Indonesia’s Economic Outlook 2019

and Key Economic Challenges

Anton H. Gunawan ~ Chief Economist

PT. Bank Mandiri (Persero), Tbk.
Jakarta: January 8th, 2019

1
 Global economic and geopolitical uncertainties
Trumponomics
New tariffs → Trade war
• Washing machines (20%) and solar panels (30%)
• Aluminum (10%) and steel (25%)
• List of Chinese products worth USD34 bn (25%)
• List of Chinese products worth USD16 bn (25%)
• List of Chinese products worth USD200 bn (10%)
Trend of US Dollar appreciation
• Fiscal stimulus boost growth, making investments in
USA more attractive
• USD appreciated mostly against EM currencies
Geopolitics
• Brexit prospect: soft Brexit or hard Brexit?
• Middle east tensions: Saudi-Turkey-Iran tensions
and their impact to oil price
• Elections in emerging markets (India, Indonesia,
Philippines, Thailand and South Africa)
US Monetary Policy
Monetary policy normalization
• 100 bps increase in total in 2018, two
times year and no more in 2020
Balance sheet reduction
• Fed’s balance sheet will shrink from
USD4.5 tn to USD2.5 – 3 tn
Monetary Policy in EU and Japan
• ECB & BOJ will remain accommodative
this year
• ECB is expected to hike rates next year
• BOJ is expecting inflation to reach 2%
next year
China’s Economy
Chinese economic slowdown
• Chinese GDP growth is expected to slow
from 6.9% last year to 6.6% this year and
6.4% next year
Weakening Yuan
• Possibility of competitive devaluation on
the brink of trade war with US
Excessive debt levels
• Aggressive fiscal stimulus could add to
excessive debt levels
China inclusions in several Global
Financial Indices:
• Both on equity and bond markets 
may lead to EMs’ weight dilution
• Aramco IPO plan (big ticket size), may
also dilute EM’s weight in Indices.
2
Impact of Global Monetary Tightening and Trade War
Global monetary tightening and trade war will slow down global economic growth
Global Trade Volume Growth (%)
Trade War China’s Great • Debt-cutting efforts

5.24
2017 Rebalancing • Falling in investment

4.18

4.07
4.00
2018

3.87
3.76
3.60
2019
2020
2021
2022
2023
Global
Demand
Global Economic Growth (%)
Source: IMF

6.60

6.22
6.18

6.00
5.75
5.60
US-China Trade War causes US

3.73

3.66
3.65

3.64

3.59
3.58
and China’s exports to reduce,

2.88
2.54
leading to less imports from

1.82
1.73
1.48
1.38
other countries

Commodity Price
World United States China
2018 2019 2020 2021 2022 2023 2018F 2019F 2020F 2021F
Global
Monetary Tightening (%) Source: IMF
Oil 73.88 75.63 71.75 69.40

2018F 2019F 2020F

Coal 102.78 91.52 84.59 93.50
2.5 3.25 3.5 Capital Outflow
CPO 2318 2325 2400 2550
-0.1 0.0 0..0
from Emerging Markets
Notes : Oil in USD/Bbl, Coal in USD/t & CPO in RM/MT
0.0% 0.10 0.50 Source: Bloomberg Estimate
Increasing investors’ appetite
Source: Bloomberg for safe-haven assets

3
Latest macroeconomic data and forecast
Macro indicators are mostly better than expected

Economic Data Latest YTD Prognosis 2018 2018F 2019F

CAD (% to GDP) 3.02a 2.63 2.88 3.0 – 3.1 2.5 – 2.6

GDP growth (% yoy) 5.17b 5.17 5.18 5.16 5.20

Inflation (% yoy) 3.16c 2.22 3.22 3.10 4.00

BI 7DRR (%) 6.00c 6.00 6.00 6.00 6.50

Note: a) as of 2Q18 b) as of 3Q18 c) as of Nov-18

“Stability while maintaining the momentum of growth”

Facing a trade off: Current Account Deficit reduction (and thus tightening
policies) versus maintaining strong economic growth

4
 Indonesia looks better than some EM Peers (Argentina, Turkey, S. Africa)
Argentina Brazil China India Indonesia Korea Malaysia Philippines South Africa Thailand Turkey

External Financing Vulnerability Index: 0.87 0.27 0.33 0.47 0.6 0.27 0.53 0.4 0.67 0.27 0.87

Current Account Balance/GDP (%, 2018f) -5.2 -1 0.7 -2.8 -2.4 4.7 2.3 -1.9 -3.3 8.1 -5

(Current Account Deficit -Net FDI)/GDP (%, 2018f) -3.1 2.9 2.2 -1.2 -0.6 5.5 4.2 1.5 -2.2 9.9 -3.8

Reserve Coverage Ratio (2018f) 0.4 2.5 2.9 1.6 0.8 1.6 1 2.5 0.8 1.7 0.3

Short-Term External Debt/Total External Debt (%, 2018f) 33 7 57 19 14 25 41 20 21 40 26

External Debt/GDP (%, 2018f) 60 36 15 22 34 29 58 23 46 27 60

Domestic Financial Vulnerability Index: 0.4 0.43 0.48 0.38 0.57 0.43 0.57 0.67 0.48 0.43 0.67

