indonesia: building on resilience and prospering amid ... · 2016 article iv consultation report on...

Indonesia:Building on Resilience and Prospering

Amid Global Economic Uncertainty2016 Article IV Consultation Report on Indonesia

John G. Nelmes

IMF Senior Resident Representative for Indonesia

Academic Roundtable Discussion, Jakarta, April 2017

Global Context

Indonesia’s Economy

Key Policy Issues

Global Context

Uncertain and shifting global economic landscape

Multiple forces shaping the global outlook

5

Demographic

headwinds

Tepid

productivity

growth

Forces

Overlaid on…

AEs EMs and DEs

Changing policy mix

Remaining post-crisis

repair

Fraying globalization

consensus

Demographic

trends

Weakening

productivity

growth

Rebalancing in China

Tightening financial

conditions

Idiosyncratic shocks

An uneven pick up in global growth

6

Global growth: uneven pick up Commodity prices have increased

1

2

3

4

5

6

7

8

2010 2012 2014 2016 2018

World

AEs

EMs and DEs

Economic Growth

In percent

Source: WEO January Update 2017

0

50

100

150

200

250

300

2010M1 2012M1 2014M1 2016M1

All commodities Energy Metal

Commodity PriceIndex, 2005=100

Source: IMF Commodity Price Indices

Growth Projections(percent change from a year earlier)

7

World U.S. Euro Area Asia China Japan India SE Asia

2016 3.1 1.6 1.7 5.2 6.7 0.9 6.6 4.8

Change 0.0 0.0 0.1 -0.2 0.1 0.4 -1.0 0.0

2017 3.4 2.3 1.6 5.3 6.5 0.8 7.2 4.8

Change 0.0 0.1 0.1 0.0 0.3 0.3 -0.5 -0.2

2018 3.6 2.5 1.6 5.3 6.0 0.5 7.7 5.1

Change 0.0 0.4 0.0 0.0 0.0 0.1 0.0 0.0

Note: Change is relative to the World Economic Outlook October 2016. Catatan: Perubahan relatif terhadap World Economic Outlook October 2016.

Sources: IMF, World Economic Outlook January 2017 Update; and IMF, World Economic Outlook October 2016. Sumber: IMF, World Economic Outlook January 2017 Update; and IMF, World Economic Outlook October 2016.

Global risks are two-sided, skewed to the downside

8

Stronger

growth in

US/China

China’s

transition

Stagnation

in AEsEM

Financial

Volatility

U.S. dollar

strengthProtectionism

Risks

How has Indonesia’s economy fared?

9

Indonesia’s Economy

Indonesia’s economy continues to perform well

11

22

23

24

25

26

27

28

0

2

4

6

8

Mar-

11

Jun

-11

Sep

-11

Dec-

11

Mar-

12

Jun

-12

Sep

-12

Dec-

12

Mar-

13

Jun

-13

Sep

-13

Dec-

13

Mar-

14

Jun

-14

Sep

-14

Dec-

14

Mar-

15

Jun

-15

Sep

-15

Dec-

15

Mar-

16

Jun

-16

Sep

-16

Dec-

16

Commodities 1/

Noncommodities

GDP growth

Commodities (in percent of GDP, right scale)

Commodity Share and Contribution to Real Growth

(In percent, year-on-year, seasonally adjusted)

Sources: Haver Analytics; and IMF staff estimates.

1/ Includes agriculture, mining and quarrying, manufacturing coal, petroleum and gas.

-4

-2

0

2

4

6

8

Emerging Market Countries' Growth in 2016

(Percentage)

EMs

Source: IMF Jan 2017 WEO Update Database

Low inflation

12

0

1

2

3

4

5

6

7

8

9

Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17

Headline Core Lower band Upper band

Inflation Developments

(In percentage points, yoy)

Source: BPS, BI

A smaller current account deficit and rebounding trade

13

-6

-4

-2

0

2

4

6

Mar-12 Mar-13 Mar-14 Mar-15 Mar-16

Current account balance

Merchandise trade balance

Services and Net Income

Current Account Balance

(In percent of GDP)

Source: BI

-30

-20

-10

0

10

20

30

40

Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17

Indonesia: Export and Import Growth

(yoy, in percent)

Export (3mma yoy)

Import (3mma yoy)

Source: BPS

Financial markets were buoyed in 2016 before partly

reversing following the U.S. election

14

-2,000

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17

Equity

Local currency government bonds

Total net inflow

Equity and Government Bond Inflow

(In millions of U.S. dollar, cumulative since Jan 2016)

Sources: Bloomberg L.P.; and IMF staff estimates.

