Ndiamé DiopLead Economist (Indonesia)

Indonesia Banking Conference

December 11, 2014

Recent developments and economic outlook for 2015 World Bank IEQ Delivering change

Introduction: delivering change

Recent economic developments: a challenging backdrop

2

Way out of subdued economic growth?

Conclusions

Near-term economic outlook: relatively subdued

3

Global economy still expected to pick-up, but at a slower pace than previously expected

World

High-income countries

Developing countries

-0.6 -0.5 -0.4 -0.3 -0.2 -0.1 0

2015 2014

Source: World bank EAP Update, October 2014; World Bank staff calculations

Difference between April 2014 and October 2014 World Bank growth projections, percentage points

4

Too soon to tell if recent oil price decline will provide decisive support to trade balance

Note: Major commodities are coal, copper, LNG, palm oil, petroleum products (including crude oil) and rubberSource: World Bank Commodity Prices and staff calculations

(US Dollar price indices, 2008=100)

Nov-08 Nov-09 Nov-10 Nov-11 Nov-12 Nov-13 Nov-140

20

40

60

80

100

120

140

Major commodity ex-ports (excl. oil)

Brent crude oil

Terms of trade for major commodities

External balance still in focus

5

Contributions to export value growth yoy, percentage points)

Source: BI; World Bank staff calculations Source: BI; World Bank staff calculations

Balance of payments main account balances, USD billion

-15

-10

-5

0

5

10

15

20

Current account Direct investment

Portfolio Other investment

Overall balance

Sep-12

Dec-12

Mar-13

Jun-13

Sep-13

Dec-13

Mar-14

Jun-14

Sep-14

-15

-10

-5

0

5

10 Non commoditiesCommoditiesExport value

Domestic and external financing conditions have tightened in recent months

Quarterly net increase in private non-financial sector credit, IDR trillion

6

Credit growth yoy, percent

Source: BI; World Bank staff calculations Source: BI; World Bank staff calculations

Sep-12 Mar-13 Sep-13 Mar-14 Sep-140

5

10

15

20

25 Bank credit

Jun-13 Dec-13 Jun-140

40,000

80,000

120,000

160,000Foreign currency debtDomestic creditDomestic bonds

Some banks have been facing funding constraints and a deterioration in asset quality

Bank profitability and asset quality, percent

7

Deposit growth yoy and time deposit interest rate, percent

Source: BI; World Bank staff calculations Source: BI; World Bank staff calculations

Aug-11 Aug-12 Aug-13 Aug-14-5

0

5

10

15

20

25

30

35

-2

0

2

4

6

8

10

Demand deposit growthTime deposit growth3-month time deposit rate (RHS)

0

1

2

3

4

5

6

Non-performing loans

Net interest margin

Weaker investment and exports drive the continued economic slowdown

8

Real annual growth rate, percent

Source: BPS; World Bank staff calculations

Fixed investment Exports-4

-2

0

2

4

6

8

10

12

14

16 2011 2014p

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

0

1

2

3

4

5

6

7

8EAP (excl. China) Indonesia

Annual growth, percent

Source: World Bank

Introduction: delivering change

Recent economic developments: a challenging backdrop

Near-term economic outlook: relatively subdued

9

Delivering change: 3 focus areas

Conclusions

Is the investment cycle turning around?

10

Contributions to import growth yoy, percent

Source: BPS; World Bank staff calculations Source: BI; World Bank staff calculations

Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14-8

-6

-4

-2

0

2

4

6Capital goodsFuelRaw material nfConsumer goodsImports

2005

2006

2007

2008

2009

2010

2011

2012

2013

0

50,000

100,000

150,000

200,000

250,000Budget

revised Budget

Actual

Ambitious infrastructure plans: crucial for long-term growth but implementation challenges

