Download Continuity… - World Bank

Indonesia Economic Quarterly Update
Continuity amidst volatility
Shubham Chaudhuri
Lead Economist
World Bank
23 June 2010
Jakarta Indonesia
What I’ll be talking about
 CONTINUITY: Indonesia’s economy continues to perform well…
 Quarterly GDP growth has continued in line with decade-averages
 Inflation continues to be subdued
 …and the fiscal position continues to be strong
 …AMIDST VOLATILITY:
 Financial markets have been more volatile because of developments in
Europe
 …and commodity prices have continued to be volatile
 …AND THE CONTINUING CHALLENGES this implies
 Indonesia is more exposed than many other economies to global
financial market and commodity price volatility
 Commodity price movements matter for Indonesia
 Understanding Indonesia’s high lending rates, interest spreads and NIMs
Continuity…
GDP growth remains robust…
 Indonesia’s economy continued to grow at a trend rate in Q1, driven by
strong investment growth
 Economy expanded by 1.3% QoQ in Q1, or by 5.7% YoY
 A record drop in government consumption was offset by strong investment and
private demand growth
 Indonesia’s major trading partners also continued to recover in Q1
Indonesian GDP growth
4
Per cent
Per cent 8
Year on year
(RHS)
Per cent
Per cent
8
3
6
2
4
1
2
0
0
6
QoQ seas. adjust
(LHS)
Average
(LHS)*
1
4
2
0
Mar-03
4
YoY Growth (RHS)
3
2
Major Trading Partner GDP growth
Quarterly Growth (sa, LHS)
-1
-2
-2
-4
-3
-6
0
Dec-04
Sep-06
Jun-08
Mar-10
Sources: BPS via CEIC, World Bank
Mar-02
Mar-04
Mar-06
Mar-08
Mar-10
Continuity…
…and domestic indicators remain strong
 Other economic indicators have
remained stable at high levels
 Consumer indicators are near
record highs
 Industrial indicators are
strong
120
BI Retail
sales (RHS)
800
'000
80
150
60
110
30
600
60
400
Mar-07
Mar-08
Per cent, yoy
Mar-09
Mar-10
Per cent, yoy
Industrial
Production
20
30
20
10
10
0
0
40
200
Motor vehicles
(RHS)
20
-10
-20
0
Apr-06
230
190
80
Motor cycles
(LHS)
BI Consumer
Survey Index
(LHS)
100
Mar-06
'000
Index
Index
-10
Cement
Electricity
-20
0
Apr-07
Apr-08
Apr-09
Apr-10
-30
Mar-07
Sources: CEIC, World Bank
-30
Dec-07
Sep-08
Jun-09
Mar-10
Continuity…
…and mainly based on consumption and services
 Private consumption and services continued to contribute the most to
GDP growth…
4
Percentage pont
Q4
Percentage point
Q1
4
Q4
Priv.
cons.
0.6
0
Discrepency
(incl. stocks)
0.4
0.2
0.6
Agric.
Manufacturing
Mining &
construct
Other
0.4
0.2
-2
Gov't. cons.
0.0
0.0
Comms. &
transport
Imports
-4
0.8
Retail trade
2
0
1.0
Q1
0.8
Investment
-2
Percentage point
Percentage point
Exports
GDP
2
1.0
-4
Sources: BPS via CEIC, World Bank
-0.2
-0.2
Continuity…
...as has been the case over the last decade
 …Private consumption and services continued to contribute the most to
GDP growth
12
Percentage point
Percentage point
Net exports
Stocks & Discrep.