Non-Financial Corporate Debt/GDP (%, ∆ in 2013-2018) 1 -1 28 -7 4 -5 8 14 7 2 27

Households Debt/GDP (%, ∆ in 2013-2018) 1.3 0 19 2.1 1 16 3 5 -7 6 -2

Private Sector Real Credit Growth (% y/y, 2012-17 average) 3 1 14 4 8 5 6 13 0 6 12

Consolidated Foreign Claims/Domestic Credit (%, 2018) 52 17 5 15 42 13 39 19 23 29 70

Foreign Holdings of Local Currency Govt. Debt (%, Jun, 2018) 12 3 4 38 12 25 40 16 17

Foreign Holdings of Equities (%, Dec, 2017) 15 36 10 21 18 28 13 15 29 19 20

Nominal Home Prices (% y/y, 2013-2018 average) 2.2 3.7 11.4 6.1 1.7 8.1 10.7 5.9 3.8 14.1

Policy Vulnerablity Index: 0.72 0.61 0.33 0.61 0.39 0.22 0.28 0.67 0.56 0.33 0.72

2018-End Inflation Forecast (vs. Central Bank Target) 47.3 (17.0) 4.2 (4.5±1.5) 2.0 (~3.0) 4.0 (4±2) 3.5 (4±1) 2.1 (2.0) 0.6 (2.5-3.5) 6.9 (3±1) 5.0 (3-6) 1.4 (2.5±1.5) 26.0 (5±2)

Current Real Interest Rates 12.7 2.3 1.1 2.7 2.5 -0.4 2.7 -2.1 1.8 0.4 -2
Fiscal Balance/GDP (%, 2018f) -3.8 -7.3 -4.2 -6.6 -2.1 2.4 -2.7 -1.1 -3.9 -0.8 -4.9

Gross Government Debt/GDP (%, 2018f) 63 88 50 70 30 40 55 40 56 42 32

World Bank Worldwide Governance Indicators (2018 release) 0 -0.2 -0.3 -0.1 -0.2 0.8 0.3 -0.3 0.1 -0.3 -0.5

WEF Global Competitiveness Index (2017-18) 57.5 59.5 72.6 62 64.9 78.8 74.4 62.1 60.8 67.5 61.6

Parliamentary/Presidential Elections in 2019-20 19-Oct 19-May 19-Apr 19-May 19-May 19-Feb

5
Source: IIF (2018) “Heat Map of Emerging Markets Vulnerabilities,” Latest Update, December
 Pressures on External Balances 1/2: rising CAD & de-industrialization

Non-
Oil&Gas

oil

Primary
Income
Setting the framework

Travel

Trans
port

Other
Services

6
 The BoP pressure: is the factor global, domestic, or both?
Investment has caused capital goods imports to increase, while higher oil prices made the oil
imports to shoot up, higher than the total export and import growth
Correlation between capital goods import and
YoY of 3mma (%) investment
80 50 12
Capital goods import 40 10
60 Export 30
Total import 8
40 20
Oil Imports
20 Capital goods import 10 6
Export
0 4
0
-10
-20 -20 2

-40 -30 0

Sep-11

Sep-12

Sep-13

Sep-14

Sep-15

Sep-16

Sep-17
Mar-11

Mar-12

Mar-13

Mar-14

Mar-15

Mar-16

Mar-17

Mar-18
-60
Sep-15

Sep-16

Sep-17

Sep-18
Jul-16

Jul-17

Jul-18
Jul-15
Mar-15

Mar-16

Mar-17

Mar-18
Jan-15

Jan-16

Jan-17

Jan-18
Nov-15

Nov-16

Nov-17
May-15

May-16

May-17

May-18
Capital goods import (% YoY) GFCF (% YoY) - RHS

Total Top 10 Imports (USD bn) Total Top 10 Exports (USD bn)
No. Sorted (in billions) 7M16 7M17 7M18 Proportion to total import (%) No. Sorted (in billions) 7M16 7M17 7M18 Proportion to total export (%)
1 Petroleum and Petroleum Products 9.3 12.1 15.4 14.4% 1 Coal, Coke, and Briquettes 7.5 11.1 14.1 13.5%
2 Electrical Machinery and Apparatus 4.7 5.0 6.5 6.1% 2 Fixed Vegetable Oils/fats 8.6 12.4 10.8 10.4%
3 Iron and Steel 3.8 4.5 6.1 5.7% 3 Gas; Natural and Manufactured 3.9 4.9 6.1 5.9%
4 General Industrial Machinery and Equipments 4.8 4.6 5.6 5.2% 4 Metalliferous Ores and Metal Scraps 2.5 2.8 5.2 5.0%
5 Road Vehicles 3.0 4.0 5.0 4.7% 5 Clothing 4.3 4.7 5.1 4.9%
6 Telecommunication and Reproducers Apparatus 3.0 3.9 4.9 4.5% 6 Petroleum and Petroleum Products 3.7 4.2 4.3 4.1%
7 Machinery Specialized for Particular Industry 3.5 3.5 4.8 4.4% 7 Road Vehicles 3.2 3.8 4.1 4.0%
8 Textile Yarns, Fabrics, and Their Products 3.5 3.5 3.9 3.7% 8 Electrical Machinery and Apparatus 3.1 3.4 3.6 3.5%
9 Organic Chemicals 2.7 3.3 3.8 3.6% 9 Organic Chemicals 2.5 3.5 3.6 3.4%
10 Plastics In Primary Forms 2.7 3.0 3.4 3.2% 10 Iron and Steel 1.2 1.8 3.5 3.3%
Total Imports 75.0 86.2 107.3 Total Exports 79.1 93.6 104.3 7
Source: CEIC
 Pressures on External Balances 2/2: declining financial & capital inflows
Setting the framework

