Ecsos.Update.Dec.2008.Eng

Half-yearly Indonesia EconomicUpdate and OutlookWilliam E. WallaceLead Economist, World Bank Indonesia

10 December 2008

Overview

The Indonesian economy coming in strong…- Growth at post-crisis highs- Strong fiscal position- Inflation waning- Banking sector ratios are healthy

Turmoil in global finance has affected Indonesia’s markets

Global developments cloud Indonesia’s economic outlook- Drop in commodity prices hitting export values, incomes and

investment- Slower global growth dragging down manufactured exports- Tighter domestic credit pressures domestic demand

Overview

Commodity prices boom…and bust

Int’l financial market turmoil

Global economic downturn

Impacts domestic economy

IDN financial markets

2007 Q3 2008 Q1 2008 Q3 2008 Q4 2009 H1 →Stage 1 ↔ Stage 2 ↔ Stage 3

Approaching the crisis:Economy coming in strong

Volatile & weaker Indo. financial mkts

Commodity prices boom

International financial market turmoil


Impacts domestic real economy

2007 Q3 2008 Q1 2008 Q3 2008 Q4 2009 H1

Commodity prices burst

Higher export prices, stronger terms of trade

Higher inflation

Lower poverty

Share market

Supports currency

Real wages

Invest’t

Employ’t

Incomes

Higher poverty

Slower decline in poverty

Export prices , terms of trade weaken

Approaching the crisis:The commodity boom supported growth

Sources: BPS and World Bank

Exports have grown very strongly…

(year-on-year percentage change)

As Indonesia’s export prices rose with global commodity prices… (Index, Jan 2005 = 100)

100

130

160

190

220

250

280

310

2005 2006 2007 2008 2009 2010

Int'l energy (USD)

Int'l non-energy (USD)

Indonesian export prices

(IDR)

0

5

10

15

20

25

30

2004 2005 2006 2007 2008*

Manufactured ProductsMining & MineralAgriculture & ForestryOil and Gas

%

Approaching the crisis:Growth coming in strong…

Strongest GDP growth post-crisis in 2007 and 2008, bringing average per capita incomes to 20 percent above pre-crisis levels

Only major economy in the region not to slow significantly in 2008 to date


4.7% 5.4%3.8% 4.4% 4.7% 5.0% 5.7%

6.3%6.3%0.8%-13.1%

5.5%

-16%

-12%

-8%

-4%

0%

4%

8%

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

*

80

90

100

110

120

Real GDP growth rate (LHS)GDP per capita index (RHS)

* first 3 quarters

Approaching the crisis:…and has been broadly based

Investment growth has been strong

Net exports made a positive contribution, despite the slow-down in global growth

There has been a rising contribution from government spending


-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

2005 2006 2007 2008

Private consumption Gov't consumptionInvestment Statistical discrepancyNet exports

(Year-on-year growthand contributions)

Approaching the crisis:Healthy public finances

Government deficits remains small

(percent of GDP)

And the debt ratio continues to fall dramatically

(percent of GDP)

Sources: Ministry of Finance, IMF, BPS and World Bank

9%

12%

15%

18%

21%

24%

2000 2002 2004 2006 2008*-6%

-3%

0%

3%

6%

9%

Realized deficit(RHS)

Proposed deficit(RHS)

Expenditure(LHS)

Revenue(LHS)

Balance(RHS)

0

20

40

60

80

100

2000 2001 2002 2003 2004 2005 2006 2007 2008

IndonesiaPhilippines MalaysiaThailand S. KoreaChina

%

Approaching the crisis:The rise in commodity prices fed inflation






2007 Q3 2008 Q1 2008 Q3 2008 Q4 2009 H1



Higher inflation

Lower poverty

Share market

Supports currency

Real wages

Invest’t

Employ’t

Incomes

Higher poverty



Approaching the crisis:Inflation, a concern early this year, is waning

However, BI responded aggressively

But concern has shifted to the real economy, motivating December’s rate cut (year-on-year)

With higher food prices, poor households’ cost of living increased faster than the average inflation

(year-on-year)


