INDONESIA ECONOMIC SNAPSHOT:

WHAT DO WE LEARN FROM A POST

COVID-19 RECOVERY AND RESILIENCE

RETNO AGUSTINA EKAPUTRI, Ph.D

Rector of University of Bengkulu

Acknowledge the document prepared by Ratu Eva Febriani, M.Sc Bengkulu, October 4, 2023
Economic Growth

Amidst the global uncertainty, Indonesia's economy has been growing at 5.3 percent yoy. Growth strengthened in 2022, higher
than the year before Covid. This momentum continued in 2023 with private consumption and exports supporting 5 percent growth
in first quarter of 2023.

Growth is mainly supported by private consumption and Leading indicators point to easing investment
exports (3mma index, Jan 2022=100)
(percent yoy, percentage points contribution to growth)

Source: BPS, World Bank Source: CEIC, World Bank

On the other hand there are signs that domestic demand is starting to moderate due to
weakening import and investment growth, slowing private sector credit growth, and slowing
core inflation since the beginning of 2023.
Economic Growth

Services contributing
the most to growth

Potential GDP
growth is declining
due to weakening
labor input and
productivity growth
(Growth, percent yoy) (percent yoy, percentage points contribution to growth)
Source: CEIC, World Bank Source: BPS, World Bank
Inflation

Inflation edged down, reaching 4 percent yoy in May 2023. It is the lowest inflation on record since peaking
in September 2022, when Global inflationary pressures are increasing after Russia invaded Ukraine.

Inflation tapered down earlier than expected The distribution of price increases across the CPI component
(contribution to inflation, percentage points) (percentage yoy)
Source: CEIC, World Bank Source: BPS, CEIC, World Bank

There has been a significant In January 2022, prices across

change in the distribution of
price increases across the CPI
components
60 percent of the CPI basket
rose between 0-2 percent
while the rest increased
between 2-4 percent
In May 2023, prices across 88 percent
of the basket rose between 0-4 percent,
and 12 percent of it rose 12-14 percent.
 Labor
Sectoral compotition of workers during Asian Financial Crisis and Covid-19 (%)

The
percentage
of people
working and
jobless in a
vary years
fluctuated

Source: BPS Source: Sakernas (1997 and 2000 data using the yearly, 2019 and 2022 are using August round

Open unemployment rate by province, 2022 (%)

Workers are still facing difficulties in finding jobs with unemployment remaining above pre-
pandemic levels. Between 2019 and 2022, among youth and elder workers, unemployment
rates rose 18.6 percent (0.7 for elder) to 20.6 percent (2.9 for elder).

The significant reduction in the share of employment in agriculture already underway prior
to the pandemic.

Distribution of workers across sectors remained unchanged three years after the COVID-19 crisis
began. Unlike previous episodes of economic shocks, which led to firm closures and worker
dismissals, COVID-19 was perceived as temporary health induced shock that led firms to
pursue reduced hours instead of closures as a main coping mechanism.

Source: BPS
 International trade

The growth of goods exports has been persistently

slowing since Q3-21.

Export of goods reached US$19.3 billion in April 2023, a

contraction of 29 percent yoy, and a significant drop from
the all-time high of US$28 billion in August 2022.

The contribution of commodity prices toexport growth

narrowed. Meanwhile, imports have also dropped amidst
moderating domestic demand to reach US$15.4 billion in
April 2023, a contraction of 22 percent yoy.
Source: BPS and Bank Indonesia Source: BPS and Bank Indonesia

▪ Indonesia’s coal exports increased from

US$33 billion in 2021 to a staggering
US$55 billion in 2022.
▪ At the beginning of 2023, Indonesia’s
minerals exports growth started to soften
as global commodity prices dropped.
▪ Services trade has traditionally accounted
for a relatively small share of Indonesia’s
total trade flows, adding up to only 7.3
percent of total exports and 15.9 percent
of total imports in 2022.
▪ In Q1-23, services exports grew by a stark
91.5 percent yoy, compared to only
0.8 percent for goods exports.
Source: BPS and Bank Indonesia Source: BPS and Bank Indonesia
Finance

The current account surplus was sustained,
supported by high commodity prices
(percent of GDP)
➢ The quarterly trend seems to be External financing needs came mostly
moderating since the start of the (financing sources, USD billion)
year 2023, while the current
account surplus has widened on a
yoy basis, from 0.2 percent of GDP
in Q1-22 to 0.9 percent in Q1-23.

