Indonesian economic outlook in the midst of global challenges

Muhammad Chatib Basri

Harvard Kennedy School

and

CReco Research

Short term problems: macroeconomic stability

2

The macroeconomic impact of the global volatility

3

The Fed interest rate hike

Risk of capital

outflow

Risk of assets re pricing

Exchange rate depreciation

Improve trade balance

or

Deteriorate trade balance

Slow down of

China

Declining commodity

priceWealth effect

Slow down growth

Bank Indonesia: interest rate ↑Govt tighten fiscal

Bank Indonesia: lower interest rate

Govt: Expand fiscal

Imported

inflation

Solution:FDI (export oriented) ↑ → BoP +

Declining oil price

Government Revenue

Problem in Euro and

China

(financial)

4

-10

-5

0

5

10

15

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

GDP Growth(Countries, annual, 2015 data is q1 data, percent, last data in the bracket)

Source: CEIC, World Bank

Indonesia (4.71)

China (7.0)

India (7.51)

South Africa (1.3)

Rusia (-2.2)Greece (0.35)

Brazil (-1.56)

-3

-1

1

3

5

7

9

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

GDP Growth(ASEAN countries, annual, 2015 data is q1 data, percent, last data in the bracket)

Source: CEIC, World Bank

Thailand (3.04)

Indonesia (4.71)

Vietnam (6.13) Philippines (5.16)

Malaysia (5.65)

GDP Growth

4,4

4,5

4,6

4,7

4,8

4,9

5

5,1

5,2

-6

-4

-2

0

2

4

6

8

Mar, 2014 Apr, 2014 Mei, 2014 Jun, 2014 Jul, 2014 Agu, 2014 Sep, 2014 Okt, 2014 Nov, 2014 Des, 2014 Jan, 2015 Feb, 2015 Mar, 2015

GDP Growth

Private Cons Govt Exp Inv Export Import GDP

7

GDP Growth

8

4

Table 4 GDP By Expenditure At Current Price and Constant Price 2010

(Trillion Rupiahs)

Component

Current Price Constant Price 2010

Qtr. I-2015 Qtr. II-2015

Qtr. I-2015 Qtr. II-2015

(1) (2) (3) (4) (5)

1. Pengeluaran Konsumsi Rumah Tangga

2. Pengeluaran Konsumsi LNPRT

3. Pengeluaran Konsumsi Pemerintah

4. Pembentukan Modal Tetap Domestik Bruto

5. Perubahan Inventori

6. Ekspor Barang dan Jasa

7. Dikurangi Impor Barang dan Jasa

Diskrepansi Statistik1

Gross Domestic Bruto (GDP)

1 529.1

30.7

180.0

891.1

77.8

600.3

585.4

5.2

2 728.8

1 567.4

31.9

254.2

925.5

80.9

620.1

613.9

0.8

2 866.9

1 188.1

23.7

133.7

688.7

55.1

497.3

468.2

39.4

2 157.8

1 201.2

24.2

176.8

709.6

56.3

505.1

473.1

39.2

2 239.3

1 Selisih GDP Industrial Origin dan GDP Pengeluaran

Table 5 Growth Rate of GDP By Expenditure Base Year 2010

(percent)

Component Qtr. I-2015

Over Qtr. IV-2014

Qtr. II-2015 Over

Qtr. I-2015

Qtr. I-2015 Over

Qtr. I-2014

Qtr. II-2015 Over

Qtr. II-2014

Semester I-2015 Over

Semester I-2014

Source of GrowthPertumbuhan

Qtr. II-2015 (y-on-y)

(1) (2) (3) (4) (5) (6) (7)

1. Pengeluaran Konsumsi Rumah Tangga

2. Pengeluaran Konsumsi LNPRT

3. Pengeluaran Konsumsi Pemerintah

4. Pembentukan Modal Tetap Domestik Bruto

5. Perubahan Inventori

6. Ekspor Barang dan Jasa

7. Dikurangi Impor Barang dan Jasa

Gross Domestic Bruto (GDP)

