INDONESIA ECONOMIC QUARTERLY Frederico Gil Sander

Lead Economist
CLOSING THE GAP October 3, 2017
How is the economy doing?
What to expect in 2018?
Closing the gap
 Growth steady amid mostly favorable conditions
GDP, change from the previous year, percent (line) and contributions to year-on-year growth, percentage points (bars)
Private consumption Government consumption Investment
Net exports Stat. discrepancy* GDP
5.0
7.0 4.7 4.8
5.2
4.9 5.2 5.0 5.0 5.0
4.9 4.9 4.9
4.8
5.0

3.0

1.0

-1.0

-3.0
Jun-14 Mar-15 Dec-15 Sep-16 Jun-17

Source: BPS; World Bank staff calculations.

Note: * Stat. discrepancy includes changes in inventories.
 Quality of spending improved, contributing to higher investment
growth
January-August expenditure realizations, shares of total expenditure
35.0 Total expenditure growth
7.9 percent
30.0

25.0 14.0

20.0 8.9 7.2

15.0
9.4 5.6
4.4
10.0

5.0 10.5 10.8

9.1

0.0
2015 2016 2017
Capital Expenditures Social Assistance Energy Subsidies

Source: Ministry of Finance; World Bank staff calculations.

4
Commodity prices retreated following earlier gains, but export growth
remained positive
Exports of goods and services at constant prices, change from the previous year, percent (line), and contributions to year-on-year growth, percentage points (bars)

10 Goods: Non-Oil & Gas Goods: Oil & Gas

8
Services Export of Goods and Services
6
4
2
0
-2
-4
-6
-8
-10
Mar-14 Dec-14 Sep-15 Jun-16 Mar-17

Source: BPS; World Bank staff calculations.

5
A wider current account deficit was mostly financed by higher FDI…
USD billion

20 Current account Direct investment Portfolio investment

Other investment Overall balance Basic balance
15

10

-5

-10

-15
Jun-14 Jun-15 Jun-16 Jun-17

Source: CEIC and BI; World Bank staff calculations.

6
… while financial flows were robust, reflecting a benign external
environment and strong demand for EM assets
Portfolio flows (debt and equity), USD billion

5.0 50
4.0 40
Emerging Markets
3.0 (RHS) 30
2.0 20
1.0 10
0.0 0
-1.0 -10
Indonesia
-2.0 -20
-3.0 -30
-4.0 -40
Jan 15 Apr 15 Jul 15 Oct 15 Jan 16 Apr 16 Jul 16 Oct 16 Jan 17 Apr 17 Jul 17

Source: IIF; World Bank staff calculations.

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Ada apa dengan
Konsumsi?

8
Many reasons why private consumption should have
accelerated...

Festive season of Idul Fitri, which moved to Q2 this year, usually sees
a pick-up in consumption

4 million jobs created, double-digit wage growth

Stable rupiah and subdued food inflation

BI’s consumer confidence index relatively high

 … so why did consumption remain flat? No clear answer – some
hypotheses, but need more data to discern among them
1. Short-term adjustments to constructive reforms
• Shift in expenditures from subsidies to capital expenditures and more targeted transfers
• Increased efforts to boost tax-to-GDP ratio to resource the state to deliver more and
better services
2. Industrial investment and productivity growth remain sluggish
• Most jobs created were informal and recent wage growth concentrated
among top earners
• Implementation of business-environment and pro-competitive reforms has
been challenging, dampening creation of high-quality jobs With some exceptions, most
possible explanations point
3. Commodity prices lost steam in Q2 to temporary causes
• Despite substantive progress in diversifying the economy,
commodity prices still matter for Indonesia
• Lower prices in Q2 vs Q1, but recovered in Q3

4. Noisy data
• The shift in the Idul Fitri holiday reduced
the number of working days and may
have introduced unusually large noise to
the national accounts data
Short-term pain for long-term gain: Administered price hikes are the
mirror image of better expenditure composition
Change from the previous year, percent

