84010 December 2013 Slower growth; high risks INDONESIA ECONOMIC QUARTERLY Slower growth; high risks December 2013 Preface The Indonesia Economic Quarterly (IEQ) has two main aims. First, it reports on the key developments over the past three months in Indonesia’s economy, and places these in a longer-term and global context. Based on these developments, and on policy changes over the period, the IEQ regularly updates the outlook for Indonesia’s economy and social welfare. Second, the IEQ provides a more in-depth examination of selected economic and policy issues, and analysis of Indonesia’s medium-term development challenges. It is intended for a wide audience, including policymakers, business leaders, financial market participants, and the community of analysts and professionals engaged in Indonesia’s evolving economy. The IEQ is a product of the World Bank’s Jakarta office. The report is compiled by the Macro and Fiscal Policy Cluster, Poverty Reduction and Economic Management (PREM) Network, under the guidance of Jim Brumby, Sector Manager and Lead Economist, Ndiame Diop, Lead Economist and Economic Advisor, and Ashley Taylor, Senior Economist. Led by Alex Sienaert, the core project team, with responsibility for Part A (economic update), editing and production, comprises Arsianti, Magda Adriani, Brendan Coates, Fitria Fitrani, Ahya Ihsan, Elitza Mileva, Violeta Vulovic and Michele Savini Zangrandi. Administrative support is provided by Titi Ananto and Sylvia Njotomihardjo. Dissemination is organized by Farhana Asnap, Indra Irnawan, Jerry Kurniawan, Nugroho Sunjoyo, Randy Salim and Marcellinus Winata, under the guidance of Dini Sari Djalal. This edition of the IEQ also includes contributions from Leni Dharmawan, Lily Hoo, Mattia Makovec, Arvind Nair, Cindy Paladines, Della Temenggung, Violeta Vulovic, and Matthew Wai-Poi. Key input was received from The Fei Ming, Neni Lestari, Djauhari Sitorus, Connor Spreng, Ekaterine Vashakmadze and Anna Wetterberg. The report also benefited from discussions with, and in-depth comments, from Mark Ahern, Jamie Carter, Sjamsu Rahardja, David Nellor and Bill Wallace (Australia Indonesia Partnership for Economic Governance) and Roland Rajah (Department of Foreign Affairs and Trade). This report is a product of the staff of the International Bank for Reconstruction and Development / The World Bank, supported by funding from the Australian Government under the Support for Enhanced Macroeconomic and Fiscal Policy Analysis (SEMEFPA) program. The findings, interpretations, and conclusions expressed in this report do not necessarily reflect the views of the Executive Directors of The World Bank or the governments they represent, or the Australian Government. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Cover and chapter photographs are taken by Josh Estey and Ed Wray and are copyright of the World Bank. All rights reserved. For more World Bank analysis of Indonesia’s economy: For information about the World Bank and its activities in Indonesia, please visit www.worldbank.org/id. In order to be included on an email distribution list for this Quarterly series and related publications, please contact madriani@worldbank.org. For questions and comments relating to this publication, please contact asienaert@worldbank.org. Table of contents EXECUTIVE SUMMARY: SLOWER GROWTH; HIGH RISKS .......................................... I  A. ECONOMIC AND FISCAL UPDATE ............................................................................... 1  1.  Slowly improving global demand, external financing risks remain ............................................................. 1  2.  Despite strong consumption, Indonesia’s economic growth is slowing ...................................................... 3  3.  Headline inflation has normalized but core inflation is rising ..................................................................... 6  4.  Indonesia’s current account deficit remains in focus, despite slowing imports .......................................... 9  5.  Credit conditions are expected to tighten further moving into 2014 .......................................................... 14  6.  Public expenditure and tax revenue growth has slowed over 2013 ............................................................. 17  7.  Given prevailing risks, further progress on pro-growth reforms is needed ................................................ 20  B. SOME RECENT DEVELOPMENTS IN INDONESIA’S ECONOMY ........................ 23  1.  A closer look at the 2014 Budget .................................................................................................................. 23  2.  An update on poverty in Indonesia ............................................................................................................. 28  C. INDONESIA 2015 AND BEYOND: A SELECTIVE LOOK ........................................... 32  1.  The labor market in Indonesia: recent achievements and challenges ....................................................... 32  a.  The challenges of an ongoing but incomplete structural transformation .......................................................... 35  b.  “Good jobs” rising, but many workers remain informal and vulnerable ............................................................ 36  c.  Coping with a largely unskilled labor force ......................................................................................................... 37  2.  Local capacity and development in Indonesia ............................................................................................ 38  a.  A brief history of community-driven development in Indonesia ........................................................................ 38  b.  Understanding changes in local capacity since 2001 .......................................................................................... 39  c.  Democratization, decentralization, CDD and local capacity…........................................................................... 41  d.  …and the importance of enhanced checks and balances at the village level ..................................................... 42  APPENDIX: A SNAPSHOT OF INDONESIAN ECONOMIC INDICATORS ................ 43  LIST OF FIGURES Figure 1: Key commodity export prices show signs of stabilizing at broadly flat levels compared with a year ago ............................................................................................................. 2  Figure 2: Global and emerging market sovereign debt funding costs remain on an up-trend ........ 2  Figure 3: Real GDP growth is moderating, falling to 5.6 percent yoy and 5.0 qoq saar in Q3… .... 3  Figure 4: …though nominal GDP growth increased sharply in Q3 on the back of rising economy- wide prices ................................................................................................................... 3  Figure 5: Investment growth has slowed markedly while consumption growth has remained strong… ........................................................................................................................ 4  Figure 6: …with only building investment driving overall positive investment growth .................. 4  Figure 7: High frequency indicators are mixed but are below their previous highs ........................ 5  Figure 8: The prices of some key foods are stabilizing after a volatile year ..................................... 7  Figure 9: Seasonal food deflation and fading transport price rises have pushed down headline monthly CPI inflation… .............................................................................................. 8  Figure 10: …but core inflation momentum has increased notably ................................................... 8  Figure 11: The current account deficit stabilized at USD 8.4 billion in Q3… ................................ 10  Figure 12: …helped by the non-oil-and-gas trade balance returning to surplus since August...... 10  Figure 13: The weakness in overall imports has been led by a contraction in capital goods ........ 10  Figure 14: Manufacturing and construction together absorb almost 70 percent of Indonesia’s imports ....................................................................................................................... 10  Figure 15: Weaker portfolio investment led to a lower capital and financial account surplus in Q3 relative to Q2… .......................................................................................................... 12  Figure 16:…but measures of onshore FX spot market liquidity conditions have improved since mid-year ..................................................................................................................... 14  Figure 17: Bank credit growth has been inflated by exchange rate effects…................................. 16  Figure 18: …but has slowed, particularly in real terms… ............................................................... 16  Figure 19: Rupiah liquidity has tightened and interbank borrowing costs have risen ................... 16  Figure 20: The 2014 Budget targets a smaller deficit than in 2013 and further reduction in the ratio of debt-to-GDP… .............................................................................................. 24  Figure 21: … but despite this, gross fiscal financing requirements are likely to be similar to 2013’s high levels .................................................................................................................. 24  Figure 22: Energy subsidies still consume a significant part of the Budget .................................. 25  Figure 23: The pace of poverty reduction in recent years has been the slowest in over a decade . 28  Figure 24: The remaining poor households in Indonesia are further below the poverty line than earlier in the 2000s… .................................................................................................. 28  Figure 25: …while the poor and vulnerable also participate less in Indonesia’s recent economic growth ........................................................................................................................ 28  Figure 26: Of Indonesia’s labor force of 121 million workers, 114 million are employed (less than half in the formal sector) ............................................................................................ 33  Figure 27: The rise in the employment rate in Indonesia since 2005 has been among the strongest in the region ............................................................................................... 33  Figure 28: Year-on-year employment growth has been sustained since 2005, although slowing down after 2011 ........................................................................................................... 34  Figure 29: Formal employment contributed four-fifths total job creation between 2001 and 2012 34  Figure 30: Low value-added sectors in services have contributed mostly to job creation between 2001 and 2012 .............................................................................................................. 35  Figure 31: Employment growth and labor productivity growth are negatively correlated............. 35  Figure 32: Important wage differences exist between sectors, and within sectors between type of employment ............................................................................................................... 36   Figure 33: Dependent employment is on the rise, but most workers are still employed in vulnerable forms of work ........................................................................................... 36  Figure 34: Although the labor force has become more skilled, less than 8 percent has a university degree ......................................................................................................................... 37  Figure 35: Over 40 percent of Indonesia’s youth aged 15-24 are not in employment, education or training ....................................................................................................................... 37  LIST OF APPENDIX FIGURES Appendix Figure 1: Quarterly and annual GDP growth.................................................................. 43  Appendix Figure 2: GDP expenditure contributions ...................................................................... 43  Appendix Figure 3: Contributions to GDP production................................................................... 43  Appendix Figure 4: Motor cycle and vehicle sales .......................................................................... 43  Appendix Figure 5: Consumer indicators........................................................................................ 43  Appendix Figure 6: Industrial production indicators ..................................................................... 43  Appendix Figure 7: Real trade flows ............................................................................................... 44  Appendix Figure 8: Balance of payments........................................................................................ 44  Appendix Figure 9: Exports of goods .............................................................................................. 44  Appendix Figure 10: Imports of goods ............................................................................................ 44  Appendix Figure 11: Reserve and capital inflows ............................................................................ 44  Appendix Figure 12: Inflation and monetary policy........................................................................ 44  Appendix Figure 13: Monthly breakdown of CPI ........................................................................... 45  Appendix Figure 14: Inflation across countries ............................................................................... 45  Appendix Figure 15: Domestic and international rice prices.......................................................... 45  Appendix Figure 16: Poverty and unemployment rate .................................................................... 45  Appendix Figure 17: Regional equity indices.................................................................................. 45  Appendix Figure 18: Dollar index and Rupiah exchange rate ........................................................ 45  Appendix Figure 19: 5-year domestic govt. bond yields ................................................................. 46  Appendix Figure 20: Sovereign USD Bond spreads........................................................................ 46  Appendix Figure 21: International commercial bank lending ........................................................ 46  Appendix Figure 22: Banking sector indicators .............................................................................. 46  Appendix Figure 23: Government debt ........................................................................................... 46  Appendix Figure 24: External debt.................................................................................................. 46  LIST OF TABLES Table 1: Indonesia’s economic growth rate is projected to slow to 5.3 percent in 2014 .................iii  Table 2: Under the baseline scenario GDP growth of 5.6 percent is projected for 2013 and 5.3 percent for 2014 ............................................................................................................ 6   Table 3: The persistence of a current account deficit is likely to keep the need to support FDI in focus ........................................................................................................................... 12  Table 4: External debt repayments in Q4 2013 have been high, likely adding to Rupiah pressures… ................................................................................................................. 12  Table 5: Higher Budget disbursement characterized the Jan – Nov 2013 period, relative to previous years............................................................................................................. 18  Table 6: The World Bank projects a fiscal deficit of 2.1 percent of GDP in 2014, narrowing from 2.5 percent in 2013 ...................................................................................................... 19  Table 7: Modestly weaker than expected consumption and investment growth could move 2014 GDP growth down to below 5 percent ...................................................................... 20  Table 8: The approved fiscal deficit in 2014 is 1.7 percent of GDP, slightly higher than previously proposed ..................................................................................................................... 26  Table 9: Macroeconomic and price assumptions have been revised in a conservative direction from those in the August proposal ............................................................................ 27  Table 10: The Medium-Term Budget Framework projects an overall surplus by 2016 ................. 27  Table 11: Comparison of Key Research Aspects in LLI1, LLI2, and LLI3 ..................................... 40  LIST OF APPENDIX TABLES Appendix Table 1: Budget outcomes and projections .................................................................... 47  Appendix Table 2: Balance of Payments ......................................................................................... 47  Appendix Table 3: Indonesia’s historical macro-economic indicators at a glance ....................... 48  Appendix Table 4: Indonesia’s development indicators at a glance .............................................. 49  LIST OF BOXES Box 1: The potential near-term impact of the proposed ban on unprocessed mineral exports on Indonesia’s trade balance .......................................................................................... 13  Box 2: Update on the policies to improve the investment climate in Indonesia............................ 22  Box 3: BLSM, Susenas and measuring poverty ............................................................................... 29  Box 4: Local Level Institutions Studies methodology .................................................................... 40  Slower growth; high risks Indonesia Economic Quarterly Executive summary: Slower growth; high risks Looking ahead to 2014, The final quarter of 2013 has seen the continuing adjustment of the Indonesian economy to Indonesia faces slower more subdued commodity prices and tighter external financing conditions, and to the related growth, and significant pressures on external balances. Policies have responded, particularly through tighter economic risks… monetary conditions, the Rupiah has depreciated substantially in real terms, and investment spending and output growth have weakened. These developments are broadly supportive of continued macroeconomic stability, including by helping to lower the current account deficit, although their impact continues to play out, adding additional uncertainty to the path of the domestic economy. At the same time, the international environment is also shifting, with global growth expected to improve, bringing potential policy changes, notably in US monetary policy, which could add to the pressures on Indonesia’s external financing position. …requiring a policy In light of the slower pace of growth, and the risks facing the economy, there is a strong focus not only on need for Indonesia to augment the recent macro focus on tighter monetary policy, exchange macro adjustment but rate adjustment and import compression, with deeper reforms to lift export performance also on credible and support investment inflows, especially FDI. Progress on the credible implementation of implementation of such measures can help to limit the vulnerability of Indonesia’s external balances to tighter, longer-term or more volatile, global financing conditions and can help to support a sustainable virtuous investment- and cycle of strong investment, including foreign investment, and output growth over the export-enhancing medium term. The political dynamics of an election year may play an important role in reforms framing policy choices in 2014 but this backdrop also adds importance to the need for clear communication and coordination of such deeper reforms, both in the formulation and implementation stages, and for the avoidance of policy missteps. This would support local and foreign investor confidence in Indonesia’s future economic trajectory, and external financing inflows. December 20 13 THE WORLD BANK | BANK DU NIA i Slower growth; high risks Indonesia Economic Quarterly The performance of Economic conditions amongst the world’s largest economies, and Indonesia’s major trading the global economy is partners, remain uneven. Growth in the US has picked up steam over 2013, the Euro Area expected to improve has finally exited its long recession but its recovery remains subdued, while growth in Japan, further in 2014… though positive, has weakened. China’s economic activity accelerated in the second half of 2013, joined in recent months by India, but activity in some other major developing economies like Brazil has remained more subdued. Moving into 2014, the baseline expectation is for global economic conditions to strengthen, as high income economies gain more traction, supporting growth in developing economies, notably including China, and resulting in a continued modest expansion in the demand for Indonesia’s exports. …and commodity International commodity prices have generally increased in recent months lifting the price prices have index of Indonesia’s top ten commodity exports by 3.8 percent since August (though it stabilized… remains 2 percent lower in 2013 and 22 percent below its recent peak in February 2011), helped by higher coal, natural gas, and palm oil prices. If sustained, the nascent stabilization in commodity prices would help arrest the decline in Indonesia’s terms of trade which has driven much of the deterioration in the external balances. However, the baseline outlook of only a moderate pick-up in global growth, coupled with the likelihood of tightening global liquidity conditions and more structural downward pressure on prices from supply-side factors, does not suggest a major upswing in commodity prices in 2014. …but international The international outlook, although improving, still contains sizeable policy challenges and policy risks and uncertainties. In Europe, the recovery is fragile and will likely be uneven due to ongoing financial conditions deleveraging and considerable reform challenges. In Asia, the pace and manner in which continue to pose ambitious structural reform efforts in China and Japan are implemented, and elections in challenges for India, will shape the outlook. Above all, the timing and pace of the phasing out of the US Indonesia Federal Reserve’s asset purchase program (so-called “tapering”) is uncertain, but keeps the risks of global market volatility and more difficult external financing conditions to the fore. Domestic policy and As highlighted in the October 2013 IEQ, the expectations of tapering, and related tightening economic adjustments external financing conditions, beginning in May, combined with the gradual transmission of over 2013 have been lower commodity prices since 2011, have precipitated a number of important economic and significant… policy adjustments in Indonesia over the second half of 2013, which are ongoing. Bank Indonesia (BI) has raised its policy interest rate corridor by 175 basis points (bp) since June, when the Government increased subsidized fuel prices by an average of 33 percent. The Rupiah has depreciated by 24 percent against the US Dollar year-to-date, largely since August, and in real trade-weighted terms fell by 12.5 percent from its recent peak in May through October. …and growth has Indonesia’s economic growth has slowed notably, to 5.6 percent year-on-year (yoy) in the slowed notably, third quarter, marking the fifth consecutive quarter of declining growth from the recent high reducing import of 6.4 percent yoy in Q2 2012. Most of the slowdown has been driven by softening demand, especially of investment spending, which was up a relatively modest 4.5 percent yoy in the third quarter, capital goods, helping reflecting contractions in machinery and equipment investment from their year-ago levels. to stabilize the current Weaker investment spending has cut capital goods imports, the US Dollar value of which account deficit was 16.3 percent lower yoy over the three months to October. Overall import volumes have been subdued, and contracted significantly in Q3. Export volumes also contracted in sequential terms in Q3, but not by as much as imports, such that net exports added significantly to output growth. Overall, indications are that Indonesia’s trade balance is shifting in such a way as to stabilize and begin to narrow the overall current account deficit. Macroeconomic The monetary policy and exchange rate adjustments seen in 2013 are broadly positive for adjustments to date macroeconomic stability, with the depreciation of the Rupiah acting as a “shock absorber” have been broadly for the weaker terms of trade by supporting export earnings and dampening import demand. positive for stability, However, these adjustments carry costs, and can bring potential risks, notably by placing but do carry some pressure on public and private sector balance sheets by raising the Rupiah value of external costs… debt—particularly if there are currency mismatches—and eroding incomes through higher debt servicing and import costs. December 20 13 THE WORLD BANK | BANK DU NIA ii Slower growth; high risks Indonesia Economic Quarterly …and while the 2014 The above monetary policy and exchange rate changes are carrying the burden for near-term Budget maintains a macro adjustment. On the fiscal side, the 2014 Budget, approved by Parliament on October prudent stance it does 25, maintains a non-expansionary stance, projecting a smaller