Regional Economic Outlook

ISEI & FEB UI International Lecture Series

GLOBAL
ECONOMIC
OUTLOOK AMID
GEOPOLITICAL
U N C E R TA I N T I E S

James P. Walsh
Senior Resident Representative
IMF Resident Representative Office for November 1st , 2022
Indonesia
Outline
Global Economic Highlights

Where Does Indonesia Stand

2
 Growth Projections: WEO October 2022
(percent change from a year earlier)

World Advanced Economies Euro Area Emerging Market ASEAN-5

2021 : 6.0 2021 : 5.2 2021 : 5.2 2021 : 6.6 2021 : 3.4
2022 : 3.2 (0.0) 2022 : 2.4 (-0.1) 2022 : 3.1 (0.5) 2022 : 3.7 (0.1) 2022 : 5.3 (0.0)
2023 : 2.7 (-0.2) 2023 : 1.1 (-0.3) 2023 : 0.5 (-0.7) 2023 : 3.7 (-0.2) 2023 : 4.9 (-0.2)

United Kingdom Russia

Canada
2021 : 7.4 2021 : 4.7
2021 : 4.5
2022 : 3.6 (0.4) 2022 : -3.4 (2.6) China
2022 : 3.3 (-0.1)
2023 : 0.3 (-0.2) 2023 : -2.3 (1.2) 2021 : 8.1
2023 : 1.5 (-0.3)
2022 : 3.2 (-0.1)
2023 : 4.4 (-0.2)

United States
2021 : 5.7 Japan
2022 : 1.6 (-0.7) 2021 : 1.7
2023 : 1.0 (0.0) 2022 : 1.7 (0.0)
2023 : 1.6 (-0.1)

Brazil
2021 : 4.6 India Indonesia
2022 : 2.8 (1.1) South Africa 2021 : 8.7 2021 : 3.7
2023 : 1.0 (-0.1) 2021 : 4.9 2022 : 6.8 (-0.6) 2022 : 5.3 (0.0)
2022 : 2.1 (-0.2) 2023 : 6.1 (0.0) 2023 : 5.0 (-0.2)
2023 : 1.1 (-0.3)

3
Number in bracket is the difference compared July 2022 WEO projections
 Three downside risks have materialized:

1. Weaker global demand: 2. More persistent

US, Euro area, and China rise in inflation.
have all weakened Expectations have
also risen though
now may be falling
3. Tighter financial conditions: in US
• Higher term and risk premia,
tight liquidity across many
financial markets
• In Asia, sovereign and
corporate spreads have risen.
4
 Downside Risk Remain Elevated

The risk of monetary, fiscal, or More persistent

financial policy miscalibration inflation especially if
amid high uncertainty and labor markets remain
growing fragilities extremely tight.

1 2 3 4

Deteriorating global financial The war in

conditions that would add Ukraine
inflation pressures and financial exacerbate the
fragilities, especially in emerging energy crisis.
markets and developing
economies.

5
Outline
Global Economic Highlights

Where Does Indonesia Stand

6
 Trading Partners
China, ASEAN, and US are largest markets Indonesia’s Exports Destination GDP Growth
(%, yoy)
2022 2021

Indonesia’s Exports Destination Indonesia 3.7 5.3

(2021, % to Total Exports)
Singapore* 3.0 7.6
Other13.1%
Philippines 5.7 6.5
Pakistan1.6% 26.3% Malaysia 3.1 5.4

Australia
1.9% Vietnam* 2.6 7.0

Netherland 2.3% Thailand 1.5 2.8

4.4%
India 6.8 8.7
China 3.2 8.1
6.5% US 1.6 5.7
Pakistan 5.7
6.0

Netherlands 4.54.9

Australia 3.8 4.9

8.7% Korea 2.6 4.1
22.6% Japan 1.7
1.7
0 2 4 6 8 10
12.6%
ASEAN: Singapore, Philippines, Malaysia, Vietnam, Thailand
Source: WEO October 2022 7
Source: BPS *Vietnam and Singapore using WEO 2022
 China and US recovered before Indonesia

