Indonesia Economic Quarterly Launch

Jakarta, March 18, 2014

Jim Brumby

Sector Manager and Lead Economist

MARCH 2014 IEQ: “INVESTMENT IN FLUX”

Investment in

flux

Fixed investment:

subdued, and risks

FDI: solid, but has

plateaued recently

Portfolio investment:

currently strong, but

volatile

Risks to fiscal space needed for

public investment

2

OUTLINE

Recent economic developments and outlook

Investment in flux, amid policy uncertainties, fiscal pressures

Priorities for the longer-term, and selected issues

3

GDP: WEAK INVESTMENT, STRONG NET EXPORTS

-3

-2

-1

0

1

2

3

4

Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13

Fixed investment Net exports

Contribution to GDP growth yoy, percent

Source: BPS; World Bank calculations

4

IMPORT DEMAND HAS SOFTENED

-12

0

12

24

36

Jan-12 Jul-12 Jan-13 Jul-13 Jan-14

Intermediate Consumption

Capital Oil & Gas

Total imports

Percent Contribution to yoy growth

Source: BPS; World Bank staff calculations

5

-15

-10

-5

0

5

10

15

Jan-13 Apr-13 Jul-13 Oct-13 Jan-14

O-S-A Coal Palm oil Rubber and products Oil and gas Others

percent

RAW MINERAL EXPORTS BAN BUMP IN Q4

Ores, Slags and Ashes

Source: BPS; World Bank staff calculations

6

OVERALL BOP: NARROWER C/A DEFICIT…

-16

-12

-8

-4

0

4

8

12

16

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

Overall balance

Net direct investment

Net other capital

Current account

Net portfolio

Balance of payments, USD billion

Note: Basic balance = Current account balance + net FDI

Source: BI; World Bank staff calculations

7

…SUPPORTING THE RUPIAH OVER Q1 2014 Nominal currency index, 2011 average =100

Note: Selected EM majors is a simple average of BRL, IDN, TRY and ZAR vs. USD; USD is broad NEER index

Source: JP Morgan; World Bank staff calculations

70

80

90

100

110

Jan-11 Jun-11 Nov-11 Apr-12 Sep-12 Feb-13 Jul-13 Dec-13

USD

IDN

Selected EM

majors

8

GLOBAL ECONOMY: LIKELY TO STRENGTHEN

Major trading partner GDP growth, percent

Source: World Bank staff calculations

3.5 4.0 4.1

-2

-1

0

1

2

3

4

5

6

7

8

9

INDONESIA: MIXED HIGH FREQ. DATA; MORE HEADWINDS

Economic activity indicators - mixed Growth in 3-month moving avg. yoy, percent

Source: CEIC; World Bank staff calculations

Credit growth - falling Growth yoy, percent

Source: CEIC; World Bank staff calculations

-10

-5

0

5

10

15

20

25

30

-10

0

10

20

30

Jan-12 Jan-13

Percent Percent

Nominal (LHS)

Real (LHS)

Monthly nominal

lending growth (RHS) -30

-20

-10

0

10

20

30

40

50

60

Feb-12 Aug-12 Feb-13 Aug-13 Feb-14

Motorcycles

Cement sales

Motor

vehicles

10

INDONESIA OUTLOOK: SOME MORE GROWTH MODERATION TO COME…

March IEQ Previous

(Dec.)