0.11

-1.19

-48.43

-4.77

-

-6.28

-10.04

-0.17

1.11

2.39

32.17

3.04

-

1.56

1.06

3.78

5.01

-8.25

2.71

4.29

-

-0.85

-2.27

4.72

4.97

-7.91

2.28

3.55

-

-0.13

-6.85

4.67

4.99

-8.08

2.47

3.92

-

-0.49

-4.62

4.70

2.66

-0.10

0.18

1.14

-

-0.03

-1.63

4.67

9

2

Table 2 Growth Rate of GDP By Industrial Origin Base Year 2010

(percent)

Industrial Origin Qtr. I-2015

Over Qtr. IV-2014

Qtr. II-2015 Over

Qtr. I-2015

Qtr. I-2015 Over

Qtr. I-2014

Qtr. II-2015 Over

Qtr. II-2014

Semester I-2015 Over

Semester I-2014

Source of GrowthPertumbuhan

Qtr. II-2015 (y-on-y)

(1) (2) (3) (4) (5) (6) (7)

A. Pertanian, Kehutanan, dan Perikanan

B. Pertambangan dan Penggalian

C. Industri Pengolahan

D. Pengadaan Listrik dan Gas

E. Pengadaan Air, Pengelolaan Sampah, Limbah dan

Daur Ulang

F. Konstruksi

G. Perdagangan Besar dan Eceran; Reparasi Mobil

dan Sepeda Motor

H. Transportasi dan Pergudangan

I. Penyediaan Akomodasi dan Makan Minum

J. Informasi dan Komunikasi

K. Jasa Keuangan dan Asuransi

L. Real Estat

M,N. Jasa Perusahaan

O. Administrasi Pemerintahan, Pertahanan dan

Jaminan Sosial Wajib

P. Jasa Pendidikan

Q. Jasa Kesehatan dan Kegiatan Sosial

R,S,T,U. Jasa Lainnya

Nilai Tambah Bruto Atas Harga Dasar

Pajak Dikurang Subsidi Atas Produk

Gross Domestic Bruto (GDP)

14.85

-8.18

-0.53

-7.17

0.27

-5.95

-0.41

-1.25

0.20

2.61

0.71

1.17

2.24

-6.43

-10.89

-6.39

1.84

-0.43

10.31

-0.17

10.09

-2.57

3.86

4.43

0.19

3.14

3.94

3.62

1.74

2.08

-1.21

1.08

1.78

0.48

6.31

3.30

1.99

3.50

13.96

3.78

4.00

-1.23

3.97

1.73

2.27

6.03

3.96

6.26

3.56

10.06

7.57

5.26

7.36

4.71

5.92

7.34

8.00

4.44

16.25

4.72

6.64

-5.87

4.42

0.76

2.15

5.35

1.69

6.59

3.87

9.56

2.46

5.03

7.64

6.46

12.16

8.16

8.07

4.13

26.70

4.67

5.37

-3.58

4.20

1.23

2.21

5.68

2.79

6.43

3.72

9.81

4.97

5.14

7.50

5.58

9.05

7.76

8.04

4.28

21.59

4.70

0.91

-0.54

0.96

0.01

0.00

0.51

0.24

0.25

0.12

0.43

0.09

0.15

0.12

0.21

0.36

0.08

0.13

4.03

0.64

4.67

10

11

Source: CEIC

0

2

4

6

8

10

12

14

16

18

20

6 8 10 12 2 4 6 8 10 12 2 4 6 8 10 12 2 4 6 8 10 12 2 4 6 8 10 12 2 4 6 8

2010 2011 2012 2013 2014 2015

Inflation(yoy growth, percent)