8
Indonesia’s economic growth still heavily dependent on the prospects
of commodity prices
Every 1 point increase in commodity price index contributes to 0,004% increase in Indonesian economic growth

Commodity Price and Economic Growth Commodity Price and Economic Growth Relationship
9
9 600
8

(Commodity Index of Top Five Exports)

8
500
7
(Economic Growth in % (t+2))

(Economic Growth in % (t+2))

7

6 400 6

5 5
300
4 4

3 200 y = 0.0041x + 4.1818

3
R² = 0.202
2
100 2
1
1
0 0
1Q10

3Q17
1Q07
3Q07
1Q08
3Q08
1Q09
3Q09

3Q10
1Q11
3Q11
1Q12
3Q12
1Q13
3Q13
1Q14
3Q14
1Q15
3Q15
1Q16
3Q16
1Q17

0
150 200 250 300 350 400 450 500 550 600
(Commodity Price Index of Top Five Exports)
GDP YoY Growth (t+2)

Commodity Index of Top Five Exports

Sources: Trade Map, CEIC, Bank Mandiri calculation

9
 Three Domestic Concerns:
• Economic Slowdown amid low level of productivity
 Despite improving EoDB, but lacking industry strategy
• External Balance Pressures: rising imports (raw materials) and trade wars,
amid tightening global liquidity
• Pressures on Financial Markets: volatile markets, risks of contagion &
weakening banks’ asset quality

Five Changes in Paradigm:

• Archipelagic Concept: inter-connectivity, reducing logistics costs & regional
development, thus building infrastructures (starts from the periphery)
• Reducing Dependency on Raw Commodities: down-streaming, including
looking for areas of exports expansion and new sources of fiscal revenues
• Reallocation of Scarce Resources: transforming general price subsidy
program into directly targeted subsidy program  Social Security program
• Rising Role of SOEs in Economic Development: in part to speed up
infrastructure projects and to go beyond the fiscal rule
• Promoting Maritime Economy: fishery (industries) and tourism services
10
2019 Spending focus: Supporting the bottom 40% of the income group

2018 Central Government Expenditure (YoY%) 2019 Central Government Expenditure (YoY%)

Social 28.6
Energy Subsidy 67.4
Interest Payment 10.4
Social 45.1
Capital 9.4
Interest Payment 15.2
Personnel 7.6
Material 9.6

Personnel
Material -0.1
9.5

Non-energy subsidy Non-energy subsidy -0.5

-6.0

Capital Energy Subsidy -4.3

-7.2

-30 0 30 60 90 -30 0 30 60

APBN 2018 RAPBN 2019

Programs to support the bottom 40% of the population
No. Amount (Rp tn) Target Amount (Rp tn) Target
1 Village Fund 60 74,957 villages 73.0 74,957 villages
2 PKH (Family Hope Program) 17.3 10 mn families 34.4 10 mn families
3 JKN (National Health Insurance) 25.5 92.5 million persons 26.7 98 mn persons
4 BPNT (Non-cash food program) 20.8 15.6 mn families 20.8 15.6 mn families
5 PIP (Indonesia Smart Program) 10.5 19.7 mn students 10.8 20.1 mn students
6 College program fund (Bidik Misi) 4.1 401.5 thousand college students 4.4 471.8 thousand college students
7 Ultra micro financing - 0.8 mn 3.0 1.4 mn debitur
Total 138.2 173.1
Source : MoF 11
 Improving investment climate (1/2)

12
Source: Taken from Republic of Indonesia (2018) “Stability at the Forefront Synergized Reform Moves,” November
 Improving investment climate (2/2)
1 Dwelling Time in Jakarta International 2 Logistic Cost in South East Asia Countries
Container Terminal (days) (% to GDP)
5.16 Singapore
4.35
Malaysia 8.1
3.36 3.54
Thailand 13

Indonesia 13.2

Vietnam
23.5
2014 2015 2016 2017
25 Source: Indonesia Logistics and
Sources: Pelindo II, Ministry of Transportation Forwarder Association (ALFI)

3
Number of Foreign Tourists Visiting Indonesia

17.0
CAGR
14.0
9,5% 11.5
10.6
9.4 9.7 9.4
8.8
7.6 8.0
6.3 7.0
6.2

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 8M2017 8M2018
13
Sources: Indonesia Central Bureau of Statistics (BPS) target
Indonesia still needs to further improve infrastructure quality

GDP 2017 Toll Road Length

Competitiveness Infrastructure
(USD Bn) Among Asian Countries
Ranking Ranking
(Km)

Indonesia 873 36 52
65,065
Thailand 374 32 43
Malaysia 313 23 22
Philippines 313.6 56 97
Singapore 294 3 2
Vietnam 8,428
199 55 79 2,623 2,350 1,016
Myanmar 66 na na China Japan South Malay Indo
Korea sia nesia
Cambodia 18 94 106
Country Land Area (Million Km2 )
Laos 13 98 102 9.6 0.38 0.1 0.33 1.97