overall fiscal deficit of 1.7 not contain any major percent of GDP. However, the Budget does not include any major revenue or expenditure fiscal reforms reforms, though it does incorporate a reduction in the allocation to electricity subsidies by 29 percent relative to 2013, reflecting the intention for ongoing upward tariff adjustment. With the impact of the June 2013 price hike offset by the weakness in the Rupiah, the budget allocation to fuel subsidies is set to remain significant in 2014 at IDR 211 trillion (or 2.0 percent of GDP), up IDR 11 trillion on the 2013 revised Budget level. The World Bank As the impact of less buoyant commodity prices, tighter external financing conditions, projects GDP growth higher real domestic interest rates, and the depreciation of the Rupiah, continues to play out, to slow to 5.3 percent Indonesia’s GDP growth is projected by the World Bank to slow to 5.3 percent yoy in 2014 in 2014, and the current in the base case (Table 1), from 5.6 percent in 2013. Helped by relatively subdued import account deficit to growth and a mild pick up in exports, the current account deficit should narrow, to USD 23 narrow… billion in 2014 (2.6 percent of GDP), from USD 31 billion (3.5 percent of GDP) in 2013. Table 1: Indonesia’s economic growth rate is projected to slow to 5.3 percent in 2014 2011 2012 2013p 2014p Real GDP (Annual percent change) 6.5 6.2 5.6 5.3 Consumer price index (Annual percent change) 5.4 4.3 7.0 6.1 Current account deficit (Percent of GDP) 0.2 -2.8 -3.5 -2.6 Budget balance (Percent of GDP) -1.1 -1.9 -2.5 -2.1 Major trading partner GDP (Annual percent change) 3.6 3.4 3.4 3.9 Source: BI; BPS; Ministry of Finance; World Bank staff projections (2013p and 2014p) …but risks around this These projections, however, are subject to significant uncertainty, and risks are tilted towards base line are skewed weaker domestic growth. In particular, the baseline view is contingent on external financing towards slower conditions being sufficiently supportive to avoid precipitating a more abrupt external growth… balance adjustment, causing economic disruption and a knock-on impact on growth. Such a deterioration could be triggered by international market developments, or be specifically due to domestic economic and policy developments. In addition to the risks around growth, there are also risks to the fiscal outlook. For example, the World Bank estimates that a 10 percent depreciation of the Rupiah increases the fiscal deficit by 0.3-0.4 percentage points of GDP, largely by raising fuel subsidy costs (see the October 2013 IEQ). …with a particular Indonesia’s GDP forecasts are particularly sensitive to the investment outlook which faces focus on risks to risks from further real interest rate increases and exchange rate volatility, or from a greater- investment growth, but than-expected tightening in credit conditions impacting the thus-far solid growth in building also to the resilience of investment. There is also the risk that private consumption growth—although notably private consumption resilient to date—may come under more pressure from higher prices and interest rates, weaker income growth and negative wealth and confidence effects. Even mildly weaker domestic demand growth than currently anticipated (e.g. a 0.5 percentage points reduction in private consumption and investment growth relative to their base lines) could reduce 2014 growth to below 5 percent. A more severe moderation in domestic demand, for example, due to an intensification of external financing constraints or negative confidence effects associated with policy missteps, could feasibly move 2014 growth to below 4.5 percent. There is a need for With consumption goods accounting for less than 10 percent of Indonesia’s imports, the policies to support slowdown in imports, while supporting a reduction in the current account deficit, mainly exports and FDI means less raw material and intermediate products for manufactured goods production, and inflows, and to avoid fewer capital goods. In the absence of available, competitive, domestic substitutes this will potentially damaging likely come at a direct cost to current and future export and output growth. While import measures aimed at compression due to relative price and income effects can play a useful short-term role in the import suppression adjustment process, the real policy challenge for Indonesia is therefore not to focus on additional import suppression through regulatory measures, but rather to increase exports, and to secure more and higher quality external financing, particularly FDI. December 20 13 THE WORLD BANK | BANK DU NIA iii Slower growth; high risks Indonesia Economic Quarterly Measures to support While FDI into Indonesia has so far proved resilient, if still at lower levels relative to GDP improvements in the than many regional peers, it is underpinned by three factors which have all come under business environment varying degrees of recent pressure: Indonesia’s huge natural resource base (undercut by have an important role generally softer global commodity prices and regulatory uncertainties), the large and growing to enhance Indonesia’s domestic market (undercut, at least in the near-term, by the headwinds facing domestic underlying demand), and Indonesia’s potential as a regional production hub in Asia (undercut by attractiveness to FDI regulatory uncertainties, and skills and infrastructure gaps). Consequently, there is a clear inflows… need to make more progress to support FDI, including by moving forward on a pro- investment revision of the negative investment list (DNI), a centerpiece of the Government’s August policy package still awaiting implementation, and strengthening the quality of the overall investment policy formation process to minimize policy uncertainty. The Government has also launched a significant policy package to improve the ease of doing business, with an action plan announced on October 25 across eight “Doing Business” areas. The challenge now is to implement this package on the ambitious February 2014 timeline, providing a positive signal as to the trajectory of the business environment and commitment to reform implementation. …and process and The real depreciation of the Rupiah over 2013, by boosting international competitiveness, regulatory presents an opportunity for Indonesia to improve its export performance. Furthermore, the improvements in trade weakening in commodity prices could also shift investment more towards the non-resources facilitation and sector, including export-oriented manufacturing. As highlighted in the October 2013 IEQ, a logistics could also number of “quick wins” are available in trade facilitation and logistics, focusing on the deliver “quick wins” to performance of import cargo clearance in ports such as Tanjung Priok in Jakarta, which by lift exports improving efficiency and predictability in trade logistics could boost exports and strengthen Indonesia’s participation in the global production network. Supporting longer-term export competitiveness also requires a continued focus on plugging infrastructure and skills gaps. A continued emphasis As highlighted in this and previous IEQs, fuel subsidies remain a major source of fiscal risk, on the quality of dent the ability of the flexible exchange rate to absorb shocks, and divert spending away spending, including, from more efficient uses, including the needed increases in public investment. Although any through subsidy fuel price increases appear politically unpalatable ahead of elections, there is clearly a strong reform, can help to need for further reforms, while at the same time improving the safety net for the poor and meet longer-term vulnerable. Reform options include those that may not result in an immediate increase in development goals… prices, such as implementing a rule-based approach for setting subsidized fuel prices in such a way as to gradually limit the fiscal exposure to higher Rupiah-denominated fuel prices. …along with measures Reallocating spending from subsidies could support a strengthening of Indonesia’s social to make further assistance programs. While the recent expansion in long-term social assistance programs progress in the fight from the third quarter of 2013 is welcome, social assistance spending (at about 0.5 percent against poverty, … of GDP) remains low by global standards and commitment to the ongoing growth of social assistance, and effective program implementation, will be required to help speed up poverty reduction. For example, poverty in Indonesia fell by 0.6 percentage points in the year to March 2013, to 11.4 percent as measured by the official rate. Moving into 2014, higher prices and slower economic growth add to the poverty reduction challenge. Indeed, the World Bank projects the March 2014 poverty rate to be 11.0-11.1 percent, indicating a continuation of the ongoing slowing of poverty reduction and suggesting that the Government’s 2014 target of an 8-10 percent poverty rate will likely be missed. …to address longer- To make further progress in achieving Indonesia’s medium-term development objectives, it term labor market will be necessary to support ongoing positive structural change in the labor market. This challenges and support requires steps to enhance productivity and facilitate formal sector employment growth in governance capacity at higher value-added sectors, including by increasing the skills base of the labor force. This the local level edition of the IEQ also considers the insights from recent survey results on another key element for delivering on Indonesia’s development goals, namely strengthening local governance capacity for effective service delivery. December 20 13 THE WORLD BANK | BANK DU NIA iv Slower growth; high risks Indonesia Economic Quarterly A. Economic and fiscal update 1. Slowly improving global demand, external financing risks remain The growth Economic conditions amongst the world’s largest economies, and Indonesia’s major trading performance of partners, remain uneven. The Euro Area finally exited from recession in the second quarter Indonesia’s major of 2013, following six consecutive quarters of contraction, but growth softened again in the trading partners third quarter (to 0.4 percent at a seasonally-adjusted annualized rate, qoq saar), suggesting remained mixed that its path to recovery remains bumpy. Growth also weakened in Japan in the third through the end of quarter, to 1.1 percent qoq saar, while, in contrast, US growth firmed to 3.6 percent qoq 2013… saar, suggesting that the US economy has continued to gain steam fairly steadily through 2013. Amongst major developing economies, growth in China moved up to 9.3 percent qoq saar, but in Brazil output contracted in Q3 versus Q2, by 0.5 percent (seasonally adjusted), and growth has been relatively subdued in India (at 4.8 percent year-on-year, yoy, in Q3), though recently showing signs of re-accelerating. …but global demand is Looking ahead to 2014, high income economy growth is expected to remain at or above its expected to stage a recent pace, with the Euro Area’s still-fragile recovery expected to continue, and the US modest improvement economy expected to expand at close to its current rate. Supported by this mild expansion, in 2014… developing country growth is also expected to increase, with China’s economy growing by 7.7 percent in 2014, and developing country growth excluding China climbing to above 4 percent in 2014, up from approximately 3.5 percent in 2013. Consequently, the World Bank projects the weighted average growth of Indonesia’s major trading partners to increase to 3.9 percent in 2014, up 0.5 percentage points from 2013. In the base case, therefore, international demand should increase moderately through 2014, supporting a continued modest expansion in the demand for Indonesia’s exports. D e c e m b e r 20 1 3 T H E W O R L D B A N K | B A N K DU N IA 1 Slower growth; high risks Indonesia Economic Quarterly …and Indonesia’s International commodity prices have generally increased in recent months. The weighted US major commodity Dollar price index of Indonesia’s ten most important export commodities, accounting for prices may be approximately half of total export revenues, troughed in September and picked up through stabilizing, following the end of November, helped by higher coal, natural gas, and palm oil prices (Figure 1). As a over two years of result the year-to-November decline was trimmed to 2.5 percent from 7 percent in sustained losses September. However, the index remained down 22 percent from its February 2011 peak, with the prices of coal (down 40 percent), palm oil (down 37 percent) and copper (down 27 percent) having fallen most precipitously from their 2011 highs. Should it prove sustained, the nascent stabilization in commodity prices would help arrest the decline in Indonesia’s terms of trade which has driven much of the deterioration in its external balances. However, the base line outlook of only a moderate pick-up in global growth conditions through 2014, coupled with the likelihood of tightening global liquidity conditions and more structural supply-side factors placing downward pressure on prices, does not suggest a major upswing in commodity prices. In addition, as noted in the October 2013 IEQ, Indonesia’s terms of trade continue to suffer from the fact that global oil prices, impacting the country’s sizable fuel imports, remain relatively elevated compared with non-energy commodity prices. However, ongoing While the expected modest increase in global growth in 2014 should be broadly positive for policy uncertainties Indonesia by supporting overall export demand, the international outlook continues to be cloud the international clouded by major policy uncertainties, keeping the risks of more adverse global growth outlook… scenarios elevated. In Europe, high unemployment (12 percent for the Euro Area), large output gaps, and continued credit contractions in the periphery generate deflation risks, while reform fatigue may mean that the reforms necessary to boost structural growth prove hard to deliver, complicating the economic recovery. In Asia, the pace and manner in which ambitious structural reform efforts in China and Japan are implemented, and national elections in India, will shape the outlook. Figure 1: Key commodity export prices show signs of Figure 2: Global and emerging market sovereign debt stabilizing at broadly flat levels compared with a year ago funding costs remain on an up-trend (US Dollar commodity price index, 2007 average=100) (yields, percent) Top 10 index Coal 300 Natural gas Palm oil 6 US 10-year note 16 Rubber Emerging markets 14 5 USD bonds (RHS) 250 Indonesia USD bonds 12 4 (RHS) 10 200 3 8 150 6 2 4 100 1 2 0 0 50 Jan-07 Jan-09 Jan-11 Jan-13 Jan-07 Jan-09 Jan-11 Jan-13 Note: Top 10 index is index of USD prices of Indonesia’s 10 most Note: Emerging market and Indonesia USD bond yields as important export commodities, weighted by share in 2012 exports measured by JP Morgan EMBIG index and Indonesia sub-index Source: World Bank Source: JP Morgan …and external Above all, the global financial market and ultimately real economy impact, and timing, of the financing and market gradual phasing out of the US Federal Reserve’s asset purchase program (so-called conditions pose “tapering”) is uncertain, but keeps the risks of international market volatility and more ongoing challenges difficult external financing conditions to the fore. US yields remain well up from their levels before tapering came into focus in May, with the US 10-year Treasury yield at 2.9 percent on 11 December up from 1.6 percent in April. Dollar sovereign borrowing costs for emerging markets have increased by approximately 160 basis points in 2013 on average (as measured by the blended yield of the JP Morgan Emerging Market Bond Index). As the US Federal December 20 13 THE WORLD BANK | BANK DU NIA 2 Slower growth; high risks Indonesia Economic Quarterly Reserve negotiates the normalization of monetary policy, the likelihood of upward pressure on longer-term borrowing costs globally, along with bouts of market volatility as experienced during the tapering “dress rehearsal” period of May-August, will remain a concern. Emerging markets, including Indonesia, therefore face tighter global liquidity conditions, placing upward pressure on their external funding costs and potentially making it more difficult to rely on net portfolio investment inflows to meet external financing needs. 2. Despite strong consumption, Indonesia’s economic growth is slowing Economic growth in Tightening external financing conditions, beginning in May, have compounded the gradual Indonesia continued to transmission of lower commodity prices since 2011, precipitating a number of important moderate in Q3… economic and policy adjustments in Indonesia, and weighing on growth. The pace of expansion of Indonesia’s economy has slowed down, a trend which the World Bank expects to continue at least into the early part of 2014. Real GDP in the third quarter was up 5.6 percent yoy, marking the fifth consecutive quarter of weakening growth in year-on-year terms, down from the recent high of 6.4 percent in Q2 2012 (Figure 3). In sequential terms, growth in Q3 slipped to 5.0 percent qoq saar, down from 5.5 percent in the previous two quarters and the recent high of 6.6 percent in Q4 2012. In contrast to real GDP, nominal GDP growth picked up sharply, to 12.1 percent yoy in Q3 from 8.2 percent yoy in Q2, reflecting an increase in the growth of the GDP deflator—the broadest measure of prices across the economy—which had previously fallen to very low levels. This is line with the sharp rise in consumer prices following the June subsidized fuel price increase (Figure 4), and likely also reflects higher import prices as a result of the Rupiah depreciation. Figure 3: Real GDP growth is moderating, falling to 5.6 Figure 4: …though nominal GDP growth increased sharply percent yoy and 5.0 qoq saar in Q3… in Q3 on the back of rising economy-wide prices (real GDP growth, percent) (growth yoy, percent) 9 30 Nominal GDP Quarter on 8 Year on year Quarter saar 7 20 6 5 10 GDP deflator 4 3 0 Consumer Price 2 Index 1 -10 Sep-06 Mar-08 Sep-09 Mar-11 Sep-12 0 Sep-06 Sep-08 Sep-10 Sep-12 Source: BPS; World Bank staff calculations Source: BPS; World Bank staff calculations …mainly reflecting The key driver of the moderation in growth in Q3 was fixed investment, which expanded by weak investment a weak 2.6 percent qoq saar to be 4.5 percent higher yoy. Investment growth, while volatile growth… across quarters, has been on a downward trend since its recent peak of 12.5 percent yoy in Q2 2012 (Figure 5). Building investment, which accounts for approximately 85 percent of total nominal fixed investment spending, has remained resilient, in fact expanding at a rapid 9.5 percent pace (qoq saar) in Q3. The slowdown in overall investment has been driven by the smaller but more volatile components of investment spending. Spending on foreign machinery, equipment and transportation goods (together accounting for the bulk of non- building fixed investment) was close to flat in Q3 compared with Q2, leaving them well below their year-ago levels (with foreign machinery and equipment and foreign transportation goods down 0.5 percent and 8.4 percent yoy, respectively). D e c e m b e r 20 1 3 T H E W O R L D B A N K | B A N K DU N IA 3 Slower growth; high risks Indonesia Economic Quarterly …which has put Flat or contracting demand for machinery and equipment, in turn, has limited imports. downward pressure on Import volumes contracted sharply in the third quarter, by 3.0 percent from the second imports, while export quarter in seasonally-adjusted terms. Export volumes were little-changed from the second volumes stayed quarter (declining by 0.8 percent, seasonally adjusted). In combination, net exports therefore subdued added significantly to output growth in the third quarter. In contrast, Private consumption, which accounts for about 55 percent of total expenditure, continued consumption growth to increase strongly in Q3, by 6.9 percent qoq saar to be up 5.5 percent yoy, despite the June has stayed strong increase in subsidized fuel prices and the monetary policy tightening, as well as the financial market turbulence and currency depreciation experienced over the quarter. The resilience of household spending reflects in part the positive impact of the Government’s IDR 30 trillion compensation package following the fuel price increase (which began to be disbursed during Q3, as discussed further in section B.1, and compares with the estimated rise in consumption over the quarter of IDR 111 trillion). Other reasons likely include lags in the transmission of monetary policy to the real economy, consistent with the still rapid pace of credit expansion recorded through September, delays in the impacts of the asset price movements seen over the quarter (which have increased import and financing costs) on domestic prices, and relatively limited near-term linkages between asset prices and consumer spending (that is, only modest wealth effects). Figure 5: Investment growth has slowed markedly while Figure 6: …with only building investment driving overall consumption growth has remained strong… positive investment growth (real GDP and expenditure constituents growth yoy, percent) (contributions to overall investment growth yoy, percent) Building Machinery 14 Private cons. Gov cons. 14 Transportation Other 12 Investment Net Exports 12 Total Discrepancy GDP 10 10 8 8 6 6 4 4 2 2 0 0 -2 -2 -4 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Sep-13 Sep-10 Jun-11 Mar-12 Dec-12 Sep-13 Source: BPS; World Bank staff calculations Source: BPS; World Bank staff calculations The construction On the production side, reduced growth was broad-based across sectors in Q3, but most sector remained strong concentrated in manufacturing and trade, hotels and restaurants. The construction sector in Q3, and the services grew by 5.9 percent qoq saar to be up 6.2 percent yoy; a slightly slower pace than in Q2 but sector continues to broadly consistent with the strong pace of building investment discussed above. Services drive growth sector growth remained generally solid, at 6.3 percent qoq saar (up 7.3 percent yoy), but a moderation in the biggest services sub-sector—trade, hotels and restaurants—was visible, with output growth slowing to 2.8 percent qoq saar, leaving Q3 output up 6.0 percent yoy, compared with a 6.5 percent increase yoy in H1 2013. Industrial output growth, excluding mining, slipped to 2.4 percent qoq saar (3.8 percent yoy). Mining output was flat compared with Q2 on a seasonally-adjusted basis, with output 1.6 percent higher yoy, but this masked diverging trends in the two main mining sub-sectors: crude oil and natural gas output remains subdued (down 3.0 percent yoy), while non-oil and –gas mining output picked up, increasing by 3.2 percent qoq saar, potentially reflecting a pick-up in production ahead of the raw mineral export ban beginning in January 2014 (see Box 1). December 20 13 THE WORLD BANK | BANK DU NIA 4 Slower growth; high risks Indonesia Economic Quarterly High frequency High frequency economic Figure 7: High frequency indicators are mixed but are indicators are mixed activity indicators suggest that below their previous highs but are consistent consumer sentiment remains (BI retail sales index, vehicle sales and cement volumes, 3mma yoy, percent) overall with a more below the highs seen in the 50 Motor vehicles moderate pace of first half of 2013 (i.e. before domestic demand the June subsidized fuel price 40 growth… increase), though not that sentiment is on a sustained 30 Cement down-trend. BI’s survey 20 measure of retail sales picked up to 12.1 percent yoy in 10 Retail sales November, but its growth rate remains lower than the Q4 0 2012 highs of around 17 -10 Motor cycles percent yoy. Vehicle sales growth has also slowed -20 relative to the high levels of 2012 and early 2013, while -30 Nov-11 May-12 Nov-12 May-13 Nov-13 motor cycle sales have been high since Idul Fitri but with Source: BPS; World Bank staff calculations declining momentum. On the production side, cement sales over the available 2-month period since Ramadan (i.e. September and October) were up 12.9 yoy, roughly halving from growth of over 21 percent yoy seen early in 2013 (Figure 7). The HSBC Purchasing Managers Index (PMI) for Indonesia’s manufacturing sector suggests marginally expansionary conditions, standing at 50.3 for November. …and output growth is The World Bank expects that Indonesia’s GDP growth will slow further, to 5.3 percent in projected to slow 2014 in the base case (Table 2). Domestic demand faces headwinds from tighter financial further conditions, as discussed further in Section 5, but also from potentially longer-term constraints due to less supportive commodity prices and terms of trade than in recent years. In particular, private consumption, the mainstay of the Indonesian economy, has so far remained notably resilient, but is likely to come under more strain, denting growth. The investment outlook hinges on building investment, which in the face of tighter credit, reduced investable funds from commodity-related profits, and increased import costs (as discussed in Section 4) is also likely to slow. Election-related spending in 2014 will likely add materially to domestic demand, as campaign-related activity adds to private consumption, but is temporary in nature, and may in part substitute for other spending. Overall, risks to the growth outlook are skewed to the downside, as discussed in Section 7. December 20 13 THE WORLD BANK | BANK DU NIA 5 Slower growth; high risks Indonesia Economic Quarterly Table 2: Under the baseline scenario GDP growth of 5.6 percent is projected for 2013 and 5.3 percent for 2014 (percentage change, unless otherwise indicated) Annual Year to December quarter Revision to Annual 2012 2013 2014 2012 2013 2014 2013 2014 1. Main economic indicators Total consumption expenditure 4.8 5.1 4.8 3.9 4.8 5.2 0.1 -0.2 Private consumption expenditure 5.3 5.1 4.9 5.4 4.4 5.2 0.2 -0.3 Government consumption 1.2 5.0 4.4 -3.3 7.0 5.0 -1.1 -0.1 Gross fixed capital formation 9.8 4.4 4.4 7.3 3.1 5.4 -0.9 -0.5 Exports of goods and services 2.0 4.4 5.4 0.5 3.8 7.0 -1.3 -0.3 Imports of goods and services 6.6 0.5 3.4 6.8 -1.9 4.0 -1.9 -1.2 Gross Domestic Product 6.2 5.6 5.3 6.1 5.1 5.4 0.0 0.0 Agriculture 4.0 3.7 2.7 2.0 5.3 2.6 0.3 0.3 Industry 5.2 4.5 4.2 5.4 3.8 4.4 0.1 0.2 Services 7.7 7.1 6.8 7.6 6.2 6.8 -0.2 -0.2 2. External indicators Balance of payments (USD bn) 0.2 -14.0 -12.8 n/a n/a n/a 1.4 -8.8 Current account bal. (USD bn) -24.4 -30.6 -22.8 n/a n/a n/a -1.4 -0.7 Trade balance (USD bn) -1.7 -9.1 -2.5 n/a n/a n/a -1.2 -1.5 Financial account bal. (USD bn) 25.2 17.1 10.0 n/a n/a n/a 2 -8.1 3. Other economic measures Consumer price index 4.3 7.0 6.1 4.4 8.6 5.1 -0.3 -0.6 Poverty basket Index 6.5 7.8 6.7 5.4 9.7 5.2 0.6 0.4 GDP deflator 4.6 4.4 6.4 2.7 6.6 5.8 1.8 2.2 Nominal GDP 11.0 10.3 12.0 9.0 12.0 11.6 1.9 2.3 4. Economic assumptions Exchange rate (IDR/USD) 9419 10600 11800 9630 11800 11800 200.0 400.0 Indonesian crude price (USD/bl) 113 104 103 108 105 103 -1.9 -2.0 Major trading partner growth 3.4 3.4 3.9 3.1 4.0 4.0 0.0 0.0 Note: Projected trade flows relate to the national accounts. Exchange rate is an assumption based on recent averages. Revisions are relative to projections in the October 2013 IEQ Source: MoF; BPS; BI; CEIC; World Bank projections 3. Headline inflation has normalized but core inflation is rising Consumer inflation has Consumer prices have been volatile over 2013, reflecting first the impact of trade restrictions been volatile over on certain foods (later unwound), and then the impact of the June increase in subsidized fuel 2013… prices. While the direct impact of the fuel price increase has now faded and food price disinflation has set in following Idul Fitri, underlying inflation pressures (as measured by core CPI) have increased significantly since May. Going forward, the challenge for monetary policy will be to gauge ongoing risks of higher pass-through from the exchange rate into consumer prices (sometimes called “imported inflation”), and rising price expectations, broadly offset by the expected continued moderation in domestic demand. …but headline Consumer prices as measured by the headline consumer price index (CPI) surged by 5.5 inflation momentum is percent from June to August, largely as a result of the 33 percent average increase in now subdued as the subsidized fuel prices implemented on June 22, but also the seasonal impact of Ramadan, effects of the fuel which this year fell in July/August. This abrupt increase in the price level has elevated year- subsidy reform and on-year inflation to 8.4 percent in November. However, headline inflation momentum has Ramadan have faded… abated since August, with the headline CPI essentially flat month-to-month over this period, as transportation-related price increases have flattened out and food prices have fallen back significantly from their Ramadan-related increases in the middle of the year (Figure 9). D e c e m b e r 20 1 3 T H E W O R L D B A N K | B A N K DU N IA 6 Slower growth; high risks Indonesia Economic Quarterly …with welcome food Domestic food prices in Figure 8: The prices of some key foods are stabilizing after price deflation having Indonesia have been volatile in a volatile year set in following a 2013, climbing early in the (price index, November 2012 average=100) volatile 2013 for some year on the back of trade 450 key food prices restrictions which significantly Ramadan 400 pushed up the prices of items Onions such as onions, chili and garlic. 