11

Note: current IDR Source: MoF

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

100,000

0

10

20

30

40

50

60

70

80

90

1002011 2012

2013 2014

2011 2012

2013 2014

Budget, revised budget and actual central government capex, IDR trillion

Monthly central government capex, IDR trillion (bars, LHS) and percent of total (lines, RHS)

Note: current IDR Source: MoF

Inflation to increase following the subsidized fuel price increase, but only temporarily

12

Quarterly and average annual inflation, percent yoy

Note: Dark bars indicate projected average annual inflationSource: BPS; World Bank staff calculations

Mar-13 Mar-14 Mar-15 Mar-160

1

2

3

4

5

6

7

8

9

6.47.5

5.2

The near-term economic outlook is expected to remain fairly subdued

13

Source: MoF; BPS; BI; World Bank projections

December IEQ Revisions

(percentage change, unless otherwise indicated) 2013 2014p 2015p 2016p 2014 2015

Real GDP 5.8 5.1 5.2 5.5 -0.1 -0.4

Consumer prices 6.4 6.4 7.5 5.2 0.6 2.6

Current account balance (% of GDP) -3.3 -3.2 -2.8 -2.8 -0.3 -0.4

Fiscal balance (% of GDP) -2.3 -2.3 -2.0 - 0.5 -

Introduction: delivering change

Recent economic developments: a challenging backdrop

Way out of subdued economic growth?

14

Near-term economic outlook: relatively subdued

Conclusions

Main risks to outlook: external environment and domestic policy agenda and execution

15

External Domestic

Positive- Lower than forecasted

international oil prices

- Reform agenda delivers early success; investment and growth rise more quickly than expected

Negative

- Slower than currently projected global recovery

- Weaker than base case commodity price trajectory;

- Tighter than expected external financing conditions

- Limited reform and implementation (capital expenditure execution), and impact on growth is slower to materialize

Greater export performance…

16

Source: BIS; BPS; World Bank staff calculationsMar-12 Sep-12 Mar-13 Sep-13 Mar-14 Sep-14

18.5

19.0

19.5

20.0

20.5

21.0

21.5

22.0

22.5

23.0

23.5

90

95

100

105

110

115

120

125

Manufacturing exports

REER

(Quarterly manufacturing exports, USD billion; Real effective exchange rate (REER), 2010=100)

Raising the game in tourism

Country Number of tourist arrivals (million)

Tourism receipts (Billion US$)

Indonesia 8.8 9.3

Singapore 11 19

Malaysia 25.7 21

Thailand 26.5 42

Sustaining manufacturing export

…more FDI…

FDI Port. Equity Inflows

Port. Debt inflows

Other inv, inflows

0

1

2

3

4

5Average

St. dev

Coeff. of variation

Source: BI; World Bank staff calculations Source: BI; WB GEP January 2014; WB staff calculations

Some sources of funding are more stable than others…(quarterly inflows, USD bn, Q3 2008 – Q3 2014 )

…and the capital flow composition determines vulnerability to global shocks(response to tightening of global financial conditions, USD bn)

17

2009 2010 2011 2012 2013 2014f 2015f 2016f0

5

10

15

20

25

30

35

40

45Capital inflows - baseline

Capital inflows - shock

…to reduce tightening conditions

18

Source: CEIC; JP Morgan; World Bank staff calculations

Financial conditions index and the variables driving it, growth yoy, percent

Tighter financial conditions hand in hand with growth moderation (real GDP growth yoy, percent; FCI index)

Source: CEIC; JP Morgan; World Bank staff calculations

-4

-3

-2

-1

0

1

2

3

4

0

1

2

3

4

5

6

7

8

FCI

Real GDP growth, RHS

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0 BIR Lending rate creditJCI REER EMBIGFCI

Conclusions • Optimistic time for Indonesia • But data show challenging

economic realities:• Slower investment, weak

exports• The bold steps of the kind the

government has signaled in its first few months are very needed, to support growth and poverty reduction

• It will take implementation, and potentially some time, for the benefits to flow through