Econmark Outlook 2019 January 2019 PDF

ECONMARK
ECONMARK: NO MORE EXCUSES

Mandiri Group Research | April 2017
Mandiri Group Research| January 2019
ECONMARK 2019 Outlook and Strategy

Research Team Contributors The Game Plan: Narrowing the Investment Gap
Anton Gunawan
FY18: Domestically stable, externally volatile. Amid the global headwinds last year,
Leo Putera Rinaldy
Indonesia’s economy was able to sail steady. Economic growth reached 5.17% in 9M18 and
Andry Asmoro inflation ended on a low note at 3.1% in YE18, maintaining a strike of below 4% inflation in
Dendi Ramdani the last four years. The biggest headwind came from the widening current account deficit
Moekti P. Soejachmoen which marked -2.9% of GDP in 9M18, followed by global financial instability, resulting in
Handy Yunianto high exchange rate volatility. This triggered policymakers to lower down their gear for
Adrian Joezer growth and aiming for stability. Bank Indonesia aggressively increased the policy rate by
Faisal Rachman 175bps to 6.0% in 2018, whereas the government introduced measures to stem imports and
Reny Eka Putri improve macro stability, including maintaining a low fiscal deficit.
Aziza Nabila Amani Better macro picture this year. The good news is the measures that have been introduced
Rully Arya Wisnubroto will start to bear real fruits. The CAD is expected to narrow to -2.8% of GDP, supported by
Andre Simangunsong lower oil price. We also slightly revised up our economic growth forecast this year to 5.2%
Andrian Bagus Santoso (vs. initially 5.1%) on the back of the still-benign inflation and hefty fiscal spending
Mamay Sukaesih supporting consumers’ purchasing power. Therefore, as overall macro backdrop is expected
Nadia Kusuma Dewi to improve, especially with a more neutral to dovish monetary stance among advanced
Adjie Harisandi countries, we think Bank Indonesia will only increase its policy rate by one time to 6.25%. Or
in other words, the policy rate hike cycle is nearing its peak.
Policy focus: narrowing the investment gap. In a more structural note, we think the focus
of policymakers ahead is to strike the right balance between pushing economic growth and
maintaining macro stability. After narrowing the infrastructure gap, the next focus of the
government is to narrow the investment gap through enlarging the direct investment
portion. This is conducted not only to achieve higher economic growth but also to create a
more sustainable financing for the CAD as portfolio flows accounts for half of the financing
in the past. Thus, more investment-driven incentives will be introduced in 2H19 (post-
election), in our opinion, specifically guiding the flows to manufacturing export-oriented
sectors. The main objective is to increase the contribution of net export to GDP, especially
with the fact that the ability of 1% economic growth to absorb employment has gradually
declined post-commodity boom, requiring for a more concentrated policy to achieve more
inclusive growth.
Exchange rate swing remains the biggest risk. The biggest headwind for the economy will
remain on the potential external imbalance. Even when imports have started to slow, the
wider CAD risk could not be ruled out if the global economic growth slowdown intensifies.
Furthermore, if the tit-for-tat on trade war continues to intensify, it could speed up the risk
of slower export. We estimate an average exchange rate at IDR14,450/USD in 2019.
Please see important disclosure at the back of this report

ECONMARK: 2019 ECONOMIC OUTLOOK
Mandiri Group Research | January 2019
FIGURE 1. MANDIRI MACRO FORECASTS

2013 2014 2015 2016F 2017 2018F 2019F
Real GDP (% yoy) 5.6 5.0 4.8 5.0 5.07 5.16 5.22
GDP (IDR tn) - nominal 9,525 10,543 11,541 12,407 13,589 14,779 16,108
GDP (USD bn) - nominal 911 888 861.9 932 1,015 1,036 1,111
GDP per capita (USD) - nominal 3,662 3,520 3,377 3,589 3,847 3,886 4,137
Current Account (% of GDP) (3.2) (3.0) (2.0) (1.8) (1.7) (2.5) (2.8)
IDR/USD (period average) 10,452 11,878 13,458 13,308 13,398 14,267 14,450
BI 7 days reverse repo rate (% year end) 4.75 4.25 6.00 6.25
Headline Inflation (% yoy, period average) 6.4 6.4 6.4 3.5 3.81 3.2 3.4
Headline Inflation (% yoy, year end) 8.08 8.36 3.35 3.00 3.61 3.13 3.8
Source: Mandiri Group
Please see important disclosure at the back of this report Page 2 of 107
Table of Contents
Economic Outlook 2019: The Need of Investment for a More Sustainable Growth
The Need of Investment for a More Sustainable Growth 3
The History of Indonesia’s Investment Driven Policies 2018 6
What are the sectors that will be pushed by the government? 13
2019 Economic Growth: Domestic Demand Driven 18
Expecting Manageable Inflation 20
2018 Fiscal Realization and Outlook 23
2019 Improving Balance of Payment Condition 27
Negative Balance of Payments is likely in 2018 31
Regional & Sector Economic Outlook 41
Banking Outlook 2019: To Remain Cautious on Liquidity and Asset Quality 64
FX Market Review: Maintaining Rupiah Stability 72
IDR Bond Market Outlook 2019 : Turning Point to Positive Return 80
Equity Market Recap 104
Economic Outlook 2019

The Need of Investment for a More Sustainable Growth and Better Stability
The need of investment flows has become more apparent for Indonesia as the availability of
conventional financing has become tighter in the last several years. Loan to deposit ratio
(LDR) has reached 93% in Nov18 and money supply grew only by 5% in Dec18, lower than
the average of in the 2010-2016 at 13% (see figure 2 & 3). Furthermore, new investment has
also become imminent in context of plugging the country’s current account deficit as
portfolio flow – which accounts 50% of Indonesia’s financial account surplus in the past –
has become unsustainable amid the global economic dynamic (see figure 4).
On the flip side, foreign direct investment contribution has remained stagnant, resulting the
basic balance (current account added by net foreign direct investment) to reach 0.4% of
GDP in 2017, one of the lowest level compare to peers (see figure 5). Fiscal has and will still
play an essential role on financing the investment cycle. Nevertheless, public investment
has its limitation considering the maximum budget deficit allowed by the law is -3.0% of
GDP.
To put in perspective, if Indonesia wants to increase its economic growth to even 5.5%, it
has to reach an investment to GDP ratio of 34% (vs. current ratio at 32%) (assuming
Indonesia’s ICOR at 6.0) (see figure 6). Therefore, this is why we believe that the
government will focus on investment-driven policies this year after closing the
infrastructure gap, because private investment contribution is a necessity to achieve higher
economic growth and also to achieve better Balance of Payment structure.
FIGURE 2. BANKING LDR HAS BEEN IN AN UPWARD TREND FIGURE 3. MONEY SUPPLY GROWTH HAS CONTINUED TO
DECELERATE
Bank LDR (%) Money Supply Growth (M1) YoY%
110 18
15.5 15.816.0
16 14.414.0
100 13.9 14.2 13.313.0 13.1
14 12.3 12.4 13.0
90 12 11.4 11.9
10.210.1
10 8.2 8.6 8.2
80
8 7.0 6.4
70 6 5.04.8
Commercial banks Bank BUKU I 4
60 Bank BUKU II Bank BUKU III 2
Bank BUKUIV
50 0
Apr-17
Oct-17
Apr-18
Oct-18
Feb-17
Feb-18
Jul-17
Jul-18
May-17
May-18
Jan-17
Jun-17
Jan-18
Jun-18
Nov-17
Dec-17
Nov-18
Dec-18
Aug-17
Sep-17
Aug-18
Sep-18
Mar-17
Mar-18
Dec-14
Dec-15
Dec-16
Dec-17
Jun-15
Jun-16
Jun-17
Jun-18
Sep-15
Sep-16
Sep-17
Sep-18
Mar-15
Mar-16
Mar-17
Mar-18
Source: CEIC Source: CEIC
FIGURE 4. SURPLUS PORTFOLIO INVESTMENT ACCOUNTS FIGURE 5. INDONESIA HAS ONE OF THE LOWEST BASIC
HALF OF THE FINANCIAL ACCOUNT SURPLUS IN THE PAST BALANCE COMPARE TO PEERS
Indonesia's Financial Account Structure (USD bn) 50.0 CA+ FDI 2017
50
40.0 38.5
4.3 CA to GDP
40 Other investment
30.0
Portfolio investment FDI to GDP
30 20.6
26.1 20.0 Basic Balance to GDP (%)
Direct investment 2.3 1.9 19.0 12.8
2.4 4.5 9.0
20 9.2 10.9 16.2 10.0 2.5 6.0 6.2
13.2 -0.4 0.4 0.5
3.8
10 0.0
10.3 16.1 19.4
4.2
4.3 5.6 1.8 11.1 11.5 13.7 12.2 14.7 10.7
4.4 5.3 3.4 -10.0
0 2.2 2.3 2.6 -0.8
-1.5
-1.0 -3.8 -4.8 -7.3 -1.8
-9.4 -8.2 -5.8 -20.0
-10.1 -10.8
Laos
India
Indonesia
Cambodia
Philippines
Malaysia
Vietnam
Thailand
Korea
Australia
-10
Singapore
-20
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Source: Bank Indonesia Source: CEIC, Mandiri Sekuritas
FIGURE 6. INDONESIA STILL WILL NEED LARGE ADDITIONAL FINANCING IF IT WANTS TO PUSH GROWTH BEYOND THE 5% LEVEL
No. Indicator 9M18 Scenario I Scenario II Scenario III Scenario IV

1 Economic Growth 5.2 5.5 6.0 6.5 7.0
2 Investment to GDP ratio 32 33.6 36.6 39.7 42.7
3 Additional Investment to GDP ratio needed (%) 1.6 4.6 7.7 10.7
4 Additional Investment needed (USD bn) 16 46 76.5 107
Source:
A Brief Look on Indonesia’s Investment Condition
Before going deeper into the incentives that are aimed to attract investment along with
their impact assessment, we would like to layout the current investment state of foreign
(FDI) and domestic direct investments (DDI).
From the FDI side, the tertiary sector has dominated the pie. It accounts 47.3% of the FDI
profile last year led by investment in the electricity, gas & water supply sector. Meanwhile,
Asian countries have dominated the investment portion to Indonesia, where Japan and
China sat in top two in the last two years (see figure 7 & 9). In context of trend, however, the
FDI has not yet shown significant improvement since the end of commodity boom era (it is
even contracting by -8.2% in 9M18 from 11.4% growth in 2017) (see figure 10). As a result,
the FDI into the primary sector fell a lot due to the commodity bust followed by the
slowdown in the manufacturing side (the FDI portion in manufacturing has decreased from
47.9% in 2012 to 36.2% in 9M18). FDI did pick up in 2016 after the government introduced
the tax holiday regulation in 2H15, yet it decelerated afterwards partly due to the increasing
uncertainty on the political condition, in our opinion. On the flip side, the growth of the
domestic direct investment has been relatively stable at 23.5% yoy in 9M18 (vs. 21.4% yoy
in 2017) (see figure 11).
FIGURE 7. THE PORTION OF TERTIARY SECTOR HAS FIGURE 8. …AND LIKEWISE IN DDI
DOMINATED THE FDI PORTION…
FDI Proportion to Total (%)
100%
DDI Proportion to Total (%)
27.9 Tertiary Sector Secondary Sector Primary Sector
80% 33.0
47.3 100%
60% 28.1 23.8

80%
47.9 52.1
40%
62.6 36.2 60%
20% 54.1
40% 58.3
24.2 25.8
16.5
0% 4.4
1 2 3 20%
22.1 22.1
Primary Sector Secondary Sector Tertiary Sector 13.6
0%
1 2 3
Source: CEIC Source: CEICs
FIGURE 9. JAPAN AND CHINA HAS BEEN THE TOP TWO DIRECT INVESTORS WITH SOUTH KOREA FOLLOWING BEHIND
FDI value (USD bn)

No. Country 9M18 No. Country 2017 No. Country 2010
1 Japan 3.75 1 Japan 5.00 1 USA 0.93
2 China 1.83 2 China 3.36 2 Japan 0.71
3 Hong Kong 1.64 3 Hong Kong 2.12 3 Netherlands 0.61
4 South Korea 1.37 4 South Korea 2.02 4 Hong Kong 0.57
5 Malaysia 1.18 5 USA 1.99 5 Malaysia 0.47
6 USA 1.00 6 Netherlands 1.49 6 South Korea 0.33
7 Netherlands 0.78 7 Malaysia 1.21 7 United Kingdom 0.28
8 Australia 0.34 8 United Kingdom 0.77 8 Australia 0.21
9 Thailand 0.32 9 Australia 0.51 9 China 0.17
10 United Kingdom 0.24 10 Taiwan 0.40 10 Germany 0.16
11 Belgium 0.15 11 Germany 0.29 11 Canada 0.15
12 Germany 0.15 12 India 0.29 12 Philippines 0.05
13 Taiwan 0.14 13 France 0.25 13 Taiwan 0.05
14 Canada 0.12 14 Brazil 0.23 14 Thailand 0.05
15 India 0.07 15 Thailand 0.22 15 Spain 0.04
16 Austria 0.06 16 Belgium 0.13 16 Czech Republic 0.03
17 United Arab Emirates 0.06 17 Canada 0.09 17 Italy 0.02
18 France 0.04 18 Philippines 0.07 18 Belgium 0.02
19 Brazil 0.03 19 Italy 0.06 19 India 0.01
20 Philippines 0.01 20 United Arab Emirates 0.03 20 Norway 0.01
Source: CEIC, Mandiri Sekuritas
FIGURE 10. FDI GROWTH HAS YET TO RECOVER SINCE THE FIGURE 11. …WHILE DDI GROWTH HAS BEEN STABLE
COMMODITY BOOM ERA…
FDI Growth (%) DDI Growth (%)
150 60 150 80
Secondary sector Primary Sector
120 120
Tertiary Sector Total FDI-RHS
40 60
90 90
60 60
20 40
30 30
0 0
0 20
(30) (30) Secondary sector Primary Sector
Tertiary Sector Total DDI-RHS
(60) (20) (60) 0
2010 2011 2012 2013 2014 2015 2016 2017 9M 2010 2011 2012 2013 2014 2015 2016 2017 9M
2018 2018
The History of Indonesia’s Investment Driven Policies
Fortunately, after five years of closing the infrastructure gap, the stars are aligning for a
better investment in 2019, mainly on supportive policies, infrastructure completion, and
political clarity. Logistic cost has started to decrease to 23.5% in 2017 from 25.7% in 2013
and after four years of construction, the length of toll roads has increased from 794 km to
1,254 km. Specifically in Java, the construction of Trans Java toll road has improved
transportation activities significantly. Five years ago, travelling by car from Jakarta to
Surabaya (816 km distance) would take around 14 hours, now it only take only about 9
hours (see figure 12 & 13).
Investment that requires sea-connectivity will also be supported along with rapid
acceleration of ports construction. About 27 new ports have been built by 2017, which
increased cargo capacity from 21.3 to 27.1 million twenty-foot equivalent units (TEUs). In
context of air connectivity, the opening of 7 new airports in 2015 to 2017 has been able to
raise the number of passengers from 158 million in 2014 to 195 million in 2017. In the first-
half of 2018, the number of passengers also went up by 11% compared to the same period
last year as 4 new airports has started operations.
Therefore, after closing the infrastructure gap, we strongly believe that the government will
gradually shift its policy direction to attract private investment. In fact, several investment
incentives have already been introduced in 2018, such as the revision of the tax holiday rule,
and the negative investment list. Historically, there are two main incentives being the
forefront of the government’s strategy to accelerate investment, which are tax allowance
and tax holiday. Tax allowance itself has been introduced since 1994 and has been revised
for multiple times, the last being in 2015. Likewise, tax holiday is not something new; it was
approved initially in 2011, starting off with only five sectors covered (the latest revision
covers 18 sectors) (see figure 15 & 16). On top of those two, the government has also
continued to ease the negative investment list for investment, and now the total business
areas in the negative list have decreased to 392 (from 515 sectors in 2016), indicating higher
openness for foreign direct investment (see figure 14). In 2016, for example, the
government made available for 100% FDI in several industries, such as e-commerce, cold
storage, creative industry (film making, cinema, etc.), health, and tourism sectors.
FIGURE 12. INDONESIA’S LOGISITC COST TO GDP HAS FIGURE 13. SEVERAL EVIDENCES OF INFRASTRUCTURE IMPACT
DECREASED
Progress in infrastructure development
No. Area Evidence
26.0 25.70 1 Land In under four years, the length of toll roads has increased from 794 to 1,254
kilometers.
Jakarta - Surabaya (816 km)
- 5 years ago: 14 hours
25.0 - Now: 9 hours
2 Sea 2017: 27 new ports have been built. Cargo capacity increasing from 21.3 to 27.1
million twenty-foot equivalent units (TEUs).
24.0 23.50 - Since late 2015, a container ship sailing from Makassar port in the eastern part of
Indonesia to Japan has been able to cut its average voyage time by 50% from 28 days
23.10 to 14 days. A direct route from Balikpapan to Shanghai starting in April 2018 slashed
the average voyage time by more than two thirds from 30 days to 9 days.
23.0 22.60 3 Air The opening of 7 new airports in 2015 to 2017 has significantly improved
Indonesia’s air connectivity.
- Number of passengers climbed from 158 million in 2014 to 195 million in 2017.
22.0 - In the first-half of 2018, the number of passengers went up by 11 percent (from 83
to 92 million) compared to the same period last year as 4 new airports started
operations.
21.0 - Visit Lake Toba: total of 3 hours in total from Jakarta by flying direct to Silangit
Airport (2 hours of flying + 1 hour drive to get to Lake Toba). Previously it used to
2013 2017 2018P 2019P take up to 6 hours to reach there including 2 hours of flying from Jakarta to Medan,
followed by 4 hours of driving time to Lake Toba.
4 Electrification During 2014 to 1H18, electrification rate rose from 84 to 97 percent. Around 24
million households or 80,377 villages are now connected to national electric grids.
Source: Indonesia Logistics and Forwarder Association (ALFI), Mandiri

estimate Source: Ministry of State-owned Enterprises
FIGURE 14. THE NEGATIVE INVESTMENT LIST WAS REVISED LAST YEAR
Number of Business Areas