350 The subsequent unwinding of 300 these measures provided some Chili price relief in the second 250 quarter, before the seasonal 200 impact of Ramadan in 150 July/August brought renewed Beef Eggs upward pressure on many 100 food prices (Figure 8). Helped 50 Soybeans Garlic by the seasonal post-Ramadan decline in many food prices, 0 three consecutive months of Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 overall food price deflation in Source: BPS; World Bank staff calculations month-on-month terms through November has now lowered raw food price inflation from a peak of 15.1 percent yoy in August, to 12.2 percent in November. Rice prices have The domestic price of rice, a key component of the consumption basket of poor households increased fairly in Indonesia, increased by 5.1 percent yoy in November. This fairly modest increase was due modestly, though to relatively favorable production. Indonesia’s rice production in 2013 is estimated officially remaining well above to have increased by 2.6 percent following the final harvest of the year, to 70.87 million tons international prices (44.6 million tons on a milled basis), mainly reflecting expanded acreage, as yields are estimated to have remained at 2012 highs of 5.1 tons per hectare. The modest rise in domestic rice prices has also contributed to a reduction in the gap between Indonesian and comparable international prices (from Thailand or Vietnam). Indonesian prices were a record 90-110 percent higher (depending on quality) than international prices in June, falling to 50–60 percent higher in November. The reduction of the Indonesian-international rice price gap was also driven by an increase in Rupiah-denominated international rice prices (including an 8 percent and 29 percent increase for medium quality rice from Vietnam in US Dollar in Rupiah terms, respectively). The pick-up in core Although the lack of upward momentum in headline CPI is an encouraging indication that inflation, however, overall consumer price pressures remain contained, the recent pattern of core inflation— suggests caution is still which excludes volatile items such as food and fuel—argues for caution (Figure 10). Core needed around CPI increased by 4.8 percent yoy in November, its highest monthly reading since September inflation risks… 2011, and its recent pace of increase, a 7.7 percent annualized rate from September to November over the previous three months, has been significant. D e c e m b e r 20 1 3 T H E W O R L D B A N K | B A N K DU N IA 7 Slower growth; high risks Indonesia Economic Quarterly Figure 9: Seasonal food deflation and fading transport price Figure 10: …but core inflation momentum has increased rises have pushed down headline monthly CPI inflation… notably (composition of monthly increase in headline CPI, percentage points) (annualized 3-month/3-month change, percent) 3.5 Other items 20 Headline 3.0 Housing & related 2.5 15 Transport, communication and finance 2.0 Food 10 1.5 Core 1.0 5 0.5 0.0 0 -0.5 -1.0 -5 Nov-11 May-12 Nov-12 May-13 Nov-13 Source: BPS; World Bank staff calculations Source: BPS; World Bank staff calculations …especially in light of One source of upward pressure on core inflation since May has likely been the depreciation cost-push pressures of the Rupiah which, while broadly supportive for Indonesia’s economic adjustment to from the weaker external constraints, adds to cost-push inflation pressures through the price of imported Rupiah goods. Given the significant 24 percent nominal depreciation of the currency year-to-date, the rise in core inflation has so far been relatively modest. However, in the absence of a counterfactual, it is important to note that inflation may have been more subdued in the absence of the Rupiah depreciation. It is also likely that the weaker Rupiah will continue to feed into inflation with a lag, as importers may absorb higher import costs for a time in order to preserve market share, but later pass on increases as a result of ongoing margin erosion. Finally, with much of the Rupiah’s adjustment to date having occurred only since August, it is too soon to know for sure how Rupiah depreciation will feed through into inflation. As a rule of thumb, however, it is estimated that a 10 percent Rupiah depreciation adds approximately 0.5 percentage points to inflation in a given quarter. In the base case, In the base case, inflation pressures are expected to remain contained, consistent with the headline inflation is weaker growth outlook, with headline inflation declining gradually through Q2 2014 to expected to remain approximately 7.5 percent. Headline inflation is then expected to fall sharply as the impact of below its recent peak, the June 2013 fuel price change drops out of the base in Q3 2014, following which headline but core inflation CPI should return to below the ceiling of BI’s current target band of 3.5-5.5 percent yoy. pressures to remain on Core inflation, however, is expected to be pushed higher in coming months (to the rise through the approximately 5.5 percent in Q1 2014) by the exchange rate and wage rises, including from first half of 2014 the impact of new minimum wage increases for 2014 (including the 11 percent increase agreed for the District of Jakarta). Risks to the base case expectations for inflation are balanced, with the outlook depending on the interplay between Rupiah depreciation, wage- setting for 2014 and temporary factors such as higher election-related spending in Q1 2014, set against the weaker domestic demand growth trend and tighter financial conditions. December 20 13 THE WORLD BANK | BANK DU NIA 8 Slower growth; high risks Indonesia Economic Quarterly 4. Indonesia’s current account deficit remains in focus, despite slowing imports External balance Indonesia’s current account deficit showed signs of stabilizing in the third quarter, but at pressures remain USD 8.4 billion remained well above net direct investment of USD 5.1 billion, implying a central to the outlook significant “basic balance” deficit (of USD 3.3 billion in Q3). This gap highlights Indonesia’s for Indonesia’s continuing reliance on potentially volatile portfolio investment inflows, a potential economy vulnerability that is likely to remain a strong focus for policymakers and investors. In addition, although Indonesia’s overall external debt burden is low, external debt repayments are significant, adding to the currency and refinancing risks faced by the Government and corporate sector in the context of ongoing international financial market uncertainties. In the base case, the current account balance is expected to narrow through 2014, but the modest likely pace of improvement, and economic costs of import compression, argue for a continued policy focus on improving export performance and supporting foreign direct investment as a source of high quality external financing. Indonesia’s current In the third quarter of 2013, the current account deficit was USD 8.4 billion, or 3.8 percent account deficit of GDP (Figure 11), narrower than the USD 10 billion or 4.4 percent of GDP deficit seen in narrowed to 3.8 percent the second quarter. Early indications for the final quarter of 2013 are that this gradual of GDP in Q3 from 4.4 narrowing of the deficit is set to continue, with the monthly goods trade balance, as percent in Q2 measured by BPS, albeit volatile, returning to a small (USD 42 million) surplus in the month of October. Non-oil and gas export The non-oil-and-gas goods trade balance returned to surplus in August after four consecutive revenues were weak in months of deficit, and remained positive through October (Figure 12). Non-oil and gas Q3 but show some exports slowed through Q3, reflecting in part further weakening in the global prices of major signs of having picked commodity exports in the early part of the quarter, and the dampening impact of Idul Fitri up into Q4… holidays on exports. Within non-oil and gas exports, manufacturing export revenues dropped by 2.8 percent relative to Q3 2012 and non-manufacturing (including all major commodities ex-oil and gas) export revenues were down by 8.1 percent relative to Q3 2012. Early indications of export performance in the fourth quarter are encouraging, with exports across the region firming, and Indonesia’s non-oil and gas export revenues rising by 2.5 percent yoy in October, likely helped by improving demand from key trading partners such as the US and China. As discussed in Section 2, export volumes also appear to have broadly held up through the latest available, third quarter data, being up 5.3 percent yoy, showing the depressing effect on export revenues of low prices and pointing to the possible rebound of export revenues in coming quarters should commodity prices indeed have stabilized and external demand continue to increase modestly. A significant risk to exports, however, is the mooted ban on raw mineral exports, discussed in Box 1. …while the oil and gas Most of the weakening in Indonesia’s overall current account balance since late 2011 has trade deficit appears been due to the collapse of the non-oil and gas trade surplus, driven mainly by declining largely unaffected by commodity export prices. However, Indonesia’s monthly oil and gas trade balance also the increase in remains a major drag on the overall trade balance, and has moved into deficit since August subsidized fuel prices 2012. The oil and gas trade deficit stood at USD 2.4 billion in Q2 and widened to USD 3.9 billion in Q3, amplified by higher holiday season-related fuel demand but also suggesting that oil import demand has been relatively insensitive to the sharp increase in subsidized fuel prices implemented in June. Subsequent monthly data, for October, does show a significant drop in oil-and-gas imports—with the oil and gas deficit shrinking by 50 percent mom to USD 750 million—but given the volatility of the monthly data this is insufficient to gauge whether significant fuel import relief is now filtering through. D e c e m b e r 20 1 3 T H E W O R L D B A N K | B A N K DU N IA 9 Slower growth; high risks Indonesia Economic Quarterly Figure 11: The current account deficit stabilized at USD 8.4 Figure 12: …helped by the non-oil-and-gas trade balance billion in Q3… returning to surplus since August (account balances, USD billion) (account balances, USD billion) Current transfers Income balance Non-O&G imports Services trade balance Goods trade balance O&G imports Non-O&G exports Current account balance O&G exports 15 Non-O&G trade balance (RHS) O&G trade balance (RHS) 10 20 4 5 10 2 0 0 0 -5 -10 -10 -2 -15 -20 -4 Sep-09 Sep-10 Sep-11 Sep-12 Sep-13 Sep-09 Sep-10 Sep-11 Sep-12 Sep-13 Source: CEIC; World Bank staff calculations Note: O&G: oil and gas Source: CEIC; World Bank staff calculations Import compression is As real growth moderates and the Rupiah has depreciated, slowing imports are supporting now clearly visible, the trade balance and the gradual narrowing in the overall current account. Capital goods in providing relief for the October were 20 percent lower yoy (and down 16 percent on a 3-month moving average trade and overall basis, yoy), consistent with subdued machinery and equipment spending as outlined in current account Section 2. Imports of intermediate goods, excluding oil and gas, were down 4.1 percent yoy balance… in October, on a 3-month moving average basis. Consumer goods imports account for only a small share of imports (7 percent of total import costs, over the 12 months through October) but have been flat since August at similar levels to one year ago. Oil and gas imports are the only major import category to have remained stubbornly high during Q3 but, as noted above, even these recorded a significant slowdown in October (Figure 13). Figure 13: The weakness in overall imports has been led by a Figure 14: Manufacturing and construction together absorb contraction in capital goods almost 70 percent of Indonesia’s imports (growth of 3-month moving average of import components yoy, percent) (sectoral allocation of nominal imports in real terms, percent) 80 Manufacturing industries Construction 60 Consumer goods Services 40 Transport & com. Intermediate goods Oil and gas 20 Trade, hotel & restaurant Agriculture 0 Total Financial & bus. Services imports -20 Mining & quarrying Capital goods Utilities -40 Oct-11 Apr-12 Oct-12 Apr-13 Oct-13 0 10 20 30 40 50 Note: Intermediate goods excludes oil and gas Source: World Input-Output database 2011; World Bank staff Source: BPS; World Bank staff calculations calculations …and may have The economic sectors which make the heaviest use of imports are manufacturing and further to run, but with construction (Figure 14), together absorbing close to 70 percent of total imports. Three real economic costs quarters of these—or half of total imports—are intermediate products from foreign December 20 13 THE WORLD BANK | BANK DU NIA 10 Slower growth; high risks Indonesia Economic Quarterly manufacturers. In addition, about 50 percent of manufactured imports into the most import- heavy sectors comprises of specific inputs to production, notably chemical and metal products, and equipment. Consequently, the expected ongoing moderation in manufacturing and construction growth in 2014 will likely assist in continuing to lower the import bill (Figure 14), but may also have implications for employment and income generation in those sectors. In addition, as described in the March 2013 IEQ, there is a sizable component of imported inputs used in the production of Indonesia’s non-commodity exports. Higher costs of imported inputs to production—due either to ongoing Rupiah depreciation or other policies aimed at import suppression—therefore may also potentially weigh on export competitiveness, offsetting some of the benefits from the real exchange rate depreciation. As the trade balance Overall, indications are that Indonesia’s trade balances are shifting in such a way as to adjustment plays out, stabilize and begin to narrow the overall current account deficit. As mentioned above, the focus on quarterly goods and services export volumes, as measured by the national accounts, have Indonesia’s external held up, and goods export revenues as measured by the monthly BPS trade data increased in financing year-on-year terms in October for the first time since March 2012 (albeit by a modest 2.6 vulnerabilities is likely percent). Import compression is visible, as described above, and even the oil and gas trade to remain deficit which has opened up since August 2012 shows some signs of narrowing. While positive for returning Indonesia’s overall external balances to a sustainable position, however, import compression comes with costs, and the pace of improvement so far has been gradual, keeping external financing vulnerabilities very much in focus. Financial account Turning to the financial account side of the balance of payments, Indonesia's capital and inflows declined in the financial account posted a surplus of USD 4.9 billion in Q3, narrowing from USD 8.4 billion third quarter as net in Q2, reflecting a weakening in portfolio investment inflows and other investment outflows, portfolio inflows despite strengthening net direct investment inflows. Net portfolio inflows eased to USD 1.8 weakened and currency billion (from USD 3.4 billion in Q2), driven by weak net inflows into both debt and equity and deposit flows securities, as also experienced by other major emerging market economies, and partly turned negative… reflecting uncertainty during the quarter regarding the timing and pace of tapering by the US Federal Reserve. Weaker offshore bond issuance in Q3 also played a role. Other investment recorded a deficit of USD 2.1 billion largely due to currency and deposit outflows. This reversed the surplus seen in Q2, which was due to a combination of seasonal USD currency inflows aimed at servicing seasonal corporate US Dollar demand. …making Indonesia Net direct investment recorded a surplus of USD 5.1 billion (from USD 3.8 billion), more dependent on reflecting strong inbound direct investment inflows of USD 5.4 billion together with a supporting FDI weakening in outward direct investment abroad to USD 0.3 billion. FDI into debt inflows instruments in Q3 2013 was at its highest level since Q4 2011 in Q3, USD 1.9 billion, up from USD 453 million in Q2. FDI into equity on the other hand dropped by 17 percent from Q2, at USD 3.5 billion. Overall, direct investment inflows appear to be holding up in the face of the weakness in global commodity prices in recent quarters and heightened regulatory uncertainty in key sectors for inbound investment, especially mining. These inflows, however, can be lumpy and are based on long-term decisions which are affected by the policy environment, which is subject to risks as described in Section 7. The current account The current account deficit is projected to reach to 3.5 percent of GDP or USD 30.6 billion deficit is projected to in 2013 as a whole, on the back of a narrowing in the current account deficit for the fourth narrow to 2.6 percent quarter to approximately USD 6.4 billion (or 3.2 percent of GDP). In 2014, the current of GDP in 2014 account deficit is projected to persist, although narrowing to USD 22.8 bn (2.6 percent of GDP) supported by subdued import growth and a mild pick up in export demand (Table 3). This baseline view, however, remains contingent on external financing conditions being sufficiently supportive, in light of the fact that Indonesia will likely continue to run a basic balance of payments deficit through 2014, increasing its reliance on potentially volatile portfolio investment flows. In addition, a specific additional risk to the trade balance is the impact of the ban on raw mineral exports, scheduled to come into effect in January 2014 (Box 1). December 20 13 THE WORLD BANK | BANK DU NIA 11 Slower growth; high risks Indonesia Economic Quarterly Figure 15: Weaker portfolio investment led to a lower capital Table 3: The persistence of a current account deficit is likely and financial account surplus in Q3 relative to Q2… to keep the need to support FDI in focus (account balances, USD billion) (USD billion) 16 2011 2012 2013 2014 Overall balance Overall Balance of Net other 12 capital Net Payments 11.9 0.2 -14.0 -12.8 portfolio As percent of GDP 1.4 0.0 -1.6 -1.5 8 Current Account 1.7 -24.4 -30.6 -22.8 4 As percent of GDP 0.2 -2.8 -3.5 -2.6 Trade 24.2 -1.7 -9.1 -2.5 0 Income -26.7 -26.8 -25.8 -24.6 Net direct Transfers 4.2 4.1 4.2 4.3 -4 investment Capital & Financial Accounts 13.6 25.2 17.1 10.0 -8 Basic balance Current As percent of GDP 1.6 2.9 2.0 1.2 -12 account Direct Inv. 11.5 14.0 16.5 13.2 Portfolio Inv. 3.8 9.2 9.9 3.1 -16 Other Inv. -1.8 1.9 -9.4 -6.3 Sep-10 Sep-11 Sep-12 Sep-13 Memo: Basic Balance 13.2 -10.4 -14.1 -9.6 As percent of GDP 1.6 -1.2 -1.6 -1.1 Source: CEIC; World Bank staff calculations Note: Basic balance = current account balance + net FDI Source: CEIC; World Bank staff calculations The current account While the current account Table 4: External debt repayments in Q4 2013 have been deficit, combined with deficit is projected to high, likely adding to Rupiah pressures… sizeable external debt continue narrowing (projected gross external debt repayments, USD million) amortizations, gradually, Indonesia’s gross Oct - Dec 2013 Jan-Sep 2014 contribute to external financing needs Government and Indonesia’s high remain high. Significant Central Bank 2,131 10,087 external financing external debt amortizations Private 18,894 15,617 needs add to a still sizeable level of Bank 3,720 3,074 the current account deficit. Non-bank 15,174 12,543 For example, gross external Non-bank financial debt repayments will total institutions 1,738 2,199 USD 21.0 billion in Q4 2013, Non-financial corporations 13,436 10,345 and USD 25.7 billion over Total 21,025 25,704 the first three quarters of Note: Based on external debt position as of September 2013; debt 2014, according to Bank repayments exclude domestic securities owned by non-residents, Indonesia (Table 4). currency and deposits, and other liabilities Projected total external debt Source: Bank Indonesia amortizations on this basis, of USD 41.2 billion over 2013, compare with the World Bank’s projection for the 2013 current account deficit of USD 31 billion. December 20 13 THE WORLD BANK | BANK DU NIA 12 Slower growth; high risks Indonesia Economic Quarterly Box 1: The potential near-term impact of the proposed ban on unprocessed mineral exports on Indonesia’s trade balance As 2014 approaches, attention has turned to the potential impact of the proposed ban on unprocessed exports, which is set to come into effect from January 2014. The 2009 Mining Law (UU 4/2009) requires all mining business permit (IUP) and Contract of Work (CoW) holders to ‘add value’ to mining products through domestic refining and processing with a five year compliance horizon. Initially set to come into force in May 2012, the proposed ban was delayed until January 2014, where based upon current regulations, IUP and CoW holders will no longer be permitted to export mineral ores or refined products of copper, nickel, tin, bauxite and iron ore, among others, that are below the minimum mineral content– all requiring smelting capacity.