I NDONESI A ECONOMI C QUARTERLY Ocea ns of Opportu nity June 2019 Preface The Indonesia Economic Quarterly (IEQ) has two main aims. First, it reports on the key developments in Indonesia’s economy over the past three months, and places these in a longer-term and global context. Based on these developments and on policy changes over the period, the IEQ regularly updates the outlook for Indonesia’s economy and social welfare. Second, the IEQ provides a more in-depth examination of selected economic and policy issues and an analysis of Indonesia’s medium-term development challenges. It is intended for a wide audience, including policy makers, business leaders, financial market participants, and the community of analysts and professionals engaged in Indonesia’s evolving economy. The IEQ is a product of the World Bank’s Jakarta office and receives editorial and strategic guidance from an editorial board chaired by Rodrigo A. Chaves, Country Director for Indonesia. The report is prepared by the Macroeconomics, Trade and Investment (MTI) Global Practice team, under the guidance of Ndiame Diop (Practice Manager) and Frederico Gil Sander (Lead Economist). Led by Derek H. C. Chen (Senior Economist and lead author), the core project team comprises Abigail, Arsianti, Dwi Endah Abriningrum, Magda Adriani, Francis Addeah Darko, Indira Maulani Hapsari, Jaffar Al-Rikabi, Ratih Dwi Rahmadanti, Maria Monica Wihardja, and Pui Shen Yoong. Administrative support is provided by Deviana Djalil. Dissemination is organized by Nugroho Sunjoyo, Jerry Kurniawan, and GB Surya Ningnagara under the guidance of Lestari Boediono Qureshi. This edition of the IEQ includes contributions from Indira Maulani Hapsari (Part A.1 and A.3), Jaffar Al-Rikabi (Box A.1), Khresna Adi Satriyo (Box A.2), Pui Shen Yoong assisted by Ratih Dwi Rahmadanti (Part A.2 and A.5), Magda Adriani (Part A.4), Dwi Endah Abriningrum (Part A.6), Maria Monica Wihardja (Part A.7), Francis Addeah Darko (Part A.8), Derek H.C. Chen (Part A.9), and David Kaczan, Andrew Harvey, Anjali Acharya, Frank van Woerden, Bertine Kamphuis, Nikola Kojucharov, John Perrottet, Andhyta F. Utami, Puni Anjungsari, Dinesh Aryal and Ann Jeannette Glauber (Part B, Box B.1, Box B.2, Box B.3 and Box B.4), and Magda Adriani assisted by Abigail, Mercoledi Nikman Nasiir and Ratih Dwi Rahmadanti (Appendix). The report also benefited from discussions with, and in-depth comments from Ekaterina T. Vashakmadze (Senior Economist, GMTPG) and Andrew D. Mason (Lead Economist, EAPCE), Ergys Islamaj (Senior Economist, EAPCE) and Francesca de Nicola (Economist, EAPCE) and Janani Kandhadai (editorial assistant). This report is a product of the staff of the International Bank for Reconstruction and Development/the World Bank, supported by funding from the Australian government under the Support for Enhanced Macroeconomic and Fiscal Policy Analysis (SEMEFPA) program. The findings, interpretations, and conclusions expressed in this report do not necessarily reflect the views of the Executive Directors of the World Bank or the governments they represent, or the Australian government. The World Bank does not guarantee the accuracy of the data included in this work. The data cut-off date for this report was June 17, 2019. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of the World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. The photographs on the cover and part B are copyright of Syarina Hasibuan and on Part A copyright of Arsianti. All rights reserved. This report is available for download in English and Indonesian via: worldbank.org/ieq. Previous report editions: • December 2018: Strengthening competitiveness • September 2018: Urbanization for All • June 2018: Learning more, growing faster To receive the IEQ and related publications by email, please email ddjalil@worldbank.org. For questions and comments, please email dchen@worldbank.org. For information about the World Bank and its activities in Indonesia, please visit: www.worldbank.org/id @BankDunia #IEQBankDunia BankDunia instagram.com/worldbank www.linkedin.com/company/the-world-bank Abbreviations APBD Anggaran Pendapatan Belanja Daerah MAC Marine and Coastal APBN Anggaran Pendapatan Belanja Negara MCS Monitoring, Control, and Surveillance APEC Asia – Pacific Economic Cooperation BI Bank Indonesia MoF Ministry of Finance (Kemenkeu) BLU Badan Layanan Umum MMAF Ministry of Marine Affairs and Fisheries BLUD Badan Layanan Umum Daerah MTP Major Trading Partners BPNT Bantuan Pangan Non Tunai Nesparnas Neraca Satelit Pariwisata Nasional BPS Badan Pusat Statistik NPISH Non-Profit Institution Serving Households CAD Current Account Deficit NPL Non-Performing Loan CAR Capital Adequacy Ratio OECD Organization for Economic Cooperation Development CEA California Environmental Associates O&G Oil & Gas CLIA Cruise Lines International Association PBI Penerima Bantuan Iuran EAP East Asia and the Pacific PIP Program Indonesia Pintar EMBI Emerging Market Bond Index PKH Program Keluarga Harapan EMCI Emerging Market Currency Index PMI Purchasing Manager Index EMDE Emerging Market Developing Economics PNBP Penerimaan Negara Bukan Pajak EPR Extended Producer Responsibility PNG Papua New Guinea FAO Food and Agriculture Organization RHS Right Hand Side FDI Foreign Direct Investment RPJMN Rencana Pembangunan Jangka Menengah Nasional FMP Fisheries Management Plans SBI Sertifikat Bank Indonesia FX Foreign Exchange Sakernas Survei Angkatan Kerja Nasional GDP Gross Domestic Product SEAFDEC Southeast Asian Fisheries Development Center GOI Government of Indonesia S&P Standard and Poor’s GVA Gross Value Added SOEs State-owned Enterprises HBA Harga Batubara Acuan STO Sustainable Tourism Observatories ICRI International Coral Reef Initiative SUN Surat Utang Negara IMF International Monetary Fund Susenas Survei Sosial Ekonomi Nasional IPCC International Panel on Climate Change ToT Terms of Trade ISU International Sustainability Unit TPS Transfer Points IUCN International Union for Conservation of UNESCO United Nations Educational Scientific Cultural Nature Organization IUU Illegal Unregulated and Unreported UNWTO United Nation World Tourism Organization JKN Jaminan Kesehatan Nasional UNWTO UNWTO International Network Sustainable INSTO Tourism Observation KNP Komodo National Park USD U.S. Dollar LFPR Labor Force Participation Rate VAT Value Added Tax LGST Luxury Goods Sales Taxes LHS Left Hand Side LKPP Lembaga Kebijakan Pengadaan Baran/Jasa Pemerintah LNG Liquified Natural Gas Table of Contents PREFACE ................................................................................................................................... I ABBREVIATIONS ..................................................................................................................... II TABLE OF CONTENTS .......................................................................................................... III EXECUTIVE SUMMARY: OCEANS OF OPPORTUNITY .......................................................... 1 A. ECONOMIC AND FISCAL UPDATE ..................................................................................... 4 1. Growth was stable despite weaker investment, but missing expectations ................................................................. 4 2. Prices of most key commodities declined compared to a year ago .......................................................................... 11 3. The current account deficit improved as investment cooled .................................................................................... 13 4. Headline inflation continued to ease due to declining food price inflation ............................................................. 17 5. Macro-financial conditions remained stable in Q1 ................................................................................................... 18 6. Weaker revenues, strong spending, in the lead up to Indonesia’s 2019 elections ..................................................... 21 7. Labor market conditions remain buoyant ............................................................................................................... 25 8. Poverty and inequality continue to decline in Indonesia ......................................................................................... 27 9. Economic growth outlook and risks ........................................................................................................................ 30 B. OCEANS OF OPPORTUNITY: REFORMS FOR A SUSTAINABLE BLUE ECONOMY IN INDONESIA ............................................................................................................................. 36 1. Indonesia can get more from its fisheries sector through improved management .................................................. 37 2. To be a leading tourism destination, Indonesia must ensure that its marine and coastal assets are managed sustainably ............................................................................................................................................................... 41 3. Marine plastic debris represents a significant risk to Indonesia’s ocean sectors, including fisheries and tourism . 46 4. Close ecological and economic links between ocean sectors mean that the reforms in each sector can deliver benefits more broadly .............................................................................................................................................. 51 BIBLIOGRAPHY ...................................................................................................................... 53 APPENDIX: A SNAPSHOT OF INDONESIAN ECONOMIC INDICATORS ........................... 59 FIGURES Figure ES.1: Weaker fixed investment and inventory drawdowns dragged on growth in Q1........................................ 3 Figure ES.2: Private consumption was robust, supported by stronger spending by non-profit institutions (political parties) ...................................................................................................................................................................... 3 Figure ES.3: The nominal current account deficit narrowed in Q1, in line with the slowdown in investment ............. 3 Figure ES.4: Portfolio flows swung to net outflows in May on renewed trade tensions ................................................ 3 Figure ES.5: Easing food price inflation weighed on headline inflation in Q1 2019 ..................................................... 3 Figure ES.6: Revenue collections slowed as VAT collections contracted ..................................................................... 3 Figure A.1: Weaker investment and inventory destocking dragged growth slightly ..................................................... 5 Figure A.2: Investment growth softened due to weakening machine and equipment investment and contraction in vehicle and other equipment investment ................................................................................................................. 5 Figure A.3: Private consumption was robust, supported by stronger spending from political parties.......................... 6 Figure A.4: Growth in government consumption was mostly driven by social spending ............................................. 6 Figure A.5: In Q1, nominal imports growth softened in many emerging countries ...................................................... 7 Figure A.6: Real exports contracted for the first time in ten quarters…........................................................................ 9 Figure A.7: …and a similar trend was seen in real imports ........................................................................................... 9 Figure A.8: Trade, hotels, and restaurants contributed the most to growth ................................................................. 11 Figure A.9: Global trade growth decelerated in Q1….................................................................................................... 7 Figure A.10: …as industrial production growth softened .............................................................................................. 7 Figure A.11: Composite PMI outcomes show a mixed picture, but May data reflects growing concerns .................... 8 Figure A.12: After ending 2018 with wild volatility swings, markets were calm in Q1 2019, but volatility is returning with renewed trade tensions ..................................................................................................................................... 8 Figure A.13: Global commodity indices fell in Q4 2018 and Q1 2019, but are largely stabilizing in Q2......................... 8 Figure A.14: Current Account Balance, Annual ............................................................................................................ 10 Figure A.15: Palm Oil, Volumes ................................................................................................................................... 10 Figure A.16: …except for LNG, which rose, and rubber, which stabilized .................................................................. 12 Figure A.17: Export volumes of coal, palm oil, and base metals rose… ....................................................................... 12 Figure A.18: …but these increases were insufficient to offset price declines ............................................................... 12 Figure A.19: Current account deficit narrowed in Q1, in line with the slowdown in investment ................................. 13 Figure A.20: Goods exports deteriorated further in all categories… ............................................................................ 15 Figure A.21: ...and goods imports contracted for the first time in ten quarters. ........................................................... 15 Figure A.20: The financial account slipped as net portfolio investment decreased in Q1… ........................................ 16 Figure A.21: …and swung to outflows in May on renewed trade tensions ................................................................... 16 Figure A.24: Foreign direct investment returned to its average for the first three quarters of 2018… .......................... 16 Figure A.25: Easing food price inflation weighed on headline inflation in Q1 2019 ..................................................... 17 Figure A.26: Key domestic food prices ticked up in May on account of upcoming Ramadan .................................... 17 Figure A.27: The Rupiah continued to recoup last year’s losses against the U.S. Dollar… ......................................... 18 Figure A.28: …and appreciated in real effective terms................................................................................................. 18 Figure A.29: Bond yields fell in Q1, but the spread vis-à-vis the U.S. Treasury yield remained stable ........................ 19 Figure A.30: Yields on 10-year sovereign bonds from Indonesia, Malaysia, and Vietnam fell in Q1 ........................... 19 Figure A.31: Overall lending rates remain low… ......................................................................................................... 20 Figure A.32: …while average credit growth plateaued ................................................................................................ 20 Figure A.33: Banking sector liquidity has stabilized, but remains sluggish ............................................................... 20 Figure A.34: Banks remain well-capitalized and the average NPL ratio is low........................................................... 20 Figure A.35: Central Government debt-to-GDP increased slightly due to rising interest rates and currency depreciation ............................................................................................................................................................ 22 Figure A.36: Revenue collections slowed as VAT collections contracted ................................................................... 22 Figure A.37: Government expenditures growth was mainly driven by higher social spending................................... 24 Figure A.38: Larger disbursement of the social budget occurred................................................................................ 24 Figure A.39: Government debt stock position end-March .......................................................................................... 24 Figure A.40: Employment rate reached a record high and the unemployment rate was a record low in February 2019 ................................................................................................................................................................................ 25 Figure A.41: Most industries saw nominal wage increases this year ........................................................................... 26 Figure A.42: Poverty continues to fall .......................................................................................................................... 27 Figure A.43: Vulnerability is still high, but the middle class is expanding ................................................................. 27 Figure A.44: Although poverty declined nationally, the reduction was not uniform across the provinces.................. 28 Figure A.45: Inequality continued to fall ..................................................................................................................... 29 Figure A.46: The fall in inequality was not uniform across provinces ......................................................................... 29 Figure A.47: Indonesia’s terms of trade are projected to deteriorate in 2019… ............................................................ 31 Figure A.48: The current account deficit is expected to narrow in 2019 and 2020 as import-intensive investment eases ....................................................................................................................................................................... 32 Figure A.49: Headline inflation expected to ease as food prices moderated ............................................................... 32 Figure A.50: The World Bank projects a fiscal deficit of 2.1 percent of GDP in 2019 .................................................. 33 Figure B.1: Indonesia is the world’s second largest marine capture fish producing nation ........................................ 37 Figure B.2: Indonesia’s fishery export earnings are ranked 14th globally .................................................................... 37 Figure B.3: Bali and Lombok receive around half of Indonesia’s foreign visitors ...................................................... 43 Figure B.4: The proportion of visitors encountering reef damage or marine debris at Komodo National Park has increased................................................................................................................................................................. 45 Figure B.5: Number of visitors and revenue collected in Raja Ampat Conservation Area .......................................... 45 Figure B.6: Despite having one of the lowest per-capita rates of waste generation amongst the world’s top ten marine debris producers (A), a high proportion of Indonesia’s total waste is classified as “mismanaged” (B) which along with its coastal geography, contributes to Indonesia’s position as the world’s second largest producer of marine debris (C) ................................................................................................................................ 46 Figure B.7: Rates of waste mismanagement vary considerably between Indonesia’s cities ....................................... 47 Figure B.8: Composition of waste found in waterways in 15 cities.............................................................................. 47 APPENDIX FIGURES Appendix Figure 1: Real GDP growth ......................................................................................................................... 59 Appendix Figure 2: Contribution to GDP growth (expenditure) ................................................................................ 59 Appendix Figure 3: Contribution to GDP growth (production) .................................................................................. 59 Appendix Figure 4: Motor cycle and motor vehicle sales ............................................................................................ 59 Appendix Figure 5: Consumer indicators .................................................................................................................... 59 Appendix Figure 6: Industrial production indicators and manufacturing PMI .......................................................... 59 Appendix Figure 7: Balance of payments .................................................................................................................... 60 Appendix Figure 8: BOP: Current account ................................................................................................................. 60 Appendix Figure 9: Exports of goods .......................................................................................................................... 60 Appendix Figure 10: Imports of goods ........................................................................................................................ 60 Appendix Figure 11: Reserves and capital flows .......................................................................................................... 60 Appendix Figure 12: CPI inflation ............................................................................................................................... 60 Appendix Figure 13: Monthly breakdown of CPI inflation .......................................................................................... 61 Appendix Figure 14: CPI inflation comparison across countries ................................................................................. 61 Appendix Figure 15: Domestic and international rice prices ....................................................................................... 61 Appendix Figure 16: Poverty and unemployment rates ................................................................................................ 61 Appendix Figure 17: Regional equity indices ............................................................................................................... 61 Appendix Figure 18: Spot exchange rates of selected currencies against USD ............................................................ 61 Appendix Figure 19: 5-year local currency government bond yields ........................................................................... 62 Appendix Figure 20: Sovereign USD bond EMBIG spread ........................................................................................ 62 Appendix Figure 21: Commercial and rural credit and deposit growth....................................................................... 62 Appendix Figure 22: Banking sector indicators .......................................................................................................... 62 Appendix Figure 23: Government debt ....................................................................................................................... 62 Appendix Figure 24: External debt ............................................................................................................................. 62 TABLES Table ES.1: Real GDP growth is projected to cool to 5.1 percent in 2019 with easing investment growth and modest support from the external sector ............................................................................................................................... 2 Table A.1: Prices of Indonesia’s key commodities were generally lower than a year ago ............................................ 12 Table A.2: Indonesia’s Balance of Payments (BOP) .................................................................................................... 14 Table A.3: The wholesale and retail trade, accommodation and food and beverage, and construction industries accounted for 95 percent of job creation in February 2019 ..................................................................................... 25 Table A.4: The fall in inequality at the national level was driven by increases in the consumption shares of the Bottom and Middle 40 percent ............................................................................................................................... 29 Table A.5: Key economic indicators ............................................................................................................................ 30 Table A.6: …as prices of all its major commodities except rubber are expected to ease ............................................. 31 Table A.7: World Bank fiscal budget projections ........................................................................................................ 33 APPENDIX TABLES Appendix Table 1: Budget outcomes .......................................................................................................................... 63 Appendix Table 2: Balance of payments ..................................................................................................................... 63 Appendix Table 3: Indonesia’s historical macroeconomic indicators at a glance ...................................................... 64 Appendix Table 4: Indonesia’s development indicators at a glance ........................................................................... 65 BOXES Box A.1: After a challenging 2018, the global economy showed further weakening this year ....................................... 7 Box A.2: Government policies on managing imports .................................................................................................... 9 Box B.1: Aquaculture: A key driver of the Blue Economy ............................................................................................ 41 Box B.2: Komodo National Park ................................................................................................................................. 45 Box B.3: Technology and innovation for customized solutions .................................................................................. 49 Box B.4: Single-use plastic bans .................................................................................................................................. 