5 September 2018 | 9:53PM SGT

Asia in Focus

How do Indonesian external indicators compare to 2013?

n Indonesian assets have sold off significantly over the past few months amid EM Nupur Gupta
+65-6654-5538 | nupur.x.gupta@gs.com
contagion risks, stronger broad USD, and US-China trade tensions. Several Goldman Sachs (Singapore) Pte

investors have asked how Indonesia’s external vulnerability indicators compare Menglu Cai
+65-6889-2472 | menglu.cai@gs.com
with the 2013 taper tantrum, and what tools policymakers have at their disposal Goldman Sachs (Singapore) Pte

to contain the sell-off if it continues. Andrew Tilton

+852-2978-1802 | andrew.tilton@gs.com

n
Goldman Sachs (Asia) L.L.C.
Market moves across all asset classes (FX, equities, bonds) have been shallower
than in 2013. Indonesian policymakers have generally used similar tools to
For the exclusive use of BIMO.PAMUNGKAS@GS.COM

combat the depreciating IDR — FX intervention and policy rate hikes — although
arguably been more communicative this time.
n Indonesia’s external vulnerability indicators have improved as compared to the
2013 levels, suggesting that the economy may be less vulnerable to external
shocks than it was a few years ago. However, in absolute terms, Indonesia’s
external vulnerability indicators still remain relatively elevated in comparison to
the rest of ASEAN and India. Therefore, if the EM sell-off continues, Indonesian
asset classes may remain under pressure, albeit less volatile than in 2013.
n We expect Indonesian policymakers to remain proactive if the pressure on the
IDR continues. We believe the central bank still has room to raise policy rates,
and add another 25bp rate hike to our forecasts for the upcoming September
26-27 meeting, in addition to our 25bp policy rate hike forecast in Q4. The
government is also likely to keep the fiscal deficit under check, in our view, and
has implemented measures to curb imports and the current account deficit in a
bid to support market sentiment. Both these policy measures place downside
risks to our 2018 and 2019 real GDP growth forecast of 5.4% and 5.7%
respectively.

Investors should consider this report as only a single factor in making their investment decision. For Reg AC
certification and other important disclosures, see the Disclosure Appendix, or go to
www.gs.com/research/hedge.html.
 Goldman Sachs Asia in Focus

How do Indonesian external indicators compare to 2013?

It has been a tough Q2 for EM Asia FX, in particular the IDR and INR which have
extended their depreciation following the continued USD rally, contagion risks from
Argentina, Turkey and South Africa spreading towards weak EM capital flows, and higher
oil prices. Amid a depreciating FX, key questions that investors are asking are: When will
the sell-off in Indonesian asset classes end? and Do policymakers have enough policy
space to contain the sell-off if it were to continue?

Comparing 2013 vs 2018 sell-off

We compare asset price movements and policy responses in the current sell-off with
the 2013 taper tantrum. (In the charts that follow, we consider the recent sell-off to have
begun on 1 April 2018, and the 2013 episode to have begun on 1 May 2013.) As Exhibit 1
shows, Indonesian FX, bond yields and the equity market have sold off less than they
did during the 2013 taper tantrum, over a similar timeframe. In particular, the IDR
depreciated 18% against the USD in summer 2013, while we have seen a 6.6%
For the exclusive use of BIMO.PAMUNGKAS@GS.COM

depreciation since April this year. Ten-year government bond yields also rose significantly
more in 2013 vs 2018 (+250bp in 2013 vs +130bp in 2018 so far), while the extent of the
equity market sell-off was similar for the first 15 weeks. Overall, the current sell-off has
been less sharp.

Exhibit 1: Indonesian assets have sold off less than they did during the 2013 taper tantrum
Percent Percent Percent Percent Percent Percent
20 20 3.5 3.5 5 5
Cumulative weekly move in USD/IDR: Cumulative weekly move in 10-year government bond yield:
18 18 3.0 3.0
Since April 2018 Since April 2018
16 16 0 0
Since May 2013 2.5 Since May 2013 2.5
14 14
2.0 2.0
12 12 -5 -5

10 10 1.5 1.5

8 8 1.0 1.0 -10 -10

Cumulative weekly move in JCI equity index:
6 6
0.5 0.5 Since April 2018
4 4 -15 -15
Since May 2013
0.0 0.0
2 2
0 0 -0.5 -0.5 -20 -20
0 4 8 12 16 20 0 4 8 12 16 20 0 4 8 12 16 20
Number of weeks Number of weeks Number of weeks

Source: Haver Analytics, Goldman Sachs Global Investment Research

Policymakers have used similar tools — FX intervention and policy rate hikes — to
combat the IDR depreciation in both instances. However, the magnitude of the
draw-down in FX reserves and policy rate hikes has been lower so far this year vs 2013,
in line with the shallower market moves. As Exhibit 3 shows, Bank Indonesia hiked
policy rates by 175bp between May-November 2013, more than reversing the policy rate
cuts in 2011-2012. So far this year, Bank Indonesia has hiked policy rates by 125bp, albeit
still not fully reversing the 200bp policy rate cuts over 2015-2017.