Openness in
Description Presidential the last 2
DNI
Regulation No. DNI
2018
44/2016
329 303
FDI portion in DNI Increasing
(64%) (83%)
Increasing FDI in DNI 2018: 90 87 177
1. FDI 100% (out of the DNI) 41 54 95
2. Reserved for SMEs for Partnerships (FDI and/or DDI) 2 16 18
3. From DDI to FDI 51% 13 7 20
4. From FDI 33% increased to FDI 67% 2 - 2
5. From FDI 49% increased to FDI 51%/67%/75% 21 6 27
8. From FDI 67% increased to FDI 75% - 3 3
9. From FDI 67% increased to be with Special Requirements - 1 1
Source: Coordinating Ministry of Economic Affairs
FIGURE 15. SUMMARY OF TAX ALLOWANCE CHANGES

PP No. 34 (1994) PP No. 148 (2000) PP No. 1 (2007) PP No. 52 (2011) PP No. 18 (2015)
Accelerated depreciation and amortization
Reduction to taxable income amounting to 5% of total investment value p.a. for 6 years
Tax loss carry
Additional 1-2 years of carry forward tax
forward for 5 years, Additional 1 year of carry forward tax loss period from the base
Tax allowance loss period from the base period of 5
but not more than 10 period of 5 years, but not more than 10 years
years, but not more than 10 years
years
10% dividend tax, payable to international taxpayer or
less according to double taxation rules applicable
Any form of investment, both from
international or domestic companies
Addition of fixed assets incl. land for new
Capital definition None having high investment value or export-
investment or expansion
oriented business, large number of
employees, or high local content.
Capital investment
None 1000 None
threshold (IDR bn)
Source: Ministry Regulation, Mandiri Sekuritas Research
FIGURE 16. SUMMARY OF TAX HOLIDAY CHANGES

PMK No. 130 (2011) PMK No. 159 (2015) PMK No. 103 (2016) PMK No. 35 (2018)
Applicant requirements Must be Indonesian legal entity
Industry pioneer
New capital investment
DER ratio in compliance with MoF's regulation
New taxpayer New and existing taxpayer
Deposit 10% of total investment to banks in Indonesia for the investment
period
Capital investment threshold
1000 1000 1000 500
(IDR bn)
Tax reduction 100% 10-100% 10-100% 100%
Tax holiday period (years) 5 to 10 5 to 15 5 to 15 5 to 20
No. of pioneer industries given 5 9 8 17 --> 18
List of pioneer industries 1. Base metals 1. Base metals - 1. Base metals - 1. Base metals – upstream
2. Petroleum refining upstream upstream 2. Oil and gas refining, with or without its
and/or basic organic 2. Petroleum refining 2. Petroleum or derivatives
chemicals sourced industry industrial refining 3. Petrochemical based on natural gas, with or
from petroleum and 3. Basic organic industry and without its derivatives
natural gas chemical industry petroleum refining 4. Basic inorganic chemistry
3. Machineries sourced from infrastructure 5. Basic organic chemistry
4. Renewable resources petroleum and including the ones 6. Pharmaceutical - raw materials
5. Communication natural gas using PPP scheme 7. Main components of electronics and
equipment 4. Machinery industry 3. Basic organic telecommunications (merged)
that produces chemical industry 8. Main components of medical devices
industrial machinery sourced from (irradiation, electro medical or
5. Agriculture-based petroleum and electrotherapy)
processing industry, natural gas 9. Main components of industrial machineries
forestry, and fisheries 4. Machinery industry (electric motors or internal combustion
6. Telecommunication that produces motors which is integrated with machinery
industry, information industrial machinery manufacturing industry)
and communication 5. Agriculture-based 10. Main components of machineries (piston,
7. Marine transportation processing industry, cylinder head, cylinder block integrated
industry forestry, and fisheries with the vehicle manufacturing industry for
8. Processing industry 6. Telecommunication four-wheelers and more)
which is the main industry, information 11. Main components of robotics
industries in the and communication 12. Main components of ship
Special Economic 7. Marine transportation 13. Main components of aircraft (engine,
Zones industry propeller, rotor, or component
9. Economic 8. Economic infrastructure integrated with aircraft
infrastructure other infrastructure other manufacturing industry)
than those using the than those using the 14. Main components of train
PPP scheme PPP scheme 15. Main components of electric power
(including power plant machinery from
garbage)
16. Economic infrastructure
17. Manufacturing industry based on
agriculture, plantation, forestry-based
processing industries
18. Digital economy
Source: Various sources
ECO BOX 1. COMPARING INDONESIA’S TAX HOLIDAY INCENTIVE WITH PEER COUNTRIES
Tax holiday in brief. The Ministry of Finance signed a new regulation of tax holiday on March 29, 2018 under the MOF
Regulation No. 35/PMK.010/2018 (PMK-35) with the aims to further incentivize business activities in Indonesia. The regulation
now applies a 100% corporate income tax exemption for investment (new and existing taxpayers are eligible to apply) at a
minimum value of IDR500bn, with the period of up to 20 years long. In the previous regulation, tax holiday is set at a range of
10 – 100% exemption and for new taxpayers. As the regulation being at the forefront of the government’s strategy to support
investment appetite towards the country, a comparison with peer countries which apply similar tax holidays becomes relevant
in order to see our relative attractiveness (see figure 17). Note that we are trying to conduct brief assessment solely on each
country’s tax holiday scheme, in other words, only the 100% corporate income tax (CIT) exemptions and any other
complementary tax incentives implemented are not discussed here. In general, we see Indonesia’s tax holiday requirement is
easier for investors and attractive for large-scale investment, although many potential sectors are still untapped.
Strength 1: Less stringent requirements. First, Indonesia’s tax holiday requirement is less stringent and relatively easier to
comprehend than peers. In order to qualify for the tax holiday incentive, a tax payer must be an Indonesian legal entity
conducting new investment in a pioneer industry, with a minimum capital investment of IDR500bn (USD36mn). Additionally, a
taxpayer must also comply with the Indonesian thin-capitalization rules (i.e. 4:1 debt-to-equity ratio). In contrast, other
countries require more specific requirements. Vietnam, for example, specifically targets large investment in manufacturing
sectors which uses high technology and/or meeting requirements regarding investment capital, minimum revenue and
minimum headcount. Philippines and Singapore also require specific calculation for the companies to be eligible, such as
capital to labor ratio as well as incurred expenses. Less rigid countries under comparison are Thailand – which does not require
any threshold of investment for their targeted sectors, and China - which requires only USD5mn investment from companies
that have operated for 10 years or more. Under this perspective, Indonesia’s tax holiday registration is relatively easier for
investors rather than peers.
Strength 2: Attract large-scale investment. Secondly, with the length of tax holiday period depending on capital investment
threshold - meaning that the larger the amount, the longer the companies can enjoy the incentive, Indonesia’s tax holiday is
definitely more attractive towards large-scale investment. A flat 100% tax exemption up until 20 years makes Indonesia’s
scheme really worthy of a re-look. Even Singapore only offers a maximum of only 10 years exemption depending on industries.
Furthermore, our maximum tax holiday period is even longer even compared to Vietnam’s maximum length of tax holiday
incentive at 13 years which already include the period of transition (4 years + transition of 9 years of 50% CIT reduction),
Strength 3: Concrete period of transitions. Indonesia offers 50% CIT reduction for 2 years after the company enjoy the tax
holiday in any pioneer sectors that are eligible. Other countries have a more complicated extensions – Vietnam and Thailand
provide transitions but depending on the project or zones. Other countries such as Philippines have a lower transition rates
compared to Indonesia, which is at 30% of CIT. We believe that Indonesia’s concrete period of tax transition for any value of
investment makes Indonesia’s tax holiday system more attractive.
Area that could be upgraded ahead: More sector coverage. We believe the sector coverage could be widened going forward.
Currently, the sectors that are eligible for tax holiday are restricted to only 18 pioneer industries. Pioneer industries in this
context is defined as an industry that has broad connection and/or linkage, provides value added and high positive economic
consequences to surrounding areas, introduces new technology and provides strategic value for the national economy. In our
assessment, we see that other countries appeal to wider sectors. For example, Vietnam targets wider manufacturing landscape
such as textile, leather/footwear, electronics/IT, and mechanical engineering, which we think are sectors that are classified as
the country’s strength to further boost exports with domestic productions. Philippines also include tourism industry under their
tax holiday scheme, while Thailand and Singapore underlines the research and development industries. Strategically speaking,
the government could target sectors that have high level of exports yet low imports, such as food products, rubber, furniture,
and wood under the list. Although so, the government has tried to cover the important sectors through the revision of the
sector list in the latest economic policy package as it adds two sectors: manufacturing industry based on agriculture,
plantation, and forestry-based processing industries, as well as the digital economy.
FIGURE 17. TAX HOLIDAY COMPARISON TABLE
Indonesia Vietnam Thailand Philippines Singapore China

Domestic and
resident foreign
Private company,
corporations
which:
registered with the
1. is incorporated in
Board of
New and existing Singapore
Applicant New enterprise/ Investments (BOI), New and existing
taxpayers Taxpayers 2. is tax resident in
requirements taxpayers Philippine Economic taxpayers
(new investment) Singapore for the
Zone Authority
year of assessment
(PEZA) and
3. No more than 20
Cagayan Economic
shareholders
Zone Authority
(CEZA)
• Capital Equipment
to Labor Ratio
Criterion does not
exceed USD10,000
• The net foreign
exchange savings or
• Projects with earnings for the first
investment capital three (3) years of
of USD 546.8 mn or commercial
more, spent within operation should at
5 years of being least be
licensed and using USD500,000
• None for activity-
high technology • The indigenous First SGD 400,000
based incentives
• Projects with raw materials used of qualifying
• Minimum ratio of USD5 million and
Capital investment capital in the manufacture expenses incurred
IDR 500 bn (USD 36 qualified eligible operation period of
investment of USD 268.4 mn, or processing of the during years of
mn) and above investment/expendi more than 10 years
threshold spent within 3 years registered product assessment 2011-
ture for additional and above
of being licensed, is at least fifty 2018 on each of six
income tax
meeting percent (50%) of the qualifying activities
exemption
requirements total cost of raw
regarding materials for each
investment capital, of the taxable year
minimum revenue, beginning the start
minimum of 8 Investment
headcount. Incentives in the
Philippines 2015
commercial
operation up to
when the extension
using this criterion
was applied for.
Tax reduction 100% 100% 100% 100% 100% 100%
2 to 4 years, where
the enterprise has
- BOI: 4-8 years
IDR 500 bn to < not derived taxable
income tax holidays
IDR1 tn: 5 years profits within 3
and 4-6 years
IDR 1 tn to < IDR 5 years of the
exemption from
tn: 7 years commencement of 2, 3, or 5 years,
3 to 8 years local business taxes 5 to 10 years
Tax holiday IDR 5 tn to < IDR 15 generating revenue depending on the
depending on for pioneer and depending on
period (years) tn: 10 years from the projects or
location non-pioneer industries
IDR 15 tn to < IDR incentivized industries
industries
30tn: 15 years activities, the tax
- PEZA: 4,6 or 8
≥ IDR 30 tn (USD 2.1 holiday/tax
years
bn): 20 years reduction will start
- CEZA: 4-6 years
from the fourth year
of operation.
• 4 years of tax -For BOI, the - ‘2 + 3 years tax
exemption and 9 company is subject Partial exemption of holiday’: two years
subsequent years of to regular 30% 75% on the first of exemption from
50% reduction for 5
50% CIT reduction 50% reduction income tax after the SGD 10,000 and CIT followed by
years of enterprises
Transition for 2 years after • 4 years of tax income tax holiday 50% exemption on three years of 50%
in investment
enjoying tax holiday exemption and 5 period. the next SGP reduction of CIT.
promotion zones
subsequent years of -For those 290,000 of normal - ‘3 + 3 years tax
50% reduction registered by PEZA chargeable income holiday’: three years
• 2 years of tax and CEZA - they are of exemption plus
Indonesia Vietnam Thailand Philippines Singapore China

