The Global and Indonesian Economy

Stefan S. Handoyo
May 2012

Global economic and financial market developments

can impact on Indonesias economy through various channels
DETERIORATION IN THE
GLOBAL OUTLOOK
TRADE
AND COMMODITY PRICE SHOCKS
TRADE AND
COMMODITY
FINANCIAL SHOCKS
PRICE SHOCKS

Strong initial conditions

Quality of domestic
policy response
Sensitivity to investor
sentiment

IMPACT ON
INDONESIA

Hard landing
in BRICs

Severe global
slowdown
Higher

More pronounced
and protracted global
growth slowdown
Sharper fall in
commodity prices

Enron or Lehman-like
triggering event
Global financial markets stall
Large-scale disruptive capital
outflows from EMEs

Return of 2009

Severity
of impact
and risks
for
Indonesia

Global growth
slowdown with swifter
recovery in large EMEs

Soft landing
in BRICs

Lower

Lower

Likelihood of scenario

Continuing turmoil
Continued turmoil
in financial markets
Growth slowdown
in US and Europe
Commodity prices
moderate

Higher

Overview
2007 Q3
Stage 1

2008 Q1

Stage 2

Commodity
prices boom
and bust

2008 Q3

Intl financial
market turmoil

2008 Q4

2009 H1

Stage 3

Global economic
downturn

IDN financial markets

Impacts domestic economy

Approaching the crisis:

Economy coming in strong
2007 Q3

2008 Q1

2008 Q3
2009 H1

2008 Q4

Commodity prices boom

Commodity prices burst

International financial market turmoil

Global economic downturn

Higher
inflation

Higher export
prices, stronger
terms of trade

Export prices , terms of trade weaken

Volatile & weaker Indo. financial mkts

Share
market

Supports
currency

Investt
Real
wages
Higher
poverty

Incomes

Impacts domestic real economy

Employt

Lower poverty

Slower decline in
poverty

Approaching the crisis:

The rise in commodity prices fed inflation
2007 Q3

2008 Q1

2008 Q3
2009 H1

2008 Q4

Commodity prices boom

Commodity prices burst

International financial market turmoil

Global economic downturn

Higher
inflation

Higher export
prices, stronger
terms of trade

Export prices , terms of trade weaken

Volatile & weaker Indo. financial mkts

Share
market

Supports
currency

Investt
Real
wages
Higher
poverty

Incomes

Impacts domestic real economy

Employt

Lower poverty

Slower decline in
poverty

Approaching the crisis:

With a strong economy, poverty has fallen
2007 Q3

2008 Q1

2008 Q3
2009 H1

2008 Q4

Commodity prices boom

Commodity prices burst

International financial market turmoil

Global economic downturn

Higher
inflation

Higher export
prices, stronger
terms of trade

Export prices , terms of trade weaken

Volatile & weaker Indo. financial mkts

Share
market

Supports
currency

Investt
Real
wages
Higher
poverty

Incomes

Impacts domestic real economy

Employt

Lower poverty

Slower decline in
poverty

The global financial market turmoil

Impacting Indonesian financial markets

2007 Q3

2008 Q1

2008 Q3
2009 H1

2008 Q4

Commodity prices boom

Commodity prices burst

International financial market turmoil

Global economic downturn

Higher
inflation

Higher export
prices, stronger
terms of trade
Supports Indon.
financial
markets
Supports Indonesias
real economy

Lower poverty

Export prices , terms of trade weaken

Yields
on
govt
debt

Credit
tighter

Stocks
fall

IDR
weaker

Investt

Higher
inflation
Employment

Income

Slower fall in poverty

The global financial & economic turmoil

Impacting Indonesian financial markets
2007 Q3

2008 Q1

2008 Q3
2009 H1

2008 Q4

Commodity prices boom

Commodity prices burst

International financial market turmoil

Global economic downturn

Higher
inflation

Higher export
prices, stronger
terms of trade
Supports Indon.
financial
markets
Supports Indonesias
real economy
Lower poverty

