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									Indonesia economic update & Country
Partnership Strategy
Indonesia economic update
Near-term issues and looking ahead to 2012
Shubham Chaudhuri
Indonesia Lead Economist
World Bank




March 2, 2011
World Bank, Washington DC
   Outline
   What I will be talking about
 Near-term issues: managing risks, maximizing opportunities
    The latest growth numbers: more of the same, floating along
    Managing capital flows
    Coping with food price increases
    Improving budget disbursement

 Looking ahead to 2012
    Strong investment driving economic growth
    Exports strong but current account continues to narrow
    High commodity prices are a double edged sword
    Why isn’t higher investment resulting in even higher growth?

 Emerging challenges for higher and broad-based growth
    While jobs are picking up they aren’t growing in line with the economy
    And inequality is rising
    RPJM growth targets are going to need higher or more productive
     investment
Near-term issues
Managing risks, maximizing opportunities
 Maximizing opportunities
 From a strong near-term outlook
 Building on strong GDP growth performance




         Sources: BPS and World Bank forecast for 2011
     Maximizing opportunities
     ...building on recent growth performance
      … and the relative trend of stronger growth for “non-tradable” sectors
       continues

          Year-on-year growth                                 Contributions to year-on-year GDP growth
     Per cent                          Per cent                        Per cent                           Per cent
10                                                10               8                                                 8
       “Non-
       tradable”                                                          “Non-
                                                                          tradable”
 8                                                8
                                                                   6                                                 6
                                                                          “Tradable”
 6                                                6

                                                                   4                                                 4
 4                                                4

                       “Tradable”                                  2                                                 2
 2                                                2


0                                                 0                0                                                 0
Jun-01    Jun-03   Jun-05    Jun-07   Jun-09                       Jun-01   Jun-03     Jun-05   Jun-07   Jun-09
 Source: CEIC, World Bank
 Note: “Tradables” defined as manufacturing, agriculture, mining and quarrying
       Maximizing opportunities, managing risks
       …from capital inflows into Indonesia
 The rise in net portfolio inflows has dominated the financial account since 2009
     USD billion                                                   USD billion
        25                                                                   25
                          Net Other Investment
        20                                                                   20
                          Net Portfolio Investment
        15                Net FDI Investment                                 15
                          Financial Account
        10                                                                   10

         5                                                                   5

         0                                                                   0

        -5                                                                   -5

       -10                                                                   -10

       -15                                                                   -15
                   2006     2007          2008       2009      2010 Q1-Q3

      Source: BI, CEIC
  Maximizing opportunities, managing risks
  …from capital inflows into Indonesia
 With the majority of portfolio flows going into government securities

 IDR trillion                                                             USD billion
     60                                                                         105
                                                       Foreign Reserves (RHS)
     40                                                                         90


     20                                                                         75


       0                                                                        60


     -20                                                                        45
                Net non-resident investor purchases (LHS):
     -40        SBI      JCI      SUN                                        30


     -60                                                                       15
        Nov-08             May-09          Nov-09            May-10      Nov-10
 Maximizing opportunities, managing risks
 …from capital inflows into Indonesia
 Portfolio capital inflows have contributed to a lowering of yields on
  government bonds…
                           Local currency government bond yields (5-year)
                   Percent                                           Percent
             15                                                                  15

                             Indonesia
             12                                                                  12


              9                                                                  9
                                    Philippines
              6                                                                  6
                       Malaysia                 Thailand
              3                                                                  3
                                             United States
              0                                                                  0
              Jan-09               Sep-09             May-10                Jan-11
Source: CEIC, World Bank
Maximizing opportunities, managing risks
…from capital inflows into Indonesia
 …and a medium-term rise in domestic equity prices

     The JCI is up 40% since 30 Dec 2009 (compared with an average of 12%
      for 10 benchmark global indices). Fall in equities in early 2011 but then
      recovery
                    Equity Indices 2Jan08=100
              150                                                  150

                                                     Jakarta
              125                                                  125
                          Thailand
              100                Malaysia                          100


               75                                                  75
                                                     Bombay

               50                                                  50
                     Shanghai
               25                                                  25
                 Jan-08          Jan-09         Jan-10         Jan-11

           Source: CEIC, World Bank
            Maximizing opportunities, managing risks
            …from capital inflows into Indonesia
            … but the exchange rate has remained relatively stable