5 September 2018 2
 Goldman Sachs Asia in Focus

Exhibit 2: Bank Indonesia has used FX reserves to moderate the Exhibit 3: ...as well as hiked policy rates
depreciation in both instances...
USD bn USD bn Percent Percent
140 140 8.0 8.0
Indonesia policy rate:
7.5 2018 (7-day reverse repo rate) 7.5
130 130
7.0 2013 (BI rate) 7.0

120 120 6.5 6.5

6.0 6.0
110 110
5.5 5.5
100 100 5.0 5.0
Indonesia FX reserves (spot and forward book):
2018 4.5 4.5
90 90
2013 4.0 4.0
80 80 Nov-15 May-16 Nov-16 May-17 Nov-17 May-18 Nov-18
-12 -10 -8 -6 -4 -2 0 2 4 6 8 10 12 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13
Time t=0 is March 2018 and April 2013 for the two series Number of months Number of months
respectively

Source: Haver Analytics, Goldman Sachs Global Investment Research Source: Haver Analytics, Goldman Sachs Global Investment Research

Taking stock of Indonesia’s external vulnerability indicators

The IMF uses several key indicators to assess the vulnerability of an economy to
For the exclusive use of BIMO.PAMUNGKAS@GS.COM

external shocks. These include, FX reserves to import cover ratio, FX reserves to

short-term external debt, total external debt as a share of GDP, and net international
investment position as a share of GDP, among others.

Indonesia’s external vulnerability indicators have generally improved over the past few
years. Its FX reserves to import ratio, FX reserves to short-term external debt ratio, and
net international investment position have all improved relative to 2013. More recently
however, reserve coverage has worsened due to a depletion of FX reserves over the
past few months.

Exhibit 4: Indonesia’s FX reserves to imports ratio is higher Exhibit 5: Indonesia’s Net International Investment Position has
compared to 2013 but has declined more recently improved slightly, but remains weak relative to the region
Ratio, 3m mov. avg. Ratio, 3m mov. avg. Percent of GDP Percent of GDP
16 16 0 0

14 14 -5 -5

-10 -10
12 12
-15 -15
10 10
-20 -20
8 8
-25 -25
6 6
-30 Net international investment position: -30
FX reserves to monthly imports:
4 Philippines 4 -35 2013 -35
Indonesia 2017
2 2 -40 -40
India
0 0 -45 -45
05 06 07 08 09 10 11 12 13 14 15 16 17 18 Malaysia Thailand Philippines India Indonesia

Source: Haver Analytics, Goldman Sachs Global Investment Research Source: Haver Analytics, Goldman Sachs Global Investment Research

While Indonesia’s external vulnerability indicators are better compared to its own
history, they still remain relatively weak when compared to the rest of the region
(Exhibit 6). A large current account deficit indicates that Indonesia is reliant on foreign
capital inflows to fund its deficit. Its overall external debt to GDP ratio of 34.8% is higher
than most of its peers, while its net international investment position (NIIP) is also the
most negative. (Note that although Malaysia has a high external debt, those are
matched almost equally by external assets taking its NIIP to near zero.) The Indonesian

5 September 2018 3
 Goldman Sachs Asia in Focus

government and non-financial corporates hold most of the external debt, at USD 176bn
and USD 134bn as of June 2018 respectively. Indonesia’s external debt is concentrated
in maturities longer than one year, with its total short-term external debt at 5.6% of GDP,
lower than Thailand’s 13.2% and Malaysia’s 31.2%. On reserve coverage, Indonesia
fares better than Malaysia on both measures, but is weaker than Thailand and India.
Note that the Philippines’ FX reserves to import ratio has deteriorated recently due to
the recent surge in imports (Exhibit 4).

At the micro level, our Asia Credit Strategy research team is of the view that the
external risks for Indonesia sovereign debt are manageable, although there could be
volatility to their credit spread performances such as those transmitted through large FX
movements.