50 Oceans of Opportunity Indonesia Economic Quarterly Executive Summary: Oceans of Opportunity In 2018, Indonesia’s coordinated and prudent in mid-2018 that saw larger capital outflows from macroeconomic policy framework underpinned steady emerging markets (including Indonesia) than during the economic growth, amid global volatility and several taper tantrum of 2013. With the U.S. Federal Reserve natural disasters. Real GDP growth strengthened to 5.2 turning more dovish, Indonesia saw portfolio inflows percent yoy in 2018 from 5.1 percent in 2017. Growth persist into Q1 (Figure ES.4), which supported the decelerated only slightly in Q1 2019, to 5.1 percent yoy. Rupiah and government bonds. However, with the Quarterly GDP growth has been broadly stable, recent escalation in trade tensions, emerging market remaining within a narrow range of 4.9-5.3 percent yoy currencies are again under pressure as investors for 14 consecutive quarters. rebalance their portfolios toward traditional safe-haven assets. In May, portfolio outflows led the Rupiah to The drivers of growth shifted in Q4 2018 and Q1 2019, depreciate and the yield on benchmark 10-year as investment growth decelerated from multi-year sovereign bonds to widen. highs, and both private and government consumption picked up. Investment slowed because of inventory In line with a relatively stable exchange rate, subdued destocking and easing fixed investment growth due to oil prices, and stable domestic energy prices, headline delays in new public projects in response to current inflation fell to an average of 2.6 percent in Q1, the account concerns, political uncertainty ahead of the lowest since Q4 2009 (Figure ES.5). Bank Indonesia general elections, and deteriorating prices of the (BI) kept the benchmark policy rate at 6 percent given country’s key commodity exports and a maturing the need to ensure stable capital flows but took investment cycle in the mining sector (Figure ES.1). On accommodative measures to stimulate domestic the other hand, growth of private and government demand. consumption gained on stronger spending by political parties and civil servant bonuses (Figure ES.2). Private The Government’s fiscal position complemented consumption was also supported by low inflation and a prudent monetary and exchange rate policies to ensure buoyant labor market. stability. Despite the fiscal impact of natural disasters and the impending general elections, the fiscal deficit The current account deficit (CAD) widened in 2018 but came in at 1.8 percent of GDP for 2018, which reduced showed signs of improvement in early 2019. The CAD financing needs and pressures on bond markets. widened to 3.0 percent of GDP in 2018, the largest Revenues increased by 16.6 percent yoy in 2018, in part since 2014, and reached 3.1 percent of GDP for the due to tax administration and policy reforms. As a four quarters through Q1 2019. Despite this widening result, the tax‐to‐GDP 1 ratio rose to 10.2 percent, after as a share of GDP, a sharper decline in imports reduced five years of yoy declines. On the expenditure side, the CAD to USD 7.0 billion in Q1 from USD 9.2 billion government spending rose by 10.3 percent yoy, with in Q4 last year (Figure ES.3), suggesting a moderating larger social, material, and personnel spending. trend. This recent improvement was driven by a turnaround in the goods trade balance from a deficit in Revenue growth slowed in early 2019 while Q4 2018 to a surplus in Q1, as imports fell more than expenditures remained robust. Growth of revenue exports. The overall balance of payments recorded a collections softened significantly, as value-added tax surplus in Q1. Consequently, Bank Indonesia’s (VAT) collections contracted, and the growth of international reserves rose to USD 124.5 billion by the commodity-linked revenues and of non-oil and gas end of March 2019, sufficient to cover 6.8 months of income taxes slowed (Figure ES.6). Meanwhile, year-to- imports and servicing government external debt. April fiscal spending remained robust, due to higher Capital flows have improved since November 2018 and disbursement of social spending, civil servant salaries remained relatively benign into early 2019. Capital flows and bonuses, and subsidies. Capital spending, however, made a solid recovery from the global financial volatility contracted for the second consecutive year. 1 Domestic and international taxes only, excluding non-tax revenues. June 2019 THE WORLD BANK | BANK DUNIA 1 Oceans of Opportunity Indonesia Economic Quarterly Table ES.1: Real GDP growth is projected to cool to account balance. Downside risks to the growth outlook 5.1 percent in 2019 with easing investment growth and have increased with re-escalating trade tensions, likely modest support from the external sector to further weigh on world trade. Relatedly, slower 2018 2019f 2020f global growth from weaker outturns among developed Real GDP (Annual percent 5.2 5.1 5.2 economies and China also poses substantial risks. change) Consumer (Annual percent price index change) 3.2 3.0 3.1 Indonesia’s oceans can be leveraged to make a larger contribution Current (Percent of to the economy, both through higher revenues from tourism and account GDP) -3.0 -2.8 -2.5 fisheries and by enhancing resilience to natural disasters and balance Government climate change. This edition therefore discusses the importance of (Percent of budget GDP) -1.8 -2.1 -2.0 the maritime economy to Indonesia’s economic development and balance Source: Bank Indonesia; Central Bureau of Statistics (BPS); presents the challenges and opportunities the country faces in Ministry of Finance; World Bank staff calculations leveraging the maritime economy for greater prosperity. Note: 2018 actual outcome; f stands for World Bank forecast Indonesia’s ocean ecosystems have tremendous In light of unfavorable external conditions, economic economic potential that has yet to be fully harnessed. growth is forecast to ease to 5.1 percent in 2019 and Its fisheries sector is the second largest in the world and then recover to 5.2 percent in 2020 (Table ES.1). The plays a critical role providing food security and modest acceleration in private consumption is expected employment. Indonesia’s tourism sector benefits to continue as inflation remains low and labor markets heavily from the country’s world-class marine and are strong. The fiscal position is expected to improve, coastal (MAC) assets, with MAC tourism being a key allowing government investment to strengthen as driver of visitor growth. infrastructure projects come back online and post- disaster reconstruction begins. Though slower, However, poor management and marine debris investment growth is expected to remain robust, threaten these invaluable national assets. Illegal, especially after the elections, with reduced political unregulated, and unreported fishing and inadequate uncertainty and more optimistic business sentiment on management are diminishing the social and economic proposed reforms. 2 Amid deteriorating external value of Indonesia’s fisheries. Marine debris hurts conditions, export growth is forecast to be muted. fisheries, shipping, and MAC tourism growth, which Import growth is also expected to be weaker in line with may itself threaten ecosystems and damage the natural slower investment growth and as government policies assets if not properly managed. to manage imports are expected to remain in place in the near-term. Given the weakness in both imports and Realizing the full potential of these sectors will require exports, the external sector will make at best a modest reforms that improve natural resource management, contribution to total output growth this year and the conserve ecosystems, improve seafood quality, enhance next. the tourist experience, and create opportunities to more strongly brand Indonesia’s MAC assets. It will also Despite a weakening of the commodity terms of trade, require cross-sector investments to protect MAC assets the CAD is forecast to narrow to 2.8 percent of GDP from marine debris. Through better policies, Indonesia in 2019 and further to 2.5 percent of GDP in 2020 on can sustainably develop its oceans and harness the full easing investment growth. In addition, a weaker potential of the Blue Economy. exchange rate relative to 2018 will support the income 2 Rompies (2019). June 2019 THE WORLD BANK | BANK DUNIA 2 Oceans of Opportunity Indonesia Economic Quarterly Figure ES.1: Weaker fixed investment and inventory Figure ES.2: Private consumption was robust, supported drawdowns dragged on growth in Q1 by stronger spending by non-profit institutions (political (contribution to growth yoy, percentage points) parties) (contributions to growth yoy, percentage points) Change in inventories Stat. discrepancy Non-Profit Institutions Others Net exports Investment Restaurant & Hotel Transportation & Comm Government consumption Private consumption Health & Education Equipments GDP App, Footwear & Maintenance F&B, Other than Restaurant 8 Private Consumption 6 6 4 4 2 2 0 -2 0 Mar-17 Sep-17 Mar-18 Sep-18 Mar-19 Mar-17 Sep-17 Mar-18 Sep-18 Mar-19 Source: Central Bureau of Statistics (BPS); World Bank staff Source: BPS; World Bank staff calculations calculations Figure ES.3: The nominal current account deficit Figure ES.4: Portfolio flows swung to net outflows in narrowed in Q1, in line with the slowdown in investment May on renewed trade tensions (USD billion) (USD billion) Income Gov. global bonds SUN 6 Services Trade SBI Equities 4 Goods Trade Main net portfolio inflows Current account balance 4 2 0 2 -2 0 -4 -6 -2 -8 -4 -10 May-17 Nov-17 May-18 Nov-18 May-19 Mar-17 Sep-17 Mar-18 Sep-18 Mar-19 Source: Bank Indonesia (BI), World Bank staff calculations Source: BI; World Bank; World Bank staff calculations Note: Sertifikat Bank Indonesia (SBI) and Surat Utang Negara (SUN) are local currency bonds Figure ES.5: Easing food price inflation weighed on Figure ES.6: Revenue collections slowed as VAT headline inflation in Q1 2019 collections contracted (change yoy, percent; last observation May 2019) (January–April revenue contribution to growth, yoy, percentage points) 11 Other International trade taxes Excises VAT/LGST 10 Administered Income taxes N-O&G O&G related revenues 9 Total revenues 25 8 22.4 7 20 6 14.8 Raw food 15 11.6 5 Non-food Food 10 4 3.8 3 5 0.5 2 Core Headline 0 1 0 -5 -1 -10 -9.8 -9.8 May-17 Nov-17 May-18 Nov-18 May-19 2014 2015 2016 2016 2017-TA 2018* 2019 Source: BPS; World Bank staff calculations Source: Source: Ministry of Finance; World Bank staff calculations Note: See Figure A.25 Note: See Figure A.36 June 2019 THE WORLD BANK | BANK DUNIA 3 Oceans of Opportunity Indonesia Economic Quarterly A. Economic and Fiscal Update 1. Growth was stable despite weaker investment, but missing expectations Growth remains After 5 years of adjusting to lower commodity prices, economic growth remained relatively remarkably stable stable in 2018 at 5.2 percent year-on-year (yoy), on the back of solid domestic demand. Private consumption growth ticked upwards given low inflation and strong labor market conditions. Similarly, investment growth surged to a 6-year high in 2018 due to relatively robust commodity prices, particularly during the first half of the year, favorable domestic financing conditions, and continued infrastructure investments by state-owned enterprises (SOEs). Government consumption growth more than doubled partly due to strong personnel and material spending. In contrast to 2017, net exports contracted due to weakening external conditions and strong capital goods imports. On the production side, gross value added at producer prices grew by 5.0 percent yoy, driven by the service sector. GDP growth In Q1 2019, the Indonesian economy grew 5.1 percent yoy, a tick slower than in Q4 2018, and remained stable at below consensus forecasts, both of 5.2 percent (Figure A.1). On a qoq seasonally adjusted 5.1 percent in Q1 annualized basis, growth moderated to 4.9 percent from 5.1 percent in the previous quarter. 3 2019 GDP growth has been stable, remaining in a relatively narrow range of 4.9 to 5.3 percent for the past 14 quarters. Due to delays in new public investment projects, uncertainty ahead of the general elections, as well as weaker commodity prices and a maturing investment cycle in the mining sector, investment growth softened, contributing to slower GDP growth. Following significant accumulation in Q4, inventories saw some drawdowns in Q1, further weighing on growth by 3 World Bank staff estimates using X12 seasonal adjustment. June 2019 THE WORLD BANK | BANK DUNIA 4 Oceans of Opportunity Indonesia Economic Quarterly 0.3 percentage points (pp). Consumption and net exports strengthened, however. Both private and government consumption growth gained on stronger spending from political parties and stronger personnel expenditures. For the first time in ten quarters, both exports and imports declined; the former on the back of slower global economic growth and weaker world trade and the latter as investments slowed. The contraction in imports was almost four times higher than that in exports, leading net exports to support growth for the first time since Q3 2017. On the production side, stronger growth was broad-based, with decelerations being recorded only for the agriculture, manufacturing, and electricity, gas, and water sectors. Gross value added (GVA) growth remained unchanged at 4.9 percent in Q1. Figure A.1: Weaker investment and inventory destocking Figure A.2: Investment growth softened due to dragged growth slightly weakening machine and equipment investment and (contributions to growth yoy, percentage points) contraction in vehicle and other equipment investment (contributions to growth yoy, percentage points) Change in inventories Stat. discrepancy Buildings & Structures Machine & Equipment Net exports Investment Vehicles Other Equipments Government consumption Private consumption Cultivated Bio. Res. Intellectual Property GDP 8 Investment 7 7 6 5 6 4 5 3 4 2 3 1 2 0 1 -1 0 -2 -1 Mar-17 Sep-17 Mar-18 Sep-18 Mar-19 Mar-17 Sep-17 Mar-18 Sep-18 Mar-19 Source: BPS; World Bank staff calculations Source: BPS; World Bank staff calculations Investment growth Investment growth continued to cool down to 5.0 percent yoy from 6.0 percent in Q4 2018, in continued to soften part because of postponed investment decisions ahead of the elections; 4 weaker public infrastructure spending, in part due to current account concerns; 5 and gradual deterioration in commodity prices 6 (Figure A.2). A high base effect also contributed to the weaker outturn. 7 Investments in buildings and structures remained the main contributor to overall investment growth at 4.1 pp up from 3.3 pp in Q4 2018. Growth in machine and equipment investment moderated significantly to 8.4 percent from 12.3 percent in Q4, ending the consecutive double- digit growth for the past six quarters. Investment in vehicles and other equipment contracted by 7.4 and 6.8 percent, respectively, reversing the positive growth seen at least in the past four quarters. Private consumption Private consumption growth picked up to reach 5.3 percent in Q1 compared to 5.2 percent in accelerated to 5.3 Q4 2018 (Figure A.3), supported by a sharp increase in the consumption expenditure of political 4 Bisnis (2019). 5 Nominal public capital expenditure declined 15.1 percent yoy in Q1, indicating the cooling down of public infrastructure investment from the government. See detailed discussion in Section 6. 6 Prices of Indonesia’s main commodities that include coal, crude oil, palm oil, rubber, and base metals, contracted 8.5 on average percent yoy in Q1 2019 7 Investment growth in Q1 2018 was 7.9 percent, the highest in nearly 5 years. June 2019 THE WORLD BANK | BANK DUNIA 5 Oceans of Opportunity Indonesia Economic Quarterly percent as spending parties, which grew by 16.9 percent in Q1, against the 10.8 percent seen in Q4. 8 Household by political parties consumption growth, however, slowed to 5.0 percent from 5.1 percent, due to softer surged consumption in services such as transportation and communication, as well as restaurant and hotel consumption. Within household consumption, consumption of food and beverages was once again the largest contributor to growth, while health and education consumption rose the fastest. Monthly indicators also hint at the robust private consumption as retail sales growth nearly doubled to 8.8 percent in Q1 and motorcycle sales growth accelerated significantly to 16.1 percent in Q1 from 7.6 in the previous quarter. Consumer confidence was flat in Q1 but ticked up significantly in April and May, pointing to a continued robust private consumption in Q2. Government Real government consumption growth accelerated to 5.2 percent yoy from 4.6 percent in Q4 consumption growth 2018. The faster growth was partly driven by considerable disbursement for personnel spending. strengthened, partly Higher in-kind transfers also supported government consumption. After seven quarters of due to increased strengthening growth, nominal government consumption rose 17.1 percent in Q1, a tick lower social spending than the 18.9 percent in Q4 2018 (Figure A.4). Growth was driven by a higher nominal social spending of IDR 102 trillion, which was double the amount in the same period last year, as the government expanded disbursements for in-kind social transfers, and personnel and material spending (See Section A.6). Figure A.3: Private consumption was robust, supported Figure A.4: Growth in government consumption was by stronger spending from political parties mostly driven by social spending (contributions to growth yoy, percentage points) (contributions to growth yoy, percentage points) Non-Profit Institutions Others 30 Other Restaurant & Hotel Transportation & Comm Social excl PKH & PIP & BPNT Health & Education Equipments 25 Non-energy subsidies App, Footwear & Maintenance F&B, Other than Restaurant 20 Material Private Consumption 6 Personnel 15 Total, yoy growth 10 4 5 2 0 -5 0 -10 Mar-17 Sep-17 Mar-18 Sep-18 Mar-19 Q12017 Q32017 Q12018 Q32018 Q12019 Source: BPS; World Bank staff calculations Source: Ministry of Finance, CEIC; World Bank staff calculations. Note: Quarterly in-kind social spending imputed using shares of annual in-kind social spending for the respective years. PKH = Program Keluarga Harapan (direct cash transfers); PIP = Program Indonesia Pintar (Education subsidy); BPNT = Bantuan Pangan Non Tunai (non- cash food assistance). 8 The surge in this component of private consumption is expected to dissipate after the elections, similar to what was seen after the 2014 elections. NPISH grew 22.4 percent yoy in Q2 2014 during the election period, but moderated significantly to 5.8 percent in Q3 2014, after the election. June 2019 THE WORLD BANK | BANK DUNIA 6 Oceans of Opportunity Indonesia Economic Quarterly Both exports and In line with the deceleration in the Figure A.5: In Q1, nominal imports growth softened in imports contracted world trade volume growth (see many emerging countries for the first time in Box A.1) and slower global (12 mma yoy growth, percent) ten quarters economic growth, Indonesia’s Indonesia Malaysia Thailand exports and imports volume Philippines Vietnam contracted. Trade eased not only 25 in Indonesia, but also in several 20 emerging market and developing 15 economies (EMDEs), following 10 the trade dispute between the 5 United States and China 9 (Figure 0 A.5). -5 -10 -15 -20 -25 Mar-15 Mar-16 Mar-17 Mar-18 Mar-19 Source: CEIC; World Bank staff calculations Box A.1: After a challenging 2018, the global economy showed further weakening this year Global growth edged down to 3.0 percent yoy in 2018 from 3.1 in 2017, driven by sluggish economic performance in Europe and Japan, slower growth in China, and notable weakness in countries like Argentina and Turkey that faced currency and financial market turbulence. Global economic activity continued to soften at the beginning of this year due to heightened policy uncertainty, including recently renewed trade tensions, accompanied by a broad-based decline in confidence.1 Figure A.6: Global trade growth decelerated in Q1… Figure A.7: …as industrial production growth softened (percent, yoy) (percent, yoy) 8 7 Euro Area imports World trade Emerging Asia 7 6 6 5 5 4 4 3 World 3 2 Advanced economies 2 1 1 0 0 -1 Euro Area -1 -2 -2 -3 Euro Area exports -4 -3 Source: CBP World Trade Monitor, World Bank staff calculations Source: CBP World Trade Monitor, World Bank staff calculations A major factor driving the global growth slowdown in 2018 was world trade, which suffered in the midst of increasing protectionism, particularly rising tariffs between the United States and China, as well as slower global investment growth and increased trade policy uncertainty (Figure A.6). As a result, global trade growth experienced its sharpest deceleration since 2012, growing by just 4.1 percent in 2018 as compared to 5.5 percent in 20172. This slowdown in trade has continued in 2019, with Q1 experiencing growth of just 0.4 percent yoy compared to 1.6 percent in Q4 2018. Similarly, global industrial production growth declined, from an average of 2.1 percent in Q4 2018 to 1.4 percent in Q1 2019 (Figure A.7) and remains largely subdued in Q2. Business sentiment, as captured by the Composite Purchasing Managers’ Index (PMI), softened in Q4 2018, Q1 2019 and the first two months of Q2, but were in most cases still above 50 – the threshold that represents expansion according to surveyed company decision makers, analysts and investors (Figure A.8). 9 World Bank (2019a). June 2019 THE WORLD BANK | BANK DUNIA 7 Oceans of Opportunity Indonesia Economic Quarterly Figure A.8: Composite PMI outcomes show a mixed Figure A.9: After ending 2018 with wild volatility swings, picture, but May data reflects growing concerns markets were calm in Q1 2019, but volatility is returning with (growth yoy, percent) renewed trade tensions (index, January 1, 2018 =100) 350 Concerns about 56 Q4-18 Q1-19 Apr-19 May-19 Concerns China growth, trade 55 U.S. about war, risk of further 300 announcemen corporate rate hikes 54 t to increase earnings for VIX Trade 53 tariffs on steel companies Earnings and tensions 250 and aluminum 52 such as corporate escalate, Google and buybacks, Fed US-Iran 51 Federal Rate hike Amazon more dovish tensions 200 50 Federal Rate 49 hike 2 Federal Rate 150 hike 3 48 100 MOVE 50 Jul-18 Jul-19 Jun-18 Aug-18 Sep-18 Nov-18 Dec-18 Jan-19 Jun-19 Apr-18 Oct-18 Apr-19 Mar-18 Feb-19 Mar-19 May-18 May-19 Source: Markit Economics, Haver, World Bank staff calculations Source: Bloomberg; World Bank staff calculations Note: Readings above 50 represent expansions and readings below 50 represent contractions Faced with weakening activity and benign inflationary pressures Figure A.10: Global commodity indices fell in Q4 2018 across most major economies, central banks have continued and Q1 2019, but are largely stabilizing in Q2 supporting activity with accommodative policy rates and/or a (index based on nominal U.S. dollar, 2010=100) more dovish policy stance signaled by the likes of the Federal 100 Base Metals (ex. iron ore) Reserve and the European Central Bank. Similarly, fiscal policy in many countries has been expansionary, with countries including 90 China, India, Japan and South Korea ramping up spending, and Agriculture 80 with some including China and India combining higher fiscal expenditures with tax cuts.3 70 In financial markets, global financing conditions rebounded in Q1 60 2019 and continued to loosen in Q2 (Figure A.9). The recovery Energy followed a dramatic end to 2018, which saw global capital outflows 50 from emerging markets exceed those during the 2013 Taper Tantrum, and the Dow and S&P 500 suffer their biggest Christmas 40 Eve declines ever, following continued concerns around the impacts of the United States-China trade tensions.4 However, Q1 2019 saw a rapid turnaround, with the S&P 500 recovering more than 50 percent of its losses in the first 6 weeks of the year, buoyed Source: WB Commodity Price Data, World Bank staff calculations by positive earnings and corporate buybacks and a shift in stance from the Federal Reserve as it abandoned projections of further rate hikes for the rest of the year.5 But with renewed trade tensions, calm waters have not persisted, and Q2 is ending with rising volatility. After declining in Q4 2018 and Q1 2019 (Figure A.10), energy commodities have seen some recovery in recent months, while metals and agriculture prices are relatively flat year-to-date. Going forward, United States-China trade and political tensions will continue to make investors nervous, with worldwide implications, in particular, on trade in Asia.6 Other risk factors may arise from different developments, including the impact of a hard Brexit on the Euro area, or from sudden shocks impacting on commodity markets, such as the recent United States-Iran standoff at the Straits of Hormuz. 1 World Bank (2019b). 2 World Bank (2019a), pp. 4. 3 On China, see: Chen and Woo (2019); on India, see: Sundaram (2019), on Japan, see: Kyodo (2019); and on South Korea, see: Choi (2018). 4 Barbieri and Goldman (2018). 5 “Instant View Reuters (March 21, 2019) 6 On escalation in the trade tensions between the United States and China, see for example: Westcott, Wang and Picheta (2019); on how tensions go beyond trade, see for example: da Costa (2019). June 2019 THE WORLD BANK | BANK DUNIA 8 Oceans of Opportunity Indonesia Economic Quarterly Figure A.11: Real exports contracted for the first time in Figure A.12: …and a similar trend was seen in real ten quarters… imports (contributions to growth yoy, percentage points) (contributions to growth yoy, percentage points) 20 20 15 15 10 10 5 5 0 0 Services Services -5 Goods: Oil & Gas -5 Goods: Oil & Gas Goods: Non-Oil & Gas Goods: Non-Oil & Gas Export of Goods and Services Import of Goods and Services -10 -10 Mar-17 Sep-17 Mar-18 Sep-18 Mar-19 Mar-17 Sep-17 Mar-18 Sep-18 Mar-19 Source: BPS; World Bank staff calculations Source: BPS; World Bank staff calculations Real imports The contraction in real imports, which was also in light of slowing investment growth, was contracted sharply almost four times greater than that in real exports, leading net exports to support growth for the first time since Q3 2017. Despite robust domestic private consumption, real imports shrank 7.8 percent in Q1, mostly driven by the reduction in oil and gas imports by 22.9 percent, which was in turn partly due to the Government mandate to use biofuel in the diesel mix 10 and Government policies to manage the imports of certain commodities, which has been implemented in the second half of 2018 11 (Figure A.11). Meanwhile, the contraction in exports was mostly due to oil and gas goods exports, dipping 0.7 percent after growing 6.0 percent in Q4 2018 (Figure A.12), in line with the reduction of Indonesia’s oil lifting and the Government policy that prioritized domestically-produced oil for domestic consumption rather than for exports (Box A.2). 12 Box A.2: Government policies on managing imports In 2018, Indonesia’s current account deficit widened to 3.0 percent of GDP, the widest since 2014, in line with strong import- intensive investments (Figure A.13). The following are selected policies that the GoI implemented in the second half of 2018 to manage imports in order to reduce the current account deficit: 1. Income tax on selected imported goods1 The GoI issued a regulation to increase the income tax rate of imported goods2 (Income Tax Article 22) for 1,147 consumer products in September 2018. Depending on the consumer product, the tax rate was increased by 2.5 percent to 7.5 percent3 of the import value. The regulation aimed to address the current account deficit by managing imports of consumer goods, while minimizing disruptions to investment. 2. B20 Policy4 In September 2018, the GoI mandated the use of biodiesel (B20), a blend of 20 percent palm oil and 80 percent of petroleum diesel, for all diesel fuel sold domestically. The regulation was aimed at reducing dependency on imported fuel by partly replacing it with local palm oil. Partly due to this regulation, the volume of diesel imports fell to 2.2 percent yoy for the last six months through Q1 2019, relative to an increase of 27.1 percent for the prior six months through Q3 2018. To date, this policy has not led to any significant decreases in palm oil exports as production increased (Figure A.14). The GoI also plans to increase the absorption of the palm oil in biodiesel by expanding the B20 to the B305 beginning January 2020. 10 The Government, through the Minister of Energy Decree no 42/2018, instructed foreign oil and gas producers in the country to prioritize the sales of their production to Pertamina from September 2018 11 Bank Indonesia (2019). 