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Half-yearly Indonesia Economic Update and Outlook

Half-yearly Indonesia Economic Update and Outlook. William E. Wallace Lead Economist, World Bank Indonesia 10 December 2008. Overview. The Indonesian economy coming in strong… Growth at post-crisis highs Strong fiscal position Inflation waning Banking sector ratios are healthy

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Half-yearly Indonesia Economic Update and Outlook

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  1. Half-yearly Indonesia EconomicUpdate and Outlook William E. Wallace Lead Economist, World Bank Indonesia 10 December 2008

  2. Overview • The Indonesian economy coming in strong… • Growth at post-crisis highs • Strong fiscal position • Inflation waning • Banking sector ratios are healthy • Turmoil in global finance has affected Indonesia’s markets • Global developments cloud Indonesia’s economic outlook • Drop in commodity prices hitting export values, incomes and investment • Slower global growth dragging down manufactured exports • Tighter domestic credit pressures domestic demand

  3. 2007 Q3 2008 Q1 2008 Q3 2008 Q4 2009 H1 → Stage 1 ↔ Stage 2 ↔ Stage 3 Commodity prices boom …and bust Int’l financial market turmoil Global economic downturn IDN financial markets Impacts domestic economy Overview

  4. Approaching the crisis:Economy coming in strong 2007 Q3 2008 Q1 2008 Q3 2008 Q4 2009 H1  Commodity prices boom Commodity prices burst International financial market turmoil Global economic downturn Higherinflation Higher export prices, stronger terms of trade Export prices , terms of trade weaken Volatile & weaker Indo. financial mkts Share market Supports currency Impacts domestic real economy Invest’t  Real wages  Incomes Employ’t  Higher poverty Lowerpoverty Slower decline in poverty

  5. As Indonesia’s export prices rose with global commodity prices…(Index, Jan 2005 = 100) Exports have grown very strongly… (year-on-year percentage change) 30 % Manufactured Products Mining & Mineral Agriculture & Forestry 25 Oil and Gas 20 15 10 5 0 2004 2005 2006 2007 2008* Approaching the crisis:The commodity boom supported growth Sources: BPS and World Bank

  6. Approaching the crisis:Growth coming in strong… • Strongest GDP growth post-crisis in 2007 and 2008, bringing average per capita incomes to 20 percent above pre-crisis levels • Only major economy in the region not to slow significantly in 2008 to date Sources: BPS and World Bank

  7. Approaching the crisis:…and has been broadly based • Investment growth has been strong • Net exports made a positive contribution, despite the slow-down in global growth • There has been a rising contribution from government spending (Year-on-year growthand contributions) Sources: BPS and World Bank

  8. Government deficits remains small(percent of GDP) And the debt ratio continues to fall dramatically (percent of GDP) Approaching the crisis:Healthy public finances Sources: Ministry of Finance, IMF, BPS and World Bank

  9. Approaching the crisis:The rise in commodity prices fed inflation 2007 Q3 2008 Q1 2008 Q3 2008 Q4 2009 H1  Commodity prices boom Commodity prices burst International financial market turmoil Global economic downturn Higherinflation Higher export prices, stronger terms of trade Export prices , terms of trade weaken Volatile & weaker Indo. financial mkts Share market Supports currency Impacts domestic real economy Invest’t  Real wages  Incomes Employ’t  Higher poverty Lower poverty Slower decline in poverty

  10. However, BI responded aggressively But concern has shifted to the real economy, motivating December’s rate cut(year-on-year) With higher food prices, poor households’ cost of living increased faster than the average inflation (year-on-year) Approaching the crisis:Inflation, a concern early this year, is waning Sources: BPS and World Bank

  11. Upstream prices have now begun to fall(year-on-year) Feeding into lower inflation expectations (year-on-year) Approaching the crisis:Inflation, a concern early this year, is waning Sources: BPS, BI and World Bank

  12. Approaching the crisis:With a strong economy, poverty has fallen 2007 Q3 2008 Q1 2008 Q3 2008 Q4 2009 H1  Commodity prices boom Commodity prices burst International financial market turmoil Global economic downturn Higherinflation Higher export prices, stronger terms of trade Export prices , terms of trade weaken Volatile & weaker Indo. financial mkts Share market Supports currency Impacts domestic real economy Invest’t  Real wages  Incomes Employ’t  Higher poverty Lower poverty Slower decline in poverty

  13. Approaching the crisis:With a strong economy, poverty has fallen • In rural areas, wages have grown more…(year-on-year growth) • …and poverty rates fallen faster than in urban areas Sources: BPS and World Bank

  14. Employ-ment The global financial market turmoilImpacting Indonesian financial markets… 2007 Q3 2008 Q1 2008 Q3 2008 Q4 2009 H1  Commodity prices boom Commodity prices burst International financial market turmoil Global economic downturn Higherinflation Higher export prices, stronger terms of trade Export prices , terms of trade weaken Yields on gov’t debt ↑ Credit tighter Stocks fall IDR weaker Supports Indon. financial markets Invest’t Higher inflation Supports Indonesia’s real economy Income Lower poverty Slower fall in poverty