exemption and 4 subject to special three years of 50%
years subsequent 5% tax on gross reduction of CIT.
years of 50% income after the tax - ‘5 + 5 years tax
reduction holiday period ends, holiday’: five years
(depending on in lieu of all local of exemption plus
projects) and national taxes five years of 50%
reduction of CIT.
17 pioneer
New/high
industries,
technology
extended to 19 in - BOI:
enterprises,
the new policy Infrastructure,
Pioneer industries advanced
package. Business Powered
Manufacturing of (R&D, IPR, technology service
Upstream base Outsourcing (BPO),
industrial products Activity-based Registration of IPR, enterprises,
metal, oil and gas, R&D
prioritized for incentives approved industrial encouraged
petrochemical, - PEZA: Economic
development (knowledge-based, or product design industries in certain
electronics, Zone Export
(support high tech infrastructure, high- carried out in regions, certain
Criteria’s/sector machineries, Manufacturing
sector, support technology, etc), Singapore, sectors (agriculture,
s given robotic, electric Enterprise,
garment, textile, merit-based acquisition or forestry, animal
power, economic Information
footwear, IT, incentives (RnD, leasing of husbandry, fishery),
infrastructure, Technology
automobiles intellectual equipment or integrated circuit
manufacturing Enterprise, Tourism
assembly or property), etc. software, training of industries,
industry based on Economic Zone
mechanics, etc.) employees) and infrastructure
agriculture, Enterprise
plant expansion projects,
plantation, forestry- - CEZA: Tourism-
environmental
based processing related activities
projects, transfers
industries, digital
of technology
economy.
Normal
corporate
25 20 20 30 17 25
income tax rate
(%)
Tax holiday will
start from the fiscal
year when the Tax holiday starts
Tax holiday applies
taxpayer reaches Tax holiday applies running from the Tax holiday starts
When tax to a new company
the commercial in the beginning date of commercial from the first
holiday is in - for its first three
operation stage after the enterprise operation, or target income-generating
effect consecutive years of
(COS), or when the first makes profits date of operation, year
assessment
taxpayer uses its whichever earlier.
own products for
further processing.
Source: Various sources
Overall, we believe that tax holiday revision in April 2018 will be more appealing for
investment. The tax holiday introduced has successfully attracted new investment
commitment worth of IDR210.8tn to date dominated to the mineral and consumer sectors,
much larger compared to the investment commitment amounting IDR39.4tn since 2011 –
Mar18. Additionally, the government is assessing another incentive, such as the double
deduction tax incentives and withholding tax reduction for fixed income assets.
So, what is the potential impact of the tax holiday to investment? We try to estimate the
impact based on the result of the previous tax holiday, which is implemented in 2011, and
when it was revised in 2015. We selected sectors of FDI which are likely to be classified
categorized as the pioneer industries in both of the periods (excluding refined petroleum
products as well as transportation and communication, as both tend to be affected by
commodity price fluctuations). We found that on average, FDI improved +44.2% yoy on the
year after the regulation is introduced or revised (t+1) (see figure 18 & 19). However, bear in
mind that the number of pioneer industries eligible for tax amnesty in 2011 and 2015 only
account for around 10% of the total 315 sectors of the FDI, while the latest revision in 2018
increased the share by around 20% of total, with its revision on the number of pioneer
industries. This suggests that, taking into account the same FDI growth at 44.2%, tax
holiday contribution to total FDI would rise from 4.45% to 9.17% of total growth this year.
FIGURE 18. THE IMPACT OF TAX HOLIDAY IN 2011 FIGURE 19. THE IMPACT OF TAX HOLIDAY IN 2015
FDI in pioneer industries(2011) FDI in pioneer industries(2015)
3.0 2.8 250%
212.4% 4.5 34.6% 34.0% 40%
2.5 200% 4.0 30%
2.0 4.0 13.3%
150% 3.5 20%
2.0 3.6
3.0 10%
100%
1.5 1.3 2.5 0%
50% 2.7 2.5
2.0 2.3 -10%
1.0 -12.9% 54.3%
37.4% 0% 1.5 -20%
0.5 0.4
0.5 -50% 1.0 -30%
-29.1%
-52.2% 0.5 -40%
0.0 -100% -41.5%
T-2 T-1 T T+1 T+2 0.0 -50%
T-2 T-1 T T+1 T+2
Value (US$ bn) % YoY Value (US$ bn) % YoY
Source: CEIC, Mandiri Sekuritas Source: CEIC, Mandiri Sekuritas
The argument of larger investment flows is also be supported by the political clarity after
the presidential election in Apr19 and the completion of large infrastructure projects such as
the Trans Java toll road will be completed (Based on KPPIP data, around IDR239tn toll road
projects will be completed in 2019, most of it is part of the Trans Java project). Furthermore,
several studies have quantified the impact of tax competition and FDI. Broekman and Vliet
(2001) using the aggregate EU inbound FDI in 1989 – 1998 found that a 1% reduction on
effective tax rate will increase the FDI inflow by 0.5% per year. A more update study in 2008
by Feld and Heckemeyer found that 1% reduction in the corporate tax rate will increase the
FDI inflow by 1.7% per year, while the study of De Mooij and Ederveen in the same year
found a higher result of 3%.
What are the sectors that will be pushed by the government?
Obviously, the Industries that will benefit the most are the 18 pioneer industries in the tax
holiday list. The focus is to revive the basic industry and reduce import dependency in the
long term (import-substitution program). Several industries that are included in the tax
holiday are components that the country imports the most such as base metal and chemical
(see figure 20). Beyond that, the government will likely focus on the manufacturing sector.
The question now, is what type of manufacturing sector does the government wants to
focus on? We believe industries that could achieve two goals.
First, increasing the export contribution. The philosophy is FDI flows that goes into the
domestic oriented industries will have an impact to economic growth, yet the effect to the
exchange rate will be mostly neutral as the FDI flows will be offset by the rising import
needs. The story will be different with export-oriented industries, where the impact will not
only be on economic growth, but also improving the current account balance structure.
Interestingly, this focus is in-line with government’s plan of Indonesia’s 4.0 Industrial
Revolution plan or so-called, making Indonesia 4.0, where one of the targets is to increase
Indonesia’s net export to GDP to 10% (vs. current level at 2%) (see figure 21).
Second, increasing labor absorption. After the commodity boom, we have seen that
quality of the economic growth in context of labor absorption has not improved a lot. Based
on our calculation, every 1% economic growth increase, will only absorb labor around 280
thousand persons (vs. 2000 – 2009 at 677 thousand persons) (see figure 22). The reason is
because large part of Indonesia’s GDP is dominated by non-tradable sectors where the
sector tends have a low employment absorption and requires high-skill labor, which does
not match Indonesia’s current labor structure. Instead, in context of education, the labor
structure has not changed significantly (see figure 23 & 24).
Therefore, based on the two goals mentioned above, we believe that the government will
focus more on manufacturing export-oriented sectors such as textile, food beverage,
processed rubber (see figure 26). One of the reasons is both of the industries have high
labor absorption while on the other hand, also have big export portion compare to other
manufacturing sides. If we look at the composition of Indonesia’s manufacturing export-
oriented industries, textile has become the top three non-oil and gas export for Indonesia in
the last several years (see figure 25). This is followed by other industries, such as processed
rubber, base metal, processed food, and automotive.
FIGURE 20. TOP 10 NON-OIL AND GAS IMPORTS
2015 2016 2017 2018 YTD

No. Commodities Value % Total % Total Commodities Value % total Commodities Value % total
(USD bn) (USD bn) (USD bn)
1 Electrical apparatus, measuring instruments and optical 16.3 14.5% 14.8% Electrical apparatus, measuring instruments and optical 19.2 15.1% Electrical apparatus, measuring instruments and optical 18.9 15.0%
2 Base metal products 14.2 12.7% 11.9% Base metal products 16.2 12.8% Base metal products 16.3 13.0%
3 Chemicals 7.5 6.7% 6.3% Chemicals 8.1 6.4% Chemicals 8.2 6.5%
4 Artificial resin, plastic materials 7.0 6.2% 6.3% Artificial resin, plastic materials 7.8 6.2% Artificial resin, plastic materials 7.7 6.1%
5 Textile and textile products 6.9 6.1% 5.9% Textile and textile products 7.5 5.9% Textile and textile products 7.1 5.7%
6 Processed food 3.9 3.5% 4.9% Processed food 5.5 4.3% Processed food 5.7 4.5%
7 Parts of vehicles 3.0 2.7% 2.8% Parts of vehicles 3.8 3.0% Parts of vehicles 3.8 3.1%
8 Cattle fodder 2.7 2.4% 2.2% Motor vehicle 4 wheels and more 3.1 2.4% Motor vehicle 4 wheels and more 3.2 2.5%
9 Computer and parts 2.3 2.1% 1.9% Cattle fodder 2.7 2.1% Cattle fodder 2.6 2.1%
10 Motor vehicle 4 wheels and more 2.2 2.0% 1.8% Computer and parts 2.4 1.9% Computer and parts 2.3 1.8%
Total imports 112.2 100.0% 100.0% Total imports 127.1 100.0% Total imports 125.9 100.0%
Source: Bank Indonesia

FIGURE 21. INDONESIA’S NET EXPORT TO GDP IS ONE OF THE FIGURE 22. THE QUALITY OF ECONOMIC GROWTH HAS BEEN
LOWEST COMPARED TO PEERS STAGNANT IN CONTEXT OF THE ABILITY TO ABSORB LABOR
Net Export to GDP 9M18 (%) Nominal change in additional employment
60 (thousand person) given 1% change in Real GDP
49.7 growth
50 800
677
700
40
600
29.9
30 500
400
297
20 300
8.3 7.8 200
10
1.1 100
0 0
Philippines Singapore Malaysia Thailand Indonesia 2000-2009 2010-2018
Source: CEIC Source: Mandiri Sekuritas estimate
FIGURE 23. 2010 LABOR BASED ON EDUCATION FIGURE 24. 2018 LABOR BASED ON EDUCATION
2018 Labour Force Share Based on Education (%)
2010 Labour Force Share Based on Education (%)
Total Labour 2010 = 131 mn
Total Labour 2018 = 131 mn
Senior High Senior High
High School
School School
19.1 Senior High
(General) (Vocational)
Senior High School
15.5 11.8
School (General)
(Vocational) 18.5 Academy
8.6 High School 2.8
Academy 18.0
3.0 University
University 9.5
5.1 No schooling
Primary No schooling
2.6
school 4.6 Primary school
28.1 16.0, not yet 24.5 12.3, not yet
complete complete
primary school primary school
FIGURE 25. INDONESIA TOP TEN MANUFACTURING EXPORT

No Product 2012 No Product 2015 No Product 2018
(USD mn) (USD mn) (USD mn)
1 Textile and textile products 12,510,222 1 Textile and textile products 12,338,750 1 Textile and textile products 11,121,025
2 Electrical apparatus, measuring 11,157,423 2 Electrical apparatus, measuring 8,777,604 2 Base metal products 10,476,188
instruments and optical instruments and optical
3 Electrical apparatus, 7,760,338
3 Base metal products 9,303,974 3 Base metal products 7,580,115 measuring instruments and
optical
4 Processed food 5,089,625 4 Processed food 6,284,553
4 Processed food 6,433,843
5 Paper and paper products 3,938,382 5 Processed rubber 5,843,690
5 Processed rubber 5,260,303
6 Chemicals 3,634,536 6 Footwear 4,507,503
6 Footwear 4,201,696
7 Footwear 3,518,257 7 Processed wood products 3,813,415
7 Chemicals 3,838,468
8 Processed wood products 3,338,150 8 Paper and paper products 3,599,154
8 Paper and paper products 3,818,050
9 Motor vehicle 4 wheels and 2,491,899 9 Articles of gold 3,292,902
more 9 Processed wood products 3,472,099
10 Chemicals 2,805,673
10 Artificial resin, plastic materials 2,475,062 10 Motor vehicle 4 wheels and 2,844,247
more
Total Manufacturing Export 112,171,467 Total Manufacturing Export 104,774,489
Total Manufacturing Export 105,181,855
Source: CEIC
FIGURE 26. TEXTILE AND FOOD BEVERAGE SECTOR HAS THE FIGURE 27. TOP FIVE SECTOR PRIORITAZED BY THE
LARGEST SHARE OF EXPORT AND EMPLOYMENT GOVERNMENT
Correlation between Export and Labor
14
Export share to total export (%)
12
Textile
10
Food and Beverage
8
Plastic and Rubber
6
0
0 5 10 15 20 25
Labor share to total labor (%)
Source: CEIC, Mandiri Sekuritas estimate Source: Ministry of Industry
Moreover, the positive investment environment followed by infrastructure completion will

also pave the way for tourism sector development (a long-time long hanging fruit for
Indonesia), which is essential to improve the structure of the country’s current account
balance in the medium term. As a comparison, one of the main reasons why Thailand could
record a current account surplus of 11% to GDP in 2017 is due to the big surplus on the
services balance (see figure 28), especially driven from travel services which is related with
the tourism sector. This is different from Indonesia where the country has a deficit on the
services balance with travelling service only generating a small surplus (see figure 29).
We think that tourism sector has a big potential as Indonesia’s tourism revenue only
reached 1.4% of GDP (vs. Thailand and Malaysia at 11.8% and 6.1% of GDP), or equivalent
with USD13.7bn (which almost four times lower than Thailand’s) (see figure 30 & 31). The
good news is visitor arrival has increased significantly in the past years due to the building of
new airports. Total visitor arrival increased by 38% in 2010 compare to 2000 and increased
by 100% in 2017 than 2010. What is more interesting is the growth of China visitor to
Indonesia has jumped by 346% in 2017 and ranked number two when it was not even in the
radar in 2000 (see figure 32). We believe that the jump on China visitor was partly as a
consequence of China’s direction to gradually change its GDP structure to be more private
consumption base.
FIGURE 28. THAILAND’S CURRENT ACCOUNT SURPLUS IS FIGURE 29. INDONESIA’S SERVICES BALANCE REMAINS IN
SUPPORTED BY THE SURPLUS IN SERVICES BALANCE DEFICIT TERRITORY WITH SMALL SURPLUS ON TRAVELLING
Thailand's Current Account Balance (USD mn) Indonesia's Current Account Balance (USD mn)
150 50
40
120
30
90 20
60 10
0
30 -10
0 -20
-30
-30
-40
-60 -50
2010
2011
2013
2014
2016
2017
2018
2012
2015
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Goods Services Primary Income Secondary Income Goods Services Primary Income Secondary Income
Source: CEIC Source: Bank Indonesia
FIGURE 30. INDONESIA’S TOURISM REVENUE TO GDP IS LOWER FIGURE 31. …INCLUDING IN NOMINAL TERMS
COMPARED TO PEERS…
Tourism Revenue to GDP (%) Tourism Revenue (USD bn)
18.0 16.4 60
51.1
15.0 50
11.8
12.0 40
9.0 30
6.1 6.0 20.8 19.5
6.0 20
13.7
3.0 1.8 10 5.7

1.4 3.5
0.0 0
Cambodia Thailand Malaysia Singapore Philippines Indonesia Thailand Malaysia Singapore Indonesia Philippines Cambodia
FIGURE 32. INDONESIA’S VISITOR ARRIVAL DATA BASED ON COUNTRY

No. Country Visitor Arrivals 2017 Country Visitor Arrivals 2010 Country Visitor Arrivals 2000
1 Malaysia 2,121,888 Singapore 1,373,126 Singapore 1,427,886
2 China 2,093,171 Malaysia 1,277,476 Japan 643,794
3 Singapore 1,554,119 Australia 771,792 Malaysia 475,845
4 Australia 1,256,927 China 469,365 Australia 459,994
5 Other Asia 1,027,685 Japan 418,971 Taiwan 356,436
6 Japan 573,310 South Korea 274,999 South Korea 213,762
7 India 536,902 Taiwan 213,442 USA 176,379
8 South Korea 423,191 United Kingdom 192,259 United Kingdom 161,662
9 United Kingdom 378,131 Philippines 189,486 Germany 151,897
10 USA 344,766 USA 180,361 Netherlands 105,109
Total Visitors 13,964,761 7,002,944 5,064,217
Source: CEIC
In order to maintain the positive momentum, the government has planned the “10 New
Bali” growth strategy, aimed to replicate the effects of tourism to Bali’s economy to be
more broad-based (the ten sites are Lake Toba, North Sumatra, Tanjung Lesung, Banten,
Seribu Island (Jakarta), Tanjung Kelayang Beach (Bangka Belitung), Borobudur Temple
(Central Java), Mount Bromo (East Java), Mandalika (West Nusa Tenggara), Labuan Bajo
(East Nusa Tenggara), Wakatobi (South Sulawesi), and Morotai Island (North Maluku) (see
figure 33).
The Ministry of Tourism specifically targets toursim to be the highest contributor of the
foreign exchange by 2020, and its contribution has actually increased significantly from
increased significantly from USD 10.1bn in 2013 to USD13.6bn in 2016 (see figure 34). For
the 10 New Bali, the Ministry of Tourism calculates the program to add USD10bn to the
foreign exchange received in 2019, which is a considerable amount, on top of the average
USD11.8bn of tourism FX contribution in 2013-2016. Despite that, investment value of
US20bn in 2019 is needed to establish the New 10 Bali, for which the Ministry of Tourism
explicitly stated that half of them (USD10bn) must be sourced from private investment –
that is the main challenge.
FIGURE 33. THE NEXT 10 BALI CONTRIBUTION