Export prices , terms of trade weaken

Yields
on
govt
debt

Credit
tighter

Stocks
fall

IDR
weaker

Investt

Higher
inflation
Employment

Income

Slower fall in poverty

Overview
2007 Q3

2008 Q1
2008 Q4

Commodity prices boom

2008 Q3
2009 H1

Commodity prices burst

International financial market turmoil

Global economic downturn

Higher
inflation

Higher export
prices, stronger
terms of trade

Export prices , terms of trade weaken

Volatile & weaker Indo. financial mkts

Supports Indon.
financial markets

Impacts domestic real economy

Supports Indonesias
real economy
Lower poverty

Slower decline in
poverty

Traditional Engines of Growth

GDP Growth Rates
2007

2008

2009

2010

2011

2012F

2013F

US

1.9

-0.3

-3.5

3.0

1.7

2.0

2.3

Euro Area

3.0

0.4

-4.3

1.9

1.5

-0.3

0.7

Germany

3.4

0.8

-5.1

3.6

3.1

1.0

1.4

France

2.2

-0.2

-2.6

1.7

1.7

0.3

0.8

Italy

1.7

-1.2

-5.5

1.8

0.4

-1.9

-0.3

Spain

3.5

0.9

-3.7

-0.1

0.7

-1.5

-0.6

Japan

2.2

-1.0

-5.5

4.4

-0.7

2.4

1.5

United Kingdom

3.5

-1.1

-4.4

2.1

0.7

0.2

1.4

Canada

2.2

0.7

-2.8

3.2

2.4

2.1

2.2

Source: IMF, World Economic Outlook Update, July 2012

F - Forecasts

The Most Powerful Economies in the World

GDP (2011)
US$B

GDP Growth
(%) year on
year (2011)

US

15,094.02

1.70

(3.10)

3.10

8.95

Eurozone

13,115.13

1.44

0.31

2.71

10.13

China

7,298.15

9.24

2.75

5.42

4.00

Japan

5,869.47

(0.75)

2.05

(0.28)

4.55

Germany

3,577.03

3.06

5.74

2.48

5.98

France

2,776.32

1.72

(2.23)

2.29

9.68

Brazil

2,492.91

2.73

(2.11)

6.64

5.97

UK

2,417.57

0.66

(1.92)

4.45

8.01

Italy

2,198.73

0.43

(3.19)

2.90

8.37

Russia

1,850.40

4.30

5.47

8.44

6.50

Canada

1,736.87

2.46

(2.81)

2.89

7.47

India

1,676.14

7.24

8.63

3.14

8.95

Mexico

1,154.78

3.97

(0.76)

3.40

5.23

South Korea

1,116.25

3.63

2.37

4.03

3.41

Country

Current
Inflation (%) Unemployed
Account
year on year
(%)
(% of GDP)

Source: World Economic Outlook Database, IMF April 2012

G-20 have replaced G-8

BRICA + South Africa:

Emerging Engines of Growth
GDP Value
BRICA +
Population
(in current
South Africa (in Millions)
prices, US$B)

Foreign
Exchange
Reserves
(US$B)

Real GDP Growth

Inflation

2010

2010

2010

2011

2012F

Brazil

193.3

2,517.9

287.5

2.7

2.5

6.6

5.2

Russia

142.9

1,479.8

454.5

4.3

4.0

8.4

4.8

India

1,190.5

1,632.0

291.5

7.1

6.1

9.0

7.0

China

1,341.4

5,878.3

2,889.6

9.2

8.0

5.4

3.7

ASEAN

591.8*

1496.3*

557.8*

4.6

5.2

5.5

3.9

50.0

363.7

39.6*

3.1

2.6

5.0

5.7

South Africa

*2009
Sources: IMF, WEO Update (July 2012); World Bank Key Development Data & Statistics
ADB Asian Development Outlook Update (July 2012); www.asean.org

