Download Presentation on Indonesia`s growth prospects ()

Economic and Social Update
November 2007
William E. Wallace, Lead Economist
World Bank, Indonesia
November 2007
The International Economic Environment
Real GDP Growth (% change)
World
OECD
United States
Japan
Euro Area
Developing East Asia Pacific
World Trade (% change Vol)
CPI Inflation G7 (% change)
Oil Price ($/bbl)
Non-oil commodity prices (% change)
Libor (US$, 6 mo)
2005
(act)
2006
(act)
2007
(proj)
2008
(proj)
3.4
2.4
3.1
1.9
1.5
9.2
7.8
2.0
53.4
13
3.7
3.9
2.8
2.9
2.2
2.8
9.8
10.2
2.0
64.3
25
5.2
3.5
2.3
1.9
2.0
2.5
10.1
9.2
1.7
67.9
13
5.3
3.4
2.2
2.1
1.8
2.1
9.7
7.5
1.7
72.4
-3
4.8
Source: World Bank DEC: Prospects Group (November 11, 2007)
Recovery in growth and investment continues
Year-ended percentage change
20%
16%
6.5%
6.0%
GDP
(RHS)
12%
5.5%
8%
5.0%
Investment
4%
4.5%
(LHS)
0%
4.0%
Q1
Q2
Q3
2005
Q4
Q1
Q2
Q3
2006
Q4
Q1
Q2
2007*
• The post-adjustment
recovery continues, with
economic growth firmly
above 6 percent
• The recovery in
investment also
continues, with
investment above 7
percent since late 2006
The broadening source of growth (1)
Contributions to GDP Growth
8%
Percentage points
Private Consumption
Government Consumption
Investment
Statistical Discrepancy
Net Exports
6%
GDP
• However, growth is
gaining a broader
domestically-focused
base with firming
consumption growth
added to rising
investment
4%
2%
0%
-2%
H1
H2
2005
• et exports retune to
support growth in first
half on faster export
growth
H1
H2
2006
H1
2007*
The broadening source of growth (2)
(year-ended growth rates)
•
10%
Service
•
8%
6%
•
4%
Industry
2%
Agriculture
•
0%
Q1
-2%
Q2
Q3
2005
Q4
Q1
Q2
Q3
2006
Q4
Q1
Q2
2007*
Growth firming for most
non-tradable, service
sectors
This complements strong
growth in some mining
and manufacturing
industries, but weaker
outcomes in others
Overall tradeables grew
4.3% y-o-y to June, while
non-tradeables grew
7.4% on average
Transport &
communications pace
growth at 11.9 percent
Strong International Trade
2006
2007
(January-June,
change from
previous year)
Year-on-year percentage change
40%
30%
Non-oil
Exports
20%
Oil and Gas
10%
Non-oil Imports
0%
-10%
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3*
2005
* preliminary
2006
2007
Percentage point
contribution to
H1-'07 export
growth
17.9
-6.7
-1.5
Oil
16.0
-0.2
-0.02
Gas
20.1
-13.7
-1.46
Non-Oil and Gas
14.4
20.9
16.3
Agriculture
26.8
21.7
3.28
Mining and Mineral
32.8
45.1
6.94
Forestry Products
3.6
11.0
0.79
Manufactured Products
6.7
13.1
5.27
Total
15.1
14.8
14.8
Inflation
20%
• Inflation
remains a little
above 6½
percent, firming
slightly in
recent months
Overall CPI
(year on year)
16%
12%
Core CPI
8%
• 2007 inflation
rate forecast to
be 6.5 percent.
