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Indonesia:Building on Resilience and Prospering
Amid Global Economic Uncertainty2016 Article IV Consultation Report on Indonesia
John G. Nelmes
IMF Senior Resident Representative for Indonesia
Academic Roundtable Discussion, Jakarta, April 2017
Global Context
Indonesia’s Economy
Key Policy Issues
Global Context
Uncertain and shifting global economic landscape
Multiple forces shaping the global outlook
5
Demographic
headwinds
Tepid
productivity
growth
Forces
Overlaid on…
AEs EMs and DEs
Changing policy mix
Remaining post-crisis
repair
Fraying globalization
consensus
Demographic
trends
Weakening
productivity
growth
Rebalancing in China
Tightening financial
conditions
Idiosyncratic shocks
An uneven pick up in global growth
6
Global growth: uneven pick up Commodity prices have increased
1
2
3
4
5
6
7
8
2010 2012 2014 2016 2018
World
AEs
EMs and DEs
Economic Growth
In percent
Source: WEO January Update 2017
0
50
100
150
200
250
300
2010M1 2012M1 2014M1 2016M1
All commodities Energy Metal
Commodity PriceIndex, 2005=100
Source: IMF Commodity Price Indices
Growth Projections(percent change from a year earlier)
7
World U.S. Euro Area Asia China Japan India SE Asia
2016 3.1 1.6 1.7 5.2 6.7 0.9 6.6 4.8
Change 0.0 0.0 0.1 -0.2 0.1 0.4 -1.0 0.0
2017 3.4 2.3 1.6 5.3 6.5 0.8 7.2 4.8
Change 0.0 0.1 0.1 0.0 0.3 0.3 -0.5 -0.2
2018 3.6 2.5 1.6 5.3 6.0 0.5 7.7 5.1
Change 0.0 0.4 0.0 0.0 0.0 0.1 0.0 0.0
Note: Change is relative to the World Economic Outlook October 2016. Catatan: Perubahan relatif terhadap World Economic Outlook October 2016.
Sources: IMF, World Economic Outlook January 2017 Update; and IMF, World Economic Outlook October 2016. Sumber: IMF, World Economic Outlook January 2017 Update; and IMF, World Economic Outlook October 2016.
Global risks are two-sided, skewed to the downside
8
Stronger
growth in
US/China
China’s
transition
Stagnation
in AEsEM
Financial
Volatility
U.S. dollar
strengthProtectionism
Risks
How has Indonesia’s economy fared?
9
Indonesia’s Economy
Indonesia’s economy continues to perform well
11
22
23
24
25
26
27
28
0
2
4
6
8
Mar-
11
Jun
-11
Sep
-11
Dec-
11
Mar-
12
Jun
-12
Sep
-12
Dec-
12
Mar-
13
Jun
-13
Sep
-13
Dec-
13
Mar-
14
Jun
-14
Sep
-14
Dec-
14
Mar-
15
Jun
-15
Sep
-15
Dec-
15
Mar-
16
Jun
-16
Sep
-16
Dec-
16
Commodities 1/
Noncommodities
GDP growth
Commodities (in percent of GDP, right scale)
Commodity Share and Contribution to Real Growth
(In percent, year-on-year, seasonally adjusted)
Sources: Haver Analytics; and IMF staff estimates.
1/ Includes agriculture, mining and quarrying, manufacturing coal, petroleum and gas.
-4
-2
0
2
4
6
8
Emerging Market Countries' Growth in 2016
(Percentage)
EMs
Source: IMF Jan 2017 WEO Update Database
Low inflation
12
0
1
2
3
4
5
6
7
8
9
Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17
Headline Core Lower band Upper band
Inflation Developments
(In percentage points, yoy)
Source: BPS, BI
A smaller current account deficit and rebounding trade
13
-6
-4
-2
0
2
4
6
Mar-12 Mar-13 Mar-14 Mar-15 Mar-16
Current account balance
Merchandise trade balance
Services and Net Income
Current Account Balance
(In percent of GDP)
Source: BI
-30
-20
-10
0
10
20
30
40
Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17
Indonesia: Export and Import Growth
(yoy, in percent)
Export (3mma yoy)
Import (3mma yoy)
Source: BPS
Financial markets were buoyed in 2016 before partly
reversing following the U.S. election
14
-2,000
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17
Equity
Local currency government bonds
Total net inflow
Equity and Government Bond Inflow
(In millions of U.S. dollar, cumulative since Jan 2016)
Sources: Bloomberg L.P.; and IMF staff estimates.