                 The rupiah strengthened by 3.6% in 2010 as a whole (with the REER
                  appreciating by 5% over the year)
      Dollar Index                IDR per USD               Jan 2002=100                     IDR per USD
                                                      400                                                   0
120                                           8500
                            IDR/USD
                            (RHS)                     350                                                   2000
                                                                          IDR Appreciation
110                                           9500    300                                                   4000

       Dollar                                         250                                                   6000
       Index                                                                                 IDR/USD
100    (LHS)                                  10500   200                                    Spot (RHS)     8000

                                                      150                       REER                        10000
                                                                                (LHS)
 90                                           11500   100                                                   12000
                                                                              NEER
                           IDR Appreciation           50                      (LHS)                         14000

 80                                           12500    0                                                    16000
  Jan-08        Jan-09       Jan-10       Jan-11        Jan-96   Jan-99    Jan-02   Jan-05    Jan-08   Jan-11


Source: CEIC, World Bank
     Managing risks...
      ...from capital inflows into Indonesia
 Exposure to foreign ownership of financial assets has increased…
    …but foreign reserves have kept pace

      Foreign Holdings                                                 Sept 2008
           of SBI
                                                                       May 2010
      Foreign Holdings                                                 Sept 2010
         of Bonds

      Foreign Holdings
         of Stocks

    Private Short-Term
      External Debt

      Total Short-Term
       External Debt


         FX Reserves
                                                                   USD bn

                         0   20    40    60    80    100   120   140

                             Sources: BI, MoF and World Bank
Managing risks
Inflation on the rise again
 Headline Inflation has risen over the year, driven primarily by volatile (food)
  prices, while core inflation still remains below historical averages




                  Source: BPS, World Bank
Managing inflation
Rice prices in particular




    Source: BPS, World Bank, FAO
Managing food price inflation
A regional priority
 Regional food price inflation is also on the rise

                    Per cent YoY                         Per cent YoY
              50                                      China
                                                                      50
                                                      India
              40                                      Indonesia       40
                                                      Malaysia
              30                                      Philippines     30
                                                      Thailand
                                                      Vietnam
              20                                                     20

              10                                                     10

                0                                                    0

              -10                                                    -10
                Dec-06       Dec-07         Dec-08   Dec-09    Dec-10

              Source: CEIC and World Bank
Poverty outlook
Potential impact of rising food prices
 Sufficiently large food price shocks can raise the poverty rate, even
  in times of robust growth, such as in 2005-06, and potentially 2011

                     National poverty rate (percent)
          20                                                   20

          18                                                   18

          16                                                   16

          14                                                   14

          12                                                   12

          10                                                   10
               2003 2004 2005 2006 2007 2008 2009 2010 2011f

          Source: Susenas and World Bank staff simulations
           Managing inflation
           Potential impact of rising food prices
           Sufficiently large food price shocks can raise the poverty rate, even
            in times of robust growth, such as in 2005-06, and potentially 2011


                                                 Inflation (percent)    Projected
                                                                       March 2011     Change in Poverty
                                                Poverty                Poverty Rate    Rate from March
Scenarios (28 December 2010)                    Basket        Core      (percent)         2010 (pp)
Spice and rice shocks remain                       11.2        4.8        14.5              +1.2
Spice and rice shocks unwind                      10.1         4.7        14.0              +0.7

Spice price shock unwinds, rice                   10.6         4.8        14.2              +0.9
price shock remains
Spice price shock remains, rice                   10.7         4.7        14.3              +1.0
price shock unwinds

Note: Inflation rates are from March 2010 to March 2011.
Source: Susenas and World Bank staff projections
        Looking ahead
        Prospects for 2012

Indonesia growth is expected to accelerate over the next two years. High
commodity prices will support growth off-Java and Bali. But Indonesia will
need to address the challenges posed by these higher commodity prices,
especially food and maybe oil prices.
          Growth is expected to be driven by increasing
          investment levels
 Investment should increase: stronger FDI flows and high commodity prices
 Net exports should further boost growth in 2011 and 2012, consistent with solid
  growth in Indonesia’s major trading partners.
 Higher inflation is a drag on private consumption expenditure
          Per cent                                  Per cent
      8                                                         8

      6                                                         6

      4                                                         4

      2                                                         2

      0                                                         0

     -2                                                         -2

     -4                                                         -4
          2005 2006 2007 2008 2009 2010 2011 2012
           Discrepancy     Net Exports      Investment
           Government          Private cons           GDP

                     Sources: BPS and World Bank forecast for 2011 and 2012
         Transport, communications and retail trade
         especially strong
 Higher commodity prices likely to result in more output from mining and agriculture
  sectors.
 The manufacturing sector is picking up as investments pay off and exports to major
  trading partners rise.