(year on year)
4%
Core CPI
(monthly)
0%
Jan-05
Jun-05
Nov-05
Apr-06
Sep-06
Feb-07
Jul-07
Credit and Monetary Policy
Credit Growth Rate (YoY, %)
• Credit started to pick up in mid-2006
• Investment credit grows faster than
consumption
Interest Rates (%)
• SBI 1 month fell from 12.8% to 8.3%
• Lending rates fall less than SBI 1
month
17
47%
Consumption Credit
42%
15
37%
13
Lending rate
(working capital)
32%
11
27%
Working Capital
SBI rate (1 month)
9
22%
17%
7
Gap
12%
7%
2%
Jan-05
5
Investment Credit
Jun-05
Nov-05
Apr-06
Sep-06
Feb-07
Jul-07
3
Jan-05
Jun-05
Nov-05
Apr-06
Sep-06
Feb-07
Jul-07
Fiscal policy
Government Debt
State Budget Balance
(percent of GDP)
100%
(percent of GDP)
0%
97%
Domestic
-1%
80%
80%
74%
75%
69%
-2%
60%
60%
-3%
54%
Realized
47%
40%
39%
External
24% 24%
20%
-4%
Budgeted
-5%
-6%
-7%
0%
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Source: Central government budget
FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08
(9m)
Source: Central government budget
Structural Change in Labor Markets
(percentage change)
02
Labor force
2.0
Employed
0.9
High school or above
1.4
Less than high school
0.8
Unemployed
14.1
High school or above
8.4
Less than high school
18.5
Unemployment Rate (%)
9.1
* Data as february (2005, 2006, 2007)
03
2.0
1.3
3.7
0.6
8.8
4.2
12.1
9.7
04
1.2
1.0
4.5
-0.1
3.1
9.2
-0.8
9.9
05*
1.7
1.2
3.6
0.5
6.2
8.0
4.9
10.3
06*
0.5
0.3
0.8
0.1
2.1
2.1
2.1
10.5
07*
1.8
2.6
5.8
1.6
-5.1
-5.0
-5.2
9.8
Outstanding
(Feb 2007)
106.4
95.5
70.4
25.1
10.9
6.1
4.8
-
Macroeconomic Projection 2007-2009
2005
(act)
2006
(act)
2007
(Pro)
2008
(Pro)
5.7
5.5
6.3
6.4
10.8
2.9
7.7
10.6
Investment (% of GDP)
23.6
24.0
24.3
25.2
Current account balance (% of
GDP)
0.1
2.7
2.5
1.8
Central government balance (% of
GDP)
-0.5
-0.9
-1.5
-1.8
Government debt (% of GDP)
46
39.1
34.5
31.9
10.5
13.1
6.5
6.0
GDP Growth Rates (percent)
o/w investment growth rates
Inflation rate (%, annual average)
Risks to these projections
Risks 1: Impact of financial market turbulence
has been short-term…so far
• An initial, sharp response, but the exchange rate, stock market
index and bond yield curves all quickly recovered
2750
10500
12.0
JSX Index
(LHS)
2500
Mid September '06
11.5
10000
11.0
2250
2000
10.5
yield
9500
Mid August '07
Early September '07
10.0
Early October '07
1750
9000
9.5
End June '07
9.0
1500
Rupiah/US$
(RHS)
1250
8500
8.5
8.0
1000
Jan-06
8000
May-06
Sep-06
Jan-07
May-07
Sep-07
1
2
3
4
5
6 7 8 9 10 11 12 13 14 15
years to maturity
Risks 2: Rising commodity prices have been
supporting Indonesia’s economy
Income gains/losses due to selected
commodity price changes (As % of GDP)
12.0
Actual & Forecast Price Changes
(%):
9.0
2004 2005
30.6 41.5
20.3 20.4
41.3 -6.6
18.6 71.5
61.1 28.4
20.4 15.2
Oil
Rice
C'nut Oil
Iron Ore
Copper
Rubber
6.0
2004-06
3.0
2006
20.4
6.5
1.6
19.0
82.7
40.3
2007
5.6
5.8
40.1
9.5
7.1
4.4
2007
Source: World Bank data and
staff estimates.
Ko
re
a
La
o
Ca
m
bo
di
a
lip
pi
ne
s
nd
Ph
i
la
na
Th
ai
Ch
i
ia
ne
s
In
do
tn
am
Vi
e
ia
ala
ys
ia
on
go
l
M
-3.0
M
PN
G
0.0
• Rising oil prices are
associated with
higher commodity
prices in general
• These are
supporting the
value of exports and
profitability
• Even if prices
stabilize, may see
ongoing volume
effects
Risks 3: The connection between US growth and
Indonesia’s may not be that strong
Event Analysis
Change in GDP Growth, USA and East Asia
Recessions
Ratio to
Average All
USA
East Asia
(median)
China
Indonesia
Korea
Malaysia
Philippines
Taiwan
(China)
Thailand
2001
Recessions
US
1982
1991
-4.5
-2.1
-2.9
-3.2
1.00
-0.6
3.9
-7.0
1.2
-1.0
0.2
0.2
5.4
-0.1
0.2
0.5
-3.6
-4.2
-0.1
-1.3
-4.6
-8.5
-4.2
-1.5
3.1
-2.8
-1.1
-3.0
-2.5
0.48
-0.97
0.89
0.34
0.95
0.80
-2.8
-0.6
1.9
-2.6
-7.9
-2.6
-2.9
-1.9
0.93
0.61
Source: World Bank data and staff estimates
• Event analysis gives a
response to US growth of
0.48 across East Asia
• Potentially high-end
estimate
• Other estimates range
from 0.1 to 0.5
• Implies US 2%  0%
lowers Indonesian
growth 6½%  5½%
Summary
• Overall story -- in our view Indonesia’s prospects for next year
are positive, with growth rising from 6.3% to 6.4%
• This projections assumes some further slowing in US growth,
that international financial market instability is largely at an end,
and that relatively high international oil & commodity prices
continue (US$ 72 a barrel for oil) – roughly the same as this
year’s average
• However, uncertainty around global growth risks persist which
could translate into more downside risk, i.e. a US recession.
• But there are also upside risks especially to inflation, which
could create challenges for Indonesia given emerging
constraints (infrastructure)
Thank You!