12 Bank Indonesia (2019).. June 2019 THE WORLD BANK | BANK DUNIA 9 Oceans of Opportunity Indonesia Economic Quarterly 3. Prioritization of the Use of Crude Oil for the Domestic Demand6 In addition to the Domestic Market Obligation (DMO) on crude oil production, the GoI issued a mandate for oil and gas contractors to offer their share of crude oil production to PT. Pertamina and other crude oil refining business entities, before any considerations for export. The regulation, which took effect since September 2018, requires PT Pertamina and crude oil refining business entities to adopt a Business-to-Business (B2B) scheme when negotiating the potential purchase. The regulation aimed to further reduce dependence on imported oil. While this regulation is likely to have contributed to reduced oil imports,7 it may have also disrupted crude oil exports, due to the effect of expanding domestic demand for crude.8 The crude oil deficit widened to 3.34 million tonnes for the October 2018-March 2019 period, compared to a deficit of 3.16 million tonnes the same period a year before. Figure A.13: Current Account Balance, Annual Figure A.14: Palm Oil, Volumes (percentage of GDP) (million tonnes) 1.0 16 Domestic Consumption Exports 0.5 14 Production 0.0 12 -0.5 10 -1.0 8 -1.5 6 -2.0 4 -2.5 2 -3.0 0 -3.5 2010 2012 2014 2016 2018 Source: Bank Indonesia, World Bank Staff Calculations Source: CEIC, World Bank Staff Calculations Note: Production equals to domestic consumption + exports + change in palm oil inventories 1 The Minister of Finance Regulation No. 110 /PMK.010/2018 2 The total tax of imported goods consists of three different tariffs and taxes: import duties, value added taxes and income tax withholding applied on the value of imported goods. In addition, if the imported goods are categorized as luxury goods, an additional luxury sales tax is also applied. Income tax withholding on imported goods serve as a ‘prepayment’ of corporate income taxes paid by businesses. This withholding mechanism is used in a few other countries, including Philippines, Pakistan, Uganda, Malawi and Jordan. 3 Kompas (2019). 4 Minister of Energy and Mineral Resources Regulation No. 41 / 2018 5 A blend of 30 percent palm oil and 70 percent of petroleum diesel 6 Minister of Energy and Mineral Resources Regulation No. 42 / 2018, Seek (November 13, 2018). 7 The volume of crude oil imports decreased by 44.0 percent in Q1 2019, compared to a decline of 9.2 percent in Q3 2018. 8 Volumes of crude oil exports fell 67.9 percent yoy in Q1 2019 compared to a decline of 22.7 percent in Q3 2018 since the policy was implemented. June 2019 THE WORLD BANK | BANK DUNIA 10 Oceans of Opportunity Indonesia Economic Quarterly On the supply side, In gross value-added (GVA) terms, Figure A.15: Trade, hotels, and restaurants contributed services drove growth in Q1 was flat at 4.9 percent the most to growth growth as (Figure A.15). While the trade, (contributions to growth yoy, percentage points) Other services manufacturing and hotels, and restaurants sector Financial services agriculture slowed contributed the most to growth, Transport & communication Trade, hotels & restaurants followed by manufacturing sector Construction in Q1, the transportation and 5 Electricity, gas & water communication as well as financial services sectors were the main 4 drivers of growth. Growth in the 3 manufacturing sector moderated, consistent with the continued 2 weakening in machines and 1 equipment investment, and contraction in vehicles and other 0 equipment investment. Meanwhile, -1 the agricultural sector grew the least Mar-17 Sep-17 Mar-18 Sep-18 Mar-19 and slower than in Q4 due to the Source: CEIC; World Bank staff calculations shift in the harvest period between Note: * Gross Value Added is the sum of value added in the agriculture, industry and services sectors. If the value added 2018 and 2019. 13 of these sectors is calculated at purchaser values, gross value added at factor cost is derived by subtracting net indirect taxes from GDP. 2. Prices of most key commodities declined compared to a year ago Commodity prices Out of Indonesia’s six major commodity exports – palm oil, rubber, base metals, coal, crude oil fell across the board and liquified natural gas (LNG) – prices of all commodities except LNG and rubber fell in Q1, compared to a year compared to the same period last year (Table A.1). Agricultural commodity prices declined for ago, except for LNG a sixth consecutive quarter. Although the B20 policy 14 helped reduce stockpiles in Indonesia, and rubber still-high inventories in Malaysia continued to drag global crude palm oil prices down by 17 percent yoy, following a 23 percent decline in Q4 2018. 15 Rubber prices also contracted by a lower magnitude, 4 percent yoy in Q1, compared to the 13 percent drop last quarter. More stable rubber prices are expected over the next few months as Indonesia, along with Malaysia and Thailand, agreed to cut rubber exports. 16 Non-agricultural commodities also mostly presented a downward trajectory. Base metals fell for a second consecutive quarter by 12 percent yoy, compared to 9 percent in Q4 2018, in part due to the high base. The price of Australian coal fell by 7 percent after ten quarters of growth (Figure A.16), mostly due to Chinese-imposed restrictions on imports of Australian thermal coal since February. The Indonesian Government’s Benchmark Thermal Coal Price (Harga Batubara Acuan, HBA) fell by a similar magnitude on weaker demand from China and India for Indonesia’s lower-grade coal. 17 Average crude oil prices also declined by 6 percent yoy after rising 7 percent in Q4 2018. However, prices continued to recover from the end-2018 plunge that was due to higher-than-expected global production. OPEC and partners have since adjusted supplies and output has declined in Venezuela and Iran, leading average prices to rise to USD 13 According to the Ministry of Agriculture, the peak of the harvest season in 2018 occurred in March (which accounted in the GDP Q1 calculation) while in 2019, it is expected to occur in April (which accounted in the GDP Q2 calculation), Adharsyah (2019) 14 Indonesia and Malaysia, the world’s largest palm oil producers, mandate the use of palm oil in biodiesel for the transport sector. However, while Indonesia extended the B20 policy – a blend of 20 percent palm oil and 80 percent fossil fuel – to non-subsidized fuels beginning September 2018, Malaysia only fully enforced a similar B10 program in February 2019. Ling and Yuan (2019). 15 The Star (April 15, 2019). 16 The Jakarta Post (April 01, 2019). 17 The Jakarta Post (May 08, 2019). June 2019 THE WORLD BANK | BANK DUNIA 11 Oceans of Opportunity Indonesia Economic Quarterly 67/bbl in May 2019. Meanwhile, LNG prices rose 20 percent yoy in Q1, extending the double- digit growth seen since Q2 2017. However, this was half the pace seen in Q4 2018, in part due to warmer weather than usual in the Northern Hemisphere. 18 Table A.1: Prices of Indonesia’s key commodities were Figure A.16: …except for LNG, which rose, and generally lower than a year ago rubber, which stabilized prices of key commodities price index (January 2017=100) Q1 Q2 Q3 Q4 Q1 Rubber 2018 2018 2018 2018 2019 200 Base Metals (ex. iron ore) Rubber 180 Coal, Australian 1.7 1.7 1.5 1.4 1.7 Crude oil, average (USD/kg) 160 Liquefied natural gas, Japan Base metals 95.6 96.4 86.0 84.2 84.0 Palm oil (index) 140 2017=100 Coal (USD/mt) 103.0 104.4 117.0 103.6 95.7 120 Crude oil 100 average 64.6 71.4 73.0 64.3 60.5 (USD/bbl) 80 LNG 60 9.8 10.3 10.9 11.8 11.7 (USD/mmbtu) Palm oil 40 706.4 681.7 611.8 554.8 586.9 (USD/mt) Source: World Bank Pink Sheet; World Bank staff calculations Source: World Bank Pink Sheet; World Bank staff calculations Figure A.17: Export volumes of coal, palm oil, and base Figure A.18: …but these increases were insufficient to metals rose… offset price declines export volume index, Jan 2017=100; index for metals on RHS yoy growth, percent change in Q12019 40 Petroleum and petroleum products 30 Prices Volumes Values 200 Gases, including LNG 800 Coal 20 Palm oil and palm oil products Rubber 10 150 Metals 600 0 -10 -20 100 400 -30 -40 50 200 -50 -60 -70 0 0 Petroleum Gases, Coal Palm oil Rubber Metals & incl. LNG petroleum products Source: BPS; World Bank staff calculations Source: BPS; World Bank staff calculations Exports of coal, Commodity export volumes presented a more mixed picture (Figure A.17). Export volumes of palm oil and metals crude oil, gas and rubber declined, while coal, palm oil, and base metals rose. Exports of crude rose in volume oil and gas fell by 70.7 percent and 13.8 percent respectively, almost double and triple the terms, but not contractions seen last quarter. These declines are likely due to the fact that oil and gas production sufficiently to only reached 90 percent of the Government’s cumulative 2019 target in Q1 as several Pertamina- counter price declines 18 Lakshmi (2019). June 2019 THE WORLD BANK | BANK DUNIA 12 Oceans of Opportunity Indonesia Economic Quarterly operated oil blocks, especially Mahakam, 19 experienced declines in production. 20 In contrast, exports of base metals increased by 64.5 percent – a more moderate rate than previous quarters, as effects from the lifting of the mineral export ban continued to subside. 21 Coal exports rose by 10.5 percent yoy in Q1, larger than the 7.6 percent expansion in Q4. 22 Nonetheless, increases in export volumes were insufficient to offset declines in the price of coal, resulting in a decline in coal export values (Figure A.18). Similarly, palm oil export volumes rose by 9.8 percent on greater demand for biodiesel from China and the European Union, 23 but the increase was outweighed by price declines. Palm oil exports may tick up in the coming months as simplified export procedures take effect, 24 but will likely face demand-side headwinds as the European Union implements new regulations limiting the use of palm oil in biofuels from June. 3. The current account deficit improved as investment cooled The current account Largely due to strong capital goods imports that are commensurate with robust investment deficit widened in growth, the CAD widened to 3.0 percent of GDP in 2018, nearly double that in 2017 and the 2018 to the largest largest since 2014. While the surplus on the capital and financial accounts shrank from 2.8 since 2014 on strong percent in 2017 to 2.4 percent of GDP in 2018, there was a notable turnaround in Q4 with a capital goods rebound of portfolio investment amounting to USD 10.4 billion. In line with the reversal of imports capital flows, the Rupiah recovered from a trough of IDR 15,237 per USD in October last year to around IDR 14,400 per USD towards the end of the year. Correspondingly, international reserves rebounded from a low of USD 114.8 billion at the end of September 2018 to reach USD 120.7 billion in December, equivalent to 6.3 months of imports of goods and services. The current account In line with the moderation in Figure A.19: Current account deficit narrowed in Q1, in deficit narrowed as investment growth and thus lower line with the slowdown in investment the trade balance imports of capital goods, 25 the (USD billion) turned into a surplus CAD narrowed to USD 7.0 billion Income from a significant in Q1 from USD 9.2 billion in Q4 Services Trade Goods Trade deficit last quarter last year, but this was still larger 6 Current account balance than the USD 5.2 billion deficit in 4 Q1 2018 (Figure A.19). 2 0 On a four-quarter rolling sum basis, -2 the CAD continued to widen to 3.1 -4 percent of GDP in Q1 from 3.0 -6 percent of GDP in Q4 2018, a slower pace than the 0.3 pp per -8 quarter average widening in 2018. -10 Mar-16 Sep-16 Mar-17 Sep-17 Mar-18 Sep-18 Mar-19 Source: Bank Indonesia; World Bank staff calculations 19 Pertamina started to operate the Mahakam block in January 2018, taking over from French multinational Total. Pertamina blamed the low lifting from Mahakam on difficulties in building drilling wells in the area. Iskana and Setiawan (2019). 20 Budget 2019 sets an oil and gas lifting target of 2.2 million barrels of oil equivalent per day (boepd); in Q1, production only reached 1.8 million boepd or 90 percent of the target. Ananta (2019). 21 From 2014 to 2017, Indonesia had a ban on unprocessed mineral exports, requiring miners to process their ore and concentrate before exporting. The ban was partially lifted at the beginning of 2017, following which export volumes of base metals surged triple digits in yoy terms every quarter from Q32017 to Q32018. Export of base metals recorded an increase of 91.1 percent in Q4. 22 The increase in coal exports is partly due to the 100 million ton increase in the coal export quota in September 2018. See World Bank (2018b). 23 This is partly due to some frontloading of biodiesel imports into the European Union in advance of new regulations that came into effect on June 10, which limit the amount of palm oil used in biofuels for the transport industry. The Star (March 29, 2019). 24 In March, the Ministry of Trade revoked a regulation (No 54/22015) to simplify the procedures for exporting palm oil, in part due to price declines and anti-palm oil campaigns in the European Union. The Jakarta Post (March 19, 2019). 25 Imports of capital goods is dominated by machinery and equipment, one of the key components of investment. June 2019 THE WORLD BANK | BANK DUNIA 13 Oceans of Opportunity Indonesia Economic Quarterly The improvement in the current account balance was driven by a turnaround in the goods trade balance to a surplus of USD 1.1 billion from a deficit of USD 2.6 billion in Q4 2018, as imports fell, on easing investment growth (Table A.2). On a yoy basis, both goods exports and imports contracted, with a deeper contraction in exports. The improvement in the goods trade balance was partially offset by slight deterioration in the services trade and income balances. 26 Despite the small decline in financial account surplus, the overall balance of payments still booked a surplus of USD 2.4 billion in Q1, and so BI continued to rebuild reserves. BI’s international reserves rose to USD 124.5 billion at the end of March 2019 from USD 120.7 billion at the end of December 2018, sufficient to cover 6.8 months of imports and servicing government external debt. Table A.2: Indonesia’s Balance of Payments (BOP) (USD billion unless otherwise indicated) Q1-2018 Q2-2018 Q3-2018 Q4-2018 Q1-2019 Nominal GDP 258.7 263.8 262.9 256.8 267.6 Overall Balance of Payments (3.9) (4.3) (4.4) 5.4 2.4 As percent of GDP (1.5) (1.6) (1.7) 2.1 0.9 As percent of GDP, four-quarter rolling sum 0.3 (0.2) (1.1) (0.7) (0.1) Current Account (5.2) (8.0) (8.7) (9.2) (7.0) As percent of current quarter GDP (2.0) (3.0) (3.3) (3.6) (2.6) As percent of GDP, four-quarter rolling sum (1.9) (2.2) (2.6) (3.0) (3.1) Goods Trade Balance 2.3 0.3 (0.5) (2.6) 1.1 Services Trade Balance (1.6) (1.8) (2.0) (1.6) (1.8) Income (5.9) (6.4) (6.2) (5.0) (6.2) Capital and Financial Accounts 2.3 3.3 3.8 15.9 10.1 As percent of current quarter GDP 0.9 1.2 1.5 6.2 3.8 As percent of GDP, four-quarter rolling sum 2.4 2.1 1.6 2.4 3.1 Direct Investment 4.8 2.4 4.4 2.0 5.2 Portfolio Investment (1.1) 0.1 (0.1) 10.5 5.4 Other Investment (1.5) 0.7 (0.5) 3.5 (0.6) Source: Bank Indonesia; World Bank staff calculations Both total exports Nominal total exports and imports shrank but Q1 saw deeper contraction in total exports than and imports declined in total imports. Total exports fell 7.9 percent yoy in Q1, faster than the decline of 1.0 percent in yoy terms last quarter, driven by declines in both goods and services exports. Total imports also dropped 5.1 percent after growing 9.0 percent in Q4 2018, mostly due to the fall in goods imports in Q1. Goods exports In line with slower global trade 27 and weaker palm oil and coal prices from a year ago, nominal continued to decline good exports deteriorated further, contracting 8.6 percent yoy in Q1 after a drop of 1.4 percent due to both internal in 2018 (Figure A.20). The decline in goods exports was broad-based, partly due to easing export and external commodity prices 28 and weakening demand from Indonesia’s major trading partners (MTPs) 29. factors… Other manufactured exports was the largest contributor in the decline in total goods exports, partly due to lower processed foods exports to the United States and Malaysia 30. 26 The income deficit widened partly due to a stronger Rupiah, which increases the USD value of given IDR values of remittances. 27 Export value growth deteriorated in East Asia and the Pacific countries, as did export volume growth (East Asia and Pacific Economic Update, April 2019). Nominal imports also weakened in the neighboring countries (see detailed discussion in Section 1). 28 Prices of Indonesia’s main commodity exports which include coal, crude oil, palm oil, rubber, and base metals, contracted on average 8.5 percent yoy in Q1 2019. See detailed discussion in Section 2. 29 The World Bank projects that the average growth of Indonesia MTP economies will moderate to 3.1 percent in 2019 from 3.2 percent in 2018. Indonesia’s MTPs comprises Australia, China, Germany, Japan, India, Netherland, Singapore, Korea, Malaysia, Philippines, Thailand, United States, and Vietnam. 30 Bank Indonesia (2019). June 2019 THE WORLD BANK | BANK DUNIA 14 Oceans of Opportunity Indonesia Economic Quarterly …while goods As investment cooled, nominal goods imports dropped for the first time in ten quarters, driving imports contracted the goods trade balance to a surplus (Figure A.21). Good imports fell sharply by 6.1 percent yoy the first time in ten in Q1, after jumping by 11.8 percent in Q4 2018, because of lower oil prices and continued quarters, consistent government policies to curb imports. 31 Imports of fuel and lubricants contracted the most, by with the easing in 19.5 percent, followed by consumption goods imports that dropped 13.3 percent. The decline investment growth in consumption goods imports was due to the moderation in the import prices and decline in the volumes for cosmetics, plastic products, and footwear. 32 Capital goods imports declined for the first time in seven quarters, in line with the slower investment growth, particularly investment in machine and equipment. 33 Figure A.20: Goods exports deteriorated further in all Figure A.21: ...and goods imports contracted for the first categories… time in ten quarters. (contribution to growth yoy, percentage points) (contribution to growth yoy, percentage points) Other goods Other manufactures Other merchandise Textile & textile products Processed commodities Capital goods Coal Oil & gas Fuel & lubricants Agriculture & other mining Goods Exports 30 Intermediate goods excluding fuel 30 Consumption goods excluding fuel Goods Imports 20 20 10 10 0 0 -10 -10 Q12017 Q32017 Q12018 Q32018 Q12019 Q12017 Q32017 Q12018 Q32018 Q12019 Source: Bank Indonesia; World Bank staff calculations Source: Bank Indonesia; World Bank; World Bank staff calculations Note: The processed commodities category includes wood, palm oil, base metals, and rubber. The “other manufactures” category includes paper, paper products, furniture, plastics, processed foods, chemicals, and other goods. Both the services Both the services trade and income account deficits widened in Q1 to USD 1.8 billion and USD and income account 6.2 billion, respectively. The services trade deficit was larger than both in the previous quarter deficit widened and Q1 2018, as services exports declined for the first time in 13 quarters, by 3.7 percent yoy, mostly due to lower travel exports as growth of foreign tourist arrivals moderated substantially. Services imports continued to deteriorate by 0.5 percent. Meanwhile, the deficit in the income account widened due to reduced income from direct investments, which was in turn because of dampened investment returns, especially for the property sector. 34 The stronger Rupiah compared to Q4 35 also contributed to higher USD profit remittances. The financial The financial account surplus decreased to USD 10.1 billion in Q1, after soaring to a record- account surplus high of USD 15.9 billion in Q4. Net direct investment (direct investment in Indonesia less declined but was still Indonesian direct investment abroad) more than doubled, but still could not compensate for robust the lower net portfolio investment and net other investment (Figure A.22). In addition, despite being substantially larger, net direct investment was still insufficient to finance the current account deficit. However, improvement in the CAD and increase in the net direct investment 31 The policies include the enactment of higher import duties for consumption goods, a mandate for production-sharing contractors to sell crude oil to Pertamina, and the Biodiesel 20 policy which stipulates that 20 percent of biofuel blend should be used in the domestic diesel mix. 32 Bank Indonesia (2019). 33 The machine and equipment category dominates the imports of capital goods. 34 Bank Indonesia (2019). 35 See footnote 30. The Rupiah appreciated against the U.S. Dollar by 1.5 percent in nominal terms. See detailed discussion in Section 5. June 2019 THE WORLD BANK | BANK DUNIA 15 Oceans of Opportunity Indonesia Economic Quarterly led to a lower deficit in the basic balance (the sum of current account balance and total net direct investment) of USD 1.8 billion from USD 7.2 billion in Q4 2018. Net portfolio inflows in Q1 totaled USD 4.7 billion, marginally lower than the inflows in Q4 2018 of USD 5.0 billion, but significantly higher than the USD 1.1 billion in the same quarter last year (Figure A.23). This outcome was mostly a result of the government payments of foreign currency government debt issuance that was due in March 2019, but also due to lower private global bonds revenue flows and less favorable external conditions, particularly from the heightened global trade tensions. Other investments saw a turnaround and posted a deficit of USD 0.6 billion (Q4 2018: +3.5 billion), driven by a rise in private sector deposits in overseas banks and private sector loans to non-residents. Equity inflows in April surged due to positive sentiment among investors following initial election results, 36 but relapsed to outflows in May on account of renewed world trade tensions. Figure A.22: The financial account slipped as net portfolio Figure A.23: …and swung to outflows in May on renewed investment decreased in Q1… trade tensions (USD billion) (USD billion) 20 Other investment Gov. global bonds SUN Portfolio investment SBI Equities Direct investment Main net portfolio inflows Capital and Financial Account 10 1 0 -10 -4 Mar-17 Sep-17 Mar-18 Sep-18 Mar-19 May-17 Nov-17 May-18 Nov-18 May-19 Source: Bank Indonesia; World Bank staff calculations Source: Bank Indonesia; World Bank; World Bank staff calculations Note: Sertifikat Bank Indonesia (SBI) and Surat Utang Negara (SUN) are local currency bonds FDI returned to its Foreign direct investment (FDI) Figure A.24: Foreign direct investment returned to its average in the first came in at USD 6.0 billion in Q1, average for the first three quarters of 2018… three quarters of after slipping to USD 3.7 billion in (USD billion) 2018… Q4 2018, but reverting to closer to 8 its average for the first three quarters 6 of 2018. This was mostly due to the 4 turnaround on mining and quarrying investments where large divestments 2 were seen in the previous quarter 37 0 Other (Figure A.24). Manufacturing as well -2 Financial Intermediation Wholesale & retail trade, Vehicle repair, household goods as wholesale and retail trade -4 Manufacturing Mining and Quarrying continued to be the main -6 Agriculture, Hunting, and Forestry Total beneficiaries of FDI, accounting for Mar-17 Sep-17 Mar-18 Sep-18 Mar-19 60.3 percent of the total flows. The Source: Bank Indonesia; World Bank staff calculations 36The initial election result was welcomed by investors and led to a surge in net foreign purchases in April. See Tari (2019). 37The large divestments in the mining sector in the previous quarter came from capital acquisition of foreign mining companies, PT. Freeport Indonesia, by Indonesia’s state-owned enterprise, Inalum. June 2019 THE WORLD BANK | BANK DUNIA 16 Oceans of Opportunity Indonesia Economic Quarterly large FDI flows into the manufacturing sector were driven by global bond issuance and debt withdrawal from several automotive companies. 38 4. Headline inflation continued to ease due to declining food price inflation Inflationary Reaching its lowest levels since Q4 2009, headline inflation fell from an average of 3.2 percent pressures continued yoy in Q4 2018 to an average of 2.6 percent in Q1 2019, on the back of easing food 39 price to weaken in Q1 inflation, which dropped to an average of 2.2 percent yoy in Q1 2019 from 4.0 percent in Q4 partly due to low 2018. Lower food price inflation was partially offset by an increase in non-food price inflation food price inflation to 3.0 percent yoy in Q1 2019 from 2.7 percent in Q4 2018. Accordingly, core inflation, which excludes inflation from volatile and administered goods, remained broadly stable at an average of 3.1 percent yoy in Q1 2019. Meanwhile, despite lower energy prices, administered prices inched up to 3.3 percent yoy in Q1 2019, from 3.1 percent in Q4 2018, due to higher domestic airline fares (Figure A.25). 40 Partly due to increased food price pressures on account of Ramadan, monthly headline inflation rose to 3.3 percent yoy in May from 2.5 percent in March, which was the lowest in more than 9 years. Figure A.25: Easing food price inflation weighed on Figure A.26: Key domestic food prices ticked up in May on headline inflation in Q1 2019 account of upcoming Ramadan (change yoy, percent; last observation May 2019) (change yoy, percent) Rice Chicken Beef 12 Cooking oil Sugar Flour Administered Red chili 10 40 30 Ramadan Ramadan 8 2017 2019 20 6 Raw food 10 Non-food Food 4 0 -10 2 Core Headline -20 Ramadan 2018 0 -30 -2 -40 May-17 Nov-17 May-18 Nov-18 May-19 May-17 Nov-17 May-18 Nov-18 May-19 Source: BPS; World Bank staff calculations Source: BPS; World Bank; World Bank staff calculations Note: Food prices are a weighted average of the raw and processed food price components of the CPI. Raw food prices Declining for the third consecutive quarter, raw food price inflation plunged from an average drove the of 4.0 percent in Q4 2018 to an average of 1.1 percent in Q1, the lowest since Q4 2017 (Figure moderation in food A.23), reflecting the declining prices of several staple foods such as rice, cooking oil, chili, sugar inflation and flour (Figure A.26). Despite recent El Nino-related events 41 which dampened agriculture output in the region, the supply of food in Indonesia remained stable in Q1 2019. This was due to the recently enhanced distribution network of new toll roads and sea lanes, effective government monitoring of food supplies, and timely import of food products in anticipation of higher demand during significant events, such as the April 2019 general elections. 38 Bank Indonesia (2019). 39 Includes both foodstuff and prepared food. 40 Thomas (2019). 41 Becker (2019). June 2019 THE WORLD BANK | BANK DUNIA 17 Oceans of Opportunity Indonesia Economic Quarterly In May, prices of foodstuff rose 4.1 percent following a 0.6 percent increase in March in the prices of several key domestic food commodities, such as eggs and flour, partly due to the Muslim fasting month of Ramadan. 5. Macro-financial conditions remained stable in Q1 Capital flows Extending the sharp turnaround in November 2018, Indonesia’s macro-financial conditions continued to return were relatively benign in Q1 as global financing conditions eased further. As the U.S. Federal in Q1, easing Reserve turned more dovish, capital flows returned to Indonesia and other emerging markets pressure off the (EM), leading the Rupiah to further recoup its losses from last year’s rout, when it depreciated Rupiah by 6.9 percent against the U.S. Dollar. Bond yields also fell as investors searched for yield. Citing the need to maintain economic stability, BI kept the benchmark policy rate at 6 percent but took accommodative measures to stimulate domestic demand. Meanwhile, banks remain well- capitalized and the average non-performing loan (NPL) ratio is low. With renewed world trade tensions, some global financial volatility has re-emerged in recent weeks, putting some pressure on emerging market currencies and bond yields, including those of Indonesia. Figure A.27: The Rupiah continued to recoup last year’s Figure A.28: …and appreciated in real effective terms losses against the U.S. Dollar… (percent change) (index, Jan 1, 2018 = 100) 104 6 Q4 2018 Q1 2019 2018 4 100 IDR Q1 avg 2 96 USD/IDR 0 IDR Q4 avg EMCI Q1 avg -2 92 JP Morgan EMCI -4 88 EMCI Q4 avg -6 84 Jan-18 May-18 Sep-18 Jan-19 May-19 Source: JP Morgan, Bank Indonesia, and World Bank staff calculations Source: JP Morgan Real Effective Exchange Rate, CPI based Note: Downward movement represents depreciation (2010=100), and World Bank staff calculations Note: Downward movement represents depreciation The Rupiah The Rupiah’s recovery vis-à-vis the U.S. Dollar continued in Q1 as Indonesia recorded net continued to portfolio inflows of USD 4.7 billion. 