* At the time of writing, the implementation details of the proposed ban are still under discussion. In part this reflects concerns about the potential near-term impact on Indonesia’s mineral exports, at a time when Indonesia already faces significant external financing pressures. Commodities account for the bulk of Indonesia’s exports, comprising roughly two-thirds of merchandise exports by value. Exports of processed and unprocessed minerals in 2012 alone totaled USD 10.4 billion, around 5 percent of total exports. The overall share of processed exports in mineral exports has increased steadily, from 40 percent in 2001 to 52 percent in 2012. In broad terms, there are three direct trade channels through which the export ore ban can have an impact on Indonesia’s trade balance. The first is a negative impact, via lower exports of unprocessed minerals. The second effect on exports (positive) would occur if there are increased volumes of exports of processed minerals. The third effect, through imports of capital and intermediate goods to build and operate smelters, would have a negative impact on the trade balance. Estimating these effects requires a range of assumptions, from the future external demand for processed and unprocessed minerals through to the share of imports in the operational and capital costs of smelters and, crucially, on the timing and scale of future investments in smelting capacity. As such, any estimates are subject to considerable uncertainty. A large number of smelter plans have been proposed, yet it is possible that not all the proposals that have been announced will be built. Further, of those likely to be economically feasible, significant uncertainty persists regarding whether proposed smelters will be operational by early 2014, especially given the long lead times required to construct smelters before commencing operations. Noting this uncertainty, two potential scenarios may be considered, relative to a baseline where no export ban is enforced, to simulate the potential impact of enforcing the ban on Indonesia’s trade balance, reflecting differences in the pace with which new proposed smelting capacity comes on-line. In the first scenario all the proposed additional smelters that are considered realistic by a recent Support for Economic Analysis Development in Indonesia (SEADI) study on this topic are built on schedule – these smelters are due to become operational in 2014 and 2015. In the second scenario none of the new proposed smelters becomes operational within the timelines set by the law and the export ban is enforced. In the first scenario, where feasible smelters come online as anticipated by SEADI, the impact of the increase in processed mineral exports on the trade balance is more than outweighed by the fall in unprocessed mineral exports, at least in 2014. Further, capital imports to build the smelters would be expected to provide a further significant drag on the trade balance. In 2014 the ban is projected to add an additional USD 6 billion to the trade deficit. However, from 2015, the ban would result in a relatively neutral impact on the trade balance, relative to the baseline, as capital imports resulting from smelter construction start to tail off and gains from higher value processed exports begin to offset the loss unprocessed mineral exports arising from the ban. In the second scenario, where no new smelting capacity comes online, the fall in unprocessed mineral exports weighs heavily on the trade balance, without any corresponding increase in processed mineral exports. The nominal value of lost export earnings increases steadily each year from around USD 5 billion in 2014 to almost USD 8 billion in 2017, reflecting foregone increases in unprocessed mineral exports over this period. This simulation exercise demonstrates the potential significant downside risks to Indonesia’s trade balance from the ban’s enforcement, particularly should new domestic smelting capacity be subject to significant delays, resulting in insufficient capacity to process raw minerals onshore, with flow on impacts to mineral exports. Even in the comparatively more optimist scenario (i.e. Scenario 1), where all smelters evaluated by SEADI as being economically feasible come online, the ban would still result in a significant, negative shock to Indonesia’s trade balance of around USD 6 billion in 2014. Such a shock would add around 0.6 percentage points of GDP to Indonesia’s current account deficit in 2014 moving the projected current account deficit from 2.6 percent to 3.2 percent of GDP, all other things being equal. This would lead to increased external financing needs at a time when global financing conditions become less favorable. In addition, to the extent that investors view enforcement of the ban as a further negative signal of the quality of the domestic policy environment, this could affect portfolio and FDI capital flows (offsetting any FDI inflows associated with any new smelting projects). Relatedly, it is important to note that the above simulations do not cover the longer-term, potentially distortionary, implications of the ban on economic production structures nor cover a detailed assessment of the ban’s underlying economic policy objectives or of its likely effectiveness in achieving these objectives. *MEMR regulation 7/2012 required COW and IUP holders to formulate smelting plans, define minimum standards for domestic processing and refining, and imposed a ban on the export of raw mineral ores within three months of the regulation (by May 2012). Partly due to lack of capacity, the ban was subsequently pushed back by MEMR 11/2012 to January 2014. In the interim period from May 2012 to January 2014, COW holders have been permitted to continue to export unprocessed minerals without additional restrictions. IUP holders have been permitted to continue exporting unprocessed minerals provided they pay a 20 percent export tax and are able to renew monthly export permits. Note: The list of proposed new smelters used in this analysis is drawn from the report “The Economic Effects of Indonesia’s Mineral- Processing Requirements for Export”, USAID, 2013, under the SEADI project for the Indonesian Ministry of Trade December 20 13 THE WORLD BANK | BANK DU NIA 13 Slower growth; high risks Indonesia Economic Quarterly 5. Credit conditions are expected to tighten further moving into 2014 The Rupiah has Indonesia’s sizeable external debt servicing and financing needs, and the resultant increased depreciated recently, foreign currency demand, are likely an important factor behind the renewed weakening of with significant gross the Rupiah since October. After strengthening to IDR 11,020 per USD in late October, the external funding needs Rupiah spot rate has subsequently weakened to IDR 12,000 on 11 December, leaving the in Q4 a likely factor… Rupiah down 24 percent against the US dollar so far this year. The Rupiah has now depreciated by almost 18 percent on a nominal trade-weighted basis through 12 December 2013, and by 8 percent in real effective terms through October. …but measures of Significantly, however, the Figure 16:…but measures of onshore FX spot market liquidity currency market recent renewed depreciation conditions have improved since mid-year liquidity conditions has not coincided with a (daily average turnover, USD billion) have improved on the pronounced tightening in 2.0 Domestic Banks levels seen in Q3… currency market conditions Overseas Banks through November, as Other customers measured by average 1.5 Daily average: 2011 turnover in the onshore spot market. This follows a Daily average: 2012 number of measures taken Daily average: 2013 1.0 by Bank Indonesia to improve onshore market liquidity, and facilitate adjustment in the Rupiah 0.5 exchange rate towards its equilibrium level. These measures have included 0.0 relaxing US Dollar Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 purchasing requirements for Note: Average daily spot FX market turnover by counterparty; 2013 exporters, extending the daily average to end-November maturity of the BI US Dollar Source: CEIC; World Bank staff calculations term deposit facility to up to 12 months, as well as holding regular US Dollar swap auctions to facilitate hedging of currency risks. Daily turnover on the onshore spot FX market has averaged around USD 500-600 million through end-November, well above the daily average of around USD 350 million seen through late August and early September (Figure 16), while spreads between the onshore spot rate and offshore forwards have remained tight. …while BI has Commensurate with the flexible approach to the Rupiah seen in recent months, Bank maintained a strong Indonesia has stated clearly that its near-term focus is on supporting the improvement in the focus on facilitating external balance. Since the previous October 2013 IEQ, BI has increased its policy interest external balance rate corridor by 25 bp (at its scheduled November Board of Governors meeting), taking adjustment cumulative interest rate increases since June to 175 basis points. The level of foreign reserves also stabilized and then gradually increased, to USD 97.0 billion at end-October where it remained through end-November, up from the recent low of USD 92.7 billion at end-July. As of September, BI had a short net open forward position of USD 5 billion, built up mainly as a result of the US Dollar swap auctions conducted since July to support the commercial availability of foreign currency hedging. D e c e m b e r 20 1 3 T H E W O R L D B A N K | B A N K DU N IA 14 Slower growth; high risks Indonesia Economic Quarterly Domestic bonds and The depreciating Rupiah, increase in short-term rates, and deceleration in output have taken equities have their toll on domestic bonds and equities which, after rebounding strongly from their late- experienced renewed August to early-September lows, have since October experienced renewed weakness. The weakness in Q4 domestic bond market rallied strongly from mid-September until late October, but yields have subsequently backed up again, returning long-term domestic interest rates to close to their highest levels of the year (with the 10-year benchmark yield at 8.80 percent, an increase of 350bp over the course of the year). Domestic equities initially bounced back strongly from their late-August lows, but stock prices have subsequently softened, leaving the Jakarta Composite Index down 2.6 percent for the year through 12 December. In October and November, offshore investors remained net sellers of Indonesian equities, selling a net IDR 6.9 trillion worth of stocks over this period, compounding a period of sustained net selling since the downturn in global risk appetite for EM assets, with a cumulative IDR 36 trillion worth of Indonesian equities sold since the end of April. In contrast, offshore bond investors have been significant net purchasers of bonds, with cumulative net purchases of IDR 42.8 trillion worth of bonds since inflows resumed in early September (through 6 December), to take their holdings of total domestic government bonds to 32.5 percent Nominal credit growth Despite the tightening in monetary policy since June, bank lending growth has remained remained strong buoyant in nominal terms, up 22.2 percent yoy in October. However, it is important to note through October, that credit extension has been boosted by exchange rate effects, which has increased the boosted by exchange Rupiah value of foreign currency-denominated lending, which accounts for 15 percent of rate effects, but has bank credit outstanding; year on year growth in foreign currency lending in Rupiah terms has come down in real risen from 15 percent yoy in May to 24 percent yoy in October (Figure 17). Furthermore, terms… real credit growth (deflated by contemporaneous CPI inflation) has continued to ease, to 12.8 percent yoy in October, from 18 percent yoy at end-2012 (Figure 18). …and while residential Although the most recent data point to strong growth rates, market reports now point to a mortgage activity tightening in property-related credit by some major banks, likely weighing on future property accelerated in Q3 price growth. Growth in property-related credit rebounded to 30 percent year on year to market reports point to September, up from 20 percent in June, the fastest pace of growth since the introduction of a tightening in tighter loan-to-value (LTV) requirements for residential mortgages in July 2012. The recent property-related credit strength in property credit reflects a pickup in growth in residential mortgages, which conditions… account for 60 percent of total property related credit. These figures also suggest that macro prudential measures to contain the pace of property lending have so far had a limited impact, with Bank Indonesia having introduced further tightening in LTV ratios for residential mortgages financing second and third homes in July 2013. Supported by strong property lending, residential house prices continued to show robust growth through Q3; national residential house prices were up 14 percent in the year to September, led by price growth in smaller homes. Residential apartment price growth has eased modestly since late 2012, yet remains strong at 30 percent yoy, as do rental prices for office space and sales prices of industrial land. …but credit growth is Going forward, bank credit growth is expected to fall, to approximately 15 percent yoy in likely to slow going coming quarters according to World Bank projections. In October, broad money (M2) forward… growth stood at 13 percent yoy, and the growth in time and savings deposits in particular was 11.6 percent yoy, well down from end-2012 growth rates of close to 20 percent. The aggregate loan to deposit ratio (LDR) stood at 88.9 percent in September, up from 84 percent at end-2012 and not far off the 92 percent ceiling of BI’s target LDR band, and suggesting limited headroom for credit growth to continue to outstrip deposit growth. December 20 13 THE WORLD BANK | BANK DU NIA 15 Slower growth; high risks Indonesia Economic Quarterly Figure 17: Bank credit growth has been inflated by Figure 18: …but has slowed, particularly in real terms… exchange rate effects… (bank credit growth yoy and mom, percent) (growth yoy, percent) 60 Foreign Currency 30 15 Loans (USD terms) Nominal (LHS) Local currency loans (IDR terms) 40 20 10 20 Real (LHS) 10 5 0 Foreign currency 0 0 -20 loans (IDR terms) Monthly nominal lending growth (RHS) -40 -10 -5 Oct-08 Oct-09 Oct-10 Oct-11 Oct-12 Oct-13 Oct-09 Oct-10 Oct-11 Oct-12 Oct-13 Source: CEIC; World Bank staff calculations Note: Real credit deflated by CPI; October inferred from 22.2 percent yoy growth, as stated by BI Source: CEIC; World Bank staff calculations …amidst a tightening Alongside weaker deposit Figure 19: Rupiah liquidity has tightened and interbank in domestic liquidity growth, banks are also borrowing costs have risen conditions… navigating tighter liquidity (interest rates, percent, and excess liquidity, IDR trillion) conditions. Excess commercial Excess commercial bank Rupiah liquidity bank liquidity as measured by (RHS) BI overnight deposit facility (FASBI) rate BI, though still substantial, is 16 250 down from its mid-year highs, 14 3-month interbank (JIBOR) rate and BI’s tightening cycle has 200 increased inter-bank lending 12 rates, with 3-month JIBOR 10 150 rising from 4.9 percent before 8 BI began its current tightening cycle in June, to 7.6 percent in 6 100 early December (Figure 19). 4 Market reports also point to a 50 tightening in domestic liquidity 2 conditions, especially for some 0 0 small- to mid-sized banks, Dec-10 Dec-11 Dec-12 Dec-13 with interbank credit limits Note: Excess liquidity data available through end-October being reduced due to concerns Source: CEIC over rising counterparty risks, related to a lack of liquid interbank or wholesale funding markets and the narrowness of deposit bases. Moreover, foreign banks’ offshore funding costs have increased, consistent with general tightening in external financing conditions for Indonesian corporates. December 20 13 THE WORLD BANK | BANK DU NIA 16 Slower growth; high risks Indonesia Economic Quarterly Aggregate domestic Increasing interest rates and competition for deposits, alongside tighter liquidity, implies banking sector risk upward pressure on banks’ costs of funds, compressing net interest margins, though by how metrics remain sound much varies depending on particular banks’ funding structures and ability to re-price their credit. Profitability metrics, however, were still strong through end-October, and other aggregate banking sector indicators have remain stable, with non-performing loans remaining below 2 per cent, capital adequacy well above minimum standards, and strong profitability metrics. Furthermore, systemic risks from the weaker Rupiah and higher long- term interest rates appear contained; Bank Indonesia stress tests published in the March 2013 Financial Stability Review suggest that a 10 percent depreciation in the Rupiah would result in a decline in the aggregate bank capital adequacy (CAR) ratio of 1.0 percent. A 20 percent decline in the value of government bonds would result in decline in the aggregate bank CAR of 1.5 percent, with relatively larger CAR falls for state-owned and foreign banks, given their relatively larger holdings of government bonds. Non-bank financing Beyond bank credit, access to other forms of financing has also tightened. Growth in finance activity is also company lending, which accounts for around 10 percent of total financial system assets, has decelerating slowed to 14 percent year on year to September 2013, from 32 percent growth a year earlier. Non-bank lending is expected to weaken further going forward, in line with tighter domestic credit conditions and higher offshore financing costs (with borrowings from foreign banks accounting for 22 percent of total finance company liabilities, compared with 35 percent comprising domestic bank borrowing). Corporate bond issuance has also fallen off sharply since June, with issuance to end-November equivalent to only 15 percent of total issuance in Q4 2012.1 6. Public expenditure and tax revenue growth has slowed over 2013 The fiscal deficit The Indonesian fiscal sector continues to be impacted by weaker international commodity through November prices and the depreciation of the Rupiah. Based on the outcome of the first eleven months 2013 was 50 percent of 2013, the fiscal deficit for the full year is likely to be broadly in line with the revised 2013 larger than in the same Budget projection, as the expected slight under-shooting of revenues is likely to be balanced period last year… by overall lower disbursement of expenditures (with subsidy spending in excess of the targeted amount being offset by lower than targeted capital and material spending). During January to November 2013, Indonesia recorded a fiscal deficit of IDR 163 trillion (or 1.7 percent of GDP), versus IDR 106 trillion in the same period last year. Revenue collection experienced slightly higher growth over this period than in 2012, while expenditure growth slowed relative to 2012 but showed higher disbursement rates (Table 5). .. due to higher Budget The major reason for the significantly higher fiscal deficit in the first eleven months of 2013 disbursement … compared with the corresponding period last year was an increase in the disbursement of allocated spending. This was especially the case for social spending (including the completion of an unconditional cash transfer, Bantuan Langsung Sementara Masyarakat, BLSM, compensation following the June increase in subsidized fuel prices) and capital spending, even though social and capital spending recorded slower nominal growth overall for this period in 2013 than in 2012. Budget execution rates in these areas were likely aided by the fact that their allocations in the 2013 revised Budget projected modest nominal growth relative to the revised 2012 Budget. Fuel subsidy spending over January-November recorded a lower disbursement rate relative to the revised Budget allocation in 2013 than last year, reaching 87 percent of targeted spending for this year. The likelihood is that actual fuel subsidy spending in 2013 will again overshoot the revised Budget allocation (with November fuel subsidy disbursement still to be added to the above figures, in addition to December). Electricity subsidies have recorded slightly faster nominal yoy growth in 2013 than last year, despite the phased tariff increases in 2013, and a marginally higher disbursement relative to the revised Budget. However, this may reflect differences in payment schedules rather than a real annual increase in spending. 1 Onshore corporate bond issuance data to 27 November 2013. D e c e m b e r 20 1 3 T H E W O R L D B A N K | B A N K DU N IA 17 Slower growth; high risks Indonesia Economic Quarterly … while revenue Total revenue collection trends in the first eleven months of 2013 were broadly similar to collection relative to those in the same period of 2012, in terms of realization of the revised Budget target, the Budget target was although nominal yoy growth was slightly higher. This resulted from a moderation in growth at a similar level to last for tax revenue collection, to 9 percent yoy from 13.9 percent yoy in 2012, on the one hand, year and a slight improvement in non-tax revenue collection on the other hand. International trade taxes contracted over their year-ago level, particularly because of a decline in export tax collection, consistent with subdued exports, as discussed in Section 4. Income tax collections from the oil and gas sector have slowed down, whereas natural resource revenues from oil and gas accelerated, with this pattern likely attributable to timing differences in the collection of these two revenue types. Despite relatively robust private consumption, VAT collection in the first eleven months of 2013 recorded substantially slower nominal yoy growth than last year (13.6 percent against 28.5 percent respectively), as well as a lower realization against the annual target. Since around 40 percent of Indonesian VAT collection comes from imports, the slowdown of imports has likely contributed significantly to this weakness. Table 5: Higher Budget disbursement characterized the Jan – Nov 2013 period, relative to previous years Nominal value (Jan - Nov) Share (Jan - Nov) Nominal growth (yoy) (IDR trillion) in revised budget (Percent) (Percent) 2011 2012 2013 2011 2012 2013 2011 2012 2013 A. Revenues 1,023 1,102 1,224 87.4 81.1 81.5 22.8 7.7 11.1 1. Tax revenues, o/w 753 858 936 85.7 84.5 81.5 22.2 13.9 9.0 Income tax (O&G) 65 74 72 99.5 108.5 96.5 39.8 13.5 -2.7 Income tax (N-O&G) 317 340 368 86.3 76.2 79.2 19.9 7.4 8.2 Sales tax (VAT) 226 291 330 75.8 86.5 77.9 18.6 28.5 13.6 Int'l trade taxes 50 46 42 105.6 95.1 86.3 107.6 -8.0 -8.3 2. NTR, o/w 267 240 286 93.3 70.5 81.8 23.9 -10.1 18.8 NRR (O&G) 154 122 156 89.2 61.6 86.6 33.6 -20.9 28.1 NRR (N-O&G) 18 19 22 97.7 100.6 94.6 18.0 3.2 15.3 B. Expenditures 1,001 1,209 1,387 75.8 78.1 80.3 22.5 20.8 14.7 1. Central gov't, o/w 648 779 910 71.3 72.8 76.0 23.2 20.2 16.8 Personnel 159 182 204 86.9 85.8 87.8 19.7 14.6 12.2 Material 85 101 118 59.5 62.1 58.0 17.9 18.4 16.9 Capital 67 91 107 47.2 51.6 57.0 39.7 36.6 18.1 Interest payments 84 91 104 79.1 77.2 92.6 7.2 7.9 14.6 Subsidies 201 250 298 84.7 101.9 85.7 55.7 24.3 19.4 Energy 175 218 260 89.4 107.8 86.6 62.9 24.9 19.1 Fuel 111 148 174 85.4 107.7 87.1 86.8 33.5 17.6 Electricity 64 70 86 97.3 107.9 85.8 33.3 9.9 22.3 Non energy 26 32 38 62.6 74.0 79.7 20.4 20.4 21.7 Social 47 61 77 57.8 70.3 95.0 -13.7 27.9 26.6 2. Transfers 353 430 477 85.7 89.9 90.1 21.2 21.8 10.8 Note: O&G denotes oil and gas, N-O&G denotes non-oil and gas; NTR denotes non-tax revenues, NRR denotes natural resource revenues Source: Ministry of Finance; World Bank staff calculations Gross security Gross securities financing requirements of IDR 326.9 trillion as per the Government’s financing targets for revised Budget for 2013 have essentially been met, with IDR 323.0 trillion worth of debt 2013 will be met securities issued through 3 December. Issuance recovered well from the period of difficult issuance conditions from May to August, during which only limited amounts of longer-tenor debt were issued, increasing the Government’s reliance on Treasury bills with a duration of 1 year or less. As of 3 December, IDR 42.4 trillion worth of Treasury bills had been issued over 2013, compared to total Treasury bill issuance in 2012 of IDR 30.5 trillion. Nevertheless, the risk profile of the Government’s debt stock as at the end of 2013, as projected by the Debt Management Office (DMO), remains generally robust, with the average time to maturity of government debt declining only marginally, to 9.6 years (from December 20 13 THE WORLD BANK | BANK DU NIA 18 Slower growth; high risks Indonesia Economic Quarterly 9.7 years in 2012). In addition, only 15.7 percent of total debt is variable rate, though currency exposure remains significant with 44.6 percent of total debt projected by DMO to be foreign-currency denominated at the end of 2013. The World Bank Considering the outturn in the first eleven months of 2013, weaker commodity prices and projects that the the depreciation in the Rupiah, but also the slight improvement in nominal GDP growth in Budget deficit in 2013 Q4 on the back of higher price growth, the World Bank has revisited its fiscal projections will be 2.5 percent of for 2013 and 2014. The projected fiscal deficit for 2013 remains unchanged from the GDP and 2.1 percent of October IEQ, at 2.5 percent of GDP. For 2014, taking into account announced policy GDP in 2014 changes and also revised macroeconomic assumptions, the World Bank has revised down its projection of the 2014 fiscal deficit slightly from 2.3 percent of GDP in the October 2013 IEQ to 2.1 percent of GDP. Section B.1 provides a detailed overview of the approved 2014 Budget, and further details on the World Bank’s assumptions for the fiscal sector in 2014. Table 6: The World Bank projects a fiscal deficit of 2.1 percent of GDP in 2014, narrowing from 2.5 percent in 2013 (IDR trillion, unless otherwise indicated) 2012 2013 2014 Audited Revised WB Budget WB actual budget A. Revenues , o/w 1,338 1,502 1,462 1,667 1,603 1. Tax revenues 981 1,148 1,115 1,280 1,246 2. Non tax revenues 352 349 342 385 353 B. Expenditures 1,491 1,726 1,686 1,842 1,819 1. Central gov’t, o/w 1,011 1,197 1,159 1,250 1,234 Personnel 198 233 230 263 261 Material 141 203 174 216 184 Capital 145 188 169 184 185 Subsidies, o/w 346 348 369 334 391 Fuel subsidies 212 200 221 211 239 Electricity subsidies 95 100 100 71 100 2. Transfers to the regions 481 529 527 593 585 C. Primary balance -53 -112 -109 -54 -88 D. Surplus/deficit -153 -224 -225 -175 -216 as percent of GDP -1.9 -2.4 -2.5 -1.7 -2.1 E. Net Financing 175 224 n.a. 175 n.a. 1. Domestic Financing 199 241 n.a. 196 n.a. 2. Foreign Financing -23 -17 n.a. -21 n.a. Key Economic Assumptions Economic growth (percent) 6.2 6.3 5.6 6.0 5.3 CPI (yoy, percent) 4.3 7.2 7.4 5.5 6.8 Exchange rate (IDR/USD) 9,384 9,600 10,563 10,500 11,800 Crude oil price (USD/barrel) 113 108 104 105 103 Oil production ('000 barrels/day) 861 840 840 870 870 Source: Ministry of Finance; World Bank staff calculations December 20 13 THE WORLD BANK | BANK DU NIA 19 Slower growth; high risks Indonesia Economic Quarterly 7. Given prevailing