Indonesia Economic Outlook 2018

Adaptive Responses to Rapid

Economic Change
Hendri Saparini, Ph.D
Senior Economist and Founder of CORE Indonesia

Presented at KEB Hana Bank Economic Outlook 2018

November 16, 2017
 Global Economic Growth 2018
Weak recovery in advanced economies; solid pickup in developing countries
China
6.8 6.5
Eurozone

2.1 1.9
USA
2017 2018

2.2 2.3 2017 2018

18,3%
11,6%

2017 2018

15,3%

Japan

1.5
0.7

2017 2018

India 4,3%
World 6.7
7.4

3.6 3.7

2017 2018
2017 2018
7,4%

share of Source: IMF , WEO October 2017

GDP
Modest Rebound of Commodity Prices
Price increases are not supported by solid and sustained demand

Commodity Price Index Global GDP

(2008=100) growth
160

OPEC
140 Wheatear production
decision
120 Agricultural
Raw Materials
100
Metals Price
80
OIL PRICE
Investment/ Non-OPEC
60 speculation Production

Fuel (Energy)
40
Geopolitical
20 Oct-16 Risk
Oct-08

Oct-10

Oct-12

Oct-14
Feb-08

Feb-10

Feb-12

Feb-14

Feb-16
Jun-09

Jun-11

Jun-13

Jun-15

Jun-17

Source: IMF
Changes in Commodity prices Oil Price US$53--US$56
(+) strong global demand increase
(+) OPEC production cut agreement
(-) recovery in U.S. shale oil production
Commodity Prices 2017 2018 % change (-) expanding output of oil producers like Iran,
Libya, and Venezuela

Oil (US$/bl) 53 56 5.7%

Natural Gas US$5,6 US$5,7
Natural Gas (US$/mmbtu) 5.6 5.7 1.7% (+) strong demand especially from
chemical and fertilizer industries
Coal (US$/mt) 85 70 -17.6% (+) China gov. encouragement to
coal-to-gas switching to reduce
732 1.7% emissions
Palm Oil (US$/mt) 720
Commodity price
Rubber (US$/kg) 2.2 2.1 -1.4% increase marginally in
2018
Cocoa (US$/kg) 2.0 2.1 5.0%
Coal US$ 89--U$ 70
Coffee (Arabica) (US$/kg) 3.3 3.3 0.0% (-) Weak demand from China as it
tackle its air pollution
(-) increase of supply from producers
Copper (US$/mt) 6,050 6,118 1.1% countries

Nickel (US$/mt) 10,100 10,559 4.5%

Tin (US$/mt) 20,225 20,426 1.0% Palm Oil U$ 720--U$732

(+) Strong demand of India and China
(+) lower soybean production in Brazil and Argentina
(-) Increase production of palm oil in Indonesia and
Malaysia

Source: World Bank

High Growth of Financial Sector
Low pressure of monetary policies on financial stability

Stock Market Indices of developed countries Stock Market Indices of developing countries
250 250

200 200

INDEXK, 2010=100
INDEX, 2010=100

150 150

100 100

50 50

0 0

Jul-11

Jul-12

Jul-13

Jul-14

Jul-15

Jul-16

Jul-17
Jan-11

Jan-12

Jan-13

Jan-14

Jan-15

Jan-16

Jan-17
May-11

May-12

May-13

May-14

May-15

May-16

May-17
Sep-11

Sep-12

Sep-13

Sep-14

Sep-15

Sep-16

Sep-17
Jan-11

Jan-12

Jan-13

Jan-14

Jan-15

Jan-16

Jan-17

Japan United Kingdom United States Euro area (19 countries) China India Indonesia Russia

Source: OECD
GDP Growth and Distribution
Driven by exports and investment

GDP Distribution (Q1-Q3 2017) GDP Growth (Q1-Q3 2017)

9.53%

3% 6.79%
7% 5.77%
4.99%
5.05%
4.36%

1.97%
1.28%
33% 57%

-3.71% -4.01%
Private Consumption Government Investment Export Import
Consumption
Private Consumption Fixed Investment Government Consumption Net Export
Q1-Q3 2016 Q1-Q3 2017

Source: BPS
GDP by Sectors and Its Distribution
Supported by non-tradable sectors