42 The Rupiah appreciated against the U.S. Dollar by 1.5 appreciate against percent in nominal terms (Figure A.27), less than the 2.8 percent gain in Q4 2018. The currency the U.S. dollar in Q1, also outperformed most other emerging market (EM) currencies, as the JP Morgan’s Emerging albeit less than in Q4 Market Currency Index (EMCI) appreciated by 0.8 percent in Q1. Although the Rupiah only 2018 appreciated by 0.9 percent in real effective exchange rate 43 terms, only the Thai Baht and Chinese Yuan performed better, while other EMs in the region experienced depreciations (Figure A.28). The Rupiah depreciated by 1.0 percent in April and May as the resurfacing of United States- China trade tensions led investors to retreat to safe haven assets, withdrawing an estimated USD 42 See Section A.3. 43 Real effective exchange rates are based on trade weighted averages of bilateral exchanges rates and adjusted by consumer prices. June 2019 THE WORLD BANK | BANK DUNIA 18 Oceans of Opportunity Indonesia Economic Quarterly 1.2 billion of portfolio funds 44 from Indonesia in May. The EMCI depreciated by 2 percent over the same period, as emerging markets similarly recorded large net outflows of USD 5.7 billion. In addition, the servicing of offshore loans and dividend payments, which typically occur in Q2, partly led to the increased domestic demand for U.S. dollars 45 in Indonesia. Bond yields fell in Sovereign bond yields across all tenors fell in Q1, with the 10-year bond yields falling 32 basis Q1, but maintained a points (bps), after declining by 20 bps in Q4 2018 (Figure A.29). The spread between IDR– constant spread vis- USD 10-year yields remained stable at 54 bps, similar to the previous two quarters. In a sign of à-vis U.S. Treasury continued investor appetite for Indonesian bonds, all auctions were oversubscribed by an yields average of 2.5 times in Q1. 46 However, investor interest was equally strong in Malaysia and Vietnam, where yields on 10-year sovereign bonds fell by a similar magnitude, and even stronger in the Philippines, where they fell by 141 bps (Figure A.30). The Emerging Markets Bond Index Plus (EMBI+) declined by 64 bps in Q1. In April, 10-year bond yields remained largely flat in April, averaging 7.9 percent, as investors postponed investment decisions on account of the Indonesian general elections. In May, however, yields rose 35 bps on heightened uncertainty from rekindled U.S.-China trade tensions. In line with the still positive growth outlook, Standard and Poor’s Global Ratings (S&P) recently in May upgraded Indonesia’s sovereign credit rating to 'BBB' (a notch above investment grade) 47 from 'BBB-' on strong growth prospects. This follows upgrades by Moody’s (April 2018), the Ratings and Investment Agency (March 2018), Japan Credit Rating Agency (February 2018) and Fitch (December 2017). Figure A.29: Bond yields fell in Q1, but the spread vis-à- Figure A.30: Yields on 10-year sovereign bonds from vis the U.S. Treasury yield remained stable Indonesia, Malaysia, and Vietnam fell in Q1 (LHS: IDN 10-year and EMBI+, percent; RHS: U.S. 10-yr, percent) (basis points) 9.0 4.0 75 Q4 2018 Q1 2019 8.5 3.8 50 IDN 10yr 3.6 8.0 25 3.4 7.5 3.2 0 EMBI+ 7.0 3.0 -25 6.5 2.8 -50 2.6 6.0 U.S. 10 -75 2.4 5.5 year (RHS) 2.2 -100 5.0 2.0 -125 -150 Philippines Malaysia Indonesia Vietnam Thailand Source: JP Morgan, CEIC, World Bank staff calculations Source: CEIC, Bank Indonesia, and World Bank staff calculations Note: EMBI+ is a JP Morgan emerging market bond index yield to maturity Overall lending rates Despite headline inflation being at its lowest since Q4 2009 (see Section A.4), monetary policy remain low, and has been on hold and largely neutral as BI focused on maintaining external stability and domestic average credit demand. BI has held the 7-day Reverse Repo rate at 6 percent (Figure A.31), as well as the deposit and lending facility rates at 5.25 and 6.75 percent respectively, since December 2018. 44 World Bank staff calculations using data from the International Institute of Finance. 45 Indeed, the Rupiah depreciated by a similar magnitude over the same period last year. 46 World Bank staff calculations based on press releases from the Ministry of Finance. 47 Equivalent to Moody’s Baa2 and Fitch’s BBB. June 2019 THE WORLD BANK | BANK DUNIA 19 Oceans of Opportunity Indonesia Economic Quarterly growth has Most other central banks in the region have also held, although a few did ease rates in May. 48 plateaued… Despite last year’s tightening cycle, 49 average lending rates 50 have remained low at 10.9 percent, unchanged from Q4 2018, suggesting that banks continue to absorb higher borrowing costs. 51 However, credit growth moderated to 11.8 percent yoy on average in Q1 (Figure A.32) from 12.2 percent in Q4 2018 as consumer loans trended downwards. Investment loan growth nonetheless remained strong, picking up to 13.1 percent yoy in Q1 compared to 11.1 percent previously, indicating investment is increasingly being financed by bank lending. 52 Figure A.31: Overall lending rates remain low… Figure A.32: …while average credit growth plateaued (percent) (yoy growth, percent) 13 7 14 Consumption lending rate 7 Day Reverse Repo Rate Working capital loans (RHS) 6 12 12 Credit growth 10 5 Consumption 8 11 Working capital lending rate 4 Investment loans 6 Investment lending rate 10 3 4 Mar-18 Jun-18 Sep-18 Dec-18 Mar-19 Mar-18 Jun-18 Sep-18 Dec-18 Mar-19 Source: CEIC, Bank Indonesia, and World Bank staff calculations Source: CEIC, Bank Indonesia, and World Bank staff calculations Figure A.33: Banking sector liquidity has stabilized, but Figure A.34: Banks remain well-capitalized and the remains sluggish average NPL ratio is low (LHS: Loan to funding ratio, percent; RHS: liquid assets to deposits and (LHS: Capital adequacy ratio, percent; RHS: non-performing loan ratio, short-term funding, percent) percent) 94 25 24.0 3.5 Capital adequacy 93 24 ratio 23.5 92 23 22 23.0 3.0 91 21 90 22.5 Liquid 20 89 Loan-to- assets to funding 19 22.0 2.5 deposits & 88 ratio 18 Non-performing short-term funding 21.5 loan ratio (RHS) 87 17 (RHS) 86 16 21.0 2.0 Mar-17 Jul-17 Nov-17 Mar-18 Jul-18 Nov-18 Mar-19 Mar-17 Sep-17 Mar-18 Sep-18 Mar-19 Source: Bank Indonesia and OJK, World Bank staff calculations Source: OJK, CEIC, and World Bank staff calculations 48 Philippines’ Bangko Nga Sentral lowered rates by 25 bps on May 5th, followed by Bank Negara Malaysia on May 7th, also by 25 bps. 49 Bank Indonesia raised policy rates six times in 2018 by a cumulative 175 bps. 50 The average of lending rates for consumption, working capital, and investment loans. Working capital loans are short-term credits given to finance the working capital needs of a debtor, e.g., property or agribusiness loans; investment loans are medium- to long-term credits to purchase capital goods and services required for a new business or project. Source: BPS. 51 Indonesian banks are able to absorb the higher borrowing costs because of high net interest margins of 5.1 percent, much higher than neighboring countries such as Thailand (2.9 percent), Malaysia (2.1 percent) and Singapore (1.5 percent). Source: World Bank Finstats and OJK. 52 This is in line with the rotation of investment away from mining, which tends to self-fund via retaining earnings, to non-mining investment, which traditionally relies more on bank financing. June 2019 THE WORLD BANK | BANK DUNIA 20 Oceans of Opportunity Indonesia Economic Quarterly …in part due to Still-sluggish banking liquidity also contributed to the slower credit growth. Despite BI’s efforts dwindling banking to shore up liquidity, the ratio of liquid assets to deposits and short-term funding 53 remained liquidity compared stable at 20.2 percent in Q1, unchanged from the previous two quarters. The loan-to-funding to a year ago. ratio 54 reached 92.1 percent, also unchanged from Q4 2018 (Figure A.33). To spur bank lending, BI announced that it would increase the frequency of open-market operations through FX swaps and repo term auctions, among other measures. 55 Other financial stability indicators remain adequate: the gross non-performing loan (NPL) ratio remained on a declining trend, hovering around 2.6 percent 56 in Q1, on par with Q4 2018, whereas the capital adequacy ratio (CAR) averaged 23 percent, well above the minimum regulatory CAR of 12 percent (Figure A.34). 6. Weaker revenues, strong spending, in the lead up to Indonesia’s 2019 elections Strong revenues in The fiscal deficit came in at 1.8 percent of GDP for 2018, the lowest since 2012, due to 2018 gave way to strengthened fiscal revenue collections and despite the fiscal impact of natural disasters. The some weakening this Central Government debt-to-GDP ratio increased slightly to 29.8 percent, reflecting in part year while rising interest rates and currency depreciation. However, the momentum in revenue collections expenditures rose slowed in the first four months of 2019, as total revenue collections softened to the lowest in prior to elections three years on weaker VAT, commodities-linked revenues and non-oil and gas (O&G) income taxes. By contrast, expenditures grew at the fastest pace in the past three years. This was due to higher disbursement of social spending, personnel, and subsidies in the quarter preceding Indonesia’s first ever simultaneous presidential and parliamentary elections. 57 Capital spending, however, contracted for the second consecutive year. The 2018 fiscal Revenues collections increased 16.6 percent yoy in 2018 compared to 2017, on the back of tax deficit narrowed administration and tax policy reforms and a cyclical increase in commodity prices. As a result, thanks to a jump in the tax‐to‐GDP 58 ratio rose to 10.2 percent from 9.9 percent in 2017, after five years of yoy revenue collection declines. On the expenditure side, government spending rose by 10.3 percent yoy compared to 2017, driven by the growth of material, energy subsidies, and personnel spending. For the first time since reforms were enacted in 2014-2015, expenditures on energy subsidies rose from 0.7 percent of GDP in 2017 to 1.0 percent of GDP in 2018. Nonetheless, the Government managed to contain spending by under-executing the capital budget and using contingency funds within the approved budget envelope for energy subsidies and natural disasters. 59 As a result of strong revenues and contained spending, the Government achieved a fiscal deficit of 1.8 percent of GDP in 2018, 60 the smallest since 2012. The debt ratio Total Central Government debt amounted to IDR 4,418.3 trillion by end-2018, equivalent to increased slightly in 29.8 percent of GDP. This represented an increase of 0.4 percentage points from 2017 (Figure 53 Ratio of liquid assets to total deposits and short-term funding (liabilities to Bank Indonesia and interbank liabilities) for all commercial banks. 54 Ratio of total credit to total third-party funds and issued securities for all commercial banks. 55 Other notable measures include increasing the supply of domestic non-deliverable forwards by simplifying regulations and lowering the cost of the National Clearance System. Bank Indonesia (2019). 56 The NPL ratio is higher among some groups of banks, especially regional development banks. 57 In previous years, the timing of the presidential elections and parliamentary elections differed. The 2019 elections were the first in Indonesia’s history that witnessed both elections on the same day. 58 Domestic and international taxes only, excluding non-tax revenues. 59 Preliminary estimates of the impact from the West Nusa Tenggara (Lombok) earthquakes and the Central Sulawesi (Palu) earthquake and tsunami, amounted to at least USD 2.2 billion in direct damages and USD 0.8 billion in economic losses. Total reconstruction needs are projected at about USD 3.4 billion (0.3 percent of GDP) between 2019 and 2021. These amounts exclude damages and losses from the Sunda Strait tsunami (Anak Krakatau), the estimates for which are still pending. 60 The primary fiscal deficit was recorded at 0.1 percent of GDP, the lowest since 2012. June 2019 THE WORLD BANK | BANK DUNIA 21 Oceans of Opportunity Indonesia Economic Quarterly 2018 in part due to A.35). Sustained GDP growth put downward pressure on the growth of the debt-to-GDP ratio, rising real interest but rising real interest rates 61 and the depreciation of the Rupiah against major currencies in rates and exchange 2018 led to an increase in debt-to-GDP. The reduction in large debt-financed capital injections rate depreciation into infrastructure State-Owned Enterprises (SOEs) and Public Service Agencies (Badan Layanan Umum or BLUs) in 2018 compared to 2015 and 2016 also helped contain the rise in the debt- to-GDP level. 62 Figure A.35: Central Government debt-to-GDP Figure A.36: Revenue collections slowed as VAT increased slightly due to rising interest rates and collections contracted currency depreciation (January–April revenue contribution to growth, yoy, percentage points) (percentage point contribution to increase in debt, percent of GDP) Other International trade taxes Public debt (RHS) Real interest effect 5% 35% Excises VAT/LGST Growth effect Primary deficit effect Income taxes N-O&G O&G related revenues 4% Exchange rate effect Capital injections 30% Total revenues 22.4 25 Residual Change in debt 3% 25% 20 14.8 15 11.6 2% 20% 10 3.8 5 0.5 1% 15% 0 0% 10% -5 -1% 5% -10 -9.8 -9.8 -15 -2% 0% 2014 2015 2016 2016 2017-TA 2018* 2019 2013 2014 2015 2016 2017 2018 Source: Ministry of Finance, LKPP, World Bank staff calculations Source: Ministry of Finance; World Bank staff calculations Note: O&G related revenues refer to oil and gas income tax, dividends and royalties (non-tax revenues), N-O&G stands for non-oil and gas income tax; VAT/LGST stands for value-added tax/luxury goods sales tax; “Other” includes: land/property taxes, other tax revenues; non-oil and gas non-tax revenues; other non-tax revenues (profits of public enterprises, revenues from Public Service Agency [BLU], and other non-tax revenues [PNBP]); and grants. 2017-TA means that total revenues exclude redemption fees collected under the Tax Amnesty Program. 2018* is a yoy comparison against 2017-TA. Revenue growth at Growth of revenue collections from January-April 2019 plunged to the lowest in three years, the beginning of after reaching a record high of 22.4 percent for the same period last year. Total revenue grew 2019 slowed as only by 0.5 percent yoy (Figure A.36), mainly due to contraction of value-added taxes and other collections from taxes, as well as slower growth of commodity-linked revenues and of non-O&G income taxes. VAT contracted While a high base effect is one explanatory factor 63, slower tax performance was also tied to the weakening of value-added taxes/luxury goods sales taxes (VAT/LGST), which contracted for the first time since 2015, by 4.4 percent. Both domestic and import VAT, the lion’s share of VAT collections, experienced slower growth. This was due primarily to (i) slowing imports and lower commodity prices; (ii) the Government’s target of improving services to businesses through accelerated VAT refunds; 64 and (iii) the changing pattern of domestic private 61 Higher interest rates reflect a normalization of global interest rates and a shift to commercial borrowing by the Government. 62 The decomposition of the debt-to-GDP ratio into its drivers (real interest rates, real GDP growth, exchange rate, primary fiscal balance and a residual) is explained in the IMF’s “Staff Guidance Note for Public Debt Sustainability Analysis for Market-Access Countries.” Annex I. see Tiwari (2019). 63 Non-O&G income taxes grew by 32.3 percent from January to April 2018 due to the strong performance of corporate taxes (Article 29) on the back of strong growth in the manufacturing sector over the same period in 2018. 64 Import and domestic VAT contracted at -10.5 percent and -7.9 percent, respectively. In January-April 2019, total refunds increased by 38 percent yoy compared to the same period in 2018, which was driven by accelerated VAT refunds that grew by 88 percent yoy. June 2019 THE WORLD BANK | BANK DUNIA 22 Oceans of Opportunity Indonesia Economic Quarterly consumption ahead of the general elections. 65 In addition, lower profits from SOEs dragged the growth of other taxes. Meanwhile, excise taxes registered their strongest performance at 82.2 percent growth due to a shift in the bulk of tobacco excise payment from year-end to year- beginning, as companies benefited from the government’s decision to maintain the 2018 tobacco tariffs in 2019. 66 Government Total Government spending from January to April stood at IDR 632 trillion or 25.7 percent of spending grew total budget, on par with the budget execution rate in the previous year at 8.4 percent yoy (Figure rapidly, particularly A.37). Spending growth was noticeably strong mainly due to a pick-up in social spending, driven by social personnel, and subsidies, which together contributed 8.2pp to spending growth over this period. spending, personnel, This reflected the Government’s policy of supporting growth by stimulating demand from the and subsidies middle class in the lead up to the general elections. Social spending grew by 75.7 percent yoy (Figure A.38) as the Government disbursed more than half of the social budget in the first four month of the year, mainly through the Family Hope Program (Program Keluarga Harapan or PKH). 67 Moreover, advance payments for the Subsidized Health Premium program (Penerima Bantuan Iuran or PBI-JKN) beneficiaries has partly accelerated expenditure execution. Personnel spending grew by 11.9 percent, more than triple the growth in the same period last year, due to higher civil servants’ salaries and performance allowances. 68 Meanwhile, growth of subsidies stayed robust at 49.2 percent yoy due to higher realization of energy subsidies and faster disbursement of subsidies for fertilizer and credit programs. 69 Capital spending The Government underspent its capital budget for the second consecutive year. Capital remained sluggish spending contracted by 15.1 percent yoy from January to April, following the contraction of 2.4 for a second percent over the same period last year. The slowdown is partly linked to restrictions in imports consecutive year of capital goods due to concerns over the widening of the current account deficit, 70 but other factors are also at play. 71 67 During election periods, consumption from non-profit institutions serving households tends to increase, but these institutions are largely VAT- exempted, hence the negative impact on VAT collections. As noted in section 1, household consumption growth also slowed in this period, impacting domestic VAT collections. 66 In previous years, the Government increased the tobacco excise on an annual basis. This meant that it was cheaper for tobacco companies to purchase tobacco excise stamps for anticipated production and sales in the new year at the end of the previous year. The incentives changed in 2019 as tobacco excise tariffs were kept unchanged from 2018. See Kemenkeu (2019); and Kontan (April 24, 2019). 67 This was mainly driven by the new addition of non-flat indices to the PKH beneficiaries. The new indices expand PKH benefits between 30 to 110 percent compared to regular allocations to families that fit the criteria in the new indexes. Specifically, the indexes adjust the PKH’s benefit of IDR 1.8 million per family per year to the following: (i) families with pregnant women, children under five, elderly people or persons with disabilities will receive additional IDR 2.4 million per person per year ; (ii) families with elementary-school-age, junior-high-school-age, and high- school-age children will get additional IDR 0.9 million, IDR 1.5 million, and IDR 2 million per person per year, respectively; (iii) each family will get additional permanent assistance of IDR 550,000 per year; while (iv) families living in difficult and remote areas will get additional permanent assistance of IDR 1 million per year. See: https://nasional.kontan.co.id/news/dana-bantuan-pkh-akan-cair-mulai-pekan-ketiga-januari 68 Riana (2019); Koran Jakarta (April 18, 2019). 69 APBN Kita (May, 2019). 70 See detailed discussion in Section A.1. 71 Slower capital expenditure growth contrasts with the fact that capital-intensive ministries such as the Ministry of Public Works and Ministry of Transportation were still contracting out more than half their projects. Late procurement, a challenge in previous years prior to Government reform in 2017-2018, no longer appears to be a binding constraint. According to some reports, contractors are completing their work but have not filed their payment claims. See Merdeka (March 25, 2019); Azka (2019). For references on project delays, see Sidik (February 11, 2019); and Aldin (2019). June 2019 THE WORLD BANK | BANK DUNIA 23 Oceans of Opportunity Indonesia Economic Quarterly Figure A.37: Government expenditures growth was Figure A.38: Larger disbursement of the social budget mainly driven by higher social spending occurred (January-April expenditure contribution to growth, yoy, percentage points) (January-April expenditure as percent of budget allocation, percent) Personnel Material 2017 2018 2019* 60 52.9 Capital Interest Payments Energy Subsidies Non Energy Subsidies 50 Social Transfers to SNG 40 Others* Total Expenditures 30 30 32 20 30 25.7 19 19 21 17 18 15 8.3 8.4 20 11 8 10 10 9.2 1 5 -1.2 0 0 -5 -10 2016 2017 2018 2019* Source: Ministry of Finance, World Bank staff calculations Notes: *Fuel and gas for 2018 is not the figure published by the Government’s APBN Kita, as it excludes arrears payments which are added back to the “Others” spending category as per the budget classification. *Others from 2017 onwards includes arrears payments from previous energy subsidies The cumulative With higher spending growth, the cumulative fiscal deficit reached IDR 101 trillion by end-April fiscal deficit is larger 2019 compared to IDR 55.1 trillion for the same period in 2018. Meanwhile, the total net than last year in financing was at IDR 143.8 trillion, in anticipation of project financing and refinancing needs. 72 nominal terms Central Government While increasing modestly in Figure A.39: Government debt stock position end-March debt levels remain recent years, total Central (IDR nominal trillion, percent of GDP, RHS) manageable Government debt until end of 4,000 Loans Govt bonds 100% March 2019 reached IDR 4,567.3 trillion, equivalent to 30.1 percent 3,500 Debt-to-GDP's legal of GDP 73, well below the legal 3,000 threshold 80% threshold of 60 percent (Figure A.39). With more than half of the 2,500 60% total debt stock denominated in 2,000 domestic currency bonds and only 9.9 percent 74 having a short- 1,500 27.4% 28.3% 29.4% 29.8% 30.1%40% term maturity, exposure to 1,000 exchange-rate and refinancing 20% risks is prudently managed. 500 - 0% 2015 2016 2017 2018 Mar-19* Source: Ministry of Finance, LKPP, World Bank staff calculations Note: *With exception of 2019, 2015-2018 debt stock position is by end- of December. The 2019 GDP is Government’s projections, estimated in end-of April using interpolations method. 72 Profil Utang Pemerintah Pusat (April, 2019). 73 Based on the Government’s projection for 2019 nominal GDP, which was estimated at the end of April using interpolation. 74 Ibid. June 2019 THE WORLD BANK | BANK DUNIA 24 Oceans of Opportunity Indonesia Economic Quarterly 7. Labor market conditions remain buoyant Indonesia’s labor In line with robust economic growth and strong domestic demand, Indonesia’s labor market market remained conditions remained buoyant at the beginning of 2019. The employment rate rose to another buoyant with… record high in February 2019, while the unemployment rate fell to a record low. With the labor force growing more rapidly than the working-age population, the labor force participation rate rose to a four-year high in February 2019. At the same time, employee wages saw a recovery with average net monthly employee wages growing 5.2 percent yoy after a decline last year. … record high The overall employment rate inched Figure A.40: Employment rate reached a record high employment rates… up to a record high of 65.8 percent and the unemployment rate was a record low in yoy in February 2019, up from 65.7 February 2019 percent in February 2018 (Figure (percent, percent) A.40). 7576 After growing by 2.0 Labor force growth (LHS) Employment growth (LHS) percent in February 2018, Working-age population growth (LHS) employment grew by a further 1.8 Unemployment rate (LHS) Employment rate (RHS) percent to reach an all-time high of 6 68 129.4 million. During this time, 2.3 5 66 4 million jobs were created, lower than 3 the 2.5 million jobs created a year ago 2 64 but more than the number of new 1 62 labor market entrants (Table A.3). On 0 -1 2014 2015 2016 2017 2018 2019 60 an industry basis, the wholesale and Source: National Labor Force Survey (Survei Angkatan Kerja retail trade industry contributed most Nasional, Sakernas), World Bank staff calculations to employment growth by creating Note: Includes February readings only more than 923,000 jobs. Similarly, the accommodation and food and beverage industry added around 700,000 jobs 77 and construction added 560,000 positions. 78 These three industries together accounted for 95 percent of new jobs. In line with continued rural-urban migration, the agriculture industry, which employs nearly 30 percent of all workers, saw a small decline in employment. Table A.3: The wholesale and retail trade, accommodation and food and beverage, and construction industries accounted for 95 percent of job creation in February 2019 Feb 2018 Feb 2018 Feb 2018 Feb 2019 Feb 2019 Feb 2019 Employment Employment Job Employment Employment Job Industries Share Growth Rate creation Share Growth Rate creation (millions) (millions) Total Employment 100.0 2.0 2.5 100.0 1.8 2.3 Wholesale/Retail Trade; Vehicle Repair 18.5 1.3 0.3 18.9 3.9 0.9 Accommodation/Food Service Activities 4.9 11.1 0.6 5.4 11.2 0.7 Construction 5.6 -1.5 -0.1 5.9 8.0 0.6 Manufacturing 14.1 4.9 0.8 14.1 1.7 0.3 Education 5.0 -1.3 -0.1 5.1 4.6 0.3 Business Activities 1.2 9.4 0.1 1.3 6.8 0.1 Transportation and Storage 4.0 3.2 0.2 4.0 2.1 0.1 75 Indonesian labor market statistics are published twice a year in February and August. However, comparisons of February and August data values are avoided as there are seasonal differences, such as in crop seasons, which would affect workforce employment and other labor market statistics. 76 The employment rate is the number of employed workers divided by the total working-age population. Its recorded value tends to be higher in the February Sakernas than the August Sakernas. 77 While changes in employment creation in most sectors in 2018 are likely due to short-term sectoral and labor market dynamics, employment creation in the wholesale and retail trade, restaurants and hotels industries have been steadily increasing since 2013, from around 589,000 additional employment in 2013, 1.5 million in 2017, to 2.6 million in 2018. A key contributing factor to this continued growth is the booming online digital platform and the tourism industry, which account for around 85 percent of employment in these two industries in 2016 (Nesparnas 2017). 