10 Years of International Development Economics Associates DEAs

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

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.

GDP Growth of Selected Countries 20, 0 15, 0 China India Indonesia 10, 0 5, 0 0, 0 -5, 0 -10, 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 World Advanced economies Euro area China India Indonesia 2011 *)China and India (January 2012) are from Government Release Source: IMF

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

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.

GDP Structure: Selected Countries (2009) 300 26 200 0 14 % 100 0 48 27 13 36 -22 -1 37 31 96 20 12 24 10 14 58 59 50 -25 0 -21 -2 200 21 68 11 40 13 55 -58 -75 0 -176 -100 -1 -200 China India Indonesia Malaysia Singapore Private consumption expenditures Government consumption expenditures Exports Of Goods And Services Imports Of Goods And Services Gross domestic capital formation Statistical discrepancy Thailand Source: ADB

GDP Structure: Selected Countries (2010) 80% 30 60% 48 40% 22 25 35 32 12 9 14 20% 57 57 34 211 21 13 48 0% -25 -26 71 97 24 11 38 -23 -79 -20% -183 26 13 54 -64 -40% -60% China India Indonesia Malaysia Singapore Statistical discrepancy Imports of goods and services Private consumption Government consumption Gross domestic capital formation Exports of goods & services Thailand Source: ADB

Sector’s Contribution To GDP Growth Sectors 2007 2008 2009 2010 2011 Agriculture, livestock, forestry and fishery 0. 5 0. 67 0. 54 0. 39 0. 47 Mining and quarrying 0. 2 0. 06 0. 37 0. 29 0. 14 Manufacturing industry 1. 3 1. 00 0. 58 1. 17 1. 52 Electricity, gas and water supply 0. 1 0. 08 0. 10 0. 04 0. 03 Construction 0. 5 0. 47 0. 44 0. 45 0. 41 Trade, hotel, and restaurant 1. 5 1. 19 0. 23 1. 47 1. 60 Transport and Communication 0. 9 1. 20 1. 23 1. 18 1. 04 Finance, real estate and business services 0. 77 0. 48 0. 54 0. 67 Sevices 0. 6 0. 58 0. 59 0. 57 0. 64 Gross Domestic Product 6. 3 6. 01 4. 58 6. 10 6. 52 Source: Central Bureau of Office

Manufacturing Sector: Sub-Sectors Growth Rate (Q 1 -Q 3 2011) Sub Sector Oil and gas manufacturing Petroleum Refinery Liquefied Natural Gas Non Oil-gas manufacturing Food, beverages and tobacco Growth Contribution -0. 05% 0. 04% -0. 10% 5. 98% 1. 96% (dominated by CPO) Textile, leather products and footwear 0. 75% Wood and other wood products Paper and printing products 0. 03% 0. 10% Fertilizers, chemical and rubber products 0. 51% Cement and non metalic quarrying products 0. 17% Iron and steel basic metal Transport equipment, machinery and apparatus Other manufacturing products Manufacturing industry 0. 20% 2. 23% (dominated by motor bike) 0. 03% 5. 93% Source: Central Bank of Indonesia

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.

…. 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.

Indonesia Top 10 Export Commodities: Raw Material No Products Billions USD Contribution 1 Coal; briquettes, ovoids & similar solid fuels manufactured from coal 18. 17 11. 5% 2 Petroleum gases 13. 67 8. 7% 3 Palm oil & its fraction 13. 47 8. 5% 4 Crude petroleum oils 10. 40 6. 6% 5 Natural rubber, balata, gutta-percha etc 7. 33 4. 6% 6 Copper ores and concentrates 6. 88 4. 4% 7 Coconut (copra), palm kernel/babassu oil & their fractions 2. 29 1. 5% 8 Refined copper and copper alloys, unwrought 2. 26 1. 4% 9 Petroleum oils, not crude 2. 19 1. 4% 10 Uncoated paper for writing, printing etc. 2. 07 1. 3% Total 10 products 78. 74 50% All products 157. 78 100. 0% Source: ITC

Malaysia Top 10 Export Commodities: Manufactured Product & Raw Material No Products Billions USD Contribution 1 Electronic integrated circuits and microassemblies 22. 81 11% 2 Petroleum gases 13. 37 7% 3 Palm oil & its fraction 12. 41 6% 4 Automatic data processing machines; optical reader, etc 11. 02 6% 5 Parts&acces of computers & office machines 10. 79 5% 6 Crude petroleum oils 9. 65 5% 7 Petroleum oils, not crude 7. 94 4% 8 Diodes/transistors&sim semiconductor devices; etc 7. 20 4% 9 Television receivers (incl video monitors & video projectors) 5. 28 3% 10 Natural rubber, balata, gutta-percha etc 2. 86 1% Total 10 products 103. 33 52% All products 198. 79 100% Source: ITC