2019 Projection
No. Destinations Investment Foreign tourists visits
Additional FX (USD billion)
(USD billion) (million people)
1 Lake Toba, North Sumatera 1.6 1 1
2 Tanjung Lesung, Banten 1.4 0.5 0.5
3 Kepulauan Seribu, Jakarta 4 1 1
4 Tanjung Kelayang Beach, Bangka Belitung 1.5 1 1
5 Borobudur Temple, Central Java 1.5 2 2
6 Mount Bromo, East Java 1.4 1 1
7 Mandalika, West Nusa Tenggara 3 2 2
8 Labuan Bajo, East Nusa Tenggara 1.2 0.5 0.5
9 Wakatobi, South Sulawesi 1.5 0.5 0.5
10 Morotai Island, North Maluku 2.9 0.5 0.5
Total 20 10 10
Source: Ministry of Tourism, Presentation material - Head of Development Acceleration in 10 Priority Tourism Destination, Dec 18, 2017
FIGURE 34. THE FX RECIEVABLE FROM TOURISM HAS CONTINUED TO INCREASE
Source: Ministry of Tourism
2019 Economic Growth: Domestic Demand Driven
Indonesia’s economic growth was solid last year as it averaged 5.17% yoy until the third
quarter, advancing relative to the FY17 at 5.07%. Private consumption reached 5.1% in
2Q18 or average of 5.03 in 9M18, passing the 5% threshold after showing muted numbers
since end of 2016. Last year’s government expenditure was more rapid than the previous
year’s, with the big push on social spending. Additionally, gross fixed capital formation or
investment increased by 7% in 9M18 (vs. 6.0% in 2017), supported by infrastructure projects
completion. In the contrary, net exports performance was non-stellar as domestic demand
spawned higher imports whereas exports moderated on the back of global uncertainties.
Overall, we forecast a 5.16% economic growth for FY18, as the 4Q18 GDP numbers will be
released this month.
We revised our economic growth forecast to 5.22% in 2019 (vs. initially 5.10%) due to
solid domestic demand. Private consumption would remain solid at 5.1% this year on the
back of manageable inflation risk and still supportive fiscal spending. Re-iterating our view,
any fuel price hike post-election will be small followed by limited pass through of producers
cost to consumer prices (see in our inflation section after this). Besides low inflation, the
consumption booster is expected to be supported by government-consumption-driven
expenditure and this is reflected on the 2019 budget. The social spending and village fund
are the only two posts (outside of other expenditure) that recorded a higher growth
compared to total fiscal spending growth this year. Economically, the higher social
spending is logical due to two factors: first, if we want to maintain the economic growth
level above 5%, then private consumption is the key as it accounts 56% of Indonesia’s GDP
pie, and second, actually the purchasing power of low-class consumers has yet to fully
recover. The employment growth in labor intensive sectors such as manufacturing,
agriculture and whole sale (accounting 63% of total labor) has been subdued in 2018 (see
figure 35 & 36). Meanwhile, the highest employment growth occurred in services sector
such as electricity, information & communication, and transportation, where the sector has
less labor absorption capacity and requires high skill. Based on working hour, the
employment of part time jobs continues to increase higher compare to full time job (see
figure 38).
1H19 would be private consumption; 2H19 on investment. Overall, we believe that

private consumption will be dominant in the first semester supported by low inflation and
fiscal stimulus. If we see the social spending distribution last year, 2019 spending will likely
be front-loaded in the first half, but not by that much. The proportion of realization
between 1H18 and 2H18 for social spending is 53.6% and 47%, respectively. We also believe
that the election related spending would have an additional contribution to economic
growth, reflected from the contribution of non-profit institution variable to the GDP. Based
on past experience, the non-profit institution tends to contribute 0.1 - 0.2ppt higher to
growth during the election year. Investment growth is expected to remain flat along 1H19.
The story will change, however, as the economy will be pushed by investment in the second
semester. The diminishing political uncertainty, tax incentives, and infrastructure
completion, are the three factors supporting the higher investment. Furthermore, we
expect economic growth to continue its momentum in 2020, reaching 5.37%.
FIGURE 35. THE CORRELATION BETWEEN EMPLOYMENT FIGURE 36. 2018 EMPLOYMENT GROWTH BASED ON SECTOR
GROWTH AND LABOR PROPORTION
Employment Growth and Labor Proportion 2018 Employment Growth
35 30 27.8
30 25
Agriculture
20
25
15 11.0 11.9
Wholesale & Retail 9.2
20 10 6.6
Manufacturing 3.7 3.9 4.2 4.9
5 2.0 2.2 2.7
15 0.1 0.2 0.6 1.5
0
10 -5
5 Electricity & Gas
Real Estate
0
-5 0 5 10 15 20 25 30
-5
Employment Growth 2018
FIGURE 37. MONTHLY AVERAGE WAGE (IDR) FIGURE 38. THE GROWTH OF PART TIME JOBS HAS OUTPACED
FULL TIME JOBS IN THE LAST TWO YEARS
No Sector 2018 2015 Growth for Full and Part time Job (%)
1 Financial and Insurance Activities 4,338,277 3,265,825 8.0
2 Information and Communication 3,928,092 3,306,611
3 Electricity and Gas Supply 3,926,869 2,740,334 4.0
4 Real Estate Activities 3,759,729 3,044,011
5 Public Services 3,739,742 2,999,404
0.0
6 Mining 3,496,989 2,518,958
7 Business Activities 3,472,259 2,664,187
-4.0
Human Health Services and Social
8 3,434,559 3,094,524 Part time job (1-34 hours)
Services
Full time job >35 hours
9 Transportation and Storage 3,202,843 2,357,391 -8.0
2014 2015 2016 2017 2018
10 Education 2,892,613 2,322,991
11 Construction 2,653,434 2,135,859
12 Manufacturing 2,484,821 1,731,475
Wholesale and Retail Trade; Repair of
13 2,278,614 1,591,648
Vehicles
Water Supply, Sewerage, Waste
14 2,236,787 1,676,460
Mangement,
Accomodation and Food Services
15 2,145,032 1,605,714
Activities
16 Other Service Activities 1,638,021 1,096,217
17 Agriculture 1,259,728 903,780
Expecting Manageable Inflation
Low inflation saga to continue. It has been a good four years for inflation as its trend has
continued to be below 4%; in fact, it marked 3.13% yoy in YE18, lower than 3.61% in YE17.
Food prices have been very manageable, marking a 0.69ppt contribution to FY18 inflation,
distinctive compared to 1.29ppt average contribution in 2012 – 2018. Besides the more
subtle weather condition, this achievement was also due to government’s effort to manage
the supply side inflation. The government has taken reforms on managing the distribution
of prominent food goods while also being more open on imports for supply and demand
management. Additionally, the low level of inflation was also due to the high base effect
from the 2017 electricity price increase and the unchanged administered prices last year.
We expect inflation to remain manageable at 3.8% this year. Indeed, there is a possibility
of administered price adjustment post-presidential election, yet any adjustment will be
limited in our opinion thanks to the lower energy prices. The potential price adjustment of
RON 88 (or premium product) is expected to only range between 10% - 15%. Based on our
estimation, every 10% increase on RON 88 price, there will be an additional inflation
contribution of 0.3ppt – 0.5ppt. We also think the risk of pass through cost from producers
to consumers have subsided amid the lower oil price and stable exchange rate. The Whole
Sales Price Index – non-oil and gas – has eased to 3.8% yoy in Dec18 from 4.3% yoy in Jul18.
Furthermore, we expect YE20 inflation to remain stable at 3.7%.
The potential impact on CPI Rebasing: lower volatility. Indonesia would likely conduct a
CPI rebasing in 2H19, changing from 2012 base year to 2017 base year. If we look at the
pattern of the last three rebasing, the share of food components continues to go down,
which this pattern would mostly continue considering the increasing income per capita (see
figure 39). If this is the case, technicality inflation could be lower. For instance, the average
2007 monthly inflation is 0.10% lower using the 2007 CPI base year compare the 2012 CPI
base year (see figure 40 & 41). Meanwhile, the better infrastructure condition should also
lower inflation volatility through lower logistic cost (as explained in the previous post).
Based on our observation, countries with high infrastructure score tends to have lower
inflation volatility (see figure 44). Every 1 score improvement in infrastructure score is
estimated to reduce the inflation volatility by 0.76%.
FIGURE 39. THE WEIGHT OF THE FOOD COMPONENTS HAS DECREASED ALONG THE CPI
REBASING
Weights
Inflation component
2002 2007 2012
Foods 25.5 19.6 18.9
Processed Foods, Beverages, Tobacco 17.9 16.6 16.2
Housing, Water, Electricity, Gas, and Fuel 25.6 25.4 25.4
Clothing 6.4 7.1 7.3
Health 4.3 4.4 4.7
Education, Recreation, and Sport 6.0 7.8 8.5
Transportation, Communication, and Finance 14.3 19.1 19.2
Total 100 100 100
Source: CEIC, BPS
FIGURE 40. MONTHLY AVERAGE INFLATION TENDS TO BE FIGURE 41. …WHICH WAS ALSO THE CASE IN 2007
LOWER USING THE NEW CPI BASE YEAR IN 2012
2012 Monthly Average Inflation (%) 2007 Monthly Average Inflation (%)
0.36 0.35 0.50 0.49

0.35
0.34 -0.05% -0.10%
0.45
0.33
0.32
0.40 0.39
0.31 0.30
0.30
0.29 0.35
0.28
0.27 0.30
CPI base year 2007 CPI base year 2012 CPI base year 2002 CPI base year 2007
Source: CEIC, Mandiri Sekuritas estimate Source: CEIC, Mandiri Sekuritas estimate
FIGURE 42. WPI INFLATION HAS EASED IN-LINE WITH THE FIGURE 43. THE INFLATION RISK: UNSTABLE WEATHER
DECLINE IN OIL PRICE CONDITION
Nino Index
2.5
El Nino (dry)
2
1.5
1 1.0
0.5
-0.5
-1
La Nina (wet)
-1.5
May-13 Feb-14 Nov-14 Aug-15 May-16 Feb-17 Nov-17 Aug-18 May-19F
Source: CEIC Source: BMKG
FIGURE 44. BETTERINFRASTRUCTURE SCORE RESULTS TO LOWER INFLATION VOLATILITY
The correlation between Infrastructure Core with

Inflation Volatility
2.5
Average StDev of YoY inflation (monthly)

2.0
Y=2.7088-0.5971*X
1.5
1.0 Indonesia
0.5
Thailand Germany
0.0
2 2.5 3 3.5 4 4.5
Average LPI Score of 49 countries
Source:LPI, CEIC, Mandiri Sekuritas estimate
2018 Fiscal Realization and Outlook
2018 budget deficit reached -1.76% of GDP. Total revenue reached 102.5% compared to
target, as non-tax revenue recorded a significant windfall due to higher oil price and
exchange rate depreciation, offsetting the tax shortfall. The realization of government
expenditure, on the other hand, reached 99.2% of target with energy subsidy above plan at
162.4%. Meanwhile, capital spending realization reached 90.7%, implying a contraction of -
11% in 2018. Overall, last year’s positive fiscal achievement was a combination of tax
reform, manageable spending, and also partly supported by higher energy prices. Going
forward, the challenge will still be on tax, as it is set to grow by 17.4% this year vs. nominal
GDP growth of around 10%.
Total revenue reached 100%, the first time since 2011. It reached IDR1,942tn (vs. IDR
1,895tn in APBN 2018), accelerating by 17% from 7% in 2017, as non-tax revenue recorded a
significant surplus of IDR132tn than target (almost three times bigger than the surplus in
2017), offsetting the tax shortfall of IDR97tn. Despite the tax shortfall, the amount is smaller
than the IDR129tn in 2017, and tax actually grew by 13.2% (vs. 4.6% in 2017). The high
energy prices also contributed to the tax revenue growth, considering mining is one of the
two sectors that recorded higher tax growth in 2018 (see figure 45). As a description,
plantation and mining accounts 6% of total tax revenue in 2018. All in all, the tax to GDP
ratio improved to 11.5% of GDP in 2018 (vs. 10.7% in 2017) (see figure 46).
FY18 government expenditure reached 99.2% of target or increased by 10% (vs. 8% in

2017). Consumption-driven-spending increased the most, such as for social spending and
energy subsidy (both increased by 52% and 57% in FY18) with their realization reaching
above 100% than target (see figure 47). “Other expenditure” section also recorded a large
increase of 77%, likely owing to the natural disaster fund along last year. Meanwhile, capital
expenditure declined by -11% (vs. 25% growth in 2017), which is not surprising due to the
Government’s target to reduce import pressure. Overall, budget deficit reached -1.76% of
GDP (the lowest deficit since 2011), whereas the primary fiscal deficit narrowed significantly
to – IDR2tn from – IDR 124tn in 2017 (see figure 48 & 49).
FIGURE 45. MINING SECTOR RECORDED HIGHER TAX REVENUE FIGURE 46. TAX RATIO TO GDP INCREASED AFTER A SERIES OF
GROWTH IN 2018 COMPARED TO 2017 DECLINE
Tax Revenue Growth based on Sector (%) Tax Ratio to GDP (%)
15 14.6
40.8 14.3
Mining
51.2
14 13.7
Trade 25.1
23.7
13
Agriculture 28.8
21.0
12 11.6 11.5
Financial Sector 8.6
11.9 10.8 10.7
11
Manufacturing 18.3
11.1 2017
10
7.2 2018
Construction & Real Estate
6.6
9
0 20 40 60 2012 2013 2014 2015 2016 2017 2018
Source: MoF Source: CEIC
FIGURE 47. 2018 FISCAL REALIZATION
25 Tax Revenue Growth (%) 40

Non-Tax Revenue Growth (%)
30.8
20.8 30 23.3
20 18.4 18.8
17.4 20
16.7 12.4
10 6.1
15 13.2 0.8 2.5
12.2
0
9.9
10 8.2 -10
-7.1
6.5
-20
4.6
5 3.6
-30
-40 -35.9
0
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 T
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 T
Social Spending Growth (%) Personnel Spending Growth (%)
60 51.7
20 18.7
40 18
16.0
21.8 21.6 16 15.4
20 11.5
3.6 6.4 6.3 14 12.6 12.0
0 12 10.9
9.9 10.1
-0.8
-7.0 10 8.5
-20
8
-40 6
-48.9 4 2.5
-60
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 T 2
0
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 T
Material Spending Growth (%) 60

Capital Spending Growth (%)
35 32.1
50 46.8 46.2
30 27.7
40
25
21.0 30 23.1 24.6 23.1
20.5
20 20
15.6
10 5.8
15 13.0 12.3 2.4
11.3
0
10
-10
4.1 -11.4
5 2.4 -20
-18.5
-21.3
0 -30
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 T 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 T
Energy Subsidy Growth (%) Interest Payment Growth (%)

25
100
82.6
18.5 19.2
80 20 18.1 17.1
16.9
57.2
60 48.0 15 12.5
40
19.9 10 7.8
20 10.3 6.9
1.1 4.2 5.5
0 5
-20 -10.3 -8.6 0
-40
-5
-60
-5.8
-80 -65.2 -10
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 T 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 T
Source: MoF, CEIC
FIGURE 48. BUDGET DEFICIT REACHED A LOW LEVEL LAST YEAR FIGURE 49. PRIMARY FISCAL BALANCE IMPROVED SIGNIFICANTLY
Budget Deficit to GDP (%) Primary Fiscal Balance (Rp tn)
0.0 84
100
-0.08 51 50 42
-0.5 39
50 30
-0.52 9
-0.68 5
-1.0 -0.87
-0.94 0
-1.04 -1.08 -2
-1.16
-1.5 -1.26
-50
-1.58 -53
-2.0 -1.74 -1.78 -1.75
-1.84 -100
-2.14 -99 -93
-2.5 -2.22
-150 -126 -124
-2.46 -2.49
-2.59 -2.51 -142
-3.0
-200
2019 F
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019: Tax revenue will be the challenge. Tax is expected to increase by 17.4% using the
2018 realization, higher than the initial plan at 10.4%. Therefore, the task will be
challenging as it is less likely that average oil price would surpass USD70/bbl this year due to
the global slowdown risk. Based on our observation, tax revenue growth tends to be below
nominal GDP growth on the absent of significant commodity price increase (see figure 51).
The positive factor will come from the non-tax revenue target considering this year’s target
is 7% below the 2018 realization. As a description, even if non-tax revenue even grows by
0%, the government will still obtain a windfall around IDR30tn. Furthermore, any fiscal risk
could be absorbed from the low budget deficit set at -1.84% of GDP next year (every 0.1%
of GDP is equivalent with IDR16tn).
Consumption-driven-expenditure will still dominate the Government’s spending in