Brunei 12 46 60
0 1000

Sources: The Global Competitiveness Report 2017 - 2018 Sources: BJPT

14
Government is currently still the major source of infrastructure financing development
Sources of infrastructure financing Government Infrastructure Spending (IDR Trillion)
Equity Financing 410.7
600 388.3
Corporate Bond
Commercial Bank Loan
500 Develoment Bank Loan
Government
400 269.1
256.1

300
145.5 155.9 154.7
200 114.2
86
100

-
2015 2016 2017 2018
2010 2011 2012 2013 2014 2015 2016 2017 2018
Sources: OJK,Bloomberg, ADB, WB, JICA, IDB (APBN)
Notes: Donors Disbursement in 2017 and 2018 are incomplete Source: Ministry of Finance

Bank Loan to Infrastructure Projects

517
CAGR 44
412 422
17,0% 53 43
Logistics Utilities Oil and Gas 347
318 43 294
277 54
252 65 205 230
223 67
178 60 180
154 162
121 43 118
47 93 101
38 76 178
41 57 124 154 149
59 71 83 94 101
42 51
2010 2011 2012 2013 2014 2015 2016 2017 1H2018 2018P 2019P
15
Structural Problems:
Pre-mature De-industrialization

16
 Proportion of manufacturing sector to GDP tend to decrease

Indonesia’s GDP Structure By Sector Value Added Constant Per Employment in

Indonesia By Sector
700
60 56.0
600
50

Million IDR/Employment
500
40
400
% of GDP

29.1
30
300
21.3
20 200
14.0

10 7.4 100
1.3
0 0

2010

2011

2012

2013

2014

2015

2016

2017
2001
1993
1995
1997
1999

2003
2005
2007
2009
2010
2012
2014
2016

Agriculture (% of GDP) Mining (% of GDP) Agriculture Mining

Manufacturing (% of GDP) Utilization (% of GDP) Manufacturing Utilisasi
Services (% of GDP) Services
*Utilization sector includes Electricity, gas, water
Source: CEIC 17
 Share of employment in industry sector increase but at low speed
Employment quality in manufacturing sector relatively low. 57% of employment in
manufacturing sector educated below Senior High School
Employment Structure in Indonesia By Sector Total Employment in Manufacturing Sector By
Education (Million People)
60
0.7
University 0.6
50.2 0.6
50
43.3 0.3
Diploma I-III/Academy 0.3
40 45.5 0.3
38.8 2.9
34.3 Vocational high school 2.5
30
%

32.1 2.6
3.4
20 Senior High School 3.0 Aug-17
22.4 3.2
17.9 Aug-16
10 15.5 3.8
Junior High School 3.7 Aug-15
3.4
0 4.0
Primary School 3.9
2016
1993
1995
1997
1999
2001
2003
2005
2007
2009
2010
2012
2014

3.5

Not Yet Completed 1.6

Employment in agriculture (% of total employment) 1.3
Primary School 1.4
Employment in industry (% of total employment)
0.3
Employment in services (% of total employment) No Schooling 0.3
0.3
Source: World Development Indicators, World Bank Source: Sakernas, BPS 18
 Mapping of Medium and Large Manufacturing Industry 2010-2015
% Imported Raw Material Vs % Exported Product
60
Other transport
equipment Computers, electronic& Repair & installation of
Pharmaceuticals,
optical products machinery & equipment
medicinal chemical &
50 Other
botanical products
% imported raw material (average 2010-2015)

manufacturing
Machinery & equipment
Fabricated metal n.e.c Electrical equipment
40 products, excepts
machinery & equipment Basicmetals
Textiles
Chemicals & chemical Leather & related Wearing
products products & footwear apparels
30 Motor vehicles, trailers
&semi-trailers
Food products
Other non-metallic
Beverages mineral products Rubber & plastic products
20
Paper & Coke & refined petroleum
Printing & reproduction paper products products
of recorded media Wood, cork, except
10
Furniture furniture; articles of straw
& plaiting
Tobacco products
0
0.0 10.0 20.0 30.0 40.0 50.0 60.0 70.0 80.0 90.0 100.0
% Exported Product (average 2010-2015)
*Bubble Size show that total labor in average 2010-2015
Source: Industrial Statistic, BPS 19
 Mapping of Medium and Large Manufacturing Industry 2010-2015
% Exported Product vs Productivity

90 Other
manufacturing
Wood, cork, except
80 Wearing furniture; articles of straw &
apparels plaiting Coke & refined petroleum
Leather & related products & products
footwear
70Repair & installation of
Computers, electronic&
machinery & equipment optical products
% exported product (average 2010-2015)t

Food Basicmetals
60 Electrical
Rubber & products equipment
plastic products Paper &
Furniture
50 paper products

Textiles Machinery &

equipment n.e.c Chemicals & chemical
40 Other non-metallic mineral Other products
products transport
Fabricated metal products,
equipment
30 excepts machinery & Pharmaceuticals, medicinal
equipment chemical & botanical
products
Motor vehicles, trailers
20
Tobacco &semi-trailers
products
10 Printing & reproduction of Beverages
recorded media

0
0 200,000 400,000 600,000 800,000 1,000,000 1,200,000
Productivity (Thousand IDR) – average 2010-2015
*Bubble Size show total labor on average in 2010-2015
Source: Industrial Statistics, BPS 20
Better freight logistics can connect resources producing regions in outer
islands with markets and manufacturing concentrations in Java and
Sumatera