                8   Per cent                                   Per cent 8



                6                                                      6


                4                                                      4


                2                                                      2


                0                                                      0
                    2005 2006 2007 2008 2009 2010 2011 2012
                      Other (incl services)          Retail trade
                      Com & trans                    Manufacturing
                      Mining and construction        Agriculture
      Sources: BPS and World Bank forecast for 2011 and 2012
        Manufacturing exports are growing, while
        the current account surplus narrows
 The current account surplus will continue to narrow despite export growth, as
  investment and domestic demand result in increased imports

 Manufacturing continues to contribute to export growth aided by an increase in
  capital goods imports (which have risen from 28% to 37% of total imports over
  the last 5 years)
         Inflation pressures will continue, particularly if oil
         price continues its upward trend
                                                Per cent                               Per cent
500                                  500   16                                                     16


400                                  400
                      Energy
300                                  300   12                                                     12


200                                  200                                   Poverty Basket
       Non-energy                                                             Inflation
                        Food
100                                  100    8                                                     8
                                                                               Headline
                                                                               Inflation
  0                                  0
                                                       Core Inflation
                                            4                                                     4
                                                2005 2006 2007 2008 2009 2010 2011 2012

 Source: World Bank                             Source: BPS and World Bank estimates


  Food price increases have resulted in high CPI and poverty basket
   inflation.
               Investment levels are increasing, but not
               delivering the growth we would expect
   Investment levels, at over 30 percent of GDP – are now at par with many
    countries in the region.
Gross domestic capital formation as percent of GDP
50                                                                    50
                                            2009
                  China                                                     A far lower real investment to
                                                         Japan
40                                                                    40
      1960                                                                   GDP ratio suggest supply side
                                     2010                                    problems with investment
30                                                                    30
                  India

20                                                                    20
                                       Korea, Rep.

10                                                                    10
                              1999
          Indonesia
  0                                                                   0
      4       5           6      7           8       9     10    11
               Ln GDP per capita (2000 USD)
Outlook for 2011 and 2012


                                       2010   2011   2012
 GDP grow th                            6.1    6.4    6.7
 External indicators
  Balance of payments (USD bn)         30.3   16.4   14.6
  Current account balance (USD bn)      6.3    2.1    2.5
  Trade balance (USD bn)               22.1   17.0   18.1
  Financial account balance (USD bn)   26.2   14.0   11.8
 CPI inflation                          5.1    6.3    6.2
 Poverty Basket Index inflation         8.6    8.3    7.0
Thank you
        Emerging challenges


Growth has accelerated and 7 percent is in reach but only if there is progress on
infrastructure and the investment climate. Growth will also need to be more
inclusive.
           Job creation remains a problem
           …especially good jobs…
 Indonesia’s workforce is strong and growing. Today, there are almost 114 million workers in Indonesia.
  Over the next decade the working age population will grow by another 20 million people.

 Economic growth is not matched by growth of higher-quality jobs (formal and non-agricultural):
  over 61 percent of workers are employed informally; over 40 percent are still working in agriculture.

               12.0%

               10.0%

                8.0%

                6.0%

                4.0%

                2.0%

                0.0%

               -2.0%

               -4.0%




                            Average growth 1991-96   Average Growth 2005-10
                         Source: BPS
While poverty levels are declining inequality is
rising
         Higher growth will take higher or more
         productive investment
       A growth accounting exercise allows us to reflect on the growth targets
        in the RPJM and the implicit investment growth.

              %Q = %A + (1- a)%L + a%K
       With L given and Q as a target, we solve for A or K respectively. With
        historical productivity gains of around 2.2, investment would need to
        grow at 11 percent to achieve economic growth of 7 percent. Annual
        investment growth in 2010 was 8.5%.