Investment
Government
Priv Cons
GDP
12
8
Percentage point
Percentage point
Services
Mining
GDP
8
Industry
Agriculture
8
6
6
4
4
4
4
0
0
2
2
0
0
-4
-4
8
1993-95 2000-05
2006
2007
2008
2009
Sources: BPS via CEIC, World Bank
1993-95 2000-05 2006
2007
2008
2009
Continuity…
Inflation continues to track historic lows…
 Though headline inflation picked up slightly in May to 4.2% YoY…
 …core inflation remained near decade lows, at 3.8% in the year to May
 The rise in headline inflation was mainly driven by food prices, which
were the only component of CPI to grow above historical averages in the
first 5 months of 2010…
 …while core inflation remained low due to low capacity utilization levels
and appreciation of the rupiah, which limited imported inflation
 Inflation is expected to pick up in the 2nd
half of 2010, as demand and credit growth
continue to recover, and administered
prices are moved closer to economic costs
4
Per cent
Per cent
Inflation YoY
(RHS)
3
16
12
Core Inflation
(RHS)
2
8
1
4
0
0
Inflation MoM
(LHS)
-1
May-07
Source: BPS
-4
May-08
May-09
May-10
Continuity…
…and the fiscal position remains strong
 …with Indonesia continuing to set a global record pace in reducing its public
debt-to-GDP ratio
Indonesia
80
Percent to GDP
Percent to GDP
80
External Debt/GDP
2009
70
60
60
50
Vietnam
India
Malaysia
40
Thailand
Indonesia
30
40
30
20
2008
50
Korea
10
Domestic Debt/GDP
70
Philippines
2007
2006
20
China
10
0
2005
0
2005
2006
2007
2008
2009
0
10
20
30
40
50
60
Percent
Continuity…
…with continuing modest budget deficits…
 The revised 2010 budget approved by the DPR targets a deficit of 2.1% of GDP
2010 budget revision (IDR Tln)
Transfers
Others
Social
Revised
Proposed Revised
Subsidies
Budget
Int. payments
Capital
Materials
Personal
0
50
100
Sources: BPS via CEIC, World Bank
150
200
250
300
350
Continuity…
…which may come in even lower than targeted…
 Alternative projections of revenue and
projected weaker disbursement suggest
the budget deficit will be significantly
smaller than current government
projections, about 1.0% of GDP in 2010
and as low as 0.4% in 2011
Per cent
35
Per cent
30
30
Tax revenue growth
Forecasts
25
25
20
20
15
15
10
10
Nom. economic growth (GDP deflator)
5
 The pickup in commodity prices is likely
to support slightly stronger government
revenue growth in 2010
 The choice of price measure for nominal
growth (deflator versus CPI) has a
significant impact on revenue projections
 By the end of Q1 2010, only 5 percent of
allocated capital expenditure has been
spent compared with 10 percent in 2009
35
5
Nominal economic growth (CPI)
0
0
-5
-5
2001
2003
2005
2007
2009
2011
Q1 actual spending vs revised budget (APBN-P) (%)
25
2008 2009 2010
20
15
10
5
0
Personal Materials Capital
Sources: BPS via CEIC, World Bank
Int. Subsidies Social
payments
Others Total CG Transf.
Total
Continuity…
…if we use the GDP deflator as a price gauge
 Nominal GDP calculated using the GDP deflator instead of CPI leads to
significant reductions in the budget deficit
 The national accounts implicit price deflators offer a broader measure of prices than
the CPI
 The relationship between the CPI and economy-wide prices in Indonesia weakened
after 2004, largely due to an acceleration in investment prices that was not captured by
the CPI…
 …but was captured by the GDP deflator, which as a result has a closer correlation with
overall prices in Indonesia
 As a result, using the GDP deflator rather than CPI improves the forecast of
government tax revenues
2010
0.0
2011
0.0
-0.5
-0.5
-1.0
-1.0
-1.5
-1.5
WB projections with
slower (CPI) inflation
WB projections
APBN projections
-2.0
-2.5
Per cent of GDP
Per cent of GDP
-2.0
-2.5
Continuity….
The outlook remains broadly positive
 Outlook remains for gradual pick-up in growth
 Continued strong private domestic demand and investment are
expected to drive growth, offsetting any drag from imports
outpacing exports
 A slowdown in major trading partner growth should not impact
Indonesia too much
 Inflation is expected to accelerate in second half of 2010 on solid
domestic demand, credit growth, a more stable exchange rate and
rising commodity prices
2009 2010 2011
Gross domestic product
(Annual per cent change)
4.5
5.9
6.2
Consumer price index
(Annual per cent change)
4.8
5.1
6.3
Balance of payments
(USD bn)
12.5
6.1
5.1
Budget balance
(Per cent of GDP)
1.6
1.0
0.4
-0.9
5.0
4.3
Major trading partner growth (Annual per cent change)
Sources: BPS, CEIC, World Bank. World Bank projections
…amidst volatility
Downside Risks have Increased
 External factors have increased risks to the outlook…
 Weak demand from OECD economies due to debt crisis could slow
down recovery in Indonesia’s MTPs
 Increased risk aversion due to debt crisis could increase financial
market volatility and capital outflows
 Ongoing commodity price volatility could affect real economy
forecasts and the budget
 …some of which call for the immediate attention of policy makers:
 Addressing large capital inflows and outflows
 Implementing policies to reduce vulnerability to commodity price
shocks
…amidst volatility
Capital outflows pushed markets down in May
 Indonesian equities and bonds weakened in May due to large capital
outflows that also put the rupiah under pressure
 Increased risk aversion due to European events triggered $5.7bn of net
foreign capital outflows in May, 90% of this in SBI sales
 The JCI fell by 5.5% on the month, yields on five year IDR sovereigns rose
by 50 basis points, and Indonesian EMBI USD bond spreads widened by
100 basis points.