21
Source: World Bank Group (2015) “Reducing freight logistics costs in Indonesia”
Challenges & Opportunities:
Labour Force & Underemployment

22
23
 Declining unemployment rate, but mainly because of higher
underemployment
Labour Force Composition (%)
100%
7.4% 7.0% 6.4% 5.9% 5.7% 5.8% 5.5% 5.3% 5.1%
90%
80%
70% While % of full employment rate
62.6% 62.6% 62.3% 62.7% 62.7% 64.4% 64.0% 64.1% 62.9% decreasing, underemployment
60%
50% contribute more to labour force
40% • Employment: 64% (2016) →
30% 62.9% (2018)
20% • Underemployment: 30.5% (2016)
30.0% 30.4% 31.3% 31.5% 31.6% 29.8% 30.5% 30.6% 32.0%
10% → 32% (2018)
0%
2010 2011 2012 2013 2014 2015 2016 2017 2018

% Underemployment (0-34 hours) % Full-time Emp. (≥35 hours) % Unemployment

Unemployment Rate by Level of Education (%)

12
Secondary graduates (Middle & High
11.16
School) posses greater risk for not
9.63 9.48
10
entering job market
8
Never attended school
Primary School
Why? Lack of skills?
6
Mid-High School
4
Higher Education
2

0 24
Source: Sakernas (BPS) 2015 2016 2017
 Zoom-in underemployment: Dominated by young ages in rural areas

Underemployment Rate by Level of Education (%)

Underemployment Rate (%) by Location
10
9
Underemployment 12
9.7
11.7
8 8.9
8.4 8.4
is dominated by 10
10.28 10.52
7 8.0
6
7.4
6.9 6.9 6.9 uneducated and 8
5 5.7 5.5 primary schools. 6
4 4.8 5.47
4 5.08 4.91
3
2 2
1
Bring more evidence
0
0 that not enough 2015 2016 2017
Never attended Primary School Mid-High School Higher Education
school
skills obtained from
City Rural
2015 2016 2017
Secondary Schools

Underemployment Rate by Age (%)

17.7
18 16.5 16.4
16
14 12.9 13.2
11.8
12
10
7.9 7.3 7.6
8 6.8 6.5 6.9
6
4
2
0
15-19 20-24 35-39 40-44
Source: Sakernas (BPS) 2015 2016 2017 25
What type of skills? Start from sectors demand more labour

25 24.1
23.2
Millions Labour 22.6
22.0
21.0 21.4
19.7
20

16.8 17.1
16.5
15.3 15.7
14.7
15 14.2

10
7.1
5.6
4.8 4.8 5.1
4.4 4.1
5
4.8 4.7 4.8 4.7 4.6 4.7 4.9

1.1 1.5 1.6 1.6 1.8 1.7 1.8

0.9 0.5 0.6 0.7 0.6 0.6 0.8
0
2011 2012 2013 2014 2015 2016 2017

Trade & Reparation Manufacturing Accomodation, F&B Transport & Storage Finance & Insurance ICT

Source: Sakernas (BPS)

Service sectors (except trade & reparation) absorb more employment in the last 3 years:
 Accommodation, F&B: 5.1 mio (2015) → 7.1 mio (2017)
 Transport & Storage: 4.6 mio (2015) → 4.9 mio (2017)
 ICT: 0.6 mio (2015) → 0.8 mio (2017)
26
Indonesia score improving in 2015, but still below OECD and it peers

Indonesia PISA Score, 2015 vs 2012

Country Mathematics Reading Science

2012 382
International Average (OECD) 490 493 493

Science
Singapore 564 535 556

China 531 494 518 2015 403

Switzerland 521 492 506

Netherlands 512 503 509

2012 396
Viet Nam 495 487 525

Reading
Russia 494 495 487

Australia 494 503 510 2015 397

Italy 490 485 481

United States 470 497 496

2012 375

Mathematics
Malaysia 446 431 443

Thailand 415 409 421

Indonesia 386 397 403 2015 386

Brazil 377 407 401

Tunisia 367 361 386 360 370 380 390 400 410

Indonesia improve significantly in science and mathematics, and has the chance to
match other developed countries in 2030 (the year of SDGs Target for quality
education)
27
Challenges & Opportunities:
Shallow Financial Sector Constraining the Development Financing

28
 Relative to GDP, Indonesia's banking assets and lending to
the private sector tend to be stagnant and considered the
lowest in ASEAN

Bank asset to GDP ratio (%) Domestic credit to private sector by banks (% of GDP)
220 140

200
120
180

160 100

140
80
120

100 60

80
40
60

40 20
2012 2013 2014 2015 2016 2017 2010 2011 2012 2013 2014 2015 2016 2017

Indonesia Malaysia Philippines Indonesia Malaysia Philippines

Singapore Thailand Vietnam Singapore Thailand Vietnam

Source: CEIC, World Development Indicator (World Bank), BI, OJK

29
 Bank office coverage is increasing and the highest in
ASEAN, but the proportion of borrowers covered tends to be
stagnant and is the lowest in ASEAN

Commercial bank branches (per 100,000 adults) Borrowers from commercial banks (per 1,000 adults)
18 1,400

