www.worldbank.org/id www.worldbank.org/indonesia

Indonesia Economic Quarterly: December 2012Policies in focus

Ndiame DiopLead Economist & Economic Advisor, IndonesiaWorld Bank

December 18, 2012World Bank and The Habibie Center Joint Launch Event Intercontinental Hotel, Jakarta

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OutlinePolicies in focus

Global growth remains weak and the outlook is still uncertain

Indonesia’s economy has performed strongly so far, despite showing some strains

Economic performance in 2013 should be solid but will depend on policies:

To respond quickly and effectively to any external shocks

To support domestic investment and growth

To ensure that the benefits of growth are shared

THE GLOBAL ECONOMY remains weak

4

Global economic conditions remain subdued…

Source: CEIC and World Bank

…growth in the US and China stabilized in Q3 but Japan and Europe contracted

-2

0

2

4

6

8

10

12

-2

0

2

4

6

8

10

12

Euro area US Japan China IndonesiaMajor Trading

Partners

2010 2011 2012f 2013f

Real GDP growth, percent Real GDP growth, percent

5

International financial market conditions have improved since mid-year…helped by loose monetary policy in the US, Japan and Euro Area

Source: CBOE, MSCI

0

25

50

75

100

125

150

175

50

75

100

125

150

Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12

Emerging market equities (LHS)

Developed market (LHS)

Index (1 Nov 2009=100) VIX index

VIX index (RHS)

6

Commodity prices remain under pressure

Note: Australian coal, World Bank global natural gas index, Malaysia palm oil, Singapore-traded rubber, London-traded copper, Brent crude; Source: World Bank and staff calculations

Since mid-2011, with rubber, coal and palm oil seeing marked declines

40

100

160

220

280

40

100

160

220

280

Nov-07 Nov-08 Nov-09 Nov-10 Nov-11 Nov-12

Coal Natural gas Palm oilRubber Copper Crude oil

Index Nov 2007=100 Index Nov 2007=100

0

100

200

300

400

500

600

700

0

100

200

300

400

500

600

700

Nov-00 Nov-02 Nov-04 Nov-06 Nov-08 Nov-10 Nov-12

Index Jan 2000 = 100 Index Jan 2000 = 100Indonesia's Major

Export Commodities

Food

Metals and Minerals

Energy

Although commodity prices more broadly remain high Price levels in nominal USD terms are still elevated on a longer view

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International USD commodity prices

Note: Price index of Indonesia’s Major Export Commodities is weighted by export shares of Coal, Gas, Palm Oil, Crude Oil, Copper and Rubber, which represent 42% of Indonesia's exportsSource: World Bank and CEIC

THE INDONESIAN ECONOMY was a solid performer in 2012 but is showing some strains

8

9

Economic growth has been supported by strong domestic demand

Source: BPS via CEIC and World Bank

…particularly private consumption and investment

-4

-2

0

2

4

6

8

10

-4

-2

0

2

4

6

8

10

Sep-09 Jun-10 Mar-11 Dec-11 Sep-12

Private cons. Gov cons. InvestmentNet Exports Discrepancy GDP

Percent Percent

Year on year GDP contributions

10

However, stock levels appear to have been building

Source: BPS and World Bank staff calculations

National accounts data show an unusual degree of inventory accumulation

-10

0

10

20

30

-4

0

4

8

12

Sep-02 Sep-04 Sep-06 Sep-08 Sep-10 Sep-12

4-quarter sum of change in stocks (RHS)

Change in stocks (LHS)

Percent of GDP Percent of GDP

11

Nominal public revenue growth has slowed

Note: *2012 data are October to October.

Source: MoF and World Bank staff calculations

Nominal growth in public revenues – Total, Tax Revenue (TR), and Non-Tax Revenue (NTR)

…with VAT revenue growth still robust but non-tax revenue growth declining

-20

0

20

40

-20

0

20

40

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012*

PercentPercent

TR-Income (non oil & gas) TR-Income oil & gasTR-VAT TR-TradeTR-Others NTR-Oil&gasNTR-Non oil&gas NTR-OthersTotal

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A trade shock has erased the trade surplus

Note: * 2012 is comparison between January–October sum and the same period in 2011. Source: BPS

Exports contracted in 2012 through October, while import growth continued

28.5 25.1 28.039.7 39.6

8.219.7 22.2 26.1

-0.5

-40

-20

0

20

40

60

80

-40

-20

0

20

40

60

80

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012*

USD billionPercentTrade balance (RHS) Export growth Import growth

13

Overall balance of payments flows returned to a small surplus in Q3

Source: BI

…but the basic balance remains negative due to the current account deficit

-12

-8

-4

0

4

8

12

16

-12

-8

-4

0

4

8

12

16

Sep-09 Sep-10 Sep-11 Sep-12

Net direct investment Net portfolio Net other capitalCurrent account Overall balance Basic balance

