OECD Economic Surveys Indonesia March 2021 OVERVIEW http://www.oecd.org/economy/indonesia-economic-snapshot/ This Overview is extracted from the 2021 Economic Survey of Indonesia. The Survey is published under the responsibility of the Secretary-General of the OECD. The Survey was discussed at a meeting of the Economic and Development Review Committee on 25 January 2021. This document, as well as any data and any map included herein, are without prejudice to the status of or sovereignty over any territory, to the delimitation of international frontiers and boundaries and to the name of any territory, city or area. The statistical data for Israel are supplied by and under the responsibility of the relevant Israeli authorities. The use of such data by the OECD is without prejudice to the status of the Golan Heights, East Jerusalem and Israeli settlements in the West Bank under the terms of international law. OECD Economic Surveys: Indonesia© OECD 2021 You can copy, download or print OECD content for your own use, and you can include excerpts from OECD publications, databases and multimedia products in your own documents, presentations, blogs, websites and teaching materials, provided that suitable acknowledgement of OECD as source and copyright owner is given. All requests for public or commercial use and translation rights should be submitted to [email protected]. Requests for permission to photocopy portions of this material for public or commercial use shall be addressed directly to the Copyright Clearance Center (CCC) at [email protected] or the Centre français d’exploitation du droit de copie (CFC) at [email protected] of or sovereignty over any territory, to the delimitation of international frontiers and boundaries and to the name of any territory, city or area. 3 Table of contents Executive summary 8 1 Key policy insights 13 Indonesia is confronting the most severe challenges since the 1997 crisis 13 Macroeconomic policy action has been stepped up in the face of the pandemic 19 Indonesia could gain more from globalisation 31 The fruits of growth should be shared 38 Regulatory barriers are high and State-owned enterprises ought to lead by example 42 A greener post-COVID-19 Indonesia? 48 Ambitious reforms are needed to sustain improvements in living standards 52 References 56 Annex 1.A. Evolution of budgetary allocations since 2019 61 FIGURES Figure 1. A sudden stop to a growth story 9 Figure 2. Poverty is on the rise again 10 Figure 1.1. The pandemic interrupted a long spell of sustained growth 13 Figure 1.2. Income and productivity convergence started decelerating around 2014 14 Figure 1.3. Consumer price inflation is low 17 Figure 1.4. A number of macroeconomic vulnerabilities have resurfaced 19 Figure 1.5. The sovereign risk premium has decreased since March 2020 but remains high 20 Figure 1.6. Debt will rise in the aftermath of COVID-19, but remain sustainable 21 Figure 1.7. The financial sector is profitable and the authorities consider it well capitalised 22 Figure 1.8. Credit growth to the real sector has weakened from very high levels 23 Figure 1.9. Fiscal and current account deficits 25 Figure 1.10. Composition of budgeted public spending 27 Figure 1.11. Tax revenue is low by OECD and G20 standards 28 Figure 1.12. Composition of tax revenue 28 Figure 1.13. Export performance has been rather modest 32 Figure 1.14. Northeast Asia is Indonesia’s main trading partner 33 Figure 1.15. Mobility restrictions are hitting tourism hard 34 Figure 1.16. Pervasive statutory restrictions discourage foreign direct investment 38 Figure 1.17. Poverty and income inequality remain high 40 Figure 1.18. Regional disparities are high with pockets of deep poverty in the poorest provinces 41 Figure 1.19. Indonesia has very strict regulations on product markets 43 Figure 1.20. Indonesia's regulatory barriers to competition are very high 43 Figure 1.21. Corruption is still perceived as high 47 Figure 1.22. The transition to a greener economy could be quicker 49 OECD ECONOMIC SURVEYS: INDONESIA 2021 © OECD 2021 4 TABLES Table 1. The economy suffered a contraction 9 Table 1.1. Macroeconomic indicators and projections 18 Table 1.2. Events that could lead to major changes in the outlook 18 Table 1.3. Main economic stimulus measures in 2020 26 Table 1.4. Past recommendations related to raising revenue 30 Table 1.5. Past recommendations related to tourism 35 Table 1.6. Past recommendations regarding SOEs 45 Table 1.7. Structural reforms to close gaps can yield large long-term gains 53 Table 1.8. The fiscal cost of reforms is modest 53 Annex Table 1. Budget comparison, 2019-2021 (IDR trillions) 61 OECD ECONOMIC SURVEYS: INDONESIA 2021 © OECD 2021 7 BASIC STATISTICS