16
1,200

14
1,000
12
800
10

8 600

6 400

4
200

2
2012 2013 2014 2015 2016 2017 0
2012 2013 2014 2015 2016 2017
Indonesia Malaysia Philippines
Singapore Thailand Vietnam Indonesia Malaysia Singapore Thailand

Source: World Development Indicator (World Bank), BI

30
 Bank interest rate spread in Indonesia, as an indicator of
efficiency in intermediation, relatively higher compared to
peers

Lower proportion of borrowers partly contributed by less efficient in bank’s

transaction costs and increasing number of bad loans

Interest rate spread (%)* Bank nonperforming loans to total gross loans (%)

7 4.0

3.5
6

3.0
5

2.5
4
2.0

3
1.5

2
1.0

1 0.5
2010 2011 2012 2013 2014 2015 2016 2017 2010 2011 2012 2013 2014 2015 2016 2017

Indonesia Malaysia Philippines Indonesia Malaysia Philippines

Singapore Thailand Vietnam Singapore Thailand Vietnam

Source: World Development Indicator (World Bank). *Bank lending rate minus deposit rate. The margin between the cost of mobilizing liabilities and the earnings on assets, measures
31
financial sector efficiency in intermediation. A narrow spread means lower transaction costs, which reduces the cost of funds for investment. This is crucial to economic growth.
 Conversely, banks as a place to deposit money tends to
increase. This makes banks increasingly invest in ATMs to
provide convenience for customers.

Increased customer funds in banks must be accompanied by an increase in lending

to private sector

Depositors with comercial banks (per 1,000 adults) ATM (per 100,000 adults)
2,400 140

120
2,000

100

1,600
80

60
1,200

40

800
20

400 0
2012 2013 2014 2015 2016 2017 2012 2013 2014 2015 2016 2017

Indonesia Malaysia Philippines Indonesia Malaysia Philippines

Singapore Thailand Vietnam Singapore Thailand Vietnam

Source: World Development Indicator (World Bank), BI

32
 Comparison of asset, market cap, loan, and Deposit of
ASEAN banks
Singaporean banks still dominate in terms of total asset, loan and deposit

June 2018 USD bn

Total asset Market Cap Loan Deposit
1 376 50 245 277

2 339 36 182 213

268 33 177 202
3

4 182 23 117 121

5 121 12 77 84

95 11 62 71
6
94 21 73 77
7

8 93 12 63 64

9 91 14 55 57

10 86 24 58 60

11 84 7 59 61

12 83 26 56 61
13 63 8 49 41

14 56 39 36 44

Source: Bloomberg, Bank Mandiri

33
Assessment on current financial deepening indicates
Indonesia shown improvement across most dimensions of
the financial market ecosystem (1/2)
CURRENT RECENT
DIMENSION MATRIX FOR ASSESSMENT
STATUS TREND

Number of issuers (stock)

Capital users
Number of issuers (bond)

Relative share of bank funding to bonds and equity

Capital providers
Ratio of foreign to local ownership (Bonds, Equity)

Mutual funds asset to GDP

Intermediaries
Insurance asset to GDP

Market volume to GDP (Bonds, Equity)

Interbank lending to GDP

Instruments Turnover (Bonds)

Turnover (Equity and FX)

Bid-ask spread

Credit bureau coverage

Market infrastructure
World Bank – depth of credit information index
34
2015 Current status relatively same as in 2015
Current
Assessment on current financial deepening indicates
Indonesia shown improvement across most dimensions of
the financial market ecosystem (2/2)
CURRENT RECENT
DIMENSION MATRIX FOR ASSESSMENT
STATUS TREND

Level of inflation

World Bank – ease of doing business index

Regulatory, legal, and

World Bank – strength of legal rights index
macro environment

Time for issuance

Tax related regulation

35
2015 Current status relatively same as in 2015
Current
 Growth of issuers for the stock market in Indonesia is
highest compared to other ASEAN countries
Metrics
2015
Number of issuers Issuers (equity market) Current status Current

905 902 900 901 909

775 769
639
757
656
750
688
745
692 Remarks
613 598
537 566
506 521
POJK No 7/POJK.04/2017, March 2017
263 265 265 267 268
 OJK cut a number of documents in the securities
registration statement and prospectus. The
2014 2015 2016 2017 2018* simplification was made to make it easier for issuers to
Indonesia Thailand Singapore Malaysia Philippines
enter the capital market, while at the same time
making it easier for prospective investors to see the
profile of the issuers who will conduct a public offering.
Growth in number of issuers (yoy, %)
 The prospectus is sufficient to use only last 3 years
6
financial data where previously requested last 5 years.
4
2
POJK No 53/POJK.04/2017, July 2017
0
2015 2016 2017 2018*  The objective is to provide wider opportunities for
2
issuers with small scale assets or issuers with medium
Indonesia Thailand Singapore
scale assets obtain funding through capital market.
Malaysia Philippines
 Previously, SME issuers are listed on the development
board which requires prospective issuers to have a
Growth in number of issuers, 2018 compared to 2015 (%)
minimum of IDR 5 billion in net physical assets. By this
regulation, acceleration board will be a place for SME
Indonesia 18.2
issuers who are still in the early stages of operations,
Thailand 12.9 such as resource-based companies like plantations,
Philippines 1.9 minerals, and oil and mining that have not recorded
Malaysia 0.4
profits.
Singapore 3.9

Source: World Federation Exchange, IDX, OJK, Mandiri analysis. *As of August 2018.
36
 Meanwhile, the number of issuers in the bond market does
not grow significantly
Metrics
Current status
Issuers (bonds market) Current status relatively same as
in 2015
Number of issuers
Remarks
3,286
2,765
 The process of issuing bonds is considered more
1,842 1,930 2,039
complicated than borrowing from a bank.

