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INDONESIA ECONOMIC QUARTERLY 06|18 LEARNING
MORE, GROWING FASTER
Frederico Gil Sander,
Lead Economist
June 6, 2018
Rencana untuk presentasi ini
1. Apakah saat ini perekonomianIndonesia sehat?
2. Tidak tayang di Bioskop Lebaran ini:
Kejarlah Rupiah… Kau ku Tangkap
Pengabdi Konsumsi
1. Apakah saat ini perekonomian Indonesia sehat?
The Indonesian economy continued to expand at a steady pace in Q1…
4Source: BPS; World Bank staff calculations
GDP growth yoy and contributions, percentage points
-4
-2
0
2
4
6
8
10
Mar-15 Dec-15 Sep-16 Jun-17 Mar-18
Private consumption Government consumption
Investment Net exports
Stat. discrepancy* Change in inventories
GDP
…lifted by further acceleration of investment growth
5Source: BPS; World Bank staff calculations
Growth in gross fixed capital formation yoy and contributions to growth, percent
-2
-1
0
1
2
3
4
5
6
7
8
Mar-15 Sep-16 Mar-18
Buildings & Structures Machine & Equipment Vehicles
Other Equipments Cultivated Bio. Res. Intellectual Property
Av 2003-12, 2.1%
Av 2013-17, 1.6%
-2%
-1%
0%
1%
2%
3%
4%
-20%
-10%
0%
10%
20%
30%
40%
Mining Comm Invest
Investment-led growth is high quality growth… but is Indonesia still too tied to commodities?
6Source: World Bank staff; BPS
Higher commodity prices drives up cash flows of mining companies and investment…
LHS: Commodity price index and
nominal mining VA, yoy change
RHS: contribution of investment
to GDP growth (pp)
-1.8%
2.3% 2.6%
4.9%5.6%
6.1% 6.1%
7.4%
9.3%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
Refinery,chemicals,
rubberproducts
High-techmanufacturing
Commoditysectors (inc.
metalsmanuf.)
GVA Traditionalservices
Modernservices
Government,utilities and
other services
Construction Low-techmanufacturing
Q1 2018 Q3'17-Q1'18
Mixed evidence of diversification into high-value added goods and services
7
Source: World Bank staff; BPS. Note: High-tech manufacturing includes electronics, transport equipment and machinery; traditional services include wholesale & retail sales, transport & storage (except
air); Modern services are financial services, information & communication, business services, real estate, air transport, health and education; Low-tech manufacturing is mostly food processing.
Yoy growth in gross value-added, by industry, percent
Growth expected to be firm despite rising global risks
8Source: Bank Indonesia, BPS, Ministry of Finance, World Bank staff projections and calculations
2017 2018f
Real GDP Annual percent change 5.1 5.2
Consumer price index Annual percent change 3.8 3.5
Current account balance Percent of GDP -1.7 -2.0
Budget balance Percent of GDP -2.5 -2.1
Risks to the global outlook are increasing: financial volatility has been on the rise; terms of trade deterioration; widening current account deficit; geopolitical risks, protectionism
Kejarlah
Rupiah…
Kau ku
Tangkap
Higher global volatility in 2018…
11
Index
Source: BPS; World Bank staff calculations
40
45
50
55
60
65
70
75
80
0
5
10
15
20
25
30
35
40
Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18
VIX Index MOVE Index (RHS)
…has led to currency depreciation and higher yields in many emerging economies
-10
-8
-6
-4
-2
0
2
4
6
8
India
Indo
nesia
Phili
ppin
es
Vie
tnam
S K
ore
a
Sin
gapore
Th
aila
nd
Mala
ysia
Japan
Chin
a
YTD
YoY
Exchange rates, year-to-date and year-on-year
percentage change
Source: JP Morgan Real Effective Exchange Rate, CPI based 2010-=100; World Bank staff calculations
10-year bond yields, basis points change from
January 1 2018
Source: www.investing.com; World Bank staff calculations
-60
-40
-20
0
20
40
60
80
100
Vie
tnam
Th
aila
nd
Mala
ysia
India
US
A
Phili
ppin
es
Indo
nesia
A sound macroeconomic policy framework provides a substantial buffer against volatility
Credible monetary policy has kept real interest rates positive, anchored inflation expectations
BI has accumulated reserves and signed bilateral swap agreements