U.S. election
12400
12600
12800
13000
13200
13400
13600
13800
14000
14200
5.5
6.0
6.5
7.0
7.5
8.0
8.5
9.0
9.5
10.0
Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17
10-year (in percent)
Exchange rate (Rp/US$, right scale)
Exchange Rate and Government Bond Yield Movements
Source: Bloomberg L.P.
U.S election
IMF Projections
15
Outlook
2016 2017 2021
GDP Growth (%) 5.0 5.1 5.5
Inflation (%) 3.0 4.5 4.0
Current Account
(% of GDP)
-2.0 -2.0 -2.3
Risks
• Stronger global growth
• Higher commodity prices
Upside
Downside
• Uncertainties around U.S. policies
• Protectionism
• More volatile global financial conditions and higher
interest rates
• Spillovers from a significant China slowdown
• Tax revenue shortfalls
Source: IMF, 2016 Article IV Consultation
Key Policy Issues
Key Ingredients of Proactive Policy Mix
17
Fiscal
Policy
Monetary
Policy
Structural
Reforms
Financial
and
Corporate
Sector
Fiscal PolicyGrowth-Enhancing Revenue and Expenditure Strategy
Near-term strength and medium-term challenges
19
Fiscal Policy: A Stronger Near-term Framework
20
-4
-2
0
2
4-4
-2
0
2
4
2012 2013 2014 2015 2016
Est.
2017
Proj.
Overall balance
Oil and gas revenue
Energy subsidies (right scale)
Fiscal Developments
(In percent of GDP)
Sources: Indonesian authorities; and IMF staff estimates and projections.
Low revenues constrain spending
21
14
15
16
17
18
2012 2013 2014 2015 2016 Est.
General Government Total Revenue
(In Percent of GDP)
Sources: Indonesian authorities; and IMF staff estimates and projections.
0
4
8
12
16
20
24
2012 2013 2014 2015 2016 Est.
Personnel Subsidies Capital spending Social spending Others
Sources: Indonesian authorities; and IMF staff estimates and projections.
General Government Total Expenditure
(In percent of GDP)
Revenues are low compared to neighbors
22
0
2
4
6
8
10
12
14
16
18
20
Vietnam China Thailand India Philippines Malaysia Indonesia
General Government Tax-to-GDP Ratio, 2015
(In percent)
Sources: IMF, WEO Database; and Authority data.
Higher revenues will finance important spending
23
10
12
14
16
18
20
Current Capital
Illustrative Growth-Enhancing Fiscal Strategy
General government, In percent of GDP
Source: World Bank; Indonesian authorities; and IMF staff estimates.
Revenue Expenditure
2017 20172021 2021
Higher revenue possible with administration reform
and removal of exemptions
24
Room to increase the VAT rate
25
0
5
10
15
20
25
30
35
40
Sin
gap
ore
Bru
nei
Cam
bo
dia
Th
aila
nd
Ru
ssia
Vie
tnam
Ko
rea
Lao
PD
R
Ind
on
esi
a
Ma
lays
ia
Myan
mar
Ch
ina
Jap
an
So
uth
Afr
ica
Ph
ilip
pin
es
Ind
ia
Bra
zil
Corporate Income Tax Statutory Rate
(In percent)
BRICS average: 27
OECD average: 25
Sources: KPMG; IBFD; IEO; IMF staff estimates.
0
5
10
15
20
25
Sin
gap
ore
Th
aila
nd
Jap
an
Ind
on
esi
a
Lao
PD
R
Cam
bo
dia
Vie
tnam
Ko
rea
Ph
ilip
pin
es
So
uth
Afr
ica
Ch
ina
Ru
ssia
Bra
zil
Value-Added Tax Statutory Rate
(In percent)
BRICS average: 17
OECD average: 19
Sources: KPMG; IBFD; IEO; IMF staff estimates.
Higher health and education spending will support
higher inclusive growth
26
0
1
2
3
4
5
Myan
mar
Lao
PD
R
Ind
on
esi
a
Ph
ilip
pin
es
Cam
bo
dia
Sin
gap
ore
Ma
lays
ia
Bru
nei
Vie
tnam
Th
aila
nd
Public Health Expenditure
(In percent of GDP)
EM Asia: 4.4
Sources: World Economic Outlook; World Bank; Indonesian authorities; and IMF staff estimates.
0
1
2
3
4
5
6
7
Cam
bo
dia
Lao
PD
R
Sin
gap
ore
Ph
ilip
pin
es
Ind
on
esi
a
Bru
nei
Th
aila
nd
Ma
lays
ia
Vie
tnam
Public Education Expenditure
(In percent of GDP)
EM Asia: 4.8
Sources: World Economic Outlook; World Bank; Indonesian authorities; and IMF staff estimates.