0

6

12

18

24

2004 2005 2006 2007 2008

Food

Headline

% Poverty consumption

basket*

* World Bank estimate

0

4

8

12

16

20

J an-06 Oct-06 J ul-07 Apr-08

%

CPI inflation

BI policy rate

Approaching the crisis:Inflation, a concern early this year, is waning

Upstream prices have now begun to fall

(year-on-year)

Feeding into lower inflation expectations (year-on-year)

Sources: BPS, BI and World Bank

0

6

12

18

24

30

36

2004 2005 2006 2007 2008

CPI (headline)

Wholesale Price Index (total)

Source:

%

0

3

6

9

12

15

18

2006 2007 2008154

160

166

172

178

184

190

CPI Inflation(year on year; LHS)

Expected inflation(6 months ahead; RHS)

% Index

Approaching the crisis:With a strong economy, poverty has fallen






2007 Q3 2008 Q1 2008 Q3 2008 Q4 2009 H1



Higher inflation

Lower poverty

Share market

Supports currency

Real wages

Invest’t

Employ’t

Incomes

Higher poverty



Approaching the crisis:With a strong economy, poverty has fallen

In rural areas, wages have grown more… (year-on-year growth)


…and poverty rates fallen faster than in urban areas

-18%

-12%

-6%

0%

6%

12%

2001

2002

2003

2004

Nov-

05

Feb-

06

Aug-

06

Feb-

07

Aug-

07

Feb-

08

RuralUrban

Total

Total Urban RuralActual:

1999 23.4 19.4 26.02002 18.2 14.5 21.12005 5.7 16.0 11.7 20.02007 6.3 16.6 12.5 20.42008 6.1 15.4 11.7 18.9

Forecast:2009 6.0 13.1

4.4 13.8 11.4 16.14.1 13.9 11.4 16.2

2010 6.4 11.75.9 12.9 10.2 15.55.7 13.1 10.3 15.6

Poverty rates (%):GDP growth

The global financial market turmoilImpacting Indonesian financial markets…




2007 Q3 2008 Q1 2008 Q3 2008 Q4 2009 H1



Higher inflation


Lower poverty

Supports Indonesia’s real economy

IDRweaker

Stocks fall

Slower fall in poverty

Invest’t

IncomeEmploy-ment

Credit tighter

Higher inflation

Yields on

gov’t debt ↑

Supports Indon. financial markets

The global financial market turmoilImpacting Indonesian financial markets…

Sharp IDR depreciation and greater volatility after an extended period of stability

Stock market fallen, along with world markets

(USD Index, 1 Jan-08 = 100)

0

20

40

60

80

100

120

J an Apr J ul Oct

Indonesia

Developing economiesaverage

Index

Sources: CEIC and World Bank

6,000

8,000

10,000

12,000

14,000

16,000

2006 2007 2008

EUR

USD

AUD

? Appreciate

? Depreciate

The global financial market turmoil …especially government debt market

Government bond yields and spreads sharply higher, and rose more than elsewhere in the region

-200

0

200

400

600

800

1000

1200

2005 2006 2007 2008

Indonesia stripped spreads (USD bonds)

Indonesian spreads less E. Asia

bps

Sources: IDX, CEIC, JP Morgan, World Bank

(Indonesian gov’t USD bonds)(Indonesian gov’t IDR bonds)

0

3

6

9

12

15

18

21

2007 2008

Indonesia

Philippines

Thailand

%

05-Aug

The global economic downturnSlower global growth will impact Indonesia

Higher inflation




2007 Q3 2008 Q1 2008 Q3 2008 Q4 2009 H1



Higher inflation

Lower poverty




IncomeEmploy-ment

IDRweaker

Stocks fall

Invest’t

Higher inflation

Weaker export demand, especially manufactures

The global economic downturnSharply lower global GDP growth


0

1

2

3

4

5

6

7

8

2000 2002 2004 2006 2008 2010

%

High- income OECD

Developing economies

Previous forecasts

Global growth prospects have been revised sharply lower Q4 slowdown looks sharper

than expected

Will impact manufacturing most Lower profits, employment,

investment and FDI Some offset from the lower

IDR

(yearly ave. percentage change)

Impact of the global downturnSharply lower global commodity priceswill lower Indonesia’s terms of trade

Sources: World Bank and BPS

Export prices will fall with global commodity prices… Int’l price forecasts suggest

Indonesia’s export pricesfall ~15% (Index, Jan 2005 = 100)

…reversing recent improvements in Indonesia’s terms of trade Some offset from weaker

IDR

(Index, Jan 2005 = 100)

80

90

100

110

120

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Index

100

130

160

190

220

250

280

310

2005 2006 2007 2008 2009 2010

Int'l energy (USD)

Int'l non-energy (USD)

Indonesian export prices

(IDR)

Index

? ?