risks, further progress on pro-growth reforms is needed Economic risks to the While the baseline expectation is for Indonesia’s economy to continue to decelerate only 2014 outlook are modestly, with quarterly growth remaining above 5.0 percent yoy through the end of 2014, significant… and for the current account deficit to narrow in coming quarters, these projections are subject to significant uncertainty. A further abrupt deterioration in external financing conditions is a particular ongoing risk, in light of Indonesia’s sizable external financing needs. Such deterioration could be triggered by international market developments, or specifically due to domestic economic and policy developments. This would spill over negatively into real economic activity by placing further upward pressure on interest rates, downward pressure on asset prices and the Rupiah, and could result in localized corporate sector stresses with damaging effects on private sector confidence. …particularly to the Indonesia’s GDP forecasts are particularly sensitive to the investment outlook, which investment outlook, depends crucially on the path of the real interest rate the exchange rate (as described in the but private October 2013 IEQ). In addition, there is also the risk that private consumption growth may consumption could slow more than anticipated in the base case, for example, if higher prices and interest rates, also weaken more than particularly if coupled with more asset price volatility, take their toll by eroding confidence, anticipated… household income and corporate profitability. This would be a material drag on growth, given that private consumption accounts for approximately 55 percent of total expenditure. …and there is a Overall, therefore, risks are skewed towards weaker domestic demand than in the base case. material risk of GDP Even mildly weaker domestic demand growth than currently anticipated (e.g. a reduction of growth for 2014 falling 0.5 percentage points in private consumption and investment) could reduce GDP growth to below 5 percent below 5 percent. A more severe moderation in domestic demand (with private consumption and investment growth dropping by 1 percentage point relative to the baseline), for example due to an intensification of external financing constraints, could feasibly lead to GDP growth in 2014 of below 4.5 percent (Table 7). Table 7: Modestly weaker than expected consumption and investment growth could move 2014 GDP growth down to below 5 percent (real growth, percent, unless otherwise indicated) Private Investment Overall GDP GDP growth relative consumption to baseline (ppt) 2014 Baseline 4.9 4.4 5.3 n.a. Mildly weaker domestic demand* 4.4 3.9 4.7 -0.6 Significantly weaker domestic demand** 3.9 3.4 4.3 -0.9 2009 Historical (reflecting GFC impact) 4.9 3.3 4.6 -0.7 Note: Scenarios assume private consumption and investment are *0.5 ppt and **1.0 ppt weaker than in the baseline, respectively; GFC: Global financial crisis Source: World Bank staff projections Macroeconomic The monetary policy and exchange rate adjustments seen in 2013 are broadly positive for adjustments to date macroeconomic stability, with the depreciation of the Rupiah acting as a “shock absorber” have been broadly for weaker terms of trade by supporting export competitiveness and encouraging positive for stability, substitution away from imports. Higher interest rates have helped to dampen domestic but carry costs… demand, and import demand, and are supportive of portfolio investment inflows. However, these adjustments carry costs, including by placing pressure on public and private sector balance sheets by raising the Rupiah value of external debt (particularly if there are currency mismatches), and eroding incomes through higher debt servicing and import costs, as well as introducing less easily quantifiable risks and uncertainties, such as the impact on sentiment. …and import Import growth has slowed and in the base case this is likely to continue, albeit fairly suppression in gradually, supporting a reduction in Indonesia’s current account deficit and external particular is no financing needs. However, as discussed above, import compression means fewer capital panacea… goods, and raw material and intermediate products for manufactured goods production, and so comes at a direct cost to current and future output growth. The real policy challenge for D e c e m b e r 20 1 3 T H E W O R L D B A N K | B A N K DU N IA 20 Slower growth; high risks Indonesia Economic Quarterly Indonesia is therefore not to focus on import suppression through regulatory measures, but rather to increase exports, and to secure more and higher quality external financing, particularly FDI. …highlighting the Moving into 2014 and beyond, the recent, necessary focus on near-term macroeconomic need for more policy stability, should continue to be augmented with more steps to support a virtuous cycle of reforms to support strong investment, including foreign investment, and output growth. To do so, an emphasis exports and FDI on supporting exports to ensure that the increased international competitiveness generated inflows… by the weaker Rupiah is not lost, on increasing investment efficiency, and on supporting, and enhancing, FDI inflows, is needed. While FDI, in nominal terms, has so far proved resilient, it is underpinned by three factors which have all come under varying degrees of recent pressure: Indonesia’s huge natural resource base (undercut by generally softer global commodity prices), the large and growing domestic market (undercut somewhat, at least in the near-term, by headwinds to domestic demand), and Indonesia’s potential as a regional production hub in Asia (undercut by regulatory uncertainties and skills and infrastructure gaps). Box 2 examines the recent uneven progress on improving Indonesia’s investment climate. More progress towards addressing these challenges can pay off not only in higher sustainable growth in the medium-term, but also for managing near-term risks as well, by supporting local and foreign investor confidence in Indonesia’s future trajectory and hence external financing inflows. …and a continued In the fiscal sector, fuel subsidies remain a major source of fiscal risk, dent the ability of the emphasis on flexible exchange rate to absorb shocks (given the significant impact of a depreciation in improving the quality increasing fuel subsidy costs), and divert spending away from more efficient uses, including of spending, including needed public investment in infrastructure, social protection and health programs, for through energy example. As described in the October IEQ, the World Bank estimates that a 10 percent subsidy reform depreciation of the Rupiah increases the fiscal deficit by 0.3-0.4 percentage points of GDP, largely by raising fuel subsidy costs. This stresses the importance of further reforms, such as implementing a rule-based approach to determine subsidized fuel prices in such a way as to limit the Government’s fiscal exposure to higher Rupiah-denominated fuel prices, while at the same time improving the safety net for those least able to cope with shocks, including to fuel-related prices. December 20 13 THE WORLD BANK | BANK DU NIA 21 Slower growth; high risks Indonesia Economic Quarterly Box 2: Update on the policies to improve the investment climate in Indonesia As of the writing of this report, the implementation of the components of the August economic policy package designed to accelerate investment has been further delayed. Three of four committed actions are outstanding: (1) expediting and simplifying investment licensing; (2) expediting revision of the “Negative Investment List” (DNI) to make the Indonesian economy more open to foreign investment; and (3) expediting agro-based investment programs (crude palm oil, cocoa, rattan) and metallic minerals (bauxite, nickel, and copper) by providing tax holidays and tax allowances as incentives. For example, the mooted reduction of the required number of licenses in the oil and gas sector from sixty-nine to eight licenses has not yet been implemented, and there are concerns that the change will be limited to the grouping of the licenses without meaningful simplification of the procedures and time to obtain those licenses. The revision of the implementing regulations on tax incentives, and the implementation mechanisms, are still to be completed. The Government continues to give conflicting messages on the progress of the DNI revision. Early in November, the Government announced that a revised DNI was almost ready and repeated its commitment to open additional sectors to foreign investment by opening up Private-Public Partnerships (PPPs) in infrastructure and relaxing foreign participation in several sectors (such as pharmacies, specialized hospitals, and transport). This announcement was widely criticized by different parties in the media*, arguing that the Government is failing to protect the national interest. Domestic business interests have also voiced their support for the protection of selected sectors from foreign competition. The Government subsequently sought to soften the earlier announcement by declaring that the discussion is far from final and reaffirming their commitment to protect the national interest. The discussion on how these interests are to be balanced in a revision of the DNI continues at this time. The protracted attempts to update the negative investment list (DNI) are indicative of a broader debate in Indonesia on the relative importance of openness to international trade and investment for supporting Indonesia’s economic growth prospects . Despite the Government’s announcement that updating the DNI was a policy priority, based on the latest progress, it is not clear whether the upcoming DNI revision will in fact make it more investor-friendly and thus improve the investment climate, as intended in the August policy package. With a national election approaching in 2014, it remains to be seen how much influence nationalist, protectionist sentiments will exert on economic policy formation in the coming months. Going forward, strengthening the quality of the policy formation process, for example through improving coordination mechanisms and consultative processes and enhancing regulatory reform processes (through “whole of government” approaches and regulatory reviews) is critical to ensure that policy uncertainty is minimized, to support the FDI inflows that help to cover Indonesia’s external financing needs, and to ensure that Indonesia benefits as fully from FDI as it should. Strengthened policy formation processes would also better address the legitimate concerns of Indonesians that policies be made in the broader public interest, while enabling the Government to weigh the general public interest more effectively against more narrow business interests and requests for protection that do not benefit the economy overall. On a positive note, on October 25, the Government launched an ambitious policy package to improve the ease of doing business. The announced action plan consists of seventeen actions across eight “Doing Business” areas (aligned to eight of the ten indicators in the World Bank Group’s “Doing Business” country rankings) and is expected to be implemented by February 2014. To ensure the implementation of this policy package, and in a signal of good coordination towards making progress on these reforms, the Government has established a joint monitoring team with different government agencies, including the Presidential Working Unit for Control and Supervision on Development (UKP4). The private sector has responded favorably to the announcement of the (domestically focused) policy package, emphasizing that the reforms are urgently needed. Indonesia currently ranks 120 (out of 189 economies) in the World Bank Group’s Doing Business 2014 rankings, a slight improvement over the past few years. However, this performance is below the regional (East Asia and Pacific) average and peer countries’ performance: Philippines, China, Thailand, and Malaysia ranked 108th, 96th, 18th, and 6th respectively. Indonesia’s overall performance is only slightly better than India and Cambodia. Notes: *See, for example, Kompas, 7 November 2013 Asing Makin Mendominasi Indonesia and Bisnis Indonesia, 7 November 2013 Daftar Negatif Investasi Dihapus, Asing makin Leluasa. December 20 13 THE WORLD BANK | BANK DU NIA 22 Slower growth; high risks Indonesia Economic Quarterly B. Some recent developments in Indonesia’s economy 1. A closer look at the 2014 Budget The 2014 Budget On October 25, 2013, Indonesia’s House of Representatives approved the Government approved by Budget for 2014. The approved Budget is non-expansionary and does not include any major Indonesia’s House of revenue or expenditure reform, except potential electricity tariff adjustment. The Budget Representatives projects an overall fiscal deficit of 1.7 percent of GDP (Table 8). Total revenues are projects a deficit of 1.7 projected to reach IDR 1,667.1 trillion, an 11.0 percent increase from revised 2013 projected percent of GDP, but revenues—revised down slightly from IDR 1,662.5 trillion in the Government’s August there are sizeable Budget proposal—while total expenditures are targeted in the amount of IDR 1,842.5 downside risks to the trillion, a 6.7 percent increase from the projection for 2013 and a small 1.8 percent increase revenue and from the initial proposal for 2014. There are, however, significant downside risks to the expenditure revenue and expenditure outlooks, mainly due to optimistic macro-economic assumptions projections and increasing fiscal financing needs. The World Bank macroeconomic and price assumptions for 2014 differ from those of the approved Budget (Table 9), resulting in the World Bank projecting a somewhat higher projected deficit of 2.1 percent of GDP. This section examines in further detail the 2014 Budget outlook. The projected The 2014 Budget anticipates a slight decline in the government debt-to-GDP ratio, to 23 narrowing in the deficit percent of GDP (Figure 20), reflecting the modest targeted deficit, coupled with assumed relative to 2013 helps to GDP growth in 2014 of 6.0 percent and inflation of 5.5 percent. These factors are offset maintain a prudent somewhat by the impact of the projected depreciation in the Rupiah on the local currency overall fiscal stance but value of the Government’s external debt. Bond redemptions and buybacks are projected, gross fiscal financing provisionally, to increase to IDR 156 trillion in 2014, up from IDR 100 trillion under the needs remain sizeable revised 2013 Budget. Consequently, gross financing needs are set to rise in 2014 in nominal at 3.8 percent of GDP terms (Figure 21), down slightly relative to GDP to 3.8 percent. Gross securities financing needs are projected to be IDR 362 trillion (3.5 percent of GDP), up from IDR 330 trillion in 2013, 80.7 percent of which is expected to be met through domestic securities issuance. December 20 13 THE WORLD BANK | BANK DU NIA 23 Slower growth; high risks Indonesia Economic Quarterly Figure 20: The 2014 Budget targets a smaller deficit than in Figure 21: … but despite this, gross fiscal financing 2013 and further reduction in the ratio of debt-to-GDP… requirements are likely to be similar to 2013’s high levels (percent of GDP) (financing requirements, IDR trillion and percentage of GDP) Securities amortizations and buybacks Budget Deficit (LHS) Government Debt (RHS) External loan amortizations 3 35 Fiscal deficit 450 4.5 Total as percentage of GDP (RHS) 30 400 2 25 350 4.0 300 2 20 250 3.5 1 15 200 10 150 1 100 3.0 5 50 0 0 0 2.5 2008 2009 2010 2011 2012 2013* 2014** 2009 2010 2011 2012 2013* 2014** Note: *Revised budget, **Budget Note: Based on provisional targets for 2014; *Revised budget, Source: Ministry of Finance **Budget Source: BI; Ministry of Finance The most significant On the revenue side, the projected 11.0 percent increase in revenues comes from both tax increase on the revenue revenues (up 11.5 percent from those projected for 2013), and non-tax revenues (up 10.4 side is higher projected percent from 2013, significantly higher than the 1.0 percent increase in the Government’s sales tax/VAT receipts August proposal). The tax-to-GDP ratio is projected to move up only slightly to 12.3 percent. The single most significant increase in revenues is of the sales tax/VAT, which sees a 16.3 percent increase from the 2013 revised Budget level (although this is below the August Budget proposal of a 22.5 percent increase). While election-related spending in 2014 may buoy sales tax receipts by lifting consumption spending, the evidence from the previous two national elections on the possible magnitude of the effect is unclear given the differing economic conditions. In addition, expected underachievement of the sales tax/VAT in 2013 (collection through November 2013 reached 77.9 percent of the revised 2013 Budget target) contributes to the World Bank’s caution regarding the approved Budget projections. The Government plans On the expenditure side, a key feature of the 2014 Budget is a 28.6 percent reduction in the to further increase spending on electricity subsidies relative to 2013 (IDR 71.4 trillion in 2014 from IDR 100.0 electricity tariffs in trillion in 2013). On October 1, PLN (PT Perusahaan Listrik Negara, the state-owned 2014… electricity company) introduced the final installment of 2013’s electricity price hike. Electricity tariffs have been raised by 4.3 percent each quarter of 2013, to reach a total of about a 15 percent annual increase, relative to 2012. The price adjustments have not affected households with consumption of 450 to 900 VA. However, the Government has also set aside an IDR 10.4 trillion contingency budget for electricity subsidies in 2014. The parliament has agreed to the Government’s proposal to increase, electricity tariffs in 2014 for certain categories of industrial and commercial users to the cost recovery level, but the detailed proposal is reportedly still being discussed . The Government is also planning to remove electricity subsidies for large industrial customers, but the timing of this is still being discussed. December 20 13 THE WORLD BANK | BANK DU NIA 24 Slower growth; high risks Indonesia Economic Quarterly … but overall energy Total expenditures are projected Figure 22: Energy subsidies still consume a significant subsidy spending is set to decrease slightly as a part of the Budget to remain a significant percentage of GDP, from 18.3 (IDR trillion) part of total spending in 2013 to 17.8 percent in 2014 2012 Audited actual 2013 Revised budget (Figure 21). The 2014 Budget 2014 Budget includes a 4.1 percent reduction 700 20 in subsidy spending compared 600 Nominal growth in 2014 11.9 to the 2013 Budget (IDR 333.7 500 trillion in 2014 versus IDR 10 -5.9 400 348.1 trillion in 2013). This 300 12.9 reduction results from the 28.6 6.4 -2.2 0 percent reduction in electricity 200 subsidies discussed above, 100 13.9 partially offset by a 6.8 percent 0 -10 increase in non-energy subsidies, including fertilizers, rice for the poor, and seeds (from IDR 48.3 trillion in 2013 to IDR 51.6 trillion in 2014). The spending allocation to fuel Source: Ministry of Finance subsidies in 2014 is IDR 210.7 trillion, IDR 10.8 trillion higher than projected under the revised 2013 Budget, reflecting primarily the higher projected Rupiah market price of fuel, offsetting the impact of June’s subsidized fuel price increase. Energy subsidy spending therefore remains a significant part of total spending (Figure 22), at 15.0 percent of total government spending under the 2014 Budget (relative to 17.0 percent projected for 2013) or 22.6 percent of central government spending. Personnel spending is The 2014 Budget also projects a 12.9 percent increase in personnel spending (from IDR projected to rise 233.0 trillion in 2013 to IDR 263.0 trillion), reflecting a planned 6 percent increase in basic significantly… salaries and a 4 percent increase in pensions, and the ongoing bureaucratic reform process in the fourteen line ministries (through which the line ministries will receive additional funding to increase basic salaries). Material expenditures in 2014 are projected to increase by 6.4 percent compared to the target in the revised 2013 Budget, despite a planned decrease of operational spending. Social spending is budgeted to increase by 13.9 percent, to IDR 91.8 trillion in 2014, including spending on the new social security system (SJSN, Sistem Jaminan Sosial Nasional) in the amount of IDR 19.9 trillion. The phasing out of the temporary cash transfer (BLSM) at the end of 2013, however, limits the increase in overall social spending. …while capital Capital spending is targeted to reach IDR 184.2 trillion, down 2.2 percent from the revised spending is targeted to 2013 allocation. This is a notable development given the previous sizeable annual increases reach a modest 1.8 in the budget allocations to capital spending, although raising disbursement rates would percent of GDP allow room for larger increases in actual nominal spending than in the budget allocation. Relative to GDP, this targeted level of spending is only 1.8 percent, the same level as in 2012. Though this level of capital spending appears relatively modest comparing to the pressing needs to address Indonesia’s infrastructure gaps, budget execution challenges have been the main constraints in delivering infrastructure projects.2 The World Bank The World Bank projects that the fiscal deficit in 2014 will be 2.1 percent of GDP, based on projects a somewhat less favorable macroeconomic assumptions to those in the Budget (Table 8). Given the larger deficit of 2.1 uncertain effect of the elections on boosting consumer spending, and the projected further percent of GDP in 2014 decline in international oil prices and depreciation of Rupiah, the World Bank projects that 2 For further discussion on Indonesia’s budget execution challenges in the infrastructure sector see the July 2012 IEQ. The March and October 2013 IEQs also contain analysis of Indonesia’s recent infrastructure investment spending and capital stock and discuss the importance of higher quality infrastructure for the growth of economic activity. December 20 13 THE WORLD BANK | BANK DU NIA 25 Slower growth; high risks Indonesia Economic Quarterly total nominal revenues will grow by 9.7 percent relative to 2013, which is below the Government’s nominal growth target of 11 percent. In addition, the weaker Rupiah puts further pressure on expenditures, especially through fuel subsidies; as highlighted in the October 2013 edition of the IEQ. As a result, a reduction in the total cost of fuel subsidies is not expected to be achieved in 2014 compared with 2013 despite the June 2013 increase in subsidized prices, as anticipated savings have been eroded by higher Rupiah-denominated fuel prices. Depending on the trends in international fuel prices and the exchange rate, the possibility of overshooting the target in 2014 cannot be ruled out. Table 8: The approved fiscal deficit in 2014 is 1.7 percent of GDP, slightly higher than previously proposed (IDR trillion, unless otherwise indicated) IDR trillion Percent of GDP 2012 2013 2014 2014 2012 2013 2014 2014 Audited Revised Proposed Audited Revised Proposed Budget Budget actual budget budget actual budget budget A. Revenues, o/w 1,338 1,502 1,663 1,667 16.2 15.9 16.1 16.1 1. Tax revenues 981 1,148 1,310 1,280 11.9 12.2 12.7 12.3 Income tax 465 539 592 586 5.6 5.7 5.7 5.7 Oil & gas 83 74 68 76 1.0 0.8 0.7 0.7 Non-oil & gas 382 465 523 510 4.6 4.9 5.1 4.9 Sales tax/VAT 338 424 519 493 4.1 4.5 5.0 4.8 Property taxes 29 27 26 25 0.4 0.3 0.2 0.2 Excises 95 105 114 116 1.2 1.1 1.1 1.1 International trade tax 50 48 54 54 0.6 0.5 0.5 0.5 2. Non-tax revenues 352 349 351 385 4.3 3.7 3.4 3.7 Natural resources 226 204 198 226 2.7 2.2 1.9 2.2 Oil & gas 206 181 171 197 2.5 1.9 1.7 1.9 Non-oil & gas 20 23 27 29 0.2 0.2 0.3 0.3 Other non-tax 126 145 153 159 1.5 1.5 1.5 1.5 B. Expenditures 1,491 1,726 1,817 1,842 18.1 18.3 17.6 17.8 1. Central Gov’t, o/w 1,011 1,197 1,230 1,250 12.3 12.7 11.9 12.0 Personnel 198 233 277 263 2.4 2.5 2.7 2.5 Material 141 203 204 216 1.7 2.1 2.0 2.1 Capital 145 188 206 184 1.8 2.0 2.0 1.8 Interest payments 101 113 120 121 1.2 1.2 1.2 1.2 Subsidies 346 348 336 334 4.2 3.7 3.2 3.2 Energy subsidies 306 300 285 282 3.7 3.2 2.8 2.7 Fuel 212 200 195 211 2.6 2.1 1.9 2.0 Electricity 95 100 90 71 1.1 1.1 0.9 0.7 Non-energy subsidies 40 48 52 52 0.5 0.5 0.5 0.5 Social 76 81 56 92 0.9 0.9 0.5 0.9 2. Transfers to regions 481 529 586 593 5.8 5.6 5.7 5.7 C. Primary balance -53 -112 -35 -54 -0.6 -1.2 -0.3 -0.5 D. Overall balance -153 -224 -154 -175 -1.9 -2.4 -1.5 -1.7 E. Net financing 175 224 154 175 2.1 2.4 1.5 1.7 I. Domestic financing 199 241 173 196 2.4 2.6 1.7 1.9 II. Foreign financing (net) -23 -17 -19 -21 -0.3 -0.2 -0.2 -0.2 The Medium-Term The approved Budget for 2014 also includes an updated Medium-Term Budget Framework Budget Framework (MTBF) over the period 2015-2017, which projects a move to an overall budget surplus by projects reaching 2016 (Table 10) and a further decline in debt-to-GDP to 23 percent. The Government overall surplus by expects to continue with the net negative flow of official foreign financing. This expected 2016… fiscal outlook is supported by an optimistic economic growth target range moving above 7 percent of GDP in 2015 and beyond, coupled with a stable inflation rate (3-5 percent) and an exchange rate of up to 10,000 Rupiah per USD. Oil production is expected to increase December 20 13 THE WORLD BANK | BANK DU NIA 26 Slower growth; high risks Indonesia Economic Quarterly gradually during the next three years, though projections are downgraded from those in the MTBF in the 2013 Budget (1,010 - 1,030 thousand barrels per day in 2016). Total nominal revenues are expected to grow by 13 percent on average between 2015 and 2017, while expenditures are planned to fall gradually as a share of GDP, from almost 18 percent of GDP to slightly over 16 percent by 2017. …a target which may In light of the recent