China Top 10 Export Commodities: Manufactured Product No Products Billions USD Contribution 1 Automatic data processing machines; optical reader, etc 139. 06 9% 2 Electric app for line telephony, incl curr line system 105. 98 7% 3 Cruise ship, cargo ship, barges 35. 19 2% 4 Diodes/transistors&sim semiconductor devices; etc 32. 00 2% 5 Television receivers (incl video monitors & video projectors) 31. 89 2% 6 Parts&acces of computers & office machines 31. 31 2% 7 Electronic integrated circuits and microassemblies 29. 61 2% 8 Liquid crystal devices; lasers; other optical appl & instruments nes 27. 85 2% 9 Printing machinery; machines for uses ancillary to printing 23. 58 1% 10 Electric transformer, static converter (for example rectifiers) 20. 19 1% Total 10 products 476. 67 30% All products 1577. 76 100% Source: ITC

India Top 10 Export Commodities: Manufactured Product No Products Billions USD Contribution 1 Petroleum oils, not crude 36. 64 17% 2 Diamonds, not mounted or set 22. 27 10% 3 Articles of jewellery&parts thereof 7. 83 4% 4 Iron ores & concentrates; including roasted iron pyrites 6. 15 3% 5 Medicament mixtures (not 3002, 3005, 3006), put in dosage 5. 15 2% 6 Refined copper and copper alloys, unwrought 4. 63 2% 7 Cars (incl. station wagon) 4. 51 2% 8 Commodities not elsewhere specified 4. 23 2% 9 Cotton, not carded or combed 2. 97 1% 10 Cotton yarn (not sewing thread) 85% or more cotton, not retail 2. 76 1% Total 10 products 97. 14 44% All products 220. 41 100% Source: ITC

Primary Commodities: World Price Fluctuation 300 250 200 Metal index 150 Industrial Materials index Energy index 100 Food index Agricultural Raw Material Index 50 0 янв- июл янв- июл 05 -05 06 -06 07 -07 08 -08 09 -09 10 -10 11 -11 Source: IMF

Indonesian Exports: By Country of Destinations (2007 -2011) Australia dan Oceania Lainnya Asia dan Timur 3% 9% Tengah lainnya 4% ASEAN 20% India 6% Korea Selatan 7% Jepang 18% RRC 10% Amerika 11% Eropa 12% Source: Central Bureau of Office

Indonesia – China Export Imports 30, 0 25, 0 23, 9 20, 7 Billions US$ 20, 0 15, 3 15, 0 10, 0 15, 6 13, 8 10, 0 6, 8 6, 7 8, 7 7, 8 11, 9 20, 5 Export Import 11, 6 9, 9 5, 0 0, 0 2005 2006 2007 2008 2009 2010 2011 Source: Central Bureau of Office

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.

ASIAN Local Currency Bond Returns Indices 700 Index, Dec 2000=100 600 Indonesia 500 Philippines Korea 400 Thailand Hongkong 300 Malaysia Singapore 200 China 100 0 2002 2004 2006 2008 2010 Source: ADB

Local Government Bond Yield (10 Year) Vietnam 12, 41 Indonesia 6, 12 Philippines 5, 16 Korea 3, 79 Malaysia 3, 59 China 3, 42 Thailand 3, 21 USA 1, 86 Singapore 1, 57 Hongkong Japan 1, 43 0, 95 0, 00 2, 00 * per January 16, 2012 4, 00 6, 00 8, 00 10, 00 12, 00 14, 00 Source: ADB

Selected Cases of Controlling Measures on Capital Inflows Instrument Recent Examples • Brazil: IOF tax raised from 4% to 6% Tax Measures Minimum Investment Periods Quantitative Limits • 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 Indonesia: 1 -month minimum holding period for CB money market certificates • 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

Central Bank of Indonesia’s Policy: Tightening Monetary Management No 1 2 3 4 Policy Widening Interest Rate of Over Night Inter-Bank Money Market Amendement of conditions for Net Exchange Balance (Posisi Devisa Netto/PDN). Applying one month holding period of Central Bank Certificate (Sertifikat Bank Indonesia /SBI). Additional monetary instrument of on-securities term deposit Effective Date June 17, 2010 July 1 , 2010 July 7, 2010 SBI 9 mo: August 2010, SBI 12 : Sept 2010 5 Issuance of 9 and 12 month SBI 6 Application of 3 parties repurchase mechanism (repurchase) of government bonds 2011 Removal of 1, 6 and 9 month (Central Bank Certificate/SBI) 1 months (Jul. 2010), 3 Months (Nov. 2010), 6 Months (Feb 2011) 7 Source: Central Bank

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 foreign financing.

