The Indonesian Economy in Haryo Aswicahyono and Hal Hill ANU Indonesia Update, September 19-20

Transcription

1 The Indonesian Economy in 2014 Haryo Aswicahyono and Hal Hill ANU Indonesia Update, September 19-20

2 THREE MAIN MESSAGES 1. THE ECONOMY IS (JUST) HOLDING UP OK SO FAR. 2. BUT THERE ARE VARIOUS FRAGILITIES, AND INDONESIA NEEDS TO DEVELOP A NEW GROWTH STRATEGY IN THE POST COMMODITY BOOM ERA. 3. MORE OR LESS COMPLETE DISCONNECT BETWEEN THE POLITICAL NARRATIVES OF 2014 AND ECONOMIC REALITY.

3 Contents 1. The economy is doing surprising well, at least for now 2. But significant global headwinds. 3. Continuing policy drift at home: zero fiscal policy space; economic fragilities. 4. Any prospects of renewed industrial dynamism? 5. Looking forward to a new administration.

4 (1) ECONOMIC OVERVIEW FIRST, THE GOOD NEWS: ON THE SURFACE, THINGS LOOK SURPRISINGLY GOOD

5 Growth holding up reasonably well A gradual slowing down, but still 5%. However, this is the slowest since Tradables (agriculture, manufacturing, mining) continue to grow more slowly.

6 Growth holding up reasonably well: GDP growth by sector Gross Domestic Product (GDP) Agriculture, Forestry & Fisheries Mining & Quarrying Manufacturing Industries (Mfg) Mfg: Petroleum & Gas Mfg excl. Petroleum & Gas Electricity, Gas & Water Supply Construction Trade, Hotel & Restaurant Transport & Communication Financial, Ownership & Business Services Non Oil & Gas Oil & Gas Tradable Non Tradable As expected, mining growth has been very slow, negative in first half of No sign yet of the revival in manufacturing.

7 Growth holding up reasonably well: GDP growth by expenditure The key to the short-term growth resilience is consumption, reflecting consumer confidence, possible election effects. No govt pump priming! Investment slowing.

8 Better than most comparators Compared to other members of the fragile five, especially the resource exporters, Indonesia is doing well.

9 Macro fairly stable (I) The inflation outlook is comfortable, though still a bit high; at least now within BI s target range. A good outcome considering the 2013 Rp depreciation, wage increases, and electricity price increases.

10 Macro fairly stable (II) The major Rp decline in 2013 still holding. A key factor in the economic adjustment. JSE recovery: return of confidence and capital inflows. Though both fragile, short term.

11 Politics Settled

12 Politics Settled

13 Politics Settled

14 (2) SIGNIFICANT GLOBAL HEADWINDS GROWTH IS QUITE GOOD ESPECIALLY CONSIDERING MAJOR EXTERNAL SHOCKS EXPERIENCED IN RECENT TIMES.

15 Jittery world economy and geostrategic situation Turmoil in Middle east New cold war between Ukraine and the West Global growth remain weaks China Slowdown Argentina Default

16 Headwinds (I): Bernanke shockwaves, May 2013: Capital flow volatility

17 BALANCE OF PAYMENTS Major concern is the CAD. In principle OK. But: (a) The oil-gas account is negative, driven by the subsidies. (b) Financing through ST capital inflows.

18 Net foreign inflows/outflows Officials were caught off guard by the capital exodus after Bernanke in May 2013: significant outflows of stocks (JSE) and SUN s. Though fairly quick recovery.

19 Comparative government bond rates International financial markets still regard Indonesia as considerably more risky than its neighbours, including the Philippines.

20 Headwinds (II): Deteriorating terms of trade - end of commodity super cycle Prices of major exports have declined, especially coal and palm oil. Though historically still buoyant.

21 (3) CONTINUING DOMESTIC POLICY DRIFT

22 (1) Major wage increases of 2013 Minimum wages rose sharply in 2013, just as export prices declined and global economic volatility increased. Eroded the Rp depreciation effects.

