June 15, 2017 Indonesia Economic Quarterly June 2017 Upgraded Hans Anand Beck Acting Lead Economist, Indonesia
June 15, 2017
Indonesia Economic Quarterly
June 2017
Upgraded
Hans Anand Beck
Acting Lead Economist, Indonesia
S&P upgrade acknowledged strong economic fundamentals
and management.
• S&P returned Indonesia to investment grade credit rating after
20 years, citing strong (fiscal) fundamentals
• Global growth and trade is firming but remains below pre-GFC
levels.
2017 economic performance continues to be broadly positive,
with some temporary help from commodities.
• Q1 2017 Quarterly GDP growth rose on a rebound in
government consumption and surging manufacturing and
commodity exports.
• Signs of a sustained turnaround in investment and credit
growth.
• Revenues continued their strong start to the year supported by
commodities, creating space for productive public spending.
• Risks remain tilted to the downside, including resistance to
structural reform efforts.
Investing in the future is critical - to leverage the upgrade,
reduce commodity dependence, and boost growth potential
• There is evidence that reducing Indonesia’s negative
investment list will boost FDI
• Invest in early childhood development to address inequality
and increase productivity
Key Takeaways
3
Invest in the future to leverage the upgrade, reduce commodity
dependence and boost growth potential
2017 positive performance continues, with temporary help from
commodities
S&P recognized strong policy and fundamentals
4
S&P recognized Indonesia’s strong economic fundamentals,
returning it’s sovereign rating to Investment grade after 20 years.
“Indonesia has exhibited effective policymaking in recent
years to promote sustainable public finances and balanced
economic growth…”
“Indonesian authorities have taken effective expenditure
and revenue measures to stabilize the country’s public
finances despite the terms of trade shock…”
“…Indonesia's increased focus on realistic budgeting has
reduced likelihood that shortfall in future revenue would
widen general government deficit significantly.”
- Standard & Poor’s
BB+ BBB-
5
Source: BI: BPS; EAP Economic Update Report ; MoF; World Bank staff calculations
Note: e stands for estimate; f stands for forecast; *estimated figure
While Indonesia’s fundamentals are strong, Indonesia
will still need to compete….
2015 2016 2017fPhilippines
2016e
Vietnam
2016e
Real GDP (Annual percent change) 4.9 5 5.2 6.8 6.2
Consumer price
index(Annual percent change) 6.4 3.5 4.3 1.8 2.7
Current account
balance(Percent of GDP) -2.0 -1.8 -1.8 0.2 3
Budget balance (Percent of GDP) -2.6 -2.5 -2.6 -2.4 -6.5
Debt (Percent of GDP) 27.4 27.9* 29.0 42.1 62.1
S&P Rating
(2017)BBB- BBB BB-
6
Source: World Bank Global Economic Prospects June 2017
growth yoy, percent
…..as the global economy begins to pick up again.
-3
-2
-1
0
1
2
3
4
5
2004 2006 2008 2010 2012 2014 2016(E)
2018(F)
-20
-15
-10
-5
0
5
10
15
20
25
Feb-04 Feb-07 Feb-10 Feb-13 Feb-16
Values Volumes
7
Invest in the future to leverage the upgrade, reduce commodity
dependence and boost growth potential
S&P recognized strong policy and fundamentals
2017 positive performance continues, with temporary help from
commodities
8
Following the first increase in growth rates in 5 years in
2016, the trend continued in Q1 2017.
-2
0
2
4
6
8
Mar-14 Dec-14 Sep-15 Jun-16 Mar-17
Private consumption Government consumption
Investment Net exports
Stat. discrepancy* GDP
Contributions to real GDP growth yoy, percentage points
Source: BPS; World Bank staff calculations
There are signs of a more sustained pick up in
investment
9
2
4
6
8
10
12
14
16
-50
-40
-30
-20
-10
0
10
20
Apr-15 Oct-15 Apr-16 Oct-16 Apr-17
Cement sales
Commercial Vehicle sales
Capital goods import growth
Investment credit growth (RHS)
3mma growth yoy, percent, LHS; growth yoy, percent, RHS
Source: BI; BPS; World Bank staff calculations
Note: The nominal capital goods imports is measured in percent yoy terms. All
other LHS variables are measured in 3mma percent yoy terms.
