Global Economic Update, Infrastructure Development, and Outook 2017

A. Tony Prasetiantono, Ph.D Kepala Pusat Studi Ekonomi dan Kebijakan Publik UGM

Global Economic Update, Infrastructure Development, and Outook 2017 A. Tony Prasetiantono, Ph.D Director, Center for Economic and Public Policy Studies Universitas Gadjah Mada

Asia Pacific Valuation Conference 2016 Bali, 13 October 2016


Outline        

Global Economic Update

The Fed: Increasing Interest Rate? Why Brexit? China’s Economy: Slowing Down “Flying Geese” Phenomenon Infrastructure Development

Tax Amnesty: Lessons Learned from Indonesia Economic Outlook 2017


The Economist: Who‘s afraid of cheap oil?


World‘s Oil Price 1970: USD 1/barrel

 1973: USD 3/barrel  1979: USD 9/barrel  1981-1982: USD 34/barrel  1986: USD 9/barrel: OIL GLUT  1991: USD 41/barrel  2007: USD 60-70/barrel  July 2007: USD 147/barrel  June 2014: USD 115/barrel  October 2014: USD 80/barrel  December 2014: USD 66/barrel: OIL FLOOD  August 2015: USD 38/barrel  February 2016: USD 27/barrel  Recently: USD 50/barrel (Brent), USD 52/barrel (WTI)




“A 10 or 20% decline in the price might work in the conventional way. But a 70% decline has really drastic effects on producers; they become more, not less, likely to be liquidity-constrained than consumers”.

Paul Krugman


Why China? Slowing Down


When China Stumbles (1)









China’s economy grew about 6.9% in 2015; and “only” 6.7% in Q1-2016 Demand for coal has been declining, due to: (1) low oil price, (2) environmental concern. Chinese government has been devalued its yuan/renminbi, in order to strengthen its competitiveness. “Sadly”, economic growth would be only 6.5% or less in 2016.


When China Stumbles (2)  Internationalization of yuan is doubtful

  

China’s foreign reserves have been dropped to USD 3.23 trillion, the lowest since 2012 Higher saving, lower consumption “Flying geese” to Vietnam


World‘s Foreign Reserves Reserves

3,500

3,316

Y to Y (Jul 2014 vs Apr 2016) 17.2%

15.6%

11.9% 9.9%

3,000

10.1% 10%

5.1% 2.2% 2,500

20%

1.2%

-1.1% -4.0%

2,000

-3.4% -5.9%

3.7% 0.5% -3.7%

-2.6%

0%

-6.3%

-9.3% -10%

-16.2%

1,500

-19.6%

-19.7%

1,263

-20%

1,000

-30%

500

433 392 372 362 361 363 0

-35.9% 250 200 182 179 173 156 147

108

97

84

84

47

50

34 -40%


Why Brexit? (1) 





European Union is an economic integration, where all members have been applied free movement of goods, services, capital, and people within its internal market. From the US perspective, it could be named as “The United States of Europe” It was followed by standardized law system, as well as similar regulation on trade, agriculture, fishery, and regional development.


Why Brexit?  European Union consists of 28 countries, 508 (2)  

million population, with total GDP amounted USD 18,4 trillion (2014). As comparion, US consists of 51 countries, 330 million population, with GDP USD 17.5 triliun (2014). The ultimate format of the integrated economy is the establishment of single curreny unit name euro.


Why Brexit? (3) Euro zone consists of 19 of 28 members of European



Union. It consists of Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain. Why Brexit? Reasons: : (1) huge trade deficitand current account deficit against European Union, and (2) negative sentiment against inbound migration.


Why Brexit? (4)  In 2015, UK received 333,000 inbound migration (including refugees), or more than tripled than the target 100,000 people.  Germany is the largest recipient of inbound migration and refugees, reaching 1 million people (Jeffrey D. Sachs, Project Syndicate, 25/6).


 Quantitative Easing I, II, III



(2009-2013): USD 4.5 trillion Low interest rate periods, FFR = 0.25% (now 0.5%)

Ben S. Bernanke


  

    

US economy is now “spring”, non-farm payroll: 200,000-300,000/ month. Unemployment rate is now 4.9%, dropped from 10% in 2009. Car sales 17 million (from 9 million only in 2009) Economic growth 2%. Dow Jones index was 18,500 (from 9,000 in 2009). Inflation rate 1.2%, still below the target of 2%. According to Bernanke, “low inflation is as bad as high inflation”. Interest rate should be at least 1%. (Why?)

Janet Yellen


Negative Interest Rate: Mario Draghi


Negative Interest Rate In Japan as Well


Flying Geese Flying Geese (1)


Flying Geese (2)


Lessons Learned from Brazil

 Political and economic   

 

disaster Suffering from the fall of commodity prices Brazil’s economy is predicted to shrink by 2.5-3% in 2016 Higher spending on pensions Fiscal deficit 10% of GDP (2015), from 2% (2010) Inflation rate 10.5%


Infrastructure Development (1)



Mario Draghi



Mario Draghi




Tax Amnesty (1): Tax Haven  Small size countries tried to attract forein

 

investments through lower tax rates. There are, for instance, Switzerland, Luxembourg, Singapore, British Virgin Islands, Cayman Islands, etc. This is normal to boost capital inflows. In the US, for instance, small state also do the same thing. Example: Delaware, a small state, neighbor of Pennsylvania and New Jersey.


Tax Amnesty (2):  The government expects Rp 1,000 trillion 

 

repatriation from abroad, particularly Singapore. So far, the government has collected Rp 137 trillion. Foreign reserves of Singapore USD 250 billion. Foreign reserves of Indonesia USD 115 billion.


Tax Amnesty (3):  Target of penalty fee/new tax collection from tax      

amnesty: Rp 165 trillion Indonesia’s GDP: Rp 12,000 trillion Revenue from cigarettes business: Rp 142 trillion. High speed train Jakarta-Bandung: Rp 74 triliun. Cost of new terminal 3 Jakarta airport: Rp 7 trillion. Cost of MRT Jakarta: Rp 30 trillion. Indonesia’s budget deficit: 2.5%-2.7% of GDP


Revenue from Tax Amnesty as per End of Sept 2016:  Declaration & Repatriation Rp 3,629 trillion  Domestic Declaration Rp 2,539 triliun  Overseas Declaration Rp 952 triliun  Repatriation Rp 137 trillion (13,7%)  Penalty/tax collection Rp 97.2 trillion


Economic Outlook 2017  Commodity prices will be more stable and more reasonable. Less volatility.

 Fed Fund Rate will increase gradually. No reason to jump dramatically. Less volatility on USD.

 Budget deficit in most countries will be smoothing.  Global economic growth will be higher  In the case of Indonesia: the success of tax amnesty program will restore confidence. Infrastructure development is a the most essential thing.


Thank you

Global Economic Update, Infrastructure Development, and Outook 2017

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