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

Source: IMF , WEO October 2017

3.6 3.7

2017 2018

World

2.2 2.3

2017 2018

USA 2.1 1.9

2017 2018

Eurozone

1.5 0.7

2017 2018

Japan

6.8 6.5

2017 2018

China

6.7 7.4

2017 2018

India

15,3%

4,3%

18,3% 11,6%

7,4%

share of GDP

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

Source: IMF

Agricultural Raw Materials

Metals Price

Fuel (Energy)

20

40

60

80

100

120

140

160

Feb

-08

Oct

-08

Jun

-09

Feb

-10

Oct

-10

Jun

-11

Feb

-12

Oct

-12

Jun

-13

Feb

-14

Oct

-14

Jun

-15

Feb

-16

Oct

-16

Jun

-17

Commodity Price Index (2008=100)

OIL PRICE

Global GDP growth

OPEC production

decision

Non-OPEC

Production

Geopolitical Risk

Investment/

speculation

Wheatear

Changes in Commodity prices

Commodity Prices 2017 2018 % change

Oil (US$/bl) 53 56 5.7%

Natural Gas (US$/mmbtu) 5.6 5.7 1.7%

Coal (US$/mt) 85 70 -17.6%

Palm Oil (US$/mt) 720 732 1.7%

Rubber (US$/kg) 2.2 2.1 -1.4%

Cocoa (US$/kg) 2.0 2.1 5.0%

Coffee (Arabica) (US$/kg) 3.3 3.3 0.0%

Copper (US$/mt) 6,050 6,118 1.1%

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

Tin (US$/mt) 20,225 20,426 1.0%

Commodity price increase marginally in

2018

Oil Price US$53--US$56 (+) strong global demand increase (+) OPEC production cut agreement (-) recovery in U.S. shale oil production (-) expanding output of oil producers like Iran, Libya, and Venezuela

Natural Gas US$5,6 –US$5,7 (+) strong demand especially from chemical and fertilizer industries (+) China gov. encouragement to coal-to-gas switching to reduce emissions

Coal US$ 89--U$ 70 (-) Weak demand from China as it tackle its air pollution (-) increase of supply from producers countries

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

Source: OECD

0

50

100

150

200

250

Jan

-11

Ma

y-1

1

Sep

-11

Jan

-12

Ma

y-1

2

Sep

-12

Jan

-13

Ma

y-1

3

Sep

-13

Jan

-14

Ma

y-1

4

Sep

-14

Jan

-15

Ma

y-1

5

Sep

-15

Jan

-16

Ma

y-1

6

Sep

-16

Jan

-17

Ma

y-1

7

Sep

-17

IND

EX, 2

01

0=1

00

Stock Market Indices of developed countries

Japan United Kingdom United States Euro area (19 countries)

0

50

100

150

200

250

Jan

-11

Jul-

11

Jan

-12

Jul-

12

Jan

-13

Jul-

13

Jan

-14

Jul-

14

Jan

-15

Jul-

15

Jan

-16

Jul-

16

Jan

-17

Jul-

17

IND

EXK

, 20

10

=10

0

Stock Market Indices of developing countries

China India Indonesia Russia

GDP Growth and Distribution Driven by exports and investment

57% 33%

7% 3%

GDP Distribution (Q1-Q3 2017)

Private Consumption Fixed Investment Government Consumption Net Export

5.05%

1.97%

4.36%

-3.71% -4.01%

4.99%

1.28%

5.77%

9.53%

6.79%

Private Consumption Government Consumption

Investment Export Import

GDP Growth (Q1-Q3 2017)

Q1-Q3 2016 Q1-Q3 2017

Source: BPS

GDP by Sectors and Its Distribution Supported by non-tradable sectors

0.1%

3.7%

4.6%

2.8%

3.7%

4.6%

7.0%

5.7%

8.2%

9.2%

1.2%

3.7%

4.2%

4.3%

4.8%

4.9%

6.1%

6.7%

8.3%

9.8%

Mining

Real Estate

Manufacturing Industries

Agriculture

Trade

Accomodation; Food & Beverage

Financial Service

Construction

Transportation

Information & Communication

GDP Growth by Its Sectors

Q1-Q3 2017

Q1-Q3 2016

Financial Service

4%

Transportation 4% Information &

Communication

5%

Mining 6%

Construction 11%

Others 19% Trade

14%

Agriculture 14%

Manufacturing Industries

23%

Source: BPS

Consumer’s Purchasing Power Decline?