14

Administered Administered price increases

12

10

8 Food

6
Headline
4
Core
2

-2
Aug-15 Feb-16 Aug-16 Feb-17 Aug-17
Source: CEIC; World Bank staff calculations. 11
Bigger concern: Boosting private investments to create good jobs in
industry and services
Change in the number of employed workers (millions), February 2016 – February 2017, by type of job and sector of employment

5.0

Unpaid
4.0 family
worker

3.0
Wage
employed Services

2.0
Non-
agricultural Industry
self-
1.0 employed
Agricultural Agriculture
self-
employed
0.0
Casual 1
worker

-1.0
Source: Sakernas; World Bank staff calculations.
1
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How is the economy doing?
What to expect in 2018?
Closing the gap
Smooth sailing or rough seas?
14
Real GDP growth is expected to gradually accelerate in H2 2017 and
into 2018

2016 2017f 2018f

Real GDP (Annual percent change) 5.0 5.1 5.3

Consumer price index (Annual percent change) 3.5 4.0 3.5

Current account balance (Percent of GDP) -1.8BI; CEIC; World Bank-1.7

Source: BPS; staff projections -1.8

Source: CEIC, BPS, World Bank staff projections.

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More drivers of growth in the near-term…

Favorable global environment

Waning of temporary effects on consumption

Dividends from reforms and crowding-in of private investment

from improved infrastructure

Lower domestic lending rates

… despite a number of downside risks
G3 monetary
policy
normalization Political
season

Growth in
China Loss of
reform
External Domestic momentum

Commodity
prices
Weak
investment
Geopolitical and job
risks creation
What will it take to accelerate growth in the long term?

Build human capital, especially through investment in the

early years

Make it easier and more predictable for the private

sector to invest

Close the infrastructure gap

How is the economy doing?
What to expect in 2018?
Closing the gap
Indonesia’s current public capital stock per person is low compared
to both emerging and advanced economies…
Capital stock per person, constant 2010 USD

30,000 28,181

25,000

20,000

15,000
9,629
10,000

3,811
5,000

0
Advanced Emerging Indonesia
Source: World Bank staff calculations using IMF (2017) data.
Note: 2015 estimates. Unweighted averages were computed for 14
advanced economies and 21 emerging economies. 20
… and even if Government manages to collect more, public
resources are not sufficient to meet infrastructure needs
USD billions
1,600 1,500
1,400
1,200
1,000
800
600
390 415
400
200 74 113
0
Capital expenditures Total infrastructure Total infrastructure RPJMN target for Estimated gap with
(2012-16) spending (2015-19) if spending (2015-19) if infrastructure spending other emerging
1/5 of all new all new Government (2015-19) economies (stock)
Government revenues revenues in 2018-19
in 2018-19 allocated to allocated to
infrastructure infrastructure
Source: World Bank staff estimates using Central
Government audited accounts and projections; World
Bank staff calculations using IMF (2017) data.
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To close the gap, private investment in infrastructure will need to
ramp up significantly
Share of total investment in core infrastructure, percent

Central Government Subnational Government SOEs Private

100 9
90 19
80 37
33
70
60 45
50 22
40 31
30 19
21
20
10 28 22
15
0
Realized infrastructure Realized infrastructure RPJMN target scenario,
investment, 2006-2010 investment, 2011-2015 2015-2019

Source: Audited accounts of Central and Subnational Governments, SOE balance sheets, World
Bank Private Participation in Infrastructure (PPI) database.
Notes: Uses methodology from World Bank (2015) and AIPEG (2017) for 2013-2016 SOE
estimates. For subnational government, 2015-2016 data refers to budgeted amounts. 22
What will it take to close the gap?