                           Investment Varies (TFP as in RPJM)TFP varies (Investment as in RPJM)
      Average 2012-2014*         Low      RPJM           High        Low       RPJM        High
              Investment          8.0      11.0          12.0        11.0       11.0        11.0
                       TFP        2.2       2.2           2.2         1.5        2.2         3.0
                      GDP         6.6       7.0           7.3         6.0        7.0         7.4
GDP/cap (USD 2010 prices)*      3470       3530          3570        3410       3530       3570
         Emerging Challenges
         Achieving higher, and broad-based, growth

                                                                 Raising the
                                                               level of growth


  Enhancing fiscal space
            Subsidy reform               Mobilizing
         Higher fiscal deficit             fiscal
 Using Fiscal Space more
               effectively               resources
  Managing bureaucracy
                   reform                             Social protection
Monitoring and evaluation                                and social
                                                         assistance

     Achieving                   Facilitating Job
   broad-based,                     Creating
     inclusive                    Investments
      growth
       Addressing emerging challenges


Focus on:
   •    Increasing growth through infrastructure investments and an
       improved business environment
   • Addressing inequality through social assistance and social
       protection programs as well as removing obstacles for job creation
   • Creating and using more effectively the necessary fiscal space to
       finance Indonesia’s priorities
           Indonesia is lagging behind most ASEAN
           peers in infrastructure development
Country            Optimum                  Optimum                   Country          Container        Vessel        Vessel
Main Airport       Passenger (mil)          Cargo (tons)              Main             handling (box    berthing      waiting
                                                                      Seaports         per hour)        (h)           (h)
Jakarta            22                       300,000
                                                                      Jakarta          23.3             50-57         2
Manila             25                       600,000                   Surabaya         10               65            2
KL                 40                       1,200,000                 Thailand         35               8             0.4
                                                                      (LC)
BKK                45                       3,000,000
                                                                      Manila           28               NA            NA
Singapore          73                       3,000,000
                                                                      Singapore        31.3             Varies        2
Source: PT Angkasa Pura II, other airports, media reports
(Standard Chartered)                                                 Source: ASEAN Ports Association
                                                                     (Standard Chartered)
                                                                                           6.12
                 Time to import                                                      4.93
                                                                                       5.35

               Without physical                        1.84
                                                1.55
                  inspection                                  2.14                    Source: LPI 2010 (World Bank)

                  With physical                                           3.28
                                                                           3.36
                   inspection                                                           5.12

                                  1                    2                      4                  8
                                      Lower middle income             East Asia & Pacific
                                      Indonesia
            Infrastructure levels have not recovered to
            pre-crisis levels yet
Public Infra Spending/ GDP                                  Investment in infrastructure (% of GDP)
3.0%

2.5%

2.0%

1.5%
                                        Subnational
1.0%

0.5%
                                           Central
0.0%
    1997199819992000200120022003200420052006200720082009
                                                           Source: Philippine’s Transport for Growth, 2009
                                                           (World Bank), various years
        Indonesia needs a big push on infrastructure with the government and public
         sector playing a lead catalytic role. Private sector participation is often around
         20% of investment, PPP will need market friendly design.
        Rationalize/ prioritize investments. See next slide for connectivity priorities.
        Identifying and implementing financing, accountability and capacity-building
         mechanisms to incentivize and empower local governments to deliver on
         water, sanitation and roads
        Creatively tackling tariff reform in the power sector
          Connectivity is a prerequisite to developing
          National Economic Corridors

 Strengthening economic integration through National Connectivity is the best way to get both the benefits
  of the concentration of production and the long-term benefits of a convergence in living standards
 Connectivity increases the gravity foces of economic corridors by amplifying market forces that are already
  driving concentration of activities/production in certain areas
    Priorities for Connectivity
    Type of          Priority
    Connectivity
                     Complete Trans-Java Expressway and coordinate with rail services in Java

                     Enhancement of JABODETABEK connectivity as part of Northern Java economic corridor,
    Intra-island     with a particular role for commuter trains
                     Performance-based transfer program to local governments for investment and
                     maintenance of local infrastructure
                     Reduce costs of inter-island shipping by improving maritime connectivity-shipping-
    Inter-island     deregulation and investment to improve efficiency of regional and gateway ports
    (domestic)       Transparent on-budget subsidies for pioneer shipping in Eastern Indonesia, and develop
                     RO-RO nautical highways
    International    Improve operational efficiency at Tanjung Priok (including access to the port by road and
                     rail) and move ahead plans to develop a new deep water port in western Java
         Strengthening the investment climate and creating jobs
         Some data and principles
         Net FDI inflows-to-GDP (percent)
 6
           1993-1997      1998-2002      2003-2007     2008-2009                                     An Indonesia that takes dynamic steps
 5                                                                                                    at improving its investment climate will
 4                                                                                                    increase the competitiveness of
                                                                                                      domestic goods and exports. Present
 3                                                                                                    reform efforts are moving in the right
 2                                                                                                    direction but require a greater push to
                                                                                                      yield results.
 1
 0
-1
-2