High Interest Rate of BI: Managing Inflation 14, 0% 12, 0% 10, 0% 8, 0% Inflasi (yoy) BI Rate 6, 0% 4, 0% 2, 0% 0, 0% Jan-08 Jul Jan-09 Jul Jan-10 Jul Jan-11 Jul Source: Central Bank of Indonesia

Lending Interest Rate: Indonesia’s Higher than Other Countries 20 18 16 14 Indonesia % 12 Philiphina China 10 Malaysia 8 Singapore 6 Thailand 4 2 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 *percent per annum, period averages Source: ADB

Domestic credit by banking sector: Indonesia’s Smallest (% of GDP), 2010 160 146, 4 135, 5 140 132, 2 120 % 100 85, 7 80 71, 1 60 49, 2 36, 5 40 20 0 China Thailand Malaysia Singapore India Philippines Indonesia Source: World Bank

Corporate Financial Source: Abandoned Banking Loan Foreign Loan 18% Others 14% Public Offering 6% Banking Loan 16% Internal Fund 46% Source: Central Bank of Indonesia

Corporate Financial Source: Increasing of Foreign Loan 100 60 40 20 11 20 3 - Q 20 10 09 20 08 20 07 20 06 20 05 20 04 20 03 20 02 20 20 01 00 20 99 19 Billions of USD 80 Source : Central Bank of Indonesia, 2012

…. Continued 3. Managing macroeconomic stability has also been done by liberalizing financial sectors and encouraging huge shortterm 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)

Balance of Payment 15 000 Transaksi Berjalan Current Account Transaksi Modal & Finansial Capital and Finnacial Account 10 000 Juta US$ 5 000 - -5 000 -10 000 Q 1 -07 Q 4 -07 Q 3 -08 Q 2 -09 Q 1 -10 Q 4 -10 Q 3 -11 Source: Central Bank of Indonesia

Asian Stock Market Index: Indonesia Grew Higher 250 200 IHSG, Indonesia 150 Hanseng, Hongkong KLSE, Malaysia Nikkei, Japan 100 STI. Singapore Kospi, Korea 50 0 янв-07 июн-07 ноя-07 апр-08 сен-08 фев-09 июл-09 дек-09 май-10 окт-10 мар-11 авг-11

Portfolio Investment: The Level of Foreign Ownership (in Trillion Rupiah) Year Central Bank Certificate % Government Obligation % Stock % Total Dec-08 8. 4 10 87. 4 17 452. 2 60 548 Dec-09 44. 18 5 108 19 783. 1 61 935 Dec-10 54. 93 27 195. 76 31 1, 184 63 1435 Dec-11 21. 34 15 220. 79 31 1, 211 60 1447 Source: Central Bank of Indonesia, MOF

Foreign Exchange Reserve 140 2011: US$ 110 billions 6. 3 months of import 120 Miliar US$ 100 80 60 40 1998: US$ 24 billions 6. 3 months of import 20 0 Jan-07 Jul. Jan-08 Jul. Jan-09 Jul. Jan-10 Jul Jan-11 Jul Source: Central Bank of Indonesia

Foreign Exchange Reserve of Selected Countries – as per Nov. 2011 China 3180 Japan 1305 Billions of USD Brazil 352 308 India Singapore 241 Malaysia 135 Indonesia 111 Philippines 76 0 500 1000 1500 2000 2500 3000 3500 Source: IMF

Asian Exchange Rate: Aprecation of Indonesian Rupiah 150 130 Index, Jan 2007=100 110 Rupiah Ringgit Malaysia 90 Bath Thailand Dollar Singapore Yen Japan 70 Yuan China 50 30 янв-07 июн-07 ноя-07 апр-08 сен-08 фев-09 июл-09 дек-09 май-10 окт-10 мар-11 авг-11 Source: IMF

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

FDI Realization by Sector 18 000 16 000 14 000 Millions USD 12 000 10 000 Other Primary Sectors Motor Vehicles & Other Transport Other Industry Metal, Machinery & Electronic Industry Food Crops & Plantation Trade & Repair Chemical and Pharmaceutical Industry Food Industry Real Estate, Ind. Estate & Business Activities Electricity, Gas & Water Supply Other Services Mining Transport, Storage & Communication 8 000 6 000 4 000 2 000 0 2006 2007 2008 2009 2010 Source: Investment Board

…. 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 4 th). 7. Other FDI goes to sectors which are related to natural resources, like mining, gas and plantation.