Financial
GDP Growth by Its Sectors
Transportation
Service
4% Information & Information & 9.8%
4% 9.2%
Communicatio Communication
Manufacturing
Industries n 8.3%
Transportation 8.2%
23% 5%
Mining Construction 6.7%
6% 5.7%

Financial Service 6.1%

7.0%
Accomodation; Food & 4.9%
Construction Beverage 4.6%
11%
Trade 4.8%
3.7%
Q1-Q3 2017
Agriculture Agriculture 4.3%
2.8% Q1-Q3 2016
14%
Manufacturing 4.2%
Industries 4.6%
Others Real Estate 3.7%
19% 3.7%
Trade
14% 1.2%
Mining 0.1%

Source: BPS
Consumers Purchasing Power Decline?
Growth of Power Sales
Growth of Vehicle Sales 7.82%
Mobil Sepeda Motor 6.36%
2.38% 2.67%

2.40%

-0.26%

Jan-Sep 2016
Jan-Sep 2017 Semester-1 2015 Semester-1 2016 Semester-1 2017
-9.74%

Growth of Cement Consumption Growth of Retail Sales (yoy, %)

2016 2017
16.3

13.6
Jan-Sep 2016 12.9
2,9%
11.1 11.2 11.4
10.6 10.6 10.5
9.9
8.1
6.3

Jan-Sep 2017 6.3 6.3

6,6% 4.2 4.2 4.3
3.7
2.2 2.4

-3.3
Jan Feb Mar Apr May June July Aug Sep Oct Nov Dec
Weakening Purchasing Power of Low Income Consumers
Expenditure Distribution by group of income Index, Farmer Exchange Rate
(2010=100)
46,6% 110 Food
108
36,3%
106

17,1% Rp 104

Rp 102
100 Holticulture
98
Rp 96 Plantation
94
92
90
Jan-10Jul-10Jan-11Jul-11Jan-12Jul-12Jan-13Jul-13Jan-14Jul-14Jan-15Jul-15Jan-16Jul-16Jan-17Jul-17
40% lowest 40% middle 20% highest

16 Administered Annual Inflation (yoy)

Index Wage Real Index %
Price
2016=100 14
102.0 12
Housemaid Volatile Food
Construction worker
101.0
10
8
100.0 6 Headline
4 Core
99.0
2
98.0
Farmworker 0
-2
97.0
-4
Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17

Source: BPS
Low Growth Sales for Retailers and Manufacturers

Retail Trade Sales Growth, (9M,yoy) Food and Household Sales Growth, (9M, yoy)
25% 30%

20%
20% 25% 24%

15% 13%
20%
10%
10%
7%
15%
5%
1% 10%
0% 9%
10%
0% 8%
6%
-5% 5% 3% 4%
-4% -4% -5% 3%
-7%
-10%
0%
Sumber Alfaria Matahari Putra Ramayana Hero Matahari Indofood CBP Sukses Mayora Indah Unilever Indonesia Ultrajaya Milk
Trijaya Prima Lestari Sentosa Supermarket Department Makmur Tbk. Industry & Trading
Store
2016 20017
2016 20017
Rapid decline of Fast Moving Consumer Goods (FMCG)
sales
Fast Moving Consumer Goods has been growing very
Total Key Account 75 Festive Categories
slowly at 2,7% in 2017 (ytd) while annual average was 11%.
45%
300
YTD 40% 38.7%
7.7% +2.7%
+11.5%
35%
250 Inflation 8.4% +10.5%
+14% 29.8%
30%
+11.1%
+9.6%
200 +4.7% +11% 25%
Inflation 11%
20.6%
+21.1%
20%
+15.2% 16.3%
Inflation 17%
150 +14.3% 13.4%
15%
+17.7%
+13.8% 10%
100 5.0%
5%

50 0%
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Fest 2012 Fest 2013 Fest 2014 Fest 2015 Fest 2016 Fest 2017

Source : Nielsen
Impact of E-commerce Expansion?
Market share of online sales is below 4% in 2017
Number of people E-commerce Total value of national Average annual e-
Growth of Retail E-Commerce Sales in Indonesia purchasing via penetrationJan 2017
(number e-commerce 2016 (US$) commerce revenue per
e-commerce of purchaser vs total user in 2016 (US$)
25. 23.3 population)
22.4 22.1 21.7
19.8
20.
16.8

15.
%

10.