USD billion USD billion

14

Our baseline projection continues to be for solid growth in 2013 Thanks to still-solid domestic demand and a slight external growth recovery

2010 2011 2012 2013

Real GDP growth (percent) 6.2 6.5 6.1 6.3

CPI inflation (percent)* 6.3 4.1 4.4 5.4

Budget balance (percent of GDP)** -0.6 -1.1 -2.2 -1.7

Major trading partner growth (percent) 6.8 3.6 3.3 3.6

Notes: * CPI inflation is Q4 on Q4. World Bank projections except for **Budget balance, which is Government revised Budget (2012) and approved Budget (2013)

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But there are external risks to the outlook……and these are mostly to the downside

Euro Area: ECB action has reduced financial crisis risk but not eliminated

risk of renewed intensification of sovereign funding and banking sector challenges

US “fiscal cliff”: World Bank assumes 1 percent fiscal drag for the US in 2013... …but “worst case” could shave 4 to 5 percent off US GDP in

2013

China: World Bank (October 2012) projects 7.7 percent growth in 2012

and 8.1 percent in 2013 Risk of further slowdown

Additional uncertainty: Impact of renewed global monetary easing on portfolio flows

and commodity prices

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Projections assume that strong investment growth will continue

Note: Price index of Indonesia’s Major Export Commodities is weighted by export shares of Coal, Gas, Palm Oil, Crude Oil, Copper and Rubber which represent 42% of Indonesia's exports

Source: World Bank and CEIC

…but there is no room for complacency on this given commodity prices and exports

-12

-6

0

6

12

18

-60

-30

0

30

60

90

Nov-04 Nov-06 Nov-08 Nov-10 Nov-12

PercentPercent

Investment (RHS)

Exports

Indonesia commodity export price basket

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FDI has held up well and maintaining it will be crucial

Source: BKPM

…for external financing and for investment growth

0

2

4

6

8

0

2

4

6

8

Sep-09 Sep-10 Sep-11 Sep-12

Primary Sector Secondary Sector

Tertiary Sector Mining

Total

USD billion USD billion

POLICIES WILL BE IN FOCUS in 2013 and will need to guard against the multiple risks to growth

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Regulatory Policies:

Reducing further uncertainties in business and investment regulations will help investment and support growth

Labor Policies:

A more comprehensive approach to balancing the interests of all stakeholders in the labor market

Public Spending:

Improving the quality of spending across functional and geographical areas

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Priority areas for policy to maintain growth in 2013…emphasizing clarity, inclusiveness and quality

20

Labor market policies

Source: World Bank Doing Business, 2013, and press and regulations for 2013 Note: Indonesia minimum wages based onDKI Jakarta (assuming USD exchange rate in 2013 is IDR 9,500); other countries based on the minimum wage in major citiesor the capital region. These wages are not adjusted for productivity differences across countries

Minimum wages

Minimum wage levels in 2013 may be a concern and the process could be improved

0

50

100

150

200

250

300

0

50

100

150

200

250

300

2007 2008 2009 2010 2011 2012 2013

USDUSD

China Indonesia

Malaysia

Philippines

ThailandVietnam

21

Improving spending quality is a key policy priority, across functions…

Source: MoF and World Bank staff calculations

Strong increase in capital spending is positive but subsidy spending is a challenge

0

100

200

300

400

0

100

200

300

400

Personnel Material Capital Social Subsidy

IDR TrillionIDR Trillion2011 - Outcome 2012 WB Projection 2013 Budget

22

…and improving spending results across space is also a challenge

Notes: Index varies from 0 to 1 with higher value indicating higher supply readinessSource: PODES (Potensi Desa) 2011 and the Village Infrastructure Census and Report

The geographical dimension (see VIC results on service delivery across Indonesia)

Composite Index of Education Supply Readiness

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Indonesia’s policy choices are critical in maintaining economic progress Summary

To recap: Indonesia’s policies will be in focus in 2013

Indonesia has already equipped itself with sound crisis responses mechanisms but further efforts may be needed

In light of the rapid transformation of the demand side of the economy, facilitating the supply response will be key

Investment remains strong but the tailwinds are weakening

Keeping investment growth going requires: …further accelerating investments by reducing regulatory

uncertainties for business and enhancing the policy framework… …finding an inclusive and comprehensive approach to labor market

policies …and enhancing the quality of public spending to boosting public

investment in growth-enhancing areas and social protection.

www.worldbank.org/id www.worldbank.org/indonesia

Thank you

Indonesia Economic Quarterly December 2012 Policies in focus also includes special topics on: Minimum wages Jakarta’s flood risks and mitigation efforts Indonesia’s natural disaster reconstruction experience Results of the recent Village Infrastructure Census