Headline Core Administered Volatile

Group Spending CPI

Jul 2015

CPI

Aug 2015

MOM

Jul 2015

MOM

Aug 2015

YOY

Aug 2014

YOY

Jul 2015

YOY

Aug 2015Contr

Headline 121.26 121.73 0.93 0.39 3.84 7.26 7.18 7.18

1 Foodstuff 130.57 131.38 1.95 0.62 1.07 8.25 8.60 1.45

2Food, beverages, cigarettes and

tobacco122.59 123.27 0.51 0.55 6.30 7.83 7.91 1.27

3 Housing, water, electricity, and fuel 119.38 119.65 0.18 0.23 5.97 7.94 7.30 1.19

4 Clothing 109.16 109.20 0.41 0.03 4.40 3.34 3.12 0.50

5 Health 115.71 116.49 0.53 0.67 4.96 6.25 6.58 0.97

6 Education, recreation and sport 110.27 111.63 0.30 1.23 3.80 3.82 4.24 0.48

7Transportation, communication and

finance116.87 116.78 0.73 -0.07 1.66 7.99 7.92 1.31

CPI by Expenditure(percent)

-10

0

10

20

30

40

50

Jan

-08

Ap

r-0

8

Jul-

08

Okt

-08

Jan

-09

Ap

r-0

9

Jul-

09

Okt

-09

Jan

-10

Ap

r-1

0

Jul-

10

Okt

-10

Jan

-11

Ap

r-1

1

Jul-

11

Okt

-11

Jan

-12

Ap

r-1

2

Jul-

12

Okt

-12

Jan

-13

Ap

r-1

3

Jul-

13

Okt

-13

Jan

-14

Ap

r-1

4

Jul-

14

Okt

-14

Jan

-15

Ap

r-1

5

Credit Growth(yoy growth, percent)

Total Credit Working Capital Investment Consumption

Source: CEIC

No Type of Tax2014

RealizationRevised 2105 State Budget

Target Δ% (2014-2015)

Δ% (2014-2015)2014 as of July

312015 as of

July 31

ANon Oil and Gas Income Tax (PPh)

458,692.28 629,835.35 37.31 258.486,23 293.521,34 13.55

B.

VAT and Luxuries taxes

408.995,74 576.469,17 40,95 216,137.27 202.701,81 (6,22)

C Land taxes 23.475,71 26.689,88 13,69 1,049.73 558,07 (46,84)

D Oil and gas taxes 87.446,35 49.534,79 (43,35) 51,876.00 31.375,54 (39,52)

E Total A+B+C+D 897.456,86 1.244.723,88 38,69 479,001.27 499.738,89 4,33

F Total A+B+C+D+E 984.903,21 1.294.258,67 31,41 530,877.27 531.114,43 0,04

Tax Revenue realization as of July 31st, 2015

0

200

400

600

800

1000

1200

1400

Jun

-00

Mei

-01

Ap

r-0

2

Mar

-03

Feb

-04

Jan

-05

Des

-05

No

v-0

6

Okt

-07

Sep

-08

Agu

-09

Jul-

10

Jun

-11

Mei

-12

Ap

r-1

3

Mar

-14

Feb

-15

Palm Oil(US Dollars per Metric Ton)

020406080

100120140160

Jun

-00

Mei

-01

Ap

r-0

2

Mar

-03

Feb

-04

Jan

-05

Des

-05

No

v-0

6

Okt

-07

Sep

-08

Agu

-09

Jul-

10

Jun

-11

Mei

-12

Ap

r-1

3

Mar

-14

Feb

-15

Crude Oil(US Dollars per Barrel)

0

50

100

150

200

250

Jun

-00

Mei

-01

Ap

r-0

2

Mar

-03

Feb

-04

Jan

-05

Des

-05

No

v-0

6

Okt

-07

Sep

-08

Agu

-09

Jul-

10

Jun

-11

Mei

-12

Ap

r-1

3

Mar

-14

Feb

-15

Coal(US Dollars per Metric Ton)