Macroprudential measures mitigate risk of dollar-denominated corporate debt
Conservative fiscal policy limits supply of rupiah assets, CA pressure
Recent policy actions signal commitment to stability13
The Rupiah recovered some ground in recent days
Index, January 2017 =100
Source: CEIC, World Bank staff calculations
94
96
98
100
102
104
Jan-17 Jul-17 Jan-18 Jul-18
USD/IDR
Deepening the financial sector will provide further resilience against external volatility
15
Credit-to-GDP ratios as of Q3 2017, percent
Source: BIS and World Bank staff calculations
A deeper financial sector would support growth and provider greater domestic liquidity
Source: ADB – Asian bonds online
Foreign holdings of local currency gov’t bonds, percent
Foreigners hold nearly 40 percent of Indonesian Government bonds
39.8
0
5
10
15
20
25
30
35
40
45Indonesia KoreaMalaysia Thailand
39.156.8 63.0
84.7
115.6134.1
210.5
0
50
100
150
200
250
Perception colored by slump in retail sales, which provide a partial view of private consumption
17Source: Bank Indonesia, BPS; World bank staff calculations
Retail sales growth, yoy, LHS; private consumption
growth, yoy, RHS
3
3.5
4
4.5
5
5.5
6
0
5
10
15
20
25
Q1
201
1
Q3
201
1
Q1
201
2
Q3
201
2
Q1
201
3
Q3
201
3
Q1
201
4
Q3
201
4
Q1
201
5
Q3
201
5
Q1
201
6
Q3
201
6
Q1
201
7
Q32017
Q1
201
8
Private consumption
Retail sales Retail sales 4 quarter
moving average
Percent of household expenditure
Source: CEIC, ; World bank staff calculations
66%
47%
42%
27%
40%
44%
7%13%
14%
0%
10%
20%
30%
40%
50%
60%
70%Goods (except prepared foods)ServicesPrepared foods, incl. food outside home
Consumption has been shifting to services and foods prepared outside the home
Retail sales and private consumption in the national accounts decoupled
0
1
2
3
4
5
6
7
8
Real private consumption growth GDP growth (HP-filtered)
Yoy growth, percent
Private consumption growth has generally followed potential GDP growth…
...especially in recent years, consistent with sound monetary, exchange rate and fiscal policies
Consumption responds to fiscal and monetary policies, but effect is small and imbalances could emerge
Vertical axis: Change in private consumption growth, percentage pointsHorizontal axis: Number of quartersSample period: 2000Q4 2018Q1
To accelerate consumption growth sustainably, the focus needs to be on unlocking supply-side constraints
Fiscal/monetary stimulus + Flat potential GDP growth possibly higher GDP and consumption growth in the short-term……but macroeconomic imbalances ( inflation, CA deficit)
Higher potential GDP growth through structural reforms higher long-term GDP growth higher
consumption growth
Policy implications➢Continue to avoid short-term measures that could build imbalances and undermine macroeconomic stability➢Focus on policies to alleviate supply-side bottlenecks: closing the infrastructure, human capital and productivity gaps
Learning more, growing faster
Indonesia has made great progress in closing ‘quantity’ gaps in education...
22
0
1
2
3
4
5
6
7
8
9
1990 1995 2000 2005 2010 2015
Average years of schooling working age population
Source: Barro and Lee (2013, SUSENAS
Share enrolled, percent
Source: SUSENAS, various years
Enrollment rates and years of schooling are up... ...especially for poorer Indonesians
0
10
20
30
40
50
60
70
80
90
2002 2006 2012 2017
Quintile 1 Quintile 2 Quintile 3
Quintile 4 Quintile 5
Modest improvements in quality have also been made…
LVARUS
SVKPOL
CZE TUN MACHUNHKG
DEUAUTSWEGBR GRCJPN
CHEFIN
PRTTHAFRAISL CAN
BELITA
NLD IRLKOR
NORAUS USANZL
URYDNK
ESP BRAMEX
LUX
IDN
TUR
-70
-40
-10
20
50
80
110
-40 -20 0 20 40Change in Math Test points
Source: World Bank estimates based on PISA scores in 2003 and 2015 (OECD, 2004; OECD, 2016)
365
370
375
380
385
390
395
400
405
410
1990 1995 2000 2005 2010 2015
Harmonized learning outcome index
Source: Altinok et al (2018)
Note: The HLO is constructed for 163 countries, it has a mean of 500 and a standard
deviation of 30.