moderation in economic growth and the World Bank’s base case prove difficult to expectations, the macroeconomic projections in the updated MTBF appear difficult to achieve achieve. In addition, the move to a budget surplus of 0.2 percent of GDP by 2016 will likely be very difficult, as it requires a reduction of spending by 2 percentage points, and an increase in revenues of 1 percentage point, of GDP relative to the 2013 revised Budget figures. The latter may be feasible, but a 2 percentage point reduction in spending would be a challenge given limited discretionary space, except if achieved through reducing subsidies, which would require major reform. Given Indonesia’s development needs, working towards improving the spending mix while increasing the level of revenue-to-GDP share may be preferable to reducing total spending in order to achieve a positive fiscal balance. Table 9: Macroeconomic and price assumptions have been revised in a conservative direction from those in the August proposal 2012 2013 2014 2014 2014 Proposed Actual audited Revised budget Budget WB budget Real GDP growth (percent) 6.2 6.3 6.4 6.0 5.3 CPI (yoy, percent) 4.3 7.2 4.5 5.5 6.1 Exchange rate (IDR/USD) 9,384 9,600 9,750 10,500 11,800 Crude oil price (USD/BBL) 113 108 106 105 103 Oil production ('000 BBL per day) 861 840 870 870 870 Source: Ministry of Finance and World Bank staff estimates Table 10: The Medium-Term Budget Framework projects an overall surplus by 2016 (IDR trillion, unless otherwise indicated) 2013 2014 2015 2016 2017 Revised budget Budget Projections % of % of % of % of % of IDR tn IDR tn IDR tn IDR tn IDR tn GDP GDP GDP GDP GDP A. Revenues, o/w 1,502 15.9 1,667 16.1 1,891 16.5 2,129 16.4 2,381 16.8 1. Tax revenues 1,148 12.2 1,280 12.3 1,513 13.2 1,746 13.4 2,003 14.2 2. Non-tax revenues 349 3.7 385 3.7 374 3.3 381 2.9 377 2.7 B. Expenditures 1,726 18.3 1,842 17.8 1,944 17.0 2,104 16.2 2,306 16.3 I. Central gov't, o/w 1,197 12.7 1,250 12.0 1,268 11.1 1,346 10.4 1,473 10.4 Line ministries 622 6.6 n.a. n.a. 663 5.8 725 5.6 823 5.8 Non-line ministries 575 6.1 n.a. n.a. 606 5.3 620 4.8 650 4.6 II. Transfers to regions 529 5.6 593 5.7 675 5.9 759 5.8 833 5.9 C. Primary balance -112 -1.2 -54 -0.5 75 0.7 155 1.2 207 1.5 D. Overall balance -224 -2.4 -175 -1.7 -53 -0.5 25 0.2 75 0.5 E. Net financing 224 2.4 175 1.7 53 0.5 -25 -0.2 -75 -0.5 I. Domestic financing 241 2.6 196 1.9 98 0.9 28 0.2 -22 -0.2 II. Foreign financing, net -17 -0.2 -21 -0.2 -46 -0.4 -53 -0.4 -53 -0.4 Key economic assumptions Real GDP growth (percent) 6.3 6,0 6.4 - 7.2 6.5 - 7.4 6.7 - 7.6 CPI (yoy, percent) 7.2 5,5 3.0 - 5.0 3.0 - 5.0 2.5 - 4.5 Exchange rate (IDR/USD) 9,600 10.500 9,700 - 10,000 9,700 - 10,000 9,700 - 10,000 Crude oil price (USD/BBL) 108 105 100 - 115 100 - 115 100 - 115 Oil production ('000 BBL per day) 840 870 960 - 980 940 - 960 920 - 940 Source: Ministry of Finance; World Bank staff calculations December 20 13 THE WORLD BANK | BANK DU NIA 27 Slower growth; high risks Indonesia Economic Quarterly 2. An update on poverty in Indonesia This section examines The rate of poverty reduction in Indonesia has been slowing in recent years. This section recent trends in examines contributory factors to this phenomenon. Moreover, in the light of slowing poverty, and the economic growth, continued inflationary risks and relatively high rice prices, the prospects prospects for further for the national poverty rate in the second half of 2013 and first half of 2014 are examined. reduction in the short- The section concludes by looking at what can be done to accelerate poverty reduction in the to medium-term future. Indonesia’s national The official Indonesian poverty Figure 23: The pace of poverty reduction in recent years poverty rate declined rate for March 2013, according has been the slowest in over a decade by 0.6 percentage to BPS (Badan Pusat Statistik), (poverty rate, percent, and change in poverty, percentage points) points in the year to was 11.4 percent, representing a 20 2.5 March 2013, continuing 0.6 percentage point decline 18 Poverty Rate (LHS) 2 a slowing trend of from 12.0 percent in March 16 poverty reduction in 2012. For the past four years, 1.5 14 recent years the annual reduction in the 1 12 poverty rate has been below 1 percentage point, and the 0.5 10 Change in Poverty 0.5 and 0.6 percentage point 8 0 declines in 2012 and 2013 6 respectively are the lowest -0.5 4 declines in over a decade, with 2 -1 the exception of the nearly 2 0 -1.5 point increase in 2006 due mainly to food price shocks (Figure 23). Source: BPS; World Bank staff calculations Figure 24: The remaining poor households in Indonesia are Figure 25: …while the poor and vulnerable also participate further below the poverty line than earlier in the 2000s… less in Indonesia’s recent economic growth (2013 average per capita household consumption by percentile, as a ratio of (2013 annual change in average per capita household consumption by decile, the national poverty line) percent) 1.4 10 1.2 Poverty Line 8 1.0 6 0.8 Growth in mean expenditure Poor households are increasingly further below 4 0.6 the poverty line 0.4 2 Growth in mean decile expenditure 0.2 0 0.0 -2 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 1 2 3 4 5 6 7 8 9 10 Source: Susenas; World Bank staff calculations Source: Susenas; World Bank staff calculations Contributing factors to There are a number of reasons for slowing poverty reduction. One important factor is that this slowdown are that as poverty in Indonesia approaches 10 percent, the remaining poor households are further the remaining poor are and further below the poverty line (Figure 24), meaning that higher consumption growth is increasingly harder to required in order to maintain the annual rate of poverty reduction as in the past. At the same reach, and that time, the poor and vulnerable have participated less in recent economic growth than economic growth wealthier Indonesians. The poorest half of Indonesians saw zero or slightly negative growth continues to be in real per capita consumption between 2012 and 2013, compared to a growth in mean unequally shared consumption across the entire population of 4 percent and an average of 7 percent for the December 20 13 THE WORLD BANK | BANK DU NIA 28 Slower growth; high risks Indonesia Economic Quarterly richest two deciles (Figure 25). While these Growth Incidence Curves (GIC) are very sensitive to the choice of start and end dates, the pattern in Figure 25 is consistent with previous GICs since 2003.3 Box 3: BLSM, Susenas and measuring poverty With higher food and non-food prices due to the rise in subsidized fuel prices in June 2013 expected to adversely affect poor and vulnerable households in the short term, the Government of Indonesia prepared a compensation package totaling IDR 29.05 trillion or about 74 percent of the total fuel subsidy savings. It included two main components: (a) the Special Compensation Program (Program Kompensasi Khusus), and (b) the Social Protection Acceleration and Expansion Program (Program Percepatan dan Perluasan Perlindungan Sosial, P4S) (see the June 2013 IEQ for further discussion). A key component of the P4S was an unconditional cash transfer (Bantuan Langsung Sementara Masyarakat, BLSM) in the amount of IDR 150,000 per household per month for a duration of four months, provided to 15.5 million households in two payments. The BLSM was intended to prevent a temporary increase in poverty due to the temporary increase in poverty basket inflation as a result of the increase in subsidized fuel prices. The World Bank projects that instead of an increase to 12.1 percent poverty in September 2013, which would have occurred without the BLSM, poverty will have continued to fall. The extent of that fall, as measured in the September SUSENAS (the national socio-economic survey conducted by BPS, from which poverty estimates are made) depends on a number of factors. In particular, the timing of BSLM disbursements, and how this money is used, will have a significant effect on how much BLSM affects measured poverty. The SUSENAS consumption module asks households detailed question about food and non-food consumption. For various food commodities consumption over the last week is asked for, and for non-food commodities the survey asks for consumption over the last three months. SUSENAS was conducted over September 2013. The first tranche of benefits was disbursed in July and August. If this was spent on food, it would not be counted in SUSENAS, as it did not happen in the week before the survey. If this was spent on non-food, then it would be counted as occurring in the last three months, but could be reported with recall error by respondents. If the money was used instead for debt repayment or savings, then it would not be captured by the survey at all, which asks only about consumption. The second tranche was disbursed in September, at the same time as SUSENAS was conducted. Whether the money was received before the survey will determine whether it is picked up by the survey. What does past experience with BLSM’s predecessor (Bantuan Langsung Tunai, BLT) tell us about how households respond? In its 2012 Social Assistance Program and Public Expenditure Review series, World Bank analysis reports that the money was generally consumed within one week of receipt (meaning the timing of the disbursements relative to the survey matters considerably), and that it was generally spent on basic necessities – food, as well as non-food items such as clothing or education expenses. The 2008-09 experience of the BLT saw a greater amount spent on education, as the disbursement was just before the beginning of the school year, whereas in 2005-06 more was weighted towards food. With the two disbursements in 2013 being just after the beginning of the school year, covering Ramadan, and leading up to Lebaran, households are likely to have consumed more and saved less, but whether this was on food or non-food is unclear. Note: For further analysis of the BLT experience see World Bank. 2012. Bantuan Langsung Tunai (BLT) temporary unconditional cash transfer. The use of the BLSM This year has been characterized by slowing growth and higher inflation. In particular, the unconditional cash year-on-year increase in the poverty basket price index (a measure of the price of a basket of transfer to compensate goods and services commonly consumed by the poor) in the third quarter of 2013 was 8.8 poor and vulnerable percent, driven by the effects of the rise in subsidized fuel prices from June. With this households for June’s increase in the cost of living for the poor likely to have been higher than increases in fuel price increase will household earnings or wages, the September 2013 poverty rate would have been expected to likely prevent a short- increase. Applying the macroeconomic outcomes to a household micro-data model of term increase in the poverty in Indonesia, and abstracting from the impact of the compensation package September 2013 poverty associated with the subsidized fuel price increase, the September poverty rate is projected to rate have been 12.1 percent, a 0.4 percentage point increase on September 2012 (and 0.7 points on March 2013). However, the poverty rate should benefit in the short-term from the temporary impact of the BLSM payments in the middle of the year, which saw two payments of IDR 300,000 to 15.5 million households in July/August and September. As a consequence, the temporary increase in inflation is likely to be offset by the temporary increase in income for poor and vulnerable households, and the World Bank projects that the September poverty rate will indicate a fall in poverty. Whether this decline is small or substantial depends on the timing of the disbursements, how the money is used, and when household consumption is surveyed (see Box 3). 3 See, for example, the discussion on Indonesia’s changing patterns of consumption growth from 1996 to 2010 in the March 2011 IEQ. December 20 13 THE WORLD BANK | BANK DU NIA 29 Slower growth; high risks Indonesia Economic Quarterly However, the The temporary BLSM payments will not affect the longer-run poverty trend, as they lasted Government’s target for only four months. With poverty as of March 2013 at 11.4 percent, even if the rate of poverty rate of 8-10 poverty reduction returns to 1 percentage point per year, the Government’s 2014 target of 8- percent in 2014 is likely 10 percent (RPJM 2009-14) would be missed. Moreover, slowing growth (projected by the to be missed… World Bank to be 5.1 percent year-on-year to March 2014) and high inflation (7.2 percent year-on-year to March 2014) mean achieving even a 1 percentage point reduction in the year to March 2014 is unlikely. The World Bank’s poverty model projects the March 2014 poverty rate to be 11.0-11.1 percent (0.3-0.4 points lower than March 2013), indicating a further slowing of poverty reduction. …although depends in However, the expansion of long-term social assistance which began in the third quarter of part on the uptake of 2013 (see following discussion) could affect this outcome. In addition to the temporary the recent expansion of BLSM, the Social Protection Acceleration and Expansion Program, P4S (see Box 3 and IEQ long-term social July 2013), also included a significant expansion in benefits of two long-term social assistance programs assistance programs – a conditional cash transfer program and a cash transfer program for poor students Significant uptake of these programs (as well as the timing of disbursement – see Box 3) could result in faster poverty reduction, and possibly mean the 2014 poverty target may be met. However, significant uptake is more likely in the second half of 2014. Continued poverty Indonesia has historically spent less on social assistance as a percent of GDP (roughly 0.5 reduction will require percent) compared to other countries in the region (1.0 percent) and middle-income continued expansion of countries in general (1.5 percent).4 While the recent expansion in long-term programs social assistance… mentioned is welcome progress, commitment to the ongoing growth of social assistance will be required to help speed up poverty reduction. As importantly, getting implementation right for these programs will also determine their effectiveness as poverty reduction tools.5. …with the Government The Conditional Cash Transfer program (Program keluarga Harapan, PKH) was expanded recently significantly from 1.1 million beneficiary households to 2.4 million in 2013, with a further expansion in expanding its 2014 to 3.2 million planned. At the same time, average benefit levels will increase from conditional cash IDR 1.4 million to IDR 1.8 million per year per household. This increase in benefits is likely transfer program… to improve appreciably the adequacy of program benefits in off-setting the costs of health and educational services for poor families. …and cash transfer Similarly, eligibility among poor students for cash transfers (Bantuan untuk Siswa Miskin, program for poor BSM) will almost double in 2013 from 8.7 million to 16.6 million beneficiaries. However, its students effect on poverty will depend on the uptake of the program by students in poor households. The benefit levels will also significantly increase: primary school (SD) benefits will increase from IDR 360,000 to IDR 450,000 per year per student, while junior secondary (SMP) benefits will increase from IDR 550,000 to IDR 750,000 per year per student. The Government also Other permanent social assistance programs were also modified under P4S, but only on a scaled up temporarily temporary basis, which is likely to imply only modest impacts on poverty reduction in the the Raskin rice subsidy long run. Under the Rice Subsidy for the Low-Income Group program, (Subsidi Beras bagi for low-income group Masyarakat Berpendapatan Rendah, or Raskin), beneficiary households were able to purchase an program, although this additional 15 kg of rice per month for three months (June, July, and August), at heavily continues to face subsidized rates. This second allotment was in addition to the original allocation of 15 kg of delivery challenges rice beneficiaries were eligible to purchase per month. However, due to challenges in the Raskin delivery system, at-risk households were likely only able to purchase much less subsidized rice than has been allocated to them through the compensation program. This affects the de facto benefit households receive through the Raskin program, and lessens program benefits and impact. (See the World Bank’s 2012 Social Assistance Program and Public Expenditure Review for a longer treatment of Raskin delivery challenges). Importantly, recent P4S program reforms have been been undertaken alongside the introduction of a Social social assistance Protection Card (Kartu Perlindungan Sosial, KPS) and in alignment with a Unified Database of 4 See World Bank (2012) Protecting the Poor and Vulnerable in Indonesia. 5 See also World Bank (2012), Protecting the Poor and Vulnerable in Indonesia. December 20 13 THE WORLD BANK | BANK DU NIA 30 Slower growth; high risks Indonesia Economic Quarterly reforms have been potential social protection program beneficiaries (Basis Data Terpadu, BDT). The use of both accompanied by the the Social Protection Cards and the BDT has important implications on potential benefits introduction of a Social across programs, especially for the very poor. For example, PKH beneficiary families will Protection Card and automatically have access to BSM, BLSM, and Raskin. When deployed in concert, these Unified database of programs have the potential of amplifying individual program benefits, leading to more beneficiaries robust poverty reduction. Future poverty Continued expansion in benefits and coverage of permanent social protection programs, reduction will be including PKH and BSM, can help boost poverty reduction in the future. The introduction supported not only by of new programs that protect currently uncovered risks, including cash or in-kind programs improved social that target the elderly and disabled, will also help protect vulnerable populations. Through protection programs further expansion and integration of existing social protection programs, and the but also by measures to introduction of new programs to address uncovered risks, the social protection system will build inclusive growth, be better able to adequately protect families from shocks and help them manage risks that for example, focusing affect them throughout the lifecycle. Programs that provide skills training and bolster formal on skills and quality sector employment are also needed to encourage labor market development and further job creation enhance poverty reduction (as discussed in the next Section). December 20 13 THE WORLD BANK | BANK DU NIA 31 Slower growth; high risks Indonesia Economic Quarterly C. Indonesia 2015 and beyond: A selective look 1. The labor market in Indonesia: recent achievements and challenges Indonesia has been Indonesia’s labor market has shown a continuous recovery since the mid-2000s, after the successful at creating downturn following the 1997/1998 East Asian financial crisis, and its performance in terms jobs, now its of increase in employment rate has been among the strongest in the East-Asia Pacific region. expanding labor Indonesia’s success in generating employment is explained mainly by sustained economic market has to address growth, a favorable economic environment, and a rapidly expanding service sector. This has several challenges… led to a gradual increase in service sector jobs and formalization of the economy, particularly in urban areas, largely through the increase in paid dependent employment. Despite these encouraging developments, Indonesia faces challenges in creating more and better jobs as the country continues its structural transformation (i.e., the movement of workers from poorly productive to highly productive activities). This section provides an overview of the recent achievements in Indonesia’s labor markets and outlines the main challenges faced. …such as expanding Specifically, three main challenges should be addressed. First, the largest economic sectors in employment growth in terms of employment are still low value added, and job creation since 2001 has been driven higher productivity by the expansion of low productivity sectors. Second, the informal sector remains large, sectors and to address employing more than 50 percent of total workers, with informal jobs paying lower wages, still high levels of providing less stability and not giving access to benefits. Third, investments in higher informality and productivity sectors are hampered by the limited availability of skilled workers. If such shortages of skilled challenges remain unaddressed, there is a risk that the recent welfare gains might be workers undermined, with a consequent slowdown in poverty reduction and increase in inequality. Indonesia’s labor force, According to the most recent data available from the February 2013 Sakernas labor force the 4th largest in the survey, out of a population of 175 million people aged over 15, Indonesia’s total labor force world, reached 121 was 121 million, of which 114 million are employed (Figure 26). Since February 2006, the million workers in early labor force participation rate to the total working age population increased slowly but 2013 and employment steadily, rising from 66.7 percent to 69.2 percent, while, over the same period, the share of is expanding… the employed to the working age population rose faster, from 59.0 percent to 65.1 percent, December 20 13 THE WORLD BANK | BANK DU NIA 32 Slower growth; high risks Indonesia Economic Quarterly reaching its mid-1990s levels. Consistently, between 2006 and 2012, the elasticity of employment to (real value-added) growth6 has reached 0.56 (meaning that a 1 percent increase in real value added translates into a 0.56 percent increase in employment, on average across sectors, over the period), against 0.47 registered between 2001 and 2005, and 0.79 registered in the early 1990s, with an average estimated elasticity equal to 0.5 between 1990 and 2012 (and not significantly different from 0 during the 1998-99 crisis). In addition to such a positive employment trend, the total unemployment rate has been continuously declining (from 10.4 percent in February 2006 to 5.9 percent in February 2013). The aggregate unemployment rate, however, remains a relatively less telling labor market indicator in Indonesia, as in other similar middle-income countries, given the high level of informal employment, as discussed below. Figure 26: Of Indonesia’s labor force of 121 million workers, Figure 27: The rise in the employment rate in Indonesia 114 million are employed (less than half in the formal sector) since 2005 has been among the strongest in the region (employment, unemployment, and formal employment, millions,) (employment rate, percent; employment rate is defined as employed aged 15+ as percent of total population 15+) Unemployment 80 140 Informal employment Formal employment Vietnam 120 75 China 100 70 80 Thailand 60 65 Indonesia 40 60 20 Philippines Malaysia 0 55 Feb-05 Aug-06 Feb-08 Aug-09 Feb-11 Aug-12 1991 1994 1997 2000 2003 2006 2009 2012 Source: World Bank staff calculations using Sakernas Source: World Bank World Development Indicators and World Bank staff calculations using Sakernas for Indonesia …although Indonesia’s At the regional level, Indonesia has been outperforming the Philippines and Malaysia during employment rate the second half of the 2000s (Figure 27), although is still lagging behind some other regional continues to lag some peers, namely, Vietnam, China and Thailand, largely because of the relatively poor labor regional peers, market participation of women and youth. Indonesia’s female employment rate in fact reached only very recently the threshold of 50 percent, and the employment rate of the youth aged below 25 still lies below 40 percent, and has not returned yet to its early 1990s levels (47 percent), after a continuous decline and a slow recovery started only in the mid ‘00s. Most worryingly, youth’s low labor market participation is accompanied by persistent high rates of NEETs (young people not in employment, education or training), as discussed below. Most job creation has Between August 2001 and August 2012, a total of over 20 million new jobs were created been in the formal (growth of 22 percent), with an average of 2.3 percent annual employment growth since sector, and in services February 2006 (Figure 28). Out of the 20 million jobs created, 16.4 million (82 percent) were formal jobs, according to new the definition of formal employment adopted by the National 6 Estimated using panel data of employment and real value added for 9 economic sectors (defined in Figure 30) between 1990 and 2012. December 20 13 THE WORLD BANK | BANK DU NIA 33 Slower growth; high risks Indonesia Economic Quarterly Statistical Institute (BPS) since 20017. The services sector contributed the vast majority of this rise in employment, with 16.8 million new jobs created by the sector (84 percent of the total), and as a result services’ share in total employment has reached 43 percent. The industry sector was able to create only 4 million new jobs and currently accounts for 21 percent of total employment, while in agriculture (where 35 percent of total workers are still employed) some 860,000 jobs were lost over this period. The expansion of employment in services has also driven the rise of the formal sector, with 85 percent of the jobs created in services since 2001 being formal jobs, as opposed to 57 percent in industry. Figure 28: Year-on-year employment growth has been Figure 29: Formal employment contributed four-fifths total sustained since 2005, although slowing down after 2011 job creation between 2001 and 2012 (year-on-year employment growth, percent) (cumulative contribution to total employment growth with employment in 2001=100) Informal Employment 5.0 24 124 growth since 2001 (%) 4.5 20 120 Formal Employment 4.0 growth since 2001 (%) 16 116 3.5 Total Employment 3.0 12 growth