And signs of a a pick up in broad credit growth
10
2
4
6
8
10
12
14
16
18
Jan-15 Aug-15 Mar-16 Oct-16 May-17
Deposit growth
Credit growth
7 Day reverse repo rate
growth yoy, percent
Source: BI; World Bank staff calculations
11
Industrial Production and manufacturing export growth is
firming up, although commodities are also supporting
exports.
index, LHS; growth yoy, percent, RHS
Industrial Production Index and PMI
-30
-20
-10
0
10
20
30
Mar-15 Mar-16 Mar-17
Oil and gas CoalMining Palm oilRubber ManufacturingOther ServicesTotal goods exports
Exports growth
growth yoy, percent
Source: BPS; Nikkei/Markit Source: CEIC and BI; World Bank staff calculation
-2
0
2
4
6
8
10
12
46
47
48
49
50
51
52
53
May-15 Nov-15 May-16 Nov-16 May-17
Manufacturing Purchasing
Managers' Index (PMI)
Growth of Industrial Production Index
(RHS)
12
Commodities are also supporting a good start to the
year for revenue collection…
Contributions to growth yoy, percentage points
Non oil and gas income tax
Oil and gas related revenues
VAT/LGST
Excises and other taxes
Revenue
growth
Source: Ministry of Finance; World Bank staff calculations
Total revenue collection increased by 17.8 percent yoy
13.6
-6.5
-6.9
17.8
-20
-10
0
10
20
Jan-May 2014 Jan-May 2015 Jan-May 2016 Jan-May 2017
13
Source: Ministry of Finance; World Bank staff calculations
…providing space to spend, especially in more
productive areas such as capital.
January-May actual expenditure growth yoy, percent
15
79
63
(32)
1.4 8.0
14.4
(12.8)
(80)
(60)
(40)
(20)
-
20
40
60
80
100
Personnel Material Capital Energy Subsidies
2015 2016 2017
14
Support from commodities is forecast to be transitory....The Net Trade-weighted Price Index
growth yoy, percent
70
90
110
130
150
Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18
2015
20162017
2018
Source: BPS; World Bank; World Bank staff
calculations
Note: Net trade-weighted price index is constructed
over Indonesia’s six major export commodities.
…and risks to growth remain tilted to the downside.
15
External risks
Domestic risks
Upside Downside
16
S&P recognized strong policy and fundamentals
2017 positive performance continues, with temporary help from
commodities
Invest in the future to leverage the upgrade, reduce commodity
dependence and boost growth potential
17
Lifting FDI restrictions can boost physical capital and hence
Indonesia’s growth potential
Inverse relationship between FDI investment policy
restrictiveness and FDI inflows
FDI stock measured in current USD and FDI regulatory index
Source: World Bank staff calculations on the basis of UNCTAD,
World Development Indicators and OECD data (online dataset
http://stats.oecd.org/).
18
And Investment in early childhood development can
create the human capital the economy needs to grow.
Association between child stunting (Height-for-age Z score) and
fluid intelligence (W Z-score) in later life, Indonesia
Source: Giles, Satriawan, and Witoelar, 2017 (based on IFLS data)
Notes: “Fluid intelligence” assesses respondents´ general ability to think abstractly, reason, identify patterns, solve problems, and
discern relationships. The Z-score is a standard measure that expresses each value by the number of standard deviations it is from
the reference mean. The W-score is the score obtained from an adaptive number series test of fluid intelligence, which was normed
and extensively pre-tested for the 2014 round of the IFLS. It was standardized into a Z-score for the purposes of this analysis.
19
…while reducing stunting also tackles a major source of
inequality.
41
48
3942
3739
3432
30 29
0
10
20
30
40
50
60
2007 2013
Stunting Incidence(percent of under-5 population)
Poorest Second Middle Fourth Richest
Stunting affects everyone, but is worse for the
poor
In early childhood, stunting leads to increased
risk of death and illness
In school-age, stunting leads to loss of IQ and
poor learning outcomes
In adulthood, stunting leads to increased risk
of NCDs and lower income levels
Source: Riskesdas
Terima Kasih
20
As global trade has rebounded, so has Indonesia’s
trade performance
21
Source: BPS; World Bank staff calculation Source: BPS; World Bank staff calculation
-10
-8
-6
-4
-2
0
2
4
6
8
10
Mar-14 Sep-15 Mar-17
Exports
Services
Goods: Oil & Gas
Goods: Non-Oil & Gas
Export of Goods and Services
-10
-8
-6
-4
-2
0
2
4
6
8
10
Mar-14 Sep-15 Mar-17
ImportsServices
Goods: Oil & Gas
Goods: Non-Oil & Gas
Import of Goods and Services
Contributions to real growth yoy, percentage points