1H19. On the other hand, the Government’s total expenditure is expected to grow by 11.8%
this year (vs. 10.8% in 2018 budget plan). Specifically, the expenditure post to support
consumption is planned to grow higher. Social spending and village gund are expected to
increase by 28% and 16%, respectively, in 2019 (see figure 50). We believe the realization of
the social spending will be front-loaded in the first semester. Meanwhile, capital and
material expenditures are only planned to increase each by 2.4% this year, suggesting the
Government’s focus on maintaining exchange rate stability. The largest expenditure post
increase is in “other spending”, which we believe is a potential source of financing for
disaster risk management and mitigation.
Fiscal Policy Outlook: Investment Driven Policies. We believe the Government’s policy
will be more investment driven in 2019 after the hefty infrastructure expenditure in the last
four years. The priority has shifted to the need to improve the funding of current account
deficit through a more sustainable financing, such as foreign direct investment, and to
increase private investment’s contribution. Several incentives have already been introduced
last year, such as the revision of the tax holiday rule for 18 pioneer industries, the revision of
the negative investment list, and several other policies in the pipeline. All of these
incentives are supported by the completion of big infrastructure projects such Trans Java
this year.
FIGURE 50. FISCAL SPENDING GROWTH IN 2019 FIGURE 51. TAX REVENUE GROWTH TENDS TO BE LOWER THAN
NOMINAL GDP IN ABSENCE OF COMMODITY PRICE HIKE
2019 Government Spending Composition Growth (%) Tax, Nominal and Commodity Growth (%)
Other expenditures 630.8% 25 30
Tax
Social assistance 21.6%
Nominal GDP 20
Village fund 16.9% 20
Total expenditure Commodity Price Index-RHS
11.8% 10
Personnel expenditure 10.1%
15 0
Transfer to region 8.4%
Interest payment 6.9%
10 -10
Energy subsidy 4.2%
Subsidy 3.5% -20
Material expenditure 2.4% 5
Capital expenditure 2.4% -30
Non-energy subsidy 1.7%
0 -40
0% 10% 20% 30% 40% 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 T
Source: CEIC, MoF Source: CEIC, Mandiri Sekuritas
2019: Improving Balance of Payment Condition
2018: Balance of payment balance went from surplus to deficit. The BoP recorded a
deficit of -USD 12.6bn in 9M18 from a surplus of USD10.6bn in the same period in 2017.
Interestingly, the reason for 2018 deficit is totally the opposite compare to 2017. If the
financial account surplus was two times larger than the current account deficit in 2017, the
condition flipped where unfortunately, the current account deficit was twice the size
compare to the financial account surplus last year. In numbers, the current account deficit
widened to –USD22.4bn in 9M18 (-2.85% of GDP) from –USD11.4bn (-1.50% of GDP) in
9M17, whereas the financial account surplus dropped to USD11.0bn from USD22.4bn in the
corresponding period (see figure 52 & 53). On the current account side, the high import
growth (growing by 24% yoy in 9M18) - due to higher oil price and capital goods needs for
infrastructure project - was not able to be offset from the export side (growing by 10% yoy)
as external demand has been sluggish. On the other hand, the financial account surplus
dropped owing to lower net direct investment flows (USD10bn in 9M18 vs. USD14.5bn in
9M17) with the portfolio investment recorded a net foreign outflow (-USD1.3bn vs.
USD18.7bn).
2019: narrower current account deficit; larger financial account surplus. The positive
news is we expect the current account deficit to narrow to -2.8% in FY19 from possibly
-3.0% to -3.1% last year (4Q18 BoP data will be announced in the second week of Feb19).
The narrowing deficit is partly driven due to government’s policies implemented since last
year to stabilize the Rupiah. The top two impacts will be sourced from: i.) bio-fuel program
(B-20 program). If the program is properly implemented, it could reduce oil imports by
USD2bn (0.2% of GDP) this year. ii.) delay on selective infrastructure projects, especially
power plant, could reduce the current account deficit around USD1-2bn per year
(0.1% - 0.2% of GDP). Furthermore, we think it is logical for the government to delay the 35
GW power plants as the economic growth assumption used for this project is higher than
5%. For information, there is around 38% of the total project that has not yet reached
financial close stage.
On the other hand, we believe that financial account surplus should improve on the back of
better portfolio flows and foreign direct investment. Indonesia’s better interest rate and
growth differential should provide incentive of stable volatility on portfolio flows.
Therefore, this year’s balance of payment is expected to turn back to surplus from deficit in
2018.
FIGURE 52. 9M18 CAD WIDENED TWO TIMES LARGER THAN FIGURE 53. …WHILE THE FINANCIAL ACCOUNT SURPLUS
9M17… DROPPED BY THE SAME SIZE
Current Account Balance (USD bn) Financial Account Balance (USD bn)
15 20 9M17
22.5 9M18
9M17 15 10.8
10 -11.4
10
5
5
0
0
-5 -5
Other investment Portfolio Investment
Secondary Income Balance -10
-10 Direct Investment Total
Primary Income Balance 9M18
-15
Services -22.4
-15
1Q04
3Q04
1Q05
1Q06
3Q06
1Q07
1Q08
3Q08
1Q09
1Q10
3Q10
1Q11
1Q12
3Q12
1Q13
1Q14
3Q14
1Q15
1Q16
3Q16
1Q17
1Q18
3Q05
3Q07
3Q09
3Q11
3Q13
3Q15
3Q17
3Q18
1Q04
3Q04
1Q05
3Q05
1Q06
3Q06
3Q07
1Q08
3Q08
3Q09
1Q10
3Q10
3Q11
1Q12
3Q12
3Q13
1Q14
3Q14
1Q15
3Q15
1Q16
3Q16
1Q17
3Q17
1Q18
1Q07
1Q09
1Q11
1Q13
3Q18
Source: CEIC, Bank Indonesia Source: CEIC, Bank Indonesia
FIGURE 54. 9M18 BOP HAS ENTERED DEFICIT TERRITORY FIGURE 55. BASED ON OUR MODIFIED TAYLOR RULE MODEL,
THIS YEAR’S POLICY RATE IS BETWEEN 6.0% - 6.25%
Balance of Payment (USD bn) Optimum Policy Rate vs. Actual 7DRRR (%)
20
6.50
15 1H17 6.00 - 6.25
6.00
5.3
10
5.50
5 5.00
0 4.50
-5 4.00
FA CA BoP 1H18 3.50
-10
-7.4
-15 3.00
7DRRR (%) Optimum Policy Rate (%)
2Q04
4Q04
2Q05
4Q05
2Q06
2Q07
2Q08
4Q08
2Q09
4Q09
2Q10
4Q10
4Q11
4Q12
2Q13
4Q13
2Q14
4Q14
2Q15
2Q16
2Q17
4Q17
2Q18
4Q06
4Q07
2Q11
2Q12
4Q15
4Q16
2.50
2010Q1
2010Q4
2011Q3
2012Q2
2014Q3
2015Q2
2016Q1
2016Q4
2019Q1
2019Q4
2013Q1
2013Q4
2017Q3
2018Q2
Source: CEIC, Bank Indonesia Source: Mandiri Sekuritas estimate
We pencil in one time policy rate hike this year. As current account deficit is expected to
narrow, inflation level would be manageable, followed by a more dovish tone Federal
Reserve, we believe that Bank Indonesia will only need to hike its policy rate by one time (25
bps) to 6.25% this year. This is also supported by our modified Taylor Rule mode where the
optimum policy rate based on the macro forecasts is 6.0% - 6.25% (see figure 55). On the
liquidity side, we believe that the Rupiah and FX liquidity should improve, especially in
2H19, in-line with the improvement on the Balance of Payment side. The government is
also expected to make policy regarding export proceeds for natural resources official in the
near term, to improve the FX liquidity in the onshore system. Below are the details:
1. The policy obligates natural resource exporters (mining, plantation, forestry, and
fishery) to repatriate their proceeds to Indonesia’s financial system and placed
them in a special banking account. The details on the natural resources export will
later be set through a Ministry of Finance rule.
2. Exporters need to place their export proceed at the latest 3 months after the
export registration paper is issued. Further details on this matter will be stipulated
in Bank Indonesia regulation.
3. There is no mandatory rule to convert the export proceed to Rupiah.
4. Exporters would enjoy lower final income tax on their deposit, with differences
compared to the initial rule (see the explanation below).
5. Exporters have to give a clear reason and underlying transaction for the usage of
the proceeds. For instance, they could still use the proceeds for import, investment
or/and debt payment purposes.
6. Sanction: If the export proceeds are not placed in Indonesia’s financial system, the
exporters could be fined or even their export permits /business could be revoked.
Overall, the total natural resources export reached USD70 – 80bn in 2017. Even if the data
tells us that almost 93% of the proceeds have already been placed in the country, we are
uncertain on how many that may have been repatriated back to overseas. This explains that
even when the country’s commodity exports are doing well, it does not necessarily translate
into a stronger or more stable Rupiah, as most of the export proceeds are likely to still be
placed overseas. Therefore, the new rule requires exporters to give clear reasons if they
want to put their proceeds overseas in the future and the underlying transaction
information on the proceeds usage.
The government also added additional sweetener on the lower final withholding tax for
deposit interest, where exporters could enjoy the tax incentive continuously as long as the
export proceed stays in the domestic financial system (previously, the incentive only applies
for one term period on the deposits). So is this tax incentive offer attractive enough
compared to peers? We believe yes. For example, the current average 3 month time
deposits (3M TD) for US Dollar currency in Indonesia is 2.33% p.a. If the exporters decide to
put their export proceeds in the deposit for 3 months, meaning they are subject to a 7.5%
final withholding tax on the deposit interest, the total interest gain is 2.16% p.a. As
compared to Singapore, which has non-tax deductible deposits with interest rate on
average at around 1.9% p.a. for 3M TD in US dollar currency, Indonesia’s deposit rate is still
attractive. Not to mention the fact that these exporters still need to pay for 25% corporate
income tax in Indonesia if they prefer to put in their money in a Singaporean bank.
Macro risk: Wider CAD risk could not be ruled out. Even when imports have started to
slow down, the wider current account deficit risk could not be ruled out assuming the global
economic growth slowdown intensifies, hitting the export part. Furthermore, if the tit-for-
tat on trade war continues to intensify, it could speed up the risk. The perfect example to
describe this risk is the large trade deficit in November and December last year which were
due to the contraction on export. Therefore, we estimate an average exchange rate at
IDR14,908/USD this year.
What are the most important countries for Indonesia economy? The top three countries
are China, Japan and United States. If we look based on the foreign direct investment
export and import, China and Japan has been in the top three last year. Thus, it becomes
logical if China is the most sensitive country for Indonesia. China holds around 15% of
Indonesia’s total export where the top three commodities exported to China are fuel
(mostly coal), vegetable (mostly CPO) and wood. Based on our simple simulation, every 1%
decrease on China’s growth will increase the current account deficit by 0.1% of GDP in the
current year.
FIGURE 56. 2018 COUNTRY RANK IN INVESTMENT, EXPORT, IMPORT AND VISTOR ARRIVAL
Investment Export Import Visitor

No Country Value Country Value Country Value Country Arrival
(USD bn) (USD bn) (USD bn) (person)
1 Japan 3.75 China 25.00 China 41.07 Malaysia 2,121,888
2 China 1.83 Japan 18.05 Singapore 19.93 China 2,093,171
3 Hong Kong 1.64 United States 16.94 Japan 16.64 Singapore 1,554,119
4 South Korea 1.37 India 12.61 Thailand 10.19 Australia 1,256,927
5 Malaysia 1.18 Singapore 11.57 United States 9.39 Other Asia 1,027,685
6 United States 1.00 South Korea 8.80 South Korea 8.32 Japan 573,310
7 Netherlands 0.78 Malaysia 8.63 Malaysia 8.01 India 536,902
8 Australia 0.34 Thailand 6.40 Australia 5.46 South Korea 423,191
9 Thailand 0.32 Philippines 6.36 India 4.60 United Kingdom 378,131
10 United Kingdom 0.24 Taiwan 4.34 Saudi Arabia 4.48 United States 344,766
Source: CEIC
FIGURE 57. EXPORTS HAVE SLOWED DOWN DEEPER FIGURE 58. …WHICH IS MAINLY SOURCED FROM THE NON-OIL
COMPARED TO IMPORTS… & GAS TRADE PERFORMANCE
Total Non-Oil and Gas Trade Growth (YoY% of 3mma) Total Non-Oil and Gas Trade Growth (YoY% of 3mma)
30 30
20 20
10 10
0 0
Import Import
-10 -10
Export Export
-20 -20
Apr-16
Apr-17
Apr-18
Apr-16
Apr-17
Apr-18
Feb-16
Feb-17
Feb-18
Feb-16
Feb-17
Feb-18
Jun-16
Jun-17
Jun-18
Jun-16
Jun-17
Jun-18
Dec-16
Dec-17
Dec-18
Dec-16
Dec-17
Dec-18
Oct-16
Oct-17
Oct-16
Oct-17
Aug-16
Aug-17
Aug-18
Oct-18
Aug-16
Aug-17
Aug-18
Source: CEIC, Mandiri Sekuritas Source: CEIC, Mandiri Sekuritas Oct-18
Negative Balance of Payments is likely in 2018

Indonesia’s poor export performance in 2018 had dragged down the Balance of Payments.
Despite its possibility of positive net balance due to USD2.9bn net capital inflows in 4Q18,
we believe that 2018 overall Balance of Payments will turn to negative (vs USD 11.6bn in
2017). Balance of Payment (BoP) is one of indicators for economic fundamental as it
measures the capability of a country to obtain foreign exchanges. The economy shall suffer
if it has persistent negative BoP since foreign currency is required in international
transactions, such as for import, foreign debt payment and other transfers. It, hence,
becomes necessary for a country to accumulate sufficient foreign reserves. Usually, it is
maintained above the international standard of reserve adequacy of three months of
imports. Foreign reserve is the net difference between the current account, which is
determined by net export and net income transfer, and capital and financial account, which
captures the traffic flow of investments.
FIGURE 59. INDONESIA’S BALANCE OF PAYMENT 2013 – 3Q18 (BILLION OF USD)

2018
Items 2013 2014 2015 2016 2017
Q1 Q2 Q3 Total
Current Account -29.11 -27.51 -17.52 -16.95 -17.31 -5.60 -7.98 -8.85 -22.42
Financial Account 21.93 44.92 16.84 29.31 29.36 2.30 4.53 4.16 11.00
Overall Balance -7.33 15.25 -1.10 12.09 11.59 -3.86 -4.31 -4.39 -12.55
Foreign Reserves 99.39 111.86 105.93 116.36 130.20 126.00 119.84 114.85
- In Months of Imports &
5.5 6.4 7.4 8.4 8.3 7.7 6.9 6.3
Official Debt Repayment
Current Account (% GDP) -3.19 -3.09 -2.22 -1.82 -1.70 -2.17 -3.02 -3.37 -2.86
FIGURE 60. INDONESIA’S BALANCE OF PAYMENT 2010 – 3Q18 (BILLION OF USD)

50 130.20 135
40 130
30 125
20 116.36 114.85 120
112.78 111.86
10 110.12 115
0 99.39 105.93 110
-10 105
-20 96.21 100
-30 95
-40 90
2010 2012 2014 2016 1Q-3Q18
Current Account (LHS) Capital Account (LHS)

Financial Account (LHS) Foreign Reserves (RHS)
BoP is one of indicators for economic fundamental as it measures the capability of a country
to obtain foreign exchanges. The economy shall suffer if it has persistent negative BoP since
foreign currency is required in international transactions, such as for import, foreign debt
payment and other transfers. It, hence, becomes necessary for a country to accumulate
sufficient foreign reserves. Usually, it is maintained above the international standard of
reserve adequacy of three months of imports. Foreign reserve is the net difference between
the current account, which is determined by net export and net income transfer, and capital
and financial account, which captures the traffic flow of investments.
In 2018, Indonesia must experience negative BoP due to widening current account deficit
(CAD), reaching 2.86% of GDP in January – September 2018, caused by accelerating
domestic economy, thus increasing demand for goods from abroad (mostly raw material
and capital goods), and export deceleration due to lower commodity prices, China’s
economic rebalancing and the US-China trade war tension.
At the same time, Indonesia must deal with declining financial account surplus affected by
the high global financial market uncertainty, triggered by the Fed’s monetary policy
normalization, which has caused capital reversal. Accumulatively, overall balance up to the
third quarter this year booked USD 12.6 billion deficits, resulting foreign reserves to plunge
from USD 130.2 billion at the end of 2017 to USD 114.8 billion at 3Q18. The latest data,
however, showed that the foreign reserves has improved to USD 120.7 billion in 12M18,
equivalent to finance 6.7 months of imports or 6.5 months of imports and government
external debt service). It is still maintained to be above the international reserve adequacy
standard of 3 months of imports.
FIGURE 61. INDONESIA’S CAD TO GDP RATIO AND FORECAST
50 0.67 1
0.19
40 0.5
30 0
20
-0.5
10
USD mn
-1
%
0
-1.70 -1.5
-10
-2
-20 -1.82
-30 -2.5
-2.22
-40 -2.65 -3
-2.78
-50 -3.19 -3.09 -3.10 -3.5
2010 2011 2012 2013 2014 2015 2016 2017 2018F 2019F
Goods (LHS) Services (LHS)