since 2001 112 (RHS) 2.5 8 108 2.0 4 104 1.5 1.0 0 100 0.5 -4 96 0.0 Feb Feb Feb Feb Feb Feb Feb Feb -8 92 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2006 2007 2008 2009 2010 2011 2012 2013 Source: World Bank staff calculations using Sakernas Source: World Bank staff calculations using Sakernas Job creation has been Job creation has been stronger in urban areas, where employment grew by 45 percent since stronger in urban 2001 against 6 percent growth seen in rural areas. Urban employment growth has gradually areas, and important outpaced rural areas’ over the last decade, and since 2008 jobs in urban areas have been geographic differences growing faster than the working age population. Also, urbanization has been importantly in employment rates associated with the rise in formality, with 72 percent of jobs created in urban areas being persist formal. The increase in formalization can be also explained by the rise in the number of salaried employees (or dependent workers), which contributed to almost 70 percent of total job creation (Figure 30). At the geographic level, although some convergence of Provincial level employment rates towards the national level can be observed over the last decade, important differences can still be registered between areas with high employment rates (over 75%) such as Bali and Papua (whose performance is likely to be explained by the natural resources extraction industries boom, in particular palm-oil), and districts with persistently low employment rates (slightly above 55%) such as North Sulawesi and Aceh. 7 According to the new definition of informality adopted by BPS since 2001, informal workers are defined according to a combination of characteristics related to the “Status of employment" and “Occupation“. “Occupation” includes 9 categories: Professional, Technical and Related Workers, Administrative and Managerial Workers, Clerical and Related Workers, Sales Workers, Services Workers, Agricultural & Forestry Workers Fishermen & Hunters Production, Transportation and Unskilled Workers, Others. “Status of Employment” includes 7 categories: Own Account, Employer assisted by temporary worker(s), Employer assisted by permanent worker(s), Employee, Casual worker in agricultural sector, Casual worker in non-agricultural sector, Unpaid family worker. Informal workers are defined as: all unpaid family workers; all casual workers and own-account (or self-employed) workers, except those working as Professional, Technical and Administrative and Managerial Workers, Clerical and Related Workers; employers assisted by temporary worker(s) in agriculture and other occupations. The main change with respect to the old definition, is that before 2001 there was no “casual worker” category in the Sakernas, so casual workers in agriculture and construction were included in the formal sector as salaried employees. December 20 13 THE WORLD BANK | BANK DU NIA 34 Slower growth; high risks Indonesia Economic Quarterly a. The challenges of an ongoing but incomplete structural transformation Employment growth The flip side of the above encouraging labor market developments, however, is that low- occurred mostly in low- labor productivity sectors (with labor productivity defined as value added divided by the value-added, low- number of workers), with a lower share of workers with tertiary education, still dominate skilled sectors employment, and that employment creation has been mainly concentrated in low- productivity, non-skill-intensive sectors. Of the total employment growth seen over 2001 to 2012, 30 percent occurred in community, social and personal services (where 6.9 million new jobs were created), and 28 percent in wholesale, trade and retail (5.7 million). Manufacturing contributed only to 16 percent of total growth (3.3 million), slightly above construction (14 percent, corresponding to 2.9 million new jobs). The negative correlation between employment growth and productivity growth between 2001 and 2012 (Figure 31), seems to suggest that job creation has not been fully productivity enhancing, and that there is room for improving the efficiency of labor reallocation from agriculture to industry and services and from low to high productive activities both within and across sectors. Figure 30: Low value-added sectors in services have Figure 31: Employment growth and labor productivity contributed mostly to job creation between 2001 and 2012 growth are negatively correlated (sector and employment status contribution to total employment growth (employment and labor productivity growth, 2001-2012, percent) between 2001 and 2012, percent) 120 Labor productivity growth rate 140 Transport 100 Soc.&pers.svcs 4.5% 30.3 Trade & retail 100 80 Manufacturing Construction 68.6 60 Trade & 60 28.5 Agriculture Soc. & Finance Employees retail 35.1% pers. 20.9% 40 Mining 20 services 16.3 Transport 15.4% Construction 6.1% 20 14.9 Casual 27.3 Electricity,gas -20 Electricity, 7.7 workers Manufacturing gas 0.2% Agriculture Self employed 4.9 13.9% 0 Mining Finance Sector Employment -60 1.4% 2.4% status -20 0 20 40 60 80 100 120 140 -20 Employment growth rate Source: World Bank staff calculations using Sakernas Note: bubble size indicates each sector’s share in total employment in 2012. Source: World Bank staff calculations using Sakernas As a result, wage This evidence is consistent with the findings that average real wage growth has been growth has been relatively modest compared to aggregate productivity growth, over the 2002 to 2012 period. moderate, but Real wages (including wages from formal sector employees) grew by 21 percent since 2001 important income gaps (Figure 32), averaging 2 percent in terms of real annual growth, which appears quite persist between formal moderate compared to an average yearly real GDP growth rate of 5.4 percent, and to a total dependent and non- growth in labor productivity of nearly 50 percent over the same period. Figure 32 also dependent workers… suggests that the growth in real earnings (income from work for the self-employed and casual workers, both formal and informal) has been much slower, only 5 percent over the whole period, resulting in persisting income gaps between formal dependent (salaried employees) and non-dependent workers. …and there is The sectorial breakdown also shows other important differences: wages in mining have been considerable variation growing twice as fast as the national average, reflecting the boost to incomes in the sector in wage growth from global commodity prices and demands over this period. However, the job expansion amongst sectors potential of this sector remains limited. In contrast, total wages in a potentially skill-intensive sector such as manufacturing have grown less than the national average, reflecting poor productivity growth. Finally, the variation in real wages within services, ranging from finance down to trade and retail, is marked, again reflecting differences in skill intensities. D e c e m b e r 20 1 3 T H E W O R L D B A N K | B A N K DU N IA 35 Slower growth; high risks Indonesia Economic Quarterly Figure 32: Important wage differences exist between sectors, Figure 33: Dependent employment is on the rise, but most and within sectors between types of employment workers are still employed in vulnerable forms of work (real average monthly income from work by sector, thousand IDR, ref. (employment composition by status, percent) year 2007) Wages 2012 Earnings 2012 40 Wages 2001 Earnings 2001 National avg 2012 National avg 2001 35 2,000 30 employees 1,500 25 employers self employed 1,000 20 500 15 unpaid family workers 0 10 casual workers 5 0 Note: Earnings refers to income from work for the self-employed Source: World Bank staff calculations using Sakernas and casual workers, both formal and informal Source: World Bank staff calculations using Sakernas b. “Good jobs” rising, but many workers remain informal and vulnerable Although “good jobs” The presence of a large informal sector still employing more than 50 percent of total are increasing, more workers (70 percent in rural areas) remains one of the most serious challenges for the than 50 percent of total Indonesian labor market. Although the share of “good jobs” in total employment (defined employment is still here simply as the share of formal dependent employees) rose from 27.7 percent to 36.4 informal and percent between August 2001 and August 2012 (Figure 33), a large share of the employed vulnerability remains pool is still highly vulnerable, including nearly 18 million unpaid family workers and some high for many workers 11.5 million casual workers (16 percent and 10 percent of total employment, respectively). In addition, a decrease in the number of casual workers in agriculture has been offset by the rise of casual workers in non-agriculture sectors, and although the number of employers with permanent workers is increasing, those with temporary workers still represent 82 percent of total employers. Finally, workers on own account (or self-employed in a strict sense), which are more likely to be vulnerable and low-productivity, although declining in number, still add up to some 18.5 million (17 percent of total employment). Vulnerable forms of work offer less protection against risk and shocks, do not enable access to social benefits, and provide lower income. For example, as of August 2012, casual workers and self-employed average earnings amount to 48 percent and 65 percent of employees’ average wage, respectively, compared to 45 percent and 75 percent as of 2001, which could explain part of the overall rise in inequality seen in Indonesia over this period. There is a high The incidence of vulnerable forms of employment shows a high variation across sectors and variation in the share provinces, also because of persistent non-compliance with Minimum Wages policies (see the of vulnerable workers December 2012 IEQ). Data constraints limit the possibility of assessing the impact on across sectors and employment of the spike in Minimum Wages levels across provinces in 2013, (in Jakarta, the geographic areas increase was over 40 percent). However, the Sakernas data show that as of 2012, the largest employment sectors (Wholesale and retail trade, and Community, Social and Personal Services ) exhibit high shares of workers paid below minimum wages: 50 percent and 45 percent respectively, which rise dramatically for informal workers (80 percent and 86 percent, respectively). These figures are even higher in agriculture, where nearly 80 percent of all workers are paid below the Minimum Wage. At the provincial level, non-compliance is above 60 percent in West Nusa Tenggara and West Sulawesi (over 75 percent for informal workers), and close to or above 50 percent in other 12 provinces (including Jakarta and Yogyakarta, and particularly high in Lampung, Aceh, South Sulawesi and South Kalimantan). December 20 13 THE WORLD BANK | BANK DU NIA 36 Slower growth; high risks Indonesia Economic Quarterly c. Coping with a largely unskilled labor force Indonesia’s workforce Nearly 50 percent of Indonesia’s workforce still possesses at most elementary education, remains largely while only 6.3 percent has a university, or 4-year diploma, degree (Figure 34). This is despite unskilled, with only 6.3 the substantial progress Indonesia made in increasing enrolment rates in secondary and percent with tertiary tertiary education for the youngest generations, and the rise in the share of the labor force education… with upper or lower secondary education from 35 percent up to 44 percent between 2001 and 2012. A low-skilled labor force represents a serious challenge for improving productivity and for meeting employers’ demands in a rapidly changing labor market, in particular given the low propensity of Indonesian firms towards providing training. As a result of this mismatch problem, a dramatic share, over 40 percent, of youth aged 15-24, remains out of education, training or work as of 2012 (Figure 35), without showing improving trends since 2001, which can seriously undermine their possibility to find good jobs in the future. Figure 34: Although the labor force has become more Figure 35: Over 40 percent of Indonesia’s youth aged 15-24 skilled, less than 8 percent has a university degree are not in employment, education or training (labor force composition by highest educational attainment, percent) (youth aged 15-24 not in employment, education or training, percent) 70 60 Male Female elementary or lower 60 50 50 40 40 upper & lower secondary 30 30 20 20 university or 4-yr diploma 10 10 0 0 2000 2002 2004 2006 2008 2010 2012 2000 2002 2004 2006 2008 2010 2012 Source: World Bank staff calculations using Sakernas Source: World Bank staff calculations using Sakernas …representing one of a In summary, the Indonesian labor market, sustained by strong job creation, is transforming number of labor towards greater formalization of its workforce. However, a number of important challenges market challenges remain: most of the jobs created over the last decade are in low-productivity sectors; over 50 facing policymakers percent of existing jobs are still informal, offering no protection to workers; the labor force is still largely unskilled, and finally women and young people still exhibit low labor force participation rates. These challenges need to be addressed by policymakers and all stakeholders, before the demographic bonus of an expanding labor force expires. In addition, greater regional integration following the onset of the ASEAN Economic Community in 2015 will lead to more competitive pressure on the domestic labor market. December 20 13 THE WORLD BANK | BANK DU NIA 37 Slower growth; high risks Indonesia Economic Quarterly 2. Local capacity and development in Indonesia New study evidence Democratization and decentralization in Indonesia during the post-1998 Reformasi period sheds light on the have brought with them changes in the relationship between the State and society. In rural changes of rural communities villagers are now free to exercise their electoral rights to choose the village community capacity head without first having to secure approval from the district level. Village heads now have and the role of village better access to resources in the district. There has also been an increased emphasis on government to address community-driven development (CDD) throughout the country, giving more voice and local problems in a decision-making authority to communities in choosing and implementing development decentralized, projects that best suit local needs. This section aims to shed light on whether and how democratic Indonesia community capacity is affected over time, by these shifts of national policies on democratization, decentralization and CDD and their complex interactions at the local level, drawing on the newly-released results of the third round of the World Bank Local Level Institutions Study (LLI3), conducted in 2012.8 a. A brief history of community-driven development in Indonesia Indonesia’s flagship The year 2013 marks fifteen years of implementation of the Indonesia National Community community-driven Empowerment Program (Program Nasional Pemberdayaan Masyarakat, PNPM), the largest development program, CDD program in the world. Since its initiation in 1998 as the Kecamatan Development PNPM, was grounded Program (KDP), PNPM has operated based on the tenet that the local community has the in community capacity capacity to identify, prioritize, select and implement development projects that best meet … their needs in improving their well-being.9 This principle was informed by the first Local Level Institutions Study (LLI1), carried out in 1996 by the World Bank. …following a study Reflecting the growing focus of the global development community on local institutions and which found that while social capital at that time, the LLI1 was conducted with the objective of understanding the communities still had role of local level institutions and social capital in the delivery of basic services and welfare capacity for collective improvement. The study – carried out in 48 villages in 3 provinces (Central Java, Jambi, action to solve their Nusa Tenggara Timur) – found that, despite the fact that Indonesia at that time was still common problems, under a highly centralized, authoritarian regime, local capacity – defined as the ability to this was undermined solve common problems collectively – remained strong in most of the study villages. This by top-down capacity, however, was constantly undermined by local governments, which delivered top- government down development projects that did not take into account specific needs at the local level.10 development policies These findings paved the way for the design and implementation of the KDP, which and projects that did provided local communities with alternative open spaces for deliberating their development not take into account needs and resources to carry out chosen projects. Barely a year after KDP started, Indonesia local needs underwent massive political changes with the demise of the Suharto regime in 1998 and the beginning of decentralization era in 2001 Democratization and The dawn of democracy and decentralization raised the question of what impacts these decentralization began changes would have on local capacity and the relationship between the State and society. In opening the space to particular, would the opening up of political space bring better opportunities for the local improve relationships community to be involved in decision-making over development projects and thus improve between communities the match between projects and local needs? To answer these questions, the follow-up LLI2 and their village study was commissioned in 2000-2001 to focus in particularly on the changes in local state- governments, and to society relationships and how these changes influenced welfare and local governance. strengthen local capacity… The study found that local capacity still existed in most study areas and that there were 8 This note draws on Wetterberg, A., Dharmawan, L., & Jellema, J.R. (2013, forthcoming) The Local Level Institutions III: Overview Report. World Bank/PNPM Support Facility. Jakarta. For more information about PNPM Support Facility, please visit http://pnpm-support.org/. 9 In 2007, the Government of Indonesia scaled up KDP and its urban sister the Urban Poverty Project, UPP, and launched the programs under one umbrella program called PNPM. 10 Chandrakirana, K. (1999). Local capacity and its implications for development: The case of Indonesia. World Bank/Bappenas. Local Level Institutions Study, Jakarta; Evers, P. (2003). Village governments and their communities. World Bank/Bappenas. Local Level Institutions Study, Jakarta.. December 20 13 THE WORLD BANK | BANK DU NIA 38 Slower growth; high risks Indonesia Economic Quarterly indications of increased opportunities for local community participation in decision-making over development projects, although most projects still did not deliver satisfactory outcomes. For example, incidents of protests against village heads increased, but without typically precipitating any real or lasting changes. New elected village councils (BPD, Badan Perwakilan Desa), which were tasked to hold village government accountable, began to operate in some areas, although confusion over their functions and limitations in terms of operational support somewhat limited their ability to perform.11 This perceived lack of change, however, was not entirely unexpected considering that the study was conducted only a few years after the economic and political turmoil of 1997/1998, and around the time of the 2001 decentralization reforms. …but have the changes More than a decade after the political shift in 1998, decentralization in 2001, and the been sustained after implementation of KDP/PNPM in over 60,000 villages, these changes were expected to more than a decade? affect local capacity. To better understand these changes, a third round of the LLI Study was conducted in 2012, with the objective of tracing developments in local capacity since LLI2, over a decade before, and to determine whether there had been shifts in the influence of different community groups over government decision-making, project implementation, and state resources at the district and village levels, and whether these shifts have any link with changes in local capacity. b. Understanding changes in local capacity since 2001 The LLI studies collect In the LLI studies, local capacity is defined as the ability to solve common problems data on the type and collectively. To measure this, the studies collect and trace data on the type and number of number of common common problems existing in study villages and investigate whether those problems were problems, if they were addressed collectively and, if so, whether successfully. Villages are then grouped into three addressed and, if so, categories of capacity (high, medium, low) based on the frequency of collective actions and whether successfully degree of success in addressing problems. Box 4 provides an overview of the survey methodology. Communities report In order to trace changes in capacity since LLI2, the LLI3 study first tabulated the numbers fewer social problems and type of problems found in study villages and then looked at how many problems have in 2012 than in 2001, been successfully solved collectively. The study finds that communities experienced fewer but more economic common problems compared to LLI2 and that the nature of the problems has shifted. In and service delivery particular, communities reported more economic and service delivery-related problems, problems while social problems (such as gambling and drinking) were barely mentioned. There is also an apparent increase in “overwhelming” problems that are difficult to solve at the local level such as natural disasters and high prices of inputs for agricultural production. Overall, the likelihood The number of collective actions to solve common problems declined in all study areas. This of a community could partly be explained by the increasing number of “overwhelming” problems that are successfully resolving a beyond a community’s capacity to address. The degree of success in solving common problem was problems, the study finds, remains largely the same as in LLI2. These general patterns, unchanged but there however, mask the substantial variation in changes of capacity across surveyed villages. Of was substantial the twenty villages revisited in LLI3, almost half (nine) retain similar capacity. In particular, variation in the more than half of the high capacity villages, as classified by LLI2, have built on their earlier changes in capacity successes in addressing more recent problems, showing persistence. This suggests that high across villages capacity villages are resilient, even in the face of the political shifts faced during the past decade. Villagers’ own efforts A quarter of surveyed villages (five) had increased their capacity. It is particularly supported by reformist encouraging that all but one of the villages with improved capacity were low capacity villages village leaders have in LLI2. Low capacity villages, by definition, have a history of not mobilizing collectively, helped to improve and their increased capacity appears to have been driven mostly by villagers’ own efforts, capacity such as finding better income resources, regaining control over natural resources, and 11 Dharmawan, L. (2002).Dynamics of Local Capacity and Village Governance: Findings from the Second Indonesian Local Level Institutions Study Central Java Report.. December 20 13 THE WORLD BANK | BANK DU NIA 39 Slower growth; high risks Indonesia Economic Quarterly engaging various mechanisms to hold village leaders accountable . Other factors that also reinforce the community’s efforts in these villages are reformist village leaders who listen to and work for villagers’ interests and, to a lesser extent, external agents such as non- governmental organizations (NGOs), especially related to land and forest use disputes. Persistent problems About a third of villages (six) experienced a decline in capacity. These villages suffer from with issues related to persistent problems with issues relating to deteriorating natural resources, such as access to deteriorating natural drinking water and land disputes. There are also signs of reduced reciprocity (gotong-royong) in resources, such as these villages, signaling a decrease in social capital. Three of the villages that experienced access to drinking declines in capacity were villages that experienced a status change from village (desa) to urban water or land disputes, ward (kelurahan). This means that these villages no longer have elected village heads who are exacerbated by non- accountable to the villagers.12 In addition, most village heads in the remaining three villages reformist leaders are weak (unable to implement decisions), and having unresponsive leaders who do not destroy local capacity work in villagers’ interests is one of the main factors causing decline in village capacity. Box 4: Local Level Institutions Studies methodology The Indonesian Local Level Institutions Table 11: Comparison of Key Research Aspects in LLI1, LLI2, and LLI3 (LLI) studies are longitudinal, using both LLI1 (1996) LLI2 (2000/2001) LLI3 (2012) qualitative and quantitative methods, Key issues  Local capacity  Local capacity  Local capacity aiming to identify the preconditions for  Social capital  Social capital  Social capital and constraints on local capacity—  Village  Village governance  Village governance defined as the ability to solve common governance  Crisis response  District governance problems collectively—and the extent to  PNPM which state structures complemented or impeded villagers’ problem-solving Research  Qualitative  Qualitative data  Qualitative data efforts. The LLI was first conducted in methods data collection collection collection 1996 in 48 villages in three provinces  HH survey  HH survey  HH survey (Central Java, Jambi, and NTT). The  Ethnography locations were chosen to ensure Districts 1. Batanghari 