➢ External financing remains

adequate at US$ 3.6 billion in Q1-
23 (1.1 percent of GDP).

➢ Portfolio inflows of 1.3 percent of

GDP over the same period. This
reversed the 2022 trend and was
realized despite tightening global
Source: Bank Indonesia, World Bank calculation
financial conditions and outflows in Source: Bank Indonesia, World Bank calculation

many EMDEs.

FDI has been a steady source of external

The bulk of external financing came
financing in the past
from FDI and other private
3 years and has outperformed the more
investments including currency,
volatile and shorter-term portfolio and debt
loans, trade credits, and advances.
flows.
 Currency

Forex reserves stocks are adequate External debt exposure is declining

(ARA metric decomposition, in billion USD) (percent of GDP)

BI’s foreign currency reserves

went from US$ 137.2 billion in
2022 to US$ 139.3 billion in
May 2023.
BI reserves remain adequate.
The Rupiah appreciated by 4.6
percent ytd against the USD,
while long-term bond yields
declined by 61 bps over the
same period.

The currency has become less

Indonesia’s external debt stock
sensitive to capital flows
continues to drop, reaching
movement. Rupiah’s volatility
28.4 percent of GDP by Source: Bank Indonesia, World Bank calculation
is relatively low compared Source: Haver Analytics, World Bank calculation
March 2023. an indication of
to peer countries (Argentina,
ample liquidity in domestic
Brazil, Russia, Turkey, South Rupiah remained stable compered to peer countries Credit risk premia declined though
markets following the
Africa, Malaysia, (currency volatility, daily movement, annualized, remained above pre-pandemic level
commodity boom
India, and Mexico.) index) (CDS spread 5-year, basis point)

In Indonesia, the medium-term

(5-years) credit default swaps
(CDS) have declined but remain
above pre-pandemic
levels and higher than peers in
the region.

Source: Bank Indonesia, IMF, World Bank calculation Source: JP Morgan, World Bank calculation
Fiscal Policy

The fiscal deficit, which peaked at 6.1 percent of GDP in 2020, declined to 2.4 percent of GDP in 2022,
below the 4.5 percent of GDP target in the revised Budget.

Faster fiscal consolidation supported by strong Commodity windfalls, domestic demand and reforms
revenue performance supported a strong revenue performance so far
(revenue, expenditure, fiscal balance, % of GDP) (contribution to annual nominal growth, percent)

Note: *2023 are projection

Source: Ministry of Finance, World Bank calculation Source: Ministry of Finance, World Bank calculation

Revenues rose by 31 percent in 2022. This was largely led by i) higher commodity prices with related revenues⁷ up by
63 percent; ii) a recovery in domestic demand boosting income tax, VAT, and excises; and iii) reforms from the Tax
Harmonization Law (THL) including a voluntary disclosure program, a tax on the digital economy, and a VAT rate hike
that was effective in April 2022.
Fiscal Policy
Expenditure growth moderated to 10 percent as the Gol rolled
back pandemic related stimulus measures. Expenditures were
largely driven by energy subsidies, which reached 2.8 percent of
GDP in 2022.
Rising energy subsidies drove expenditure growth
(contribution to annual nominal growth, percent)
Source: Ministry of Finance, World Bank calculation
fiscal surplus of 0.6 percent of GDP in Q1-23, up significantly from
Public debt dropped from its peak of 40.7 percent of GDP in 2021
to 39.5 percent in 2022, and now stands at 39.1 percent in March
2023.0.1 percent of GDP in Q1-22.
Public debt dropped from its peak of 40.7 percent of GDP
in 2021 to 39.5 percent in 2022, and now stands at 39.1
percent in March 2023.
Indonesia’s public debt is gradually declining, in contrast with some its peers
(public sector debt, percent of GDP)
Source: IMF-Fiscal Monitor April 2023
By the end of Q1-23, domestic debt accounted for 72.1 percent of
total public debt (up from 70.8 percent in 2022) with commercial
banks increasing their sovereign lending.
Banks now hold 29.9 percent of domestic government
debt while the public holds 35.2 percent.
Monetary Policy
Easing inflation and resilient capital flows have led Bank Indonesia to ease its pace of monetary tightening.
BI raised its policy rate by a cumulative 225 basis points last year. Since January 2023, BI has held its policy
rate at 5.75 percent.

