Indonesia Economic Prospects

June 2023
Part A: Economic Outlook And Policy
Priorities

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Outlook & Risks: Sources of growth
rebalancing as economy normalizes
from recent shocks

Macro Foundations: Disinflation,

deleveraging, and de-risking help
enhance economic resilience and
policy space

Structural Reforms: Further

decluttering of markets can raise
growth and economic potential
Outlook & Risks: Sources of growth
rebalancing as economy normalizes
from recent shocks

Macro Foundations: Disinflation,

deleveraging, and de-risking help
enhance economic resilience and
policy space

Structural Reforms: Further

decluttering of markets can raise
growth and economic potential
 Sources of growth rebalancing as economy normalizes from recent shocks

Growth and inflation projected to moderate in 2023 Amid stable macroeconomic conditions

Real GDP and CPI (% change yoy) 2019 2020 2021 2022 2023 2024 2025
6
5 Actual Projection
4
3 Real GDP 5.0 -2.1 3.7 5.3 4.9 5.0 5.0

2
CPI (end of period) 2.6 1.7 1.9 5.5 3.6 3.4 3.3
1
0 Fiscal Balance -2.2 -612 -4.6 -2.4 -2.5 -2.5 -2.5
-1
Central Government
-2 30.2 39.3 40.7 39.5 39.2 38.8 38.6
Debt
-3
Current account
-2.7 -0.4 0.3 1.0 0.0 -0.4 -1.0
2019

2020

2021

2022

2023

2024

2025 balance
Net Foreign Direct
Real GDP CPI (year-average) 1.8 1.3 1.5 1.1 1.3 1.3 1.4
Investment

Source: BPS, WB staff calculations. Source: BPS, Bank Indonesia, WB staff calculations.
Outlook & Risks: Sources of growth
rebalancing as economy normalizes
from recent shocks

Macro Foundations: Disinflation,

deleveraging, and de-risking help
enhance economic resilience and
policy space

Structural Reforms: Further

decluttering of markets can raise
growth and economic potential
Disinflation: Inflation slowed more quickly than anticipated with easing supply pressures

Inflation back within Bank Indonesia target by May 2023 More broad-based price increase due to second round effects

Inflation: Indonesia vs. Peers (%yoy) Inflation distribution (price increases % yoy
7
vs. share of CPI basket)
100
6

Share of CPI basket

80
5
4 60

3 40
2
20
1
0
0

Oct-22
Oct-20

Oct-21
Jul-20

Jul-21

Jul-22
Jan-20

Jan-21

Jan-22

Jan-23
Apr-20

Apr-21

Apr-22
Jul-20

Jul-21

Jul-22
Nov-20

Nov-21

Nov-22
Jan-23
Mar-22
Jan-20

Jan-21

Jan-22
Mar-20
May-20

Sep-20

Mar-21
May-21

Sep-21

May-22

Sep-22

Mar-23
May-23
Food Non-Food CPI CPI BENCHMARK 0-2% 2-4% 4-6% 6-8% 8-10% 12-14% 14-16%

Source: BPS, WB staff calculations. Source: BPS, Bank Indonesia, WB staff calculations.
 Deleveraging: Government debt has started to decline with growth and prudent fiscal

Government debt increased by less than peer countries during COVID And has started to decline with prudent fiscal policies and growth

100 Public sector debt (% GDP) Revenue, expenditure, fiscal balance (%

90
17 GDP)
80
14
70
60 11
50 8
40 5
30 2
20 -1
10 -4
0
-7
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023

2018

2019

2023*
2015

2016

2017

2020

2021

2022
Brazil China Indonesia
Malaysia Philippines Thailand Fiscal balance (Budget) Fiscal balance
Vietnam Total revenue Total expenditure

Source: IMF Fiscal Monitor April 2023. Source: Ministry of Finance, WB staff calculations.
 Deleveraging: Government and private exposure to external debt has also fallen

Public and private borrowers turning from external to domestic debt External borrowing maturities have been extended

20% External debt (% of GDP) External debt (%GDP)

18%
16% 36.5% 39.4% 34.9%
40%
14% 30.2%
14.8% 28.4%
12% 30% 13.3% 13.3%
10% 11.4% 10.4%
20%
8%
6% 10%
4% 4.7% 4.8% 3.9% 3.9% 3.7%
0%
2%

2019

2020

2021

2022

2023
0%
Public sector Private Non- Private Banks Private Non-
Financial Bank Financial Short-term public debt Short-term private debt
Corporations Corporations Long-term public debt Long-term private debt
2019 2023 (est) Debt stock (% of GDP)

Source: Source: Bank Indonesia, WB staff calculations.

