June 15, 2017

Indonesia Economic Quarterly

June 2017

Upgraded

Hans Anand Beck

Acting Lead Economist, Indonesia

S&P upgrade acknowledged strong economic fundamentals

and management.

• S&P returned Indonesia to investment grade credit rating after

20 years, citing strong (fiscal) fundamentals

• Global growth and trade is firming but remains below pre-GFC

levels.

2017 economic performance continues to be broadly positive,

with some temporary help from commodities.

• Q1 2017 Quarterly GDP growth rose on a rebound in

government consumption and surging manufacturing and

commodity exports.

• Signs of a sustained turnaround in investment and credit

growth.

• Revenues continued their strong start to the year supported by

commodities, creating space for productive public spending.

• Risks remain tilted to the downside, including resistance to

structural reform efforts.

Investing in the future is critical - to leverage the upgrade,

reduce commodity dependence, and boost growth potential

• There is evidence that reducing Indonesia’s negative

investment list will boost FDI

• Invest in early childhood development to address inequality

and increase productivity

Key Takeaways

3

Invest in the future to leverage the upgrade, reduce commodity

dependence and boost growth potential

2017 positive performance continues, with temporary help from

commodities

S&P recognized strong policy and fundamentals

4

S&P recognized Indonesia’s strong economic fundamentals,

returning it’s sovereign rating to Investment grade after 20 years.

“Indonesia has exhibited effective policymaking in recent

years to promote sustainable public finances and balanced

economic growth…”

“Indonesian authorities have taken effective expenditure

and revenue measures to stabilize the country’s public

finances despite the terms of trade shock…”

“…Indonesia's increased focus on realistic budgeting has

reduced likelihood that shortfall in future revenue would

widen general government deficit significantly.”

- Standard & Poor’s

BB+ BBB-

5

Source: BI: BPS; EAP Economic Update Report ; MoF; World Bank staff calculations

Note: e stands for estimate; f stands for forecast; *estimated figure

While Indonesia’s fundamentals are strong, Indonesia

will still need to compete….

2015 2016 2017fPhilippines

2016e

Vietnam

2016e

Real GDP (Annual percent change) 4.9 5 5.2 6.8 6.2

Consumer price

index(Annual percent change) 6.4 3.5 4.3 1.8 2.7

Current account

balance(Percent of GDP) -2.0 -1.8 -1.8 0.2 3

Budget balance (Percent of GDP) -2.6 -2.5 -2.6 -2.4 -6.5

Debt (Percent of GDP) 27.4 27.9* 29.0 42.1 62.1

S&P Rating

(2017)BBB- BBB BB-

6

Source: World Bank Global Economic Prospects June 2017

growth yoy, percent

…..as the global economy begins to pick up again.

-3

-2

-1

0

1

2

3

4

5

2004 2006 2008 2010 2012 2014 2016(E)

2018(F)

-20

-15

-10

-5

0

5

10

15

20

25

Feb-04 Feb-07 Feb-10 Feb-13 Feb-16

Values Volumes

7

Invest in the future to leverage the upgrade, reduce commodity

dependence and boost growth potential

S&P recognized strong policy and fundamentals

2017 positive performance continues, with temporary help from

commodities

8

Following the first increase in growth rates in 5 years in

2016, the trend continued in Q1 2017.

-2

0

2

4

6

8

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

Private consumption Government consumption

Investment Net exports

Stat. discrepancy* GDP

Contributions to real GDP growth yoy, percentage points

Source: BPS; World Bank staff calculations

There are signs of a more sustained pick up in

investment

9

2

4

6

8

10

12

14

16

-50

-40

-30

-20

-10

0

10

20

Apr-15 Oct-15 Apr-16 Oct-16 Apr-17

Cement sales

Commercial Vehicle sales

Capital goods import growth

Investment credit growth (RHS)

3mma growth yoy, percent, LHS; growth yoy, percent, RHS

Source: BI; BPS; World Bank staff calculations

Note: The nominal capital goods imports is measured in percent yoy terms. All

other LHS variables are measured in 3mma percent yoy terms.