Primary Income (LHS) Secondary Income (LHS)
CA/GDP (RHS)
Source: Bank Indonesia, OCE Bank Mandiri’s calculation
Looking to trade data in 4Q18, we expect that CAD to GDP ratio in 4Q18 can be higher than
in 3Q18, or between -3.7% to -3.9%. This is well-above our previous forecast of -2.89%.
Total trade deficit of the quarter is already larger than the total trade deficit in the third
quarter. Thereby, full-year CAD to GDP ratio is projected to be around -3.10%, above our
initial forecast of -2.87% in 2018.
This, indeed, gives rising alert for the government to overcome this widening CAD issue.
The government actually has implemented various policies to curb the widening CAD, and
we see that these continuing efforts by providing export incentives, enhancing export
competitiveness, strengthening trade cooperation with non-traditional markets, managing
consumer good imports (rising PPh 22 tariff), imposing biodiesel use (B20) and increasing
the level of domestic components for infrastructure projects (TKDN) shall start taking a full
effect next year. We, thus, project that CAD to GDP ratio in 2019 to shrink to around -
2.78%.
FIGURE 62. INDONESIA’S GOODS BALANCE (BILLION OF USD)

60
50
40 31.00 33.83
30 18.79
5.83 6.98 14.05 15.32
20 8.68
2.22
10
0
-10
-20
-30
2010 2011 2012 2013 2014 2015 2016 2017 1Q-3Q18
Non-Oil and Gas Oil Gas Other Goods Goods Balance
Goods balance is prone to decline in 2018, breaking the upward trend of 2013 – 2017. Latest
data show that cumulatively, goods balance of 1Q18 to 3Q18 is around USD 2.22 billion
surpluses, notably lower than 2017 full-year reading of USD 18.79 billion surpluses. There
are, at least, two key factors contributing to this decline. First, non-oil and gas balance
tends to shrink in 2018, mostly caused by non-oil and gas imports outpacing exports, as a
result of accelerating domestic economic growth that encourages the demand for imported
raw material and capital goods. Second, the perpetual deficit of oil balance is apt to widen
again in 2018 following the increasing trend of oil price, which has begun in 2016. This
reading, indeed, indicates the need for the government to immediately boost non-oil and
gas exports, and reduce oil imports.
FIGURE 63. INDONESIA’S SERVICES BALANCE (BILLION OF USD)

10
0
-5.73
-5 -7.08 -7.83
-9.79 -8.70
-9.80 -10.56 -10.01
-12.07
-10
-15
2010 2011 2012 2013 2014 2015 2016 2017 Q1-3Q18
Travel Transportation: Passenger Transportation: Freight

Other Services Services Balance
We see that services balance in 2018 will be not much changing that the 2017 reading. We
project that the balance will stay deficit around USD 7 – 8 billion in 2018. According to the
latest data, cumulatively to 3Q18, the deficit has reached USD 5.73 billion. The deficit is
mainly caused by the negative balance on transportation balance. Passenger transportation
in 2018 is projected to be still deficit around USD 1 billion as the number of domestic
tourists travelling abroad for vacation, business trips and pilgrimage remains high.
Meanwhile, the deficit on freight transportation in 2018 is forecasted to be higher
compared to the 2017 reading, following the increasing trend of good imports. On the other
side, travel balance is predicted to keep posting a surplus in 2018. Until 3Q18, the balance
has booked USD 4.04 billion surpluses. The surplus is mostly due to the increase in both the
number of foreign tourists visiting Indonesia, and amount of their spending per person.
2018 Asian Games event in Jakarta and Palembang also has a major contribution in the last
year surplus.
Hence, this reading signals that there is a huge opportunity to improve and develop
domestic tourism sector as it has become one of the most potential sectors to accumulate
foreign reserves. The government, moreover, needs to optimize domestic freight services in
order to significantly reduce the deficit on services balance.
FIGURE 64. INDONESIA’S PRIMARY INCOME BALANCE (BILLION OF USD)

0
-5
-10
-15 -20.70
-20 -23.72
-26.55 -26.63 -27.05
-25 -29.70 -28.38 -29.65
-30 -32.76
-35
2010 2011 2012 2013 2014 2015 2016 2017 1Q -
3Q18
Direct Investment Portfolio Investment

Other Investments Others
Primary Income Balance
Since 2008 Indonesia’s primary income balance always has a tendency to be persistently
deficit. Thus, it shall not surprisingly remain a deficit in 2018. Not changing from previous
years, all primary income groups in 2018 post a deficit with direct investment income group,
as expected, booking the highest deficit. It is mostly due to the growing equity capital
payments as Indonesia keeps booking direct investment surplus in the financial account
balance. The second highest deficit is contributed by portfolio investment income group. It
is due to the larger dividend payments and government bond’s interest payment, following
the historical patterns of portfolio investment surplus in the financial account balance.
FIGURE 65. INDONESIA’S SECONDARY INCOME BALANCE (BILLION OF USD)

7
6
5
5.22 5.51
4 4.81
4.63 4.46 4.50
3 4.21 4.09 4.18
2
1
0
-1
-2
2010 2011 2012 2013 2014 2015 2016 2017 1Q -
3Q18
Government Personal Transfer

Other Current Transfer Secondary Income Balance
Secondary income balance performance has been remarkable. Historically, it always posts
surplus but the trend is weakening in 2016. In 2018, however, cumulatively to Q318, the
surplus (USD 4.81 billion) has surpassed the 2017 full-year reading (USD 4.50 billion). It can
be identified that the main source of the surplus comes from personal transfer balance. It is
mostly personal transfer receipt in the form of remittances, transferred from Indonesians
who work abroad.
This arises the necessary for the government to enhance education, skill and capability of
Indonesian migrant workers to meet the recent global labor market demand, and to
improve protections for them. By doing so, there will be more Indonesian migrant worker
able to work in professional and modern sectors, which promise higher income. This, in
consequent, may increase total remittance receipt, improving Indonesia’s recent current
account balance position.
Managing CAD for a more sustainable economic growth
To accelerate economic growth, it is pivotal for Indonesia to shrink its CAD. According to
Thirlwall (2011), a country may and can run CAD in a short period but it cannot be persistent
and sustained indefinitely since the deficit sooner or later shall hamper GDP to grow.
Furthermore, a country essentially cannot grow faster than its BoP equilibrium growth rate
for a very long period, compelling it to have a slower economic growth in certain point of
time in order to accumulate surpluses.
FIGURE 66. INDONESIA’S GDP GROWTH VS. BOP CONSTRAINED GROWTH
5.56
14 5.6
12 5.5
12.44
5.4
10
5.3
8 5.17
5.72 5.2
6
5.03 5.1
5.01
4
5.07 5.0
4.88
2 3.23 4.9
2.54 2.64
0 1.65 4.8
2013 2014 2015 2016 2017 1Q-3Q18
BoP Constrained Growth, % (LHS) GDP Growth, % (RHS)
Note: BoP constrained growth = export growth divided by domestic income elasticity of import
(Thirlwall's Law)
Source: Bank Indonesia and BPS, OCE Bank Mandiri’s calculation
This happens because financing an ever-growing deficit with borrowing from abroad
becomes more difficult to do. First, when the growth of the capital inflow is greater than
GDP growth, the international debt to GDP ratio will be greatly increasing causing foreign
investors become nervous and panic about the default risk (more severe in the less-
developed countries). Second, foreign investors tend to punish a country with widening
CAD triggering a massive short-term capital outflow which ends up in depreciating local
currency, and domestic liquidity problems. In summary, in the long run BoP becomes a
constraint for the economy to expand (BoP constrained growth). The growth, therefore,
must be consistent with the BoP equilibrium growth in the long run.
We can see from figure 66 that GDP growth trend followed BoP constrained growth. It can
be identified that Indonesia experienced the slowing BoP constrained growth after the end
of the commodity boom era. Export growth was flagging because most of Indonesia’s main
exports are commodities. The constraint was tightening as BoP constrained growth
dropped from 12.44% in 2013 to 1.65% in 2015, resulting in a limited room for GDP to grow
faster. GDP growth consequently slowed down from 5.56% in 2013 to 4.88% in 2015.
In 2016 – 2017, the BoP constrained growth was improving indicating that the constraint on
growth is easing, allowing GDP to grow at a faster pace. The BoP constrained growth in
2017 (5.72%) even booked a higher rate than GDP growth (5.07%), which allowed Indonesia
to have lower CAD and accumulate higher foreign reserves, providing extra room for the
economy to grow faster in 2018. The concern, however, is that the BoP constrained growth
tends to decline again in 2018 (1Q-3Q18). This thereby signals that without a solid effort of
shrinking CAD (boosting export growth and curtailing import growth), GDP growth rate
next year may not be as high as targeted. In other words, this shall disturb Indonesia’s
growth momentum in 2019.
FIGURE 67. INDONESIA’S CA TO GDP RATIO VS. BOP CONSTRAINED GROWTH
14 0.0
12.44
12 -0.5
10 -1.0
8 -1.70 -1.5
-1.82
6 -2.22 -2.0
4 2.54 5.72 -2.5

2.64
-3.19
2 3.23 -2.86 -3.0
-3.09 1.65
0 -3.5
2013 2014 2015 2016 2017 1Q-3Q18
BoP Constrained Growth, % (LHS) CA, % of GDP (RHS)
Source: Bank Indonesia and BPS, OCE Bank Mandiri’s calculation
Thirlwall's Law also explains that widening CAD gives an indication that BoP constrained
growth is prone to decline. However, as long as it does not surpass -3% of GDP (the line
between an under control deficit and a serious deficit), GDP may still be growing at a faster
pace. This can be a bad signal for Indonesia’s next year economy as we project that FY2018
CAD will be slightly above -3%, or around -3.10% of GDP deficit. Thus, this supports our
forecast of limited GDP growth in 2019, or at 5.22% (vs. 5.16% GDP growth forecast for
2018).
The key concept of the law is actually straightforward. When an open economy’s growth
rate keeps accelerating from time to time, and this is not followed by a notable rise in
export growth, the long run outcome will be a BoP crisis, inevitably resulting in the return of
slower growth. Based on the concept, for an open economy, the attempt of increasing GDP
growth must be backed up by policies that may boost export growth in order to have more
sustained foreign exchange inflow.
Developing countries like Indonesia require to earn sufficient foreign exchange to be able to
keep importing intermediate and capital goods, which are needed to increase domestic
investment formation (the engine of growth). When it is true that the need for foreign
exchange can be obtained from capital inflow, the history shows that it is very vulnerable to
the short-term capital flow volatility (portfolio investment). Meanwhile, in order to sustain
foreign exchange inflow, the long-term capital (foreign direct investment) also must be
managed optimally to support export-oriented sectors.
The government in fact has initiated various policies and strategies to foster Indonesia’s
export growth, which are:
a. Export incentives, such as export facilities including import facility for export purposes
(KITE) and bonded zone, access to raw materials, export financing and standard and
non-tariff measure (NTM) fulfillment in export destination countries;
b. Optimizing the existing FTA agreement utilization, increasing market access through
international trade cooperation with non-traditional export markets, and facilitating
market penetration to non-traditional export markets;
c. Fiscal incentives, such as tax holiday and tax allowance for export-oriented industries,
import duty exemption on capital goods and raw material (master list) for investment
purpose and import duty borne by the government (BMDTP);
d. Non-fiscal incentives, including ease for export financing, human resources training,
professional competency certification, transfer of production right, investment
security guarantee in national vital object category in industrial sector (OVNI), product
certification, infrastructure development, promotional assistance, and ease of doing
business acceleration;
e. Export competitiveness enhancement through export diversification and higher value-

added products;
f. Revising Negative Investment List (DNI) to promote export-oriented sectors;
g. Encouragement of export proceeds (DHE) receipt, especially from sectors exporting

natural resources, to be put in the domestic financial market using a special account.
The receipt then must be converted to Rupiah. Currently, the amount of DHE receipt
put into domestic banks is around 93% of total export, but only 15% is converted to
Rupiah.
As some efforts of increasing exports also require structural reform to succeed, hence it
takes time to have a significant effect, the implementation has to be supported by import
reduction strategies in order to improve CAD. The government’s attempts to limit import
growth, include:
a. Restricting consumer goods import by rising PPh 22 tariff
The Ministry of Finance has issued PMK no.110/2018 to increase PPh 22 tariff to a range of
2.5 – 10% on 1,147 products since September 2018. The regulation is claimed to be
successful in delivering a positive result as the Ministry claimed that average daily import
payment for those products in November 2018 has decreased by 41.05%.
FIGURE 68. AVERAGE DAILY IMPORT PAYMENT FOR PRODUCTS SUBJECTED TO PPH 22
TARIFF INCREASE
35
31.10
30
25
USD mn
20 18.30
15.90
15
10.70 9.60
10
5.40 4.80
5 3.22
0
All 1,147 Products Luxury Goods Supporting Goods Pure Consumer
Goods
Jan - Sep 2018 Sep - Nov 2018
Source: The Ministry of Finance
Average daily import payment in January – September 2018 was around USD31.1 million,
while average daily import payment in September – November 2018 was reportedly around
USD18.3 million. The largest drop was seen at imported luxury consumer goods, which
plunged by 49.5% from USD10.7 million to USD5.4 million. Imported supporting consumer
goods came next. It decreased by 39% from USD15.9 million to USD9.6 million, followed by
pure consumer goods, which fell by 32% from USD4.8 million to USD3.22 million.
b. Imposing 20% biodiesel use (B20)
B20 policy has been applied for both public service obligation (PSO) and non-PSO since
September 2018 in order to curb the prone-to-widen CAD this year. The government
targets the foreign exchange saving from B20 implementation in September – December
2018 to be around USD1.02 billion (USD0.52 billion for PSO and USD0.5 billion for non-
PSO) by distributing around 1.91 million KL (0.97 million KL for PSO and 0.94 million KL for
non-PSO) volume of B20. Until October 2018, the realization of B20 utilization for non-PSO
has reached 0.27 million KL, or USD0.15 billion (29% of the target for non-PSO).
Based on our calculation, by replacing 20% of domestic diesel fuel consumption by

biodiesel, the government actually may reduce the full-year CAD to GDP ratio by around 0.1
– 0.2 percentage points. This supports our forecast for 2019 CAD, which is projected to be
back to below 3% of GDP, as we believe that the policy shall be fully and effectively in force
in 2019.
FIGURE 69. INDONESIA’S OIL AND GAS IMPORTS (OCTOBER – DECEMBER 2018)
Total (change, %)
Import Oct-18 Nov-18 Dec-18
yoy mtm yoy mtm yoy mtm Jan-Dec yoy
Oil and Gas 31.78 26.97 28.62 -2.80 -23.33 -31.45 22.59
- Crude Oil 13.2 23.72 62.61 -2.37 -41.90 -45.07 29.70
- Oil Products 44.27 30.46 21.92 -1.63 -13.01 -26.23 21.02
- Gas 29.88 18.28 -1.73 -10.51 -23.63 -21.90 12.49
Volume (change, %)
yoy mtm yoy mtm yoy mtm Jan-Dec yoy
Oil and Gas -4.47 20.37 11.05 9.16 -19.77 -18.66 -2.49
- Crude Oil -22.88 18.44 12.29 -4.18 -34.23 -5.67 -5.67
- Oil Products 8.81 23.59 11.39 15.18 -13.41 -1.11 -1.11
- Gas 13.43 11.73 6.12 23.29 -2.95 1.07 1.07
Average Aggregate Price (change, %)

yoy mtm yoy mtm yoy mtm
Oil and Gas 37.96 5.48 15.81 -10.96 -4.44 -15.72
Source: BPS
Another challenge in decreasing fuel imports is that the global oil price and the Rupiah
exchange rate incline to be highly volatile, with an upward bias, due to a high global market
uncertainty. This may increase the need for foreign exchange to import fuel albeit the
import volume has notably declined. Oil product volume was reportedly decreasing by
1.11% yoy in 2018, but the value was soaring by 21.02% (see figure 69).
To reduce import, the government also decided to increase the level of domestic
components (TKDN), specifically for infrastructure projects. This attempt is more an act to
shift the rising domestic demand for productive imported goods toward local production.
However, it takes time to be fully in force as it also requires some structural reform,
strengthening the value chain from the upstream to downstream sectors, therefore the
impact of the policy adoption mostly can be recognized at least in the middle to long run.
Regional & Sector Economic Outlook
Regional outlook 2019. The main challenge for regional economic growth in 2019 is
normalization of commodity prices, as many provinces are relatively dependent on the
commodity sector. Our view on commodity would say that the price would be corrected to
lower the average price level next year. However, this price is slightly higher than in the end
of 2018. The price drop in the end of 2018 was due to overshoot and different issues in each
commodity. The commodity prices in 2019 may be not too high and not too low, but we
believe this level still gives a sufficient incentive for efficient producers.
FIGURE 70. REGIONAL ECONOMIC GROWTH
Economic Contribution and Growth by Island (%)

