Presentation of the 2018 OECD Economic Survey for Indonesia

OECD ECONOMIC SURVEY OF INDONESIA 2018 PROMOTING A MORE INCLUSIVE AND RESILIENT ECONOMY

Bali, October 10th 2018 http://www.oecd.org/eco/surveys/economic-survey-indonesia.htm

@OECDeconomy @OECD

Living standards have risen 100

1996

2006

100

2016

90

90

80

80

70

70

60

60

50

50

40

40

Indonesia

OECD EMEs

Indonesia

OECD EMEs

Access to electricity in rural School enrollment, secondary, areas, in % in %

Indonesia

OECD EMEs

Life expectancy (in years)

Note: “OECD EMEs� (Emerging Market Economies) is the average of Chile, Hungary, Mexico, Poland and Turkey.

Source: World Bank, World Bank Development Indicators.

2

Poverty has receded Percentage of the population below the poverty line

30

Urban

30

Rural

25

25

20

20

15

15

10

10

5

5

0

0

1990

1995

2000

2005

2010

2015

Note: The poverty rate is the percentage of the population below the poverty line, which is based on the minimum expenditure for food equivalent to 2 100 kilocalories per day, and basic housing, clothing, education and health needs.

Source: Statistics Indonesia.

3

Economic growth has been solid GDP and investment growth, year-on-year percentage changes 10

10

Investment

GDP

8

8

6

6

4

4

2

2

0 2013

0

Source: CEIC.

2014

2015

2016

2017

2018

4

Inflation is low Consumer price inflation, year-on-year percentage changes 9

9

8

8

Target band

7

CPI

Core CPI

7

6

6

5

5

4

4

3

3

2

2

1

1

0

0

2013

2014

Source: CEIC; Thomson Financial.

2015

2016

2017

2018

5

Exports are growing again Export volumes, 2011Q1 = 100, seasonally adjusted 140

140

Exports

Export markets

130

130

120

120

110

110

100

100

90

90

80 2011

80

2012

2013

2014

Source: OECD, OECD Economic Outlook database.

2015

2016

2017

2018

6

Rising imports have widened the current account deficit Current account balance, in % of GDP, seasonally adjusted 4

4 Current account balance

3

Trade balance (goods and services)

3

2

2

1

1

0

0

-1

-1

-2

-2

-3

-3

-4

-4

-5

-5

2011

2012

2013

2014

Note: Trade balance is on a national accounts basis.

Source: OECD, OECD Economic Outlook database.

2015

2016

2017

2018

7

Financial markets are less developed than in neighbouring countries Bond market size, in % of GDP 250

250 Corporate

Government

200

200

150

150

100

100

50

50

0

0

IDN

VNM

PHP

CHN

Source: Asian Development Bank, AsianBondsOnline.

THA

SGP

MYS

KOR

JPN

8

Monetary policy is appropriately balancing growth and stability Policy and exchange rates 10

110

9

105

8

100

7

95

6

90

5

85

4

80

3 2

70

7-day reverse repo rate (left scale, %)

1 0

75

Previous policy rate (left scale, %)

65

Nominal effective exchange rate (right scale, index, 2010=100) 2010

2011

2012

2013

2014

Source: CEIC; OECD, OECD Economic Outlook database.

2015

2016

2017

2018

60 9

The fiscal deficit has been contained Central government fiscal deficit, in % of GDP 2

2

1

1

0

0

-1

-1

-2

-2

-3

-3

1990 Source: CEIC.

1995

2000

2005

2010

2015

10

Government debt is low Gross general government debt, in % of GDP, 2017 90

90

80

80

70

70

60

60

50

50

40

40

30

30

20

20

10

10

0

0

Source: IMF, World Economic Outlook Database; Bank Indonesia; OECD, OECD Economic Outlook Database.

11

Low government revenues limit spending Social government spending, in % of GDP, 2016 or latest

Source: IMF, Government Finance Statistics Database; OECD, Government at a Glance Database.

12

State-owned enterprises play an important role 6

6

5

5

4

4

3

3

2

2

1

1

0

0

GBR EST NLD LVA MLT KOR JPN IRL DNK SVK CHL LUX ISL CAN BEL BRA BGR DEU AUS NZL USA MEX AUT PRT FIN CZE ISR HUN GRC ESP ZAF LTU CHE SVN SWE ITA NOR FRA TUR ROU HRV IND RUS POL IDN CHN

Broader scope

Scope of state-owned enterprises

Note: This indicator measures the involvement of state-owned enterprises across sectors of the economy.

Source: OECD, Product Market Regulation Database.