2011 2012F

The Next 11: Emerging Engines of Growth

Population 2011

GDP 2011

(in millions)

(current US$ B)

Country

Bangladesh

166.7

115.0

Egypt

79.4

231.9

Indonesia

240.5

834.3

Iran

75.9

475.1

Mexico

109.7

1,185.2

Nigeria

160.3

247.1

Pakistan

175.3

204.1

Philippines

95.8

216.1

South Korea

49.0

1,163.8

Turkey

72.2

763.1

Vietnam

89.3

121.6

Source: IMF estimates, World Economic Outlook Database, Sept. 2011

Asian Growth Rates

SOUTHEAST ASIA
Indonesia
Malaysia
Philippines
Singapore
Thailand
Vietnam
NORTHEAST ASIA
China
Hong Kong
Korea, Republic of
Taiwan
SOUTH ASIA
India

2007
6.3
6.5
6.6
8.9
5.0
8.5

2008
6.0
4.8
4.2
1.7
2.5
6.3

2009
4.6
-1.6
1.1
-1.0
-2.3
5.3

2010
6.2
7.2
7.6
14.8
7.8
6.8

2011
6.5
5.1
3.7
4.9
0.1
5.9

2012F
6.4
4.0
4.8
2.8
5.5
5.7

2013F
6.7
5.0
5.0
4.5
5.5
6.2

14.2
6.4
5.1
6.0

9.6
2.3
2.3
0.7

9.2
-2.6
0.3
-1.8

10.4
7.0
6.2
10.7

9.2
5.0
3.6
4.0

8.2
3.0
3.4
3.4

8.5
4.5
4.0
4.6

9.3

6.7

8.4

8.4

6.5

6.5

7.3

GDP Growth Rates

F-forecasts
Source: Asian Development Outlook Update, July 2012

ASEAN:GDP Growth Rates and Per Capita Income

GDP per Capita, at
Current Prices (in US$)

GDP Growth Rates

Country

2010

2011

2012F

2008

2009

Indonesia

6.2

6.5

6.4

2,236.9

2,363.6

Malaysia

7.2

5.1

4.0

7,969.6

6,822.0

Philippines

7.6

3.7

4.8

1,843.7

1,749.6

Singapore

14.8

4.9

2.8

37,629.2

36,631.2

Thailand

7.8

0.1

5.5

4,117.3

3,950.8

Vietnam

6.8

5.9

5.7

1,052.7

1,119.6

F-forecasts
Sources: Asian Development Outlook, ADB April 2012; aseansec.org as of 2011

Domestic Markets
Mid-Year
Population
2010
(in millions)
Southeast Asia

Age Distribution 2010

(as % of total
Age
population)
Dependency
Ratio
0-14
15-64
65 +

596.0

Indonesia

234.2

26.8

66.9

6.2

49.4

Malaysia

28.3

30.2

64.5

5.3

55.0

Philippines

94.0

35.3

60.7

4.0

64.9

Singapore

5.1

17.1

72.3

10.6

38.3

Thailand

67.3

20.2

69.4

10.4

44.1

Vietnam

86.5

23.3

69.5

7.2

43.8

Source: Key Indicators 2011, ADB

Top Economies by 2050

(From HSBCs The Wider World in 2050)
Ran
k

Country

Change in rank
from 2010

Ran
k

Country

Change in rank
from 2010

China

+2

16

Philippines

+27

U.S.

-1

17

Indonesia

+4

India

+5

18

Australia

-2

Japan

-2

19

Argentina

Germany

-1

20

Egypt

+15

UK

-1

21

Malaysia

+17

Brazil

+2

22

Saudi Arabia

+1

Mexico

+5

23

Thailand

+6

France

-3

24

Netherlands

-9

10

Canada

Same

25

Poland

-1

11

Italy

-4

26

Peru

+20

12

Turkey

+6

27

Iran

+7

13

South Korea

-2

28

Colombia

+12

14

Spain

-2

29

Switzerland

-9

15

Russia

+2

30

Pakistan

+14

The underlying causes of the

global crisis

The Art of the Deal

Enron used outside special purpose partnerships (SPP) to get cash
values of assets and move debts off its balance sheet. It was deeply
involved in funding these partnerships.