Overall, the broad improvement in Indonesia’s external vulnerability indicators relative to

2013 taper tantrum suggests that the economy is likely to be less volatile to EM shocks
than it was previously. However, on an absolute basis, Indonesia continues to remain
more susceptible to external shocks relative to its peers, if the EM sell-off continues.
For the exclusive use of BIMO.PAMUNGKAS@GS.COM

Exhibit 6: Indonesia’s external ratios are still weaker compared to rest of ASEAN and India

Stronger Weaker

External ratios: Asia (as % of GDP )*

Current account balance Thailand Malaysia Philippines India Indonesia

8.4 2.0 -0.2 -2.6 -2.7

Net International Investment Position* Malaysia Thailand Philippines India Indonesia

-1.8 -7.0 -13.8 -16.8 -32.8

Total external debt India Philippines Thailand Indonesia Malaysia

20.4 23.0 32.1 34.8 70.1

Short-term external debt India Philippines Indonesia Thailand Malaysia

3.9 4.0 5.6 13.2 31.2

FX reserves to Short-term external debt (ratio) Philippines India Thailand Indonesia Malaysia
5.5 3.9 3.3 2.1 1.0

FX reserves (in months of imports) Thailand India Philippines Indonesia Malaysia

9.9 9.4 8.1 7.9 5.6
*Latest available data (2017 or H1 2018)

Source: Haver Analytics, Goldman Sachs Global Investment Research

5 September 2018 4
 Goldman Sachs Asia in Focus

Policy implications
Monetary policy to tighten further

We expect Indonesian policymakers to remain proactive on both FX intervention as well

as policy rate hikes if the pressure on the IDR continues. As highlighted earlier, BI has
raised policy rates by 125bp so far this year, but the rate hikes still do not reverse the
200bp of easing delivered over the past few years. During a Parliamentary hearing on
September 4-5, BI governor Perry Warjiyo reiterated that the central bank would
continue to conduct “dual” intervention (bond and FX intervention), and “take
pre-emptive, front-loaded and ahead of the curve measures to face new developments
in global markets”, according to Bloomberg.

Following the recent IDR depreciation, our augmented Taylor rule-implied policy rate for
H2 2018 has risen by 20bp relative to a month ago. (The increase would have been
higher but has been supported by a lower term premium on US Treasuries.) We now
expect BI to hike policy rates by 25bp at its meeting on September 26-27, in addition to
our expectation of a hike in Q4 2018. This would take cumulative rate hikes in 2018 to
For the exclusive use of BIMO.PAMUNGKAS@GS.COM

175bp, with risks tilted towards more hikes if pressures on the IDR continues. Our
forecasts are more hawkish than Bloomberg consensus estimates, where most
economists are expecting a 0-25bp rate hike between now and the end of the year (vs
our expectations of 50bp).

Exhibit 7: We expect Bank Indonesia to hike policy rates by another 50bp this year

Percent Percent
18 18

Bank Indonesia policy rate:*

16 16
+/- 1 Standard Deviation Band

Actual policy rate

14 14
Fitted policy rate
12 12
GS forecast

10 10

8 8

6 6

4 4

2 2

0 0
01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19
*We splice Indonesia bank rate with the 7-day reverse repo rate.

Source: Haver Analytics, Goldman Sachs Global Investment Research

5 September 2018 5
 Goldman Sachs Asia in Focus

Government to keep fiscal deficit under check and curb imports

In addition to tighter monetary policy, Indonesia’s government may help reduce external
vulnerability via:

1. Prudent fiscal policy: As highlighted in an earlier note, Indonesia’s revenue growth in

2018 year-to-date has exceeded budget expectations. Expenditure growth has
increased at a slower pace, implying a lower fiscal deficit year-to-date (1.6% of GDP
seasonally-adjusted in H1 2018 vs 2.9% in 2017). We had initially expected the
government to accelerate fiscal spending in H2 2018 given the solid fiscal position in
order to support growth; however, recent comments from the government suggest
that the priority may have shifted towards stability vs growth. This places downside
risks to our 2018 fiscal deficit forecast of 2.6% of GDP.
2. Restricted imports to control the current account deficit: The Ministries of Finance
and Trade announced this evening that the import tariffs on several consumer goods,
including electronics, soaps and shampoos will be increased to 10% from 2.5%
currently (timing uncertain). Import tariffs on cars will also be raised to 10% from
For the exclusive use of BIMO.PAMUNGKAS@GS.COM

7.5% currently. According to Finance Minister Sri Mulyani, these measures are an
effort to “discourage [import] demand and guard rupiah from weakening further”, as
reported by Bloomberg. In our view, the import tariffs may lower overall consumer
goods imports at the margin over the coming months (which account for 9% of
overall imports in 2018 year-to-date). According to Bank Indonesia, the current
account deficit in 2018 is likely to average 2.5% of GDP (vs GSe: 2.9% of GDP and
2017: 1.7% of GDP ). Indonesia’s broad balance of payments (the sum of current
account balance, net foreign direct investment, and net portfolio investment) has
been relatively healthy through 2016-17 supported by a surge in portfolio inflows.
However, it turned negative in H1 2018 following net portfolio outflows of 0.9% of
GDP (Exhibit 8).