Retail Sales Asynchronous recoveries

(% MoM, 12mma) • China got pandemic under control very
5.0 quickly in 2020, and grew throughout 2021
• US recovered strongly in 2021 with fast
4.0 United vaccine rollout and pandemic fatigue
States China and US Policies
3.0
• China’s investment-focused stimulus
2.0 China postponed reducing financial vulnerabilities
but supported consumption
1.0 • Consumer-focused US stimulus supported
domestic demand and aggravated
0.0 bottlenecks

-1.0 Indonesia Indonesia case

• Export demand remained strong while
-2.0 domestic demand was weak
• US and China now dealing with negative
-3.0 consequences of pandemic policies as
Dec-19 Apr-20 Aug-20 Dec-20 Apr-21 Aug-21 Dec-21 Apr-22 Aug-22
Indonesia is recovering
Source: CEIC, Bloomberg, Staff Calculation 8
 External Position Remains Strong
Reserves position strengthened during the pandemic, but now slightly below mid-2021 peaks

Indonesian Trade Profile Foreign Reserve

Sept 2022 Trade
(in Billion US$) Balance: USD5Bilion
Foreign Reserve USD mn

160 In Months of Imports & Official Debt Repayment - 11

10 10

in US$ billion
RHS

8 8 9
Oil and Gas 140
6 6
Non Oil and Gas
7
4 Trade Balance 4
120
2 2
5
0 0 100
-2 -2
3

-4
2018: 2019: 2022 (as of Sept)
-4 80
2020: 2021: 1
-USD8.7 Bilion -USD3.2 Bilion USD21.8 Bilion USD35.5 Bilion USD39.8 Bilion
-6 -6

-8 -8 60 -1
Sep-18 Mar-19 Sep-19 Mar-20 Sep-20 Mar-21 Sep-21 Mar-22 Sep-22 Jan-18 Aug-18 Mar-19 Oct-19 May-20 Dec-20 Jul-21 Feb-22 Sep-22
Source: CEIC, BI, Statistic, BPS Source: CEIC, BI

9
 External Financial Conditions Generally Positive
Indonesia is already better insulated than during past events. Spreads have generally fallen during the acute
phase of the pandemic, and the exchange rate has been more stable than most EMs

Policy Rate (Percent) Spread UST vs LCY Exchange Rates

from January 2020 to September 2022 Jan 2020 = 0 Indexes, Jan 2020 = 100

16 6 150
Position End of Sep 2022
5
14 140
Position End of Jan 2020
4
12 130
3
10 120
2
8 110
1
6 100
0
4 90
-1 Indonesia Brazil Indonesia Brazil
2 India China 80
-2 India China
South Africa Mexico
South Africa Mexico
0 70
-3
Indonesia India China Russia South Brazil Mexico Jan-20 May-20 Sep-20 Jan-21 May-21 Sep-21 Jan-22 May-22 Sep-22 Jan-20 May-20 Sep-20 Jan-21 May-21 Sep-21 Jan-22 May-22 Sep-22
Africa
Source: CEIC, IMF Staff Calculation
Source: Bloomberg S.P., IMF Staff Calculation Source: Bloomberg S.P., IMF Staff Calculation

10
 ….but impact of US uncertainty will continue
Outflows have picked up as spreads with US bonds have fallen and then stabilized

Portfolio Flows 10-year LCY yield and Yield Spread

(in US$ billion) (in percent)
3,000 3,000 9 9

1,000 1,000 8 10yr LCY Bond 8

-1,000 -1,000 7 7

-3,000 -3,000 6 6

-5,000 -5,000 5 5

-7,000 Equity Debt Net (3mma) -7,000 4 Yield Spread 4

-9,000 -9,000 3 3
Dec-19 Mar-20 Jun-20 Sep-20 Dec-20 Mar-21 Jun-21 Sep-21 Dec-21 Mar-22 Jun-22 Sep-22
Mar-20 Sep-20 Mar-21 Sep-21 Mar-22 Sep-22