Jawa Sulawesi
5.72 5.74
8.19 7.42
5.59 5.61 6.99 6.77 6.94
5.47 6,1%
58,6%
2015
2016
2017
9M18
2019P
9M18
2019P
2015
2016
2017
Bali-Nusa Tenggara
Sumatera
10.45
4.29 4.30 4.58 4.54
3.53 3,0% 5.89
3.73 4.56
2.22
21,5%
2015
2016
2017
2019P
9M18
9M18
2019P
2015
2016
2017
Kalimantan
Maluku-Papua
4.33 2,5%
3.33 3.25 11.82
8,1% 1.37 2.01 7.45
6.35 4.89 5.30
2015
2016
2017
2019
9M18
2019P
2015
2016
9M18
2017
Proportion of Economic Size Economic Growth
Sources: BPS and OCE’s forecast.
Accordingly, we predict that economic growths in provinces on Kalimantan and Sumatera

islands are likely to be slightly lower. The main reason is the price correction for CPO and
coal. Sumatera and Kalimantan in 2019 are likely to grow by 4.54% and 3.25%, respectively.
We estimate that crude palm oil (CPO) and coal prices are each USD 535.5 per ton and USD
85.6 per ton, both are lower than their average price in 2018 (see below for our analysis in
more details).
Conversely, we expect economic growth in Java to be slightly higher due to the acceleration
in manufacturing sector and the positive impact of completed infrastructures starting to
emerge. We think manufacturing is starting to accelerate, indicated by its high investment
growth trend as well as by high import of raw materials and capital goods. We realize that
high import of raw materials and capital goods may create a deficit in the current account
problem, however, in the short term, this issue is hard to resolve. Instead, there is another
way to reduce the current account deficit, which is to accelerate export.
FIGURE 71. ECONOMIC GROWTH 1Q-3Q2018
Aceh
4.33 N.Kalimant
an
N.Sumatera N.Sulawesi
5.01
5.16 C.Sulawesi 6.01
Riau 6.42
Riau Island E.Kalimant
2.74 W.Kalimanta N.Maluku
4.24 an Gorontalo
W.Sumater n 7.80
1.79 6.25 W.Papua
a Jambi 5.09
C.Kalimant W.Sulawesi 8.45
5.01
4.70 Babel an S.Kalimant 6.74
S.Sumatera
4.72 5.56 anl SE.Sulawes
Bengkulu 6.03
4.95 i Maluku
5.05 S.Sulawesi 6.21 5.76 Papua
Lampung DKI 18.34
7.29
5.22 6.12 C.Java
Banten W.Java 5.38
5.76 Bali
5.73 E.Java
DIY 5.99 East Nusa
5.48 W.Nusa
5.79 Tenggara
Tenggara 5.14
-5.40
Source: BPS
Notes: Arrow represents increasing or declining growth compare to 1Q18-3Q18, no arrow means no different growth compare to 1Q18-3Q18
Source: BPS.
Meanwhile, we may see that economic growths in Sulawesi and Bali-Nusa Tenggara are
continuing to accelerate. We predict their growths are slightly higher; 6.94% in Sulawesi
and 4.56% in Bali-Nusa Tenggara in 2019. Yet, we think the engine of growth in Sulawesi
comes from manufacturing industry and infrastructure construction. Further, we predict the
economic growth in Bali and Nusa Tenggara is 4.56%, which is much higher than in 2018.
The main reasons are tourism sector recovery and mining sector production. The tourism
sector has been hit by Mount Agung’s eruption and Lombok’s earthquake, causing a tourist
visit drop in 2018. In 2019, we expect the tourism sector in Bali and Nusa Tenggara will
recover, assuming no other natural disasters in 2019. At the same time, we also expect the
mining production in PT Amman Mineral Nusa Tenggara (PT AMNT), which is the main
economic engine in Nusa Tenggara Barat, is likely to increase. It will likely create another
source of growth in Nusa Tenggara.
FIGURE 72. SECTORAL ECONOMIC GROWTH
2011 2012 2013 2014 2015 2016 2017 2018P 2019P c3Q17 c3Q18
Agriculture. Forestry and Fisheries 3.95 4.59 4.2 4.24 3.77 3.25 3.81 4.08 3.72 4.25 3.91
Mining & Quarrying 4.29 3.02 2.53 0.43 -3.42 1.06 0.69 2.15 2.38 0.89 2.05
Manufacturing Industry 6.26 5.62 4.37 4.64 4.33 4.29 4.27 4.26 4.31 4.21 4.24
Electricity & Gas Supply 5.69 10.06 5.23 5.9 0.9 5.39 1.54 5.67 5.78 1.29 5.48
Water Supply. Sewerage. Waste & Recycle 4.73 3.34 3.32 5.24 7.07 3.6 4.61 4.82 4.65 4.3 4.6
Construction 9.02 6.56 6.11 6.97 6.36 5.22 6.79 6.65 6.25 6.63 6.27
Wholesales and Retail Trade. Repair of Motor Vehicles 9.66 5.4 4.81 5.18 2.59 3.93 4.44 5.27 5.32 4.43 5.14
and Motorcycles
Transportation & Storage 8.31 7.11 6.97 7.36 6.68 7.74 8.49 7.89 8.76 8.59 7.59
Accommodation & Food Beverages Activity 6.86 6.64 6.8 5.77 4.31 4.94 5.55 5.91 6.20 5.57 5.7
Information & Communication 10.02 12.28 10.39 10.12 9.69 8.87 9.81 7.92 8.10 10.1 7.8
Financial & Insurance Activity 6.97 9.54 8.76 4.68 8.59 8.9 5.48 4.02 4.56 6.03 3.59
Real Estate 7.68 7.41 6.54 5 4.11 4.3 3.68 3.63 3.61 3.67 3.4
Business Services 9.24 7.44 7.91 9.81 7.69 7.36 8.44 8.50 8.55 8.16 8.54
Gov't Administration. Defense & Compulsory Social
6.43 2.13 2.56 2.38 4.63 3.19 2.06 7.06 7.10 0.3 6.98
Security
Education Services 6.68 8.22 7.44 5.47 7.33 3.84 3.66 5.70 5.85 2.82 5.51
Human Health & Social Services 9.25 7.97 7.96 7.96 6.68 5 6.79 6.61 6.94 6.96 6.88
Other Services 8.22 5.76 6.4 8.93 8.08 7.8 8.66 8.82 8.55 8.58 8.95
Gross Domestic Product (GDP) 6.17 6.03 5.56 5.01 4.88 5.02 5.07 5.16 5.20 5.03 5.17
Source: BPS and OCE’s forecast.
Going further on sectoral economic growth, we may see that manufacturing and mining
growths are likely to increase to 4.31% and 2.38, respectively, because of large investments
in these two sectors, implying production increase in 2019. Conversely, we predict that
agriculture and construction sectors are likely to grow slower in 2019 because of El Nino
disturbing agriculture production and due to deceleration in the number of infrastructure
projects. Note also that low CPO price in the end of 2018 has caused low expenditure for
maintenance (including for fertilizer), which could cause low production level of CPO in
2019.
Meanwhile, transportation and storage, wholesale and retail trade, electricity and gas
supply, accommodation, and information and communication sectors would grow slightly
higher in 2019 than 2018. We may see that transportation, trade, electricity, and
information and communication will grow as the movement of goods and people will
increase due to more activities in spending and consumption, tourism, and manufacturing
production. Note that the information and communication sector in 2019 is likely to recover
after lower economic growth in 2018 compared to 2017. The lower information and
communication sector growth in 2018 was due to a mobile phone number identity
registration policy which caused the SIM (Subscriber Identification Module) production and
its sales to decrease. In 2019, we think it is going to normalize, because the transition period
of subscriber registration has been completed.
Commodity outlook 2019. By and large, we think commodity prices in the next coming
years will be lower, because we are now entering a normalization of monetary policy in the
US, indicated by tightening policy and increase of Fed Fund Rate (FFR). As the pressure of
FFR increase may be lower in 2019, commodity prices may not be decreasing much. Our
investigation into the prices of five important commodities to Indonesia (crude palm
oil/CPO, crude oil, coal, rubber, and nickel) shows that their prices are negatively associated
with the additional US dollar money supply (M2). This evidence may indicate speculative
motive of the money which drives the price higher. In addition, out plot between DXY index
and commodity price index also shows that stronger USD is negatively correlated to
commodity price. As the USD in 2019 may be less strong, the commodity prices would be
slightly increasing compared to the end of 2018.
FIGURE 73. COMMODITY PRICE IS HIGHLY ASSOCIATED WITH FIGURE 74. COMMODITY PRICE IS ALSO ASSOCIATED WITH
USD M2 DXY INDEX
600 140
600 450
400
120
500 500
350
1st Difference M2 (USD Billion)

Commodity Index (2000 = 100)
100
300

400 400
DXY Index
250
80
300 200 300
150 60
200 200
100
40
50
100
100
0 20
0 -50
0 0
3Q01
2Q02
1Q03
4Q03
3Q04
4Q06
3Q07
2Q08
1Q09
4Q09
1Q12
4Q12
3Q13
2Q14
1Q15
1Q18
4Q18
1Q00
4Q00
2Q05
1Q06
3Q10
2Q11
4Q15
3Q16
2Q17
1Q00
4Q00
3Q01
4Q03
3Q04
2Q05
4Q06
3Q07
2Q08
1Q09
3Q10
2Q11
1Q12
4Q12
2Q14
1Q15
4Q15
3Q16
1Q18
4Q18
2Q02
1Q03
1Q06
4Q09
3Q13
2Q17
Commodity Price Index 1st Difference M2 Index Commodity Price Index DXY Currency
Source: Trademap Source: Bloomberg and OCE Forecast.
In addition, another factor which may drive commodity prices lower is demand from China.
As China is a very large market for commodity sector and the largest for some
commodities, the demand from China is a game changer for commodity prices. According
to Bloomberg forecast, China’s economic growth is in downward trend to 6.2-6.1% in 2019-
2020. Note that China’s economic growth in 2018 was respectively 6.8, 6.7, and 6.5 in 1Q,
2Q, and 3Q18. So, the declining trend of China’s economic growth likely implies weaker
demand for commodities. It means commodity prices would be under pressure to go lower
in coming years.
FIGURE 75. RATIO OF CHINA’S DEMAND TO GLOBAL DEMAND FIGURE 76. COMMODITY PRICE IS HIGHLY CORRELATED TO
FOR EACH COMMODITY CHINA’S ECONOMIC GROWTH
600 16
14
500
China Economic Growth yoy (%)

47.0%

57.0% 56.0%
12
Coal Aluminum Nickel 400
10
#1 #1 #1
300 8
6
200
4
100
2
0 0
50.0% 50.0% 14.0%
1Q00
1Q01
1Q02
1Q03
1Q04
1Q05
1Q06
1Q07
1Q08
1Q09
1Q10
1Q11
1Q12
1Q13
1Q14
1Q15
1Q16
1Q17
1Q18
1Q19
1Q20
Steel Cooper Crude Oil
Commodity Price Index
#1 #1 #2 Commodity Price Index Forecast
China Economic Growth YoY (%)
China Economic Growth Forecast (%)
Note: Commodity price index consists of crude oil, CPO, coal, rubber
and cooper.
Source: Trademap Source: Bloomberg and OCE Forecast.
To sum up, we predict the average commodity prices are likely to be slightly lower in 2019
than 2018. However, compared to the end of 2018, we think the commodity prices in 2019
would be slightly higher. In more details, we predict for 2019 that the average crude oil price
is likely to be USD 65.6 per barrel; CPO (FOB Malaysia) at USD 535.8 per ton; coal at USD
85.6 per ton, and rubber at USD 1.3 per kg.
FIGURE 77. COMMODITY PRICE INDEX MOVEMENT

US Subprime Mortgage Crisis Europe Financial Crisis &
900
China Economic Slowdown
800 Divergen – Supply Side Issue
700
Price Index (100=January 2000)
600
Normal Period
500
400
300
200
100
0
2Q00
3Q00
4Q00
4Q02
1Q03
2Q03
1Q05
2Q05
3Q05
4Q05
3Q07
4Q07
1Q08
2Q08
1Q10
2Q10
3Q10
2Q12
3Q12
4Q12
1Q13
4Q14
1Q15
2Q15
3Q15
2Q17
3Q17
4Q17
1Q18
1Q00
1Q01
2Q01
3Q01
4Q01
1Q02
2Q02
3Q02
3Q03
4Q03
1Q04
2Q04
3Q04
4Q04
1Q06
2Q06
3Q06
4Q06
1Q07
2Q07
3Q08
4Q08
1Q09
2Q09
3Q09
4Q09
4Q10
1Q11
2Q11
3Q11
4Q11
1Q12
2Q13
3Q13
4Q13
1Q14
2Q14
3Q14
4Q15
1Q16
2Q16
3Q16
4Q16
1Q17
2Q18
3Q18
4Q18
Brent Oil Price CPO Malaysia Price LME Copper Price Rubber Price TOCOM Coal Price Newcastle

FIGURE 78. IMPORTANT COMMODITIES FOR INDONESIA, PRICE FORECASTS 2019-2020
End of Period
Average Price 2019 2020
Price
OCE OCE
Bloomberg Bloomberg
2017 2018 2017 2018 Forecast Forecast
Consensus Consensus
(avg) (Average)
Oil (Brent)
66.9 53.8 54.8 71.7 65.6 70 67.6 69.0
USD/bbl
CPO (FOB Malaysia)

601.8 484.8 647.7 559.5 535.8 555.8 582.7 573.8
USD/Ton
Coal
100.8 102.1 88.1 107.2 85.6 91.5 89.4 84.6
(Newcastle)
Rubber
1.5 1.2 1.7 1.4 1.3 NA 1.2 NA
(TSR)
Sources: Bloomberg and OCE’s Forecast.
In relation to the price trend in the end of 2018, we observe that the price drop in this period
was due to overshoot responding to the expectation of the US economic slowdown and due
to different external shocks for each commodity. In more details, crude oil price drop in the
end of 2018 was due to more additional supply from the US shale oil responding to high
price in the beginning of 2018. CPO price drop was due to trade war between the US and
China, causing the soybean price drop, as China charged tariff to soybean from the US.
Rubber price has been staying at a low level due to low demand from China because its
import has been substituted by synthetic rubber. Rubber price drop in the end of 2018 was
likely due to negative sentiment from oil price. Different from other commodities, coal price
stayed at USD 100 per ton, which was fairly high, because of strong demand from China and
India.
In 2019, we predict these commodity prices would likely recover compared to the end of
2018. As we argued above that overshoot was the main reason for the price drop in the end
of 2018. In 2019, the price will rebound compared to the end of 2018. For oil price, we
believe the OPEC is very likely to maintain the price level and may cut its production quota
again to repulse the price. Meanwhile, the CPO price is likely to recover, as we think the
tension of the US-China trade war will reduce. For the rubber price, we think the price is still
under pressure, as technological progress makes synthetic rubber as good as natural
rubber. In contrast, we predict coal price is very likely to be lower compared to both the
average price in 2018 and the price at the end of 2018. The main reason is import restriction
in China, because it already has a large stock in 2018 and possibly more supply from
Indonesia and Australia.
What is the driving sector in 2019? We think manufacturing would be an important sector
that can push economic growth. Note that manufacturing is the largest sector, contributing
almost 20% or more precisely 19.66% in 3Q19. Consequently, this sector is a larger
contributor of GDP than any other sector to economic growth, which was 0.91% in 3Q18. In
more details, we may see the following domestic oriented industries still grow at a high
rate: food and beverages, chemical and pharmacies, and basic metal. The domestic
oriented industries grow satisfactorily high because of high domestic demand supported by
a large proportion of young people, growing income, and infrastructure development, and
possibly property growth in the near future. Meanwhile, we also see some export oriented
industries have started to grow extraordinarily in 2018, i.e. textile and wearing apparels,
leather, rubber products, machinery equipment, and transportation equipment. Greater
export market opportunity in foreign market and rupiah depreciation in combination are
important to increase manufacturing export growth. These is combined with an increase of
investment in this sector, a part of infrastructure, and institutional development may
facilitate for the manufacturing sector to grow higher
FIGURE 79. MANUFACTURING GROWTH IN DETAILS AND ITS PROPORTION TO NON OIL AND GAS MANUFACTURING
Growth Proportions to Manufacturing
2015 2016 2017 c3Q17 c3Q18 2015 2016 2017 c3Q17 c3Q18
Food and Beverages 7,54 8,33 9,23 7,71 9,74 30,84 32,80 34,33 33,90 35,73
Tobacco Processing 6,24 1,58 -0,84 1,53 0,97 5,18 5,18 5,02 5,10 4,99
Textile and Wearing Apparels -4,79 -0,09 3,76 2,89 7,98 6,64 6,35 6,19 6,17 6,37
Leather. Leather Produts. and Footwear 3,97 8,36 2,22 3,95 8,55 1,50 1,56 1,52 0,57 1,60
Wood and Other Wood. Bamboo. and Rattan
-1,63 1,74 0,13 -1,40 2,57 3,72 3,55 3,36 3,35 3,25
Products
Paper and Printing Products Industries -0,16 2,61 0,33 1,96 -1,34 4,18 3,97 3,99 4,04 3,94
Chemicals. Pharmaceuticals. & Traditional
7,61 5,84 4,53 8,05 -3,98 10,00 9,89 9,72 9,98 9,09
Medicine
Rubber. Rubber Products and Plastics 5,04 -8,50 2,47 2,25 8,96 4,10 3,50 3,53 3,53 3,60
Non Metallic Quarrying 6,03 5,47 -0,86 -1,71 2,99 3,97 3,94 3,69 3,65 3,53
Basic Metals 6,21 0,99 5,87 5,48 6,77 4,30 3,96 4,07 4,05 4,17
Metal Products. Computer. Electronics. Optic &
7,83 4,33 2,79 3,65 -1,27 10,80 10,70 10,40 10,50 9,81
Electricity
Machinery & Equipment 7,58 5,05 5,55 4,30 7,79 1,78 1,78 1,77 1,78 1,81
Transportation Equipment 2,40 4,52 3,68 3,10 4,59 10,51 10,47 10,16 10,14 9,95
Furniture 5,17 0,46 3,71 3,68 2,13 1,49 1,42 1,39 0,51 0,50
Other Manufacturing. Repair Services &
4,66 -3,04 -1,72 -1,55 -2,74 0,98 0,92 0,85 0,59 0,29
Machinery & Equipment Installation
Manufacturing (Non Oil & Gas) 5,05 4,43 4,84 4,73 4,78 100,00 100,00 100,00 100,00 100,00
We see some important indicators to argue that manufacturing sector will likely accelerate
in 2019. First, we find that investment expenditures (both domestic and foreign direct
investments) up to 9M19 have shown that manufacturing is one of the key sectors targeted
by investors, such as: food industry, chemical and pharmaceutical, metal, machinery, motor
vehicles, and electronics industries. Second, we also see that capital goods import has been
increasing in 2018, which indicates that production capacity would continue to get larger. In
line with this, raw materials import has been also increasing, which indicates production
increase in the following quarters. Third, in line with those two indicators above, we find
that capacity of utilization has had an increasing trend. We believe that the growth
momentum for the production increase exist in 2019 in particular for manufacturing sector.
FIGURE 80. DOMESTIC DIRECT INVESTMENT