106
569
30 110
493
26 110
433
27 115
381
24 113
344
24
 In a certain period, interest rate of bonds issued are
relatively not much different than bank loans.Hence,
2014 2015 2016 2017 2018* companies tend to choose banking because the
Indonesia Thailand Singapore Malaysia process is simpler.
 Not all companies can issue bonds. Only companies
Growth in number of issuers (yoy, %) that get investment grade can issue bond, which is
40
relatively limited.
 Lack of knowledge from domestic companies
20
regarding the way and process of issuing bonds or
0
accessing the capital market. The lack of education
2015 2016 2017 2018* from regulators contribute to this.
20
 Not all companies are willing to fulfill the obligation to
Indonesia Thailand Singapore Malaysia open company information to the public as a condition
to raise public investor funds.
Growth in number of issuers, 2018 compared to 2015 (%)

Singapore 78.4

Indonesia 6.6

20.0 Malaysia

39.5 Thailand

Source: World Federation Exchange, IDX. *As of August 2018.

37
Appendix

38
Challenges & Opportunities:
Internet and Tourism

39
 Middle-expenditure consumption growth remain strong
Per Capita Spending
3,000
Thousands Rp

2,405
Mid-expenditure people could
2,500
2,096
maintain consumption growth
2,000 above 25% for 2 year (or around
1,725
12.5%/year)
1,500

1,036 945
1,000 753 Shifting of consumption from food
600
371 444 to non-food in 2015 didn’t continue
500 267 304 297
224 in 2017
-
poor low-expend mid-expend high-expend

2013 2015 2017 avg spend 2017

Source: Susenas (BPS)

100% 100% 100%

90% 90% 90%
33% 34% 35% 36% 33% 35%
80% 41% 80% 44% 80% 42%
70% 62% 70% 65% 70% 60%
60% 60% 60%
50% 50% 50%
40% 40% 40%
67% 66% 65% 64% 67% 65%
30% 59% 30% 56% 30% 58%
20% 38% 20% 35% 20% 40%
10% 10% 10%
0% 0% 0%
poor low-expend mid-expend high-expend poor low-expend mid-expend high-expend poor low-expend mid-expend high-expend
40
2013 food 2013 non-food 2015 food 2015 non-food 2017 food 2017 non-food
 Slowdown consumption growth of cigarette, and the raise of internet
Spending for cigarette
400
Thousands Rp

362 Cigarette consumption growth declining for low-

335
350 expend & poor category in 2017
285
300 267 272  Poor: 30% in 2015 (compare to 2013) become
250 14.7% in 2017 (compare 2015)
210
182
 Low-expend: 42% in 2015 (compare to 2013)
200
160 become 14% in 2017 (compare 2015)
150 117 113
102
100 78 Spending for pre/post paid cellular

50 300

Thousands Rp
- 250 238
poor low-expend mid-expend high-expend
200 188
2013 2015 2017
170
150
Spending for internet
100 81
100 61 67
Thousands Rp

87 36 31
90 50 23 16 28
17
80
-
70 65
poor low-expend mid-expend high-expend
60
2013 2015 2017
50
40 32
25
All level of expenditure reducing spending for
30
20
pre/post paid cellular in 2015;
13
7
10
1 1 3 1 3 5 While consumption for internet increased
- significantly, especially low-expenditure people
poor low-expend mid-expend high-expend

2013 2015 2017 41

Source: Susenas (BPS)
 An indication a lower health spending triggered more clothing
consumption
400
Thousands Rp

Spending for health

350
341
300
BPJS significantly reduced spending for
250 health of all expenditure category in 2015:
259
200 225
 Overall: -25.6% compare to 2013, with the
150 highest contribution from high-expenditure (-
34%)
100

50 79
18 17 19 25 23 30 66 60
-
poor low-expend mid-expend high-expend

2013 2015 2017

350
Thousands Rp

Spending for clothing

300
286
While consumption of clothing jumped 70% in 2015,
250 an indication that people taken benefit of lower
251
health spending
200
186 Low-expend and Mid-expend were the biggest
150
contributor for increased clothing consumption in
100 129 2015
97
50
60
14 38 44 19 49 48
-
poor low-expend mid-expend high-expend
Source: Susenas (BPS) 42
2013 2015 2017
 Mid-expend people spend more for air transport and accommodation
Spending for accomodation
25 23
Thousands Rp

19 Spending for tourism and travel industry, as

20
indicated by air transport, land transport,
15 accommodation, increase overall by 27%,
30%, and 21% respectively
10

5 Mid-expend spending for air transport and

0.6 1 hotel jumped significantly in 2017 (51% &
-
poor low-expend mid-expend high-expend
63%)
2015 2017

Spending for land transport Spending for air transport

120 80
108
Thousands Rp

Thousands Rp
70 67
100
82 60 54
80
50

60 40
45
35 30
40
20
19
20 13 15
12
10 4
3
- -
poor low-expend mid-expend high-expend poor low-expend mid-expend high-expend
43
Source: Susenas (BPS) 2015 2017 2015 2017
Challenges & Opportunities:
Internet & Digitalization