Investor
Enron helped provide some or
3
all of the 3% of capital injected by the
outside investors in the SPP.

E
N
R
O
N

Enron transfers assets to SPP to

1
move the assets and debt off the balance
sheet and to recognize a gain from the
transfer.

Enron guarantees the bank loan, either

with Enron shares or a pledge to make up any
shortfall. As Enrons share price declined, banks
required cash guarantees or assignment of more
shares.

2
Special
Purpose
Partnership

4
Lending
Banks

By Financial
Accounting
Standards Board
rules, a 3% outside
investments allows
Enron to not
classify the SPP as
a subsidiary

P.N.
Banks typically lent
up to 97% of the
capital of the SPP.
The SPP expected to
repay the loan from
cash generated by its
assets.

$7.14-B Loss

Lawyers for Jrme Kerviel say other traders at the

bank were involved in unauthorized deals and assert that the
practices were tolerated as long as they were profitable.

$2.3-B Loss
The losses from alleged unauthorized trading rank
among the largest in the history of finance.

$1-B Loss

Olympus said Tuesday (Nov 8, 2011) that more than $1

billion in merger payouts were used to hide years of losses
on investments

$14.5-T Wiped out

LIBOR is the basis of between

$350T-$800T worth of funds

Self-Dealing

The insider in the diagram owns 25% of Public Corp and 100% of Private Corp.
In a deal among the two companies, the risk is that Public Corporation will get
cheated because the insider has a greater vested interest in ensuring the
welfare of Private Corp than in Public Corp.
For example, Public Corp may acquire assets/services from Private Corp at
inflated prices.

Tunneling
Taking Corporate Property

Transfer corporate resources to the insiders insiders can

use their control over corporate decisions to divert resources
of the firm for their own benefit (hurting outside investors).

A portrait of deforestation in
East Kalimantan

Where did it go wrong?

Why lessons are not learned?

First Social Responsibility of

Company: Employees

Management by
Objectives

BASIC ELEMENTS IN
THE ORGANIZATION

ENVIRONMENT (PROFIT)

Strategy

Processes

Resources

Objectives

Management
system

Talent

Mission

Values

Commitment

CULTURE (UNITY)

BASIC ELEMENTS IN
THE ORGANIZATION

Management
by Missions

ENVIRONMENT (PROFIT))

Strategy

Processes

Resources

Objectives

Management
system

Talent

Mission

Values

Commitment

CULTURE (UNITY)

Management by Mission
From empowerment (MBO) to ownership (MBM)
Commit to multi-stakeholders
Unite around the mission
Determine and pursue shared concerns
operating units

What does MBM do?

Management
by tasks

Command and control

Centralized power

Management
by objectives

Empowerment
Value based on profit contribution

Management
by missions

Ownership
Teamwork & unity

Promoting unity & teamwork:

multi-stakeholder

MBO
MBM

What we like
to achieve?

For whom do
we like to
achieve it for?

Objectives

Stakeholders

Etc.

Etc.

Logistics

Human
resource

Sales

Production

Purchasing

After sales

Stakeholders

Government

Environment

Community

Suppliers

Shareholders

Employees

Promoting unity & teamwork:

shared missions
Mission

We have:
declining external debt ratios,
an improved fiscal position,
and rising external reserves

Investors increasingly focus on these key success factors:

2012

2011
Moodys

Stable economic and

Baa3

political outlook
Confidence in the

S&P

Fitch

BBB-

BB+
JCR

stock market
Resilience to international

Fitch

Moodys

financial turbulence

Ba1

Business sector that

BB-

BB+

is increasingly applying

S&P

GCG principles

JCR : Japan Credit Rating Agency

Source: Coordinating Ministry of Economic Affairs

JCR

42

We have a lot of

homework
to accomplish

PT. Anugerah Nusantara

PT Anak Negeri
Accounting Fraud

Tunneling

Accounting Fraud

Insider Trading

Trading Huddles

Political Connection
Accounting Fraud
Ponzi Schemes

Deutsche Bank, US
Tax fraud shelter

Kickbacks

44

Peregrine Investment
Holding, HK
Non transparency

Is CG relevant for all?

