Doing Business in Indonesia Opportunities and Outlook

Nick Gandolfo Pritya Pravina

SVP Leading International Business Relationship Manager
HSBC Indonesia October 2012 PUBLIC Banking
Commercial
Agenda

Indonesia Overview

Why Indonesia?

Economic Fundamentals & Outlook

Competitiveness and Comparisons

Singapore Indonesia: Trade & Investment

Opportunities: Hot Sectors

Market Entry & Considerations

Key Banking Considerations

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Indonesia Overview

Largest archipelago in the world (17k+ islands)

4th largest population in the world (240m), 50% < 30 yrs

33 Provinces with 3 times zones

Large GDP rapidly approaching USD 1trl

Java has 55% of Economy, 60% of the population (Concentrated)

Largest economy in ASEAN (No. 19 globally), G20 Member

60% of GDP from domestic consumption

Resilient economy grew 4.5% in 2009 (through the crisis)

3rd largest democracy in the world

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Master Economic Plan - Indonesia Overview

Source: BAPPENAS

Huge economy and population concentration in Java

Push to be top ten Economy Globally
USD 460bln investment needed
Blueprint for economic growth and focus
Increase value added, improve efficiency and then move to more knowledge based economy

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Why Indonesia? Too Big to Ignore

Overlooked potential: large progress & stability AT Kearny FDI Confidence Index 2012

Large Population - Demographic Dividend

Abundant Resources; Largest Palm Oil & Coal

Growing Middle Class (110m doubled last 10 yrs)

Strategic Location for Shipping/Trade

Large Domestic Market

Competitive labor costs

Resilient economy 50% of ASEAN GDP

5th largest emerging market in the world

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Rating Investment Grade

Source: Bank Indonesia

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Economic Fundamentals

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Indonesia GDP: Rates and Composition

Urbanization, rising GDP Growth Rate

incomes, and
demographics

4.6% growth through

GFC, avg. > 5% last
10 years
Source: Bank Indonesia
Economy Structure

Favorable policy
settings: fiscal and
monetary

Manufacturing and
trade important

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Indonesia GDP: Contribution to GDP Growth

Contributions to y-o-y
Contributions to YOY Growth
growth
Growth still strong in 10

8
Q1 & Q2, 6.3% and
6

%-pt to GDP y-o-y

6.4% 4

Consumption & -2

-4
Mar-10 Sep-10 Mar-11 Sep-11 Mar-12
Investment key
Pte cons Govt cons Investm Chg in stks
Net expts Stat disc GDP y-o-y Source: HSBC, CEIC

Net exports relatively GDP By Component

low contributor

GDP by component
stable, investments
growing

Source: HSBC,CEIC

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Indonesia GDP: Industry Growth and HSBC PMI

GDP Breakdown
GDP breakdown by by Industry
industry

Manufacturing and 7
6

%-pt contrib to GDP y-o-y

Trade & Hospitality are 5
4
key sectors 3
2

1
0
HSBC PMI Index Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12

(July 2012) Agric Mining Manuf Utilities Constr

Trade & hospitality Trspt & comm Fin & biz svcs Other svcs GDP y-o-y
Source: HSBC, CEIC
Manufacturing
activity is expanding HSBC PMI Index

Local orders expand

export orders decline

Source: HSBC,CEIC

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GDP Per Capita & Demographics

Reached USD3.4k (f) GDP Per Capita USD 000

in 2011 and growing
fast

Resilient growth
expected with
demographic changes

50% of the population Dependency Ratio

< 30 years old
demographic dividend

4th largest population

globally - rapidly
growing Middle Class

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Inflation & Interest Rates

Inflation
YOY contained MOM
less so = expectations
elevated

Still remains a risk on

the upside
Source: Bank Indonesia

Accommodative Bank Indonesia Rate

monetary policy, growth,
IDR, fuel subsidies

Interest Rates at historic

lows normalize in
2013

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IDR: Currency

Rupiah Exchange Rate

Short Term Outlook
for IDR is still
challenging (trade
deficit)

