Indonesia 2016 OECD Economic Survey Jakarta 24 October

OECD

OECDEconomics

2016 OECD ECONOMIC

SURVEY OF INDONESIA

Jakarta, 24 October 2016

Getting the fundamentals right

www.oecd.org/eco/surveys/economic-survey-indonesia.htm

GDP growth is still strong but has been

slowing

2

GDP growth

% growth, volumes

Source: OECD Economic Outlook database.

0

1

2

3

4

5

6

7

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Outstanding progress in social outcomes

3

Selected heath and education indicators over the long term

Source: World Bank, Word Development Indicators.

0

20

40

60

80

100

120

140

160

180

0

10

20

30

40

50

60

70

80

90

1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

Gross enrolment ratio, secondary, both sexes (%) (left scale)

Mortality rate, under-5 (per 1,000) (right scale)

The business environment is improving

4

1. Rankings of the subcomponents of Indonesia’s Ease of Doing Business (EDB) index.

Source: World Bank, Ease of Doing Business.

Ease of Doing Business: aggregate and subcomponents

Rank 2015 and 20161

050100150200

Aggregate ranking

Starting a Business

Dealing with Construction Permits

Getting Electricity

Registering Property

Getting Credit

Protecting Minority Investors

Paying Taxes

Trading Across Borders

Enforcing Contracts

Resolving Insolvency

2015

2016

The government’s 13 reform packages will go a long way to further

improving the business environment.

Regulatory impediments remain

5

1. The Services Trade Restrictiveness Index (STRI) between 0 and 1, with 1 being the most

restrictive. 2. Emerging markets are an average of Brazil, China, Colombia, India, Indonesia,

Russia and South Africa. Source: OECD Services Trade Restrictiveness Index database

Services trade restrictiveness, 20151

0

0.2

0.4

0.6

0.8

1

INDONESIA OECD Emerging markets ²

Challenges ahead

6

The fiscal balance has weakened

7

General government revenue, expenditure and balance

% of GDP

Source: CEIC database.

-3

-2

-1

0

1

2

3

4

5

-15

-10

-5

0

5

10

15

20

25

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

Fiscal balance (right scale) Expenditure (left scale) Revenue (left scale)

Legal 3% of GDP deficit limit

If growth disappoints, employ a prudent monetary response to stabilise

output without endangering financial stability.

Tax revenues are low

8Source: World Bank World Development Indicators.

Improve the effectiveness

of tax collection.

Tax Revenue as % of GDP

The tax base is narrow,

the number of tax payers

is low and compliance

weak.

Automatic Exchange of

Information will reduce

tax avoidance.

Tackle labour informality.

0 10 20 30

India

INDONESIA

Philippines

Singapore

Brazil

Korea

OECD

Malaysia

Thailand

Turkey

South Africa

Low public spending squeezes social

services and infrastructure

9

Share of Government Revenue % of GDP

Source: World Bank World Development Indicators.

Raise government revenues to fund a longer-term increase in

high-priority spending.

0 5 10 15 20 25 30 35 40

India

Philippines

INDONESIA

Singapore

Thailand

Malaysia

Korea

Brazil

OECD

South Africa

Turkey

Redirection of spending reflects the

government’s priorities

10

Change in government spending

Difference between 2014 and 2015, % of total expenditure

Remove remaining

subsidies on fuel,

electricity and fertiliser

to fund public priorities.

Source: CEIC database.

-14 -12 -10 -8 -6 -4 -2 0 2 4 6 8

Other

Infrastructure

Education

Health

Energy Subsidy

Removing subsidies on

fuel has created space

for increased spending

in priority areas such as

infrastructure.

Spending on social assistance is low

11

Public expenditures on social assistance

latest year, % of GDP1

1. Public social expenditure excluding health and old-age spending.

Source: OECD Social Expenditure database.

0

1

2

3

4

5

6

7

8 Streamline social

assistance and integrate

social security payments

with the income tax system.

Boost funding for the most

efficient measures, such as

conditional cash transfers.

Continue efforts to create a

unified database of

beneficiaries.

Despite progress important health

challenges remain

12

Source: International Food Policy Research Institute Global Hungry Index database; World Bank

World Development Indicators database.

Prevalence of stunting in children under five years (%)

Focus on those specific weaknesses in Indonesians' health outcomes that

have high economic costs, like child malnutrition and stunting.

0

5

10

15

20

25

30

35

40

45

The quality of public governance ranks low

13

Government effectiveness, 2015

Percentile rank1

1. Government effectiveness percentile rank between 0 and 100.

Source: World Bank Worldwide Governance Indicators.

Specific targets for spending

(20% for education and 5% for

health) are fine. However,

controls on how funds are

spent could be improved.

Move ahead with

performance-based

budgeting (“money follows

the programme”).

