"Indonesia Jobs Report - PowerPoint"
Indonesia Economic Update Clearing skies and the road ahead Shubham Chaudhuri Senior Economist World Bank 14 September 2009 Jakarta Indonesia The Indonesian economy through the global financial crisis, and the road ahead Indonesia has weathered the storm well Why? Clearing skies are ahead The coming policy agenda Indonesian economy through the crisis 5 facts 1. Growth rising 2. …and more robust than elsewhere 3. Financial markets are recovering 4. Inflation is at its low point…but remains higher than Indonesian’s neighbors 5. Social impact has been limited Indonesia through the global crisis Growth has picked up from the start of 2009 After stalling at the end of 2008, quarterly growth rates show the economy has been recovering through the first half of 2009 Exports have recovered faster than imports, supporting GDP Domestic demand remained robust, supported by election spending, and now the government’s stimulus spending (aggregate GDP growth) 4 Per cent Per cent 8 Year on year (RHS) 3 6 QoQ seasonally 2 adjusted (LHS) 4 1 2 0 0 Jun-02 Mar-04 Dec-05 Sep-07 Jun-09 Sources: BPS via CEIC, World Bank Indonesia through the global crisis …and other indicators also show recovery 120 Index 240 Index After the downturn of late 2008, BI consumer BI retail 110 220 other indicators show conditions confidence index sales index (LHS) (SA; RHS) picking up since the start of 2009 100 200 Consumer confidence at record 90 180 highs 80 160 Car & motorcycle demand 70 140 recovering Danarakesa consumer survey (LHS) Industrial activity has picked up 60 120 2005 2006 2007 2008 2009 50 % 90% Cement 40 Motorcycles sales Electricity use Vehicles 30 60% by industry 20 30% 10 0 0% -10 Industrial -30% -20 production -30 -60% 2005 2006 2007 2008 2009 2005 2006 2007 2008 2009 Sources: BPS, GAI, PLN, ICA and Astra via CEIC, Danarakesa, World Bank Indonesia through the global crisis Growth has been stronger than elsewhere Extreme volatility in financial markets in late 2008 led to a sharp falls in real output in most economies The global economy started to stabilized and recover in Q2 (GDP growth, quarterly, seasonally adjusted) 6 % Q3 2008 Q4 2008 Q1 2009 Q2 2009 4 2 0 -2 -4 -6 Philip. Malaysia Thailand China India Indonesia Euro Area Japan U.S. Sources: CEIC, Haver Analytics, BPS, JP Morgan, World Bank Indonesia through the global crisis Financial markets are stabilizing Yields on Indonesian debt have returned to early 2008 levels Spreads on Indonesian debt spiked during the financial market turbulence with Indonesia singled out as a vulnerable country More volatile than elsewhere, too But they have subsequently recovered, and are now below global emerging market levels (EMBI spreads on sovereign USD bonds) (local currency 5 year bond yields) 12 % 400 % bps 21 Indonesian USD 10 bond spreads 32018 Indonesia (LHS) 15 8 240 12 6 160 9 Philippines 4 80 6 2 0 3 Indonesian spreads Thailand less global emerging market average (RHS) 0 0 -80 Jan Apr Jul Oct Jan Apr Jul Jan 07 Jul 07 Jan 08 Jul 08 Jan 09 Jul 09 08 08 08 08 09 09 09 Sources: JP Morgan, BI, CEIC, World Bank Indonesia through the global crisis Financial markets are stabilizing The rupiah, and foreign exchange reserves, have IDR/ USD 12,600 Foreign exchange reserves 65 stabilized USD bn (USD bn; RHS) During the peak period of 12,000 60 market volatility, the rupiah 11,400 55 depreciated by over one- third, and foreign reserves 10,800 50 fell sharply – before Exchange rate recovering 10,200 45 (IDR/USD; LHS) 9,600 40 9,000 35 8,400 30 Jan 07 Jul 07 Jan 08 Jul 08 Jan 09 Jul 09 Source: BI Indonesia through the global crisis Inflation, at its low point, is still relatively high Inflation is near its low-point But Indonesia’s inflation remains Lower food prices benefiting much higher than its trading poorer households especially partners’ Core inflation has fallen less Per cent Per cent Per cent Per cent 6 24 20 20 Food (RHS) 5 20 Indonesia 15 15 4 16 India Poverty 10 10 3 basket 12 China Inflation (RHS) (RHS) 2 8 5 5 1 4 0 0 0 0 Japan Inflation - monthly Thailand (LHS) -5 -5 -1 -4 Aug-07 Feb-08 Aug-08 Feb-09 Aug-09 Aug-05 Aug-06 Aug-07 Aug-08 Aug-09 Sources: BPS, CEIC< World Bank estimates of poverty basket inflation Indonesia through the global crisis And the social impact limited National poverty fell to 14.2% Open unemployment also fell in the year to February Employment growth outpaced the increase in the workforce But most new jobs were informal % 25 23.4 National poverty rate (%) Open unemployment rate 20 19.1 18.4 18.2 17.8 17.4 16.7 16.6 16.0 15.4 14.2 15 11.5 11.2 9.9 10.3 10 9.1 9.3 8.5 8.1 8.1 6.4 6.1 5 0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Source: BPS Why has Indonesia weathered the storm so well? Structure of the economy (producers of capital and high-tech goods