                                                                                        Global Rank in Doing Business 2011 -
                                                                                           selected countries in East Asia
                                                           1          2      19 21 33
                                                                                                              73 78 79
        Effective reform requires coordinated                                                                                             103 121
         actions by different ministries,                                                                                                                       147 148
         institutions and layers of government.                                                                                                                                          171
         Therefore, it needs to be led from the top.
         A single agency should be tasked with




                                                                                                                                                    Indonesia


                                                                                                                                                                           Philippines
                                                                     Hong…
                                                                             Thailand




                                                                                                              Mongolia




                                                                                                                                                                Cambodia
                                                         Singapore




                                                                                                                         Vietnam


                                                                                                                                           Papua…
                                                                                        Malaysia
                                                                                                   Taiwan,…




                                                                                                                                   China




                                                                                                                                                                                         Lao PDR
         undertaking a multi-year national and
         subnational regulatory review and reform
         initiative.
  Strengthening the investment climate and creating jobs
  A Regulatory Reform Commission
 Priority reforms:
   •   Draft regulatory reform law incorporating the need for Regulatory Impact
       Assessments and a 60-day public disclosure and feedback period prior to
       enactment of new regulations.
   •   Revise the Investment Negative List (DNI) maintaining the positive
       improvements in the 2007 revision while relaxing restrictions in key sectors.
   •   Push ahead on the National Single Window agenda by accelerating current
       work plan implementation, e.g. replacing paper copies for a single electronic
       document and single approval.
   •   Establish National Logistics Council to implement logistics reform blueprint.

 Easiest and fastest way to accomplish these reforms is to create a Regulatory
  Reform Commission with a broad mandate and authority to balance interests,
  address policy, coordination and implementation issues
    existing Timnas PEPI structure provides foundations for such a commission
     Access to Finance remains a challenge
     Particularly for the poorer segments of the population
            Access to Financial Services in Indonesia                          Mainstream financial
                                 (All sample)
                                                                                inclusion into the planning
                  Financially Served - 83 %
                                                                                process
       Using Formal - 52 %
                                                              Underserved
                                                                               Streamline existing
                  49                  3             31            17            individual ministry programs
                                                                                into coherent programs to
                                                                                maximize impact and
0%           20%             40%              60%           80%        100%

     Bank    Formal Other        Informal & Semi-formal       Underserved
                                                                                increase effectiveness

            Access to Financial Services in Indonesia
                                                                               Improve coordination among
                             (Poor Households)                                  various government
        Financially Served - 61 %                                               ministries and central and
 Using Formal - 21 %                                                            subnational governments.
                                                         Underserved

      19      2                40                            39




0%           20%             40%              60%           80%        100%

     Bank    Formal Other        Informal & Semi-formal       Underserved
                         Maximizing opportunities
                         Indonesia’s remaining demographic dividend
                  90.0                                                                                        90.0
                                               Dependency ratio
                                                     (%)




                                                                                                                     children and elderly to working age (%)
                  80.0                                                                                        80.0

                  70.0                                                                                        70.0
                                Working age: 15 to




                                                                                                                               Dependency ratio:
                  60.0               64 (%)                                                                   60.0
% of population




                  50.0                                                                                        50.0

                  40.0                                                                                        40.0
                                 Children: 14 and
                  30.0              below (%)                                                                 30.0

                  20.0                                                                                        20.0
                                                       Elderly: above 64
                  10.0                                        (%)                                             10.0

                   0.0                                                                                        0.0
                         1950    1960   1970    1980     1990   2000       2010   2020   2030   2040   2050
         Expand and target skills training to address
         Indonesia’s skills shortage
 Skills shortage: Only one-fifth of workers
  have finished senior secondary school; only    BLK revitalization and expansion is
  6 percent have a tertiary degree.               important, but not enough. The
                                                  number of BLK is not enough to meet
 Employers are looking for increasingly          potential demand.
  higher skill levels, resulting in high wage
  premiums for educated workers,                 Pilot a complementary third
                                                  approach to training using public-
                                                  private partnerships.

