDN financial markets
2007 Q3 2008 Q1 2008 Q3 2008 Q4 2009 H1 →Stage 1 ↔ Stage 2 ↔ Stage 3
Approaching the crisis:Economy coming in strong
Volatile & weaker Indo. financial mkts
Commodity prices boom
International financial market turmoil
Global economic downturn
Impacts domestic real economy
2007 Q3 2008 Q1 2008 Q3 2008 Q4 2009 H1
Commodity prices burst
Higher export prices, stronger terms of trade
Higher inflation
Lower poverty
Share market
Supports currency
Real wages
Invest’t
Employ’t
Incomes
Higher poverty
Slower decline in poverty
Export prices , terms of trade weaken
Approaching the crisis:The commodity boom supported growth
Sources: BPS and World Bank
Exports have grown very strongly…
(year-on-year percentage change)
As Indonesia’s export prices rose with global commodity prices…
(Index, Jan 2005 = 100)
100
130
160
190
220
250
280
310
2005 2006 2007 2008 2009 2010
Int'l energy (USD)
Int'l non-energy (USD)
Indonesian export prices
(IDR)
0
5
10
15
20
25
30
2004 2005 2006 2007 2008*
Manufactured ProductsMining & MineralAgriculture & ForestryOil and Gas
%
Approaching the crisis:Growth coming in strong…
Strongest GDP growth post-crisis in 2007 and 2008, bringing average per capita incomes to 20 percent above pre-crisis levels
Only major economy in the region not to slow significantly in 2008 to date
Sources: BPS and World Bank
4.7% 5.4%3.8% 4.4% 4.7% 5.0% 5.7%
6.3%6.3%0.8%
-13.1%
5.5%
-16%
-12%
-8%
-4%
0%
4%
8%
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
*
80
90
100
110
120
Real GDP growth rate (LHS)GDP per capita index (RHS)
* first 3 quarters
Approaching the crisis:…and has been broadly based
Investment growth has been strong
Net exports made a positive contribution, despite the slow-down in global growth
There has been a rising contribution from government spending
Sources: BPS and World Bank
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
2005 2006 2007 2008
Private consumption Gov't consumptionInvestment Statistical discrepancyNet exports
(Year-on-year growthand contributions)
Approaching the crisis:Healthy public finances
Government deficits remains small
(percent of GDP)
And the debt ratio continues to fall dramatically
(percent of GDP)
Sources: Ministry of Finance, IMF, BPS and World Bank
9%
12%
15%
18%
21%
24%
2000 2002 2004 2006 2008*
-6%
-3%
0%
3%
6%
9%
Realized deficit(RHS)
Proposed deficit(RHS)
Expenditure(LHS)
Revenue(LHS)
Balance(RHS)
0
20
40
60
80
100
2000 2001 2002 2003 2004 2005 2006 2007 2008
IndonesiaPhilippines MalaysiaThailand S. KoreaChina
%
Approaching the crisis:The rise in commodity prices fed inflation
Volatile & weaker Indo. financial mkts
Commodity prices boom
International financial market turmoil
Global economic downturn
Impacts domestic real economy
2007 Q3 2008 Q1 2008 Q3 2008 Q4 2009 H1
Commodity prices burst
Higher export prices, stronger terms of trade
Higher inflation
Lower poverty
Share market
Supports currency
Real wages
Invest’t
Employ’t
Incomes
Higher poverty
Slower decline in poverty
Export prices , terms of trade weaken
Approaching the crisis:Inflation, a concern early this year, is waning
However, BI responded aggressively
But concern has shifted to the real economy, motivating December’s rate cut (year-on-year)
With higher food prices, poor households’ cost of living increased faster than the average inflation
(year-on-year)
Sources: BPS and World Bank
0
6
12
18
24
2004 2005 2006 2007 2008
Food
Headline
% Poverty consumption
basket*
* World Bank estimate
0
4
8
12
16
20
J an-06 Oct-06 J ul-07 Apr-08
%
CPI inflation
BI policy rate
Approaching the crisis:Inflation, a concern early this year, is waning
Upstream prices have now begun to fall
(year-on-year)
Feeding into lower inflation expectations (year-on-year)
Sources: BPS, BI and World Bank
0
6
12
18
24
30
36
2004 2005 2006 2007 2008
CPI (headline)
Wholesale Price Index (total)
Source:
%
0
3
6
9
12
15
18
2006 2007 2008154
160
166
172
178
184
190
CPI Inflation(year on year; LHS)
Expected inflation(6 months ahead; RHS)
% Index
Approaching the crisis:With a strong economy, poverty has fallen