78 Both the wholesale and retail trade industry and the accommodation, food, and beverage industry are low-wage industries with wages are below the national average wage of IDR 2.8 million.. June 2019 THE WORLD BANK | BANK DUNIA 25 Oceans of Opportunity Indonesia Economic Quarterly Financial/Insurance Activities 1.3 -5.4 -0.1 1.4 5.0 0.1 Real Estate Activities 0.2 -19.5 -0.1 0.3 26.7 0.1 Mining & Quarrying 1.1 1.9 0.0 1.1 -1.0 0.0 Water Supply/Sewerage/Waste 0.3 20.3 0.1 0.3 -3.6 0.0 Management/Remediation Human Health/Social Work Activities 1.6 9.2 0.2 1.5 -1.7 0.0 Electricity and Gas 0.3 14.5 0.0 0.2 -9.9 0.0 Information and Communication 0.8 17.6 0.1 0.7 -5.8 -0.1 Public Admin/Defense/Compulsory 4.2 6.4 0.3 4.0 -3.7 -0.2 Social Sec Agriculture, Forestry, Hunting/Fishery 30.5 -2.5 -1.0 29.5 -1.5 -0.6 Other Services Activities 6.4 14.3 1.0 4.6 -27.2 -2.2 Source: National Labor Force Survey (Survei Angkatan Kerja Nasional, Sakernas), World Bank staff calculations. … and record low The record high employment rate was matched by the unemployment rate falling to a record unemployment rates low of 5.0 percent in February 2018 from 5.1 percent a year ago. The number of unemployed people fell by 51,260 to 6.8 million in February from 6.9 million in the same month last year. However, the rural–urban disparity persists with the urban unemployment rate at 6.3 percent, almost double the rural unemployment rate of 3.5 percent. The overall unemployment rate has been consistently declining since 2015, despite the growing labor force, which totaled 136.2 million in February this year, an increase of 2.2 million (1.7 percent) from a year ago. With the working-age population growing at only 1.5 percent, the Labor Force Participation Rate (LFPR) accordingly ticked up from 69.2 percent in February 2018 to 69.3 percent in February this year, a four-year high. The higher LFPR is also in line with robust economic activity, motivating people to join the labor force. Significant gender disparity still exists, with the male LFPR at 83.2 percent while the female LFPR is at 55.5 percent. Figure A.41: Most industries saw nominal wage increases this year (Growth rate of Average Net Monthly Employee Wages, percent) 21.9 February 2018 February 2019 20 16.9 16.4 15 11.9 10.1 10.0 8.6 8.3 7.7 10 7.4 7.0 5.2 4.8 5 0 -0.3 -0.7 -1.4 -1.4 -5 -10 -15 -13.2 -20 Source: National Labor Force Survey (Survei Angkatan Kerja Nasional, Sakernas), World Bank staff calculations. Nominal wages In contrast to February 2018, employee wages saw a recovery with average net monthly recovered with a employee wages increasing 5.2 percent yoy (Figure A.41), significantly better than the 1.8 percent number of industries decline registered in February 2018, coupled with an inflation rate of 3.2 percent. The wage June 2019 THE WORLD BANK | BANK DUNIA 26 Oceans of Opportunity Indonesia Economic Quarterly having double-digit increase was broad-based, with only a handful of industries showing lower wages relative to last wage increases year. Mining and quarrying workers saw the largest wage increase of more than 20 percent. Agriculture and forestry, electricity and gas, real estate, and health services were other industries that experienced double-digit wage growth. Industries with significant employment shares, such as manufacturing and wholesale and retail trade, saw wage increases of more than 7 percent. Despite the robust Despite the robust labor market outturn in February 2019, the labor market continues to have labor market structural issues. These include relatively low-quality job creation as most new jobs are in outturn, structural relatively low-wage sectors, high youth unemployment rate (19.7 percent in August 2018), 79 low issues in jobs remain female labor force participation, and the gender wage gap with male wages being 20 to 25 percent higher than female wages. 80 8. Poverty and inequality continue to decline in Indonesia The poverty rate Indonesia’s poverty rate fell from 10.1 percent in September 2017 to 9.7 percent in September reached a record low 2018, a historic low (Figure A.42). In absolute terms, the number of poor people declined from of 9.7 percent in 27.6 million in September 2017 to 25.7 million in September 2018. The poverty gap, which September 2018 measures the extent to which the expenditure of poor households falls below the poverty line, also fell from 1.8 percent in September 2017 to 1.6 percent in September 201881. Although poverty has been declining, the rate of the decline has slowed in recent years. 82 Growth, rather than changes in the consumption distribution, continues to remain the main driver of the observed decline in poverty. Figure A.42: Poverty continues to fall Figure A.43: Vulnerability is still high, but the middle class (poverty rate, percent, LHS; change in poverty, percentage points, RHS) is expanding (percent) Change in National Poverty Rate, yoy (RHS) Poor Vulnerable National Poverty Rate (LHS) Aspiring middle class Middle class 25 Urban Poverty Rate (LHS) 2.5 Rural Poverty Rate (LHS) Upper class 100% 2 20 1.5 80% 15 1 0.5 60% 10 0 40% -0.5 5 -1 20% 0 -1.5 2006M 2007M 2008M 2009M 2010M 2011M 2011S 2012M 2012S 2013M 2013S 2014M 2014S 2015M 2015S 2016M 2016S 2017M 2017S 2018M 2018S 0% 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Source: National Socio-Economic Survey (Survei Sosial Ekonomi Source: National Socio-Economic Survey (Survei Sosial Ekonomi Nasional, Susenas). M=March, S=September Nasional, Susenas). 79 Youth is defined as those 15-24 years old. 80 A forthcoming WB study will present analysis on this topic of gender disparity in wages. Mincerian regressions using 2016 to 2018 Sakernas data were estimated to determine the return to years of education, years of experience, and training for wage employees. Regressions controlled for occupational status, “completed training with certificate”, gender, disability, sector and rural–urban and were estimated by sector for all sectors. 81 The poverty gap depicts the depth of poverty or the average minimum cost of eliminating poverty, hence the fall in the poverty gap means that, on average, the poor people in September 2018 are less poor than those in September 2017. This implies that it is easier/cheaper to eliminate poverty in September 2018 than it was in September 2017. 82 Between 2012 and 2018, the poverty rate based on the national poverty line decreased by only 0.4 percentage points on average per year compared to the average of 1 percentage point annual decline between 2007 and 2012. June 2019 THE WORLD BANK | BANK DUNIA 27 Oceans of Opportunity Indonesia Economic Quarterly Over 20 percent of Vulnerability – the proportion of households living just above the poverty line – has also the population is at continued to decline from 33.7 percent in 2002 to 20.2 percent in 2018, which indicates that risk of falling into one-fifth of the population are at risk of falling into poverty (Figure A.43). Hence, in addition poverty, but the to lifting the 9.7 percent of the population out of poverty, there is a need for pragmatic measures economically secure to be put in place to keep the vulnerable 20.2 percent of the population out of poverty. The population is also middle class 83 has, however, been growing by 10 percent every year, from 7.0 percent of the expanding population in 2002 to 22.5 percent in 2018. The expanding middle class will be a major driver of economic growth as it results in improved entrepreneurship and job creation, as well as improved social cohesion and political stability. 84 Poverty is still largely Poverty is still more prevalent in rural areas in absolute terms and in terms of population shares. a rural phenomenon In September 2018, poverty rate in rural areas was 13.1 percent, nearly double that of the 6.9 but the share of percent in urban areas; and 60.5 percent of the poor lived in rural areas. Also, out of the 1.8 urban population in million people that were lifted out of poverty between September 2017 and September 2018, the total number of 84.6 percent lived in rural areas. Poverty is more predominant in the rural areas because there is poor people is relatively limited access to income-generating opportunities, markets, health, and educational increasing facilities in rural than in urban areas. It should, however, be noted that although poverty is more prevalent in rural areas, the share of the urban population in the total number of poor people has gradually increased – from 34.7 percent in March 2002 to 39.5 percent in September 2018. This is primarily due to urbanization, that is, the relocation of rural dwellers to urban areas. Figure A.44: Although poverty declined nationally, the reduction was not uniform across the provinces (poverty rate, percent; decrease in poverty, percentage points) Poverty rate, % (LHS) Contribution to national poverty, % (LHS) Decrease in poverty rate, yoy (RHS) 30 1.4 1.2 25 1 20 0.8 0.6 15 0.4 10 0.2 0 5 -0.2 0 -0.4 Source: National Socio-Economic Survey (Survei Sosial Ekonomi Nasional, Susenas) While the national The reduction in poverty at the national level was not uniform across the provinces of Indonesia poverty rate (Figure A.44). In fact, poverty increased slightly in two provinces: West Sulawesi and North declined, a few Maluku. The largest yoy reduction in poverty in the year to September 2018 occurred in provinces saw an Gorontalo (1.3 percentage points) followed by Central Java, North Sulawesi, South Sulawesi, increase in poverty West Java, South Sulawesi, and Babel Islands. The rest of the provinces recorded poverty reductions of less than 0.5 percentage point over the same time period. Most of the poor were located in the Java Islands, but the poverty rate is highest in Papua (27.4 percent in Papua and 22.7 percent in West Papua). 83The middle class is the section of the population that is economically secure, with little chance of falling into poverty. 84World Bank (2018a). The aspiring middle class – who have escaped poverty but are not yet economically secure, with a greater-than-10-percent chance of being vulnerable next year – has also increased slightly from 41.1 percent in 2002 to 47 percent in 2018. June 2019 THE WORLD BANK | BANK DUNIA 28 Oceans of Opportunity Indonesia Economic Quarterly Inequality also Inequality also continued to decline, due mainly to increases in the share of the bottom and continued to fall, middle 40 percent in national consumption (Figure A.45 and Table A.4). Inequality at the primarily because of national level, measured by the Gini coefficient, declined from 39.1 in September 2017 to 38.4 increases in the in September 2018, thus continuing the downward trend that began in 2014. However, similar share of the bottom to the trend in poverty, the decline in inequality was not uniform. Across the urban–rural split, and middle 40 inequality decreased substantially (40.4 to 39.1) in urban areas but remained almost the same percent in national (32.0 to 31.9) in rural areas. The urban–rural differential in inequality decline resulted from consumption substantially larger shares of the bottom and middle 40 percent in urban consumption, in contrast to the rural population, where the share of the top 20 percent in rural consumption rose. Figure A.45: Inequality continued to fall Table A.4: The fall in inequality at the national level was (share of national consumption, percent) driven by increases in the consumption shares of the Bottom and Middle 40 percent (share of national consumption, percent) Period Bottom 40 Middle 40 Top 20 yoy change (RHS) Gini (LHS) National 45 4 Sep 2017 17.2 36.7 46.1 Sep 2018 17.5 37.0 45.6 3 Δ 2018-2017 +0.3 +0.3 -0.5 40 2 Urban Sep 2017 16.3 36.7 46.9 Sep 2018 16.8 37.5 45.8 35 1 Δ 2018-2017 +0.5 +0.8 -1.1 0 Rural Sep 2017 20.3 40.0 39.7 30 Sep 2018 20.4 39.8 39.8 -1 Δ 2018-2017 +0.1 -0.2 +0.1 25 -2 Source: Susenas Source: Susenas Note: M = March and S = September Figure A.46: The fall in inequality was not uniform across provinces (inequality rate, percent, LHS; decrease in inequality, percentage points, RHS) Gini (September 2018) Decrease in Gini (Sep 2017 to Sep 2018) , RHS 45 4 40 3 35 2 30 1 25 0 20 -1 15 -2 10 -3 5 -4 0 -5 Source: National Socio-Economic Survey (Survei Sosial Ekonomi Nasional, Susenas) The decline in The decline in inequality was also not uniform across provinces, which implies that more inequality was not customized approaches to inequality reduction are required for certain provinces (Figure A.46). June 2019 THE WORLD BANK | BANK DUNIA 29 Oceans of Opportunity Indonesia Economic Quarterly uniform across Across 33 provinces, inequality worsened in 12: Riau, Jambi, Bengkulu, West Java, West Nusa provinces Tenggara, South East Kalimantan, East Kalimantan, Gorontalo, West Sulawesi, Maluku, North Maluku, and West Papua; and remained unchanged in 2 provinces (East Nusa Tengara and Papua). The largest decline on inequality occurred in West Sulawesi (2.7 points), Riau (2.2 points), South East Kalimantan (1.7 points), West Nusa Tenggara (1.3 points), West Java (1.2 points) and Gorontalo (1.2 points). The reduction in inequality for the remaining provinces was below 1 Gini point. 9. Economic growth outlook and risks The outlook Despite being projected to be lower than before, Indonesia’s growth outlook remains positive continues to be in line with the recent S&P rating upgrade. The economy is expected to be lifted by robust positive; however, domestic demand, underpinned by strong fundamentals coupled with a coordinated and significant downside prudent macro-fiscal-exchange rate policy framework. Furthermore, some support from the risks persist external sector is expected for at least the near term, despite external conditions becoming even less conducive in recent weeks. Risks to the growth outlook have become even more tilted towards the downside, with renewed and escalating trade tensions likely to further weigh on world trade. Relatedly, slower global growth from weaker outturns among developed economies and China also pose substantial risks. Table A.5: Key economic indicators (growth yoy, percent, unless otherwise indicated) Annual Revision from previous IEQ 2018 2019f 2020f 2019 1. Main economic indicators Gross Domestic Product (GDP) 5.2 5.1 5.2 -0.1 Private consumption 5.1 5.2 5.2 0.0 Government consumption 4.8 5.1 5.0 -0.2 Gross fixed capital formation 6.7 5.0 5.2 -2.5 Exports of goods and services 6.5 2.6 3.5 -4.6 Imports of goods and services 12.0 0.0 3.2 -10.7 2. Other economic indicators Consumer price index 3.2 3.0 3.1 -0.5 3. Economic Assumptions Exchange rate (IDR/USD) 14237 14186 14475 -74 Indonesian crude price (USD/bbl) 67.5 64.3 63.3 -2.4 Source: BPS; Bank Indonesia; CEIC; World Bank staff projections Note: 2018 figures are actual outcomes; f stands for forecast. Statistical discrepancies and changes in inventories are not presented in this table. All GDP components are based on the latest GDP data. Exchange rate and crude oil price assumptions are average annual data. Revisions are relative to projections in the December 2018 edition of the Indonesia Economic Quarterly. Growth is expected Given the weaker-than-expected outturn in Q1 and renewed trade tensions, economic growth to ease to 5.1 percent in 2019 is forecast to ease to 5.1 percent and then tick up to 5.2 percent in 2020 (Table A.5). in 2019 on more The modest acceleration in private consumption is expected to continue due to the general unfavorable external elections, low inflation, and buoyant labor market conditions. Despite lower-than-expected conditions year-to-date revenue collections, ongoing fiscal reforms are projected to expand the fiscal space, allowing government investment to strengthen as infrastructure projects come back online and post-disaster reconstruction begins. While notably slower than last year’s six-year high, investment growth is expected to remain robust, especially after the elections with reduced political uncertainty and more optimistic business sentiment on the proposed structural reforms. Government consumption is also expected to strengthen as the Government embarks on new June 2019 THE WORLD BANK | BANK DUNIA 30 Oceans of Opportunity Indonesia Economic Quarterly programs to boost human capital investment. 85 Amid deteriorating global conditions, slower world trade, and slower growth of Indonesia’s major trading partners, exports growth is forecast to be muted. Import growth is also expected to be weaker, in line with slower but still robust investment growth and as government policies to curb imports are expected to remain in place in the near-term. Export growth is also projected to exceed import growth and thus the external sector will support total output growth for this year and the next. The terms-of-trade are projected to deteriorate significantly in 2019 Figure A.47: Indonesia’s terms of trade are projected Table A.6: …as prices of all its major commodities except to deteriorate in 2019… rubber are expected to ease (index 2017=100) prices, historical and forecast 110 2017 2018 2019f 2020f 2017 Rubber (USD/kg) 2.0 1.6 1.7 1.8 2018 100 Base metals (index) 84.9 90.6 87.4 89 Coal, Australian 90 88.5 107 94 90 (USD/mt) Crude oil average 52.3 68.3 66 65 (USD/bbl) 80 2019f LNG Japan, (USD/mt) 8.6 10.7 7.4 7.5 70 Palm oil (USD/mt) 751 639 600 623 Source: BPS; World Bank; World Bank staff calculations Source: World Bank Commodity Markets Outlook, April 2019 Note: The net trade-weighted price index is constructed over Note: f stands for forecast. Indonesia’s six major export commodities (rubber, base metals, coal, oil, LNG, and palm oil). 2017 and 2018 are historical; 2019 is forecasted. Lower prices of Indonesia’s terms-of-trade (ToT) 86 are expected to be significantly lower in 2019 than in 2018 Indonesia’s major (Figure A.47). Indonesia’s net trade-commodity price index 87 is expected to decline by 16 points commodities lead to in 2019 due to the lower projected prices of its key commodities, especially of coal (Table A.6). a projected weaker Coal prices are expected to decline as advanced economies shift to natural gas for electricity terms-of-trade in generation, and environmental considerations reduce demand from China and India. Crude oil 2019 prices have also been revised downwards due to a weaker-than-expected global growth outlook and greater-than-anticipated U.S. production. However, since Indonesia is a net importer of oil, lower oil prices will improve the country’s terms-of-trade. The current account deficit is expected to narrow in 2019 The current account In line with weakening global trade, growth of total exports and imports values are expected to deficit is projected to be relatively muted, particularly in the near term. Despite slower projected growth among improve in 2019 Indonesia’s MTPs and a weakening of the commodity terms-of-trade, the CAD is forecast to narrow to 2.8 percent of GDP in 2019 and further to 2.5 percent of GDP in 2020 on easing 85 Selected programs mentioned in President Jokowi’s campaign speeches include the Smart Indonesia Scholarship Card for Tertiary Education, the Pre-Employment Card for recent university graduates seeking employment and the Affordable Food Card targeted to low income households for purchasing food at subsidized prices. See The Jakarta Post (December 04, 2018); Tempo (February 25, 2019). 86 Terms of trade (TOT) refers to the relative price of imports in terms of exports and is defined as the ratio of export prices to import prices. It can be interpreted as the amount of import goods that an economy can purchase per unit of export good. ℎ,, � �−�, � 87 The Net Trade-Commodity Price Index (NTI) is defined as: = where ℎ, = ∑�, and i= commodity type; , , �−∑ , t= month; p=period cycle (ex. 5 year average); N = number of commodities; T= base year; E=value of export; I=value of import. This edition of the IEQ updates the base year of the index to 2017 (in previous editions, 2015 was used as the base year). June 2019 THE WORLD BANK | BANK DUNIA 31 Oceans of Opportunity Indonesia Economic Quarterly investment growth and as government policies to discourage imports remain in place, especially in the near term (Figure A.48). Figure A.48: The current account deficit is expected to Figure A.49: Headline inflation expected to ease as food narrow in 2019 and 2020 as import-intensive investment eases prices moderated (percent of GDP) (change yoy, percent; last observation May 2019) 0.0 4.5 -0.5 4.0 Consumer Price -1.0 3.5 3.8% -1.5 3.1% -2.0 3.0% 3.0 3.2% -2.5 2.5 -3.0 Forecast -3.5 2.0 2013 2014 2015 2016 2017 2018 2019 2020 Jan-17 Jan-18 Jan-19 Jan-20 Jan-21 Source: Bank Indonesia; World Bank staff calculations Source: BPS; World Bank staff calculations Inflation is expected The Muslim festivities of Ramadan and Eid-ul-Fitr in May and June are expected to exert the to remain moderate usual seasonal increase in inflationary pressures due to higher consumption demand for food ahead of Ramadan and non-food goods. However, inflationary effects this year are likely to be more muted due to and Eid-ul-Fitr easing foodstuff price inflation, as relatively favorable weather conditions, combined with ample supplies, are expected to keep food prices relatively stable. 88 In addition, domestic rice prices are expected to remain steady in the coming months as rice 89 crops saw their peak harvest in April and May, thereby boosting domestic rice supply. Furthermore, Indonesia’s National Food Logistic Agency (Bulog) has maintained sufficient stocks of rice to last until the end of this year. 90 The easing food price inflation is expected to offset the seasonal increase in transportation costs. 91 Together with a relatively stable exchange rate and subdued commodity prices, overall pressures on headline inflation are expected to be largely contained. Annual average headline inflation rate is therefore projected to be at 3.0 percent yoy in 2019, inching up to 3.1 percent in 2020, remaining within Bank Indonesia’s target band of 2.5-4.5 percent (Figure A.49). 88 Xinhuanet (May 23, 2019). 89 Rice is the most important crop in the Indonesia. BPS data showed that the weight of rice is 3.8 percent in the total consumption or 20.2 percent in the food basket. 90 Bulog jamin stock beras Aman, tak akan impor sampai akhir tahun 2019, see Merdeka (May 03, 2019) 91 Due to increase in air fares since the end of 2018. See detailed discussion in Section 4. June 2019 THE WORLD BANK | BANK DUNIA 32 Oceans of Opportunity Indonesia Economic Quarterly Government budget deficit is set to widen in 2019 The fiscal deficit is Consistent with the macroeconomic Figure A.50: The World Bank projects a fiscal projected to widen outlook for 2019, and due in part to the deficit of 2.1 percent of GDP in 2019 slightly to 2.1 impact of continued tax reforms, 92 total (percent of GDP) percent of GDP in Central Government revenues are 20 Revenue Expenditure Fiscal Balance 2019 projected to grow 13.3 percent of GDP. 14.8 14.9 14.7 15.4 16 Meanwhile, total Government 12.3 13.1 12.9 13.3 expenditures are forecast to increase 12 15.4 percent of GDP. Thus, the fiscal deficit is set to widen slightly to 2.1 8 percent of GDP in 2019, 0.3 percentage 4 point higher than in 2018, but lower -1.8 -1.8 than the annual deficits recorded for -2.5 -2.1 0 the years 2013 through 2017 (Figure Budget WB -4 A.50, Table A.7). 93 2017 2018 2019 2019 Source: Ministry of Finance, World Bank staff calculations Note: 2017–2018 are actual audited figures Table A.7: World Bank fiscal budget projections (IDR trillion, unless otherwise indicated) Budget 2019 WB 2019* 2017 2018 2019 2019 vs Actual vs Budget 2018 (% 2019 (% World change) change) Actual Actual Budget Bank A. Revenues 1,666 1,944 2,165 2,106 11.4 -2.7 1. Tax revenues 1,344 1,519 1,786 1,679 17.6 -5.9 Oil & Gas Income taxes 50 65 66 64 1.5 -3.0 Non-Oil & Gas taxes, o/w: 1,101 1,248 1,511 1,409 21.1 -6.8 Non-Oil & Gas Income taxes 596 685 828 774 20.1 -6.5 VAT/LGST 481 537 655 607 22.0 -7.3 Land and building tax 17 19 19 20 0 5.3 Other taxes 7 7 9 7 28.6 -22.2 Excises 153 160 166 160 3.8 -3.6 International trade taxes 39 46 43 46 -6.5 7.0 2. Non-tax revenues 311 409 378 424 -7.8 12.2 Natural resources revenues 111 181 191 180 5.5 -5.8 Oil & Gas 82 143 160 139 11.9 -13.1 Non-Oil & Gas 29 38 31 40 18.4 29.0 Other non-tax revenues 200 229 188 244 -17.9 29.8 3. Grants 12 16 0 3 -100.0 200.0 B. Expenditures 2,007 2,213 2,461 2,442 11.2 -0.8 1. Central government 1,265 1,455 1,634 1,365 12.3 -16.5 Personnel 313 347 382 370 10.1 -3.1 Material 291 347 345 371 -0.6 7.5 Capital 209 184 189 287 2.7 51.9 Interest payments 217 258 276 255 7.0 -7.6 Subsidies, o/w: 166 251 224 226 -10.8 0.9 Energy 98 154 160 157 4.0 -1.9 Fuel 47 97 101 96 4.1 -5.0 Electricity 51 57 59 61 3.5 3.4 Non-energy 69 63 64 69 3.2 7.8 92These include the revenue gains from expected reforms such as revenue administrative reforms that target higher compliance rates. 