March 15, 2016
Indonesia Economic Quarterly
March 2016
Private investment is essential
Ndiamé Diop
Lead Economist, Indonesia
Introduction
2015: tough but growth expected to have
bottomed out
Significant improvement in composition of
spending away from energy subsidies…
… allowing a spectacular rise in public
investment…
… and helped growth in 2015
2016: staging a firm rebound will be no small
challenge
Given pressures on export and oil and gas
fiscal revenues, private investment recovery
is essential
Private investment also critical to address
medium-term challenges
Revival of manufacturing, rise of tourism
Good quality jobs
3
How public investment helped growth
Staging a firm growth rebound in 2016
Medium-term challenges and opportunities
The budget before 2015: Close to 1/3 spent on energy subsidies
Share of average central government spending, 2012-2014, percent
Source: Ministry of Finance; World Bank staff calculations
29%
14%
4%3%
50%
Energy subsidy
Capital spending
Health
Social assistance
Other
Fuel subsidy reform: The foundation
Source: Ministry of Finance; World Bank staff calculations
0
50
100
150
200
250
300
2012 2013 2014 2015
Fuel subsidies Infrastructure
Public investment and growth in 2015
6
Real growth yoy, percent
Note: Capital expenditure deflated with the implicit fixed investment deflator.
Source: BPS; Ministry of Finance; World Bank staff calculations
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
-60
-40
-20
0
20
40
60
80
100
Mar-14 Sep-14 Mar-15 Sep-15
Real capital expenditure (LHS) GDP (RHS)
7
How public investment helped growth
Staging a firm growth rebound in 2016
Medium-term challenges and opportunities
Weak global growth and global trade: Harder to generate export revenues
8
Source: World Bank, January 2016 Global Economic Prospects
Annual growth, percent
-12
-10
-8
-6
-4
-2
0
2
4
6
8
10
12
14
2001 2003 2005 2007 2009 2011 2013 2015e 2017f
Global trade
Global GDP
Subdued household real income growth Only moderate pick up in private consumption
9
Source: BPS; World Bank staff calculations Source: BPS; World Bank staff calculations
Weaker job creation
GDP growth, percent, LHS; millions,
RHS
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
3.0
3.5
4.0
4.5
5.0
5.5
6.0
6.5
2010 2011 2012 2013 2014 2015
Job creation
GDP growth
0
2
4
6
8
10
12
Jan-15 Jul-15 Jan-16
Headline
Unprocessed food
Persistently high food price inflation,
percent
Low commodity prices Continued pressure on oil and gas fiscal revenues
10
Source: Ministry of Finance; World Bank staff calculations
Contributions to nominal growth yoy, percent
-15
-10
-5
0
5
10
15
20
25
2011 2012 2013 2014 2015
Oil and gas-related revenues Other Total revenues
Public investment rise in 2016Likely less dramatic than in 2015
Budget allocation for infrastructure increases, driven by transfers to SNGs and SOEs
(IDR trillion)
Source: Ministry of Finance; World Bank staff calculations
0
50
100
150
200
250
300
350
2014 2015 revised Budget 2016 Budget
Line ministries Non-line ministries
Transfers to SNGs Capital injection to SOEs
Private investment is essential
12
Real fixed investment growth
(percent yoy)
Note: Capital expenditure deflated with the implicit fixed investment deflator.
Source: BPS; Ministry of Finance; World Bank staff calculations
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
2013 2014 2015 2016f
Public Private
Baseline outlook
13
2015 2016f 2017f
Real GDP (annual % change) 4.8 5.1 5.3
Consumer prices (annual % change) 6.4 4.0 4.6
Current account balance (% of GDP) -2.1 -2.3 -2.5
Budget balance (% of GDP) -2.5 -2.8 n.a.
Source: BPS; World Bank staff projections
Supporting near-term growth (1)Gradual monetary easing
14
4
6
8
10
12
14
Feb-15 May-15 Aug-15 Nov-15 Feb-16
BI policy key rate
JIBOR interbank rate - 3 month
Investment lending rate
Source: BI; World Bank staff calculations
Annual growth, percent
Revenue collectionOngoing reform areas critical
15
• Reforming tax policy:
• Revisions to Income Tax and VAT Laws and the Final Tax regime for
MSMEs provide an opportunity to broaden the tax base and reduce
economic distortions.
• Strengthening tax administration:
• Ease electronic filing process for taxpayers, while making e-filing
mandatory for certain types of taxes;
• Unique taxpayer ID system;
• Improved compliance risk management and auditing processes, including
use of third-party data;
• Stronger law enforcement efforts.
• Building the underlying tax administration capacity:
• Investment in IT and data management systems.