13

A demographic dividend will boost economic growth Change in the working-age population share over 2015-30, in percentage points 3

3

2

2

1

1

0

0

-1

-1

-2

-2

-3

-3

-4

-4

-5

-5

-6

-6

High-income countries

China

World

Source: United Nations, World Population Prospects: the 2017 Revision.

Indonesia

India

14

Pervasive informality traps many in low-quality jobs Informality rates, in % of total employment

80

80

70

70

60

60

50

50

40

40

30

30

20

20

10

10

0

0

CHL

ZAF

BRA

CRI

TUR

ARG

COL

Notes: Estimates may differ from national sources due to definitional differences.

Source: OECD calculations from national labour force surveys.

MEX

IDN

PER

15

Employment regulation is relatively strict

2

1

1

0

0

Note: Flexibility of employment regulation is from the Economic Freedom Indices calculated by the Fraser Institute and ranges from 0 (low economic freedom) to 10 (high economic freedom).

Source: Fraser Institute, Economic Freedom of the World Index.

MYS

2

HUN

3

PHL

3

ZAF

4

IND

4

CRI

5

COL

5

MEX

6

CHN

6

RUS

7

CHL

7

ARG

8

THA

8

TUR

9

IDN

9

BRA

More flexibility

Flexibility of employment regulations, 2016

16

Improving skills remains a challenge Educational attainment of 25-34 olds, % Tertiary education

Upper secondary or post-secondary non-tertiary education

40

30

30

20

20

10

10

0

0

Source: OECD (2018), Education at a Glance 2018.

RUS

40

OECD

50

CHL

50

ZAF

60

ARG

60

COL

70

BRA

70

TUR

80

CRI

80

IDN

90

MEX

90

IND

100

CHN

100

17

Key recommendations for making the economy more resilient and inclusive • Deepen domestic financial markets to mitigate risks of capital outflows.

• Improve targeting of social assistance, including by shifting towards more conditional transfers.

• Improve the transparency and governance of state-owned enterprises, including by strengthening their supervision and selection of board members.

• Pilot lower levels of employment protection and discounted minimum wages for youth in special economic zones. If successful, extend them.

• Further simplify business regulations to encourage formalisation and collect user feedback to improve the online single submission system.

• Introduce regular teacher evaluations and link teacher remuneration more closely to performance and ongoing training.

See the Key Policy Insights of the 2018 Economic Survey of Indonesia for more.

The Survey includes two thematic chapters related to: raising revenues to meet spending needs and developing a stronger and sustainable tourism sector.

18

RAISING MORE REVENUES TO MEET SPENDING NEEDS

19

Tax revenues are relatively low Tax revenues including social security contributions, in % of GDP

35

35

30

30

25

25

20

20

15

15

10

10

5

5

0

0

IDN

MYS

PHL

Note: Based on the OECD definition of tax revenues.

Source: OECD, Revenue Statistics Database.

MEX

COL

TUR

ZAF

BRA

20

Registration has expanded but there are still too few taxpayers Registered taxpayers, millions 40

40 Government taxpayers

35

Corporate taxpayers

35

Individual taxpayers

30

30

25

25

20

20

15

15

10

10

5

5

0

0

2006

2008

2010

2012

Note: Married couples typically pay tax as a household using the same taxpayer number.

Source: Directorate General of Taxes.

2014

2016

21

Top personal income tax rates bite at high levels of income 25

Income threshold for paying lowest and highest marginal tax rates, as a multiple of average earnings, 2016 Brazil

South Africa

China

25

Indonesia

20

20

15

15

10

10

5

5

0

0

Lowest tax rate

Highest tax rate

Source: ILO, ILOSTAT Database; EY (2016), Worldwide Personal Tax and Immigration guide 2016-17.

22

Value-added tax has revenue-raising potential Value-added and sales taxes, in % of GDP, 2016 or latest 12

10

10

8

8

6

6

4

4

2

2

0

0

USA PHL MYS CHE AUS IDN MEX JPN KOR CAN IRL TUR COL ITA LUX ESP SVK OECD BEL ZAF GBR NLD FRA DEU POL CZE AUT LTU LVA SVN CHL ISL PRT NOR FIN ISR SWE EST DNK NZL HUN BRA

12

Source: OECD, Revenue Statistics Database.

23

Male smoking rates are high Percentage of population smoking, in %, 2015 80

Male

70

Female

60 50

40 30 20

Source: World Health Organisation.