Source: IIF; IM F Staff Calculation Source: Bloomberg S.P; IMF Staff Calculation
Note: Spread of 10-year LCY yield with 10-year US Treasury yield

11
 Exchange Rate is Now Responding
After a long period of stability, the ER has recently depreciated, and hedging has risen

Expected exchange rate movement/pressure FX Swap and DNDF

(Left-hand: Nominal Exchange Rate in Level, Right-hand: Implied Yield (in US$ million, Spot/Forward ER on RHS)
RHS in percent)
18,000 40 2500 18,000
Onshore rupiah per US$ FX Swap DNDF Spot Forward

17,000 1-month NDF rupiah per US$ 30 2000 17,000

1-month NDF implied annual yield (right scale)

16,000 20 1500 16,000

15,000 10 1000 15,000

14,000 0 500 14,000

Depreciation

13,000 -10 0 13,000

Jan-20 May-20 Sep-20 Jan-21 May-21 Sep-21 Jan-22 May-22 Sep-22 Jan-20 May-20 Sep-20 Jan-21 May-21 Sep-21 Jan-22 May-22 Sep-22

Source: Bloomberg Source: BI, Bloomberg S.P., IMF Staff Calculation

12
 Indonesia: Growth is Returning
Banks are lending again, and investment is rising

Credit Growth and Capital Adequacy Ratio

(growth in percent year-on-year, CAR in percent RHS) Real Capital Goods Import and Investment
15 27 30 Capital Goods yoy, 3mma, deflated 12

GFCF- RHS yoy

20 8
10 25
10 4

5 23 0 0

-10 -4
0 21

-20 -8
Credit Growth (yoy) CAR (RHS)
-5 19
-30 -12
Dec-17 Sep-18 Jun-19 Mar-20 Dec-20 Sep-21 Jun-22
Jan-20 Jun-20 Nov-20 Apr-21 Sep-21 Feb-22 Jul-22
Source: OJK; IMF Staff Calculation Source: CEIC

13
 Inflation remains largely import-driven
Food prices have pushed inflation above target band, while core inflation is slowly rising.

Inflation Inflation of Selected Food Commodities

(year-on-year percent changes) (domestic retail price, year-on-year percent changes)
14 14 50 50
Chicken Beef
12 Headline Core 12
40 Condensed Milk Cooking Oil 40
Administered Volatile Food
10 Sugar Flour
10
30 Chicken Egg 30
8
8
6 20 20
6
Upper target band 4 10 10
4
2
0 0
2
0
Lower target band
0 -10 -10
-2

-2 -4 -20 -20
Jan-20 May-20 Sep-20 Jan-21 May-21 Sep-21 Jan-22 May-22 Sep-22 Mar-20 Jul-20 Nov-20 Mar-21 Jul-21 Nov-21 Mar-22 Jul-22
Source: CEIC, Statistics Indonesia (BPS), IMF Staff Calculation Source: CEIC, IMF Staff Calculation

14
 Monetary Policy is in a Difficult Position
Both policy rate and exchange rate depreciation are imperfect tools

Output Gap & Inflation Fuel and Food Imports

(percent) (%, of GDP)
18 2.0 7% 0.9%

16 Output Gap Estimation (RHS) 1.0 6% Fuel 0.8%

Imports
14
0.0
5% 0.8%
12
-1.0
4% 0.7%
10
-2.0
8 3% 0.7%
-3.0
6
2% 0.6%
-4.0
4
Inflation
-5.0 1% 0.6%
2
Food Imports* (RHS)