  15. Sharp IDR depreciation and greater volatility after an extended period of stability Stock market fallen, along with world markets (USD Index, 1 Jan-08 = 100) The global financial market turmoilImpacting Indonesian financial markets… Sources: CEIC and World Bank

  16. The global financial market turmoil…especially government debt market • Government bond yields and spreads sharply higher, and rose more than elsewhere in the region (Indonesian gov’t IDR bonds) (Indonesian gov’t USD bonds) Sources: IDX, CEIC, JP Morgan, World Bank

  17. Supports Indon. financial markets Employ-ment Supports Indonesia’s real economy Lower poverty The global economic downturnSlower global growth will impact Indonesia 2007 Q3 2008 Q1 2008 Q3 2008 Q4 2009 H1  Commodity prices boom Commodity prices burst International financial market turmoil Global economic downturn Higherinflation Higherinflation Higher export prices, stronger terms of trade Weaker export demand, especially manufactures IDR weaker Stocks fall Invest’t  Income Higher inflation Slower fall in poverty

  18. Global growth prospects have been revised sharply lower Q4 slowdown looks sharper than expected Will impact manufacturing most Lower profits, employment, investment and FDI Some offset from the lower IDR (yearly ave. percentage change) The global economic downturnSharply lower global GDP growth Sources: BPS and World Bank

  19. Export prices will fall with global commodity prices… Int’l price forecasts suggest Indonesia’s export pricesfall ~15%(Index, Jan 2005 = 100) …reversing recent improvements in Indonesia’s terms of trade Some offset from weaker IDR(Index, Jan 2005 = 100) Impact of the global downturnSharply lower global commodity priceswill lower Indonesia’s terms of trade Sources: World Bank and BPS

  20. Impact of the downturn Slower growth in Indonesia… • Growth slowing in 2009 before recovering in 2010 • Significant downside risks: Commodity prices falling faster and further, and Q3 & Q4 2008 growth and indicators in most economiesmuch weaker than expected Sources: BPS and World Bank

  21. Sectoral output (year average growth) Manufactures, and cash crops important recent drivers of growth, will be hit by lower external demand and prices Conventional agriculture and services expected to do better (and the rainy season has started well) Impact of the downturn…especially in externally-oriented industries Sources: BPS and World Bank

  22. One positive from the downturn : lower inflation Lower commodity prices more than offset the IDR’s depreciation Food & basic goods prices should fall most, benefiting poorer households Inflation for the average andfor the poor consumer (year-on-year) Impact of the downturnBut inflation should continue slowing Sources: BPS and World Bank

  23. Impact of the downturnSlower poverty reduction in 2009 • More people remain poor: 1.6 million more in 2009 2.8 million more in 2010 Sources: BPS and World Bank

  24. Indonesia’s pro-active policy responseAddressing the immediate crisis • Supporting the financial sector: • Injecting liquidity into inter-bank market, cutting interest rates • Increased flexibility on deposit insurance,including raising limit to IDR 2 billion • Regulation to allow intervention in troubled financial institutions • Using public finances to support financial markets & economic activity: • Target deficit of 1.0% GDP in 2009, reducing financing needs • Cut in tax rates for corporations and individuals coming in 2009 • Sustaining social and infrastructure spending • Lower fuel prices with a linkage of diesel and gasoline prices to market prices proposed

  25. Indonesia’s policy responsePositioning for a strong, sustainable recovery • Enhance the financial system’s robustness • Improve banking and capital market supervision • Social policy • Put monitoring program in place -- Given the degree of uncertainty and understanding improved monitoring will be needed. A monitoring system could build on the experience from the crisis updated for new institutions and technologies • Developed response mechanisms that build on existing programs to provide targeted income and job support in rural and urban areas (building on PNPM, BLT, PKH, etc.) • Invest in infrastructure • Increase Indonesia’s competitiveness (transportation and energy) • Stimulate economic activity and employment

  26. Half-yearly Indonesia EconomicUpdate and Outlook William E. Wallace Lead Economist, World Bank Indonesia 10 December 2008

  27. 2007 Q3 2008 Q1 2008 Q3 2008 Q4 2009 H1  Commodity prices boom Commodity prices burst International financial market turmoil Global economic downturn Higherinflation Higher export prices, stronger terms of trade Export prices , terms of trade weaken Yields on gov’t debt ↑ Credit tighter Stocks fall IDR weaker Supports Indon. financial markets Invest’t Higher inflation Employ-ment Supports Indonesia’s real economy Income Lower poverty Slower fall in poverty The global financial & economic turmoilImpacting Indonesian financial markets…

  28. 2007 Q3 2008 Q1 2008 Q3 2008 Q4 2009 H1  Commodity prices boom Commodity prices burst International financial market turmoil Global economic downturn Higherinflation Higher export prices, stronger terms of trade Export prices , terms of trade weaken Volatile & weaker Indo. financial mkts Supports Indon. financial markets Impacts domestic real economy Supports Indonesia’s real economy Lower poverty Slower decline in poverty Overview

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