Higher capital spending to improve productivity
27
0
2
4
6
8
10
12
14
Ind
on
esi
a
Thailan
d
Ph
ilip
pin
es
Sin
gap
ore
Mala
ysia
Vie
tnam
Cam
bo
dia
Mya
nm
ar
Bru
nei
Lao
PD
R
Public Capital Investment
(In percent of GDP)
EM Asia: 5.1
Sources: World Economic Outlook; World Bank; Indonesian authorities; and IMF staff estimates.
Key Tax Reforms
28
PIT: lower
threshold for
top rate,
capitalize on
amnesty
declarations
Excise tax rates
on vehicle and
tobacco,
environmental
(fuel) tax
CIT: reduce
exemptions and
unify rates
VAT: Gradually
raise rate, remove
exemptions,
simplify
administration
Real property:
replace transaction
tax with real
property tax
Tax
administration
reforms
Remove
ambiguities and
inconsistencies in
the tax laws
Simplify VAT
filing and
refund
requirements
Enhance risk
management,
extend audit
coverage, and
use external
taxpayer
information
Tax Policy Tax Administration
Key Expenditure Reforms
29
Investment
Education
Health
Social
Efficiency
6. Reduce non-
priority
spending
4. Consolidate
social assistance
programs and
conditional cash
transfers
1. Raise
investment
spending
2. Raise
education
spending and
improve
efficiency
3. Universal
health insurance
coverageGrowth-enhancing expenditure
strategy. Higher expenditure in
selected areas will support
inclusive growth.
Transfers
5. Enhance the
capacity of local
governments
Monetary and Exchange Rate PolicyMaintaining Stability
Taking aim at inflation
31
Monetary Policy: Current stance is appropriate
32
0
1
2
3
4
5
6
7
8
9
Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17
Headline Core Lower band Upper band
Inflation Developments
(In percentage points, yoy)
Source: BPS, BI
1
2
3
4
5
6
7
8
9
Jan-1
2
Apr-
12
Jul-
12
Oct
-12
Jan-1
3
Apr-
13
Jul-
13
Oct
-13
Jan-1
4
Apr-
14
Jul-
14
Oct
-14
Jan-1
5
Apr-
15
Jul-
15
Oct
-15
Jan-1
6
Apr-
16
Jul-
16
Oct
-16
Interest rate corridor Deposit facility
O/N JIBOR Lending facility
BI 7-day reverse repo
Monetary Policy and Interbank Rates
(In percent)
Sources: CEIC Data Co., Ltd.; and IMF staff estimates.
Continue exchange-rate flexibility
33
8,500
9,500
10,500
11,500
12,500
13,500
14,500
15,500
Jan
-13
Ap
r-13
Jul-
13
Oct
-13
Jan
-14
Ap
r-14
Jul-
14
Oct
-14
Jan
-15
Ap
r-15
Jul-
15
Oct
-15
Jan
-16
Ap
r-16
Jul-
16
Oct
-16
Jan
-17
Onshore rupiah per US$
Foreign Exchange Rates
Source: Bloomberg L.P.
0
50
100
150
200
250
2013M1 2014M1 2015M1 2016M1 2017M1
All commodities Energy Metal
Commodity PriceIndex, 2005=100
Source: IMF Commodity Price Indices
Ongoing monetary operations reforms welcome
34
Monetary
Operations
Reforms
7-day
Reverse
Repo
Reverse
Requirement
Averaging
Remove
Deposit and
Lending Rate
Cap
Financial and Corporate SectorReinforcing the Stability Framework
How healthy?
36
A sound and profitable banking sector
37
0
5
10
15
20
25
Ind
on
esi
a
Th
aila
nd
Po
lan
d
Ma
lays
ia
Bra
zil
Tu
rkey
Ph
ilip
pin
es
So
uth
Afr
ica
Me
xico
Ind
ia
Ru
ssia
Regulatory Capital to Risk-Weighted Assets
(In percent)
Source: IMF, Financial Soundness Indicators database.
0.0
0.5
1.0
1.5
2.0
2.5
Ind
on
esi
a
Tu
rkey
Me
xico
So
uth
Afr
ica
Ph
ilip
pin
es
Th
aila
nd
Ma
lays
ia
Bra
zil
Po
lan
d
Ind
ia
Return on Assets
(In percent)
Source: IMF, Financial Soundness Indicators database.
Non-performing loans have increased but from a low
level
38
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
Jan-11 Oct-11 Jul-12 Apr-13 Jan-14 Oct-14 Jul-15 Apr-16
Agriculture and mining Manufacturing
Construction and real estates Retail and accomodations
Services (incl. financial intermediaries) Households
Others
Commercial Banks' Nonperforming Loans by Industry
(In percent of total loans)
Sources: CEIC Data Co. Ltd.; and IMF staff estimates.