5.
24.74 Million 9% $5.6 Billion $228
0.
2016 2017* 2018* 2019* 2020* 2021*

Percent of Retail Sales Mode Online Share of E-commerce from Total Retail Sales In Indonesia
(2014, % of total retail sales) 5.0
4.4
4.5
7.8% 3.9
7.1% 4.0
5.8% 3.5 3.1
3.0
4.5% around or below 1%
2.5 2.2

%
2.0
1.4
1.5
1.0 0.8
0.5
Europe China United Singapore Malaysia Thailand Philippines Indonesia Vietnam 0.0
States 2014 2015 2016* 2017* 2018* 2019*
Sumber: Statista, Wearesocial.org, Asosiasi E-Commerce Indonesia (IdEa)
Upper-Middle Class Holding Back Consumption
Third party deposit for above Rp 2 billion accounts grows faster
Third Party Deposit by Nominal
3,500

Composition of income household usage

3,000
% usage

Triliun Rp
2,500
N>2B
2,000

1,500
N<2B
1,000

Growth of Third Party Deposit By Nominal Segment

26%
24%
N>2B
22%
20%
18%
16%
14%
12%
10%
8%
6% N<2B
4%
2%
0%

Source : LPS dan BI

Direct Investment Growth
Domestic investment grows faster, mostly supported by government expenditure

Domestic & Foreign Direct Investment Growth Highest Direct Investment Sectors Realization
(Q1-Q3 2017)
40.0%
36.5% Mining 62.62
FDI DDI
35.0%

30.0% Metal, Machinery & Electronic

51.61
Industry
25.0%
21.7%

20.0% 18.6% Food Industry 47.46

17.1% 16.3% 16.9% 16.7%

15.0%
12.0%
10.5% Chemical and Pharmaceutical
39.44
10.0% Industry
7.8% 7.8%

5.0%
26.59
0.9% Food Crops & Plantation
0.0%
Q1-2016 Q2-2016 Q3-2016 Q1-2017 Q2-2017 Q3-2017
Triliun Rupiah
Investment in manufactures is slowing down
DDI Growth by Sector (yoy) DDI by Sector (in Trillions Rupiah)
70% 100 89.1
61%
90
60% 75.4
80 73
50% 42% 70 62.6
41%

Triliun Rp
40% 60
50
30% 40 32.6
20%
20% 12% 30 20.2
20
10%
10
0% 0
-10% Primary Secondary Tertiary Primary Secondary Tertiary
-3%
Jan-Sep 2016 Jan-Sep 2017 Jan-Sep 2016 Jan-Sep 2017

FDI Growth by Sector (yoy) FDI by Sector (in Trillions Rupiah)

80% 200 180.1
65%
58% 180
60% 50% 160 139.8
140 118.3
40%

Triliun Rp
120
20% 100
74.9
80 60.4
0% 60 40.2
40
-20%
20
-22% -25%
-40% -30% 0
Primer Sekunder Tersier
Tertiary Primary
Primer Secondary
Sekunder Tersier
Tertiary
Primary Secondary
Jan-Sep 2016 Jan-Sep 2017 Jan-Sep 2016 Jan-Sep 2017
GOVERNMENT AND SOE Capital Expenditure

Capital Expenditure by Government and Realization of Government Capital

SOEs Expenditure
700 90 45
40
80 37.2 40
600
70 35
500 27.8
60 30

Triliun Rupiah
50 23.1 25
400 405 21.5

%
268 40 20
15.4
300
212 255 30 15
11
143
200 20 10
118 5.1 5.7
4.3
10 1.4 5
100 215 207 111
181
145 147
118 0 0
47.5 75
Q1 Q2 Q3 Q1 Q2 Q3 Q1 Q2 Q3 Q1 Q2 Q3
0
2011 2012 2013 2014 2015 2016 Jun-17 Aug-17 2014 2015 2016 2017

Gov. Capital Exp. BUMN Capital Exp. Realization (in Trillions Rp) Realization (in %)
Indonesia Export Rebound
Supported by increased commodity prices

Export growth by Sectors Import Growth by Broad Economy Categories

37,8%

18,4% 12,8%
14,5%
Consumption Goods 12,4%
Jan-Sep -9,8%
2017

Raw Material Goods

15,21%

Agriculture Manufacture Mining -12,6%

Jan-Sep Capital Goods
9,2%
2016
-3,5%
Jan-Sep Jan-Sep
-17,4% 2016 2017
-18,0%

Source: BPS, IMF

Next Year Goverment Budget
Increased allocation for infrastructure, minimum short-term impacts on
economy

