Ndiame Diop, Lead Economist & Economic Advisor World Bank Indonesia

BKPM, December 16, 2013

Overview of recent economic developments

Framing the policy choices for the current account and growth in 2014

2014: outlook and policies

97

98

99

100

101

102

103

Oct-09 Oct-10 Oct-11 Oct-12 Oct-13

Japan US Euro Area Brazil China India

OECD composite leading indicators

GLOBAL ECONOMY IMPROVING

Source: OECD

COMMODITY PRICES STABILIZING

50

100

150

200

250

300

Jan-05 Jan-07 Jan-09 Jan-11 Jan-13

USD price index, 2005=100

Energy prices

Non-Energy prices

Top 10 Indonesian export commodities

Source: World Bank

22 percent fall since Feb 2011

0

2

4

6

8

10

12

14

16

0

1

2

3

4

5

6

Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13

US 10-year (LHS) Emerging markets USD bonds (RHS) Indonesia USD bonds (RHS)

GLOBAL POLICY UNCERTAINTIES STILL HIGH

Sovereign bond yields, percent

Source: JP Morgan

RUPIAH AND INTEREST RATES ADJUSTING

4

5

6

7

8

9

10

8

9

10

11

12

13

Dec-09 Dec-10 Dec-11 Dec-12 Dec-13

5-yr gov. bond yield (RHS)

IDR 000 per USD

1000 IDR per USD Yield, percent

Source: CEIC

AND GROWTH MODERATING

0

1

2

3

4

5

6

7

8

9

Sep-06 Sep-08 Sep-10 Sep-12

QoQ saar Year on year

GDP growth, percent

Source: BPS; World Bank staff calculations

THE CURRENT ACCOUNT DEFICIT STABILIZING

-15

-10

-5

0

5

10

15

Sep-09 Sep-10 Sep-11 Sep-12 Sep-13

Goods trade balance Services trade balanceIncome balance Current transfersCurrent account balance

USD billion

Source: BI

THE TRADE BALANCE RECOVERY NASCENT

-3

-2

-1

0

1

2

3

4

Oct-09 Oct-10 Oct-11 Oct-12 Oct-13

Non-oil and gas

Oil and gas

Merchandise trade balance

Goods trade balance, USD billion

Source: BI

EXPORT BAN MAY HURT TRADE IN THE SHORT TERM

-9.9

-6.0 -5.2

-12

-10

-8

-6

-4

-2

0

Scenario 1 -100%

smelters built

Scenario 2 -realisticsmelters

Scenario 3 -no smelters

Net trade impacts from the raw mineral export ban are expected to be negative in the near-term

Scenario 1: the export ban is fully enforced and 100% of proposed smelters in the pipeline are built and operate to full capacity. Scenario 2: As Scenario 1 except only the proposed additional smelters that are considered realistic by the SEADI (2013) export ban study are built. Scenario 3: The export ban is fully enforced but none of the proposed smelters in the pipeline are built and become operational over 2014-2017.

Impact on net trade in 2014 relative to baseline, USD billion

Under Scenario 2 the projected negative impact on net trade in 2014 is around 0.6 percentage points of GDP, moving the current account deficit projection up to 3.2 percent of GDP

The longer-term distortionary implications of the export ban could be sizeable

Overview of recent economic developments

Framing the policy choices for the current account and growth in 2014

2014: outlook and policies

MYTH #1: INDONESIA GETS ENOUGH FDI

0 1 2 3 4 5 6 7 8

KoreaPhilippines

South Africa*TurkeyMexico

IndonesiaIndia*

ArgentinaThailand

Malaysia*Brazil

RussiaChina

Vietnam*

Percent to GDP

*Data through 2011 Source: World Bank

Foreign direct investment as a share of GDP (2009-2012 average)