0

10.000

20.000

30.000

40.000

50.000

60.000

Jun

-00

Jun

-01

Jun

-02

Jun

-03

Jun

-04

Jun

-05

Jun

-06

Jun

-07

Jun

-08

Jun

-09

Jun

-10

Jun

-11

Jun

-12

Jun

-13

Jun

-14

Jun

-15

Nickle(US Dollars per Metric Ton)

Commodity Price

Source: Index Mundi

0,0

0,2

0,4

0,6

0,8

1,0

1,2

0

1

2

3

4

5

6

7

8

9

Jan

-12

Mar

-12

Mei

-12

Jul-

12

Sep

-12

No

v-1

2

Jan

-13

Mar

-13

Mei

-13

Jul-

13

Sep

-13

No

v-1

3

Jan

-14

Mar

-14

Mei

-14

Jul-

14

Sep

-14

No

v-1

4

Jan

-15

Mar

-15

Mei

-15

Policy Rates(Percent)

Indonesia (LHS)

US (RHS)

China (LHS)

Japan (RHS)

Germany (RHS)

India (LHS)

Source: CEIC

-5

-4

-3

-2

-1

0

1

2

3

4

5

Real Interest Rate(Monthly, Gov.Bond 10y, %)

Indonesia

US

China

Japan

Germany

India

Source: CEIC

Data as of Aug 28, 2015

Indonesia

Russia

Brazil

South Africa

Australia

Source: CEIC

80

100

120

140

160

180

200

220

Exchange Rates(Commodity countries, Des 2013=100)

Short and long term challenges

Short term:

Potential growth is limited --> stabilization over growth

Medium-

long term:

focus on supply constraint

22

Medium term and long-term issues: how to improve

productivity

23

In technology: no self discovery

Source: Authors’ calculation using UN-Comtrade data based on SITC classification

24

Source: Basri and Rahardja ( 2011)

Capability to undertake complex task is

still behind other middle income

countries

If products could not be made in Indonesia, where else can they be made?

From observed trade data, Indonesia made progress in improving capability to export products requiring more complex task (but so does Vietnam)

Why matters? It reflects institutional capacity and ability to accumulate and channel knowledge into productive activities

25

Source: Atlas of Economic Complexity (Hausmann and Hidalgo et.al)

Not yet able to manage complex tasks?

Economic Complexity Index

Development challenges are beyond

macro-stability

26

Brazil China India Indonesia Malaysia Philippines Thailand Vietnam

Characteristics (2013)

Population (person mn) 200.4 1,357.4 1,252.1 249.9 29.7 98.4 67.0 89.7

GDP Per Capita (in PPP, USD) 5,823 3,583 1,165 1,810 6,998 1,581 3,438 1,029

Density (person/sq km) 24.0 144.6 421.1 137.9 90.4 330.0 131.2 289.3

Real Exchange Rate Movement (%)

2003-2013 (average 68.3 31.4 -0.3 6.4 2.5 39.2 25.0 50.9

PISA Test Score (2012)

Math 391 613 351* 375 421 427 511

Science 406 580 348* 382 420 438 528

Broadband Penetration

Fixed (wired)-broadband subscriptions per

100 inhabitants (2013) 10.08 13.36 1.16 1.3 8.22 9.12 7.36 5.62

Logistics Performance Index (2014) 2.94 3.53 3.08 3.08 3.59 3.00 3.43 3.15

Percentage of shipment met quality 82 76 67 70 97 71 83 76

Government effectiveness score -0.08 -0.03 -0.19 -0.24 1.10 0.06 0.21 -0.30* Tamil Nadu dan Himachal Pradesh Sources: World Bank, ITU, BIIS and others

Policy anticipation

Short term

• Increase aggregate demand:

• cash transfer,

• cash for work,

• tax incentive for companies to keep their workers

Medium term

• Infrastructure

• Human capital: Attract FDI for technology spill over

• Tax incentive for R&D, training, export oriented sector

27