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March 22, 2017
Indonesia Economic QuarterlyMarch 2017
Staying the Course
Hans Anand BeckActing Lead Economist, Indonesia
2016 stronger economic fundamentals despite global uncertainty Growth was higher than previous year for first time
in five years
Prospects for a pick up are subject to risks and challenges Early signs of pickup including on consumer
spending, employment, revenue collection and infrastructure spending.
Staying the course crucial for realizing prospects Maintain vigilance, continue strong macro-
economic management, sustain reform momentum. Opportunity to raise competitiveness by
reducing restrictiveness of service sector Review subsidy programs (KUR)
Key Takeaways
3
Staying the course is crucial for realizing prospects
Prospects for a pick up, but subject to risks and challenges
2016 stronger fundamentals despite global uncertainty
4
-2
0
2
4
6
8
2012 2013 2014 2015 2016 2017
Statistical discrepancy* Net exportsGross fixed capital formation Government consumption expenditurePrivate consumption expenditure Gross domestic product
Despite global headwinds, annual real growth increased in 2016, for the first time in 5 years…
Contributions to GDP growth, percentage points
5
2015 2016
Real GDP (Annual percent change) 4.9 5
Consumer price index (Annual percent change) 6.4 3.5
Current account balance (Percent of GDP) -2.0 -1.8
Budget balance (Percent of GDP) -2.6 -2.5
Source: BI: BPS; MoF; World Bank staff calculations Note: 2016 actual outcome; f stands for forecast
….as part of a broader strengthening of economic fundamentals
6
Staying the course crucial for realizing prospects
Prospects for a pick up, but subject to risks and challenges
Robust growth in the face of global uncertainty
7Source: World Bank Global Economic Prospects January 2017
Percent, growth
External conditions are forecast to firm up.
0
1
2
3
4
5
World AdvancedEconomies
Emerging andDevelopingEconomies
Major TradingPartners excluding
China
2015 2016e 2017f
2.32.72.7
2.11.6 1.8
3.5 3.4
4.2
2.72.73.0
Early shoots of consumer confidence emerging…
8
Source: BPS; Nikkei/Markit Source: ASI; GAI; World Bank staff calculations
Consumer durables leading indicators
-40
-20
0
20
40
Jan-15 Jan-16 Jan-17
Motorcycle Sales
Cement Sales
Car Sales: Commercial
Car Sales: Passenger
3month ma growth yoy, percent
9
2
3
4
5
6
7
8
2002 2004 2006 2008 2010 2012 2014 2016
Unemployment rate - core
(20)
(15)
(10)
(5)
-
5
10
15
20
25
-
100
200
300
400
500
600
700
800
900
1,000
Real median monthly income (LHS)
Real median monthly income growth (RHS)
Core unemployment fell to its lowest rate since 2012 and real earnings growth appeared to strengthen significantly in 2016
…supported by an employment rebound and real wages.
10Source: Ministry of Finance; World Bank staff calculations
Tax collection is picking up again (Jan-Feb)…
Contributions to annual revenue growth, Percentage Points
Total revenue collection increased by 8.9 percent yoy, but levels are still lower than 2014 and 2015
Non oil and gas income taxOil and gas related revenues
VAT/LGST
Excises and other taxes
-25
-20
-15
-10
-5
0
5
10
15
20
25
Jan-Feb 2014 Jan-Feb 2015 Jan-Feb 2016 Jan-Feb 2017
Revenue growth
11
Source: Ministry of Finance Data; World Bank staff calculations Note: Target revenue path is calculated by using the average percentage monthly contributions to total revenues (2010-16)
and the Budget 2017 Total Revenues target
-
630
1,260
1,890
2016 actual collection
2017 Inferred collection path to targetIDR Trillion
…but there is a long way to go to meet 2017 targets.
2017 actual collection
- 20 40 60 80
100 120 140 160 180 200
January February
12
0.0
1.0
2.0
3.0
4.0
5.0
6.0
2014 2015 2016 2017
Jan-Feb capital expenditure outturns(IDR Trillion)
January-February capital expenditure sustains high level achieved in 2016; Early procurement policy continued: by mid February, a third of Ministry of Public
Works budget had been contracted
Government capital spending began 2017 well.
13
Contributions to goods exports values growth, percentage points
Source: CEIC and staff calculations
-25-20-15-10
-505
101520
Dec-14 Dec-15 Dec-16
Oil and gas Coal MiningPalm oil Rubber ManufacturingOther Total exports
Manufacturing and commodities increased
Exports are growing for the first time since 2013, carried by manufacturing, and commodities....
14
Energy prices forecast to surge 26 percent this year
Source: World Bank Pink Sheet; CEIC; World Bank (2017); World Bank Staff Calculation
…supported by a positive commodities terms of trade shock, which forecasts suggest will be temporary
Inde
x 20
11 =
100
Forecast
50
75
100D
ec 1
4
Jun
15
Dec
15
Jun
16
Dec
16
2017
2018
2019
2020
Downside risks easing but still dominate upside
15
External risks
Domestic risks
Upside Downside
January IEQ risk balance
16
Staying the course is crucial for realizing prospects
Prospects for a pick up, but subject to risks and challenges
Robust growth in the face of global uncertainty
Indonesia is in the top decile of countries in terms of restrictions
17
Staying the course by, for example, reforming services sector…
OECD Services Trade Restrictiveness Index for Indonesia
0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1
EngineeringArchitecture
Logistics customs brokerageComputer
Logistics storage and warehouseRoad freight transport
Rail freight transportConstruction
Maritime transportBroadcasting
AccountingLogistics cargo-handling
InsuranceCommercial banking
TelecomLogistics freight forwarding
Air transportLegal
Indonesia
Average acrosscountries
By removing barriers to services trade, increased openness would likely: Improve quality Reduce price for
some sectors Help facilitate
introduction of new services
Expose domestic market to new knowledge
18
…to improve service sector productivity and competitiveness.
0
5
10
15
20
25
30
35
40
45
Indonesia Korea Malaysia Philippines Thailand
Indonesia has relatively low productivity in a number of areas
5 reasons to re-consider the new KUR program’s effectiveness*
19
Review costly, regressive and untargeted subsidies like the KUR program.
Principle Reason new KUR program is not optimalRelevance x Sustainable loans access more important for MSMEs than lower
interest rates
Costs x Expansive coverage of KUR means higher costs
Competitive environment
x High risk market for MSME loans impeded as subsidies crowd out commercial lending
Equity among participants
x Regressive, as total subsidy Government pays increases linearly with loans size
Sustainability x Current KUR interest rate deviates significantly from market rates and is not financially sustainable
* Original KUR program introduced 2007; new design introduced 2015
Terima Kasih
20