7.82% 6.36%

2.40%

Semester-1 2015 Semester-1 2016 Semester-1 2017

Growth of Power Sales

Growth of Cement Consumption

2,9%

6,6% Jan-Sep 2017

Jan-Sep 2016 12.9

10.6 11.1 11.2

13.6

16.3

6.3

11.4 10.6

8.1

9.9 10.5

6.3

3.7 4.2 4.2 4.3

6.3

-3.3

2.2 2.4

Jan Feb Mar Apr May June July Aug Sep Oct Nov Dec

Growth of Retail Sales (yoy, %)

2016 2017

2.38%

-9.74%

2.67%

-0.26%

Mobil Sepeda Motor Growth of Vehicle Sales

Jan-Sep 2016

Jan-Sep 2017

Weakening Purchasing Power of Low Income Consumers

Farmworker

Construction worker Housemaid

97.0

98.0

99.0

100.0

101.0

102.0

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

Index 2016=100

Wage Real Index

Food

Plantation

Holticulture

90

92

94

96

98

100

102

104

106

108

110

Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17

Index, (2010=100)

Farmer Exchange Rate

20% highest 40% middle 40% lowest

Rp Rp

Rp 17,1%

36,3%

46,6%

Expenditure Distribution by group of income

Headline

Core

Administered Price

Volatile Food

-4

-2

0

2

4

6

8

10

12

14

16 % Annual Inflation (yoy)

Source: BPS

Low Growth Sales for Retailers and Manufacturers

20%

1%

7%

-7%

10%

13%

-4% -4% -5%

0%

-10%

-5%

0%

5%

10%

15%

20%

25%

Sumber Alfaria Trijaya

Matahari Putra Prima

Ramayana Lestari Sentosa

Hero Supermarket

Matahari Department

Store

Retail Trade Sales Growth, (9M,yoy)

2016 20017

10%

24%

9%

6%

3%

8%

4% 3%

0%

5%

10%

15%

20%

25%

30%

Indofood CBP Sukses Makmur

Mayora Indah Unilever Indonesia Tbk.

Ultrajaya Milk Industry & Trading

Food and Household Sales Growth, (9M, yoy)

2016 20017

Rapid decline of Fast Moving Consumer Goods (FMCG) sales

Source : Nielsen

38.7%

29.8%

20.6%

16.3%

13.4%

5.0%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Fest 2012 Fest 2013 Fest 2014 Fest 2015 Fest 2016 Fest 2017

Total Key Account 75 Festive Categories

+13.8%

+17.7%

+14.3%

+15.2%

+21.1%

+4.7% +11%

+9.6% +11.1%

+14% +10.5%

+11.5% 7.7%

YTD +2.7%

50

100

150

200

250

300

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Fast Moving Consumer Goods has been growing very slowly at 2,7% in 2017 (ytd) while annual average was 11%.

Inflation 8.4%

Inflation 11%

Inflation 17%

Impact of E-commerce Expansion? Market share of online sales is below 4% in 2017

22.4 23.3

22.1 21.7 19.8

16.8

0.

5.

10.

15.

20.

25.