IDN

RUS

CHN

MYS

CHL

TUR

PHL

EME

ZAF

OECD

MEX

IND

BRA

0

COL

10

24

Property taxes are low Property tax revenue, in % of GDP, 2016 or latest 4.5 4.0

4.5 Other property tax

Recurrent taxes on immovable property

4.0 3.5

3.0

3.0

2.5

2.5

2.0

2.0

1.5

1.5

1.0

1.0

0.5

0.5

0.0

0.0

EST MEX LTU IDN SVK IND CZE PHL MYS AUT SVN CHL LVA SWE DEU HUN RUS TUR NOR PRT IRL POL FIN ZAF NLD CHN DNK CHE ISL NZL BRA COL JPN ESP GRC USA ITA AUS KOR ISR LUX BEL CAN FRA GBR

3.5

Source: OECD, Revenue Statistics Database; Ministry of Finance.

25

Key recommendations for raising revenues • Increase investment in tax administration, particularly staff, electronic services and databases.

• Make greater use of information technology to strengthen monitoring and facilitate tax compliance.

• Freeze the basic tax allowance for individuals to broaden the tax base.

• Gradually lower thresholds for paying the top two rates of personal income tax.

• Broaden value-added tax by removing most exemptions and lowering the threshold for compulsory registration.

• Increase and harmonise tobacco excise across products.

• Increase training and assistance for sub-national governments to improve the quality of property tax databases, valuation methods and tax administration. Raise the cap on property tax rates.

More in Chapter 1 of the Economic Survey of Indonesia 2018

26

DEVELOPING A STRONGER AND SUSTAINABLE TOURISM SECTOR

27

Tourist numbers have surged Tourist arrivals 14

1.4 Arrivals (left scale, in millions)

12

Share of world tourism (right scale, in %)

1.2

10

1.0

8

0.8

6

0.6

4

0.4

2

0.2

0

0.0

1995

Source: CEIC.

2000

2005

2010

2015

28

Tourism can help overcome regional inequality Coefficient of variation on regional GDP per capita, 2016 or latest 0.9

0.9

0.8

0.8

0.7

0.7

0.6

0.6

0.5

0.5

0.4

0.4

0.3

0.3

0.2

0.2

0.1

0.1

0

South Africa

China

India

Source: Statistics Indonesia; OECD, OECD Regional Database.

Brazil

Mexico

Colombia

Indonesia

0 29

There is potential to attract more and higher-spending tourists Foreign tourists’ expenditure, in % of GDP, 2016 12

10

10

8

8

6

6

4

4

2

2

0

0

BRA CHN RUS JPN ARG IND DEU CHL USA FIN CAN IDN KOR NOR GBR IRL SAU FRA NLD ISR MEX TUR ITA DNK POL CHE SWE BEL AUS ZAF LTU SVK LVA CZE HUN ESP AUT NZL SVN EST PRT LUX GRC ISL

12

Source: United Nations World Tourism Organisation; OECD, OECD Economic Outlook Database.

30

Infrastructure gaps are a drag on competitiveness Travel and Tourism Competitiveness Score, 2017 7

Airport infrastructure

Ground and port infrastructure

Tourist service infrastructure

7

6

6

5

5

4

4

3

3

2

2

1

1

0

0

Philippines

Vietnam

Indonesia

Malaysia

Note: The score ranges from 1 to 7 (best).

Source: World Economic Forum, The Travel & Tourism Competitiveness Report 2017.

Thailand

Singapore

31

The growth of tourism can create many jobs Share of tourism in the economy, %, 2015 12

12 GDP

Employment

10

10

8

8

6

6

4

4

2

2

0

0

Indonesia

Source: Statistics Indonesia; OECD, Tourism Database.

OECD

32

Most protected areas are not open for tourists Protected areas, in % of total land 30

30

Most restricted

Other

25

25

20

20

15

15

10

10

5

5

0

0

TUR

IND

ARG

RUS

IDN

MEX

COL

CHN

ZAF

OECD

CRI

Source: Mackie et al. (2017), “Indicators on terrestrial and marine protected areas: methodology and results for OECD and G20 countries”, OECD Environmental Working Papers, No. 126, OECD Publishing, Paris.

BRA

33

Key recommendations for developing tourism • Give more prominence to revenue-based targets for tourism in future plans.

• Incorporate needed infrastructure in forthcoming destination management plans to ensure sustainable development of tourism.

• Expand vocational and on-the-job training to build tourism-related skills in the workforce, especially in areas with skills shortages.

• Increase the coverage of protected areas, and consider opening more for tourism use, but with visitor controls including regulations, and appropriate user and concession fees.

More in Chapter 2 of the Economic Survey of Indonesia 2018

34

For more information

http://www.oecd.org/eco/surveys/economic-survey-indonesia.htm Disclaimers: 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.

This document 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.

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