And signs of a a pick up in broad credit growth

10

2

4

6

8

10

12

14

16

18

Jan-15 Aug-15 Mar-16 Oct-16 May-17

Deposit growth

Credit growth

7 Day reverse repo rate

growth yoy, percent

Source: BI; World Bank staff calculations

11

Industrial Production and manufacturing export growth is

firming up, although commodities are also supporting

exports.

index, LHS; growth yoy, percent, RHS

Industrial Production Index and PMI

-30

-20

-10

0

10

20

30

Mar-15 Mar-16 Mar-17

Oil and gas CoalMining Palm oilRubber ManufacturingOther ServicesTotal goods exports

Exports growth

growth yoy, percent

Source: BPS; Nikkei/Markit Source: CEIC and BI; World Bank staff calculation

-2

0

2

4

6

8

10

12

46

47

48

49

50

51

52

53

May-15 Nov-15 May-16 Nov-16 May-17

Manufacturing Purchasing

Managers' Index (PMI)

Growth of Industrial Production Index

(RHS)

12

Commodities are also supporting a good start to the

year for revenue collection…

Contributions to growth yoy, percentage points

Non oil and gas income tax

Oil and gas related revenues

VAT/LGST

Excises and other taxes

Revenue

growth

Source: Ministry of Finance; World Bank staff calculations

Total revenue collection increased by 17.8 percent yoy

13.6

-6.5

-6.9

17.8

-20

-10

0

10

20

Jan-May 2014 Jan-May 2015 Jan-May 2016 Jan-May 2017

13

Source: Ministry of Finance; World Bank staff calculations

…providing space to spend, especially in more

productive areas such as capital.

January-May actual expenditure growth yoy, percent

15

79

63

(32)

1.4 8.0

14.4

(12.8)

(80)

(60)

(40)

(20)

-

20

40

60

80

100

Personnel Material Capital Energy Subsidies

2015 2016 2017

14

Support from commodities is forecast to be transitory....The Net Trade-weighted Price Index

growth yoy, percent

70

90

110

130

150

Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18

2015

20162017

2018

Source: BPS; World Bank; World Bank staff

calculations

Note: Net trade-weighted price index is constructed

over Indonesia’s six major export commodities.

…and risks to growth remain tilted to the downside.

15

External risks

Domestic risks

Upside Downside

16

S&P recognized strong policy and fundamentals

2017 positive performance continues, with temporary help from

commodities

Invest in the future to leverage the upgrade, reduce commodity

dependence and boost growth potential

17

Lifting FDI restrictions can boost physical capital and hence

Indonesia’s growth potential

Inverse relationship between FDI investment policy

restrictiveness and FDI inflows

FDI stock measured in current USD and FDI regulatory index

Source: World Bank staff calculations on the basis of UNCTAD,

World Development Indicators and OECD data (online dataset

http://stats.oecd.org/).

18

And Investment in early childhood development can

create the human capital the economy needs to grow.

Association between child stunting (Height-for-age Z score) and

fluid intelligence (W Z-score) in later life, Indonesia

Source: Giles, Satriawan, and Witoelar, 2017 (based on IFLS data)

Notes: “Fluid intelligence” assesses respondents´ general ability to think abstractly, reason, identify patterns, solve problems, and

discern relationships. The Z-score is a standard measure that expresses each value by the number of standard deviations it is from

the reference mean. The W-score is the score obtained from an adaptive number series test of fluid intelligence, which was normed

and extensively pre-tested for the 2014 round of the IFLS. It was standardized into a Z-score for the purposes of this analysis.

19

…while reducing stunting also tackles a major source of

inequality.

41

48

3942

3739

3432

30 29

0

10

20

30

40

50

60

2007 2013

Stunting Incidence(percent of under-5 population)

Poorest Second Middle Fourth Richest

Stunting affects everyone, but is worse for the

poor

In early childhood, stunting leads to increased

risk of death and illness

In school-age, stunting leads to loss of IQ and

poor learning outcomes

In adulthood, stunting leads to increased risk

of NCDs and lower income levels

Source: Riskesdas

Terima Kasih

20

As global trade has rebounded, so has Indonesia’s

trade performance

21

Source: BPS; World Bank staff calculation Source: BPS; World Bank staff calculation

-10

-8

-6

-4

-2

0

2

4

6

8

10

Mar-14 Sep-15 Mar-17

Exports

Services

Goods: Oil & Gas

Goods: Non-Oil & Gas

Export of Goods and Services

-10

-8

-6

-4

-2

0

2

4

6

8

10

Mar-14 Sep-15 Mar-17

ImportsServices

Goods: Oil & Gas

Goods: Non-Oil & Gas

Import of Goods and Services

Contributions to real growth yoy, percentage points