93 This projection rests on the assumption that the Government does not undertake a significant revision of the Budget mid-year. Instead of narrowing its fiscal deficit, the Government may instead choose to increase spending mid-year, in line with an upward revision of the oil price assumption in its Budget, especially if revenue collections continue to perform strongly. June 2019 THE WORLD BANK | BANK DUNIA 33 Oceans of Opportunity Indonesia Economic Quarterly Grants 5 2 2 2 0 0 Social 55 84 102 92 21.4 -9.8 Other 9 16 114 17 612.5 -85.0 2. Transfers to regions 742 758 827 822 9.1 -0.6 C. Overall Balance -341 -269 -296 -336 10.0 13.5 D. Financing 367 306 296 313 -3.3 5.7 Memo items (as % of GDP) Total Revenues 12.3 13.1 13.5 13.3 Tax Revenues 9.9 10.2 11.1 10.6 Non-Tax Revenues 2.3 2.8 2.4 2.7 Total Expenditure 14.8 14.9 15.3 15.4 CG Expenditure 9.3 9.8 10.2 8.6 Transfer to regions and Village Fund 5.5 5.1 5.1 5.2 Overall Balance -2.5 -1.8 -1.8 -2.1 Assumptions: Real GDP growth rate (%) 5.1 5.2 5.3 5.1 CPI (%) 3.8 3.2 3.5 3.0 Exchange rate (IDR/USD) 13,384 14,427 15,000 14,186 Crude-oil price (USD/barrel) 51.2 48.0 70.0 64.3 Source: Ministry of Finance and WB Staff calculations. Downside risks have recently increased with renewed and escalating trade tensions External risks have Downside risks to Indonesia’s growth outlook remain substantial amid renewed global recently heightened uncertainty. In light of the recent re-escalation of trade tensions, uncertainties surrounding with the re- global trade policy have again heightened and continue to pose risks to world trade and China’s escalation of trade growth outlook. Malaysia, Vietnam, and other regional economies that partake in regional supply tensions chains could also experience slower growth if Chinese growth slows significantly. Further escalation of such trade disputes could weigh on regional growth and therefore on Indonesia’s economic growth through weaker exports and dampened commodity prices. Unfavorable external After a solid recovery from last year’s emerging market selloff, emerging market currencies are conditions can again under pressure as investors rebalance their portfolios with traditional safe-haven assets trigger another such as U.S. treasuries in lieu of emerging market assets. The Rupiah depreciated as much as 2.1 emerging market percent while the yield on benchmark 10-year sovereign bonds surged to a high of 21 basis asset selloff, hiking points in May. Higher bond yields and the consequent higher borrowing costs could dampen borrowing costs, and the recent credit recovery and further weigh on private investment and economic growth. This dampening persistent risk of renewed financial volatility justifies Bank Indonesia’s continued cautious investment approach to the policy rate and the pre-funding of government borrowing needs, as well as the need to maintain a healthy level of foreign reserves whenever the opportunity arises. Weaker-than- The growth outlook is also predicated on robust investment growth. Investment is in turn expected investor underpinned by continued strong investor confidence on the resilience of the Indonesian confidence will dim economy and the growth enhancing reforms that are expected to be undertaken by the prospects Government. Should the reforms not materialize or if investor confidence is shaken for other reasons, investment growth will be lower than expected, dampening overall growth. Monetary and fiscal With the re-escalation of trade tensions, there is a risk that pressures from capital outflows could policy could be intensify, weighing on the Rupiah and Indonesian bond prices. In the face of accelerated capital further tightened, outflows, the Government is likely to further tighten both monetary and fiscal policy to stem weighing on growth the outflows, weighing on growth in the immediate and medium-term. June 2019 THE WORLD BANK | BANK DUNIA 34 Oceans of Opportunity Indonesia Economic Quarterly Medium-term structural reforms such as collecting more revenue remain critical for enhancing potential growth Despite recent Reforms to collect more revenue are critical to expanding the necessary fiscal space for priority progress, Indonesia expenditures aimed at enhancing potential growth and providing basic services for all. While should continue improving the quality of spending is important for supporting priority development areas, there undertaking reforms are constraints imposed by Indonesia’s limited public spending envelope. Indonesia’s public to collecting more spending stood at 14.9 percent of GDP in 2018, compared to an average of 35.4 percent of revenue GDP in other emerging markets. Given the fiscal rule to keep the deficit below 3 percent of GDP, increasing public expenditure significantly is only possible if more revenue is collected. Despite recent improvements in revenue collection, Indonesia’s tax-to-GDP ratio of 10.2 percent of GDP in 2018 is still one of the lowest among its regional and emerging market peers. Weaker oil prices contribute to this low ratio. But more importantly, the country has a large gap between actual and potential revenue, with collection rates for major taxes estimated to be around 50 percent of potential tax revenues. Tax policy gaps and weak revenue administrative capacity, partly due to an outdated and inadequate core tax IT system, account for this large tax gap. Tax policy and administration reforms are thus needed to increase the tax-to-GDP ratio over the medium term, and to create fiscal space for spending on development priorities and for achieving development outcomes. June 2019 THE WORLD BANK | BANK DUNIA 35 Oceans of Opportunity Indonesia Economic Quarterly B. Oceans of opportunity: reforms for a sustainable blue economy in Indonesia Indonesia—the largest archipelagic country on Earth—is home to ocean ecosystems of tremendous economic potential. Indonesia's fisheries sector is the second largest in the world and plays a critical role in providing food security and employment. Indonesia's tourism sector benefits heavily from the country's world-class marine and coastal (MAC) assets, with MAC tourism being a key driver of visitor growth. However, recent analysis suggests that Indonesia's ocean-related sectors are generating returns below their potential. Deficiencies in fisheries management are diminishing the long-term productivity and economic value of Indonesia’s fishery assets. If not sustainably managed, rapid MAC tourism growth will threaten ecosystems and damage the natural assets that attract visitors. Realizing the full potential of these sectors will require reforms that improve natural resource management, conserve ecosystems, develop seafood supply chains, improve the tourist experience, and create opportunities to more strongly brand Indonesia's MAC assets. It will also require cross-sector investments and policies to protect MAC assets from threats such as marine debris that harm the tourism, fishing, and shipping industries. Through these steps and others, Indonesia can sustainably develop its oceans and harness the full potential of the Blue Economy. Indonesia’s ocean ecosystems have tremendous economic potential With more than 17,000 islands, 108,000 kilometers of coastline, and two-thirds of its territory at sea, oceans are central to Indonesia's identity and prosperity. Indonesia’s oceans confer an unparalleled source of comparative economic advantage and are estimated to support more than USD 280 billion 94 of economic activity annually. Yet, the evidence presented in this article shows that Indonesia's oceans have more to offer. Realizing this potential will deliver increased growth, jobs, food security, and reductions in the current account deficit, protect ecosystems for future generations, and further Indonesia's ambition of becoming a global “maritime nexus.” This article provides the rationale and path forward for achieving these goals via an integrated, multi-sectoral “Blue Economy” strategy. It begins with a discussion of the potential economic opportunities within two key sectors—fisheries and tourism—which have clear prospects for 94 Total estimated value of ocean-based and ocean-related economic sectors in 2013, in 2019 USD. This includes: marine construction (35 percent), marine manufacturing industries (26 percent), minerals, oil and gas (16 percent), fisheries and aquaculture (11 percent), marine tourism and recreation (10 percent), marine transportation (1 percent), and defense and government (less than 1 percent). See Ebarvia (2016). June 2019 THE WORLD BANK | BANK DUNIA 36 Oceans of Opportunity Indonesia Economic Quarterly growth and job creation, but for which resource use sustainability and environmental protection are crucial. Marine plastics pollution is a growing and severe threat to the development of both sectors, and this article next discusses options to address this central challenge to Indonesia’s oceans. It concludes with a description of the potential elements of an integrated Blue Economy strategy. 1. Indonesia can get more from its fisheries sector through improved management As the world’s Between 2013 and 2017, Indonesia harvested an average of 6.1 million metric tons of marine second largest fish fish annually, second only to China (Figure B.1). Marine capture fisheries and aquaculture producer, fisheries together employ around 7 million Indonesians, 95 representing a crucial source of employment play a critical role for for Indonesia's coastal populations. Indonesia is considered the world’s eighth most fish- Indonesia’s food dependent country: 96 fish contribute 52 percent of all animal-based protein in the Indonesian security and diet, well above the global average of 16 percent. In 2018, the sector contributed over USD 26.9 economy billion to the national economy, or around 2.6 percent of GDP, a larger proportion than in regional peers, including China (1.4 percent), the Philippines (1.5 percent), Malaysia (1.1 percent), and Thailand (0.67 percent). 97 Fisheries contributed to export earnings worth around USD 4.1 billion (2.4 percent of Indonesia's export total) in 2017, supplying around 2.6 percent of the global market (Figure B.2). 98 Figure B.1: Indonesia is the world’s second largest marine Figure B.2: Indonesia’s fishery export earnings are ranked capture fish producing nation 14th globally 2016 production, million metric tons 2016 fisheries export value, billion USD 0.0 4.0 8.0 12.0 16.0 0.0 5.0 10.0 15.0 20.0 China China Indonesia Norway United States of America Vietnam Russian Federation Thailand Peru United States India India Vietnam Chile Norway Canada Chile Denmark Thailand Sweden Spain Netherlands Canada Spain Ecuador Ecuador Denmark Russia Netherlands Indonesia Sweden Peru Source: FAO FishStat Database 2019 http://www.fao.org/fishery/statistics/en Despite current high Yet, marine pollution (one type of which—marine plastic debris—is discussed in Section 3 production, long- below) and overfishing threaten the growth in the social and economic value of Indonesia's term growth is not marine fisheries. Fisheries are natural assets that, if managed well, provide a flow of present and assured future economic returns. Mismanagement, such as harvesting above sustainable limits (overfishing), undermines long-term returns by shrinking the size of the fish stock and reducing future productivity. This lowers the benefits accruing across generations, even if it boosts revenues in the short term. This pattern is seen in many countries: marine fisheries production 95 Wild-capture fisheries and aquaculture sectors employ approximately 2.7 million and 3.3 million workers, respectively, in addition to over 1 million workers in the processing and marketing of fisheries products. See CEA (2018). 96 Bennett et al. (2018). 97 Data for China and Thailand (2016) is from CIEC (2019); data for Philippines and Malaysia (2015) is from SEAFDEC (2019). 98 FAO (2018a). June 2019 THE WORLD BANK | BANK DUNIA 37 Oceans of Opportunity Indonesia Economic Quarterly globally has plateaued due to overfishing and is now likely in decline. 99,100 While Indonesia's marine capture fisheries output continues to rise slowly, and initiatives such as a crackdown on illegal, unreported, and unregulated (IUU) foreign fishing have shown results, management practices are not yet optimized for the best long-term returns. Recent analysis suggests that improvements to fisheries management—such as those described below—would add value of up to USD 3.3 billion per year within ten years, relative to a scenario in which current practices continue. 101 Many of Indonesia's Realizing this potential value will require policies that help rebuild fish stocks following past fish stocks are overfishing; and prevent its reoccurrence in the future. In 2017, data from the National depleted due to Commission on Stock Assessments showed that nearly half of the nation’s wild fish stocks were historical and overfished, meaning that their stocks have been partially depleted and their current and future ongoing overfishing productivity has been undermined. 102,103 This occurred due to IUU fishing, as well as legal fishing that at times has occurred at unsustainable levels. While the level of severity varies by region and fishery, overfishing has impacted stocks in almost all parts of the country. Deficiencies in Data deficiencies have contributed to the problem. Timely information on stock levels and fisheries data fishing effort are critical for evidence-based decisions, yet the data available are often insufficient contribute to for species-level management. 104 Insufficient coordination between provinces and levels of reduced government is also implicated: stocks cross jurisdictions, and provinces that introduce harvest management controls are disadvantaged when other provinces do not do likewise. As a result of these issues effectiveness and others, Indonesia is ranked 22nd out of the largest 28 marine fishing nations for fishery management effectiveness—the degree to which management objectives are achieved via research, management systems, and enforcement. 105 In addition to lost The importance of fisheries management extends beyond commercial sector returns. Fisheries revenues, overfishing provide supporting income for coastal households, often in the form of part-time or seasonal risks livelihoods and work. Studies in communities that are highly dependent on fish for protein and income have food security in shown that overfishing increases conflict between fishers, raises poverty rates, and erodes vulnerable coastal communities' food security. 106,107 These impacts compound the already-elevated levels of communities poverty found within the small-scale fishing sector: the poverty rate 108 among fishing households in West Sumatra, for example, is around 70 percent higher than the cross-sector average found in comparable areas. 109 While the policies required to combat rural coastal poverty extend beyond fisheries, healthy fish stocks are an important asset for poverty reduction. Indonesia’s strong Overfishing has occurred due to the activities of illegal foreign vessels, and due to an stance on illegal, insufficiently robust regulatory framework for domestic fishing activities. The Government of unreported, and Indonesia (GoI) has taken strong action to address the former. In 2014, the Ministry of Marine unregulated (IUU) Affairs and Fisheries (MMAF) began seizing and sinking illegal foreign vessels, sending 539 to 99 FAO (2018b). 100 Pauly and Zeller (2016). 101 Based on analysis underpinning Costello et al. (2016) (pers. comm.). 102 Marine and Fisheries Ministerial Decree 50/Kepmen-Kp/2017 reports on estimates of the potential, total allowable catch, and level of utilization by fisheries management area. 103 CEA (2018). 104 Ibid. 105 These 28 countries together account for 80 percent of the total global catch. See Melnychuk et al. (2017). 106 Pomeroy et al. (2007). 107 Muawanah et al. (2012). 108 Number of poor households (rumah tangga miskin) and chronically poor households (rumah tangga sangat miskin) as defined by BPS classification criteria. 109 Stanford et al. (2013). June 2019 THE WORLD BANK | BANK DUNIA 38 Oceans of Opportunity Indonesia Economic Quarterly fishing by foreign the bottom of the ocean to date and sending a strong message of deterrence. 110 Concurrently, vessels has reduced at-sea transfers of fish—a method sometimes used by fishers to avoid detection and losses and pressure regulation—were banned. A comprehensive analysis using both satellite and vessel monitoring on stocks data showed that these efforts were highly successful, with a 90 percent reduction in foreign IUU, and a 25-40 percent reduction in the total pressure on fish stocks within Indonesia’s waters since 2014. 111 This step went a considerable way to stemming losses from IUU (estimated in 2014 to be worth roughly one-third of the value of the annual reported marine catch 112,113) and has created an opportunity to rebuild stocks for long-term economic gains in the domestic fisheries sector. But unmanaged On the other hand, pressure on fish stocks from the domestic fleet has increased, with the expansion of the number of small vessels now growing with the explicit encouragement of national policy. 114 The domestic fleet risks GoI is in the process of expanding the domestic fleet by providing 2,515 new nearshore ocean- negating sustained going vessels and over 18,000 sets of gear to replace foreign fishing boats and create local increases in harvests employment in remote areas. To avoid replacing one form of overfishing with another, the GoI aims to stop short of replacing the expelled foreign capacity entirely. The new vessels have a smaller size distribution than the foreign vessels they replace, and so if deployed strategically as part of a comprehensive fishery development plan, the net effect is expected to be a 25 percent reduction in overall fishing pressure. 115 Implementing To be successful, such a development plan requires broader management reforms to prevent domestic reforms creeping capacity increases, minimize IUU fishing within the domestic fleet, and prevent future can lock in the overfishing. Indonesia's fishers receive a range of fuel, credit, and gear subsidies, most of which benefits of are not tied to sustainability requirements. Like the new vessels, these encourage growth in the Indonesia's strong fleet and thus increase the pressure on stocks. 116 Furthermore, as the number of vessels anti-IUU policies for increases, competition between them for the remaining stocks are likely to cause cost increases, future generations further undermining fishers' livelihoods and preventing fisheries from delivering their maximum value over time. The experience of the United States is instructive: in 1976, the Magnuson– Stevens Act brought illegal foreign fishing to a halt. Yet, subsequent over-investment in domestic capacity undermined the initial gains, necessitating painful stock rebuilding that continues to suppress catches to this day. 117 Implementing domestic reforms is necessary to avoid this risk, and to lock in the benefits of Indonesia's strong anti-IUU policies for future generations. Three areas of While there are many policy options to maximize the economic and social value of fisheries, reform can prevent three broad categories of reform are needed. The first and most fundamental is completing overfishing and Indonesia's decentralized fishery management architecture. Whether through the existing increase returns: (1) Fishery Management Areas (Wilayah Pengelolaan Perikanan) or through alternative structures, the strengthening sector requires a framework for decision-making that more effectively brings together frameworks for governments, industry, and other stakeholders, clarifies roles and responsibilities, and decision-making… improves coordination. This includes coordinating Fisheries Management Plans (FMPs) across jurisdictions, and ensuring that FMPs reflect scientific recommendations. 110 The ship-sinking policy's impact on marine pollution is less positive. One such type of pollution, marine plastic debris, is the focus of section 3 below. 111 Cabral et al. (2018). 112 Busro (2017). 113 The value of the unreported harvest in 2014 was estimated at USD 3.53 billion (in 2019 USD) across Indonesia. See Sea Around Us (2019). 114 Cabral et al. (2018). 115 Measured in terms of boat capacity. See Cabral et al. (2018). 116 In addition to increasing fishing pressure, input-based fishing subsidies tend to be relatively inefficient at supporting fisher incomes. Payments that support efficient business operations and skills development have lower impacts and deliver higher benefits to fishers. See OECD (2019). 117 Pew (2011). June 2019 THE WORLD BANK | BANK DUNIA 39 Oceans of Opportunity Indonesia Economic Quarterly …(2) improving Second, investment in fishery research, monitoring, and reporting is needed to better inform fishery data for harvest limits. Indonesia can build on its existing strong fishery research capacity to develop evidence-based more detailed area-specific and species-specific stock assessments, as well as draw on alternative management… forms of fishery information well-suited to the challenges of data collection across expansive and remote coastal areas. Potential areas of expansion and innovation include greater use of onboard observers, e-monitoring, and e-catch documentation, as well as improved verification and integration of industry data for use in the fishery management planning process. … and (3) Third, improved monitoring, control, and surveillance (MCS) is needed to ensure that implementing management decisions and FMPs are adhered to, with defined consequences (such as stock or fishery-specific area closures) if harvest limits are exceeded. Building upon Indonesia’s success in tackling management plans foreign IUU fishing, a larger proportion of the overall fleet—importantly, the small vessel with stronger category that catches around 50 percent of the total harvest 118—must be brought under monitoring, control evidence-based harvest controls over time. Improved MCS should include further phase-outs and surveillance of destructive gear types, support for Indonesia's rapidly growing marine protected areas, and further expansion of co-management with local communities in near-shore areas. Managers could also consider trialing rights-based fishery management approaches such as “catch-shares” in select commercial fisheries. These approaches allocate fishing rights (“quotas”) to vessels, companies, or individuals to reduce inefficient competition that otherwise undermine economic returns in fisheries. 119,120 In parallel, stronger pollution control measures should be incorporated into the regulatory framework to address damaging fishing-related debris such as discarded nets (discussed further in section 3). These reforms Improved fisheries management will complement investments already underway. These include complement the provision of incentives for supply-chain strengthening, development of new electronic investments already traceability systems and investments in public port infrastructure. 121 Such improvements help underway… Indonesia's fishers generate more value from each unit of harvest, and are essential to maximize the economic returns achieved through the above three areas of management reform. By corollary, it is only with long-term sustainable stocks that returns to these supply-chain investments will be realized. Robust fisheries management underpins and complements these efforts, ensuring healthy stocks and harvests for supply-chains, and a regulatory framework that provides investors with confidence. Improved fisheries management is also important in the context of Indonesia's growing aquaculture industry (see Box B.1), which draws on marine and coastal resources, increases the demand for fishmeal, and shares elements of the same supply- chains. …and underpin Improved fisheries management also complements efforts to increase the public-revenue efforts to increase contribution from fisheries. The sector currently contributes non-tax state revenue (Penerimaan fisheries' fiscal Negara Bukan Pajak, PNBP) in the form of commercial levies. 122 In 2017, fisheries PNBP contribution amounted to USD 36.4 million, the highest in the past ten years due to regulatory changes in 118 CEA (2018). 119 Costello et al. (2008). 120 Birkenbach et al. (2017). 121 For example, new technologies being trialed by the Ministry of Marine Affairs and Fisheries such as e-logbook—an app-based tool for recording and verifying fishing activity—can help modernize data collection among Indonesia's small-scale fishers and help managers understand the condition of stocks. Similar technologies, if sufficiently integrated with existing data systems, can help fishers access better prices and satisfy traceability requirements for premium markets. Other policy initiatives include incentives for private sector investment in refrigeration facilities, establishment of decentralized export hubs, and continued growth in the marine protected area network. The GoI is promoting exports by investing to improve product quality, marketing, and supply chain management. 122 Commercial fisheries charges (Pungutan Pengusahaan Perikanan) are based on vessel licenses and the type of fishing gear used. Fishery levies (Pungutan Hasil Perikanan) are more like royalties, calculated as a function of production, boat size, and fish price. June 2019 THE WORLD BANK | BANK DUNIA 40 Oceans of Opportunity Indonesia Economic Quarterly 2015. However, this remains a small proportion of total PNBP relative to other resources sectors such as forestry and mining, representing only 0.17 percent of the total in 2017. Tax revenue is similarly low: USD 80.2 million was collective in 2017 from around 4,000 listed taxpayers, and between 2011 and 2016, the fisheries sector’s ratio of tax-to-GDP contribution (0.26 percent) was well below the national cross-sector average (11 percent). 123 Further adjustments to fiscal instruments 124 could increase revenues. Importantly, adjustments to revenue formulas could help incentivize prioritization of higher output and value—rather than higher fishing effort—benefiting stocks and thus productivity long-term. Well-managed fisheries with healthy stocks are integral to an increased fiscal contribution, as they are for broader social and economic returns for Indonesia. Box B.1: Aquaculture: A key driver of the Blue Economy Indonesia’s aquaculture sector is amongst the fastest growing in the world. While marine capture fisheries production grew slowly over the last decade, from 5.0 million metric tons in 2010 to around 6.2 million in 2017, Indonesia's aquaculture production more than doubled over the same period, from 2.4 million to 6.1 million metric tons, with around 3.3 million people directly employed. Of the total aquaculture production, around 43 percent is from the rapidly growing marine aquaculture sector, worth over USD 6 billion per year. The growth of Indonesia’s seaweed cultivation is even more dramatic, increasing from less than 4 million metric tons in 2010 to 9.7 million in 2017, and accounting for over 35 percent of global production.1 By value, the most important aquaculture product is shrimp, which contributed USD 1.7 billion to export earnings in 2018. With strong demand for fish products but declining wild capture globally, there is great potential for further aquaculture growth. The GoI estimates that 26 million hectares of coastal land are suitable for aquaculture expansion. However, much of this land includes ecologically sensitive mangrove and coral reef habitats. With these habitats having high biodiversity value, contributing to climate change resilience, and providing critical ecosystem services that underpin fishery, tourism, and other economic sectors, aquaculture expansion must be based on sound marine spatial planning and must be integrated with other sector development priorities. The environmental impacts of aquaculture (such as those caused by inappropriate use of feed and antibiotics) must also be anticipated and managed. The greatest economic returns are likely to be achieved through intensification of existing farms rather than through habitat conversion to create new farms. Three-quarters of Indonesia’s aquaculture farms currently use traditional extensive production techniques, while only ten percent use modern intensive technologies. Considerable production increases could be realized from existing farms while avoiding the economic and environmental costs of converting new habitats. Opportunities for growth exist around improving brood stock genetic quality to increase yields and reducing the cost of feeds. 1 FAO FishStat Database (2019). http://www.fao.org/fishery/statistics/en 2. To be a leading tourism destination, Indonesia must ensure that its marine and coastal assets are managed sustainably Globally, marine and While substantial, the value of fisheries is eclipsed by marine and coastal (MAC) tourism, 125 coastal tourism is a which represents around 26 percent of ocean-related value-added globally. 126 According to fast-growing OECD estimates, MAC tourism is projected to become the largest ocean-related sector by 2030, surpassing the slower-growing offshore oil and gas sector. 127 During the same period (2010- 123 CEA (2018). 124 This is the subject of recently-commenced work by the Fiscal Policy Agency of the Ministry of Finance in partnership with the World Bank. 125 Marine and coastal tourism are distinct but closely related concepts that encompass a wide range of activities, assets, and income-earning opportunities. Marine tourism refers to activities occurring on, or connected to, the sea and marine environment, including cruises and sailing, nautical sports and water-based activities such as scuba diving, underwater fishing, water skiing and windsurfing, tours to maritime parks, wildlife mammal watching, etc. Coastal tourism refers to on-shore activities for which the water-based elements are the predominant attraction— swimming, sunbathing, coastal walks, etc.—and also encompasses tourism in resorts and vacation homes located near a coastline. 126 OECD (2016). 127 Off-shore oil and gas is projected to become 21 percent of the value-added of the ocean economy in 2030, down from an estimated 34 percent in 2010. During the same period, MAC tourism’s share is projected to remain at 26 percent. See OECD (2016). June 2019 THE WORLD BANK | BANK DUNIA 41 Oceans of Opportunity Indonesia Economic Quarterly segment of the ocean 2030), projections by UNWTO suggested that international tourist arrivals will grow by 3.3 economy percent annually. To date, the industry has outperformed these projections. China continues to lead global outbound travel, which in turn benefits near-by Asian destinations (EAP destinations are projected to grow above the world average). 