 The rupiah weakened by 1.8% against the USD
45,000
IDR billion
IDR per USD
25,000
8,000
9,000
90000
IDR billion
IDR billion
75000
Net Foreign
Purchases of
SBI (RHS)
60000
5,000
-15,000
-35,000
45000
30000
15000
10,000
Net Foreign
Capital Inflows
(LHS)
IDR/USD
(RHS)
45000
0
30000
-15000
11,000
12,000
15000
13,000
0
IDR Appreciation
-55,000
Jan-07
Mar-08
Apr-09
May-10
-30000
Foreign holdings
of SBI outstanding
(LHS)
Jan-07
Mar-08
-45000
Apr-09
May-10
…amidst volatility
Financial markets vulnerable to capital outflows
 After a record month of $4bn of net capital inflows in April, May’s
$5.7bn in net capital outflows demonstrated Indonesia’s vulnerability
to volatile capital flows
 Compared to late 2008, Indonesia’s financial markets are more exposed now to
a sudden reversal of capital flows due to the high percentage of foreign holdings
of equities, bonds and SBIs
 Reserves fell by $4bn in May as BI bought rupiah to smooth out exchange rate
volatility caused by capital outflows
 90% of the outflows were SBI sales; new BI policies may help stem some of this
going forward
Capital Inflows in
prior 12 months
Foreign Holdings
of Bonds
80000
Financial sector is
more vulnerable to
a sudden reversal
of capital flows
Short-Term Debt*
Total FX
Reserves
May
2010
...but short term
external leverage is
little changed
9500
60000
Total Reserves
(LHS)
40000
IDR/USD
(RHS)
10500
11500
...and the reserves
cushion is deeper
IDR Appreciation
USDbn
0
100
200
* For 2010, short-term debt and corporate external short term debt
reflect March numbers
8500
Sept
2008
Foreign Holdings
of Stocks
Corporate
External ST Debt*
IDR per USD
USD million
20000
Jan-07
12500
Nov-07
Sep-08
Jul-09
May-10
…and some challenges this implies
Indonesia particularly exposed to global volatility
 Open capital account, relatively large presence of non-resident
investors in local financial markets
 Importance of commodity prices for Indonesia’s economy
Share (%) of commodities in exports
Reasons
Annual
70
1. Share of aggregate value added
26%
2. Share of total exports
63%
3.
14%
Share of GDP
Per cent
Per cent
70
60
60
50
50
4. Share of total im ports
34%
40
40
5.
6%
30
30
6. CPI w eight (raw foods, h/hold energy)
48%
20
20
7.
74%
10
10
8. Share of total Governm ent revenues
23%
0
0
9.
8%
Share of GDP
Poverty Basket CPI
Share of tax revenues
10. Market capitlisation of Com m odity shares on IDX*
18%
…and some policy challenges
Real economy, budget vulnerable to commodity price shocks
 Volatility of commodity prices affects real economy and price forecasts
in Indonesia as well as budget projections
 consider 3 scenarios of commodity price shocks on the economy (+30%,
+15% and -15%)
 We found commodity price movements have a large impact on prices, and a
more subdued impact on the real economy
 The poverty rate declined slightly with an increase in commodity prices
2010
2011
-15% Baseline
15%
Exports
14.3
15.0
15.6
Im ports
18.7
18.3
Trade Balance
14.3
GDP
-15% Basline
15%
16.2
10.5
11.1
11.7
12.3
17.9
17.5
11.9
11.6
11.4
11.2
14.2
13.6
13.2
16.7
13.2
9.1
5.3
5.8
5.9
6.0
6.1
6.1
6.2
6.4
6.5
GDP Deflator
9.3
9.3
9.9
10.2
11.5
12.2
13.2
13.9
Nom inal GDP
15.7
15.9
16.5
16.9
18.3
19.2
20.4
21.3
CPI
5.0
5.1
5.3
5.5
6.0
6.3
6.5
6.7
Core inflation
4.2
4.3
4.5
4.7
5.8
6.0
6.1
6.3
Poverty CPI
6.5
6.8
7.1
7.4
6.8
7.2
7.5
7.8
Poverty rate
13.2
13.0
12.9
12.8
12.4
12.2
12.0
11.9
Sources: World Bank
30%
30%
…and some policy challenges
High lending rates, NIMs may stifle investment
 Indonesia has the highest NIMs in the
region, driven by high lending rates
10
8
 High and volatile historical inflation and
bond yields increase the risk premium
lenders charge on loans
4
 A deeper financial sector with a more
competitive market structure, lower
inflation volatility, improved corporate
reporting, and higher bank-level
efficiency could help reduce rates and
NIMs going forward
18
Lending Rates
(RHS)
 High deposit-side competition but low
lending competition for banks in
Indonesia leads to high deposit and
lending rates, as well as NIMs
 Micro-level inefficiencies such as high
operating costs combined with the noncompetitive market structure may also
contribute to higher NIMs
Percent
Percent
14
Deposit Rates
(RHS)
Net Interest
Margin (LHS)
6
10
BI Policy Rate
(RHS)
2
6
2
Jan-06
Nov-06 Sep-07
Jul-08
May-09
Mar-10
2006-2010
Average
Lending Rate
Indonesia
Philippines
Deposit Rate
Thailand
Malaysia
5yr yield
CPI
Percent
0
5
10
15
20
Indonesia Economic Quarterly Update
Continuity amidst volatility
Shubham Chaudhuri
Lead Economist
World Bank
23 June 2010
Jakarta Indonesia