Budget Allocation for Infrastructure Average Index of Riil Labour Wage

Index
480 70% 2016=100

62% 401 410

60% 102.0
400
Housekeeper
50% Construction
317 101.0 Labour
320 290
TRILIUN RUPIAH

40%
240 100.0

178 30%
27% 156 27%
160 146
99.0
20%
14% Farmer Labour
80 10% 98.0
9%
7% 6%
0 0%
97.0
2012 2013 2014 2015 2016 2017F 2018F

Apr-16

Apr-17
Mar-16

Mar-17
Jan-16
Feb-16

Jun-16

Aug-16
Sep-16

Jan-17
Feb-17

Jun-17

Aug-17
Jul-16

Oct-16
Nov-16

Jul-17
May-16

Dec-16

May-17
Goverment Infrastructure Budget Growth (%YoY)
Better Targeting Subsidies
Improving the accuracy of electricity subsidy (900 VA)

Goverment Subsidy Spending

450

400

350 Energy Subsidy

300
Rp 95 Tn
Tn Rupiah

250

200

150

100

50
Electricty Subsidy
0 Fuel And LPG Subsidy
Rp 47,7 Tn
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Rp 46,9 Tn
Total Energy Subsidy Total Non Energi Subsidy
 Increased Allocation for Social Assistance
Require close supervision to improve effectiveness

Program Keluarga Harapan

Social Assistance Spending 10 Million Family
120 60%

100

28%
80 22% 22% 23%
16% 17%
Contribution for the poor in
Tn Rupiah

4% 6% 6%
JKN
60 -1% 0%
-7% 92,4 Million Family
40

20
-49%
0 -60% Program Indonesia Pintar
2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

19,7 Million Student

Social Assistance Growth (YoY)
Revenue Target for 2018
Increased target will require extra efforts

Tax Revenue Revenue realization increase due to Lower Target and

1800 Tax Amnesty Program
1618
1539
1600 1489 1503 1472
1600 3.3% -4.3%
1489 1472 9.9%

19.5%
1400 14.6% 1246
1246 24%
516 481
30% 1200 595
1200
340
Trlion Rupiah

3.5%
1000 8.2%

Axis Title
800 800

600
987 991
906 894
400 400

200

0 0
2014 2015 2016 APBNP 2017 2018 Okt 14 Okt 15 Okt 16 Okt 17
Realization Remaining Target Target Realization Remaining Target Target
Higher risk for budget deficit leading to increased debts
High foreign ownership in government bonds is vulnerable to sudden capital
outflow
Foreign Holding in Goverment Bonds
818
Budget Surplus/Deficit 900 42
Percentage
400 0.00 40
750
38

Tn Rupiah
300 600
-0.50 36 %
Value
450
200 34
300 32
-1.00
100 150 30
Trillions Rupiah

Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17

% of GDP
0 -1.50

% Foreign Holding in Goverment Bonds by Country

-100
-2.00
Meksiko 64.5
Afrika Selatan 38.3
-200 Indonesia 38.2
Polandia 31.9
-2.50 Rusia 30.1
-300 Hungaria 29.4
Malaysia 28.4
Turki 19.9
Thailand 15
-400 -3.00 Filipina 13.9
2013 2014 2015 APBN-P 2016 Outlook 2017 RAPBN 2018 Korea 13.5
Brazil 13.3
Primary balance Surplus/Deficit % of GDP Israel 5.2
Cina 3.9
0 10 20 30 40 50 60 70
Redesign Fiscal Policy to Reduce Income Inequality

Poverty Line Poverty budget VS poverty reduction

45 20 -0.8

40 18

16 +0.3
35
14
30
+0.1
Millions People

12
25 -1.1
10 -0.9

%
-0.9
20 214.4
8 -1.5
-2.4
15 172.4
6
131.2

Trilion Rupiah
10 119
4 109.2
96.1
79.9 81.5
5 2

0 0
2006 2007 2008 2009 2010 Mar Mar Mar Mar Mar Mar Mar
11 12 13 14 15 16 17 2009 2010 2011 2012 2013 2014 2015 2016
Number Percentage
Continued low inflation rate since 2016
Lower volatile foods inflation, but higher administered prices in 2017

