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Current Indonesian Economic Growth: Is It An Indication of Decoupling from World Downturn? Hendri Saparini ECONIT – Jakarta

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Presentation on theme: "Current Indonesian Economic Growth: Is It An Indication of Decoupling from World Downturn? Hendri Saparini ECONIT – Jakarta"— Presentation transcript:

1 Current Indonesian Economic Growth: Is It An Indication of Decoupling from World Downturn? Hendri Saparini ECONIT – Jakarta 24-26 January, 2012, Muttukadu, Chennai, India 10 Years of International Development Economics Associates (!DEAs)

2 Indonesian Economic Growth The economic growth of Indonesia has been relatively stable. During the last 10 years (2001-2011) growing at 5.5 % in average. In 2009, Indonesia was one of the Asian countries which has experienced positive growth. In 2011 when the global economy faced a downturn, Indonesia grew at 6.5% (higher than 2010 at 6.1%). While at the same period China and India has experienced a slower growth, at 8.9% and 7.2%, respectively, compared with 10.3% and 10.01% in 2010.

3 GDP Growth of Selected Countries *)China and India (January 2012) are from Government Release China India Indonesia Source: IMF

4 Factors Supported Indonesia to Avoid the Negative Impact of World Economic Downturn 1.GDP Structure 2.Export Structure 3.Capital and Financial Market Policy 4.Macroeconomic Stability Policy

5 Indonesian GDP Structure: Relatively Resistance to Global Economic Dowturn 1.Indonesian GDP was dominated by private consumption, 59 percent in 2009 and 57 percent in 2010. 2.Indonesian net export was relatively low compared to other countries, 10 percent in 2009 and 2 percent in 2010.

6 GDP Structure: Selected Countries (2009) Source: ADB

7 GDP Structure: Selected Countries (2010) Source: ADB

8 Sector’s Contribution To GDP Growth Source: Central Bureau of Office Sectors20072008200920102011 Agriculture, livestock, forestry and fishery0.50.670.540.390.47 Mining and quarrying0.20.060.370.290.14 Manufacturing industry1.31.000.581.171.52 Electricity, gas and water supply0. Construction0.50.470.440.450.41 Trade, hotel, and restaurant1. Transport and Communication0. Finance, real estate and business services 0.70.770.480.540.67 Sevices0.60.580.590.570.64 Gross Domestic Product6.36.014.586.106.52

9 Manufacturing Sector: Sub-Sectors Growth Rate (Q1-Q3 2011) Sub SectorGrowth Contribution Oil and gas manufacturing-0.05% Petroleum Refinery0.04% Liquefied Natural Gas-0.10% Non Oil-gas manufacturing5.98% Food, beverages and tobacco1.96% (dominated by CPO) Textile, leather products and footwear0.75% Wood and other wood products0.03% Paper and printing products0.10% Fertilizers, chemical and rubber products0.51% Cement and non metalic quarrying products0.17% Iron and steel basic metal0.20% Transport equipment, machinery and apparatus 2.23% (dominated by motor bike) Other manufacturing products0.03% Manufacturing industry5.93% Source: Central Bank of Indonesia

10 Indonesian Export Structure: Reducing Global Crises Effect 1.Primary commodities (energy and raw material) dominated (50%) the export. Compared to Malaysia, for instance, that has 77,8% of its exports in 2009 were of manufactured goods. 2.The effect of decreasing global demand for energy and raw material as a result of global economic slowdown would have a longer time-lag than decreasing demand for final and intermediate products. Hence, when economic slowndown occured in 2009 and 2011, Indonesian export still grew, yet decreasing.

11 ….Continued 3.When world commodities prices has decreased before global crisis (2008) and world downturn (2011), this situation has been taken by many industrial countries as an opportunity to keep importing commodities for stock piling. Indonesian export to major destination countries (ASEAN, China and Japan) has increased in the periods. 4.While India and China experienced growth deceleration in 2011 due to their major exports were manufacturing products, both final and intermediate products.