128 MAC tourism, which includes cruise tourism, is projected to be a relatively strong-performing segment of the tourism industry, in large part due to the expected high growth of cruise tourism—in 2019, an estimated 30 million travelers are expected to cruise, up 6 percent from 28.2 million in 2018. 129 With world-class Containing the world’s highest coral diversity, or 76 percent of the world’s coral species and 37 marine and coastal percent of the world’s coral reef fish species, the Coral Triangle is well-positioned to capture a assets, Indonesia’s large share of this growth. The Coral Triangle spans six countries, 130 but the largest area falls MAC tourism is within Indonesian territorial waters. 131 Indonesia’s current coral reef tourism is estimated at an already a key driver annual value of USD 3.1 billion. 132 With more than 17,000 islands and one of the world’s longest of visitor growth and coastlines, the archipelago’s overall MAC tourism potential is immensely promising. In 2016, 44 tourism revenues percent of foreign visitors surveyed indicated that they undertook, amongst other activities, marine tourism activities. 133 Out of all overnight stays of international, cruise, and domestic visitors in Indonesia, an estimated 29 percent are in coastal and non-urban destinations. 134 The GoI has Out of the ten tourism destinations chosen for priority development by the GoI, seven have identified MAC key MAC sites or assets. Through the development of these destinations, the GoI aims to tourism as a driver of increase MAC-related international arrivals, including Chinese outbound travelers. Much of this national tourism growth is envisioned to come from increased coastal tourism, but rising cruise ship and yacht development activity is also expected to play a key role. In recent years, the GoI has simplified regulations related to yachting, cruise, and recreational fishing. 135 Furthermore, it has organized professional surfing competitions, yacht rallies, and free-diving competitions, with the aim of promoting Indonesia’s position as a leading MAC tourism destination. 136 The development of certified diving products and training of local dive guides is also a priority, given Indonesia’s world- renowned dive sites. The economic However, growth is not assured. The natural assets that attract MAC tourism, such as coral potential of MAC reefs, coastlines, and beaches, are at risk of degradation from intensifying weather and climate tourism is vulnerable extremes, rising sea levels, and oceanic acidification. Island nations such as Indonesia are to climate change especially economically exposed to these climate risks given their high reliance on vulnerable and other ocean resources. 137 With sea surface temperatures projected to increase, more than 80 percent environmental of Indonesia’s coral reefs will experience thermal stress sufficient to induce severe bleaching in factors at least five out of ten years in the 2030s. 138 Meanwhile, global warming of 2°C is projected to 128 Rates of growth were 7.0 percent in 2017 and 5.6 percent in 2018. See UNWTO (2011; 2019). 129 CLIA (2019). 130 Indonesia, the Philippines, Malaysia, Papua New Guinea, Solomon Islands, and Timor-Leste. 131 UN Environment et al. (2018). 132 This estimate refers to the value of tourism that is directly related to the coral reef, which consists of two components: (1) “on-reef” tourism, such as diving and snorkeling; and (2) “reef-adjacent” tourism, which refers to activities/attractions not occurring on the reef but directly related to the reef environment, such as sandy beaches, sheltered water, and attractive views. It excludes, however, the value of broader non reef-related coastal tourism. See Spalding et al. (2017). 133 Ministry of Tourism (2016). In 2015 and 2014, this percentage of visitors undertaking marine tourism activities was 39 percent. 134 Spalding et al. (2017). 135 Examples include: Presidential Regulation No. 105/2015 on Foreign Yacht Visits to Indonesia; and the Regulation of The Minister of Transportation No. 123/2016 Regarding an Amendment to the Regulation of The Minister of Transportation No. 171/2015 Regarding Procedures for Services for Foreign Yachts in Indonesia at 19 Entry/Exit Points. 136 For example, the Sabang International Freediving Competition of 2018. See also: World Surf League (May 26, 2018). 137 IPCC (2014). 138 Burke et al. (2012). June 2019 THE WORLD BANK | BANK DUNIA 42 Oceans of Opportunity Indonesia Economic Quarterly result in the loss of more than 99 percent of the world’s coral reefs. 139 Recent surveys by the Indonesian Institute of Sciences show that around one-third of Indonesia's reefs are already in poor condition due to climate change and other human-related factors. The accumulation of marine debris is another acute threat to Indonesia’s coastal assets (discussed in Section 3). Gaps in basic In some cases, Indonesia's MAC assets are also impacted by insufficient basic infrastructure and infrastructure and services for local residents, which undermines environmental sustainability, health, hygiene, and services also cleanliness, diminishing the destinations’ attractiveness for tourists. For example, Lombok’s contribute to tourist areas are characterized by low average household access to piped water supply (45 degradation of MAC percent of households have access), sanitation (48 percent), and solid waste collection services assets (26 percent). In most of Lombok’s key tourism areas, 95 percent of projected basic infrastructure gaps are linked to household needs, with the remainder covering growing visitor and business needs. 140 The impact of these deficiencies on tourist perception can be seen in online reviews: topics of dissatisfaction expressed on TripAdvisor by users of beaches along Lombok’s less-explored southern coast include the poor state of local sanitation and noticeable marine and coastal pollution. 141 Moreover, unless With more visitors comes more pressure on fragile on-shore and off-shore ecosystems, managed, MAC increased consumption of energy and water, and increased waste production. Unless properly tourism growth can managed, this visitor traffic and associated pollution can: (i) strain local infrastructure and public itself exacerbate services; (ii) contribute to increased waste, nutrient, and sediment inputs into coastal and marine environmental ecosystems; and (iii) lead to land use change, coastal urbanization and loss of natural capital in pressures coastal areas, especially coastal wetlands. 142 Over-tourism in Over the past ten years, Indonesia’s Figure B.3: Bali and Lombok receive around half of some MAC coastal tourism destinations have Indonesia’s foreign visitors destinations is attracted an increasing share of number of international arrivals (bars, LHS), proportion of beginning to damage international visitors—in 2017, Bali and international arrivals, percent (lines, RHS) 143 natural assets Lombok alone received around 50 Bali Lombok percent of all foreign visitors (Figure B.3). This concentration of visitor 6,000,000 50% growth in parts of Bali and Lombok has 40% led to problems of overcrowding, 4,000,000 30% pollution, critical user-generated reviews and media reporting, which could cause 2,000,000 20% a deterioration in visitor satisfaction over 10% time. 0 0% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Source: World Bank staff calculations based on BPS data The environmental In recent years, environmental pollution and damage from tourism growth has forced several impacts associated world-renowned destinations elsewhere in Southeast Asia to temporarily close. Maya Beach, with over-tourism Koh Phi Phi, Thailand, was closed for four months in 2018 in an attempt to heal the damage impose economic caused by up to 5,000 visitors and 200 boats per day. 144 The impact of litter, sunscreen, and boat costs pollution is estimated by the Thai National Parks Department to have damaged 80 percent of 139 IPCC (2018). 140 Horwath (2017) and World Bank staff calculations. 141 An analysis of user-generated reviews in all available languages, of three beach attractions along the southern coast of Lombok, on the travel website TripAdvisor (as of October 31, 2016) indicated the lack of cleanliness and raw sewage as reasons for dissatisfaction. 142 Attri (2018). 143 Lombok data includes all of Nusa Tenggara Barat province, of which Lombok accounts for around 98 percent of visitors. 144 Ellis-Petersen (2018). June 2019 THE WORLD BANK | BANK DUNIA 43 Oceans of Opportunity Indonesia Economic Quarterly the bay's coral. The cost of the required shutdown is high, given the estimated revenue of USD 12.6 million that the bay's visitors generate each year. Boracay Island, Philippines, a destination which previously attracted more than 1.7 million visitors per year, was closed for six months in 2018 due to deteriorating environmental conditions. The shutdown was prompted by direct dumping of sewerage from hotels, which have since been upgraded with sewage treatment facilities as a condition of operation, and the destination has re-opened with stricter management of tourism infrastructure and activities. One estimate places the cost of this six-month closure to the Philippines economy at USD 37.6 million. 145 Sustainable Effective environmental impact monitoring systems are needed at MAC destinations to detect development of problems early and inform mitigation measures. Recognizing these threats, the GoI has Indonesia’s MAC encouraged the establishment of Sustainable Tourism Observatories (STOs) in priority tourism will require destinations to monitor risks to natural and cultural assets and identify growing pressure points. monitoring of These observatories, supported by the Ministry of Tourism, are tasked to monitor selected environmental indicators of ‘sustainable tourism’ in key tourism areas. 146 Over time, such STOs or other similar impacts,… institutions for environmental impact monitoring should become standard practice in popular MAC destinations. … management of For MAC destinations that are either at risk of overcrowding or already showing signs of visitor flow, … environmental degradation, measures to limit or better manage the flow of visitors are required. These could include: (i) use of tiered pricing with higher access fees for more fragile areas (for example, as applied in the more fragile upper areas of the Annapurna Conservation Area in Nepal); (ii) “congestion pricing”, whereby above-average entrance fees are charged for certain tourist sites during peak demand periods; (iii) setting minimum expenditure thresholds for tour access (for example, as is practiced in Bhutan); (iv) the use of new technologies to control crowd flows such as scheduling apps that allocate visitors to specific time slots at key attractions; and (v) the development of alternative tourism attractions to divert and re-distribute visitors away from popular but environmentally-fragile attractions. … adaptive “Carrying capacity” management strategies—restricting the number of visitors to an absolute management limit—are appealing, but have limitations, since: (i) the impact of tourism depends not only on strategies, … absolute numbers of tourists but also on tourist behavior, infrastructure, and management; (ii) local residents also create potentially negative impacts and use resources (Box B.2); and (iii) the quality of the visitor experience does not necessarily improve as a result. Instead, employing adaptive management strategies based on “limits of acceptable change” could help ensure that the destination values that attract tourists are identified, monitored, and maintained over time. Results from monitoring may then be used to adapt strategies to maintain optimum ecological conditions. 147 … and investment in Finally, public investment in basic services infrastructure and systems must be increased to help basic services and manage pollution and waste generation in MAC sites, which is often predominantly a result of infrastructure for basic infrastructure gaps for residents but is also exacerbated by growing tourism activity. The residents and Ministry of Public Works and Housing, as part of the government’s tourism development tourists program, already has active investment programs to expand the quality and coverage of basic services across Indonesia. Going forward, these investments will have to be targeted and scaled up in those key tourism areas (including MAC tourism areas) that receive high visitor traffic. The GoI is currently taking an integrated tourism master planning approach for priority development of selected destinations. This approach aims to mobilize central, provincial and 145 de Vera (2018). 146 UNWTO (2004). 147 Twining-Ward et al (2018). June 2019 THE WORLD BANK | BANK DUNIA 44 Oceans of Opportunity Indonesia Economic Quarterly local government funds, as well as private resources, toward a common objective in each of the destinations. To ensure implementation, the GoI has recently established institutional arrangements and enhanced collaboration amongst various institutions. 148 Box B.2: Komodo National Park Figure B.4: The proportion of visitors encountering reef Komodo National Park's (KNP) universal values are its superlative damage or marine debris at Komodo National Park has land- and seascapes and its biodiversity, especially the Komodo increased dragon. The UNESCO World Heritage Site is well preserved and 1 proportion of visitors encountering impacts considered largely intact, and is drawing an increasing number of 2 visitors, from 32,000 in 2009 to almost 120,000 in 2017. However, Reef damage Marine debris the site's seascape is facing emerging negative impacts and threats to its marine species from population growth and unsustainable 60% resource use, particularly illegal and destructive fishing practices. 50% The increasing levels of visitation within and around the park may have added further pressure. The proportion of visitors 40% encountering reef damage and marine debris grew from less than 10 percent in 2009 to over 50 percent in 2017 (Figure B.4).3 30% Improvements to management strategies can help protect KNP’s 20% outstanding values and reduce the possibility of these threats deterring visitors in the future. 10% 0% 1 UNESCO (2013). 2009 2010 2011 2012 2013 2014 2015 2016 2017 2 IUCN (2017). 3 Harvey et al. (2018). Source: Harvey et al. (2018) Monetization of The monetization of MAC sites Figure B.5: Number of visitors and revenue collected in MAC sites can and assets by designating them as Raja Ampat Conservation Area provide additional protected areas (with proper number of visitors (bars, LHS), income generated (line, RHS) resources to support zoning and enforcement Number of visitors the preservation of mechanisms 149) and charging 35,000 Revenue generated (IDR billion) 35 MAC assets visitor access fees is one approach to financing their 30,000 Est. revenue required for comprehensive conservation 30 protection and promoting 25,000 25 sustainability. This can include private initiatives such as those in 20,000 Est. minimum annual 20 Papua New Guinea (PNG) MPA costs 15,000 15 operated by the PNG Dive and Surf Associations, and in Fiji 10,000 10 operated by the Mamanuca 5,000 5 Environment Society, where revenues collected from visitors 0 0 are shared with resource owners 2015 2016 2017 2018 and channeled to programs to protect the reefs. In Indonesia, Source: Papua Barat Tourism data visitors to Raja Ampat’s five marine protected areas pay an “ecosystem services” fee of IDR 500,000-1,000,000 that is administered by a Regional Public Service Agency (BLUD) under the regency Marine and Fisheries Agency. 150 In 2018, these visitor fees generated revenues 148 See BPIW (2019) for more details. 149 Zoning refers to the activities permitted in different parts of a protected area, for example, natural resources management, cultural activities, visitor use, facilities placement, among others. 150 Regent Regulation No. 18 Year 2014 on the Environmental Service Fee by the Marine Protected Area Technical Management Authority under the Raja Ampat Marine and Fisheries Agency. June 2019 THE WORLD BANK | BANK DUNIA 45 Oceans of Opportunity Indonesia Economic Quarterly exceeding IDR 28 billion, fully covering the minimum annual MPA management costs of IDR 14 billion even after deduction of a 30 percent contribution to the local government in support of community development initiatives (Figure B.5.). However, comprehensive conservation and rehabilitation efforts require more than double this amount, or up to IDR 30 billion. Furthermore, protection cannot be solely dependent on the ability of a given asset to generate income. Many MAC sites are effectively “open to all,” making it difficult to collect revenues and manage access, while others do not receive sufficient visitor numbers for meaningful revenue raising. A system-wide approach to financing is needed in which visitor fee revenue is collected where possible, with a focus on maximizing revenue through appropriate pricing, rather than through maximizing tourist numbers. Additional public funding will be needed to underpin conservation and management efforts at both revenue and non-revenue sites more broadly. 3. Marine plastic debris represents a significant risk to Indonesia’s ocean sectors, including fisheries and tourism Marine debris causes Realizing the opportunities from fisheries and tourism development requires efforts to address damage to marine a range of environmental challenges. One such challenge, of growing concern worldwide, is ecosystems that marine plastic debris. Recent modelling suggests that between 4.8 and 12.7 million metric tons exceeds USD 13 of plastic debris flow into the world’s oceans each year, 151 and the rate of this “leakage” is billion annually increasing. 152 It impacts wildlife, human health, and maritime economies, particularly fisheries, worldwide coastal tourism, and commercial shipping. Eighty percent of the world’s marine debris is terrestrial in origin, with the remaining 20 percent originating from shipping and fishing activities. 153 The annual global damage of plastics to marine ecosystems is estimated to exceed USD 13 billion; while the cost of marine plastics to the tourism, fishing, and shipping industries in the Asia-Pacific Economic Cooperation (APEC) region alone is estimated at over USD 1.3 billion per year. 154 Figure B.6: Despite having one of the lowest per-capita rates of waste generation amongst the world’s top ten marine debris producers (A), a high proportion of Indonesia’s total waste is classified as “mismanaged” (B) which along with its coastal geography, contributes to Indonesia’s position as the world’s second largest producer of marine debris (C) A B C Per-capita waste generation Mismanaged waste (% of total Marine debris (million tons/year) (kg/day) waste) 0 1 2 3 4 0 2 4 6 0 50 100 Bangladesh Bangladesh Malaysia Nigeria Philippines Egypt Malaysia Indonesia Thailand Egypt Vietnam China Thailand Nigeria Indonesia Sri Lanka China Philippines Thailand Vietnam Nigeria Egypt Philippines Sri Lanka Malaysia Indonesia Vietnam Sri Lanka Bangladesh China Source: Jambeck et al. (2015) 151 Jambeck et al. (2015). 152 Hoornweg et al. (2013). 153 Eunomia Research and Consulting (2016). 154 Raynaud (2014). June 2019 THE WORLD BANK | BANK DUNIA 46 Oceans of Opportunity Indonesia Economic Quarterly Indonesia is the The greatest volumes of marine debris are produced by countries that have large populations, world’s second rapid rates of economic growth, limited waste management infrastructure, and high coastal largest producer of exposure. 155 In a 2015 study, Indonesia was ranked second globally, behind China, but ahead of marine plastic the Philippines, Vietnam, Thailand, and Malaysia (Figure B.6). These six countries combined pollution, generating were estimated to contribute more than 50 percent of the total plastic waste in the world’s up to 1.3 million tons oceans. 156 In 2010, Indonesia had a population of 187 million living within 50 km of the coast, every year generating 3.22 million metric tons per year of mismanaged municipal plastic waste and leaking an estimated 0.5 to 1.3 million tons of plastic into the ocean annually. 157 Despite modest per- Mismanaged municipal solid waste is the single largest source of marine debris. Current capita waste estimates show that about 105,000 metric tons of municipal solid waste158 are generated every generation, high day in Indonesia’s urban areas, and this figure is expected to increase to 150,000 tons by 2025. 159 rates of waste Approximately 40 percent of this waste is generated by households. 160 Recycling is largely an mismanagement are informal sector activity that captures 15 percent of total waste, with formal recycling systems found in many capturing less than 5 percent of waste generated.161 Enforcement of solid waste laws and Indonesian cities standards (from city-level violations to individual polluters) is limited. A 2018 analysis of 15 cities in western and central Indonesia by the World Bank found that rates of unmanaged waste vary considerably between cities (Figure B.7), and that debris in waterways primarily comprises plastic bags (16 percent), packaging, and other types of plastics such as rubber sandals, toys, and cups (Figure B.8). 162 A large proportion of this mismanaged waste enters waterways and eventually Indonesia’s oceans. Figure B.7: Rates of waste mismanagement vary Figure B.8: Composition of waste found in waterways in 15 considerably between Indonesia’s cities cities (metric tons/day) (percent) Plastic Waste Generation Mismanaged waste (potential leakage) Packaging, 5% 10,000 Plastic Bags, 16% 8,000 Organic Plastic 6,000 Waste, Bottles, 1% 44% 4,000 Glass and Metal, 4% 2,000 Other 0 Plastics, 9% Diapers, 21% Source: Shuker and Cadman (2018) 155 Jambeck et al. (2015). 156 In a subsequent assessment (Lebreton and Andrady, 2019), Indonesia was ranked ninth in terms of mismanaged plastic waste generated. Note that this is a different outcome–mismanaged waste rather than ocean leakage—from that used for the ranking by Jambeck et al. (2015). Mismanaged waste is an indicator of potential for marine debris leakage. 157 Jambeck et al. (2015). 158 Waste that is similar in nature to household waste and thus excludes waste categories such as hazardous waste, healthcare waste, construction and demolition waste, and most types of industrial waste. 159 World Bank (2012). 160 The remaining percentage is produced by a variety of sources, such as markets (20 percent), streets (9 percent), public facilities (9 percent), offices (8 percent), and industry (6 percent). See Shuker and Cadman (2018). 161 Shuker and Cadman (2018). 162 Ibid. June 2019 THE WORLD BANK | BANK DUNIA 47 Oceans of Opportunity Indonesia Economic Quarterly Marine debris poses Marine debris is hazardous to fish stocks due to entanglement and ingestion. A recent study a risk to Indonesia’s found particles of plastic debris (“microplastics”) 163 in 28 percent of individual fish and 55 fisheries, … percent of all species sampled from fish markets in Makassar. 164 While little is known about the long-term health impacts of plastics pollution, plastics contain chemicals known to cause toxicological impacts in humans, including reproductive and development abnormalities, increased rates of cardiovascular disease, and type-2 diabetes. 165,166,167 With over half of the animal protein consumed in Indonesia provided by fish and seafood, growing per-capita fish consumption, and Indonesia’s position as a major exporter of seafood to global markets, research is needed to evaluate the potential public-health risks posed by plastic debris. … shipping, …. Marine debris is also a threat to navigation and affects recreational, commercial, and fishing vessels. Larger pieces of debris causes damage to vessels by blocking cooling systems or becoming entangled in propellers, 168 with the most severe impacts on the small vessels with outboard motors that are in widespread use amongst Indonesia’s small-scale coastal fisheries. 169 The cost of marine debris damage to shipping and fishery sectors, based on insurance claims alone, 170 is around USD 280 million per year for countries in the APEC region. 171 While little is known about the cost of marine debris on shipping in Indonesia, it is likely to pose a growing challenge as Indonesia develops its national shipping lanes and positions itself as a global maritime axis. … and marine Tourism is clearly vulnerable to marine debris impacts as well, with both direct costs of cleanup tourism development and indirect costs from lost visitor revenue. Just as iconic tourism sites in the Philippines and goals Thailand were closed by pollution impacts (as discussed above), in 2017 Bali declared a “garbage emergency” as popular beaches such as Jimbaran, Kuta, and Seminyak became overwhelmed by plastic waste. At the peak of the subsequent clean up, workers were removing as much as 100 metric tons of waste per day. 172 A recent study by the Making Oceans Plastic Free Initiative estimated that plastic bag pollution causes revenue losses of USD 140 million annually to Indonesia’s tourism sector, with USD 55 million from Bali alone. 173 The costs of action There is a strong economic rationale for investment in waste management to avoid these and are smaller than the other costs. Based on estimates for five countries (China, Indonesia, Philippines, Thailand, and estimated Vietnam), the economic cost of each metric ton of mixed household waste that is not collected environmental costs but is instead burned in backyards, dumped or discharged in waterways is around USD 375. 174 of inaction In comparison, the World Bank estimates the cost of universal (full coverage) waste collection and adequate treatment or disposal to eliminate waste leakages to waterways at between USD 50-100 per metric ton in middle income countries. Indonesia’s Recognizing these challenges, solid waste management is high on the national agenda. Launched ambitious National in June 2017, the National Action Plan on Marine Debris aims to achieve the ambitious goal of Action Plan targets a reducing marine debris by 70 percent by 2025. Achieving this goal will require concerted efforts 70 percent reduction from national policymakers and local governments across five reform areas, or “pillars” (a) 163 When plastics are exposed to sunlight and wave action, they degrade into microplastics—plastic particles under 5 mm in size. Microplastics harm marine organisms, which mistake them for food, and can be subsequently consumed by humans if harvested as seafood. 164 Rochman et al. (2015). 165 Swan (2008). 166 Swan et al. (2005). 167 Lang et al. (2008). 168 Hall (2000). 169 McIlgorm et al. (2009). 170 Takehama (1989). 171 McIlgorm et al. (2011). 172 Oliphant (2017). 173 Making Oceans Plastic Free Initiative (2017). 174 McKinsey Center for Business and Environment (2016). June 2019 THE WORLD BANK | BANK DUNIA 48 Oceans of Opportunity Indonesia Economic Quarterly in marine debris by improving behavioral change, (b) reducing land-based leakage, (c) reducing sea-based leakage, 2025 via … (d) reducing plastic production and use, and (e) enhancing funding mechanisms, policy reform, and law enforcement. improving behavioral Behavior change strategies, such as the recent Clean Indonesia campaign (“Gerakan Indonesia change, … Bersih”) are promoting reduced plastics usage (especially single-use plastics), along with increased recycling and proper disposal practices. Successful examples of change already exist, such as in Malang, where recycling rates of more than 50 percent are achieved. The waste sector there has adopted the practice of ensuring that public outreach campaigns are local and targeted. For example, different messaging and strategies are used in inner cities and suburban areas. Other local initiatives such as community waste banks (“bank sampah”) have contributed to localized waste reductions and increased incomes. 