45

Need to pay special

attention :

A REGIONAL
BENCHMARK

But:
GLOBAL COMPETITIVENESS INDEX
COUNTRY

SCORE

GCI 2011-2012
RANKING

GCI 2010-2011
RANKING

Indonesia

4.4

46

44

http://www3.weforum.org/docs/WEF_GCR_Report_2011-12.pdf

Our ranking in global competitiveness is at the low

end of the scale out of 142 countries.

Somalia

How confidence Investors are?

Indonesia

New Zealand

49

RANK

COUNTRY

SCORE

NEW ZEALAND

9.5

DENMARK

9.4

FINLAND

9.4

SWEDEN

9.3

SINGAPORE

9.2

100

INDONESIA

3.0

100

MADAGASKAR

3.0

100

MEXICO

3.0

177

UZBEKISTAN

1.6

180

AFGHANISTAN

1.5

180

MYANMAR

1.5

182

NORTH KOREA

1.0

182

SOMALIA

1.0

50

Which way we will follow?

Somalia

Bad Governance +
Corruption

Good Governance
- Corruption

Indonesia

Clean Governance +
Zero Tolerance

New Zealand

CG Watch Market Scores 2012 v. 2010 v. 2007

Market

2007

2010

2012

Change

Trend of CG reform

1. Singapore

65

67

69

(+2)

Improving, but culture needs to open more

2. Hong Kong

67

65

66

(+1)

Static, but reinvigorated regulator positive

3. Thailand

47

55

58

(+3)

Improving, but corruption a major issue

4. Japan

52

57

55

(-2)

Government stalling, companies opening

5. Malaysia

49

52

55

(+3)

Culture at last showing signs of openness

6. Taiwan

54

55

53

(-2)

Rules improving, but still behind the curve

7. India

56

48

51

(+3)

Enforcement up, Delhi an obstacle

8. Korea

49

45

49

(+4)

Government more open, chaebols closed

9. China

45

49

45

(-4)

Rules improve, but culture still weak

10. Philippines

41

37

41

(+4)

Improving, but will it be sustained?

11. Indonesia

37

40

37

(-3)

Regressing, but new regulator may help

Source: Asian Corporate Governance Association (ACGA)

Inherent in the PERSON

Social responsibility

Oriented towards
others

Takes on
responsibilities and
duties.

Discharging
responsibilities with DUE
CARE and DILIGENCE

The Essential Need for

Responsible Citizenship
for society

for others
seeks

Sustainability

for himself

55

A CORPORATE
CULTURE that is

CULTURE of
SPORTSMANSHIP

FAIR

FAIR PLAY

SPORTIVENESS

ACCOUNTABLE

HONESTY & OPENNESS

TRANSPARENT

56

Inseparable, reinforcing, trinitarian

fundamental principles

Transparency

Fairness

Accountability

63

Protect the rights of

stakeholders

Ensure independent
judgment of directors

Stronger, more effective

enforcement system

Raise disclosure
standards

Protect the interests of noncontrolling shareholders

Shareholder engagement

64

65

Protect the rights of

stakeholders

Stronger, more
effective
enforcement system

Ensure independent
judgment of directors

Protect the interests of

non-controlling
shareholders

Raise disclosure
standards

Shareholder
engagement

THE POWER OF TEAM WORK

FCGI
Forum for Corporate Governance in Indonesia

Bringing corporate governance practice to a

78