0 -6.0 0% 0.5%
2001 2004 2007 2010 2013 2016 2019 2022 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Source: BPS, Staff Calculation
Note: Inflation is end of period consumer prices Food Imports: Rice, Fruit, Meat, Sugar, Soybean, Wheat 15
 Fiscal Policy Remains Prudent
Budget deficit should be below 3 percent ceiling in 2023
• The deficit ceiling has served Indonesia
Revenue, Expenditure, Deficit and Debt well, improving stability and bringing down
(In percent of GDP) borrowing rates for the government.
20 45
18 40
• IMF assesses Indonesia’s public debt as
16 sustainable. All countries’ debt levels rose
35
14 during the pandemic due to the
30
12
extraordinary needs for spending, and
10
25
Indonesia rightfully allowed its debt levels
8
20 to rise, as well.
15
6
4 10 • Indonesia’s debt was at a low level before
2 5 the pandemic and remains within a level
0 0
that does not present important risks.
2018 2019 2020 2021 2022 2023 2024

Revenue Expenditure Effective Pandemic Response

Net lending/borrowing 3 percent target
General government gross debt (RHS) The PEN programs, via targeted spending, have
supported vulnerable households impacted by
Source: WEO Database October 2022 pandemic.
16
 Normalization Means Concluding BI Purchases
IMF supports authorities’ commitment to exit from monetary financing by the end-2022 target date, and
recommends confining further primary market purchases under market mechanism to periods of severe
market dysfunction

Holdings of Government Bond BI Bond Purchase in Primary Market

(in percent of total bond) (in IDR trillion)
50 50 500
Market Mechanism

40 Bank 40 400 Private Placement

300
30 30 398
215
Other (non-bank)
Foreign 200
20 20

BI (net, excl. bond used

for monetary op.) 100 99 95
10 10 140 143
116
76 65
26 48 33 43
0 9
0 0 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3*
Jan-20 May-20 Sep-20 Jan-21 May-21 Sep-21 Jan-22 May-22 Sep-22
2020 2021 2022
Source: Debt M anagement Office, IM F Staff Calculation Source: BI, IMF Staff Calculation
*) until October 19th, 2022
Note: Cumulative issuance in respective year
17
 Exchange Rate Policy: Flexibility Can Help
Rupiah depreciation helps shift demand away from imported goods and toward domestically produced
substitutes. At Cash Transfers can help maintain purchasing power among low-income households.

Total Import and Exchange Rate

Cash Transfer and Retail Sales
(Import in billion, exchange rate in level RHS)
(year-on-year percent change, 12 mma) Retail Sales
17.0 25,000 10 Index 100
Billion USD

5 80
16.0 20,000
60
Total Import 0
15.0 15,000
40
-5
20
14.0 10,000
Rupiah/USD Spot -10
(RSH) Social Spending 0
13.0 5,000 (RHS)
-15 -20

12.0 0 -20 -40

Jan-19 Jul-19 Jan-20 Jul-20 Jan-21 Jul-21 Jan-22 Jul-22 Jan-19 Jul-19 Jan-20 Jul-20 Jan-21 Jul-21 Jan-22 Jul-22

Source: Bloomberg, IM F Staff Calculation

Source: M OF, CEIC, IM F Staff Calculation

18
 Structural Reform 1: Revenue and Spending
Investing in health, education, and infrastructure will require higher revenues
GG Revenues Source: MoF

(% of GDP) Indonesia’s Tax Composition (% of Tax Revenue)

- Value is for 2022-
15.4 Income Tax Value added Tax Land and building tax Excise Others tax Import duties Export duties
Vietnam
100%

Thailand 20.1
90%

80%
South 27.5
Africa 70%

Russia 34.9 60%

50%
Philippine 20.7
s 40%

17.4 30%
Malaysia
20%

Indonesia 13.5
10%

0%
India 18.9
2023 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
2022
26.0
China 2021 • Pandemic made revenue source shrink for many countries. Some able
30.9
2020 to return to pre-pandemic level, but some still fall behind.
Brazil 2019
• Indonesia revenue is relatively low compared to other EMs.
10 15 20 25 30 35 40 • Indonesia’s tax revenue came mostly from Income tax and VAT, both
Source: IMF WEO Database, April
2022
are related to cyclical economic activity.

