ieq - mainting resilience - english-presentation

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Indonesia Economic Quarterly: October 2012 Maintaining resilience

Lead Economist & Economic Advisor, Indonesia

World Bank

October 15, 2012 Paramadina Public Policy Institute

www.worldbank.org/id www.worldbank.org/indonesia



Outline

The contrast is striking between the global economy and Indonesia:

Global growth is weak and downside risks high

Indonesia: growth remains strong and the economy resilient…..

despite the drag of exports on growth

Looking ahead, global risks remain high and to the downside

The most significant manifestation of this is China

Question: How can Indonesia maintain its resilience?

2



THE GLOBAL ECONOMY remains weak



The global economy slowed going into H2...

- ’ …

105105

Composite leading indicatorsLong term trend=100

Euro Area

China

100100

United States

IndiaJapan

9595

9090

Aug-07 Aug-08 Aug-09 Aug-10 Aug-11 Aug-12

4

Source: OECD



Global economic growth should improve slightly going into 2013…

…

Real GDP growth year-on-year, percent

7.4

6.2

5.15.6

6.0 6.06

8

6

8

3.9

2.82.3 2.6

3.3 3.4

3.0 2.2 2.4 2

4

2

4

. 1.3 1.5

-2

0

-2

0

-6

-4

-6

-4

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

World High-income countries Developing countries

5

Source: World Bank



International financial market conditions have stabilized…

… ,

Index 2 June 2008=100 VIX index

150

175150 Emerging market

equities (LHS)

100

125

100

50

75

75

Developed market equities (LHS)

VIX index

(RHS)

050

Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12

6

Source: CBOE, MSCI



Commodity prices generally rose in Q3

Index Jan 2000 = 100 Index Jan 2000 = 100

..

International USD commodity prices

600600

Indonesia's Major

Export Commodities

400400

Energy

200200Food

00

Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12

Metals and Minerals

7

Note: Price index of Indonesia’s Major Export Commodities is weighted by export shares of Coal, Gas,Palm Oil, Crude Oil, Copper and Rubber which represent 42% of Indonesia's exports

Source: World Bank and CEIC



THE INDONESIAN ECONOMY has been resilient despite the

headwinds

8



Indonesia’s growth performance in the first half of 2012 was strong…

… , - -

Real GDP growth year-on-year, percent

8

10

8

10

Indonesia

2

4

2

4

-2

0

-2

0Indonesia’s Major Trading

Partners

-6

-4

-6

-4

Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12

9

Source: BPS and World Bank



Economic growth has been supported by strong domestic demand…

… ,

Contribution to quarter-on-quarter, seasonally adjusted real GDP growth (percentage point)

3

4

3

4

0

1

0

1

-2

-1

-2

-1

-- Jun-09 Mar-10 Dec-10 Sep-11 Jun-12

Discre anc Net Ex orts Investment Gov cons. Private cons. GDP

10

Source: BPS via CEIC and World Bank



Investment growth is a notable recent feature of the economy…

… - - …

Percent PercentInvestment as a share of nominal GDP

3535

Malaysia Philippines

Thailand Indonesia

2525

2020

1515

2005Q1 2006Q1 2007Q1 2008Q1 2009Q1 2010Q1 2011Q1 2012Q1

11

Source: BPS, CEIC and World Bank estimates



Recent period of high growth and low inflation stands out…

…

1212

Percent Percent

1010

Core CPI inflation

6

8

6

8

44Real GDP growth

00

Jan-03 Jan-05 Jan-07 Jan-09 Jan-11

12

Source: BPS, BI



External balances are showing the effects of weak external demand …

…

Export value (LHS) Import value (LHS)Trade balance (LHS) Export growth 3mma yoy (RHS)Im ort rowth 3mma o RHS

8020

USD

billionPercent

4010

-40

0

-10

0

-80-20

Aug-08 Aug-09 Aug-10 Aug-11 Aug-12

13

Source: BI



The shrinking trade surplus has pulled the current account into deficit

… -

Goods trade balance Services trade balance

1515

Income balance Current transfers

USD billion USD billion

55

-

-5

-

-5

-15-15

Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12

14

Source: BI



Overall balance of payments flows have turned negative

…

1616

Current account Overall balance

USD billion USD billion

8

12

8

12

-4

0

-4

0

-12-8

-12-8

Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12

15

Source: BI



Shrinking current account balances are being seen elsewhere

…

Percent Percent

Current account balances relative to GDP

1214

1214

2011 Q3 2011 Q4

6

8

6

82012 Q1 2012 Q2

2

4

0

2

-20

-4-2

China Indonesia Korea, Rep. Malaysia Philippines Thailand

17

Source: Haver Analytics, BI and World Bank staff calculations



WILL ECONOMIC GROWTH REMAIN ROBUST ? Yes, but there are

multiple risks to Indonesia’s continued resilience

18



Our baseline projection is continued strong economic growth…

-… . .