12 Indonesia Top 10 Export Commodities: Raw Material NoProductsBillions USDContribution 1 Coal; briquettes, ovoids & similar solid fuels manufactured from coal 18.1711.5% 2Petroleum gases13.678.7% 3Palm oil & its fraction13.478.5% 4Crude petroleum oils10.406.6% 5Natural rubber,balata,gutta-percha etc7.334.6% 6Copper ores and concentrates6.884.4% 7 Coconut (copra),palm kernel/babassu oil & their fractions 2.291.5% 8Refined copper and copper alloys, unwrought2.261.4% 9Petroleum oils, not crude2.191.4% 10Uncoated paper for writing, printing etc.2.071.3% Total 10 products78.7450% All products157.78100.0% Source: ITC

13 Malaysia Top 10 Export Commodities: Manufactured Product & Raw Material NoProductsBillions USDContribution 1Electronic integrated circuits and microassemblies22.8111% 2Petroleum gases13.377% 3Palm oil & its fraction12.416% 4Automatic data processing machines;optical reader, etc11.026% 5Parts&acces of computers & office machines10.795% 6Crude petroleum oils9.655% 7Petroleum oils, not crude7.944% 8Diodes/transistors&sim semiconductor devices; etc7.204% 9 Television receivers (incl video monitors & video projectors) 5.283% 10Natural rubber,balata,gutta-percha etc2.861% Total 10 products103.3352% All products198.79100% Source: ITC

14 China Top 10 Export Commodities: Manufactured Product NoProductsBillions USDContribution 1Automatic data processing machines;optical reader, etc139.069% 2Electric app for line telephony,incl curr line system105.987% 3Cruise ship, cargo ship, barges35.192% 4Diodes/transistors&sim semiconductor devices; etc32.002% 5Television receivers (incl video monitors & video projectors)31.892% 6Parts&acces of computers & office machines31.312% 7Electronic integrated circuits and microassemblies29.612% 8Liquid crystal devices; lasers; other optical appl & instruments nes27.852% 9Printing machinery; machines for uses ancillary to printing23.581% 10Electric transformer,static converter (for example rectifiers)20.191% Total 10 products476.6730% All products1577.76100% Source: ITC

15 India Top 10 Export Commodities: Manufactured Product NoProductsBillions USDContribution 1Petroleum oils, not crude36.6417% 2Diamonds, not mounted or set22.2710% 3Articles of jewellery&parts thereof7.834% 4Iron ores & concentrates; including roasted iron pyrites6.153% 5Medicament mixtures (not 3002, 3005, 3006), put in dosage5.152% 6Refined copper and copper alloys, unwrought4.632% 7Cars (incl. station wagon)4.512% 8Commodities not elsewhere specified4.232% 9Cotton, not carded or combed2.971% 10Cotton yarn (not sewing thread) 85% or more cotton, not retail2.761% Total 10 products97.1444% All products220.41100% Source: ITC

16 Primary Commodities: World Price Fluctuation Source: IMF

17 Indonesian Exports: By Country of Destinations (2007-2011) Source: Central Bureau of Office

18 Indonesia – China Export Imports Source: Central Bureau of Office

19 Indonesian Case, Maintaining High Cost Support Has Reducing Global Crises Impact 1.Since global crises began, many emerging markets have cut their interest rate and yield of government bonds, as well as controlled capital flow. 2.Indonesia has been maintaining high interest rate (Central Bank ), even when inflation was manageable. 3.Steps to control capital flows were minimum, i.e.: increasing SBI (Central Bank Certificate) tenor. Indonesia also has released financial services from value added tax obligation.

20 ASIAN Local Currency Bond Returns Indices Source: ADB

21 Local Government Bond Yield (10 Year) * per January 16, 2012 Source: ADB

22 Selected Cases of Controlling Measures on Capital Inflows InstrumentRecent Examples Tax Measures Brazil: IOF tax raised from 4% to 6% Korea: re-imposition of 14% withholding and 20% capital gains taxes on foreign purchases of government bonds Thailand: 15% tax on interest income and capital gains earned by foreign investors Minimum Investment Periods Indonesia: 1-month minimum holding period for CB money market certificates Quantitative Limits China: limits on HK bank's net open positions and ability to access Yuan through China's FX market Indonesia: short-term external bank borrowing limited to 30% of capital Korea: Implemented cap on size of banks' FX derivatives books Unremunerated Reserve Requirements Brazil: 60% reserve requirements on banks’ short dollar position in the spot market Turkey: reserve requirements raised and expanded to repo transactions Source: IIF (2011) from Financial Development Report 2010