Movements influenced
by outward capital
flows and volatility Source: Bank Indonesia

Recent Weakening Rupiah

Still expected to
strengthen with strong
domestic conditions in
the Longer Term

Source: HSBC, CEIC

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Trade Performance and Flows

Trade Patterns Reflect global Weakness

Export growth slowing

Import growth remains

strong (buoyant
conditions) Source: HSBC, CEIC

Imports - by Country Exports by Country

Trade flows are Asia
Pacific heavy

US & Europe relatively

low trade flows

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Trade Forecast

Indonesian total trade

to rise 171% by 2026

Trade activity forecast

to increase by 6.9%
annually over this
period

Source: HSBC Global Connection

Japan, China, the US
and Singapore are the 2012-16 2012-21 2012-26 2017-21 2022-26
key trading partners CAGR World 3.7% 4.8% 4.7% 5.9% 4.3%
CAGR
8.5% 8.1% 6.9% 7.7% 4.5%
Indonesia
Machinery and Source: HSBC Global Connection

commodities lead
exports

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Balance of Payments

Widening Current Account Deficit

Widening current account deficit

CAD expects to persist 10,000

8,000

in short term with 6,000

4,000

reducing trade balance

USD mn
2,000

-2,000
-4,000
Large services -6,000
-8,000
payments balanced by Mar-08 Dec-08 Sep-09 Jun-10 Mar-11 Dec-11

Trade acct Income acct Transfers Current acct

FDI and portfolio flows
Source: CEIC, HSBC

Balance of Payments
Still low % of GDP,
however, creates
pressure on IDR

Net exports are a low

% contribution to GDP
Source: Bank Indonesia

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Potential Impacts: USA & Europe

Domestic
Low Exports to Focused Consumption Powered
GDP and Economy Economy and Growing
Low Net Exports Middle Class
(Demographics)

Low Debt to GDP

and Diversified
Fiscal Flexibility Indonesia Export
Markets*
FDI Momentum Solid
& Banking
Confidence Sector
Low Household Nature of
and Corp Exports**
Leverage

* < 15% of exports go to the US + Europe

** > 50% of exports are commodities
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Potential Impact: Trade
World Bank Growth Scenarios
Source: World Bank

Low % Exports to GDP

versus peers

Low % of exports to
GDP

Diversified trade
partners Exports/GDP Exposure to European Banks
25
% 150% 70%

20

Relatively low exposure 15

to European banks 10

-
CH HK IN ID KR MA PH SG SL TW TH VN

Exports (% GDP) European Bank Foreign Claims (% GDP)

Source: CEIC, BIS, HSBC

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Outlook: Key Forecasts

Macro Economic Key Indicators and Forecasts

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Competitiveness and Comparisons

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Indonesia vs BRIC Comparison

Factor Indonesia Brazil Russia India China

Population (m) 240 196 142 1,102 1,300
GDP (USD) 846bln 2.45trl 1.47trl 1.8trl 7.23trl

Per Capital GDP 3.4k 12.7k 13.4k 1.46k 5.4k

GDP Growth 2012 (forecast) 6.1% 2.5% 3.0% 6.2% 8.4%

World Competitive 2012 (WEF) 50 48 67 59 29

Doing Business Rank 2011 (IFC) 129 126 120 132 91

Source: HSBC, World Bank, IMB, CIa Factbook

Large population, rapid growing GDP per capita, solid competitiveness rankings

Indonesia included in N11, Global Growth Generator, and CIVITS classifications

Indonesia sits relatively well with the BRICs

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 World Economic Forum Competitiveness Score

World Competitiveness Ranking Scores

Source: World Economic Forum

Indonesia compares well also to many other emerging markets

Compares well to some regional peers

Key positive area; size of economy, business sophistication and macro environment

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Singapore Indonesia:
Trade & Investment Opportunities

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Singapore & Indonesia Trade Flow

Trend%) Jan-Jul Changes%)