Volatile & weaker Indo. financial mkts
Commodity prices boom
International financial market turmoil
Global economic downturn
Impacts domestic real economy
2007 Q3 2008 Q1 2008 Q3 2008 Q4 2009 H1
Commodity prices burst
Higher export prices, stronger terms of trade
Higher inflation
Lower poverty
Share market
Supports currency
Real wages
Invest’t
Employ’t
Incomes
Higher poverty
Slower decline in poverty
Export prices , terms of trade weaken
Approaching the crisis:With a strong economy, poverty has fallen
In rural areas, wages have grown more…
(year-on-year growth)
Sources: BPS and World Bank
…and poverty rates fallen faster than in urban areas
-18%
-12%
-6%
0%
6%
12%
2001
2002
2003
2004
Nov-
05
Feb-0
6
Aug-0
6
Feb-0
7
Aug-0
7
Feb-0
8
RuralUrban
Total
Total Urban RuralActual:
1999 23.4 19.4 26.02002 18.2 14.5 21.12005 5.7 16.0 11.7 20.02007 6.3 16.6 12.5 20.42008 6.1 15.4 11.7 18.9
Forecast:2009 6.0 13.1
4.4 13.8 11.4 16.14.1 13.9 11.4 16.2
2010 6.4 11.75.9 12.9 10.2 15.55.7 13.1 10.3 15.6
Poverty rates (%):GDP growth
The global financial market turmoilImpacting Indonesian financial markets…
Commodity prices boom
International financial market turmoil
Global economic downturn
2007 Q3 2008 Q1 2008 Q3 2008 Q4 2009 H1
Commodity prices burst
Higher export prices, stronger terms of trade
Higher inflation
Export prices , terms of trade weaken
Lower poverty
Supports Indonesia’s real economy
IDRweaker
Stocks fall
Slower fall in poverty
Invest’t
IncomeEmploy-ment
Credit tighter
Higher inflation
Yields on
gov’t debt ↑
Supports Indon. financial markets
The global financial market turmoilImpacting Indonesian financial markets…
Sharp IDR depreciation and greater volatility after an extended period of stability
Stock market fallen, along with world markets
(USD Index, 1 Jan-08 = 100)
0
20
40
60
80
100
120
J an Apr J ul Oct
Indonesia
Developing economiesaverage
Index
Sources: CEIC and World Bank
6,000
8,000
10,000
12,000
14,000
16,000
2006 2007 2008
EUR
USD
AUD
? Appreciate
? Depreciate
The global financial market turmoil …especially government debt market
Government bond yields and spreads sharply higher, and rose more than elsewhere in the region
-200
0
200
400
600
800
1000
1200
2005 2006 2007 2008
Indonesia stripped spreads (USD bonds)
Indonesian spreads less E. Asia
bps
Sources: IDX, CEIC, JP Morgan, World Bank
(Indonesian gov’t USD bonds)(Indonesian gov’t IDR bonds)
0
3
6
9
12
15
18
21
2007 2008
Indonesia
Philippines
Thailand
%
05-Aug
The global economic downturnSlower global growth will impact Indonesia
Higher inflation
Commodity prices boom
International financial market turmoil
Global economic downturn
2007 Q3 2008 Q1 2008 Q3 2008 Q4 2009 H1
Commodity prices burst
Higher export prices, stronger terms of trade
Higher inflation
Lower poverty
Supports Indon. financial markets
Supports Indonesia’s real economy
Slower fall in poverty
IncomeEmploy-ment
IDRweaker
Stocks fall
Invest’t
Higher inflation
Weaker export demand, especially manufactures
The global economic downturnSharply lower global GDP growth
Sources: BPS and World Bank
0
1
2
3
4
5
6
7
8
2000 2002 2004 2006 2008 2010
%
High- income OECD
Developing economies
Previous forecasts
Global growth prospects have been revised sharply lower Q4 slowdown looks sharper
than expected
Will impact manufacturing most Lower profits, employment,
investment and FDI Some offset from the lower
IDR
(yearly ave. percentage change)
Impact of the global downturnSharply lower global commodity priceswill lower Indonesia’s terms of trade
Sources: World Bank and BPS
Export prices will fall with global commodity prices… Int’l price forecasts suggest
Indonesia’s export pricesfall ~15%
(Index, Jan 2005 = 100)
…reversing recent improvements in Indonesia’s terms of trade Some offset from weaker
IDR
(Index, Jan 2005 = 100)
80
90
100
110
120
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
Index
100
130
160
190
220
250
280
310
2005 2006 2007 2008 2009 2010
Int'l energy (USD)
Int'l non-energy (USD)
Indonesian export prices
(IDR)
Index
? ?