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Mobilizing the private sector for infrastructure development
requires addressing four major challenges
More certainty for laws and regulations

Difficulties in identifying, selecting and preparing viable projects

SOE dominance hinders private sector interest

Limited long-term domestic currency financing for infrastructure

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1. More certainty in laws and regulations  fewer delays and
cancellations
E.g. In the water sector, average tariffs paid by consumers is USD 0.28 per m3 – partly explains
Mispricing of insufficient interest of private sector operators
tariffs,
uncertainty
regarding
tariff setting
and revisions Overlapping, often
E.g. in February 2015 the Constitutional Court invoked Law 07/2004 on
inconsistent
Water Resources due to a broad reading of Article 33  Implication:
regulations (~158
Private sector not allowed to operate water distribution networks
laws and regulations
related to PPP)
Delays in
obtaining
permits and
approvals
Interviews with investors indicate that the permits regime is still
cumbersome despite efforts to establish a one-stop integrated
services center and a fast-track online system

25
2. Challenges in identifying, selecting and preparing viable
projects  lack of ‘bankable’ projects for the market
Bappenas MoF decides Trilateral meeting
screens which projects between
New project
project receive viability Bappenas, MoF
proposal
proposals and gap funding and and GCA to
originates from
Outline endorses review and
GCA
Business financing finalize budget
Cases (OBCs) schemes submission

Ability for GCA to Due to staffing Coordination could

conduct rigorous and budget be enhanced among
assessment could be constraints, mechanisms to
improved Bappenas cannot allocate projects to
make up for different Government
Procurement relative lack of support instruments
regulations and project (viability gap,
remuneration caps preparation by availability payments
prevent GCAs from GCAs etc.)
hiring qualified
external consultants
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 3. SOEs play an important role in boosting infrastructure stock, but
their dominance also crowds out private sector investment
IDR trillions, LHS; Percent of GDP, RHS
Revenues Profits • SOEs account for about a third of core
Revenues (% GDP) Profits (% GDP) infrastructure spending, but have not always
2,500 25 delivered infrastructure efficiently: declining
revenues and flat profits as percent of GDP
2,000 20 • Crowding out:
• Electricity – Only 9 percent of installed
1,500 15 generation capacity by private power utilities
and captive generation
1,000 10
• Transport – Private sector only accounts for 33
percent in total length of completed roads,
500 5 less than 15 percent of roads under
construction/awarded/assigned
0 0
• SOEs benefit from direct assignment and access to
cheaper sources of financing
Source: Ministry of SOEs and press reports, World
Bank staff calculations.
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 4. Small, concentrated banking sector limits availability of
infrastructure financing…
2.00 Ratio of banking assets to GDP Share of total banking assets, %
1.75 CIMB
1.80
Niaga, 4
BTN, 3 Mandiri,
1.60 15
BII/Maybank
1.40 ,3
1.20 1.14
1.07
1.00 0.92 0.96
0.81
0.80 Other BRI, 14
(>IDR
0.60 0.52 50tr), 23
0.40
0.20
0.00 BCA, 11

Other (IDR
10-50tr), Other (IDR1- BNI, 8
16 10tr), 3
Source: World Bank, IMF.

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 4. …and domestic institutional investors are mostly focused on
short-term gains
Share of pension fund investments, percent Land and Other
buildings 35
5.6

Deposit and
savings
Shares 28.1
12.1

Mutual fund
6.0

Government
bonds
23.2 Bond and sukuk
21.5
Source: OJK (July 2017), World Bank staff calculations.
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Now is the time to act to attract more private investments in
infrastructure

One-belt-one road: USD275 billion in South and SE Asia

Global interest rates going up as monetary policy is finally

heading towards normalization

Low levels of indebtedness create space for prudent expansion of

PPP guarantees

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TERIMA THANK YOU
KASIH
 While improving recently, quality of infrastructure is perceived to be
lower than in ASEAN peers
(indices of infrastructure quality; 1(worst) to 7(best) points)
6 Indonesia (2016-17) Indonesia (2017-18) ASEAN

5.5

4.5

3.5

3
Overall Roads Railroad Ports Air transport Electricity supply
infrastructure
Source: World Bank staff calculations using World Economic Forum Global Competitiveness Report data
Note: ASEAN is the unweighted average of Malaysia, Singapore, Thailand and Philippines; BRICS is the unweighted
average of Brazil, Russia, India, China, South Africa

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