2016 2017* 2018* 2019* 2020* 2021*

%

Growth of Retail E-Commerce Sales in Indonesia

0.8

1.4

2.2

3.1

3.9

4.4

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

2014 2015 2016* 2017* 2018* 2019*

%

Share of E-commerce from Total Retail Sales In Indonesia

Jan 2017

Sumber: Statista, Wearesocial.org, Asosiasi E-Commerce Indonesia (IdEa)

7.8% 7.1%

5.8%

4.5%

Europe China United States

Singapore Malaysia Thailand Philippines Indonesia Vietnam

Percent of Retail Sales Mode Online (2014, % of total retail sales)

around or below 1%

Number of people purchasing via e-commerce

E-commerce penetration (number of purchaser vs total

population)

Total value of national e-commerce 2016 (US$)

Average annual e-commerce revenue per

user in 2016 (US$)

24.74 Million 9 % $5.6 Billion $228

Source : LPS dan BI

Composition of income household usage % usage

Upper-Middle Class Holding Back Consumption Third party deposit for above Rp 2 billion accounts grows faster

N<2B

N>2B

1,000

1,500

2,000

2,500

3,000

3,500

Trili

un

Rp

Third Party Deposit by Nominal

N<2B

N>2B

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

22%

24%

26%

Growth of Third Party Deposit By Nominal Segment

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

17.1%

7.8% 7.8%

0.9%

10.5% 12.0%

18.6%

21.7%

16.3%

36.5%

16.9% 16.7%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

Q1-2016 Q2-2016 Q3-2016 Q1-2017 Q2-2017 Q3-2017

Domestic & Foreign Direct Investment Growth

FDI DDI

26.59

39.44

47.46

51.61

62.62

Food Crops & Plantation

Chemical and Pharmaceutical Industry

Food Industry

Metal, Machinery & Electronic Industry

Mining

Triliun Rupiah

Highest Direct Investment Sectors Realization (Q1-Q3 2017)

Investment in manufactures is slowing down

20.2

75.4

62.6

32.6

73

89.1

0

10

20

30

40

50

60

70

80

90

100

Trili

un

Rp

DDI by Sector (in Trillions Rupiah)

Jan-Sep 2016 Jan-Sep 2017

Secondary Tertiary

40.2

180.1

74.9 60.4

139.8

118.3

0

20

40

60

80

100

120

140

160

180

200

Primer Sekunder Tersier Tr

iliu

n R

p

FDI by Sector (in Trillions Rupiah)

Jan-Sep 2016 Jan-Sep 2017

Primary Secondary Tertiary -30%

65%

-25%

50%

-22%

58%

-40%

-20%

0%

20%

40%

60%

80%

Primer Sekunder Tersier

FDI Growth by Sector (yoy)

Jan-Sep 2016 Jan-Sep 2017

Primary Secondary Tertiary

Primary

41%

20%

12%

61%

-3%

42%

-10%

0%

10%

20%

30%

40%

50%

60%

70%

DDI Growth by Sector (yoy)

Jan-Sep 2016 Jan-Sep 2017

Primary Secondary Tertiary

GOVERNMENT AND SOE Capital Expenditure

118 145 181

147 215 207

47.5 75

118

143

212 255

268

405

111

0

100

200

300

400

500

600

700

2011 2012 2013 2014 2015 2016 Jun-17 Aug-17

Capital Expenditure by Government and SOEs

Gov. Capital Exp. BUMN Capital Exp.

4.3

15.4

37.2

1.4

11

27.8

5.1

21.5

40

5.7

23.1

0

5

10

15

20

25

30

35

40

45

0

10

20

30

40

50

60

70

80

90

Q1 Q2 Q3 Q1 Q2 Q3 Q1 Q2 Q3 Q1 Q2 Q3

2014 2015 2016 2017

%

Trili

un

Ru

pia

h

Realization of Government Capital Expenditure

Realization (in Trillions Rp) Realization (in %)

Indonesia Export Rebound Supported by increased commodity prices

Source: BPS, IMF

Jan-Sep 2017

Jan-Sep 2016

18,4% 14,5%

37,8%

-17,4%

-3,5%

-18,0%

Export growth by Sectors

12,8%

12,4%

-9,8%

15,21%

9,2%

-12,6%

Import Growth by Broad Economy Categories

Jan-Sep 2017

Jan-Sep 2016

Consumption Goods

Raw Material Goods

Capital Goods

Agriculture Manufacture Mining

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

146 156 178

290 317

401 410

27%

7%

14%

62%

9%

27%

6%

0%

10%

20%

30%

40%

50%

60%

70%

0

80

160

240

320

400

480

2012 2013 2014 2015 2016 2017F 2018F

TRIL

IUN

RU

PIA

H

Budget Allocation for Infrastructure

Goverment Infrastructure Budget Growth (%YoY)