Y-axis: change in enrollment, percentage points
…but large gaps remain: 55% of Indonesians are functionally illiterate…
24
Share of the population by level of achievement and country, percentage points
INDONESIA VIETNAM OECD
Source: Source: World Bank estimates based on data from PISA 2015 (OECD, 2016)
Note: Students with achievement level below 2 in PISA achievement scale are considered functionally illiterate
…and progress has been faster among higher-income students
325
350
375
400
425
450
-4 -3 -2 -1 0
Index socio economic conditions
2015
2003
PISA math score, points
Source: World Bank estimates based on data from PISA 2003 and 2015 (OECD, 2004; OECD, 2016)
Note: Index of socioeconomic conditions measure family economic background including family assets, education levels, among others
Closing the learning gap with OECD countries will take much longer for poor students
Mathematics Reading Science
Richest quintile 20 33 62
Average 50 69 134
Poorest quintile 136 190 484
Number of years to catch up to OECD average PISA scores based on current growth rate in Indonesian PISA scores
Source: World Bank staff calculations
How can Indonesia reform education to close the human capital gap?
Improve delivery at the local level, where most of the growing education budget goes
OTHER MINISTRIES, 3%
MORTHE, 9%
MORA, 12%
Other education funds, 3% MOEC,
9%
DISTRICTS AND
PROVINCES, 63%
72%
MOEC
System
Source: Presidential Regulation No. 107/2017 on the education budget details for 2018
Share of total, percent
0
5
10
15
20
0
50
100
150
200
250
300
350
400
450
500
Total education spending (national), LHS
Total education spending (2010=100), LHS
Total education spending as % national spending, RHS
LHS: IDR Trillion; RHS: percent of GDP and spending
Source: World Bank COFIS database using MOF data and Presidential Regulation on budget details of respective years
Notes: Realized spending data is available until 2014. 2016 and 2017 are revised budget data, 2018 is budget data. Realized spending data might
not capture some SNG (Sub-National Government) education spending if coded under the General Administration function
Take advantage of large number of upcoming retirements to boost teacher quality
0
10
20
30
40
50
60
70
80
90
100
PNS Non PNS PNS Non PNS
2006 2016
Bachelor degree or
higher
Less than Bachelor
degree
Percent
Source: Teacher census (2006) and DAPODIK (2016)
Note: PNS refers to civil servant teachers
0
50,000
100,000
150,000
200,000
250,000
300,000
350,000
400,000
450,000 2005 2015
Y-axis: Number of teachers; X-axis: Age of teachers
Source: SAKERNAS 2005 and 2015
Initiatives to improve quality require more and better information on learning outcomes
Source: Rahmawati, 2018
0
10
20
30
40
50
60
70
Less than 50 Between 50 and 60 Between 60 and 70 Between 70 and 80 Higher than 80
National Exam 2016
National Exam 2017
Score in National Exam by integrity index in 2016
Key reform areas to boost the quality of Human Capital in Indonesia
Start right by investing in early childhood education and stunting eradication
Take action to improve service quality at the district level
➢low-performing districts need qualified human resources and technical support
➢opening of new schools and madrasahs needs to be limited to those where there is both demand and institutional capacity to deliver high-quality services
➢resource transfer mechanisms should use performance-based criteria
New teachers being hired need to be adequately qualified, with higher standards than in the past
A National Education Quality Initiative should be launched...
...but this will first require better information on learning outcomes31
There are large payoffs to successful education reforms
32
Source: Hanushek and Woessmann (2011), World Bank staff calculations.
Note: Points denote possible improvements to current PISA score.
Annual percentage point addition to economic growth rates
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0201
6
201
7
20
18
201
9
202
0
202
1
202
2
202
3
202
4
202
5
20
26
202
7
202
8
202
9
203
0
203
1
203
2
203
3
20
34
203
5
203
6
203
7
203
8
203
9
204
0
25 points 50 points 75 points 100 points
Perc
enta
ge
poin
ts a
dditio
n to g
row
th r
ate
TERIMA KASIHTHANK YOU