2012 2013 2014 2015 2014p

Real GDP (% change) 6.2 5.8 5.3 5.6 5.3

Consumer price index

(% change) 4.3 6.9 6.2 5.2 6.7

Current account balance

(USD billion) -24.4 -28.5 -24.4 -20.2 -22.8

Current account balance

(% GDP) -2.8 -3.3 -2.9 -2.1 -2.6

Budget balance (% of GDP) -1.9 -2.2 -2.6 n.a. -2.1

Source: BI; BPS; Ministry of Finance; World Bank staff projections

11

…AMIDST SIGNIFICANT RISKS

Domestic External

Positive

• Elections lead to a stronger than expected boost to consumption, investment

• Commodity prices rise • Global risk appetite is

stronger than expected, boosting portfolio inflows to EMEs inc. Indonesia

Negative

• Investment weakens as downturn extends to building investment

• Consumption growth disappoints as income and credit effects take their toll

• External financing conditions tighten again

• Global commodity prices fall, e.g. due to slower than expected growth in China

12

OUTLINE

Recent economic developments and outlook

Investment in flux, amid policy uncertainties, fiscal pressures

Priorities for the longer-term, and selected issues

13

INVESTMENT IN FLUX…

0

1

2

3

4

5

6

Dec-06 Dec-08 Dec-10 Dec-12

USD billion

Source: BI; World Bank staff calculations

-5

0

5

10

15

Dec-06 Dec-08 Dec-10 Dec-12

Other

Foreign transportation

Foreign machinery & equip

Building

Total

Foreign direct investment Inbound FDI, rolling 4-quarter average

Fixed investment Contributions to real growth yoy, percent

14

FISCAL SECTOR: REVENUES SOFT; NEW POLICY PRESSURES

-2.5

-1.5

-0.5

0.5

1.5

2.5

3.5

4.5

-25

-15

-5

5

15

25

35

45

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Deficit (RHS, % of GDP)

Revenues (LHS, yoy nominal growth, %)

Expenditures (LHS, yoy nominal growth, %)

Note: 2013 deficit is World Bank staff projection Source: Ministry of Finance; World Bank staff calculations

15

FUEL SUBSIDY REFORM WOULD HELP

-300

-250

-200

-150

-100

-50

0

50

100

2009 2010 2011 2012 2013

2014

Fuel subsidy expenditure, GoI

Savings

Expenditures

Scenario 1 (2013 again)

Scenario 2: 50% economic price fill

2014 WB projection

Achieving a deficit of <2.5% in 2014 looks difficult without more fuel subsidy reform

IDR trillion

16

EXAMINING THE MINERAL EXPORT BAN

Unprocessed export ban

+ Export duty and tax

Increased domestic mineral

processing

Higher value-added mineral

exports

GDP growth

Trade Balance

Fiscal Revenues

Job Creation

• Significant processing investment is stimulated. i.e, that smelters are financially viable

• Processing adds a lot of value to mineral exports

• Higher processed exports will offset lower ore exports

• Higher value exports will increase non-tax revenues

• Processing will create more and better jobs in the sector

Rationale

Underlying assumptions

17

BUT IS THE MINERAL EXPORT BAN SOUND?

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

Copper Nickel Tin Iron Bauxite OtherMinerals

Percent of total USD million Processed Mineral Exports

Unprocessed Mineral Exports

Share of Mineral in Total Exports

Note: Data for 2013 Source: WITS database; World Bank staff calculations

18

TRADE IMPACTS

19

-5.3

-3.3 -3.0

-0.9

-6

-5

-4

-3

-2

-1

0

2014 2015 2016 2017

USD billion

Estimated impact on net trade balance

Source: World Bank

REVENUE IMPACTS

-0.4

-1.1

-1.8

-2.2

-4

-2

0

2014 2015 2016 2017

USD billion

Estimated impact on fiscal revenues (export duties and taxes, royalties and CIT)

Source: World Bank

20

OUTLINE

Recent economic developments and outlook

Investment in flux, amid policy uncertainties, fiscal pressures

Priorities for the longer-term, and selected issues

21

AVOIDING THE TRAP THE CHALLENGE –harnessing Indonesia’s potential to generate shared prosperity, through fast productivity-driven economic growth with inclusiveness

Structural policies to boost prosperity:

• Closing the infrastructure gap

• Closing the skills gap

• Enhancing the functioning of markets

Complementary areas:

• Service delivery for all

• Social protection

• Natural disaster risk management

Foundational pre-requisites:

• Macro-fiscal management and managing shocks

• Implementation

22

URBAN DISASTER PREPAREDNESS

23

THANK YOU

March 2014 IEQ contents:

Regular update on economic developments and the outlook

Examining the mineral exports ban

Urban disaster risks planning

A taster of the forthcoming World Bank report, Avoiding the Trap

On the web: http://www.worldbank.org/en/news/feature/2014/03/18/indonesia-economic-quarterly-march-2014

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