1. Batanghari 1. Batanghari geographic and socio-economic variation. (re-)visited 2. Merangin 2. Merangin 2. Merangin The Batanghari and Merangin districts in 3. Banyumas 3. Banyumas 3. Muara Jambi Jambi represent Sumatra, with economies 4. Wonogiri 4. Wonogiri 4. Banyumas mostly based on plantations and cash 5. Ngada 5. Ngada 5. Wonogiri crops (rubber, palm oil, coffee, etc.), 6. Timor Tengah 6. Ngada Selatan 7. Nagakeo relatively good transport infrastructure Number of 48 40 20 (qualitative) and a mid-range population density. The villages 40 (quantitative) Banyumas and Wonogiri districts in Central Java represent the island of Java, the most densely populated area of Indonesia. Ngada and Timor Tengah Selatan (TTS) districts in NTT represent Eastern Indonesia, which is more arid, less densely populated, and has lower than average incomes. Village research sites were chosen to capture upland and lowland communities with varying access to the sub-district capital. In LLI2, only 40 villages were revisited because TTS was at that time inaccessible for security reasons. In the latest, third, round of LLI, 20 villages were revisited for qualitative data collection while quantitative data collection was conducted in all 40 villages from LLI2. Table 11 shows the comparison of key research aspects of the three rounds of LLI. For the qualitative component of the studies, researchers conducted interviews with relevant key informants at district and village levels, such as the district head (or secretary), officials from district offices (planning, rural/community development), district parliament (DPRD, Dewan Perwakilan Rakyat Daerah) members, NGOs/CSOs, village heads, representatives from community empowerment bodies (BPM, Badan Pemberdayaan Masyarakat/LPM, Lembaga Pemberdayaan Masyarakat) and religious/adat/community figures. The interviews helped collect data on, among others, problem solving; leadership, network and institutional profiles; as well as projects profiles (including PNPM). The studies also conducted a series of focus group discussions (FGDs) with community members. Topics of the FGDs included (1) land use, power relations, and natural resources threats, (2) production, consumption, threats to survival and getting ahead, (3) Government role and relations, and (4) problem-solving. For the quantitative component, the studies conducted a panel household survey, including modules on household characteristics and consumption, household involvement/membership in organizations (formal and informal) and the benefits, common problems that households faced in their areas, patterns of ownership of land and other resources, social interaction and trust, recent crises and crisis resolution mechanism, village government (satisfaction, transparency and accountability). Note: see Wetterberg et al 2013 (forthcoming) for more information 12 Kelurahan is lead by a lurah who is appointed by district head and thus responsible only to the district, not to the villagers. December 20 13 THE WORLD BANK | BANK DU NIA 40 Slower growth; high risks Indonesia Economic Quarterly c. Democratization, decentralization, CDD and local capacity… Democratization has With democratization, village heads are democratically elected by villagers. During the enabled villagers to Suharto era candidates had to obtain the approval of the district government to be able to choose reformist, pro- run and be inaugurated. Elections now take place periodically and candidates are not community village imposed by supra-village governments. Further, term limits, involving a maximum of two 6- heads that support year terms, for village heads have been enforced post-2001. The democratization also helps local capacity… reduce space for dynastic leadership, which was common in the past, and has broadened candidate slates. …and provided new Free elections have made village heads more responsive to villagers’ interests and seen them prominence for village play a stronger role in solving identified collective problems. Strong village heads can be heads, enabling them more effective in dealing with external actors (e.g., investors) and supra-village governments to play a bigger role in to solve community problems. For example, one village head in the study area participated in problem solving a network of thirty village heads to have the repair of the provincial road passing their villages approved just before the re-election of the incumbent governor, demonstrating a strong organizational ability to obtain benefits from the district level. Another village head mobilized his network, including working with regional and national NGOs, to reclaim villagers’ land from concessions issued by the central government (although, unfortunately, villagers also suspected that he disproportionately benefited from this effort). Decentralization has The strength of the village head position is increased further by the fact that decentralization increased village gives village heads direct access to district heads (bupati) and the district sectoral offices heads’ access to which manage large funds from the central government. Previously, this contact was district-level intermediated through the sub-district. However, in order to obtain funds (and projects) resources… from the district, village heads have to be pro-active and have good networks, visiting sectoral offices and the Parliament and actively seeking support for projects. Village heads with limited networks have to rely on the formal process of annual development planning (Musrenbang, Musyawarah Perencanaan Pembangunan) to obtain projects, a process which some village heads see as an unproductive formality. This benefits village heads who can exploit the additional direct, and sometimes informal, access provided by decentralization. …but without control Strengthening village heads does not, however, translate directly to strengthening the village mechanisms, villagers community, especially when control mechanisms are lacking to pressure village heads to are unable to pressure work for the community’s interests. These can be seen in villages with strong village heads village heads to work but low in capacity. Communities in these villages have not been able to capitalize on for the community’s changes in the political environment and demand that village heads work for the interests community’s interests. These villages mainly rely on elections to oust unresponsive leaders at the end of their terms. Higher capacity villages, however, are able to make village heads use their stronger position to solve community problems and to hold village heads accountable through mechanisms such as customary laws and traditions (adat) or the BPD that has retained its original role as found in LLI2. The weakening of the The BPD was first mandated in Law 22 of 1999 on Regional Government, as a village village council position representative council with elected members to provide checks and balances in village vis-à-vis village heads government. The village head was thus accountable to the BPD and the district head (who has undermined local provided funds for village government). However, this mechanism was later changed by Law capacity… 32 of 2004, and so was the name, although the abbreviation remained the same. The BPD is now Badan Permusyawaratan Desa, or village consultation council and the members are appointed by consensus and essentially have no power over the village head. These changes also reduce villagers’ ability to monitor the village head and to ensure that village government is working for the broader collective interest, rather than for exclusive individual or elite benefits. The BPD as conceived in 1999 proved to be an effective accountability mechanism in the subset of villages where the council had time to operate before it was weakened by the 2004 legislation. A small number of villages in Central Java for example, have retained the BPD’s December 20 13 THE WORLD BANK | BANK DU NIA 41 Slower growth; high risks Indonesia Economic Quarterly original role while a few villages in Jambi maintained their adat control mechanisms. In these communities, the BPD and adat institutions have enhanced local capacity by channeling villagers’ needs to officials and ensuring that village government is working to address identified community priorities. …with district Despite the lack of checks and balances mechanisms in villages caused by the weakening of government not the BPD, there has been no offsetting increase in the control or supervision of village heads providing control and by districts to hold village heads accountable. Districts provide little supervision and supervision over village monitoring of whether village heads are performing their duties or whether funds are used heads, potentially effectively. Under these circumstances, the stronger position of village heads could leading to power abuse potentially lead to power abuse and corruption. In one of the villages in the LLI3 study, for and corruption example, the village head built a new, expensive village hall, the idea of which was conceived in his first term but was blocked by the BPD in 2001. To finance the hall he used the village development budget, reportedly coerced villagers into giving financial contributions, and reportedly even denied poor households their subsidized rice to help pay for construction. CDD projects work The LLI3 study also sheds light on the influence of CDD programs on local capacity. better in higher Participatory projects could potentially be one means to improve local capacity by providing capacity villages rather space for collective decision-making to solve local problems and by increasing than improving accountability. However, while LLI3 villagers report higher satisfaction, more transparency, governance in lower and better maintenance for PNPM relative to other non-CDD projects, levels of capacity villages participation in village development planning have not increased overall. In particular, in villages with lower capacity, CDD projects have not facilitated improvement in participatory decision-making and governance. High-capacity villages, on the other hand, are better able to take advantage of the open planning and decision-making in these projects to solve some of their collective problems. d. …and the importance of enhanced checks and balances at the village level Stronger checks and Overall, the LLI3 study suggests that local capacity in the sampled villages in Indonesia has balances mechanisms been largely maintained, with high capacity villages being able to capitalize on the at the village level and opportunities brought forth by changes in national policies. Some low capacity villages have a better strategy in been able to improve their capacity organically by addressing resource constraints and using CDD projects is existing control mechanisms to hold village government accountable. These villages have needed to help support also benefited from democratization, which allows villagers to elect reformist, pro- local capacity community village heads that work for villagers’ interests, and from decentralization, which gives reformist village heads direct access to the district to obtain the support needed to solve identified problems. However, some villages have experienced capacity declines, being unable to address persistent problems related to deteriorating natural resources and to hold village government accountable. In a number of cases, this decline in local capacity can be ascribed to losing the ability to elect a village head because of a change of status from village to ward. These findings strongly point to the need to strengthen checks and balances mechanisms at the village level to help villagers hold village government accountable. Thus, while CDD projects have assisted high and medium capacity villages in solving some of their collective problems, more needs to be done to allow lower capacity villages to benefit from the process as well. December 20 13 THE WORLD BANK | BANK DU NIA 42 Slower growth; high risks Indonesia Economic Quarterly APPENDIX: A SNAPSHOT OF INDONESIAN ECONOMIC INDICATORS Appendix Figure 1: Quarterly and annual GDP growth Appendix Figure 2: GDP expenditure contributions (real GDP growth, percent) (contribution to QoQ seasonally-adjusted real GDP growth, percent) Private cons. Gov cons. 4 8 Investment Net Exports Year-on-year (RHS) 4 3 6 QoQ seas. 2 2 adjust (LHS) Average (LHS)* 4 0 1 2 -2 0 0 -4 Sep-06 Jun-08 Mar-10 Dec-11 Sep-13 Sep-10 Jun-11 Mar-12 Dec-12 Sep-13 Note: *Average QoQ growth between Q3 2003 – Q3 2013 Source: BPS; World Bank staff calculations Source: BPS; World Bank seasonal adjustment Appendix Figure 3: Contributions to GDP production Appendix Figure 4: Motor cycle and vehicle sales (contribution to QoQ seasonally-adjusted real GDP growth, percent) (monthly sales, 000 unit) Agriculture Mining and Const Manufacture Comm and Trans. 900 130 Trade, Hotel, & Rest. Other services Overall GDP Motor vehicles (RHS) 2.0 110 700 90 1.0 70 500 0.0 50 Motor cycles (LHS) -1.0 300 30 Sep-10 Jun-11 Mar-12 Dec-12 Sep-13 Nov-10 Nov-11 Nov-12 Nov-13 Source: BPS; World Bank staff calculations Source: CEIC Appendix Figure 5: Consumer indicators Appendix Figure 6: Industrial production indicators (index) (3 month average, year-on-year growth, percent) 160 20 60 BI Retail sales index BI Consumer 140 Survey Index 15 Cement sales (RHS) 45 120 10 30 100 5 15 80 0 0 Manufacturing production index (LHS) 60 -5 -15 Nov-10 Nov-11 Nov-12 Nov-13 Nov-10 Nov-11 Nov-12 Nov-13 Source: BI Source: CEIC D e c e m b e r 20 1 3 T HE W ORL D BA NK | BAN K DU NIA 43 Slower growth; high risks Indonesia Economic Quarterly Appendix Figure 7: Real trade flows Appendix Figure 8: Balance of payments (quarter-on-quarter real growth, percent) (USD billion) 15 Capital and financial Current account Errors and omissions Overall BoP inflows 15 10 Exports 10 5 5 0 0 -5 -5 -10 Imports -15 -10 Sep-10 Sep-11 Sep-12 Sep-13 Sep-10 Sep-11 Sep-12 Sep-13 Source: BPS Source: BI Appendix Figure 9: Exports of goods Appendix Figure 10: Imports of goods (USD billion) (USD billion) 20 20 Total Exports Total Imports 16 16 12 12 Intermediate 8 Manufacturing 8 Agriculture & forestry Capital Oil & gas 4 4 Consumer Oil & gas Mining & 0 minerals 0 Oct-10 Apr-11 Oct-11 Apr-12 Oct-12 Apr-13 Oct-13 Oct-10 Apr-11 Oct-11 Apr-12 Oct-12 Apr-13 Oct-13 Source: BPS Source: BPS Appendix Figure 11: Reserve and capital inflows Appendix Figure 12: Inflation and monetary policy (USD billion) (month-on-month and year-on-year growth, percent) 3.5 12 150 5.0 Headline inflation, YoY (RHS) International Reserves (LHS) BI policy rate (RHS) 125 2.5 2.5 8 Core inflation, YoY (RHS) 100 0.0 1.5 4 75 -2.5 Headline inflation MoM (LHS) Non-resident portfolio inflows, (RHS): Equities 0.5 0 50 -5.0 SUN SBI 25 -7.5 -0.5 -4 Nov-10 Nov-11 Nov-12 Nov-13 Nov-09 Nov-10 Nov-11 Nov-12 Nov-13 Source: BI; CEIC; World Bank staff calculations Source: BPS; World Bank staff calculations December 2013 T HE W ORL D BA NK | BAN K DU NIA 44 Slower growth; high risks Indonesia Economic Quarterly Appendix Figure 13: Monthly breakdown of CPI Appendix Figure 14: Inflation across countries (percentage point contributions to monthly growth) (year-on-year, October 2013) Core Administered Volatile Headline Korea 3.6 USA 3.0 Japan 2.4 Thailand* Singapore 1.8 Malaysia 1.2 Philippines 0.6 China* Indonesia* 0.0 India -0.6 -1 0 1 2 3 4 5 6 7 8 9 Nov-10 Nov-11 Nov-12 Nov-13 Source: BPS; World Bank staff calculations *November inflation figure otherwise October Source: National statistical agencies via CEIC; BPS Appendix Figure 15: Domestic and international rice prices Appendix Figure 16: Poverty and unemployment rate (percent LHS, wholesale price, in IDR per kg RHS) (August unemployment data, percent) 100 10,000 25 25 Percentage spread (LHS) 20 20 50 7,000 Poverty rate 15 15 10 10 0 4,000 Unemployment rate Domestic rice, IR-III 5 5 Vietnamese rice 15% broken (RHS) (RHS) -50 1,000 0 0 Nov-09 Nov-10 Nov-11 Nov-12 Nov-13 2003 2005 2007 2009 2011 2013 Source: PIBC; FAO; World Bank Source: BPS Appendix Figure 17: Regional equity indices Appendix Figure 18: Dollar index and Rupiah exchange rate (daily index September 2009=100) (daily index, LHS and IDR/USD, RHS) 250 120 8,500 SET IDR/USD 200 110 (RHS) 9,500 JCI 150 100 IDR Appreciation 10,500 SGX Dollar Index 100 BSE 90 (LHS) 11,500 Shanghai 50 80 12,500 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Source: CEIC; World Bank staff calculations Source: CEIC; World Bank staff calculations December 2013 T HE W ORL D BA NK | BAN K DU NIA 45 Slower growth; high risks Indonesia Economic Quarterly Appendix Figure 19: 5-year domestic govt. bond yields Appendix Figure 20: Sovereign USD Bond spreads (daily, percent) (daily, basis points) 10 475 60 Indonesia spreads less overall EMBIG Index spreads (RHS) 8 400 0 Indonesia 6 325 -60 4 Philippines Thailand 250 -120 Malaysia 2 175 -180 United States Indonesia EMBIG bond spreads (LHS) 0 100 -240 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Source: CEIC; World Bank staff calculations Source: JP Morgan; World Bank staff calculations Appendix Figure 21: International commercial bank lending Appendix Figure 22: Banking sector indicators (monthly, index January 2009=100) (monthly, percent) 235 100 10 Loan Deposit 215 Indonesia Ratio (LHS) India 80 8 195 Singapor 175 60 6 Malaysia Non-Performing Return on Assets Loans (RHS) Ratio (RHS) 155 40 4 135 Thailand United States 20 2 115 Capital Adequacy Ratio 95 (LHS) 0 0 Sep-09 Sep-10 Sep-11 Sep-12 Sep-13 Source: CEIC; World Bank staff calculations Source: BI Appendix Figure 23: Government debt Appendix Figure 24: External debt (percent of GDP; USD billion) (percent of GDP; USD billion) 60 300 60 300 Government debt ratio to GDP External debt ratio to GDP (LHS) (LHS) 40 200 40 200 20 100 20 100 0 0 0 0 2005 2007 2009 2011 2013 2005 2007 2009 2011 2013 External debt, RHS September Private external debt, RHS September Domestic debt, RHS Public external debt, RHS Source: MoF; BI; World Bank staff calculations Source: BI; World Bank staff calculations D e c e m b e r 20 1 3 T HE W ORL D BA NK | BAN K DU NIA 46 Slower growth; high risks Indonesia Economic Quarterly Appendix Table 1: Budget outcomes and projections (IDR trillion) 2009 2010 2011 2012 2013 2014 Revised Outcome Outcome Outcome Outcome Budget budget A. State revenue and grants 849 995 1,211 1,338 1,502 1,667 1. Tax revenue 620 723 874 981 1,148 1,280 2. Non-tax revenue 227 269 331 352 349 385 B. Expenditure 937 1,042 1,295 1,491 1,726 1,842 1. Central government 629 697 884 1,011 1,197 1,250 2. Transfers to the regions 309 345 411 481 529 593 C. Primary balance 5 42 9 -53 -112 -54 D. SURPLUS / DEFICIT -89 -47 -84 -153 -224 -175 (percent of GDP) -1.6 -0.7 -1.1 -1.9 -2.4 -1.7 Source: MoF Appendix Table 2: Balance of Payments (USD billion) 2011 2012 2013 2010 2011 2012 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Balance of Payments 30.3 11.9 0.2 -3.7 -1.0 -2.8 0.8 3.2 -6.6 -2.5 -2.6 Percent of GDP 4.3 1.4 0.0 -1.7 -0.5 -1.3 0.4 1.5 -3.0 -1.1 -1.2 Current Account 5.1 1.7 -24.4 -2.3 -3.2 -8.1 -5.3 -7.8 -5.9 -10.0 -8.4 Percent of GDP 0.7 0.2 -2.8 -1.1 -1.5 -3.7 -2.4 -3.6 -2.7 -4.4 -3.9 Trade Balance 21.3 24.2 -1.7 3.5 1.8 -2.0 0.8 -2.4 -0.8 -3.8 -2.6 Net Income & Current Transfers -16.2 -22.5 -22.7 -5.8 -5.0 -6.2 -6.1 -5.4 -5.0 -6.1 -5.8 Capital & Financial Accounts 26.6 13.6 25.2 0.2 2.1 5.1 5.9 12.1 -0.3 8.4 4.9 Percent of GDP 3.8 1.6 2.9 0.1 1.0 2.3 2.6 5.5 -0.1 3.7 2.3 Direct Investment 11.1 11.5 14.0 3.1 1.6 3.7 4.5 4.1 3.9 3.8 5.1 Portfolio Investment 13.2 3.8 9.2 0.2 2.6 3.9 2.5 0.2 2.8 3.4 1.9 Other Investment 2.3 -1.8 1.9 -3.2 -2.1 -2.5 -1.2 7.7 -6.9 1.2 -2.1 Errors & Omissions -1.5 -3.4 -0.5 -1.6 0.1 0.2 0.2 -1.1 -0.4 -1.0 0.9 Foreign Reserves* 96.2 110.1 112.8 110.1 110.5 106.5 110.2 112.8 104.8 98.1 95.7 Note: * Reserves at end-period Source: BI; BPS December 2013 T HE W ORL D BA NK | BAN K DU NIA 47 Slower growth; high risks Indonesia Economic Quarterly Appendix Table 3: Indonesia’s historical macro-economic indicators at a glance 1990 1995 2000 2005 2010 2011 2012 1 National Accounts (% change) Real GDP 9.0 8.4 4.9 5.7 6.2 6.5 6.2 Real investment 25.3 22.6 11.4 10.9 8.5 8.8 9.8 Real consumption 23.2 21.7 4.6 4.3 4.1 4.5 4.8 Private 23.9 22.7 3.7 0.9 4.7 4.7 5.3 Government 18.8 14.7 14.2 6.6 0.3 3.2 1.2 Real exports, GNFS 22.5 18.0 30.6 16.6 15.3 13.6 2.0 Real imports, GNFS 30.2 29.6 26.6 17.8 17.3 13.3 6.6 Investment (% GDP) 28 28 20 24 32 32 33 Nominal GDP (USD billion) 114 202 165 286 709 846 878 GDP per capita (USD) 636 1035 804 1,300 2,984 3,498 3,563 2 Central Government budget (% GDP) Revenue and grant 18.8 15.2 20.8 17.8 15.5 16.3 16.2 Non-tax revenue 1.0 4.8 9.0 5.3 4.2 4.5 4.3 Tax revenue 17.8 10.3 11.7 12.5 11.3 11.8 11.9 Expenditure 11.8 13.9 22.4 18.4 16.2 17.4 18.1 Consumption .. 3.9 4.0 3.0 3.8 4.0 4.1 Capital .. 4.6 2.6 1.2 1.3 1.6 1.8 Interest .. 1.4 5.1 2.3 1.4 1.3 1.2 Subsidies .. .. 6.3 4.3 3.0 4.0 4.2 Budget balance 0.4 1.3 -1.6 -0.6 -0.7 -1.1 -1.9 Government debt 41.9 32.3 97.9 47.6 26.0 24.3 23.9 o/w external government debt 41.9 32.3 51.4 22.3 9.5 8.3 7.4 Total external debt (including private sector) 61.0 61.5 87.1 47.7 28.2 27.5 29.6 3 Balance of Payments (% GDP) Overall balance of payments .. .. .. 0.2 4.3 1.4 0.0 Current account balance -2.6 3.2 4.8 0.1 0.7 0.2 -2.8 Exports GNFS 25.6 26.2 42.8 35.0 24.7 26.2 24.1 Imports GNFS 24.0 26.9 33.9 32.0 21.6 23.3 24.3 Trade balance 1.6 -0.8 8.9 2.9 3.0 2.9 -0.2 Financial account balance .. .. .. 0.0 3.7 1.6 2.9 Net direct investment 1.0 2.2 -2.8 1.8 1.6 1.4 1.6 Gross official reserves (USD billion) 8.7 14.9 29.4 34.7 96.2 110.1 112.8 3 Monetary (% change) 1 GDP deflator 7.7 9.9 20.4 14.3 8.3 8.1 4.5 Bank Indonesia interest key rate (%) .. .. .. 9.1 6.5 6.6 5.8 Domestic credit .. .. .. 28.7 17.5 24.4 24.2 4 Nominal exchange rate (average, IDR/USD) 1,843 2,249 8,422 9,705 9,090 8,770 9,387 1 Prices (% change) Consumer price Index (eop) 9.9 9.0 9.4 17.1 7.0 3.8 4.3 Consumer price Index (average) 7.7 9.4 3.7 10.5 5.1 5.4 4.3 Poverty basket inflation (average) .. .. .. 10.8 8.7 8.2 6.5 5 Indonesia crude oil price (USD per barrel) .. 17 28 53 79 112 113 Source: 1 BPS and World Bank staff calculation; 2 MoF and World Bank staff calculation (for 1995 is FY 1995/1996, for 2000 covers 9 months); 3 Bank Indonesia; 4 IMF; 5 CEIC December 2013 T HE W ORL D BA NK | BAN K DU NIA 48 Slower growth; high risks Indonesia Economic Quarterly Appendix Table 4: Indonesia’s development indicators at a glance 1990 1995 2000 2005 2010 2011 2012 1 Demographics Population (million) 184 199 213 227 241 244 247 Population growth rate (%) 1.7 1.5 1.3 1.2 1.3 1.3 1.2 Urban population (% of total) 31 36 42 46 50 51 51 Dependency ratio (% of working-age population) 67 61 55 54 53 53 52 2 Labor Force Labor force, total (million) 75 84 98 106 117 117 118 Male 46 54 60 68 72 72 73 Female 29 31 38 38 45 45 45 Agriculture share of employment (%) 55 43 45 44 38 36 35 Industry share of employment (%) 14 19 17 19 19 21 22 Services share of employment (%) 31 38 37 37 42 44 43 Unemployment, total (% of labor force) 2.5 7.0 8.1 11.2 7.1 6.6 6.1 3 Poverty and Income Distribution Median household consumption (IDR 000) .. .. 104 211 374 421 446 National poverty line (IDR 000) .. .. 73 129 212 234 249 Population below national poverty line (million) .. .. 38 35 31 30 29 Poverty (% of population below national poverty line) .. .. 19 16 13 12 12 Urban (% of population below urban poverty line) .. .. 14.6 11.7 9.9 9.2 8.8 Rural (% of population below rural poverty line) .. .. 22.4 20.0 16.6 15.7 15.1 Male-headed households .. .. 15.5 13.3 11.0 10.2 9.5 Female-headed households .. .. 12.6 12.8 9.5 9.7 8.8 Gini index .. .. 0.30 0.35 0.38 0.41 0.41 Percentage share of consumption: lowest 20% .. .. 9.6 8.7 7.9 7.4 7.5 Percentage share of consumption: highest 20% .. .. 38.6 41.4 43.5 46.5 46.7 4 Public expenditure on social security & welfare (% of GDP) .. .. .. 4.4 3.9 3.9 4.2 1 Health and Nutrition Physicians (per 1,000 people) 0.14 0.16 0.16 0.13 0.29 .. 0.20 Child malnutrition weight for age (% of children under 5) .. 27.4 24.8 24.4 18.6 .. .. Under five mortality rate (per 1000 children under 5 year) 98 67 52 42 34 32 31.0 Neonatal mortality rate (per 1000 live births) 27 26 22 19 16 15.5 15.0 Infant mortality (per 1000 live births) 67 51 41 34 28 26.7 25.8 Maternal mortality ratio (estimate, per 100,000 live births) 600 420 340 270 220 .. .. Skilled birth attendance (% of total births) 36 .. 66 .. 82 .. .. Measles vaccination (% of children under 1 year) .. 63 74 .. 76 .. .. Total health expenditure (% of GDP) .. 1.8 77.0 2.8 2.8 2.7 .. Public health expenditure (% of GDP) .. 0.7 89.0 89.0 1.0 0.9 .. 3 Education Primary net enrollment rate, (%) .. .. .. 92 92 92 93 Female (% of total net enrolment) .. .. .. 48 48 49 49 Secondary net enrollment rate, (%) .. .. .. 52 61 60 60 Female (% of total net enrolment) .. .. .. 50 50 50 49 Tertiary net enrollment rate, (%) .. .. .. 9 16 14 15 Female (% of total net enrolment) .. .. .. 55 53 50 54 Adult literacy rate (%) .. .. .. 91 91 91 92 4 Public spending on education (% of GDP) .. .. .. 2.7 3.4 3.5 3.5 4 Public spending on education (% of spending) .. .. .. 14.5 19.7 19.8 18.9 1 Water and Sanitation Access to an improved water source (% of population) 70 74 78 81 84 84 .. Urban (% of urban population) 91 91 91 92 93 93 .. Rural (% of rural population) 61 65 68 71 75 76 .. Access to improved sanitation facilities (% of population) 32 38 44 53 58 59 .. Urban (% of urban population) 56 60 64 70 73 73 .. Rural (% of rural population) 21 26 30 38 43 44 .. 1 Others Disaster risk reduction progress score (1-5 scale; 5=best) .. .. .. .. .. 3.3 .. 5 Proportion of seats held by women in national parliament (%) .. .. 8 11 18 18.2 18.6 Source: 1 World Development Indicators; 2 BPS (Sakernas); 3 BPS (Susenas) and World Bank; 4 MoF and World Bank staff calculation, only includes spending on Raskin, Jamkesmas, BLT, BSM, PKH and actuals (except 2012 from revised budget); 5 Inter-Parliamentary Union December 2013 T HE W ORL D BA NK | BAN K DU NIA 49 December 2013 Slower growth; high risks