Exhibit 8: Indonesia’s broad balance of payments has turned negative amid limited capital inflows

Percent of GDP Percent of GDP

6 6

4 4

2 2

0 0

-2 Indonesia: -2
Net portfolio investment
Net foreign direct investment
-4 -4
Current account
Broad balance of payments
-6 -6
06 07 08 09 10 11 12 13 14 15 16 17 18

Source: Haver Analytics, Goldman Sachs Global Investment Research

5 September 2018 6
 Goldman Sachs Asia in Focus

Both the aforementioned measures are likely to be a drag on overall real GDP growth,
implying downside risks to our 2018 and 2019 real GDP growth forecasts of 5.4% and
5.7% respectively.

Conclusion
The sell-off in Indonesian asset markets has been shallower this year than in the 2013
taper tantrum episode. This is likely due in part to improving external vulnerability
indicators, and proactive policymakers. However, on an absolute basis, Indonesia
continues to remain susceptible to external shocks, given that its external liabilities are
higher than its regional peers, and because reserve coverage, although better than 2013,
is still low relative to ASEAN. We expect Indonesian policymakers to remain proactive if
the pressure on the IDR continues. We expect Bank Indonesia to hike policy rates by
another 50bp in 2018, taking cumulative rate hikes this year to 175bp. The government is
also likely to keep the fiscal deficit under check, in our view, and has implemented
measures to curb imports and the current account deficit.
For the exclusive use of BIMO.PAMUNGKAS@GS.COM

5 September 2018 7
 Goldman Sachs Asia in Focus

Disclosure Appendix
Reg AC
We, Nupur Gupta, Menglu Cai and Andrew Tilton, hereby certify that all of the views expressed in this report accurately reflect our personal views,
which have not been influenced by considerations of the firm’s business or client relationships.
Unless otherwise stated, the individuals listed on the cover page of this report are analysts in Goldman Sachs’ Global Investment Research division.

Disclosures
Global product; distributing entities
The Global Investment Research Division of Goldman Sachs produces and distributes research products for clients of Goldman Sachs on a global basis.
Analysts based in Goldman Sachs offices around the world produce equity research on industries and companies, and research on macroeconomics,
currencies, commodities and portfolio strategy. This research is disseminated in Australia by Goldman Sachs Australia Pty Ltd (ABN 21 006 797 897); in
Brazil by Goldman Sachs do Brasil Corretora de Títulos e Valores Mobiliários S.A.; Ombudsman Goldman Sachs Brazil: 0800 727 5764 and / or
ouvidoriagoldmansachs@gs.com. Available Weekdays (except holidays), from 9am to 6pm. Ouvidoria Goldman Sachs Brasil: 0800 727 5764 e/ou
ouvidoriagoldmansachs@gs.com. Horário de funcionamento: segunda-feira à sexta-feira (exceto feriados), das 9h às 18h; in Canada by either Goldman
Sachs Canada Inc. or Goldman Sachs & Co. LLC; in Hong Kong by Goldman Sachs (Asia) L.L.C.; in India by Goldman Sachs (India) Securities Private
Ltd.; in Japan by Goldman Sachs Japan Co., Ltd.; in the Republic of Korea by Goldman Sachs (Asia) L.L.C., Seoul Branch; in New Zealand by Goldman
Sachs New Zealand Limited; in Russia by OOO Goldman Sachs; in Singapore by Goldman Sachs (Singapore) Pte. (Company Number: 198602165W);
and in the United States of America by Goldman Sachs & Co. LLC. Goldman Sachs International has approved this research in connection with its
distribution in the United Kingdom and European Union.
European Union: Goldman Sachs International authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and
the Prudential Regulation Authority, has approved this research in connection with its distribution in the European Union and United Kingdom; Goldman
Sachs AG and Goldman Sachs International Zweigniederlassung Frankfurt, regulated by the Bundesanstalt für Finanzdienstleistungsaufsicht, may also
For the exclusive use of BIMO.PAMUNGKAS@GS.COM

distribute research in Germany.