Business environment Further reforms could tip investor confidence
• Reducing or removing minimum capital and reserve requirements for
setting up logistics service providers – too high and hinder competition
• Clarifying the roles of port authorities and port operators in port
development and management – lack of clarity has led to severe
underinvestment in port infrastructure
• Regulatory review mechanism is needed to take stock of existing
business, investment and trade regulations (e.g. NTMs), cancel ones that are
conflicting and unnecessary, and reject or approve new regulations
• Establishing an up-to-date, comprehensive depository of
licensing/regulatory requirements that can be accessed online - there is
no list of requirements that firms needs to comply with
17
How Public Investment Helped Growth
Staging a firm growth rebound in 2016
Medium-term challenges and opportunities
China 1990 China 2005
China 2014
Indonesia 1990
Indonesia 2005
Indonesia 2014
Malaysia 1990
Malaysia 2005
Malaysia 2014
Thai 1990
Thailand2005
Thailand 2014
10
15
20
25
30
35
40
0 5,000 10,000 15,000 20,000 25,000
Source: World Development Indicators, World Bank
Manufacturing has prematurely retracted due to
commodity boom
Manufacturing as percentage of GDP (y axis), GDP per capita (x axis), PPP
(constant 2011 int USD)
Source: Calculation based on CEIC data
Unit labor costs in manufacturing, 2012 =100
80
90
100
110
120
130
140
150
2011 2012 2013 2014
Indonesia Malaysia
Thailand Vietnam
Philippines
Worker productivity is low despite wage advantage
0
100
200
300
400
500
600
700
800
900
2005 2007 2009 2011 2013
China IndonesiaMalaysia PhilippinesThailand Vietnam
Real wages (real 2012 USD)
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Self-employed/employers in agriculture
Unpaid family worker in agriculture
Self-employed/employers in nonagriculture
Unpaid family worker in non agriculture
Casual workers in agriculture
Casual workers in non agriculture
Domestic, security and cleaning workers
Employees paid below Minimum Wage
Employees paid at least the MinimumWage
Source: World Bank calculations based on BPS, Sakernas data
Percent of workers in different types of work
Sluggish manufacturing growth and low productivity
have reduced the quality of jobs…
Source: World Bank calculations based on BPS, Sakernas data
Poor quality of jobs keeps many around the poverty line
• 75 percent of poor households fail to
definitely move out of poverty or
vulnerability over a three-year period.
• A large number of workers are not
safe and secure from poverty due to
their type of job
• The quality of jobs in manufacturing is
typically better – more formal and
higher value
• China lifted 680 million people
between 1992 and 2012 by focusing
on manufacturing growth
Status in 2010 of households who were poor
in 2008 (percent)
0
20
40
60
80
100Moved out ofpoverty andvulnerability
Moved out ofpoverty butremainvulnerable
Moved out ofpoverty butfall back in
Always Poor
…and kept many people vulnerable
Source: UN-COMTRADE, HS4 digits and OECD industrial code
Share to total exports, percent
0
2
4
6
8
10
12
0
3
6
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
Industrial acid oils Footwears
Wood furniture Textiles&garments
Palm oil prod (rhs) Playwood (rhs)
0.0
0.5
1.0
1.5
2.0
2.5
3.0
0.0
0.3
0.6
0.9
1.2
1.5
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
Gold Tin, not alloyedRubber tires Petrol products (rhs)Refined copper
Medium –Low–tech exportsLow –tech exports
Medium-term strategy:Identify promising industries (1)
Identify promising industries, “to avoid shooting in the dark”
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1990 1994 1998 2002 2006 2010 2014
Insulated cable fiber
Cars
Automotive spareparts
Bulldozers,excav, & parts
Parts of motorcycles
Saturated monohydric alcohols
0.0
0.1
0.1
0.2
0.2
0.3
0.3
0
1
2
3
4
5
6
1990 1994 1998 2002 2006 2010 2014
Office & comp equip
Radio, TV & com equip
Aerospace (RHS)
Drug & medicine (RHS)
High –tech exportsMedium–high -tech exports
Share to total exports, percent
Source: UN-COMTRADE, HS4 digits and OECD industrial code
Medium-term strategy:Identify promising industries (2)
Medium-term strategy:Key reforms
24
• Implement cross-cutting reforms to create an supportive policy
environment for all firms in all sectors
• Progress on labor laws and regulations dialogue and reform crucial (e.g.
severance pay creating a lose-lose outcome)
• Recognize that export growth and industrialization will be driven by a few
industries: policy focus and attention to most promising branches is
key
• For promising sectors:
─ Facilitate agglomeration/ clustering
─ Actively weed out entry barriers
─ Actively attract FDI and joint ventures in these industries
─ Public-private partnerships to close skills gaps (training, specific schools, etc.)
Also in the March 2016 IEQ
Beyond the 10 economic policy
packages
How to address constraints to growth in
logistics, trade, investment climate and
financial markets
Sustainable energy development
Aligning pricing, regulations and
investment policies can help Indonesia’s
transition to a more sustainable energy
path
Public support for action on inequality
A majority of Indonesians think that
inequality is too high and urge
government action to reduce it