 De-risking: Disinflation and deleveraging help de-risk by lowering vulnerabilities

Sovereign spreads have increased slightly but overall remain stable External surplus and deleveraging reduce external financing needs

CDS spread 5-year (basis points) Financing sources (USD billion)

80

Capital Outflows from EMDEs

Russia’s Invasion of Ukraine
Early Spread of COVID-19

US Inflation Reached 40-year high

800
700 60
600
40
500
400 20
300
200 0
100 -20
0

2016

2017

2018

2019

2020

2021

2022
Jan-21
Jan-19

Jan-20

Jan-22

Jan-23
May-19

Sep-19

May-20

Sep-20

May-21

Sep-21

May-22

Sep-22

May-23
FDI Portfolio Inv.
60 per. Mov. Avg. (China) 60 per. Mov. Avg. (Indonesia) Capital Acc. Other Inv.:Public
60 per. Mov. Avg. (Brazil) 60 per. Mov. Avg. (Philippines) Other Inv.: Private Change in Reserves
60 per. Mov. Avg. (South Africa) 60 per. Mov. Avg. (Turkey) Financing Needs

Source: JP Morgan, WB staff calculations. Source: Bank Indonesia, WB staff calculations.

 De-risking: At the same time, external buffers are adequate and currency stable

Forex reserves adequate according to IMF ARA metric Which has helped stabilize the currency when needed

Contributions to IMF Measure of Reserve Currency volatility (daily movement,

140
Adequacy (US$ billion) annualized, index, Indonesia vs. other
0.35
120 EMDEs)
0.3
100
0.25
80
0.2
60
0.15
40
0.1
20
0.05
0
0
2012
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011

2013
2014
2015
2016
2017
2018
2019
2020
2021
2022

Jul-19

Jul-20

Jul-21

Jul-22
Jan-19

Oct-20
Jan-20

Jan-21

Jan-22

Jan-23
Oct-19

Oct-21

Oct-22
Apr-19

Apr-20

Apr-21

Apr-22

Apr-23
Export revenues (BXGS) Broad money (FMB_USD)
Short-term Debt (D_SRM) Other Liabilities (OL)
Reserves Interquartile Range of Peers Indonesia

Source: IMF, Haver Analytics, WB staff calculations. Source: Haver Analytics, WB staff calculations.
Outlook & Risks: Sources of growth
rebalancing as economy normalizes
from recent shocks

Macro Foundations: Disinflation,

deleveraging, and de-risking help
enhance economic resilience and
policy space

Structural Reforms: Further

decluttering of markets can raise
growth and economic potential
 Declining productivity growth is weighing on economic potential

Scope to improve efficiency in how labor and capital are utilized This will be essential to reverse the trend of slowing potential growth

Compound Annual Growth (%points) GDP: Potential vs. Actual (%yoy)

15 15
6.06
5.46 10
10 1.98
0.88 5
1.05 1.17
1.95 1.66 0
5
-5
5.63 5.95
-10
0
Indonesia 2003-2019 Lower Middle Income, 2003- -15
2017

2018
1985
1988
1991
1994
1997
2000
2003
2006
2009
2012
2015

2021
2024
Total Factor Productivity gA Human Capital per Labor gh
Labor gL* Capital Stock gK
Real GDP gY Actual GDP YoY Potential GDP YoY

Source: World Development Indicators,, WB staff calculations using the Growth Source: CEIC, WB staff calculations.
Decomposition Tool,.
 Indonesia could accelerate potential growth through enhanced competition

Different competitiveness drivers at different stages of development Next stage of reforms should focus on efficiency drivers

Indonesia performance in structural reform areas

relative to peers (z scores based on multiple
competitiveness indices)
Macroeconomics
Basic Governance

Structural reform areas

Innovation drivers Infrastructure
• Research and Labor markets
Efficiency drivers: Development International trade
• Business • Business
sophistication Basic human capital
regulations
• Labor markets Business regulations
Factor
accumulation: • Financial sector Financial sector
• Competition Competition
• Basic governance
• Trade openness
• Basic human capital
-0.2 0.3 0.8
• Basic infrastructure
• Macroeconomic Z score (higher score = stronger performance relative to
stability peers; lower score = weaker performance relative to peers)

Source: Global Competitiveness Index, Economic Freedom Index, OECD Product Market
Regulations, Bertelsmann Transformation Index, Economist Intelligence Unit.
15

Thank You
Indonesia Economic Prospects, June 2023

Download the Report at

www.worldbank.org/iep