Jim Brumby, Lead Economist and Sector Manager

World Bank Indonesia Paramadina Public Policy Institute, October 4, 2013

OCTOBER 2013 IEQ LAUNCH PRESENTATION

More subdued growth outlook, resulting from two major shocks to the economy and ongoing adjustments

Developments in Q3 show adjustments are well underway but highlight Indonesia’s macro vulnerabilities

The role of good policies in this time of continuing adjustment

-2

0

2

4

6

8

10

12Quarterly merchandise trade balance, USD billion

Source: BI

FIRST SHOCK: TRADE SHOCK, SINCE 2011…

…AS TERMS OF TRADE HAVE WEAKENED

-100

0

100

200

300

400

500

600

Jan-00 Jan-03 Jan-06 Jan-09 Jan-12

US Dollar price index, 2000 average = 100

Source: World Bank

Indonesia’s major export commodities

Brent crude oil

PRESSURING THE OVERALL CURRENT ACCOUNT

-15

-10

-5

0

5

10

15

Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13

Goods trade balance Services trade balanceIncome balance Current transfersCurrent account balance

USD billion

Source: BI

SECOND SHOCK: FINANCING COSTS

0

1

2

3

4

5

6

7

8

Sep-09 Apr-10 Nov-10 Jun-11 Jan-12 Aug-12 Mar-13

10-year US Treasury note

Emerging market sovereign USD bonds (EMBIG) Indonesia sovereign USD bonds (EMBIG sub-index)

Source: JP Morgan

Yield, percent

OCTOBER 2013 IEQ LAUNCH PRESENTATION

More subdued growth outlook, resulting from two major shocks to the economy and ongoing adjustments

Developments in Q3 show adjustments are well underway but highlight Indonesia’s macro vulnerabilities

The role of good policies in this time of continuing adjustment

CURRENCY: RUPIAH ADJUSTING

70

75

80

85

90

95

100

105

110

Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 Sep-12 Sep-13

USD/IDR

Trade-weighted Inflation-adjusted trade-weighted

Index, 2010 average = 100

Source: World Bank

MONETARY CONDITIONS: TIGHTENING BI Overnight deposit facility rate Percent, year-on-year

Source: BI

FASBI rate

New loan approvals (RHS)

-100

-50

0

50

100

150

200

0

2

4

6

8

10

Jan-06 Dec-07 Dec-09 Dec-11

DOMESTIC DEMAND: SOFTENING Growth yoy, percent

Source: BPS; World Bank staff calculations

Real domestic demand

Imports (US Dollar, RHS)

-60

-40

-20

0

20

40

60

80

100

0

1

2

3

4

5

6

7

8

9

Jun-05 Oct-06 Feb-08 Jul-09 Nov-10 Apr-12

INVESTMENT SLOWING DOWN

-4

0

4

8

12

16

Jun-11 Dec-11 Jun-12 Dec-12 Jun-13

Building Foreign machinery & equipForeign transportation OtherTotal

Real fixed investment growth, percent

Source: World Bank

REPEATED DOWNWARD REVISIONS

5.4

5.6

5.8

6.0

6.2

6.4

2013

2014

Average of analysts’ real GDP growth forecasts

Source: Consensus Economics

OUTLOOK: MORE ADJUSTMENT TO COME…

October IEQ Previous (July)

2011 2012 2013p 2014p 2013p 2014p

Real GDP (% change) 6.5 6.2 5.6 5.3 5.9 6.2 Consumer price index (% change) 5.4 4.3 7.3 6.7 7.2 6.7

Current account deficit (% GDP) 0.2 -2.8 -3.4 -2.6 -2.7 -2.1

Major trading partner GDP (% change) 3.6 3.4 3.4 3.9 3.4 4.0

Source: BI; BPS; Ministry of Finance; World Bank staff projections

…BUT PERSPECTIVE, PLEASE

-6

-4

-2

0

2

4

6

8

Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13

Major trading partners

Indonesia

Source: World Bank

Real GDP growth, percent

OCTOBER 2013 IEQ LAUNCH PRESENTATION

More subdued growth outlook, resulting from two major shocks to the economy and ongoing adjustments

Developments in Q3 show adjustments are well underway but highlight Indonesia’s macro vulnerabilities

The role of good policies in this time of continuing adjustment

THREE R’S FOR POLICY Responding, to facilitate more

near-term adjustment: Monetary and fiscal policy

coordination Exchange rate flexibility

Reducing uncertainty: Contingency planning Communication

Refocusing policies to lift sustainable growth rate:

August package: follow through “Quick wins” for competitiveness Fiscal sector: energy subsidies,

infrastructure spending, social protection

AUGUST PACKAGE: IMPLEMENTATION IS KEY

Relieve external balance pressures • Exports: tax relief for labor-intensive exporters • Investment: DNI; “de-bottlenecking”

Reduce inflation pressures • Food imports: move to price-based restrictions

Support employment • Bounded zones • Tax relief for qualifying firms in labor-intensive sectors • Minimum wages

MORE MEASURES TO LIFT COMPETITIVENESS Boost from weaker Rupiah provides an opportunity… …but will be wasted without a supply response “Quick wins” in trade facilitation can help

4.5

5.5

6.5

7.5

8.5

9.5

10.5

Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13

Average container dwell time at Tanjung Priok, days

Source: Jakarta International Container Terminal (JICT)

COSTS AND RISKS FROM ENERGY SUBSIDIES

Energy subsidy costs – baseline and with 10 percent IDR depreciation/oil price increase

Note: *World Bank projections Source: World Bank staff calculations

0

50

100

150

200

250

300

350

400

2009 2010 2011 2012 2013* 2014*

IDR trillion

Energy subsidies (Baseline)

Energy subsidies (10% IDR depreciation)

Energy subsidies (10% Oil price increase)

REDIRECTING SPENDING: THE OPPORTUNITY

Spending on fuel subsidies and infrastructure, percent of GDP

*World Bank projections Source: Ministry of Finance; World Bank

0

1

2

3

4

5

6

7

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013* 2014*

Fuel subsidy costTotal infrastructure spending (government, SOE and private)

MORE INFRASTRUCTURE STOCK, HIGHER INCOME

3,471

180 648

-

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

Actual 5 percent 10 percent

2011 per capita income – actual, and following higher annual infrastructure growth rate increases (USD)

Source: World Bank staff calculations

ADDRESS THE PERSISTENT

INFRASTRUCTURE GAP

REALLOCATE SPENDING TOWARDS

INFRASTRUCTURE

SUPPORT EXTERNAL

BALANCES OVER THE MEDIUM-

TERM

BREAKING INTO INFRASTRUCTURE CYCLE

• Improve domestic and external competitiveness

• Potential to re-orientate import-intensity of spending

• Enhance FDI potential (and provide more stable financing)

• Offset the rise in financing costs • Enhance sustainable growth

MAIN MESSAGES Indonesia faces greater constraints: trade shock, global liquidity The economy and policy settings are adjusting:

Base case outlook for growth moderation and gradually narrowing current account deficit

But external uncertainties still elevated and adjustment phase carries risks

Critical continued role for policy – 3 R’s: Responding, to facilitate more near-term adjustment Reducing uncertainty: contingency planning and communication to

support confidence Refocusing policy efforts on lifting competitiveness and the sustainable

growth rate • August policy package implementation • Additional “quick wins”, e.g. trade facilitation • Continuing progress on fiscal sector reforms