23 Central Bank of Indonesia’s Policy: Tightening Monetary Management NoPolicyEffective Date 1 Widening Interest Rate of Over Night Inter-Bank Money Market June 17, 2010 2 Amendement of conditions for Net Exchange Balance (Posisi Devisa Netto/PDN). July 1, 2010 3 Applying one month holding period of Central Bank Certificate (Sertifikat Bank Indonesia /SBI). July 7, 2010 4 Additional monetary instrument of on-securities term deposit July 7, 2010 5Issuance of 9 and 12 month SBI SBI 9 mo: August 2010, SBI 12 : Sept 2010 6 Application of 3 parties repurchase mechanism (repurchase) of government bonds 2011 7 Removal of 1, 6 and 9 month (Central Bank Certificate/SBI) 1 months (Jul. 2010), 3 Months (Nov.2010), 6 Months (Feb 2011) Source: Central Bank

24 Prioritizing Macroeconomic Stability: Improving Indonesian Resistance against Crisis 1.Government policy choice on macroeconomic stability: maintaining high interest rate and government bond yield. Even when inflation decreasing, central bank’s interest rate was kapt high. 2.This policy has affected real sector as loan interest rate of banks were still high. Private sector has to offer higher yield to compete with government bond or seeking for foreign financing.

25 High Interest Rate of BI: Managing Inflation Source: Central Bank of Indonesia

26 Lending Interest Rate: Indonesia’s Higher than Other Countries Source: ADB *percent per annum, period averages

27 Domestic credit by banking sector: Indonesia’s Smallest (% of GDP), 2010 Source: World Bank

28 Corporate Financial Source: Abandoned Banking Loan Source: Central Bank of Indonesia

29 Corporate Financial Source: Increasing of Foreign Loan Source : Central Bank of Indonesia,2012

30 ….Continued 3.Managing macroeconomic stability has also been done by liberalizing financial sectors and encouraging huge short- term capital inflow. 4.As a result of the policy, Indonesian stock market index has risen at higher rate than that of other countries, exchange rate strengthening, foreign ownership in financial market increased sharply, as well as foreign exchange reserve. 5.Short-term capital inflow would continue, beside as a result of high interest rate policy and high cost debt, due to investment grade improvement of Indonesia since end of December 2011 (Fitch Rating and Moody’s)

31 Balance of Payment Source: Central Bank of Indonesia Current Account Capital and Finnacial Account

32 Asian Stock Market Index: Indonesia Grew Higher

33 Year Central Bank Certificate % Government Obligation %Stock%Total Dec-088.41087.417452.260548 Dec-0944.18510819783.161935 Dec-1054.9327195.76311,184631435 Dec-1121.3415220.79311,211601447 Portfolio Investment: The Level of Foreign Ownership Source: Central Bank of Indonesia, MOF (in Trillion Rupiah )

34 Foreign Exchange Reserve Source: Central Bank of Indonesia 1998: US$ 24 billions 6.3 months of import 2011: US$ 110 billions 6.3 months of import

35 Foreign Exchange Reserve of Selected Countries – as per Nov. 2011 Source: IMF

36 Asian Exchange Rate: Aprecation of Indonesian Rupiah Source: IMF

37 Indonesian Sovereign Rating: Return to the Same Position after 13 years Source: Central Bank of Indonesia

38 FDI Realization by Sector Source: Investment Board

39 ….Continued 6.FDI flow has also increased. The hugest FDI was in transportation and communication; this sector has been experiencing incredible growth. In 2011 internet users: 45 million people (19%). It was predicted that would reach 153 million people in 2014 or 61,2% of population (Business Monitor International’s Research). Also as one of the most ‘connected ‘ countries to the world: 35 million of “facebook” users; 4,8 million of Twitter users (the world rank on 4th). 7.Other FDI goes to sectors which are related to natural resources, like mining, gas and plantation.

40 Growth, Competitiveness and Welfare: Indonesia Needs More than Growth Decoupling 1.Some indicators may show Indonesian decoupling growth with global economy. But, what actually occured may that Indonesia faces a long time-lag relatively to other countries against negative impact of global crises. 2.Other important issue is that the policy in maintaining economic growth has resulted a fragile economic structure, and also counterproductive for economic competitiveness (competitiveness index and doing-business level). 3.In addition to that, although growth decoupling has occured, people’s quality of live in Indonesia has not been improved much (stagnant on Human Development Index, wider income inequality, etc.).