suffered larger falls in GDP) Relatively low trade shares % 2 overall – a large domestic 1 Indonesia market (with the added benefit 0 GDP growth (Sep-08 to Mar-09) of momentum coming in) Australia -1 Exports weighted towards Canada -2 commodities and sent to a France Spain diverse range of markets -3 US Netherlands UK Low manufacturing/tech -4 Italy shares and correspondingly -5 Korea higher commodity shares in Germany -6 trade Malaysia -7 But these factors are likely to Japan Taiwan -8 limit Indonesia's growth Mexico Thailand prospects going forward -9 0 4 8 12 16 20 24 % Medium- and high-tech manufacturing output (% GDP) Sources: IMF, CEIC, Thomson- Reuters, RBA, BPS, World Bank Why has Indonesia weathered the storm so well? Strong position coming into the crisis Relatively strong financial sector – with little exposure to critical financial products Low corporate leverage Low public debt, strong fiscal position (central government budget deficit and debt levels) % 120 % 3.0 100 Deficit 2.5 (RHS) 80 2.0 Public debt 60 (LHS) 1.5 102.5 40 77.1 80.0 76.4 45.6 1.0 65.4 58.3 55.2 20 38.6 34.9 32.9 32.9 0.5 0 0.0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009* Sources: MoF and World Bank Why has Indonesia weathered the storm so well? Proactive Government responses Financial market safety net response Expenditure stimulus plus tax cuts response Public finance response (Central government budget balance and bank deposits at the end of the first half of each year, IDR trillions) IDR trillion IDR trillion 80 160 60 120 40 80 20 40 0 0 Fiscal Balance Govt. deposits at BI (RHS) -20 -40 S1 2005 S1 2006 S1 2007 S1 2008 S1 2009 Sources: Ministry of Finance and BI The outlook: skies continuing to clear With the outlook now for gradual recovery The outlook for the global economy has stabilized, and foresees a gradual recovery in growth China and other developing economies are projected to lead the recovery But global growth is projected to remain below the ~5% average of recent years into the next decade (Annual growth of Indonesia’s major export destinations) Per cent Per cent 6 6 Forecasts 3 3 0 0 Jun-09 Sep-09 -3 -3 2001 2003 2005 2007 2009 2011 Source: World Bank The outlook: skies continuing to clear Commodity prices, still volatile, recovering some of their losses International commodity prices are back to 2006 levels Outlook for some further, small recovery (Index, July 2008 peak = 100) 100 Index Indonesian International export prices non-energy 80 60 International 40 energy 20 0 2005 2006 2007 2008 2009 2010 2011 Source: World Bank The outlook: skies continuing to clear What it has meant and is likely to mean for Indonesia Indonesia is positioned to do well, but a weaker global environment means that growth prospects may be somewhat lower than they have been and sustaining growth is going to take a push Gains in poverty reduction likely to slow Budget deficit may well be smaller than government’s proposed budgets, suggesting greater scope for stimulatory spending Scope to lock-in current low inflation rates 2008 20092008 20102009 20112010 2011 Gross domestic product Gross domestic product 6.1 4.3 6.1 5.4 4.3 6.0 5.4 6.0 Consumer price index Consumer price index 9.8 4.7 9.8 5.6 4.7 6.5 5.6 6.5 Major growth Major trading partner trading partner growth 2.1 -1.8 2.1 3.3 -1.8 3.4 3.3 3.4 Poverty rate Poverty rate 15.4 14.215.4 13.614.2 11.5 13.6 11.5 Sources: BPS, CEIC, World Bank. World Bank projections The outlook: skies continuing to clear But considerable global risks remain The medium term global challenge is to unwind the various stimuli used to fight the downturn: Reducing the fiscal stimulus and developed country debt burdens is made more difficult by aging populations and political will And unwinding monetary stimulus is difficult due to uncertainty around lags (too soon and recovery suffers, too late and inflation takes off) and the shift from goods inflation to asset price volatility This implies that financial markets may remain volatile for some time (exchange rates, commodity prices, interest rates and so forth) Indonesia is particularly vulnerable to this volatility Still the volatility, and impact on the economy, is likely to be smaller than late 2008 And the longer term challenges Addressing global imbalances – improving but are still large implying weaker world growth as OECD consumers save more and consume less And a difficult structural adjustment to higher world capital and energy prices – compounded by higher carbon prices? The outlook: skies continuing to clear …and these risks impact the outlook for Indonesia There is both upside potential (from policy breakthroughs) and downside risks (from more adverse global environment) to the base outlook (Annual GDP growth) Per cent Per cent (Poverty rate) 7 7 2008 2009 2010 2011 High Low Reference 