Farmer Labour

Construction Labour

Housekeeper

97.0

98.0

99.0

100.0

101.0

102.0

Jan

-16

Feb

-16

Mar

-16

Ap

r-1

6

May

-16

Jun

-16

Jul-

16

Au

g-1

6

Sep

-16

Oct

-16

No

v-1

6

Dec

-16

Jan

-17

Feb

-17

Mar

-17

Ap

r-1

7

May

-17

Jun

-17

Jul-

17

Au

g-1

7

Index 2016=100

Average Index of Riil Labour Wage

Better Targeting Subsidies Improving the accuracy of electricity subsidy (900 VA)

Energy Subsidy Rp 95 Tn

Fuel And LPG Subsidy Rp 46,9 Tn

Electricty Subsidy Rp 47,7 Tn

0

50

100

150

200

250

300

350

400

450

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Tn R

up

iah

Goverment Subsidy Spending

Total Energy Subsidy Total Non Energi Subsidy

Increased Allocation for Social Assistance Require close supervision to improve effectiveness

22% 16%

28%

-7%

4% 6%

22%

6% -1%

-49%

17% 23%

-60%

0%

60%

0

20

40

60

80

100

120

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

Tn R

up

iah

Social Assistance Spending

Social Assistance Growth (YoY)

Program Keluarga Harapan 10 Million Family

Contribution for the poor in JKN 92,4 Million Family

Program Indonesia Pintar 19,7 Million Student

Revenue Target for 2018 Increased target will require extra efforts

1246

1489 1539

1472

1618

0

200

400

600

800

1000

1200

1400

1600

1800

2014 2015 2016 APBNP 2017 2018

Trlio

n R

up

iah

Tax Revenue

Realization Remaining Target Target

19.5%

30%

8.2%

3.3%

24%

3.5%

-4.3%

14.6%

9.9%

906 894 987 991

340

595 516 481

1246

1489 1503 1472

0

400

800

1200

1600

Okt 14 Okt 15 Okt 16 Okt 17

Axi

s Ti

tle

Revenue realization increase due to Lower Target and Tax Amnesty Program

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

-3.00

-2.50

-2.00

-1.50

-1.00

-0.50

0.00

-400

-300

-200

-100

0

100

200

300

400

2013 2014 2015 APBN-P 2016 Outlook 2017 RAPBN 2018 %

of

GD

P

Trill

ion

s R

up

iah

Budget Surplus/Deficit

Primary balance Surplus/Deficit % of GDP

Value

818

Percentage

30

32

34

36

38

40

42

150

300

450

600

750

900

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

%

Tn R

up

iah

Foreign Holding in Goverment Bonds

3.9 5.2

13.3 13.5 13.9

15 19.9

28.4 29.4 30.1

31.9 38.2 38.3

64.5

0 10 20 30 40 50 60 70

Cina

Israel

Brazil

Korea

Filipina

Thailand

Turki

Malaysia

Hungaria

Rusia

Polandia

Indonesia

Afrika Selatan

Meksiko

% Foreign Holding in Goverment Bonds by Country

Redesign Fiscal Policy to Reduce Income Inequality

79.9 81.5 96.1

109.2 119

131.2

172.4

214.4

2009 2010 2011 2012 2013 2014 2015 2016

Trili

on

Ru

pia

h

-2.4

-0.9

-1.1

+0.1

+0.3

-1.5

-0.9

-0.8

Poverty budget VS poverty reduction

0

2

4

6

8

10

12

14

16

18

20

0

5

10

15

20

25

30

35

40

45

2006 2007 2008 2009 2010 Mar 11

Mar 12

Mar 13

Mar 14

Mar 15

Mar 16

Mar 17

%

Mill

ion

s P

eop

le

Poverty Line

Number Percentage

Continued low inflation rate since 2016 Lower volatile foods inflation, but higher administered prices in 2017