19
 Structural Reform 1: Revenue and Spending
Indonesia has started a strong reform, but further interventions required to create budget efficiencies
Fuel Prices, Economic vs Retail

Indonesia Spending Allocation Rp/liter Source: Bloomberg, Bank Indonesia, IMF Staff Calculation
Shell Super
(% to Total Allocation) 25000 Pertamax Retail/Government's Price 25000
20% 25% Pertamax Economic Price
Health Infrastructure Social Subsidy Education
Diesel Economic Price
Diesel Government Price
18% 20000 Pertalite Economic Price 20000
Pertalite Retail/Government's Price
16% 20%

15000 15000
14%

12% 15%
10000 10000

10%

5000 5000
8% 10%

6%
0 0
Jan-20 Jul-20 Jan-21 Jul-21 Jan-22 Jul-22
4% 5%

2% • Allocation for infrastructure jumped but now on a declining trend.

• High subsidy allocation burdened the development spending.
0% 0%
Source: 2015
MoF
Audited
2016
Audited
2017
Audited
2018
Audited
2019
Audited
2020
Audited,
2021
Audited,
2022
Revised
• Prices of different types of fuel (Pertalite/RON 90, Pertamax/RON
92, and Diesel) are below economical price.
Infra Budget Infra Budget Budget

20
 Structural Reforms 2: Supporting Industrialization
Incentives should build on strengths and ensure value added stays in Indonesia
Natural Resource Optimization
• Over the years, natural resources
Industrial Complex Smelter Development exports have generated billions in
proceeds.
• Challenges persist in fully monetizing
global demand for resources while
making sure to protect domestic
needs and environment.

Industrialization
• Indonesia has put forward initiatives
for domestic industry acceleration.
• Focusing on exports and areas where
Indonesia is already strong are most
likely to be successful
Fiscal Supports • Ensuring knowledge transfer and
• Tax Holiday & Tax Allowance developing domestic skills are
• Super deduction essential
Regulatory Support
• Opening of negative investment list
Foreign Investment
• Omnibus law
• UU Cipta Kerja improved
environment for FDI, but more
reforms could also help 21
Source: kppip.go.id
 Structural Reforms 3: Climate Change
Climate change presents a threat to long-term growth and prosperity

Ambitious pledges, but actual policies need to be implemented

• World needs to rid itself of all fossil fuel subsidies.
• Robust carbon pricing will help redirect investment and innovation to
clean technologies and encourage energy efficiency.
• Green investments to incorporate renewables and energy efficiency.
• Low-income households are more likely to be hurt by carbon pricing, as
they spend a relatively large share of their income on energy.
• Work for a “just transition’’ to a low-carbon economy. Revenues from
carbon pricing can be used for cash transfers, social safety nets,
retraining, and so on to compensate workers and businesses in affected
high-emission sectors.

Some policy recommendation:

• Fully or partially rebate the carbon revenues through cash transfers.
• Higher spending on clean public infrastructure could help create new
jobs in low-carbon sectors and offset job losses in high-carbon sectors.
• Retooling workers will also help to smoothen job transitions.
Indonesia is in the front row of the discussion
with Carbon Tax Policy. However, challenges for
Indonesia persist which include the existing
energy subsidy/compensation scheme and the
need for more frequent market price
adjustments in fuel and electricity
22
Renewable Energy
The world needs to reduce dependence on fossil fuel and rid itself of all fossil fuel subsidies

Indonesian Energy Mix

Coal Oil Gas NRE

6.24% 8.55% 9.15% 11.20% 11.50%

15.70%
23%
21.34%
Indonesian Energy
19.67% 20.13% 19.16% 19.30%
22.50%

Mix 22%

38.81% 33.58% 31.20%

42.09% 38.04%
27.30%
25%

37.15% 38%
32.97% 31.60% 34.50%
30.33% 30%

2017 2018 2019 2020 2021 2022p 2025p

23
Thank You

24