U.S. election

12400

12600

12800

13000

13200

13400

13600

13800

14000

14200

5.5

6.0

6.5

7.0

7.5

8.0

8.5

9.0

9.5

10.0

Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17

10-year (in percent)

Exchange rate (Rp/US$, right scale)

Exchange Rate and Government Bond Yield Movements

Source: Bloomberg L.P.

U.S election

IMF Projections

15

Outlook

2016 2017 2021

GDP Growth (%) 5.0 5.1 5.5

Inflation (%) 3.0 4.5 4.0

Current Account

(% of GDP)

-2.0 -2.0 -2.3

Risks

• Stronger global growth

• Higher commodity prices

Upside

Downside

• Uncertainties around U.S. policies

• Protectionism

• More volatile global financial conditions and higher

interest rates

• Spillovers from a significant China slowdown

• Tax revenue shortfalls

Source: IMF, 2016 Article IV Consultation

Key Policy Issues

Key Ingredients of Proactive Policy Mix

17

Fiscal

Policy

Monetary

Policy

Structural

Reforms

Financial

and

Corporate

Sector

Fiscal PolicyGrowth-Enhancing Revenue and Expenditure Strategy

Near-term strength and medium-term challenges

19

Fiscal Policy: A Stronger Near-term Framework

20

-4

-2

0

2

4-4

-2

0

2

4

2012 2013 2014 2015 2016

Est.

2017

Proj.

Overall balance

Oil and gas revenue

Energy subsidies (right scale)

Fiscal Developments

(In percent of GDP)

Sources: Indonesian authorities; and IMF staff estimates and projections.

Low revenues constrain spending

21

14

15

16

17

18

2012 2013 2014 2015 2016 Est.

General Government Total Revenue

(In Percent of GDP)


0

4

8

12

16

20

24

2012 2013 2014 2015 2016 Est.

Personnel Subsidies Capital spending Social spending Others


General Government Total Expenditure

(In percent of GDP)

Revenues are low compared to neighbors

22

0

2

4

6

8

10

12

14

16

18

20

Vietnam China Thailand India Philippines Malaysia Indonesia

General Government Tax-to-GDP Ratio, 2015

(In percent)

Sources: IMF, WEO Database; and Authority data.

Higher revenues will finance important spending

23

10

12

14

16

18

20

Current Capital

Illustrative Growth-Enhancing Fiscal Strategy

General government, In percent of GDP

Source: World Bank; Indonesian authorities; and IMF staff estimates.

Revenue Expenditure

2017 20172021 2021

Higher revenue possible with administration reform

and removal of exemptions

24

Room to increase the VAT rate

25

0

5

10

15

20

25

30

35

40

Sin

gap

ore

Bru

nei

Cam

bo

dia

Th

aila

nd

Ru

ssia

Vie

tnam

Ko

rea

Lao

PD

R

Ind

on

esi

a

Ma

lays

ia

Myan

mar

Ch

ina

Jap

an

So

uth

Afr

ica

Ph

ilip

pin

es

Ind

ia

Bra

zil

Corporate Income Tax Statutory Rate

(In percent)

BRICS average: 27

OECD average: 25

Sources: KPMG; IBFD; IEO; IMF staff estimates.

0

5

10

15

20

25

Sin

gap

ore

Th

aila

nd

Jap

an

Ind

on

esi

a

Lao

PD

R

Cam

bo

dia

Vie

tnam

Ko

rea

Ph

ilip

pin

es

So

uth

Afr

ica

Ch

ina

Ru

ssia

Bra

zil

Value-Added Tax Statutory Rate

(In percent)

BRICS average: 17

OECD average: 19

Sources: KPMG; IBFD; IEO; IMF staff estimates.

Higher health and education spending will support

higher inclusive growth

26

0

1

2

3

4

5

Myan

mar

Lao

PD

R

Ind

on

esi

a

Ph

ilip

pin

es

Cam

bo

dia

Sin

gap

ore

Ma

lays

ia

Bru

nei

Vie

tnam

Th

aila

nd

Public Health Expenditure

(In percent of GDP)

EM Asia: 4.4

Sources: World Economic Outlook; World Bank; Indonesian authorities; and IMF staff estimates.