6 6 Reference projection 15..4 14.2 13.6 11.5 High scenario 15..4 14.2 13.9 11.8 5 5 Low scenario 15..4 14.2 13.4 11.3 4 4 3 3 2001 2003 2005 2007 2009 2011 Sourcse: BPS, World Bank projections Looking ahead to accelerating growth Rising or floating 1600 Per-capita real GDP grow th trajectories Indonesia (constant 2000 USD) "rising" Thailand 1200 (1979 to 1993) Philippines Indonesia (1993 to 2006) "floating" 800 400 Indonesia (1978 to 2007) 0 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 Source: World Bank Realizing the development agenda Indonesia is poised for government-catalyzed and private sector- driven investment and growth with the right policy improvements for the investment climate and complementary public investments …and Indonesia has to put in place a social protection system appropriate for an emerging middle-income economy Indonesia can afford to spend more on these development priorities Indonesia’s fiscal and debt position is strong… …and there are resources to be had if energy subsidies are redirected towards targeted social spending A big push on infrastructure – a two part strategy Indonesia is ready for and needs some breakthroughs: Easing transport and logistics bottlenecks and connecting and integrating Indonesia’s domestic markets and regions: Backbone infrastructure: Trans-Java highway (trans Sumatra too?) This could change global perceptions (Indonesia as a BRIC?) while being desirable in its own right While delivering a big push at the local level by: Building world-class cities by investing in urban infrastructure (mass transport, housing, water and sanitation) in the key cities that drive Indonesian competitiveness Revitalizing PDAMs to provide water and sanitation to Indonesia’s citizens (and especially a growing middle class) But this will require providing resources and changing incentives – including through performance linked matching grants to Local Governments for roads/water/sanitation Accelerating investment climate reforms and attacking coordination problems Take a more aggressive stance toward facilitating domestic and foreign investment including Lower entry barriers, including the time and cost to start a business, the Negative List (maintaining the positive improvements in the 2007 revision while relaxing restrictions in key sectors) Lower operating costs with a focus on actionable steps to improve logistics, Improve trade facilitation (replacing paper copies with a single electronic document and approval) through the National Single Window and control the proliferation of non-tariff barriers that raise costs and reduce competitiveness To solve difficult coordination problems success here might require a Regulatory Reform Commission with a broad mandate and authority to balance interests, address policy, coordination and implementation issues …and the sectors with major reforms have experienced accelerating growth Service sectors, many deregulated at the start of the decade, have been growing much faster than the rest of the economy Partly this reflects the fact that telecoms, retailing and domestic airlines all experienced rapid growth But partly that other sectors, especially mining and manufacturing have not been doing as well (average annual growth) 10 % Agriculture, mining & manufacturing 8 Services 6 4 2 0 2000-02 2002-04 2004-08 Sources: BPS and World Bank 10/16/08 Putting in place a Social Protection System Consistent with Middle Income Status Opportunities and Challenges Indonesia has the resources and institutional capacity to develop effective social protection systems as demographic and epidemiological challenges mount Key elements Build proven and successful social assistance and poverty alleviation programs (PNPM, BOS, BLT,…) into a comprehensive social assistance program Lay the groundwork for a future National Health Insurance System that is clear, feasible and affordable And put in place a grand bargain between employers and workers on severance pay that provides worker’s security without discouraging job creation 10/16/08 But all of this will require a bigger push on institutional and civil service reforms Replicate models of institutional reform underway (at the Ministry of Finance – especially Tax and Treasury) in other institutions with significant contact with the public—Customs, BPOM, Manpower, Trade and Industry… Complement ongoing bureaucracy reforms at the institution level with a modernized regulatory framework and central institutional set-up for civil service policy making, regulation and management Improve compensation, recruiting and promotion but link it to accountability Allowing fit for function institutions (not one size fits all) Indonesia Economic and Policy Update: Clearing Skies Shubham Chaudhuri Senior Economist World Bank 14 September 2009 Jakarta Indonesia