Impact of the downturnSlower growth in Indonesia…
Growth slowing in 2009 before recovering in 2010
Significant downside risks: Commodity prices falling faster and further, and Q3 & Q4 2008 growth and indicators in most economiesmuch weaker than expected Sources: BPS and World Bank
4.7% 5.4%3.8% 4.4% 4.7% 5.0%
5.9%4.4%
5.7%
6.1%6.3%0.8%
-13.1%
5.5%
-15%
-10%
-5%
0%
5%
10%
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
(f)
2009
(f)
2010
(f)
80
90
100
110
120
130
Real GDP growth rate (LHS)
GDP per capita index (RHS)
Impact of the downturn…especially in externally-oriented industries
Sources: BPS and World Bank
Sectoral output
(year average growth) Manufactures, and cash
crops important recent drivers of growth, will be hit by lower external demand and prices
Conventional agriculture and services expected to do better (and the rainy season has started well)
0%
2%
4%
6%
8%
10%
2004 2005 2006 2007 2008 2009 2010
AgricultureIndustryServices
Manufacturing
Impact of the downturnBut inflation should continue slowing
Sources: BPS and World Bank
One positive from the downturn : lower inflation Lower commodity
prices more than offset the IDR’s depreciation
Food & basic goods prices should fall most, benefiting poorer households
0
6
12
18
24
2004 2005 2006 2007 2008 2009 2010
Headline
% Poverty consumption
basket*
* World Bank estimate
Inflation for the average andfor the poor consumer
(year-on-year)
Impact of the downturnSlower poverty reduction in 2009
More people remain poor: 1.6 million more in 20092.8 million more in 2010
Sources: BPS and World Bank
Total Urban RuralActual:
1999 23.4 19.4 26.02002 18.2 14.5 21.12005 5.7 16.0 11.7 20.02007 6.3 16.6 12.5 20.42008 6.1 15.4 11.7 18.9
Forecast:2009 6.0 13.1
4.4 13.8 11.4 16.14.1 13.9 11.4 16.2
2010 6.4 11.75.9 12.9 10.2 15.55.7 13.1 10.3 15.6
Poverty rates (%):GDP growth
Indonesia’s pro-active policy responseAddressing the immediate crisis Supporting the financial sector:
Injecting liquidity into inter-bank market, cutting interest rates
Increased flexibility on deposit insurance,including raising limit to IDR 2 billion
Regulation to allow intervention in troubled financial institutions
Using public finances to support financial markets & economic activity: Target deficit of 1.0% GDP in 2009, reducing financing
needs Cut in tax rates for corporations and individuals coming in
2009 Sustaining social and infrastructure spending Lower fuel prices with a linkage of diesel and gasoline
prices to market prices proposed
Indonesia’s policy responsePositioning for a strong, sustainable recovery
Enhance the financial system’s robustness Improve banking and capital market supervision
Social policy Put monitoring program in place -- Given the degree of
uncertainty and understanding improved monitoring will be needed. A monitoring system could build on the experience from the crisis updated for new institutions and technologies
Developed response mechanisms that build on existing programs to provide targeted income and job support in rural and urban areas (building on PNPM, BLT, PKH, etc.)
Invest in infrastructure Increase Indonesia’s competitiveness (transportation and
energy) Stimulate economic activity and employment
Half-yearly Indonesia EconomicUpdate and Outlook
William E. Wallace
Lead Economist, World Bank Indonesia
10 December 2008
The global financial & economic turmoilImpacting Indonesian financial markets…
Commodity prices boom
International financial market turmoil
Global economic downturn
2007 Q3 2008 Q1 2008 Q3 2008 Q4 2009 H1
Commodity prices burst
Higher export prices, stronger terms of trade
Higher inflation
Export prices , terms of trade weaken
Lower poverty
Supports Indonesia’s real economy
IDRweaker
Stocks fall
Slower fall in poverty
Invest’t
IncomeEmploy-ment
Credit tighter
Higher inflation
Yields on
gov’t debt ↑
Supports Indon. financial markets
Overview
Volatile & weaker Indo. financial mkts
Commodity prices boom
International financial market turmoil
Global economic downturn
Impacts domestic real economy
2007 Q3 2008 Q1 2008 Q3 2008 Q4 2009 H1
Commodity prices burst
Higher export prices, stronger terms of trade
Higher inflation
Slower decline in poverty
Export prices , terms of trade weaken
Lower poverty
Supports Indon. financial markets
Supports Indonesia’s real economy