0

1

2

3

4

5

6

7

Cam

bo

dia

Lao

PD

R

Sin

gap

ore

Ph

ilip

pin

es

Ind

on

esi

a

Bru

nei

Th

aila

nd

Ma

lays

ia

Vie

tnam

Public Education Expenditure

(In percent of GDP)

EM Asia: 4.8


Higher capital spending to improve productivity

27

0

2

4

6

8

10

12

14

Ind

on

esi

a

Thailan

d

Ph

ilip

pin

es

Sin

gap

ore

Mala

ysia

Vie

tnam

Cam

bo

dia

Mya

nm

ar

Bru

nei

Lao

PD

R

Public Capital Investment

(In percent of GDP)

EM Asia: 5.1


Key Tax Reforms

28

PIT: lower

threshold for

top rate,

capitalize on

amnesty

declarations

Excise tax rates

on vehicle and

tobacco,

environmental

(fuel) tax

CIT: reduce

exemptions and

unify rates

VAT: Gradually

raise rate, remove

exemptions,

simplify

administration

Real property:

replace transaction

tax with real

property tax

Tax

administration

reforms

Remove

ambiguities and

inconsistencies in

the tax laws

Simplify VAT

filing and

refund

requirements

Enhance risk

management,

extend audit

coverage, and

use external

taxpayer

information

Tax Policy Tax Administration

Key Expenditure Reforms

29

Investment

Education

Health

Social

Efficiency

6. Reduce non-

priority

spending

4. Consolidate

social assistance

programs and

conditional cash

transfers

1. Raise

investment

spending

2. Raise

education

spending and

improve

efficiency

3. Universal

health insurance

coverageGrowth-enhancing expenditure

strategy. Higher expenditure in

selected areas will support

inclusive growth.

Transfers

5. Enhance the

capacity of local

governments

Monetary and Exchange Rate PolicyMaintaining Stability

Taking aim at inflation

31

Monetary Policy: Current stance is appropriate

32

0

1

2

3

4

5

6

7

8

9

Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17

Headline Core Lower band Upper band

Inflation Developments

(In percentage points, yoy)

Source: BPS, BI

1

2

3

4

5

6

7

8

9

Jan-1

2

Apr-

12

Jul-

12

Oct

-12

Jan-1

3

Apr-

13

Jul-

13

Oct

-13

Jan-1

4

Apr-

14

Jul-

14

Oct

-14

Jan-1

5

Apr-

15

Jul-

15

Oct

-15

Jan-1

6

Apr-

16

Jul-

16

Oct

-16

Interest rate corridor Deposit facility

O/N JIBOR Lending facility

BI 7-day reverse repo

Monetary Policy and Interbank Rates

(In percent)

Sources: CEIC Data Co., Ltd.; and IMF staff estimates.

Continue exchange-rate flexibility

33

8,500

9,500

10,500

11,500

12,500

13,500

14,500

15,500

Jan

-13

Ap

r-13

Jul-

13

Oct

-13

Jan

-14

Ap

r-14

Jul-

14

Oct

-14

Jan

-15

Ap

r-15

Jul-

15

Oct

-15

Jan

-16

Ap

r-16

Jul-

16

Oct

-16

Jan

-17

Onshore rupiah per US$

Foreign Exchange Rates

Source: Bloomberg L.P.

0

50

100

150

200

250

2013M1 2014M1 2015M1 2016M1 2017M1

All commodities Energy Metal

Commodity PriceIndex, 2005=100

Source: IMF Commodity Price Indices

Ongoing monetary operations reforms welcome

34

Monetary

Operations

Reforms

7-day

Reverse

Repo

Reverse

Requirement

Averaging

Remove

Deposit and

Lending Rate

Cap

Financial and Corporate SectorReinforcing the Stability Framework

How healthy?

36

A sound and profitable banking sector

37

0

5

10

15

20

25

Ind

on

esi

a

Th

aila

nd

Po

lan

d

Ma

lays

ia

Bra

zil

Tu

rkey

Ph

ilip

pin

es

So

uth

Afr

ica

Me

xico

Ind

ia

Ru

ssia

Regulatory Capital to Risk-Weighted Assets

(In percent)

Source: IMF, Financial Soundness Indicators database.

0.0

0.5

1.0

1.5

2.0

2.5

Ind

on

esi

a

Tu

rkey

Me

xico

So

uth

Afr

ica

Ph

ilip

pin

es

Th

aila

nd

Ma

lays

ia

Bra

zil

Po

lan

d

Ind

ia

Return on Assets

(In percent)


Non-performing loans have increased but from a low

level

38

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

Jan-11 Oct-11 Jul-12 Apr-13 Jan-14 Oct-14 Jul-15 Apr-16

Agriculture and mining Manufacturing

Construction and real estates Retail and accomodations

Services (incl. financial intermediaries) Households

Others

Commercial Banks' Nonperforming Loans by Industry

(In percent of total loans)

Sources: CEIC Data Co. Ltd.; and IMF staff estimates.