Improve evaluation of

existing and future

programmes.0

20

40

60

80

100

But corruption remains the number one

impediment to doing business in Indonesia

14Source: World Economic Forum, Global Competitiveness Report 2015-16

The most problematic factors in doing business in Indonesia, 2015

0 2 4 6 8 10 12

Corruption

Inefficient government bureaucracy

Inadequate supply of infrastructure

Access to financing

Inflation

Policy instability

Poor work ethic in labour force

Tax rates

Inadequately educated workforce

Complexity of tax regulations

Foreign currency regulations

Government instability

Crime and theft

Poor public health

Insufficient capacity to innovate

Restrictive labor regulations

Corruption is still

hampering economic

development and should

be fought by all means.

Support for anti-corruption

agencies is critical.

Including support for

further expanding anti-

corruption activities into

the regions.

Indonesia faces important environmental

challenges

15Source: OECD Green Growth Indicators

Air pollution

Air pollution and CO2 intensity

may get worse due to:

o Increasing reliance on coal;

o Untaxed fossil fuel

consumption; and

o Forest clearing and fires.

Forest clearing also generates

health and biodiversity risks.

Remove remaining energy

subsidies and then begin to

tax CO2 emissions.

Better enforce laws against

forest clearing. 0

5

10

15

20

25

1990 1994 1998 2002 2006 2010 2014

Annual concentration of PM2.5 (µg/m³)

OECD

INDONESIA

Decentralisation to promote regional

development

16

The variance in GDP per capita across

provinces is large

17

% of average national per capita GDP

Source: Statistics Indonesia.

0

50

100

150

200

Ea

st N

usa T

en

gg

ara

Ma

luku

We

st N

usa T

en

gg

ara

No

rth

Ma

luku

Go

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talo

We

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ula

we

si

Ace

h

Be

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kulu

DI Y

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kart

a

Ce

ntr

al Ja

va

We

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alim

anta

n

Lam

pun

g

We

st Ja

va

We

st S

um

atr

a

So

uth

Ka

lima

nta

n

So

uth

ea

st S

ula

we

si

Ce

ntr

al K

alim

anta

n

Ce

ntr

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ula

we

si

No

rth

Su

law

esi

Ba

nte

n

So

uth

Su

law

esi

No

rth

Su

ma

tra

So

uth

Su

ma

tra

Ba

li

Ea

st Ja

va

Ba

ng

ka B

elit

ung

Ja

mb

i

Pa

pu

a

We

st P

apu

a

No

rth

Ka

lima

nta

n

Ria

u

Ria

u Isla

nd

s

Ea

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n

DK

I Jakart

a

89%

57%

Central Government Sub-national governments

Expenditure share

Revenue share

Revenue and expenditure are unbalanced

18

Revenue and expenditure shares by level of

government, 2015 The large imbalance between

the spending of regional

governments limits the

benefits of decentralisation.

At the same time, the

administrative capacity of

local governments is

sometimes weak.

Source: Ministry of Finance, Statistics Indonesia; OECD estimates.

In the short-term, expand use

of targeted grants.

In the longer term, increase

regional capacity and then

raise regions revenue

sources.

The administrative burden on firms varies

significantly across regions

19

Cost of a construction permit in major Indonesian cities

As a percentage of income per capita by city

Source: World Bank, Doing Business in Indonesia 2012, January, Washington, DC.

0 50 100 150

JambiPontianak

Palangka RayaSemarangSurakarta

PalembangMataram

BalikpapanPekanbaru

Banda AcehINDONESIA

MedanSurabayaDenpasarBandung

YogyakartaManadoJakartaBatam

Makassar The best performing

regions equal that of

global best practice.

Work with the sub-

national governments

to move the regulation

of business to best

practice.

Other recommendations

o Employment protection discourages formal jobs and skills investment and reinforces

labour-market segmentation.

Reduce impediments to hiring and dismissal of workers, and provide incentives

for investment in skills.

o Poor nourishment and exposure to disease have left over one third of all children

under five stunted.

Expand existing programmes to tackle stunting.

o Sub-national governments often underspend their budgets, impeding infrastructure

investment in particular.

Expand assistance to help regions to improve budget planning and

implementation capacity.

o More special economic zones (SEZs) are to be established, in spite of their limited

success to date.

Experiment with different incentives in special economic zones, including more

flexible labour regulation, with a view to extending proven good practices to the

whole economy.20

Other Recommendations

o Central government transfers cover the entire cost of sub-national governments’

public service payroll.

Revise the system of transfers from central to sub-national governments to

remove the link with payroll.

o The spending mix could by fine tuned.

Eliminate remaining fuel subsidies. Phase out fertiliser subsidies in favour of

investments in irrigation systems, rural infrastructure and research, and direct

cash support for the poorest farmers.

Replace RASKIN with food vouchers for the poorest. Liberalise imports to

reduce food prices.

Continue prioritising infrastructure investment, and reinforce cooperation with

the private sector by promoting further PPPs.

21

More Information…

www.oecd.org/eco/surveys/economic-survey-indonesia.htm

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