DESCRIPTION 2007 2008 2009 2010 2011
2007-2011 2011 2012 2012/2011

Total trade
20.341.412,1 34.651.531,5 25.813.063,4 33.964.096,3 44.408.559,4 16,67 25.407.081,9 25.297.120,2 -0,43

Oil & gas 7.442.699,2 13.451.378,2 8.628.905,0 14.357.256,3 22.746.763,9 25,85 12.669.256,0 13.047.647,7 2,99

Non oil & gas 12.898.712,9 21.200.153,3 17.184.158,3 19.606.840,0 21.661.795,5 10,06 12.737.825,8 12.249.472,6 -3,83

Export
10.501.617,3 12.862.045,2 10.262.665,1 13.723.265,6 18.443.891,1 12,65 10.334.228,5 9.732.266,8 -5,82

Oil & gas 1.511.244,1 2.757.476,6 2.315.102,5 4.169.693,5 7.330.455,9 42,93 3.722.961,1 3.857.539,2 3,61

Non oil & gas 8.990.373,2 10.104.568,6 7.947.562,6 9.553.572,1 11.113.435,2 3,75 6.611.267,4 5.874.727,6 -11,14

Import
9.839.794,8 21.789.486,3 15.550.398,3 20.240.830,7 25.964.668,3 20,53 15.072.853,4 15.564.853,4 3,26

Oil & gas 5.931.455,1 10.693.901,6 6.313.802,6 10.187.562,8 15.416.308,0 20,46 8.946.294,9 9.190.108,4 2,73

Non oil & gas 3.908.339,7 11.095.584,7 9.236.595,7 10.053.267,9 10.548.360,4 20,77 6.126.558,4 6.374.744,9 4,05

Balance of
trade 661.822,4 -8.927.441,2 -5.287.733,2 -6.517.565,1 -7.520.777,2 0,00 -4.738.624,9 -5.832.586,5 23,09

Oil & gas

-4.420.211,0 -7.936.425,0 -3.998.700,1 -6.017.869,3 -8.085.852,0 0,00 -5.223.333,8 -5.332.569,2 2,09

Non oil & gas 5.082.033,4 -991.016,2 -1.289.033,0 -499.695,8 565.074,8 0,00 484.709,0 -500.017,3 -203,16

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Singapore & Indonesia Trade Flow by Product

Indonesias imports from Singapore

Product
Value in 2009 Value in 2010 Value in 2011
All products 15,550,398 20,240,831 25,964,666
Mineral fuels, oils, distillation products, etc 6,328,152 10,205,403 15,442,276
Electrical, electronic equipment 1,949,418 2,465,100 2,512,726
Machinery, nuclear reactors, boilers, etc 1,967,508 1,830,172 1,771,384
Plastics and articles thereof 593,360 865,551 1,095,115
Organic chemicals 627,024 998,338 1,076,374
Source: International Trade Centre

Indonesias exports to Singapore

Product
Value in 2009 Value in 2010 Value in 2011
All products 10,262,665 13,723,266 18,443,890
Mineral fuels, oils, distillation products, etc 2,365,556 4,194,732 7,335,579
Electrical, electronic equipment 1,473,992 2,219,593 2,545,163
Tin and articles thereof 1,004,837 1,122,809 1,535,622
Machinery, nuclear reactors, boilers, etc 1,356,074 1,300,673 1,394,160
Pearls, precious stones, metals, coins, etc 462,017 347,971 824,396
Source: International Trade Centre

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FDI Trends (2011)

FDI by Country FDI by Sector FDI by Location

Source: BKPM

Singapore continues to dominate

More than 50% of FDI is now outside Java

Similar sectors remain consistently hot

Automotive, plantation, food & beverage as key emerging sectors

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Singapore FDI to Indonesia

Realized FDI (USD Billions)