                                                 Consider the Jovenes model from
                                                  Latin America that provides
                                                  comprehensive training (including soft
                                                  skills), work opportunities, links with
                                                  industries, and vouchers for vulnerable
                                                  groups.
           Address unemployment and pension rights
           at the same time as severance
 Hiring and firing regulations are among the            Redundancy Costs (weeks of salary)
  region’s most rigid but compliance is low              120
  creating a “lose-lose” situation for employers         100
  and most workers: High de jure rates
                                                             80
  discourage entrepreneurs and stunts creation
                                                             60
  of “good” jobs. Low de facto pay (as reported
                                                             40
  by workers) leaving the majority of employees
                                                             20
  unprotected.
                                                              0




                                                                   Source: Doing Business, 2010
                                            Negotiate to:
                                           1. Introduce an SJSN pension program for workers.
                                           2.Adjust severance rates downward in-line with regional
                                           standards.
                                           3.Reform severance system to improve real protection
                                           and boost job creation.
           More can be spent on Social Assistance,
           but funds should be spent effectively…
Targeted Social Assistance Spending by Program (IDR billion, realized expenditure)
                                                       2005         2006          2007      2008      2009
Unconditional Cash Transfer (BLT)                     4,620       18,619           -      13,206     3,733
Subisidized rice (Raskin)                             5,100        5,700         6,284    11,210    12,987
Health Insurance for the Poor (Jamkesmas)                n/a       3,065         4,567     4,448     4,620
Scholarships for the Poor                                n/a          n/a          323     1,238     2,562
Conditional Cash Transfer (PKH)                          n/a          n/a          720       946     1,068
Social Welfare for Children                              n/a         211           187       311       296
Social Welfare for the Disabled                          n/a         130           152       190       217
Social Welfare for the Elderly                           n/a          53            57        69        82
Total Targeted Social Assistance                      9,720       27,779        12,291    31,619    25,564
   Share of central government spending (%)              2.7          6.3           2.4       4.6       4.1
   Share of GDP (%)                                      0.4          0.8           0.3       0.6       0.5

 Constraints:                                 Recommendations
                                                     Prepare white papers and operationalize
      Fragmentation                                  reform roadmaps for each SA program..
                                                     Clarify institutional arrangements and begin
      Gaps in coverage                               performance-based budgeting
                                                     Unified database of potential beneficiaries
      Targeting errors                               can improve targeting outcomes.
                                                     Monitoring and Evaluation needs to be
      Monitoring and Evaluation                      made permanent and regular.
       Future social protection
       Strategic vision
 Vision of the SJSN laid out in White Paper and government regulation

 SJSN programs: cover the whole population, with the same benefits to all
  and base benefits only
    Health: Basic health services
    Pension: Lifetime old-age annuity, disability and survivor benefits (20%
     replacement ratio)
    Old-age Savings: Modest lump-sum at retirement (3% contribution rate)
    Death: Lump-sum on death of worker (10 mill Rp.)
    Worker accident
  Achieving the vision
     Building and reforming legal structures, institutions and infrastructure
     SJSN program design, governance, financing and sequence of
      introduction
     Harmonization with existing programs
     Budget impact
         Mobilizing fiscal resources
         Enhancing fiscal space – fuel subsidy reform
 Indonesia’s fuel subsidies are very regressive, costly, and continue to
  create uncertainty for public finances

 The number of vehicles in Indonesia is rapidly growing leading to a
  steady increase in the consumption of subsidized gasoline and diesel

 The gap between subsidized and economic fuel prices is on the rise
  resulting in a large increase in subsidy spending in coming years
  (current oil price above any of the assumptions below)

 Projected spending on fuel subsidies under different oil price assumptions
                                                                        2010        2011      2012       2013       2014      Sum
 IDR trillion
                                                                       APBN-P       Proj.     Proj.      Proj.      Proj.    2011-14
 Baseline scenario (RPJM assumptions, avg oil price of US$80/barrel)     89         104        115        149        192       560
 Flat oil price assumption of US$90/barrel from 2011                     --         131        162        186        214       692
 Flat oil price assumption of US$100/barrel from 2011                    --         157        193        223        258       831