The real interest rate is Overall, policy rate differential with the US Federal BI has used a mix of policy responses to navigate
gradually picking up. By April Reserve has been narrowing despite recent pickup external shock, which have eased in early 2023
(real interest rate differential with the US, percent) (standardized monthly change, percent)
2023, it reached an estimated
1.72 percent. The real interest
rate is expected to gradually
edge up though by the end of
the year if inflation remains
within BI’s desirable target
range of 3±1 percent.

In 2022, BI used foreign

currency reserves and
interest rate more
prominently. As a result, M2
growth further decelerated to
5.5 percent yoy in April from
8.4 percent yoy in end-2022.
Source: CIEC, Consensus Forecast, World Bank calculation Source: Haver Analytics, World Bank calculation
Monetary Policy

➢ Bank asset quality remains

Financial indicators remain sound Credit to the private sector is stable
generally high, and bank
capital and provisioning levels
adequate to withstand
potential adverse shocks.
➢ NPL -> 2.5% since mid-2020
and stands of March 2023.
➢ The capital adequacy ratio
remains stable at 24.6% as of
March 2023, well above the
regulatory minimum of 8
percent.
➢ As of February 2023, return
on assets (ROA) and interest
margin to gross income were
at 2.8% and 4.7%
Source: The financial services authority (OJK) respectively. Source: The financial services authority (OJK)

▪ Return on equity (ROE): 13.3% (Dec. 2022), lower than As of January 2023, lending to Micro,
pre-pandemic levels of 14.6 percent. Small and Medium Enterprises (MSMEs)
▪ Credit growth has been positive for almost two years and stood at IDR 1,358 trillion (6.4 percent of
grew by 9.9 percent yoy as of March 2023, broadly at par GDP), accounting for 21 percent of all
bank lending.
with pre-pandemic average.
Investment

Investment contribute about Private investment far exceeding public Higher contribution to growth than other lower
60% of growth investment Middle-Income Countries (LMICs)

Investment for Indonesia (%) Indonesia’s investment growth vs other TFP, labor and human capital growth
LMICs

33 32,29 32,35
31,71
32
30,79
31

30
29,08 29,11
29
27,9
28

27

26

25
2018 2019 2020 2021 2022 2023 I 2023 II

Source: BPS Source: World Development Indicators, World Bank calculation Source: World Development Indicators, World Bank calculation

There have been large

Labor input TFP, both labor and human Between the early 2000s and 2019 labor movements from
contributed 14% capital growth have slowed (prior to COVID-19), labor agriculture to industry and
in recent years and have
to growth, and 8% been growing at slower
productivity growth slowed services. While services
from human accounted for over 70 percent of have higher productivity in
rates than other LMICs in
capital the last 20 years total labor productivity growth. absolute terms.
 Poverty
Indonesia poverty rates (%) Poverty rates for Indonesia and its Poverty rates and changes in the number of poor
economic peers
10,2
10
9,8
9,6
9,4
9,2
9
8,8
2018 2019 2020 2021 2022 2023
Poverty Rate 9,82 9,41 9,78 10,14 9,54 9,36

Source: BPS Source: World Bank Source: LPEM FEB UI & BAPPENAS

Log GDP per capita (PPP) vs poverty rate for Share of population classified as structurally poor,
economically insecure, and economically secure
ccc
peers ❑ The Government of Indonesia (GoI)
committed in 2020 to fully eradicating
extreme poverty by 2024.
❑ Poverty rate dropped from 18.8% in 2002 to
2.7% in 2019, continued to drop further to
1.5% in 2022.
❑ The share of the poor, defined as living below
a poverty line at US$ 3.20 2011 PPP, dropped
from 61% in 2002 to 20% in 2019 and
further to 15.7% in 2022.
❑ In 2019, 40 percent of Indonesians were
economically insecure
Source: World Bank Source: World Bank
Competitiveness

Indonesia performs well on drivers of factor

Determinants of competitiveness will vary accumulation relative to its peers though lag on
according to a country’s stage development efficiency drivers
(Z score)

Source: Adapted from Sala-I-Martin and Artadi (2004), Porter (1990), Source: World Bank calculation
and World Economic Forum’s Global Competitiveness Index
Competitiveness

Indonesia could reach HIC by 2045 if it can sustain

Indonesia maintains one of the most restrictive
its performance of the last 10 years
policies on international services trade
(y axis = number of years to reach HIC based on
(y axis = OECD STRI; x axis = log per capita GDP)
growth in GNI pc between 2009 and 2019)

Source: OECD Trade Restrictions Index, World Development Indicators Source: World Development Indicators
Selected Macroeconomic Indicator

Note: WB = World Bank