OF INDONESIA, 2019* (Numbers in parentheses refer to the OECD average)** LAND, PEOPLE AND ELECTORAL CYCLE Population (million) 270.2 Population density per km² (2018) 147.8 (38.0) Under 15 (%) 26.2 (17.9) Life expectancy at birth (years, 2018) 71.5 (80.1) Over 65 (%) 6.1 (17.1) Men (2018) 69.4 (77.5) International migrant stock (% of population, 2015) 0.1 (9.7) Women (2018) 73.7 (82.8) Latest 5-year average growth (%) 1.2 (0.6) Latest general election April 2019 ECONOMY Gross domestic product (GDP) Value added shares (%) In current prices (billion USD) 1 118.9 Agriculture, forestry and fishing 13.3 (2.6) In current prices (trillion IDR) 1 583.5 Industry including construction 40.6 (26.8) Latest 5-year average real growth (%) 5.0 (2.2) Services 46.1 (70.5) Per capita (000 USD PPP) 12.3 (48.9) GENERAL GOVERNMENT Per cent of GDP Expenditure (2018, OECD: 2019) 18.2 (40.6) Gross financial debt (2018) 33.7 (107.5) Revenue (2018, OECD: 2019) 16.6 (37.5) Net financial debt (2018, OECD: 2017) 6.6 (67.9) EXTERNAL ACCOUNTS Exchange rate (IDR per USD) 14 149.9 Main exports (% of total merchandise exports) PPP exchange rate (USA = 1) 4 743.3 Mineral fuels, lubricants and related materials 20.2 In per cent of GDP Manufactured goods 15.8 Exports of goods and services 18.4 (54.2) Machinery and transport equipment 13.3 Imports of goods and services 19.0 (50.6) Main imports (% of total merchandise imports) Current account balance -2.7 (0.4) Machinery and transport equipment 32.5 Net international investment position -30.3 Manufactured goods 17.5 Chemicals and related products, n.e.s. 14.0 LABOUR MARKET, SKILLS AND INNOVATION Employment rate (aged 15 and over, %) 65.7 (57.6) Unemployment rate (aged 15 and over, %) 6.0 (5.4) Men 79.3 (65.6) Youth (aged 15-24, %) 13.5 (11.7) Women 52.2 (50.0) Long-term unemployed (1 year and over, %) 0.6 (1.4) Participation rate (aged 15 and over, %) 67.5 (61.1) Tertiary educational attainment (aged 25-64, %, 11.9 (38.0) 2017, OECD: 2019) Mean weekly hours worked 38.2 (37.4) Gross dom. spending on R&D (% of GDP, 2018) 0.2 (2.6) ENVIRONMENT Total primary energy supply per capita (toe, 2017, 0.9 (4.0) CO2 emissions from fuel combustion per capita 1.9 (8.6) OECD: 2018) (tonnes, 2017, OECD: 2018) Renewables (%, 2017, OECD: 2018) 33.2 (10.5) Renewable internal freshwater resources per 7.9 capita (1 000 m³, 2014) Exposure to air pollution (more than 10 μg/m³ of PM 94.8 (58.7) 2.5, % of population, 2017) SOCIETY Income inequality (Gini coefficient, 2018, OECD: 2017) 0.378 (0.332) Education outcomes (PISA score, 2018) Poverty gap at USD 3.20 a day (2011 PPP, %, 2018) 5.1 Reading 371 (487) Public and private spending (% of GDP) Mathematics 379 (489) Health care (2016, OECD: 2018) 3.1 (8.8) Science 396 (489) Education (% of GNI, 2018) 3.3 (4.5) Share of women in parliament (%) 17.4 (30.7) * The year is indicated in parenthesis if it deviates from the year in the main title of this table. ** Where the OECD aggregate is not provided in the source database, a simple OECD average of latest available data is calculated where data exist for at least 80% of member countries. Source: Calculations based on data extracted from databases of the following organisations: OECD, International Energy Agency, International Labour Organization, International Monetary Fund, World Bank. OECD ECONOMIC SURVEYS: INDONESIA 2021 © OECD 2021 8 Executive summary OECD ECONOMIC SURVEYS: INDONESIA 2021 © OECD 2021 9 COVID-19 interrupted a long and stable Figure 1. A sudden stop to a growth story growth journey, causing a recession GDP growth, y-o-y % changes Real GDP growth rate After two decades of sustained, steady growth, % the pandemic triggered a “perfect storm”. GDP 8 contracted in 2020 and some of Indonesia’s vulnerabilities have come to the fore, although 6 unprecedented policy interventions have 4 circumscribed the damage. The 2020 recession was widespread. Most 2 sectors were hit, while uncertainty over the evolution of the pandemic and depressed 0 confidence held back investment and consumption, IDN Other G20 EMEs¹ with few exceptions such as ICT and healthcare -2 services. Subdued global demand weighed on -4 commodities sectors, notwithstanding 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 improvement in the second half. Construction was 1. Other G20 EMEs include Argentina, Brazil, China, India, Mexico, also affected, with delays in infrastructure projects. Russia, Saudi Arabia, South Africa, and Turkey. Source: OECD Economic Outlook 108 database updated. The social fallout is severe. Formal employment StatLink 2 https://stat.link/jr1hzt is shrinking, and the crisis is disproportionally hitting vulnerable groups such as informal workers, Table 1.