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

Questions?fgilsander@Worldbank.org