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. ).

Global Competitiveness Index 2011 -2012: From 44 th to 46 th as a Result of Policy and Strategy Choices No 1 2 3 4 5 6 7 Indicator Rank 2011 Rank 2010 Change Basic Requirements Category 53 60 7 Institution Infrastructure Macroeconomy Health adn Basic Education 71 76 23 64 61 82 35 62 -10 6 12 -2 Efficiency Support Category 56 51 -5 High education Market efficiency of goods Labour market efficiency 69 67 94 66 49 84 -3 -18 -10 69 94 15 41 62 91 15 37 -7 -3 0 -4 45 36 37 36 -8 0 8 Financial market 9 Technology readiness 10 Market Magnitude Innovation and Business Sophistication Category 11 Business Sophistication 12 Innovation

Factors of Competitiveness Downgrade: Determinant Aspects of Investment Competitiveness No Level of Change Indicators 4 Down 1 -5 level (22 indicators) Among others: Investors Protection Power (-3), Employment Rigidness (-4), etc 5 Down 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)

Doing Business Level in Asia (2011) Economy Dealing Ease of with Doing Starting a Getting Registering Getting Protecting Constructi Business Electricity Property Credit Investors on Rank Permits Paying Taxes Trading Across Borders Enforcing Resolving Contracts Insolvency Singapore 1 1 2 3 1 2 1 Hong Kong SAR, China 2 2 10 2 2 1 3 Thailand 3 8 4 4 5 5 4 18 3 4 6 Malaysia 4 6 19 13 11 1 3 9 5 6 5 Taiwan, China 5 3 16 1 6 5 12 13 4 14 2 China 13 20 24 17 7 5 15 20 9 3 9 Vietnam 14 13 10 19 8 4 21 24 11 5 16 Indonesia 19 21 12 23 15 16 7 22 18 Philippines 20 23 17 11 19 16 18 23 8 17 20 Cambodia 21 24 23 18 17 14 12 10 20 18 19 Source: World Bank

Higher Inflation are Facing by the Lower Income: Cummulative Inflation 2005 -2010 Bahan Raw Makanan Food 85% Makanan jadi, Beverages, Minuman, Cigarette, Rokok dan. . . Processed food, etc 50% Sandang Clothing 47% Umum General 42% Pendidikan, Rekreasi dan Olah Raga Education, Recreation and Sport 39% Housing, Water, Electricity, Gas and. Bakar Fuel Perumahan, Air, Listrik, Gas dan Bahan 32% Health Kesehatan Transport. , Communication, Services Transpor, Komunikasi, and dan. Financial Jasa Keuangan 28% 9% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% Source: BPS, processed

Economic Growth and Poverty: Ineffective in Eradicating Poverty Upper Middle (US$ 10 -20) Middle (US$ 4 -10) 9. 7% Lower Middle (US$ 2 -4) 29. 9% 1. 0% Rich (>US$ 20) 0. 2% Upper Rich (>US$ 20) Middle (US$ 10 -20) 4% 19% Poor (< US$ 2 ) 7% Lower Middle (US$ 2 -4) 23% Poor (< US$ 2 ) 59. 2% Middle (US$ 4 -10) 47% 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 Source: ADB

Middle Class in Indonesian vs. China: Nurturing New Middle Class in Villages Rich (>US$ 20) Cities Villages . Cities Rich (>US$ 20) Villages Upper Middle (US$ 10 -20) Upper middle (US$ 10 -20) Middle (US$ 410) Lower Middle (US$ 2 -4) Poor (< US$ 2 ) 0 20 40 60 80 100 Million people INDONESIA (2009) middle and upper middle classes people only in cities 0 50 100 150 200 250 300 350 Million people CHINA (2007) middle and upper middle classes are more in villages Source: ADB

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 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.