44
 Internet still luxurious good: consumed by higher spending groups

Number of People Accessing Internet in 2017 (Decile of Spending)

Internet Purpose Number of People (2017)
25
Millions

News & Info 51,652,374

20
School Assign 19,847,521
15
Email 16,186,523
10
SocMed 60,715,691

5 Entertain 34,582,406

0 Trade Act. 8,299,532

1 2 3 4 5 6 7 8 9

Yes No e-Banking 3,896,740

Source: Susenas (BPS)

Total people accessing internet reach 76.7 However, people tend to use this
million in 2017. The rest, about 160.4 technology with unproductive purposes
million never touch internet in the last 3 (75%): Entertainment (games, video,
months in 2017. streaming), Social-Media, News/Info

While the use for e-Banking only reach 3.9

million (2%)
45
 Why technology (internet) & digitalization importance? Snapshot of Spending

Internet & Expenditure per Capita (Decile of Spending)

3.5
At the lower spending/expenditure level,
Millions (Rp)

3.0
the difference in spending from 1st to 7th
2.5
decile not much
2.0
1.5
1.5 However, start from 8th decile, spending
0.8
1.0 of people who accessed internet are
0.5 higher
0.0
1 2 3 4 5 6 7 8 9 10 Avg
Yes No Expen

e-Banking & Expenditure per Capita (Decile of Spending)

4.0
For e-banking the result is clearer: people
Millions (Rp)

3.5
3.1 use e-banking spend significantly more
3.0
than people who don’t
2.5
2.0
1.5
1.0
1.0
0.5
0.0
1 2 3 4 5 6 7 8 9 10 Avg
Yes No Expen
46
Source: Susenas (BPS)
Challenges & Opportunities:
Woman Empowerment & Financial Inclusion

47
 Woman tend to be Entrepreneur

70%
61.40% 60.35% 60.33% 58.42% 58.08% 58.05%
60%
50.82% 49.55% 48.98%
50% 46.43% 46.76% 46.73%

40% Woman as entrepreneur is higher

30% than man (58% vs 46%)
20%
10%
0%
2012 2013 2014 2015 2016 2017

Wirausaha pria (% jumlah pria bekerja)

Wirausaha wanita (% jumlah wanita bekerja)
Woman Employment by Sector (% total woman employment)
60% 54.0% 54.8%
50.4% 51.2% 51.7%
49.0%
50%
Trend of working in services sectors 40% 35.2% 33.9% 33.3% 32.6%
30.1%
is also increasing for woman 30%
29.3%

• Agriculture: 35% (2012) to 29% (2017) 20%

• Service: 49% (2012) to 55% (2017) 10% 15.8% 15.7% 15.4% 15.7% 16.0% 15.9%

0%
2012 2013 2014 2015 2016 2017

Sektor Pertanian Sektor Industri Sektor Jasa

Source: BPS dan ILO. 2017 is an estimation

48
Global Findex Data - Indonesia

Financial inclusion rapidly increases due to non cash transfers for social assistance

General Information 2011 2014 2017

Has a national identity card (% age 15+) 90%

Account (% age 15+) 20% 36% 49%
Account, male (% age 15+) 20% 35% 46%
Account, female (% age 15+) 19% 37% 51%
Account, young adults (% ages 15-24) 13% 35% 47%
Account, older adults (% ages 25+) 22% 36% 49%
Financial institution account (% age 15+) 20% 36% 48%
Financial institution account,male(% age 15+) 20% 35% 46%
Financial institution account,female(% age 15+) 19% 37% 51%
Financial institution account,young adults(% age 15-24) 13% 35% 45%
Financial institution account, older adults(% age 25+) 22% 36% 49%
Source: World Bank Group

49
Financial Inclusion in Indonesia: Man vs Woman

Woman (% of Age 15+)

60%
51%
50%

40% 37% Access of finance for woman show

32% 2011 greater improvement compare to
30% 26% man
2014
19%
20% 17%
2017
10% 11%
10% 8%
0% 2% 2%
0% Significant increase of account
Account Own Debit Card Credit Card Borrow at Fin. Institution ownership at financial institution:
19% (2011) to 51% (2017)
Male (% of Age 15+)
50% 46%

40% The improvement also trigger the

35%
29%
increase of credit card holder by
30% 25% woman: 10% (2011) to 32% (2017)
20% 2011
20% 18%
15% 2014
12%
9%
10% 2017
3%
1% 1%
0%
Account Ownership Debit Card Credit Card Borrow at Fin. Institution

Source: World Bank Group

50
 Financial Inclusion for Woman: Needs and Potential

% working ages School Participation Rate (APS)

Woman has the same 96.1% 99.1% 96.0% 93.8%

67% 67%
59% proportion of working
49% ages with man. However, 72.1% 69.6%
APS for woman is higher
27% 28% for secondary and higher
education
0-14 15-64 65+
SD SMP SMA
Wanita Pria Wanita Pria

Average Spending of Household (Gender of

KRT)
1,086
Household with woman as the
1,022 head spend more compare to
766
704
the man. The difference is
about 42% in 2017

Wanita Pria

2012 2017

51
Sumber: Susenas (BPS)