0

50

100

150

200

250

Jan

-13

Ma

y-13

Sep

-13

Jan

-14

Ma

y-14

Sep

-14

Jan

-15

Ma

y-15

Sep

-15

Jan

-16

Ma

y-16

Sep

-16

Restructured Loans

(In trillions of Indonesian rupiah)


Corporate external borrowing has declined,

but so has profitability

39

0

2

4

6

8

10

12

14

16

0

20

40

60

80

100

120

140

2010 2011 2012 2013 2014 2015 2016Q32016Q4

External borrowing

In percent of GDP (right scale)

Corporates: External Borrowing(In billions of U.S. dollar)

Sources: CEIC Data Co. Ltd.; and IMF staff estimates.

5

10

15

20

25

2012 2013 2014 2015 2016 Q2

Return on assets, market capitalization

Debt at risk (in percent to total debt, ICR<1)

Corporates: Debt Service Capacity and Profitability

(In percent)

Sources: Bloomberg L.P.; and IMF staff estimates.

Good progress in important areas

40

Macro-

finance

FSCPM

Law

Capital

BufferFX

Hedging

Close

monitoring of

macro-financial

linkages

FSCPM law

introduced,

implementing

regulations

being drafted

Counter-

cyclical capital

buffer

introduced

Corporate FX

hedging

regulations

implemented

Continue financial stability reforms

41

Closely monitor banks’ soundness and

liquidity conditions, while enhancing inter-

agency coordinationOn Banks

Make the FSCPM Law fully operational

Revise BI, OJK and LPS laws to clarify

mandates and responsibilities

On FSCPM

Law

Financial deepening: A government priority

42

Sources: IMF Staff Discussion Note 15/08; and IMF Staff estimates.

0

20

40

60

80

100

120

140

160

180

Ch

ina

Th

aila

nd

Ma

lays

ia

Vie

tnam

Bra

zil

Ind

ia

Ph

ilip

pin

es

Ind

on

esi

a

Me

xico

Domestic credit to private sector

In percent of GDP

Source: World Bank

Structural PolicyBoosting Private Investment

What is needed to increase long-term growth

and equality?

44

Improving the business climate

45

-5 0 5 10 15 20

Construction permit

Resolving insolvency

Protecting minority investors

Enforcing contracts

Registering property

Trading across borders

Getting credit

Paying taxes

Getting electricity

Starting a business

Overall

Indonesia: Ease of Doing Business Indicators 2017

(Change in Rank, points)

Source: World Bank

Singapore

Malaysia

Thailand

BruneiChina Viet Nam

Indonesia

Philippines

India

1

21

41

61

81

101

121

141

Ra

nk

Ease of Doing Business Rank 2017:

Indonesia and Selected Regional Peers

Rank

Source: World Bank

Modernizing FDI regime

46

0

1

2

3

4

5

6

7

Philippines Indonesia China India Thailand Malaysia Viet Nam

Inward FDI

2005-2015 Average, In percent of GDP

Source: UNCTAD database, IMF World Economic Outlook

0.0

0.1

0.2

0.3

0.4

0.5

OECD -

Average

Brazil Malaysia India Indonesia China Philippines

FDI Regulatory Restrictiveness Index

(1=closed; 0=open)

Source: OECD

Important for investment and manufacturing

47

Reforms to reduce inequality and diversify growth

48

• Expand infrastructure

• Streamline regulations, increase

coordination with local governments

• Pursue trade integration and open

new sectors to investment

• Close labor skill gaps

0.30

0.35

0.40

0.45

2005 2007 2009 2011 2013 2015

Gini Coefficient of Inequality: Higher is Less Equal

Sources: BPS

Summary of Recommendations

49

Strengthen the medium-term fiscal framework through tax policy and administration reform. Improve the effectiveness and efficiency of public spending.

FiscalPolicy

Stand ready to deal with changes in a more volatile external environment, while maintaining exchange rate and bond yield flexibility.

Monetary Policy

Continue close monitoring of macro-financial vulnerabilities and actions to safeguard stability.Fully implement the FSCPM law and continue strengthening inter-agency coordination

Financial and

Corporate

Continue improving the investment climate and expand infrastructure.Pursue trade integration and further modernize the FDI regime.

Narrow the employment skills gap.

Structural Reform

IMF/ World Bank Annual Meeting 2018 in Bali

50

Terima Kasih

indonesia: building on resilience and prospering amid ... · 2016 article iv consultation report on...

Documents