1. Ndiamé Diop Lead Economist (Indonesia) Indonesia Banking Conference December 11, 2014 Recent developments and economic outlook for 2015 World Bank IEQ Delivering change

2. Introduction: delivering change Recent economic developments: a challenging backdrop 2 Way out of subdued economic growth? Conclusions Near-term economic outlook: relatively subdued

3. 3 Global economy still expected to pick-up, but at a slower pace than previously expected Source: World bank EAP Update, October 2014; World Bank staff calculations Difference between April 2014 and October 2014 World Bank growth projections, percentage points

4. 4 Too soon to tell if recent oil price decline will provide decisive support to trade balance Note: Major commodities are coal, copper, LNG, palm oil, petroleum products (including crude oil) and rubber Source: World Bank Commodity Prices and staff calculations (US Dollar price indices, 2008=100)

5. External balance still in focus 5 Contributions to export value growth yoy, percentage points) Source: BI; World Bank staff calculations Balance of payments main account balances, USD billion

6. Domestic and external financing conditions have tightened in recent months Quarterly net increase in private non-financial sector credit, IDR trillion 6 Credit growth yoy, percent Source: BI; World Bank staff calculations

7. Some banks have been facing funding constraints and a deterioration in asset quality Bank profitability and asset quality, percent 7 Deposit growth yoy and time deposit interest rate, percent Source: BI; World Bank staff calculations

8. Weaker investment and exports drive the continued economic slowdown 8 Real annual growth rate, percent Source: BPS; World Bank staff calculations Annual growth, percent Source: World Bank

9. Introduction: delivering change Recent economic developments: a challenging backdrop Near-term economic outlook: relatively subdued 9 Delivering change: 3 focus areas Conclusions

10. Is the investment cycle turning around? 10 Contributions to import growth yoy, percent Source: BPS; World Bank staff calculations Source: BI; World Bank staff calculations

11. Ambitious infrastructure plans: crucial for long- term growth but implementation challenges 11 Note: current IDR Source: MoF Budget, revised budget and actual central government capex, IDR trillion Monthly central government capex, IDR trillion (bars, LHS) and percent of total (lines, RHS) Note: current IDR Source: MoF

12. Inflation to increase following the subsidized fuel price increase, but only temporarily 12 Quarterly and average annual inflation, percent yoy Note: Dark bars indicate projected average annual inflation Source: BPS; World Bank staff calculations 6.4 7.5 5.2

13. The near-term economic outlook is expected to remain fairly subdued 13 Source: MoF; BPS; BI; World Bank projections December IEQ Revisions (percentage change, unless otherwise indicated) 20132014p2015p2016p20142015 Real GDP5.85.15.25.5-0.1-0.4 Consumer prices6.4 7.55.20.62.6 Current account balance (% of GDP)-3.3-3.2-2.8 -0.3-0.4 Fiscal balance (% of GDP)-2.3 -2.0-0.5-

14. Introduction: delivering change Recent economic developments: a challenging backdrop Way out of subdued economic growth? 14 Near-term economic outlook: relatively subdued Conclusions

15. Main risks to outlook: external environment and domestic policy agenda and execution 15 External Domestic Positive -Lower than forecasted international oil prices -Reform agenda delivers early success; investment and growth rise more quickly than expected Negative -Slower than currently projected global recovery -Weaker than base case commodity price trajectory; -Tighter than expected external financing conditions -Limited reform and implementation (capital expenditure execution), and impact on growth is slower to materialize

16. Greater export performance… 16 Source: BIS; BPS; World Bank staff calculations (Quarterly manufacturing exports, USD billion; Real effective exchange rate (REER), 2010=100) Raising the game in tourism CountryNumber of tourist arrivals (million) Tourism receipts (Billion US$) Indonesia 8.89.3 Singapore 1119 Malaysia 25.721 Thailand 26.542 Sustaining manufacturing export

17. …more FDI… Source: BI; World Bank staff calculationsSource: BI; WB GEP January 2014; WB staff calculations Some sources of funding are more stable than others… (quarterly inflows, USD bn, Q3 2008 – Q3 2014 ) …and the capital flow composition determines vulnerability to global shocks (response to tightening of global financial conditions, USD bn) 17

18. …to reduce tightening conditions 18 Source: CEIC; JP Morgan; World Bank staff calculations Financial conditions index and the variables driving it, growth yoy, percent Tighter financial conditions hand in hand with growth moderation (real GDP growth yoy, percent; FCI index) Source: CEIC; JP Morgan; World Bank staff calculations

19. Conclusions Optimistic time for Indonesia But data show challenging economic realities: Slower investment, weak exports The bold steps of the kind the government has signaled in its first few months are very needed, to support growth and poverty reduction It will take implementation, and potentially some time, for the benefits to flow through