0
50
100
150
200
250
Jan
-13
Ma
y-13
Sep
-13
Jan
-14
Ma
y-14
Sep
-14
Jan
-15
Ma
y-15
Sep
-15
Jan
-16
Ma
y-16
Sep
-16
Restructured Loans
(In trillions of Indonesian rupiah)
Source: IMF, Financial Soundness Indicators database.
Corporate external borrowing has declined,
but so has profitability
39
0
2
4
6
8
10
12
14
16
0
20
40
60
80
100
120
140
2010 2011 2012 2013 2014 2015 2016Q32016Q4
External borrowing
In percent of GDP (right scale)
Corporates: External Borrowing(In billions of U.S. dollar)
Sources: CEIC Data Co. Ltd.; and IMF staff estimates.
5
10
15
20
25
2012 2013 2014 2015 2016 Q2
Return on assets, market capitalization
Debt at risk (in percent to total debt, ICR<1)
Corporates: Debt Service Capacity and Profitability
(In percent)
Sources: Bloomberg L.P.; and IMF staff estimates.
Good progress in important areas
40
Macro-
finance
FSCPM
Law
Capital
BufferFX
Hedging
Close
monitoring of
macro-financial
linkages
FSCPM law
introduced,
implementing
regulations
being drafted
Counter-
cyclical capital
buffer
introduced
Corporate FX
hedging
regulations
implemented
Continue financial stability reforms
41
Closely monitor banks’ soundness and
liquidity conditions, while enhancing inter-
agency coordinationOn Banks
Make the FSCPM Law fully operational
Revise BI, OJK and LPS laws to clarify
mandates and responsibilities
On FSCPM
Law
Financial deepening: A government priority
42
Sources: IMF Staff Discussion Note 15/08; and IMF Staff estimates.
0
20
40
60
80
100
120
140
160
180
Ch
ina
Th
aila
nd
Ma
lays
ia
Vie
tnam
Bra
zil
Ind
ia
Ph
ilip
pin
es
Ind
on
esi
a
Me
xico
Domestic credit to private sector
In percent of GDP
Source: World Bank
Structural PolicyBoosting Private Investment
What is needed to increase long-term growth
and equality?
44
Improving the business climate
45
-5 0 5 10 15 20
Construction permit
Resolving insolvency
Protecting minority investors
Enforcing contracts
Registering property
Trading across borders
Getting credit
Paying taxes
Getting electricity
Starting a business
Overall
Indonesia: Ease of Doing Business Indicators 2017
(Change in Rank, points)
Source: World Bank
Singapore
Malaysia
Thailand
BruneiChina Viet Nam
Indonesia
Philippines
India
1
21
41
61
81
101
121
141
Ra
nk
Ease of Doing Business Rank 2017:
Indonesia and Selected Regional Peers
Rank
Source: World Bank
Modernizing FDI regime
46
0
1
2
3
4
5
6
7
Philippines Indonesia China India Thailand Malaysia Viet Nam
Inward FDI
2005-2015 Average, In percent of GDP
Source: UNCTAD database, IMF World Economic Outlook
0.0
0.1
0.2
0.3
0.4
0.5
OECD -
Average
Brazil Malaysia India Indonesia China Philippines
FDI Regulatory Restrictiveness Index
(1=closed; 0=open)
Source: OECD
Important for investment and manufacturing
47
Reforms to reduce inequality and diversify growth
48
• Expand infrastructure
• Streamline regulations, increase
coordination with local governments
• Pursue trade integration and open
new sectors to investment
• Close labor skill gaps
0.30
0.35
0.40
0.45
2005 2007 2009 2011 2013 2015
Gini Coefficient of Inequality: Higher is Less Equal
Sources: BPS
Summary of Recommendations
49
Strengthen the medium-term fiscal framework through tax policy and administration reform. Improve the effectiveness and efficiency of public spending.
FiscalPolicy
Stand ready to deal with changes in a more volatile external environment, while maintaining exchange rate and bond yield flexibility.
Monetary Policy
Continue close monitoring of macro-financial vulnerabilities and actions to safeguard stability.Fully implement the FSCPM law and continue strengthening inter-agency coordination
Financial and
Corporate
Continue improving the investment climate and expand infrastructure.Pursue trade integration and further modernize the FDI regime.
Narrow the employment skills gap.
Structural Reform
IMF/ World Bank Annual Meeting 2018 in Bali
50
Terima Kasih