23 (2) No action on subsidies Without subsidy reform, the government has zero fiscal policy space for new initiatives. It may already be over the 3% deficit limit. No deal possible?

24 (3) Financial fragility: a sleeper issue? On the surface OK. But TMP has pushed up interest rates. Creating problems for some banks. And still no FSN JPSK bill not passed. Shadow of Bank Century still looms.

25 Nervousness also in capital/forex markets For some months in 2013, the gap between the forward and spot exchange rates widened considerably, while BI was trying to hold the Rp rate.

26 (4) Economic nationalism: no respite Powerful campaign rhetoric, bills enacted. Will be difficult to turn around. Plantations likely to be affected by 30% cap. In conflict with the AEC. Probable mining deal, but at a high cost.

27 (5) CAN INDONESIA CHART A NEW STRATEGY AFTER THE COMMODITY BOOM (LIKE IT DID IN THE 1980S)? WHAT PROSPECTS FOR MANUFACTURING- LED GROWTH?

28 Recent manufacturing growth Manufacturing Industries (Mfg) Mfg: Petroleum & Gas Mfg: Petroleum Refinery Mfg: Liquefied Natural Gas Mfg excl. Petroleum & Gas Food, Beverage & Tobacco Textile, Leather Products & Footwear Wood & Wood Products Paper & Printing Fertilizers, Chemicals & Rubber Cement & Non-metallic Mineral Iron & Basic Steel Transport Eq. Machinery & Apparatus Other Manufacturing Products Tradable Non Tradable Manufacturing growing quite slowly, 5-6%, no sign yet of pickup. The major export sectors garments, components growing slowly. Food processing doing better.

29 Recent export performance also weak Exports of commodities low or negative growth; to be expected. No sign yet of manufacturing taking up the slack: weak global demand, competitiveness problems at home.

30 No evidence yet of resources moving out of natural resources and into manufacturing. Credit growth and investment flows by sector no clear trend.

31 What s needed for Indonesia to compete in global industrial markets? The supply side efficiency, productivity is the key. Some major challenges here, little progress to date: Infrastructure; labour, skills; business climate; the exchange rate.

32 3.7 Logistic Performance Index: Score Indonesia Malaysia Philippines Thailand Philippines Vietnam

33 600 TIMSS: Mean performance on the science scale for eighth grade students, total Indonesia Malaysia Thailand

34 600 TIMSS: Mean performance on the mathematics scale for eighth grade students, total Indonesia Malaysia Thailand

35 Doing Business Rank Malaysia Thailand Vietnam Philippines Indonesia

36 Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan Indonesia Malaysia Philippines Thailand

37 Digression: In any case, is Indonesian manufacturing really under-performing? Relative to its per capita income, Indonesia s manufacturing output share is actually higher than comparable countries.

38 Digression (cont): if there is a problem manufacturing, it s with the employment record But Indonesia s manufacturing employment share is actually lower than comparators. Suggesting an employment problem, presumably linked to regulations and skills.

39 Summing Up 1. Indonesia at the cross-roads: a high-growth, prosperous future or a middle-income trap? 2. Back to the future: very similar to the situation/choices in early 1980s. 3. The government managed the 2013 mini economic crisis effectively, but significant macro challenges remain. 4. Absence of reform elsewhere; 2014 political narratives not encouraging, but

40 Looking forward, what do we know so far about a likely Jokowi administration, and what are the markers of likely success?

41 Looking forward: markers 1. Subsidy reform essential: the Jokowi/JK rhetoric hopeful? Also enhanced tax effort. 2. Key cabinet appointments, especially Coordinating Economics, Finance ministers; and ensure BI remains independent. 3. Working with the new DPR. 4. Clear signs of progress, some quick wins (not grand rhetoric) in key policy areas regulatory reform; infrastructure; winding back some of the excesses in economic nationalism, labour market populism, etc.

42 So, unless there is action on the subsidies, business environment, infrastructure, the ambitious Jokowi plans won t be realized; leading to widespread disenchantment, fuelled by a subterranean Piketty effect.