                                                                         2010       2011       2012       2013       2014    Average
 Key assumptions from RPJM
                                                                       Estimate     APBN      RAPBN      RAPBN      RAPBN    2011-14
 GDP growth (%)                                                               5.9       6.4        6.8        7.3        7.7       7.1
 Exchange rate (IDR/USD)                                                    9050      9250       9750       9850       9850      9675
 Indonesian crude oil price (USD/barrel)                                      78         80         75         80         85       80
Fuel subsidy reform
Alternative reform options
 Reform options
    Current proposal (subsidies removed for private cars)
    The ESDM Road Map (January 2010)
    Convertible fuel vouchers
    Indexation of regulated fuel prices to the economic cost of fuel
    Full deregulation of fuel prices with compensating BLT program

 International experience shows that it is difficult to target fuel
  subsidies well, and instead that many countries are moving to
  eliminate universal fuel subsidies by reducing the price gap while
  compensating the poor directly
    Indonesia can do the same, as it has successfully done on an ad hoc
     basis before, but to go further and imbed sustainable reforms
    Building broad-based political support will be critical to achieve reform
     as will socializing reforms with wider public (e.g. media campaigns)
            Fuel subsidy reform
            The potential impact of reforms
 Reductions in fuel subsidies will impact three key variables – fiscal spending, inflation and the
  poverty rate. The poverty impact can be offset through BLT.
                                                           OUTCOMES 2011-2014
                                   2011 APBN then RPJM Oil Price and Macroeconomic Assumptions
                                                                           Cumulative      Cumulative     Cumulative   Average      2014


                                                                                          Exp on social   Net fiscal      CPI
       (Only gasoline and diesel prices adjusted;
                                                                          Fuel Subsidy     assis (BLT)     saving      Inflation   Poverty
       kerosene and LPG prices held at 2010 levels)
                                                                           Exp (IDR tr)      (IDR tr)      (IDR tr)       (%)        (%)
       BASELINE SCENARIO:
       Status quo (unchanged fuel subsidy regime,                             560               0             0            5.6      11.3
       ongoing conversion to LPG, US$80 oil)

       ALTERNATIVE REFORM SCENARIOS                                                         CHANGES relative to baseline

       Current proposal:
       Subsidies removed for private cars in Java & Bali    Without BLT        -58              0             58
       in Q2 2011, remaining private cars 2012
       ESDM Roadmap (Price adjustment):
                                                            Without BLT       -142             0             142           0.2      0.2
       Subsidies for all private cars removed 2011, for
                                                            With BLT          -142             28            114           0.2      -0.4
       motorcycle 2012

       Convertible Fuel Voucher:
       25% discount on 15 liters per month per houshold                       -456             62            394           0.9      -0.2
       for all households who do not own car

       Full Indexation:                                     Without BLT       -177             0             177           0.6       0.6
       at 10% below economic price                          With BLT          -177             28            149           0.6       0.0

                                                            Without BLT       -466             0             466           0.9       0.9
       Full Deregulation
                                                            With BLT          -466             28            438           0.9       0.3
            Looking ahead: the potential wage bill by
            2014 with BR
                                                    2010 (p)  2011 (p)  2012 (p)  2013 (p)  2014 (p)
     Baseline national wage bill (IDR billion)      361,108   402,966   441,915   499,081   564,505
        % GDP                                            5.8       5.8       5.9       5.9       5.8
        % Total national expenditure                   28.3      29.3      28.9      29.0      29.0
        % Total national domestic revenue              34.1      34.8      33.3      33.2      32.9
     Estimate national wage bill with BR            395,175   442,509   486,935   549,577   824,887
        % GDP                                            6.3       6.3       6.5       6.4       8.5
        % Total national expenditure                   31.0      32.2      31.9      31.9      42.4
        % Total national domestic revenue              37.3      38.2      36.7      36.5      48.1
     Central BR                                      34,067    39,543    45,020    50,496    55,288
     Sub-national BR                                    -         -         -         -     205,095
     Key assumptions (Budgets for 2010 and 2011, RPJM for 2012-14):
        GDP growth (%)                                   5.8       6.3       6.9       7.4       7.7
        CPI change (%)                                   5.3       5.3       6.0       5.5       5.5
        Central gov. fiscal deficit (% GDP)              2.1       1.9       1.6       1.4       1.2
     Memo items:
        Total national expenditure (IDR billion)  1,274,666 1,376,131 1,528,173 1,720,940 1,944,979
          % GDP                                        20.4      19.6      20.3      20.2      20.1
        Total national dom. revenue (IDR billion) 1,058,683 1,159,020 1,326,224 1,504,302 1,713,412
          % GDP                                        16.9      16.5      17.6      17.6      17.7
        GDP (IDR billion)                         6,253,789 7,006,727 7,522,630 8,523,667 9,684,888