2010 2011 2012 2013

Real GDP growth (percent) 6.2 6.5 6.1 6.3

CPI inflation (percent)* 6.3 4.1 4.9 5.1

Budget balance (percent of GDP)** -0.7 -1.1 -2.2 -1.6

Major trading partner growth (percent) 6.8 3.1 3.3 3.6

Notes: * CPI inflation is Q4 on Q4. World Bank projections except for *Budget balance, which is

19



But there are risks to the outlook…

…

Euro Area:

ECB action has reduced financial crisis risk but not eliminated

risk of renewed intensification of sovereign funding and

banking sector challenges

US “fiscal cliff”:

World Bank assumes 1 percent fiscal drag for the US in 2013...

…but “worst case” could shave up to 5 percent off US GDP in

2013

China:

World Bank projects 7.7 percent growth in 2012 and 8.1 percent

Risk of further slowdown

Additional uncertainty:

20

Impact of renewed global monetary easing on portfolio flows

and commodity prices



Further external shocks would be felt through the trade channel…

’ …

Share (%) of commodity in country’s total exports (by value) in 2011

IDN JPN KOR MYS SGP THA VNM*

Agriculture, Foods & Tobacco1 23.5 4.4 3.5 19.8 3.5 25.4 25.7

Mining & Bulk Commodities2 13.6 14.3 20.2 12.1 24.9 12.3 7.5

Mineral Fuels3 31.3 0.0 0.0 12.0 0.0 0.6 9.2

. . . . . . .

Manufacturing4 31.4 80.1 76.0 55.8 71.2 60.9 57.4

…of which: Capital &5

7.5 50.8 37.9 16.7 23.5 28.9 10.8

Note: Aggregated using two digits ISIC Rev.3 code (ISIC3). 1. ISIC3 01-05, 15-16, 25; 2. ISIC3 12-14, 23, 26-28; 3. ISIC3 10-11; 4. ISIC317-22,24,32-33,36; 5. ISIC3 29-31, 34-35

Other 0.3 1.2 0.4 0.3 0.4 0.7 0.2

21

ource: v a



And shocks could also be felt through the financial channel

…

Sep 2008

Non-resident local gov.securities holdin s

on-res en o ngs May 2010

Sep 2011

Jul 2012

Non-resident equity holdings

Short-term external debt*

0 25 50 75 100 125 150 175

22

Source: BI, KSEI and CEIC, * Data is for end-May 2012 for short term debt



…and could spill over into domestic demand…

…

Index

(Dec 2004=100)

Year-on-year growth,

percent

20%400

Real investment growth in Indonesia (RHS)USD international commodity price index (LHS)

10%200

5%100

0%0

Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11

23

Source: CEIC and World Bank



MAINTAINING RESILIENCE in Indonesia in an uncertain global

environment will not be easy

24



Maintaining resilience has multiple dimensions….

n a ese mens ons are mpor an

Crisis management protocol in place (capacity of the fiscal and

Ability to promptly implement countercyclical fiscal policies

Maintaining fiscal room & contingent financing

Pre-agreement on swift Parliament approval of spending and

financing re-adjustment if external risks materialize

Efficient spending execution and absorption

Quality of spending improvement

Support FDI to meet larger external financing needs

Reducing regulatory uncertainties to maintain high level of

investment growth (esp. if commodity prices fall)

25



Strong debt dynamics give Indonesia fiscal space against more shocks

…

Percent of GDP Percent of GDP

80

100

80

100

Indonesia Brazil China India Malaysia Philippines

6060

2020

00

26

Source: IMF Fiscal Monitor April 2012, MoF, BPS.Note: All data from IMF except Indonesia from World Bank staff calculations



And public deficit is currently low

…

Projected fiscal balance in 2012 for selected economies

24

24

ercen o ercen o

-4

-2

-4

-2

-10

-8

-

-10

-8

-

-12-12

27

Source: IMF Fiscal Monitor Database October 2012 except * Indonesia is MoF Semester I projection



As well as securing high quality external funding

…

Foreign direct investment, net inflows

8

1056 1993-1997 1998-2002

2003-2007 2008-2011

4

6

2

3

-2

0

-2

-1

0

29

Note: * data not available for 2011Source: World Bank World Development Indicators



And reducing regulatory uncertainties

… ,

r va e nves men s a orwar - oo ng ac v y an nvo ves sun cos ;

thus uncertainty is a deterrent to investment

Indonesia’s success in boostin investment artiall reflects success in

establishing a stable macroeconomic framework (fiscal fundamentals and

low inflation)

will help investments and support resilience

And strengthening the policy framework will support Indonesia’s

eve opmen o ec ves

30



Maintaining resilience amidst global uncertainty

To recap: What does it takes for Indonesia to maintain resilience in the

Indonesia has already equipped itself with sound mechanisms to remain

resilient but further efforts may be needed

In light of the rapid transformation of the demand side of the economy,

facilitating the supply response will be key in furthering resilience

This requires

…further accelerating investments by reducing regulatory

uncertainties for business and enhancing the policy framework…

…emphasizing clarity, consistency and certainty… …and enhancing the quality of public spending to boosting public

investment in growth-enhancing areas and social protection.

31



Thank you

Indonesia Economic Quarterly October 2012 Maintaining

resilience also includes special topics on:

Spending dynamics:

The proposed 2013 Budget

Trends and drivers of ublic ersonnel

expenditure Higher education reform

www.worldbank.org/id www.worldbank.org/indonesia

ieq - mainting resilience - english-presentation

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