Singapore FDI to Indonesia
USD'Bln
6.0
A ust r a l i a FD I t o I ndone si a

U SD 'm
250

200

150
5.0
100

50
4.0
0
2006 2007 2008 2009 2010
3.0
2.0
1.0
0.0
2006 2007 2008 2009 2010 2011 Q1
2012
Source: Bank Indonesia Source: BKPM

FDI in Indonesia increased by 18.4% to USD 19.28 bln in 2011

FDI figure is expected to rise even further following Indonesias upgrade to investment grade

Singapore is the biggest source of FDI, investing USD 5.1 bln (26.3%), followed by Japanese
investors (USD 1.5 bln)

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Sectors: Key Opportunities

Commodities Plastics Engineering

Machinery Chemicals Infrastructure

Electronics Pharmaceutical Logistics

Retail Medical Transport

Education
Singapore -
Chemicals, machinery and logistics/transportation BATAM
Connection
Trading, Manufacturing & Services

Developing opportunities in many sectors

Not just Jakarta or Java focused

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Market Entry & Considerations

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 Market Entry Options
Foreign
Source: PWC Investor

Indirect Presence Production

Subsidiary (PMA Branch Representative (Agency/ Sharing Contract
Company) Office Office Distributor) (PSC)

Considerations PMA Company

Operations/activities/business
Duration of presence
COMMERCIAL ACTIVITIES Branch Office
Agency (Sole/Non-Exclusive)
(Direct trading/servicing to
Cooperation/Production
customer)
Sharing

NON-COMMERCIAL ACTIVITIES
Time frame (Market research, promotion,
Representative Office
excluding Public Works
marketing, liaison, coordination,
Representative Office)
Minimum Capitalization searching for business
opportunities)

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 Market Entry Options
Closed for
investment
Foreign investor
Reserved only for cannot engage in the Stop
Identify if NLI provides domestic investor or business
certain restrictions small/medium
company

Yes
Identify whether the Require joint venture
Identify business
business classification with local partner
classification code
code is mentioned in
under KBLI
the Negative List
No

Theoretically, foreign Foreign investor

investor can own 100% to establish an Indonesian
shareholding (seek Limited Liability Company
confirmation from and obtain the necessary
Other Considerations BKPM) licenses

Must have min 2 directors

Source: PWC

Practicality of Local Partners

Commissioners (Independent directors)

Company set up 2-3 months

Rep office approx 2-3 weeks

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Culture & Communication (Indonesia)

Cultural Values Business Values Strategies for Success

Hierarchical Business is Personal Focus on Accomplishment
not Negative
Formal Style Non-Confront
Dont Show Impatience or
Retain Face Lose Temper
Group Oriented

Head of Co. Father Build Consensus

Relationship
Focused
Emotional Control Focus on LT Relationship

Indirect Win-Win
Build Trust before
Negotiating
Fluid View of Time Collective

Source: HSBC, Culture Wizard LLC

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Challenges in Doing Business

Factors for Doing Business Stage of Development

Source: World Bank

Source: World Bank

Dynamic Regulatory Environment (Overlapping regulations)

Skilled Labour HR (Labour Laws)

Infrastructure & Logistics Cost: Huge Country

Local Partners Negative Investment List

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Key Banking Considerations

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Key Banking Considerations

IDR not permitted offshore

Capital flows largely unregulated

Reporting requirements and documentation needed to support transactions

USD sales permitted onshore (developing IDR rules for onshore sales)

Export Sales proceeds must be remitted back to Indonesia (new rules)

Rupiah Volatility

Non resident accounts can be opened

Competitive banking market

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Key Banking Considerations: Lending & Funding

Minimum Capitalization (min now USD1.2m: 1 part equity 3 parts loans etc)

No formalized thin capitalization rules (shareholder loans common)

USD and IDR available (mach to business needs) IDR only onshore

Cannot lend to a non-resident company

Most of the bank debt market is short term working capital

Onshore vs Offshore (cost/security/structure) considerations for funding

Bond market is growing but relatively small (15% of GDP)

Equity market foreign companies can list (overall market cap small 50% of GDP)

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