175 Behavior change is also promoted through community-led clean-ups. Past campaigns with slogans such as “bersih itu sehat” (to be clean is to be healthy) have garnered wide-ranging attention. In Bali, the "garbage emergency" of 2017 sparked the “Bali’s Biggest Clean-up” event, which took place in some 115 locations around the island and mobilized over 15,000 people. 176 … reducing land- Around 80 percent of marine plastics originate from the mismanagement of waste on land. In based leakage, other words, Indonesia could achieve its targeted 70 percent reduction in marine debris solely targeting coastal and by capturing municipal solid waste that is not currently collected and halting leakages from riverside cities, … poorly managed waste facilities such as transfer points, treatment facilities, and waste disposal sites. The GoI, through the Ministry of Public Works and supported by the Ministry of Environment and Forestry, the Ministry of Home Affairs, and the Ministry of National Development Planning, is developing a national platform to assist cities to improve solid waste management using the national budget (ABPN) and international donor funding. Unfortunately, international experience (for example, within EU accession countries) shows that achieving universal waste collection in urban areas alone can take up to ten years to achieve, even when strong support programs are in place. The total investment needed in Indonesia’s urban areas alone is likely to exceed USD 5 billion, a sum that will be difficult to mobilize by 2025. However, Indonesia could achieve the greatest reductions in plastics leakages by focusing on coastal cities and river floodplains, and by moving waste management infrastructure away from waterways. A good example is the Citarum Harum Program that is now applying this approach to cities along the Citarum River. Box B.3: Technology and innovation for customized solutions Recognizing the magnitude of its plastic pollution issue, Indonesia is piloting a range of innovative technologies and incentive measures. These include encouraging manufacturers to maximize recycled plastics as input materials, producing more biodegradable plastics from cassava and seaweed, promoting waste-to-energy options, and incorporating low-value plastic waste into road and building material. Given the diversity of cities in terms of their waste production and composition, financial resources, and management capacity, city-specific solutions will need to be developed. …reducing sea- Well-proven solutions to reduce plastic waste discharges from maritime activities include harbor based leakage, … reception facilities that receive solid waste from ships, as well as measures to prevent the disposal of fishing gear at sea. Abandoned fishing nets in particular have devastating impacts on marine life. Highly successful refund systems for end-of-life fishing gear, such as those adopted by 175 Waste banks are community-based recycling schemes where waste deposits are sold for recycling, providing cash returns for members after covering operating costs. Waste banks have been shown to promote waste segregation, reduce inorganic waste, and encourage composting. See Halimatussadiah et al. (2016). 176 Taylor (2018). June 2019 THE WORLD BANK | BANK DUNIA 49 Oceans of Opportunity Indonesia Economic Quarterly countries surrounding the North Sea, provide effective models that could be investigated and adapted for Indonesia. …reducing plastic Pilots are underway in several cities to put in place bans and taxes that will help reduce waste production and use, from single-use plastics and over-packaging, and encourage reuse (see Box B.3 and Box B.4). with economic In 2016, Jakarta imposed an IDR 200 (approx. USD 0.01) tax on plastic bags, but following disincentives… the completion of the three-month pilot, and despite an estimated 55 percent reduction in plastic waste during the project’s short duration, some retailers refused to continue the initiative in part due to the lack of a supporting regulatory framework. 177 An excise tax on plastic producers has been proposed as a potential alternative, and the Ministry of Finance estimates that such a tax would generate IDR 500 billion (USD 34.5 million) in revenue annually. The World Bank’s hotspots study 178 found that 21 percent of plastic waste extracted from waterways consisted of plastic bags and single-use plastic packaging materials and thus the impact of bans and taxes on these materials could be significant. Box B.4: Single-use plastic bans In December 2018, Bali Governor Wayan Koster introduced an all-encompassing ban against single-use plastic, including plastic bags, Styrofoam, and straws. Retailers in the city of Denpasar have already adopted the rule, which came into force across the whole island in June 2019. The ban has an ambitious target of reducing marine plastic debris by 70 percent within the year. The new regulation follows in the footsteps of decrees issued in Banjarmasin and Balikpapan, Kalimantan, as well as in Bogor, West Java, that banned the use of plastic bags. Jakarta, which accounts for approximately 20-30 percent of Indonesia's plastic waste, is preparing to introduce a similar rule in 2019. … and incentives, … The Ministry of Environment and Forestry is working to make consumer goods manufacturers more responsible for managing the waste from their product packaging through an Extended Producer Responsibility (EPR) regulation later in 2019. This would oblige producers and retailers to include a higher proportion of recyclable material in product packaging and oblige greater responsibility for the management of waste from their products. EPR schemes have shown success globally. Most countries have started with EPR for beverage packaging, which may also be a suitable entry-point for Indonesia. It should be noted that incentive measures such as EPR and taxes involve a chain of producers, wholesalers, retailers and customers, each with different and sometimes conflicting interests. For such financial instruments to be applied, a regulatory structure is required to collect the fees and feed them back to the product chain. Such a structure should be prepared in consultation with stakeholders and preferably tested in a pilot stage. … and enhancing The actions presented under the National Action Plan for Marine Debris can only be successful funding when supported by policy reforms, strong regulation and oversight. Mechanisms to support mechanisms, policy implementing parties, including the local governments of Indonesia’s cities and kabupaten, are reform, and law also needed. Thus far, the track record of investments in Indonesia’s waste sector from the enforcement national budget has been mixed. Recent World Bank analysis found that a large proportion (more than 70 percent) of the local disposal cells and treatment facilities that have been built with central government financing function poorly within a few years of commissioning and hand-over to the local government. Broadly acknowledged reasons include: (i) lack of operational capacity; (ii) lack of operational budget; (iii) poor integration of community-level collection systems and city-level transport, treatment, and disposal systems; and (iv) limited 177 This highlights the importance of a robust legal and regulatory framework for bans on single-use plastic and waste-associated taxes. A further example is seen in Bali's single-use plastics ban, where a judicial review has been brought over whether Bali Governor Regulation No. 97/2018 regarding single-use plastic is aligned with Law No. 18/2008 on waste management. Robust and clear legal frameworks help stakeholders anticipate and mitigate risks, including legal challenges. 178 Shuker and Cadman (2018). June 2019 THE WORLD BANK | BANK DUNIA 50 Oceans of Opportunity Indonesia Economic Quarterly repercussions for poor waste management performance. An important contributing factor is the level of local operational budget (APBD) towards waste management, which varies widely across Indonesia (0.5-6.7 percent of APBD). Based on the experience of Indonesian cities with adequate waste services, four percent of APBD appears to be a good benchmark to ensure that operations can be sustained. 4. Close ecological and economic links between ocean sectors mean that the reforms in each sector can deliver benefits more broadly Realizing the full Harnessing the potential of Indonesia's oceans will require cross-sector collaboration and potential of coordination around priorities. Continued reform in the fisheries sector—through improved Indonesia’s ocean science and data, decision-making structures, and harvest controls with strong enforcement— economy will require have the potential to increase the sector's contribution and prevent long-term reductions in sector reforms as fisheries productivity. Protecting MAC assets as the basis for enhanced tourism can ensure that well as cross-sector tourism growth is sustainable. Initiatives that reduce the threat of marine debris to Indonesia’s investments and spectacular MAC resources are vital complements to these efforts. Importantly, there are coordination spillover benefits between these sectors. For example, conservation measures that protect MAC assets such as coral reefs also support productive fisheries. Cross-sectoral investments, with plans for coordination around key priorities, will be critical given the interdependence of ocean- related sectors. There are a range of These intersectoral linkages provide innovative options for financing the investments that will innovative financing be required. For example, the economic value of Indonesia’s reefs for tourism, estimated at over opportunities both USD 3 billion per year, can support visitor fees and tourism taxes that could help finance within and across ecosystem conservation. Studies show that revenue potential, as determined by visitors’ these sectors willingness to pay at key MAC sites, is much higher than is currently collected. 179 Such revenues could also contribute to waste management efforts. Tax revenues raised as part of incentive mechanisms to lower plastics use could be employed to finance plastic cleanup efforts in tourist hotspots. More broadly, in Indonesia’s context of significant gaps in basic infrastructure and services (which contribute to the degradation of MAC assets), public investment in basic infrastructure and services will remain key (predominantly for residents but also for a growing tourism industry). Meanwhile, fisheries’ current contribution to fiscal revenues is low; revenue- raising could be facilitated by improvements to the systems and policies required for stronger MCS. Adjustments to revenue raising formulas can also help incentivize prioritization of higher output and value—rather than higher fishing effort—benefiting stocks and thus productivity long-term. A Blue Economy In recognition of these sectors' interdependence, the GoI should pursue a Blue Economy strategy, strategy can help where the development of ocean sectors is sustainable and integrated. This can be achieved achieve policy through improved use of tools such as marine spatial planning, integrated coastal zone integration for management, integrated tourism master plans, 180 fisheries management plans, and the sustainable strengthening of management for the country's rapidly expanding network of marine protected development areas. A Blue Economy strategy further allows for the future integration of additional activities within existing policy and strategic frameworks. These could include offshore energy, bioprospecting, and desalination, among others yet to be developed. 179Pascoe et al. (2014). 180For tourism development in general, the GoI is already taking an integrated approach by using integrated tourism master plans for each destination to improve inter-ministry/agency, central-local, and public-private collaboration. The GoI’s tourism development program consists of four integrated components: (i) increase institutional capacity; (ii) improve tourism-relevant road quality and basic services accessibility; (iii) promote local participation in the tourism economy (skills, firm capabilities, and community engagement); and (iv) enhance the enabling environment for private investment and business entry. This program currently includes one MAC destination (Lombok). Expansion to further MAC destinations, such as Labuan Bajo and Komodo National Park, is under preparation. See BPIW (2019). June 2019 THE WORLD BANK | BANK DUNIA 51 Oceans of Opportunity Indonesia Economic Quarterly With these steps, The GoI has shown strong commitment to integrated development in its efforts to realize the Indonesia's ocean country’s ambition of becoming a global “maritime nexus.” The challenges remain substantial: sectors will have a both upscaling of existing efforts and implementation of new ideas is required. However, the promising future success of current initiatives, public enthusiasm, and positive global trends in these sectors make this an opportune time to lock-in gains and position Indonesia’s ocean economy for decades of sustainable growth to come. 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GFCF 10 Change in stock Stat. discrepancy 5.8 Exports Imports 8 Total GDP 5.5 Total GDP 6 5.3 4 2 5.0 0 4.8 -2 4.5 -4 Mar-13 Mar-15 Mar-17 Mar-19 Mar-16 Mar-17 Mar-18 Mar-19 Source: BPS; World Bank staff calculations Source: BPS; World Bank staff calculations Appendix Figure 3: Contribution to GDP growth Appendix Figure 4: Motor cycle and motor vehicle sales (production) (growth yoy, percent) (contribution to real GDP growth yoy, percentage points) Taxes-subsidies Services Industry Agriculture, forestry & fishery Motorcycle sales Motor vehicle sales 80 6 Total GDP 60 5 40 4 20 3 2 0 1 -20 0 -40 Mar-16 Mar-17 Mar-18 Mar-19 May-16 May-17 May-18 May-19 Source: BPS; World Bank staff calculations Source: BPS; World Bank staff calculations Appendix Figure 5: Consumer indicators Appendix Figure 6: Industrial production indicators and (retail sales index 2010=100) manufacturing PMI (PMI diffusion index; industrial production growth yoy, percent) Retail sales index Manufacturing PMI 275 150 BI consumer survey index (RHS) 55 Industrial production index (RHS) 10 250 120 5 225 90 50 0 200 60 175 30 -5 150 0 45 -10 May-16 May-17 May-18 May-19 May-16 May-17 May-18 May-19 Source: BI Source: BPS; Nikkei/Markit; World Bank staff calculations Note: Manufacturing PMI above 50 indicates expansion June 2019 THE WORLD BANK | BANK DUNIA 59 Oceans of Opportunity Indonesia Economic Quarterly Appendix Figure 7: Balance of payments Appendix Figure 8: BOP: Current account (USD billion) (USD billion) Errors & omissions Goods trade Services trade Capital & financial account 12 Primary income Secondary income 15 Current account Current account Overall balance 8 4 5 0 -5 -4 -8 -15 -12 Mar-16 Mar-17 Mar-18 Mar-19 Mar-16 Mar-17 Mar-18 Mar-19 Source: BI Source: BI Appendix Figure 9: Exports of goods Appendix Figure 10: Imports of goods (USD billion) (USD billion) Total exports (fob) Agriculture Total imports (cif) Oil and gas Manufacturing Mining Consumer goods Raw materials Oil and gas Capital goods 20 20 18 18 16 16 14 14 12 12 10 10 8 8 6 6 4 4 2 2 0 0 Apr-16 Apr-17 Apr-18 Apr-19 Apr-16 Apr-17 Apr-18 Apr-19 Source: BPS Source: BPS Appendix Figure 11: Reserves and capital flows Appendix Figure 12: CPI inflation (USD billion) (growth yoy, percent) 6 140 6 5 Non-food 3 120 4 Food Headline 0 100 3 2 -3 Global bonds 80 SBI Core SUN 1 Equities International reserves (RHS) -6 60 0 May-16 May-17 May-18 May-19 May-17 Nov-17 May-18 Nov-18 May-19 Source: BI; Ministry of Finance (MoF) Source: BPS; BI; World Bank staff calculations Note: SUN is government securities, SBI is BI certificates June 2019 THE WORLD BANK | BANK DUNIA 60 Oceans of Opportunity Indonesia Economic Quarterly Appendix Figure 13: Monthly breakdown of CPI inflation Appendix Figure 14: CPI inflation comparison across (contribution to growth yoy, percentage points) countries (growth yoy, percent) Processed food Raw Food Clothing Transport Philippines 5 Health Education Housing Headline India 4 Indonesia China 3 USA 2 Thailand Singapore* 1 Korea 0 Japan* Malaysia* -1 May-17 Nov-17 May-18 Nov-18 May-19 0.0 1.0 2.0 3.0 4.0 Source: BPS; World Bank staff calculations Source: BPS; CEIC; World Bank staff calculations Note: May 2019, * April 2019 data Appendix Figure 15: Domestic and international rice prices Appendix Figure 16: Poverty and unemployment rates (wholesale price, in IDR per kg) (percent) 12,500 Domestic rice, IR64-II 20 11,000 16 9,500 Poverty rate 8,000 12 6,500 Vietnam rice 5% broken Unemployment rate 8 5,000 3,500 4 May-16 May-17 May-18 May-19 2007 2009 2011 2013 2015 2017 2019 Source: Cipinang wholesale rice market; FAO Source: BPS Note: “5% broken” refers to the quality of milled rice. 5 percent being the Note: Poverty line based on national poverty line proportion of grains broken during the processing stage Poverty rate refers to March data, Unemployment rate refers to February data Appendix Figure 17: Regional equity indices Appendix Figure 18: Spot exchange rates of selected (daily index, 19 June 2017=00) currencies against USD (monthly index, 1 May 2017=100) JSI-Indonesia Shanghai-China Turkey Indonesia Brazil BSE-India SGX-Singapore 130 140 India South Africa SET-Thailand 120 130 110 120 100 110 90 100 80 90 70 80 60 70 50 Jun-17 Dec-17 Jun-18 Dec-18 Jun-19 May-17 Nov-17 May-18 Nov-18 May-19 Source: CEIC; World Bank staff calculations Source: CEIC; World Bank staff calculations June 2019 THE WORLD BANK | BANK DUNIA 61 Oceans of Opportunity Indonesia Economic Quarterly Appendix Figure 19: 5-year local currency government Appendix Figure 20: Sovereign USD bond EMBIG spread bond yields (basis points) (percent) Indonesia Malaysia Indonesia spread - overall EMBIG spread (RHS) 10 Singapore Thailand 250 60 Indonesia EMBIG bond spread United States 8 225 0 6 200 -60 4 175 -120 2 150 -180 0 125 -240 Jun-17 Dec-17 Jun-18 Dec-18 Jun-19 Jun-17 Dec-17 Jun-18 Dec-18 Jun-19 Source: CEIC Source: JP Morgan Appendix Figure 21: Commercial and rural credit and Appendix Figure 22: Banking sector indicators deposit growth (monthly, percent) (growth yoy, percent) Loans to deposit ratio 15 Private deposits Loans Liquidity to assets ratio Capital adequacy ratio Non-performing loans ratio (RHS) 100 Return on asset (RHS) 5 12 80 4 60 3 9 40 2 6 20 1 3 0 0 Apr-17 Oct-17 Apr-18 Oct-18 Apr-19 Apr-17 Oct-17 Apr-18 Oct-18 Apr-19 Source: BI; World Bank staff calculations Source: BI; World Bank staff calculations Appendix Figure 23: Government debt Appendix Figure 24: External debt (percent of GDP, LHS; USD billion, RHS) (percent of GDP, LHS; USD billion, RHS) External (RHS) Domestic (RHS) Public (RHS) Private (RHS) Total debt to GDP % Total ext. debt to GDP % 40 300 40 500 400 30 225 30 300 20 150 20 200 10 75 10 100 0 0 0 0 2012 2013 2014 2015 2016 2017 2018 Mar-19 Source: BI; MoF; World Bank staff calculations Source: BI; World Bank staff calculations June 2019 THE WORLD BANK | BANK DUNIA 62 Oceans of Opportunity Indonesia Economic Quarterly Appendix Table 1: Budget outcomes (IDR trillion) 2012 2013 2014 2015 2016 2017 2018 Actual Actual Actual Actual Actual Actual Actual A. State revenue and grants 1,338 1,439 1,550 1,508 1,556 1,666 1,944 1. Tax revenue 981 1,077 1,147 1,240 1,285 1,344 1,519 2. Non-tax revenue 352 355 399 256 262 311 409 B. Expenditure 1,491 1,651 1,777 1,807 1,864 2,007 2,213 1. Central government 1,011 1,137 1,204 1,183 1,154 1,265 1,455 2. Transfers to the regions 481 513 574 623 710 742 758 C. Primary balance -53 -99 -93 -142 -126 -124 -11 D. SURPLUS / DEFICIT -153 -212 -227 -298 -308 -341 -269 (percent of GDP) -1.9 -2.3 -2.2 -2.6 -2.5 -2.5 -1.8 Source: MoF; World Bank staff calculations Note: Budget balance as percentage of GDP uses the revised and rebased GDP Appendix Table 2: Balance of payments (USD billion) 2017 2018 2019 2016 2017 2018 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Balance of payments 26.2 11.6 -7.1 5.4 1.0 -3.9 -4.3 -4.4 5.4 2.4 Percent of GDP 1.0 1.1 -0.7 2.0 0.4 -1.5 -1.6 -1.7 2.1 0.9 Current account -62.0 -16.2 -31.1 -4.2 -5.6 -5.2 -8.0 -8.7 -9.2 -7.0 Percent of GDP -2.3 -1.6 -3.0 -1.6 -2.2 -2.0 -3.0 -3.3 -3.6 -2.6 Trade balance 10.6 11.4 -7.5 3.2 1.0 0.8 -1.6 -2.5 -4.2 -0.7 Net income & current transfers -72.5 -27.6 -23.5 -7.4 -6.5 -5.9 -6.4 -6.2 -5.0 -6.2 Capital & Financial Account 91.1 28.7 25.3 9.6 7.1 2.3 3.3 3.8 15.9 10.1 Percent of GDP 3.4 2.8 2.4 3.7 2.8 0.9 1.2 1.5 6.2 3.8 Direct investment 41.6 18.5 13.7 7.0 4.4 4.8 2.4 4.4 2.0 5.2 Portfolio investment 61.2 21.1 9.3 3.8 2.6 -1.1 0.1 -0.1 10.5 5.4 Other investment -11.6 -10.7 2.2 -1.2 0.2 -1.5 0.7 -0.5 3.5 -0.6 Errors & omissions -2.9 -1.0 -1.4 0.0 -0.6 -1.0 0.4 0.5 -1.3 -0.7 Foreign reserves* 116.4 130.2 120.7 129.4 130.2 126.0 119.8 114.8 120.7 124.5 Source: BI; BPS; World Bank staff calculations Note: * Reserves at end-period June 2019 THE WORLD BANK | BANK DUNIA 63 Oceans of Opportunity Indonesia Economic Quarterly Appendix Table 3: Indonesia’s historical macroeconomic indicators at a glance 2000 2011 2012 2013 2014 2015 2016 2017 2018 1 National Accounts (% change) Real GDP 4.9 6.2 6.0 5.6 5.0 4.9 5.0 5.1 5.2 Real investment 11.4 8.9 9.1 5.0 4.4 5.0 4.5 6.2 6.7 Real consumption 4.6 5.1 5.4 5.7 4.7 4.9 4.3 4.6 5.1 Private 3.7 5.1 5.5 5.5 5.3 4.8 5.0 5.0 5.1 Government 14.2 5.5 4.5 6.7 1.2 5.3 -0.1 2.1 4.8 Real exports, GNFS 30.6 14.8 1.6 4.2 1.1 -2.1 -1.7 8.9 6.5 Real imports, GNFS 26.6 15.0 8.0 1.9 2.1 -6.2 -2.4 8.1 12.0 Investment 16.7 8.9 9.1 5.0 4.4 5.0 4.5 6.2 6.7 Nominal GDP (USD billion) 165 893 918 915 891 861 932 1,015 1,042 GDP per capita (USD) 857 3,688 3,741 3,668 3,532 3,370 3,602 3,877 3,932 Central Government Budget (% GDP)2 Revenue and grants 20.8 15.5 15.5 15.1 14.7 13.1 12.5 12.3 13.1 Non-tax revenue 9.0 4.2 4.1 3.7 3.8 2.2 2.1 2.3 2.7 Tax revenue 11.7 11.2 11.4 11.3 10.9 10.8 10.4 9.9 10.3 Expenditure 22.4 16.5 17.3 17.3 16.8 15.7 15.0 14.8 14.8 Consumption 4.0 3.8 3.9 4.1 4.0 4.5 4.6 4.4 4.6 Capital 2.6 1.5 1.7 1.9 1.4 1.9 1.4 1.5 1.2 Interest 5.1 1.2 1.2 1.2 1.3 1.4 1.5 1.6 1.7 Subsidies 6.3 3.8 4.0 3.7 3.7 1.6 1.4 1.2 1.5 Budget balance -1.6 -1.1 -1.8 -2.2 -2.1 -2.6 -2.5 -2.5 -1.8 Government debt 97.9 23.1 23.0 24.9 24.7 27.5 28.3 29.4 29.8 o/w external government debt 51.4 10.2 9.9 11.2 10.2 12.7 12.4 12.4 12.5 Total external debt (including private 87.1 25.2 27.5 29.1 32.9 36.6 34.7 37.1 39.5 sector) Balance of Payments (% GDP)3 Overall balance of payments .. 1.3 0.0 -0.8 1.7 -0.1 1.3 1.1 -0.7 Current account balance 4.8 0.2 -2.7 -3.2 -3.1 -2.0 -1.8 -1.6 -3.0 Exports GNFS 42.8 23.8 23.0 22.5 22.3 19.9 18.0 19.1 20.0 Imports GNFS 33.9 21.2 23.2 23.2 22.7 19.3 17.1 18.0 20.7 Trade balance 8.9 2.7 -0.2 -0.7 -0.3 0.6 0.9 1.1 -0.7 Financial account balance .. 1.5 2.7 2.4 5.0 2.0 3.1 2.8 2.4 Direct investment -2.8 1.3 1.5 1.3 1.7 1.2 1.7 1.8 1.3 Gross official reserves (USD billion) 29.4 110 113 99 112 106 116 130 121 Monetary (% change)3 GDP deflator1 20.4 7.5 3.8 5.0 5.4 4.0 2.4 4.3 3.8 Bank Indonesia interest key rate (%) .. .. .. .. .. 6.3 4.8 4.3 6.0 Domestic credit (eop) .. 24.6 23.1 21.6 11.6 10.4 7.9 8.2 11.8 Nominal exchange rate (average, 8,392 8,776 9,384 10,460 11,869 13,389 13,309 13,381 14,238 IDR/USD) Prices (% change)1 Consumer price Index (eop) 9.4 3.8 3.7 8.1 8.4 3.4 3.0 3.6 3.1 Consumer price Index (average) 3.7 5.3 4.0 6.4 6.4 6.4 3.5 3.8 3.2 Indonesia crude oil price (USD per 28 112 113 107 60 36 51 61 55 barrel, eop)4 Source: BPS and World Bank staff calculations, using revised and 2010 rebased figures. MoF and World Bank staff calculations, BI, CEIC 1 2 3 4 June 2019 THE WORLD BANK | BANK DUNIA 64 Oceans of Opportunity Indonesia Economic Quarterly Appendix Table 4: Indonesia’s development indicators at a glance 2000 2010 2011 2012 2013 2014 2015 2016 2017 2018 Demographics1 Population (million) 213 242 245 248 251 254 258 261 264 .. Population growth rate (%) 1.3 1.3 1.3 1.3 1.3 1.3 1.2 1.1 1.1 .. Urban population (% of total) 42 50 51 51 52 53 53.3 54 55 .. Dependency ratio (% of working-age population) 55 51 51 50 50 49 49.0 49 49 .. Labor Force2 Labor force, total (million) 98 117 117 120 120 122 122 125 128 131 Male 60 72 73 75 75 76 77 77 79 80 Female 38 45 44 46 45 46 46 48 49 51 Agriculture share of employment (%) 45 38 36 35 35 34 33 32 30 29 Industry share of employment (%) 17 19 21 22 20 21 22 21 22 23 Services share of employment (%) 37 42 43 43 45 45 45 47 48 48 Unemployment, total (% of labor force) 8.1 7.1 7.4 6.1 6.2 5.9 6.2 5.6 5.5 5.4 Poverty and Income Distribution3 Median household consumption (IDR 000 per month) 104 374 421 446 487 548 623 697 765 835 National poverty line (IDR 000 per month) 73 212 234 249 272 303 331 354 375 402 Population below national poverty line (million) 38 31 30 29 28 28 29 28 28 26 Poverty (% of population below national poverty line) 19.1 13.3 12.5 12.0 11.4 11.3 11.2 10.9 10.6 9.8 Urban (% of population below urban poverty line) 14.6 9.9 9.2 8.8 8.4 8.3 8.3 7.8 7.7 7.0 Rural (% of population below rural poverty line) 22.4 16.6 15.7 15.1 14.3 14.2 14.2 14.1 13.9 13.2 Male-headed households 15.5 11.0 10.2 9.5 9.2 9.0 9.3 9.0 8.7 6.4 Female-headed households 12.6 9.5 9.7 8.8 8.6 8.6 11.1 9.8 9.3 6.6 Gini index 0.30 0.38 0.41 0.41 0.41 0.41 0.41 0.40 0.39 0.39 Percentage share of consumption: lowest 20% 9.6 7.9 7.4 7.5 7.4 7.5 7.2 7.1 7.0 7.0 Percentage share of consumption: highest 20% 38.6 40.6 46.5 46.7 47.3 46.8 47.3 46.2 45.7 45.4 Public expenditure on social assistance (% of GDP)4 .. 0.4 0.5 0.5 0.7 0.6 0.8 0.7 0.7 0.7 Health and Nutrition1 Physicians (per 1,000 people) 0.16 0.29 .. 0.20 .. .. .. .. .. .. Under five mortality rates (per 1000 children under 5 52 33 32 30 29 28 27 26 25 .. yrs) Neonatal mortality rates (per 1000 live births) 22 16 16 15 14 14 13 13 12 .. Infant mortality (per 1000 live births) 41 28 26 25 25 24 23 22 21 .. Maternal mortality ratio (modeled est., per 100,000 265 165 156 148 140 133 126 .. .. .. live births) Measles vaccination (% of children under 2 years) 76 78 80 82 81 75 75 76 75 .. Total health expenditure (% of GDP) 2.0 3.5 3.3 3.4 3.4 3.4 3.3 3.3 .. .. Public health expenditure (% of GDP) 0.7 0.9 0.9 1.0 1.0 1.1 1.2 1.4 1.4 1.4 Education3 Primary net enrollment rate (%) .. 92 92 93 92 93 97 97 97 98 Female (% of total net enrollment) .. 48 49 49 50 48 49 49 49 49 Secondary net enrollment rate (%) .. 61 60 60 61 65 66 66 79 79 Female (% of total net enrollment) .. 50 50 49 50 50 51 51 49 49 Tertiary net enrollment rate (%) .. 16 14 15 16 18 20 21 19 19 Female (% of total net enrollment) .. 53 50 54 54 55 56 55 53 53 Adult literacy rate (%) .. 91 91 92 93 93 95 95 96 96 Public spending on education (% of GDP)5 .. 3.1 3.3 3.3 3.3 3.3 3.5 3.4 3.1 3.0 Public spending on education (% of spending)5 .. 19.4 18.9 17.9 17.3 17.4 19.3 20.0 20.0 20.0 Water and Sanitation1 Access to at least basic drinking water services (% of 75 85 86 87 88 89 90 .. .. .. population) Urban (% of urban population) 64 76 77 78 79 80 81 .. .. .. Rural (% of rural population) 89 94 94 95 96 96 97 .. .. .. Access to at least basic sanitation facilities (% of 44 60 62 64 65 66 68 .. .. .. population) Urban (% of urban population) 28 47 49 51 53 55 57 .. .. .. Rural (% of rural population) 66 74 74 75 76 77 77 .. .. .. Others1 Disaster risk reduction progress score (1-5 scale; .. .. 3.3 .. .. .. .. .. .. .. 5=best) Proportion of seats held by women in national 8 18 18 19 19 17 17 17 20 20 parliament (%)6 Source: 1 World Development Indicators; 2 BPS (Sakernas); 3 BPS (Susenas) and World Bank; 4 MoF and World Bank staff calculations, Social assistance includes spending on Raskin, health insurance for the poor, scholarship for the poor, family hope program (PKH), cash for work (PKT, 2018), and remaining MOSA and social protection function expenditures and actuals; 5 MoF; 6 Inter-Parliamentary Union. June 2019 THE WORLD BANK | BANK DUNIA 65 Supported by funding from the Australian Government (Department of Foreign Affairs and Trade, DFAT), under the Support for Enhanced Macroeconomic and Fiscal Policy Analysis (SEMEFPA) program.