Embed Size (px)
Citation preview
Ndiamé Diop
Lead Economist, Indonesia
July 8, 2015
Indonesia Economic
Quarterly
July 2015
Slower Gains
Introduction
The government announced and
initiated ambitious policy reforms
(e.g., fuel subsidy, business
licensing) and infrastructure
development plans (doubling of
capital budget allocation in
2015).
These raised expectations about
the results they can achieve…
…but so far gains remain smaller
than expected.
In this IEQ, we try to understand
why this is the case and discuss
options for addressing ongoing
challenges.
Three facts about the global economy
Indonesia: recent developments and near-term outlook
3
Effective policy response
Fact 1. Global growth still subdued
despite recovery in the US
2.6
2.8
3.3
2
2.5
3
3.5
4
Jan'13 Jun'13 Jan'14 Jun'14 Jan'15 Jun'15
2014
2015
2016
World Bank projections for global growth in 2014, 2015 and 2016, percent
Source: World Bank Global Economic Prospects
Fact 2. Major developing countries
growing below past 10-year average…
-2
0
2
4
6
8
10
12
2015f
2016f
2005-2014 (excl. GFC*)
Note: *2008/9 global financial crisis period.
Source: World Bank Global Economic Prospects June 2015; World Development Indicators; World Bank staff
calculations
Real annual GDP growth in select countries, percent
31.5
-7.8
-10
-5
0
5
10
15
20
25
30
35
2005-2011* 2012-2014
…China’s slowing and changing growth
pattern particularly far-reaching
Chinese imports from Indonesia, average annual growth, percent
Note: * excludes 2009 global financial crisis period.
Source: BPS; World Bank staff calculations
Fact 3. Commodity exporters: growth
and fiscal buffers declining
-12 -10 -8 -6 -4 -2 0 2
Algeria
Australia
Brazil
Chile
Indonesia
Malaysia
Norway
Peru
Qatar
Russia
GDP growth
Primary balance (% of GDP)
Change between 2011 and 2015 in
select countries, percentage points
Source: IMF World Economic Outlook; World Bank staff calculations
Indonesia: recent developments and near-term outlook
Three facts about the global economy
8
Effective policy response
-2
0
2
4
6
8
10
2011 2012 2013 2014 Q1 2015
Statistical discrepancy*
Net exports
Gross fixed capital formation
Government consumption expenditure
Private consumption expenditure
Gross domestic product
Weaker GDP growth in Q12015, with
investment still subdued…
Note: *Statistical discrepancy also includes change in inventories. Q1 2015 quarterly growth in year on year terms.
Source: BPS; World Bank staff calculations
Growth yoy, percent
…and weaker private consumption
growth, especially in nominal terms
0
2
4
6
8
10
12
14
Mar-12 Sep-12 Mar-13 Sep-13 Mar-14 Sep-14 Mar-15
Real Nominal Implicit deflatorGrowth yoy, percent
Source: BPS; World Bank staff calculations
Employment growth has
slowed across Indonesia
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
Commodity boom (2007-2011)
Post-commodity boom (2012-2014)
Average annual difference in
employment rates, percentage points
Source: BPS; World Bank staff calculations
Weak revenue collection has
limited the fiscal space
Contributions of select revenue categories to nominal
revenue growth yoy for January - May, percent
Source: Ministry of Finance; World Bank staff calculations
-15
-10
-5
0
5
10
15
2013 2014 2015
O&G related revenuesIncome taxes N-O&GConsumption taxesInternational trade taxesOtherTotal revenues
-70
-50
-30
-10
10
30
50
2014 Jan-May share of total rev. Budget2015 Jan-May share of total rev. Budget2015 Jan-May nominal growth (yoy)
Capital budget execution challenges have
further curtailed the development agenda
Source: Ministry of Finance; World Bank staff calculations
January-May realization as a share of
total revised Budget, percent;
nominal growth yoy, percent
Inflation remains sticky
due to rising food prices
0
2
4
6
8
10
12
Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15
Headline
Core
Food
Percent change, yoy
Source: BPS; World Bank staff calculations
Baseline GDP growth in 2015
has been revised down
Note: Revisions are relative to March 2015 IEQ.