41 Global Competitiveness Index 2011-2012: From 44th to 46th as a Result of Policy and Strategy Choices NoIndicatorRank 2011Rank 2010Change Basic Requirements Category53607 1Institution7161-10 2Infrastructure76826 3Macroeconomy233512 4Health adn Basic Education6462-2 Efficiency Support Category5651-5 5High education6966-3 6Market efficiency of goods6749-18 7Labour market efficiency9484-10 8Financial market6962-7 9Technology readiness9491-3 10Market Magnitude15 0 Innovation and Business Sophistication Category 4137-4 11Business Sophistication4537-8 12Innovation36 0

42 Factors of Competitiveness Downgrade: Determinant Aspects of Investment Competitiveness No Level of Change Indicators 4Down 1-5 level (22 indicators) Among others: Investors Protection Power (-3), Employment Rigidness (-4), etc 5Down more than 5 level (53 indicators) Amon others: Quality of Port Infrastructure (-7), Stock Exchange Trade Regulation (-7), Trade Tariff (- 15), Foreign Investor Ownership (-20), Bank Health (-20), Agreement to Delegate Authority (- 24), Impact of Foreign Inveatment Business Rules (-29)

43 Doing Business Level in Asia (2011) Economy Ease of Doing Business Rank Starting a Business Dealing with Constructi on Permits Getting Electricity Registering Property Getting Credit Protecting Investors Paying Taxes Trading Across Borders Enforcing Contracts Resolving Insolvency Singapore 11231312121 Hong Kong SAR, China 221210221213 Thailand 384455418346 Malaysia 46191311139565 Taiwan, China 531616512134142 China 13202417751520939 Vietnam 1413101984212411516 Indonesia 1921122315167227 18 Philippines 202317111916182381720 Cambodia 2124231817141210201819 Source: World Bank

44 Higher Inflation are Facing by the Lower Income: Cummulative Inflation 2005-2010 Source: BPS, processed Raw Food Processed food, Beverages, Cigarette, etc Clothing General Education, Recreation and Sport Housing, Water, Electricity, Gas and Fuel Health Transport., Communication, and Financial Services

45 Economic Growth and Poverty: Ineffective in Eradicating Poverty INDONESIA (2009) 10,7% of population included in middle and upper middle classes CHINA (2007) 66% of population included in middle and upper middle classes Lower Middle (US$ 2-4) 29.9% Middle (US$ 4-10) 9.7% Poor (< US$ 2 ) 59.2% Rich (>US$ 20) 0.2% Upper Middle (US$ 10-20) 1.0% Poor (< US$ 2 ) 7% Lower Middle (US$ 2-4) 23% Rich (>US$ 20) 4% Middle (US$ 4-10) 47% Upper Middle (US$ 10-20) 19% Source: ADB

46 Middle Class in Indonesian vs. China: Nurturing New Middle Class in Villages INDONESIA (2009) middle and upper middle classes people only in cities CHINA (2007) middle and upper middle classes are more in villages. 020406080100 Poor (< US$ 2 ) Lower Middle (US$ 2-4) Middle (US$ 4- 10) Upper middle (US$ 10-20) Rich (>US$ 20) Million people Cities Villages 050100150200250300350 Poor (< US$ 2 ) Lower Middle (US$ 2-4) Middle (US$ 4- 10) Upper Middle (US$ 10-20) Rich (>US$ 20) Million people Cities Villages Source: ADB

47 Current Indonesia Economic Growth: Decoupled from World Downturn, but also from Economic Competitiveness and People Welfare 1.Compared to global economic, growth decoupling occured in Indonesia. Indonesian economy still grew amids global economic down turn. 2.Some factor has supported Indonesia to be relatively resistance from global economic down turn : a)GDP structure: dominated by private consumption b)Export structure: dominated by primary comodities c)Maintaining high cost support (maintaining high interest rate and minimum of control capital inflows) 3.Several indicators may have shown that Indonesia experienced decoupling. But, actually Indonesia experienced a relative long time lag of negative impact of global crisis. Such positive performance did not result the improvement of competitiveness as well as the people quality of live.

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