General disclosures
This research is for our clients only. Other than disclosures relating to Goldman Sachs, this research is based on current public information that we
consider reliable, but we do not represent it is accurate or complete, and it should not be relied on as such. The information, opinions, estimates and
forecasts contained herein are as of the date hereof and are subject to change without prior notification. We seek to update our research as
appropriate, but various regulations may prevent us from doing so. Other than certain industry reports published on a periodic basis, the large majority
of reports are published at irregular intervals as appropriate in the analyst’s judgment.
Goldman Sachs conducts a global full-service, integrated investment banking, investment management, and brokerage business. We have investment
banking and other business relationships with a substantial percentage of the companies covered by our Global Investment Research Division.
Goldman Sachs & Co. LLC, the United States broker dealer, is a member of SIPC (http://www.sipc.org).
Our salespeople, traders, and other professionals may provide oral or written market commentary or trading strategies to our clients and principal
trading desks that reflect opinions that are contrary to the opinions expressed in this research. Our asset management area, principal trading desks and
investing businesses may make investment decisions that are inconsistent with the recommendations or views expressed in this research.
The analysts named in this report may have from time to time discussed with our clients, including Goldman Sachs salespersons and traders, or may
discuss in this report, trading strategies that reference catalysts or events that may have a near-term impact on the market price of the equity securities
discussed in this report, which impact may be directionally counter to the analyst’s published price target expectations for such stocks. Any such
trading strategies are distinct from and do not affect the analyst’s fundamental equity rating for such stocks, which rating reflects a stock’s return
potential relative to its coverage group as described herein.
We and our affiliates, officers, directors, and employees, excluding equity and credit analysts, will from time to time have long or short positions in, act
as principal in, and buy or sell, the securities or derivatives, if any, referred to in this research.
The views attributed to third party presenters at Goldman Sachs arranged conferences, including individuals from other parts of Goldman Sachs, do not
necessarily reflect those of Global Investment Research and are not an official view of Goldman Sachs.
Any third party referenced herein, including any salespeople, traders and other professionals or members of their household, may have positions in the
products mentioned that are inconsistent with the views expressed by analysts named in this report.
This research is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be
illegal. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of
individual clients. Clients should consider whether any advice or recommendation in this research is suitable for their particular circumstances and, if
appropriate, seek professional advice, including tax advice. The price and value of investments referred to in this research and the income from them
may fluctuate. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur.
Fluctuations in exchange rates could have adverse effects on the value or price of, or income derived from, certain investments.
Certain transactions, including those involving futures, options, and other derivatives, give rise to substantial risk and are not suitable for all investors.
Investors should review current options disclosure documents which are available from Goldman Sachs sales representatives or at
http://www.theocc.com/about/publications/character-risks.jsp. Transaction costs may be significant in option strategies calling for multiple purchase and
sales of options such as spreads. Supporting documentation will be supplied upon request.
Differing Levels of Service provided by Global Investment Research: The level and types of services provided to you by the Global Investment
Research division of GS may vary as compared to that provided to internal and other external clients of GS, depending on various factors including your
individual preferences as to the frequency and manner of receiving communication, your risk profile and investment focus and perspective (e.g.,
marketwide, sector specific, long term, short term), the size and scope of your overall client relationship with GS, and legal and regulatory constraints.
As an example, certain clients may request to receive notifications when research on specific securities is published, and certain clients may request
that specific data underlying analysts’ fundamental analysis available on our internal client websites be delivered to them electronically through data
feeds or otherwise. No change to an analyst’s fundamental research views (e.g., ratings, price targets, or material changes to earnings estimates for
equity securities), will be communicated to any client prior to inclusion of such information in a research report broadly disseminated through electronic
publication to our internal client websites or through other means, as necessary, to all clients who are entitled to receive such reports.

5 September 2018 8
 Goldman Sachs Asia in Focus

All research reports are disseminated and available to all clients simultaneously through electronic publication to our internal client websites. Not all
research content is redistributed to our clients or available to third-party aggregators, nor is Goldman Sachs responsible for the redistribution of our
research by third party aggregators. For research, models or other data related to one or more securities, markets or asset classes (including related
services) that may be available to you, please contact your GS representative or go to http://360.gs.com.
Disclosure information is also available at http://www.gs.com/research/hedge.html or from Research Compliance, 200 West Street, New York, NY
10282.
© 2018 Goldman Sachs.
No part of this material may be (i) copied, photocopied or duplicated in any form by any means or (ii) redistributed without the prior written
consent of The Goldman Sachs Group, Inc.
For the exclusive use of BIMO.PAMUNGKAS@GS.COM

5 September 2018 9