Annual Inflation (yoy) Inflation Rate According to Expenditure Group

%
16 Administered
Price
14 General 2.7
2.1
12 Transportation, 3.4
-1.9
Volatile Food
10 Education, Recreation and Sports 3.2
2.7
8 Health 2.5
3.3
3.7
6 Headline Clothing 3.5
4 Housing, Water, Electricity, Gas, 4.8
Core 1.6
2 3.6
Finished food, beverages, 4.6
0 Food material -1.3
3.4
-2
-4 -2 0 2 4 6
-4 Jan-Okt 2017 %
Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16 Jan-17 May-17 Sep-17 Jan-Okt 2016
 Balance of payment
Improved export performance and increased capital flows

Balance of Payment Current Account

20 8 Goods Services Primary Income Secondary Income
6
15 Financial
Transaction 4
10
2
Billion USD

5 0

Bil. US$
Balance of
Payment -2
0
-4
-5
Current -6
-10 Account
-8

-15 -10
 Stable Exchange Rate in 2017
Foreign pressures decline, domestic economy is relatively stable

Rupiah/US$ Exchange Rate of Asian Currency

Index
15000 2015:100
130
14500 125
120 Ringgit
Average S1-16
14000 115
Rp 13.409 Average S1-17
Yuan
Rp 13.328 110
13500
105 Rupiah

100 Won
13000 Bath
95
Yen
90
12500
85
80
12000
Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17

Source: IMF
 LOW Impact of Monetary Policy on Bank Lending Rate
Time lag in monetary policy transmission

BI 7 Repo Rate, Lending Rate, Deposito Rate Average of Bank Interest Rate Ags 16 - Oct 17

% %
9 14 Reference Rate

Lending 100 bps

8 12
Facility Lending
Rate
7 10
Deposit
Lending rate
6 BI Rate
BI 7 Day RR 8
Rate 62 bps
Rate
5 6
Deposit Rate
4 Deposit
4
Facility
Spread
67 bps
3
2

2
Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17

Source : Bank Indonesia

 Banking Credit Growth & Non Performing Loan
Credit continues to grow one digit in 2017 due to high NPL and low demand

Annual Credit Growth (yoy) Bank NPL

Annual Credit Growth Mining 8%
Construction 23%
18% Ags-16 Ags-17
Financial Intermediaries 9%
17% 8.2% 10.2% Trade 4.4%

Transportation,
13% 4.1%
Electricity, gas and water 29% warehousing

Agriculture 11% Acomodation Provision 4.1%

16% Consumption

Real Estate 7% Manufacturing 3.7%

13%

Acomodation Provision 6%
16% Construction 3.6%

Manufacturing 5%
3% Credit Real Estate 3.2%

Mining -20% 5%
Agriculture 1.9%
Working
Investment
Trade 4% Capital
6% Aug-17
Electricity, gas and water 1.5%
Transportation, warehousing -1%
and communication -2%
Ags-16 Ags-16 Ags-17 Financial Intermediaries 0.8%
Ags-17
-30% -20% -10% 0% 10% 20% 30% 40%
9.4% 7% 4.7% 7.8% 0% 2% 4% 6% 8% 10%
Aug-17 Aug-16

Source : OJK
Incentive System by Bank Indonesia
Important factors that causes ineffectiveness of monetary transmission

Growth of Third Party Fund

Placement of Banking Funds in Bank Indonesia
Instruments 30%
600 25% Valas
506 20%
500 484 486 Rupiah
429 15%
410 420
400 10%
325 5%
Trilion Rp

300 0%
Total DPK
-5%
191
200
-10%
-15%
100
-20%

Feb-15

Feb-16

Feb-17
Apr-14
Jun-14

Apr-15
Jun-15

Apr-16
Jun-16

Apr-17
Jun-17
Aug-14

Dec-14

Aug-15

Dec-15

Aug-16

Dec-16

Aug-17
Oct-14

Oct-15

Oct-16
0
2010 2011 2012 2013 2014 2015 2016 43009

Source : Bank Indonesia

Bank Health Indicators

23.4 (Aug-16) 81.3 (Aug-16)

23.3 (Aug-17) 78.9 (Aug-17)

CAR BOPO

NIM LDR
5.6 (Aug-16) 90.0 (Aug-16)

5.3 (Aug-17) 89.2 (Aug-17)

Source : OJK
Thank You