Headline

Core

Administered Price

Volatile Food

-4

-2

0

2

4

6

8

10

12

14

16

Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16 Jan-17 May-17 Sep-17

% Annual Inflation (yoy)

3.4

4.6

1.6

3.5

3.3

2.7

-1.9

2.1

-1.3

3.6

4.8

3.7

2.5

3.2

3.4

2.7

-4 -2 0 2 4 6

Food material

Finished food, beverages, …

Housing, Water, Electricity, Gas, …

Clothing

Health

Education, Recreation and Sports

Transportation, …

General

%

Inflation Rate According to Expenditure Group

Jan-Okt 2017

Jan-Okt 2016

Balance of payment Improved export performance and increased capital flows

-10

-8

-6

-4

-2

0

2

4

6

8

Bil

. US$

Current Account

Goods Services Primary Income Secondary Income

Current Account

Financial Transaction

Balance of Payment

-15

-10

-5

0

5

10

15

20

Bill

ion

USD

Balance of Payment

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

Source: IMF

Average S1-17

Rp 13.328

Average S1-16

Rp 13.409

12000

12500

13000

13500

14000

14500

15000

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

Rupiah/US$

Yuan

Rupiah

Yen

Won

Ringgit

Bath

80

85

90

95

100

105

110

115

120

125

130

Index 2015:100

Exchange Rate of Asian Currency

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

Source : Bank Indonesia

Δ Ags 16 - Oct 17

Reference Rate

100 bps

Lending rate

Deposit Rate

62 bps

67 bps

BI 7 Repo Rate, Lending Rate, Deposito Rate Average of Bank Interest Rate

BI Rate BI 7 Day RR

Rate

Deposit Facility

Lending Facility

2

3

4

5

6

7

8

9

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

%

Lending Rate

Deposit Rate

Spread

2

4

6

8

10

12

14 %

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

Source : OJK

Ags-16

4.7% Ags-17

7.8%

Annual Credit Growth

Ags-16

9.4% Ags-17

7%

Ags-16

8.2% Ags-17

10.2%

-2%

6%

-20%

3%

16%

13%

16%

29%

9%

18%

-1%

4%

5%

5%

6%

7%

11%

13%

17%

23%

-30% -20% -10% 0% 10% 20% 30% 40%

Transportation, warehousing and communication

Trade

Mining

Manufacturing

Acomodation Provision

Real Estate

Agriculture

Electricity, gas and water

Financial Intermediaries

Construction

Annual Credit Growth (yoy)

Aug-17 Aug-16

0.8%

1.5%

1.9%

3.2%

3.6%

3.7%

4.1%

4.1%

4.4%

8%

0% 2% 4% 6% 8% 10%

Financial Intermediaries

Electricity, gas and water

Agriculture

Real Estate

Construction

Manufacturing

Acomodation Provision

Transportation, warehousing …

Trade

Mining

Bank NPL

Aug-17

Credit

Consumption

Working Capital

Investment

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

Source : Bank Indonesia

Total DPK

Rupiah

Valas

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

Ap

r-1

4

Jun

-14

Au

g-1

4

Oct

-14

Dec

-14

Feb

-15

Ap

r-1

5

Jun

-15

Au

g-1

5

Oct

-15

Dec

-15

Feb

-16

Ap

r-1

6

Jun

-16

Au

g-1

6

Oct

-16

Dec

-16

Feb

-17

Ap

r-1

7

Jun

-17

Au

g-1

7

Growth of Third Party Fund

484 506

429

325

410

191

420

486

0

100

200

300

400

500

600

2010 2011 2012 2013 2014 2015 2016 43009

Trili

on

Rp

Placement of Banking Funds in Bank Indonesia Instruments

Bank Health Indicators

Source : OJK

• 90.0 (Aug-16)

• 89.2 (Aug-17)

• 5.6 (Aug-16)

• 5.3 (Aug-17)

• 81.3 (Aug-16)

• 78.9 (Aug-17)

• 23.4 (Aug-16)

• 23.3 (Aug-17)

CAR BOPO

LDR NIM

Thank You