Source: BI; BPS; Ministry of Finance; World Bank staff projections
July 2015 IEQ Revisions
(percentage change, unless otherwise
indicated) 2014 2015p 2016p 2015 2016
Real GDP 5.0 4.7 5.5 -0.5 0.0
Consumer prices 6.4 6.8 5.3 0.3 0.2
Current account balance (% of GDP) -2.9 -2.7 -2.9 0.3 0.3
Fiscal balance (% of GDP) -2.2 -2.5 - 0.0 -
Main risks to outlook are
firmly on the downsideExternal
• Foreign currency financing costs;
• Lower trend output growth in developing countries;
• A setback in the still-fragile Euro Area recovery.
Domestic
Private consumption Government
consumption
Fixed investment
• Sticky inflation;
• Fuel price uncertainty;
• Further Rupiah
depreciation;
• Lower consumer
confidence.
• Revenue shortfall;
• Budget under-execution.
• Weaker business
confidence;
• Subdued credit growth;
• Lower government
capital spending.
Effective policy response
Three facts about the global economy
17
Indonesia: recent developments and near-term outlook
4
5
5
6
6
7
7
Mar-06 Sep-07 Mar-09 Sep-10 Mar-12 Sep-13 Mar-15
GDP
Potential output
Growth yoy, percent
Source: BPS; World Bank staff estimates
Deep reforms are needed to
sustain growth of more than ~5.5%
Fiscal reforms: “spend the capital budget”
Central government capital spending
(Nominal IDR trillion and percent of Total expenditure and of GDP)
64 73 76 80
118 140
181
135 160
1.6 1.3 1.3 1.2 1.5 1.6 1.9 1.3 1.4
8.5
7.4 8.1
7.7
9.1 9.5
11.0
7.7
9.1
-
2.0
4.0
6.0
8.0
10.0
12.0
-
20
40
60
80
100
120
140
160
180
200
2007 2008 2009 2010 2011 2012 2013 2014 2015f
Capital Exp IDR Tn Capital Exp as % GDP Capital Exp as % Total Exp
Source: BPS, Ministry of Finance, World Bank staff calculation
Fiscal reforms: measures to
collect more in the medium-term
Recently adopted policies:
• VAT electronic tax return submission, effective July 1;
• Improvements in income tax audit strategy (e.g. focus on tax
payers more likely to rely on transfer pricing), effective 2015;
• Removal of luxury sales tax on certain goods to lower cost of tax
administration, effective July 9.
Further options to mobilize revenues:
• Optimize the tax regime (e.g. revisions to sales and excise taxes
for vehicles, fuels and tobacco);
• Improve corporate income tax (e.g. reduce firms’ incentives to
remain small);
• Revise VAT exemptions to increase equity (e.g. for electricity
consumption of high consuming households).
Support the rebalancing of the economy
With low commodity prices, relative profitability is
expected to now favor manufacturing industries and
services over most commodity sectors…
Policy support to businesses and investments in
manufacturing and services is thus crucial:
- Improve logistics services (dwell time)
- Facilitate firms’ access to key inputs (incl. imports)
- Speed up licensing approval process (e.g. one stop
shop)
- Realign sector-specific regulations with the provisions
of the investment law
Invest more and better in human capital to raise long-
term growth
Also in this IEQ: geothermal, BOS and CAD
Three facts about the global economy
22
Indonesia: recent developments and near-term outlook
Effective policy response
July 2015 IEQ Contents
Regular update on economic
developments and the outlook
Indonesia’s current account
deficit going forward
Fuel subsidy reform: a major
one but how to make it
sustainable?
Realizing Indonesia’s
potential in geothermal.
Ten years of school grant
program (BOS): successes
and challenges
Main takeaways “Slower gains”:
Output and employment growth are weakening.
Major policy initiatives are facing implementation challenges – fuel pricing,
infrastructure.
Indonesia is not alone in facing these challenges:
EMEs worldwide are slowing down and need to confront structural
constraints
Indonesia is still in a good position to respond by:
Expanding infrastructure spending, to the extent possible given deficit limit
Following through on measures to improve revenues and the business
environment
Communicating in a consistent way about new policies and decisions to
investors, as consistent communication reduces uncertainty.
But slower gains are a sign of serious constraints and a shifting
economy:
Supporting a rebalancing of the economy key