FACT: MORE FDI NEEDED, QUITE URGENTLY

-16

-12

-8

-4

0

4

8

12

16

Sep-10 Sep-11 Sep-12 Sep-13

Overall balance

Basic balance

Net direct investment

Net other capital

Current account

Net portfolio

Policy options: Implementation of

August package investment measures

Implementation of the good “Doing Business” measures announced

Higher regulatory and policy certainty – e.g. mining

USD billion

Source: BI

MYTH #2: INDONESIA IMPORTS TOO MUCH

0 20 40 60 80 100

BrazilArgentina

RussiaIndonesia

China*India

TurkeySouth Africa

MexicoPhilippines

Korea*ThailandMalaysiaVietnam

Percent to GDP

Imports of goods and services as a share of GDP (2009-2012 average)

*Data through 2011 Source: World Bank

FACT: IMPORT COMPRESSION HURTS GROWTH…

0 10 20 30 40 50

Utilities

Mining & quarrying

Financial & bus. Services

Agriculture

Trade, hotel & restaurant

Transport & com.

Services

Construction

Manufacturing industries

Source: World Input-Output database 2011

Destinations of imports by sector, percent

…AND IT IS HAPPENING ALREADY

-40

-20

0

20

40

60

80

Oct-11 Apr-12 Oct-12 Apr-13 Oct-13

Consumer goods

Raw materials

Capital goods

Oil and gas

Total imports

Import growth, year-on-year change in 3-month moving average, percent

Source: BPS; World bank staff calculations

MYTH #3: A LARGE BASE OF CONSUMPTION ASSURES STRONG

GROWTH

50

55

60

65

70

2005 2006 2007 2008 2009 2010 2011 2012

Indonesia India

0

2

4

6

8

10

12

2005 2006 2007 2008 2009 2010 2011 2012

Indonesia

India

Household final consumption expenditure, percent of GDP

Real GDP growth, percent

Source: World Bank

FACT: THE CURRENT RISKS ARE REAL

Overview of recent economic developments

Framing the policy choices for the current account and growth in 2014

2014: outlook and policies

SLOWER GROWTH IN 2014 THAN 2013

December IEQ Previous (Oct)

2011 2012 2013p 2014p 2013p 2014p

Real GDP (% change) 6.5 6.2 5.6 5.3 5.6 5.3 Consumer price index (% change) 5.4 4.3 7.0 6.1 7.3 6.7

Current account balance (% GDP) 0.2 -2.8 -3.5 -2.6 -3.4 -2.6

Major trading partner GDP (% change) 3.6 3.4 3.4 3.9 3.4 3.9

Source: World Bank

…WITH GROWTH RISKS TO THE DOWNSIDE

Material risk of growth falling below 5 percent, due to: External financing constraints bite harder More marked deceleration in domestic demand than expected in the

base case as private consumption and investment are affected by: Higher interest rates Higher import prices Wealth and sentiment effects

SLOWER PACE OF POVERTY REDUCTION…

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

0

2

4

6

8

10

12

14

16

18

20

2003 2005 2007 2009 2011 2013

Poverty rate (LHS)

Change in poverty (RHS)

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1 3 5 7 9 11 13 15 17 19

Poverty Line

Poor households are increasingly further below the poverty line

MORE ENTRENCHED POOR Percent 2013 average per capita household

consumption by percentile, as a ratio of the national poverty line

Source: BPS; World Bank staff calculations

SUPPORTING GROWTH AND MINIMIZING RISKS IN 2014

Maintaining macroeconomic stability •Currency flexibility •Monetary and fiscal

policy coordination •Building policy buffers

and contingency planning

Supporting investment, including inward direct investment •Pro-investment DNI

revision • Implementation of

“doing business” measures

• Improving policy and regulatory certainty: process and implementation

Supporting exports • “Quick wins” in trade

facilitation and logistics

•Plugging infrastructure and skills gaps for longer-term competitiveness

ALSO IN THIS DECEMBER 2013 IEQ EDITION

Analysis of the 2014 Budget An update on poverty trends An update on labor market trends New survey results on local governance capacity On the web: http://www.worldbank.org/en/news/feature/2013/12/16/indonesia-economic-quarterly-slower-growth-high-risks