Impact of the downturnSlower growth in Indonesia…

Growth slowing in 2009 before recovering in 2010

Significant downside risks: Commodity prices falling faster and further, and Q3 & Q4 2008 growth and indicators in most economiesmuch weaker than expected Sources: BPS and World Bank

4.7% 5.4%3.8% 4.4% 4.7% 5.0%

5.9%4.4%

5.7%

6.1%6.3%0.8%-13.1%

5.5%

-15%

-10%

-5%

0%

5%

10%

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

(f)

2009

(f)

2010

(f)

80

90

100

110

120

130

Real GDP growth rate (LHS)GDP per capita index (RHS)

Impact of the downturn…especially in externally-oriented industries


Sectoral output

(year average growth) Manufactures, and cash

crops important recent drivers of growth, will be hit by lower external demand and prices

Conventional agriculture and services expected to do better (and the rainy season has started well)

0%

2%

4%

6%

8%

10%

2004 2005 2006 2007 2008 2009 2010

AgricultureIndustryServices

Manufacturing

Impact of the downturnBut inflation should continue slowing


One positive from the downturn : lower inflation Lower commodity

prices more than offset the IDR’s depreciation

Food & basic goods prices should fall most, benefiting poorer households

0

6

12

18

24

2004 2005 2006 2007 2008 2009 2010

Headline

% Poverty consumption

basket*

* World Bank estimate

Inflation for the average andfor the poor consumer

(year-on-year)

Impact of the downturnSlower poverty reduction in 2009

More people remain poor: 1.6 million more in 20092.8 million more in 2010


Total Urban RuralActual:

1999 23.4 19.4 26.02002 18.2 14.5 21.12005 5.7 16.0 11.7 20.02007 6.3 16.6 12.5 20.42008 6.1 15.4 11.7 18.9

Forecast:2009 6.0 13.1

4.4 13.8 11.4 16.14.1 13.9 11.4 16.2

2010 6.4 11.75.9 12.9 10.2 15.55.7 13.1 10.3 15.6

Poverty rates (%):GDP growth

Indonesia’s pro-active policy responseAddressing the immediate crisis Supporting the financial sector:

Injecting liquidity into inter-bank market, cutting interest rates

Increased flexibility on deposit insurance,including raising limit to IDR 2 billion

Regulation to allow intervention in troubled financial institutions

Using public finances to support financial markets & economic activity: Target deficit of 1.0% GDP in 2009, reducing financing needs Cut in tax rates for corporations and individuals coming in

2009 Sustaining social and infrastructure spending Lower fuel prices with a linkage of diesel and gasoline prices

to market prices proposed

Indonesia’s policy responsePositioning for a strong, sustainable recovery

Enhance the financial system’s robustness Improve banking and capital market supervision

Social policy Put monitoring program in place -- Given the degree of

uncertainty and understanding improved monitoring will be needed. A monitoring system could build on the experience from the crisis updated for new institutions and technologies

Developed response mechanisms that build on existing programs to provide targeted income and job support in rural and urban areas (building on PNPM, BLT, PKH, etc.)

Invest in infrastructure Increase Indonesia’s competitiveness (transportation and

energy) Stimulate economic activity and employment

Half-yearly Indonesia EconomicUpdate and OutlookWilliam E. WallaceLead Economist, World Bank Indonesia

10 December 2008

The global financial & economic turmoilImpacting Indonesian financial markets…




2007 Q3 2008 Q1 2008 Q3 2008 Q4 2009 H1



Higher inflation


Lower poverty


IDRweaker

Stocks fall


Invest’t

IncomeEmploy-ment

Credit tighter

Higher inflation

Yields on

gov’t debt ↑


Overview






2007 Q3 2008 Q1 2008 Q3 2008 Q4 2009 H1



Higher inflation



Lower poverty



Ecsos.Update.Dec.2008.Eng

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