 Driven by: (1) high annual civil service pay rises; (2) increasing numbers of civil servants at
  sub-national level; (3) new performance allowances for pilot BR agencies at the central level
Bureaucracy reform
Policy options to manage fiscal risks

 Range of policy options to help contain wage bill and fiscal risks
  from bureaucracy reform
    Short-term measures include:
       Carefully screen/audit BR plans and sequence payment of
        performance allowances
       Offset new performance allowances by streamlining/abolishing old
        allowances
       Decompress performance allowances
       Consider setting wage ceilings as share of expenditure or revenue
       Temporary freeze or capping of annual pay increases
       Partial or selected hiring freeze, accelerated early retirement
    Longer-term response may include undertaking functional reviews and
     rationalizing size and structure of government
                      Mobilizing Fiscal Resources
                      Indonesia can afford higher budget deficits
      Percent                        Public Debt to GDP ratios                                             Total debt service to revenues
      100                                                                              100
                                     India                                                                    Baseline
       80                                                                              80
                                             Brazil                                                           Larger deficit by 0.5 pp of GDP

       60                                                                              60                   Larger deficit by 0.5 pp of GDP plus
                                                            Philippines
                Thailand                                                                                30% growth boost
       40                                                                              40
                     Malaysia
                                                       Indonesia
                                                                                                        25%
       20                                                                              20               20%

        0
                     China
                                            Interest payments (% of             15%    0

                                                             revenue)
           2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Sources: IMF Public Debt Database, IMF Fiscal Monitor, Ministry of Finance, BPS
                                                                                10%

                                                                                                         5%
Note: Figures for 2010 are projections with exception of Indonesia
                                                                                                         0%
Interest payment (% revenuie)
                                                                                                              2009 2010 2011 2012 2013 2014 2015
 Percent
 40                                                                               40
                                               2001-2004       2005-2008
                                                                                              Higher budget deficits,
 30                                                                               30
                                               2009-2010                                      combined with a renewed
 20                                                                               20          focus on efficiency of
                                                                                              spending, would allow
 10                                                                               10
                                                                                              Indonesia to undertake the
  0                                                                               0           necessary investments
       Indonesia   China     India   Philippines Thailand    United   Euro area
                                                             States
                                                            Better use of fiscal resources
                                                            Improving subnational spending
                                              35%                                                                                    Status of district road by condition
                                                                                        Government Apparatus

                                              30%                                                              100%
Share of total sub-national expenditure (%)




                                                                                                                                                                                     390,000
                                                                                                               90%
                                                                                         Education
                                              25%                                                              80%                                                                   370,000
                                                                                                               70%
                                                                                                                                                                                     350,000
                                              20%                                                              60%
                                                                                         Infrastructure                                                                              330,000
                                                                                                               50%
                                                                                                               40%                                                                   310,000
                                              15%
                                                                                                               30%
                                                                                          Others                                                                                     290,000
                                                                                                               20%
                                              10%                                                                                                                                    270,000
                                                                                           Health              10%
                                                                                                                0%                                                                   250,000
                                              5%
                                                                                           Agriculture
                                                                                                                      2001   2002      2003   2004    2005   2006    2007   2008

                                              0%                                                                      Good          Fair      Poor       Damage        Length of road (Km)
                                                     2001   2002   2003   2004   2005   2006         2007*

                    Some initial thoughts on improving subnational spending:
                                                     Develop financing instruments that allow urban districts to finance necessary infrastructure
                                                      investments;
                                                     Develop performance based transfers, with more rigorous assessment of performance and
                                                      recognition of success;
                                                     Improved information system for transparency and planning purposes;
      Better use of fiscal resources
      Improving Indonesia’s M&E System
 Three characteristics of successful M&E systems
    Intensive utilization of the M&E information in one or more stages of
     the policy cycle;
    Information meets standards for data quality and evaluation
     reliability;
    Sustainability: the system will survive a change in administration,
     government ministers, or top officials.

 Increase utilization through relevant information, enhance skills to use
  information and provide incentives for use of information.

 Improve availability and quality of relevant M&E information for planning
  and budgeting purposes. Quality assurance needed.

 Ensure sustainability through powerful champion, stewardship by
  capable ministry and incentives in agencies to use M&E information.

 Changing culture: impose accountability on line ministries and agencies,
  prepare guidelines of M&E role on results based budgeting.

								
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