50,000
45,000
40,000
35,000
30,000
IDR Billion
25,000
20,000
15,000
10,000
5,000
0
2014 2015 2016 2017 9M18
Source: BKPM.
In addition to manufacturing sector, we may see that communication, and transportation

and warehousing are still continuing to grow at a higher rate in 2019. The need for
communication is high because the consumption of data per capita in Indonesia of only 2.6
GB per month per person is much lower than other comparable countries, such as
Thailand’s (7.7 GB) and Malaysia’s (8 GB). As a derivative sector, transportation and
warehousing is likely also enjoying high growth due to larger production, consumption, and
distribution activities because of the increase in investment and consumption.
Meanwhile, we see infrastructure construction grows at a high rate, but likely to decelerate
in 2019. The main reason is that some infrastructure projects have been completed;
implying the amount of new construction projects is smaller than before. Consequently, in
2019, the construction growth, which is mainly supported by infrastructure projects, is
slightly lower than in 2018.
FIGURE 81. FOREIGN DIRECT INVESTMENT

5,000
4,500
4,000
3,500
3,000
IDR Billion
2,500
2,000
1,500
1,000
500
0
2014 2015 2016 2017 9M18
FIGURE 82. CAPITAL AND RAW MATERIAL IMPORT GROWTH FIGURE 83. CAPACITY UTILIZATION INCREASING
60 85
50 83
40 81
79
30
77
20
(%)
75
10 73
0 71
-10
69
67
-20
65
2004
2008
2009
2010
2011
2012
2013
2014
2015
2005
2006
2007
2016
2017
9M18
-30
-40
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 10M17 10M18
Average capacity utilization Agriculture, livestock & fishery
Raw Material (Excl. Oil & Gas) Capital goods (Excl. Transportation Car & Other)
Mining & quarrying Manufacture
Capital Goods (Incl. Transportation Car & Other)
Source: BPS. Source: BPS
In addition to the factor that may spur manufacturing growth, we think industrial estates
and special economic zones could play an important role for higher manufacturing growth
in 2019 and afterward. To date, 87 existing industrial estates/parks have been operating to
produce various manufacturing goods. In the last four years, more industrial estates and
special economic zones have been developed to focus on manufacturing of commodities to
process mining (e.g. aluminum, alumina, cooper, and nickel), fishery, and plantation (e.g.
rubber and CPO). Down streaming policy of industrialization is indeed an important
strategy to boost manufacturing industry. The Government pushes to create more added
value from Indonesia’s commodities.
As to the contribution of private investment to boost economic growth, we see that its role
is likely getting larger in the next coming years. In the last four years or the first Joko
Widodo presidential term, the role of SOEs seems very dominant in executing various
projects, mainly infrastructures. The reason may relate to the fact that most projects give
low profit margin which is not very attractive for private sector causing long delay. For
example, Becakayu toll road was delayed but then its concession is bought by Waskita
Karya through acquisition of PT Kresna Kusuma Dyandra Marga (KKDM). Similarly, Bocimi
toll road project was delayed but its concession is bought by Waskita Karya from MNC Toll
Road which was bought before from Bakrie Toll Road. Another reason may relate to the
fact that the government really wanted to speed up the infrastructure development
through empowering SOEs.
In 2019 and afterward, we see that the government gives strong signal that private
investment is expected to play more important roles. One of the schemes that may attract
private investment is through joint project between private and SOE investments. During
the IMF World Bank Annual meeting 2018, in 11 October 2018, some joint projects have
been signed such as, a USD 2.7 toll road project between Allianz, AIA and Jasa Marga; a
USD 1.2 billion mining project between Chalco, Antam and Inalum; a USD 900 million
aircraft maintenance project between Air France/KLM, CCCC and GMF AeroAsia; and a
green refinery project between ENI and Pertamina. In total, the government welcomes
investors to participate in a wide range of investment opportunities which is approximately
amounted USD 46 billion. These investment opportunities cover energy sector (5 projects
with investment opportunity USD 3.4bn), oil and gas (6 projects, USD 11.6bn),
manufacturing (1 project, USD600mn), telecommunication (3 projects, USD3.4mn),
infrastructure (30 projects, USD16.2bn), transportation (4 projects, USD1.2bn), seaports ( 7
projects, USD1.1bn), airports (5 projects, USD2.8bn), real estate (7 projects, USD265mn),
hotel and tourism (3 projects, USD3.1bn), defense (1 project, 80bn) and capital market (7
projects, USD1.7bn).
FIGURE 84. SPECIAL ECONOMIC ZONES (SEZ) & INDUSTRIAL ESTATES (IE) PLAN IN 2015-2019
Landak IE Palu IE/SEZ Bitung IE/SEZ

Rubber, CPO Rattan, Cacao, Smelter Logistic, Coconut, Fis Buli IE
Kuala Tanjung IE hery Smelter Ferronickel, stainless
Aluminium, CPO steel
Batu Licin IE Morotai SEZ

Stainless Steel Tourism, Logistic
, Fishery
Galang Batang SEZ
Bauksit, Logistic MBTK SEZ
CPO, Wood, Energy Teluk Bintuni IE
Arun SEZ Oil & Gas, Fertilizer
CPO, Petrochemi
cal, Energy
Ketapang IE Sorong SEZ

Sei Mangkei IE/SEZ Alumina Nickel, CPO, Sag
CPO, Tourism, Rubber o, Logistic
Tanjung Kelayang SEZ

Tourism
Tanjung Api-Api SEZ
Morowali IE
CPO, Rubber, Petrokimia
Smelter
Ferronickel, stainl
ess steel
Tanggamus IE
Maritime & Logistic Bantaeng IE
Smelter Industrial Estate & SEZ
Tanjung Lesung SEZ Ferronickel, stainless steel
Industrial Estate
Tourism Konawe IE
Smelter SEZ
Mandalika SEZ
Ferronickel, stainles
Torism
s steel
Source: Coordinating Ministry for Economy Affairs & Indonesian Ministry of National Development Planning.
FIGURE 85. EXPORT IS STILL DEPENDING ON COMMODITY SECTOR
How can manufacturing industries possibly grow to reduce current account deficit in
2019? We see some underutilized manufacturing industries have opportunities to grow
toward export, i.e. automotive and textile industries. Automotive industry has installed
capacity at 1.9 million units, but the car production reaches about 1.3-1.4 million units. So,
the unused capacity is about 0.5-0.6 million units. This large unused capacity can be
empowered quickly as long as the market can absorb the additional production.
Subsequently, the main problem of the underutilized industries is to find new markets. In
this context, the role of the Government is important to open new markets through G-to-G
bilateral trade negotiation. Generally, the key strategy to find a new market is market
diversification beyond traditional markets, which are countries in the Middle East, South
Asia, and Africa.
Moreover, another industry which is potentially able to reduce oil import is biodiesel and
bio-energy production. Note that in 2018, the amount of fuel import is USD 26.6bn or 15.5%
of total import. Our calculation shows that a full implementation of B20 program is able to
reduce diesel import by 2.28 million kilo liter. Assuming rupiah exchange rate is IDR14,000,
we could save USD 1.9bn from the oil import reduction.
ECO BOX 2. THE IMPACTS OF INFRASTRUCTURE DEVELOPMENT
The Government of Indonesia (GOI) has developed some infrastructure projects to accelerate economic growth. Infrastructure
creates output multiplier for the economy and boosts economic growth. Based on our calculation using Input Output Table 2010,
all infrastructure types have >1 output multiplier, which means the development of infrastructure (final demand) will increase all
the output needed for the final demand to more than 1. For instance, as seen in graph 1, electricity has the largest total output
multiplier of 2.69. It means that for every IDR 1tn increase in final demands (such as investment) in construction sector would
increase total output for the economy by IDR 2.69tn.
FIGURE 86. OUTPUT MULTIPLIER BY TYPE OF INFRASTRUCTURE
Electricity 2.685
Other Buildings 2.034
Agriculture Infrastructure 1.998
Trash, Waste and Recycle Management 1.998
Building and Installation of Electricity, gas,

1.987
drinking water and communication
Road. Bridge and Port 1.880
Natural and artificial gas products, procurement

1.583
steam/hot water, cold air and ice products
Water Supply 1.258
Source: OCE Research Team calculation
In order to be more focused on the infrastructure project development, GOI has launched national strategic project since 2016.
To date, the national strategic project consists of 223 projects and 3 programs based on Presidential Regulation No.56/2018.
FIGURE 87. NATIONAL STRATEGIC PROJECT: IDR 4,150TN TOTAL INVESTMENT FOR 223 PROJECTS & 3 PROGRAMS
Sources: KPPIP
According to the data from KPPIP (Komite Percepatan Penyediaan Infrastruktur Prioritas/Committee for the Acceleration
Development of Prioritized Infrastructures), there are many infrastructure projects that are still under constructions. The total
value of these projects are IDR 2.5tn, which is distributed in all regions with the largest proportion in Java (IDR 502.7tn), followed
by Sulawesi (IDR 303.3tn) and Sumatera (IDR 282.7tn). The projects are also allocated in some sectors, with the largest in energy
sector (IDR 1.258.9tn), electricity (IDR 1,035tn), and road (IDR 684tn).
FIGURE 88. VALUE OF NATIONAL STRATEGIC PROJECTS BY ISLAND 2016-2018 (IN BILLION RUPIAH)
Investment Value of Projects
Region Total
Construction Preparation Transaction Completed
Bali-Nusa Tenggara 5,568 2,389 2,978 10,935
Java 502,708 231,866 208,026 89,884 1,032,484
Kalimantan 199,282 84,168 197,586 47,590 528,626
Maluku-Papua 140,311 323,700 1,637 465,648
Nasional 1,066,484 31,058 247,358 1,344,900
Sulawesi 303,298 5,121 2,159 310,578
Sumatera 282,717 254,847 14,140 551,704
Total 2,500,368 933,149 652,970 158,388 4,244,875
Sources: KPPIP
FIGURE 89. VALUE OF NATIONAL STRATEGIC PROJECTS BY SECTOR 2016-2018 (IN BILLION RUPIAH)
Investment Value of Projects
Sector Total
Construction Preparation Transaction Completed
Water and Sanitation 5,603 75,989 1,016 82,608
Airport 16,284 5,158 13,423 34,865
Dam 29,346 20,760 8,531 58,637
Energy 278,072 289,900 644,244 46,715 1,258,931
Aircraft Industry 24,138 24,138
Irrigation 2,747 1,078 3,825
Road 348,173 254,228 7,710 74,459 684,570
Economic Zone 362,890 55,520 418,410
Railway 203,608 189,572 1,133 394,313
Electricity 1,035,918 1,035,918
Seaport 109,903 10,964 12,000 132,867
Economic Equality Programmed 0
Education 567 567
Agri/Marine 106 106
Housing 752 752
Cross Border Post 943 943
Smelter 95,548 95,548
Sea Dike 3,044 3,044
Technology 7,913 6,920 14,833
Total 2,500,368 933,149 652,970 158,388 4,244,875
Sources: KPPIP
Further, progress of the national strategic projects is still on the right track. During 2016-2018, there is a total of 46 national
strategic projects that have been completed with total investment value of IDR 159 trillion, including for toll roads, airports, sea
ports, railways, and dams.
FIGURE 90. 46 NATIONAL STRATEGIC PROJECTS COMPLETED, 2016-2018

No Projects Location No Projects Location
2016 25 Jangkrik and Jangkrik North East Field East Kalimantan
1 Gempol-Pandaan Toll Road (14 km) East Java 26 Nanga Badau Cross Border Post West Kalimantan
2 Sentani Airport, Jayapura Papua 27 Aruk Cross Border Post West Kalimantan
3 Juwata Airport, Tarakan North Kalimantan 28 Wini Cross Border Post East Nusa Tenggara
4 Fatmawati Soekarno Airport Bengkulu 29 Teritip Dam East Kalimantan
5 Mutiara Airport, Palu Central Sulawesi 30 Umpu irrigation system, Way Besai Lampung
6 Matahora Airport, Wakatobi South East Sulawesi 2018
7 Labuan Bajo Airport, Komodo Island East Nusa Tenggara 31 Prabumulih-Kertapati Railway (32 km) Sumatera
8 Soekarno Hatta Airport Development Banten 32 Raknamo dam East Nusa Tenggara
9 Kalibaru Sea Port DKI Jakarta West Nusa
33 Tanju dam
Tenggara
10 Belawan-Sei Mangkei gas pipe, 75 mmscfd North Sumatera
34 Palembang-Simpang Indralaya Toll Road (22 km) South Sumatera
11 Entikong Cross Border Post, Sangau West Kalimantan
35 Pejagan-Pemalang Toll Road (57.5 km) Central Java
12 Motaáin Cross Border Post, Belu East Nusa Tenggara
Central Java-East
36 Solo – Ngawi Toll Road (90.1 km)
13 Motamassin Cross Border Post, Malaka East Nusa Tenggara Java
14 Skouw Cross Border Post, Jayapura Papua 37 Pemalang-Batang Toll Road (39.2 km) Central Java
15 Paya Seunara Dam, Sabang NAD 38 Ngawi Kertosono Toll Road (87 km) East Java
16 Rajui Dam, Pidie NAD 39 Kertosono-Mojokerto Toll Road (40.5 km) East Java
17 Jatigede Dam, Sumedang West Java 40 Semarang-Solo Toll Road (72.6 km) Central Java
18 Bajulmati Dam, Banyuwangi East Java 41 Batang – Semarang Toll Road (75 km) Central Java
19 Nipah Dam, Madura East Java 42 Gempol – Pasuruan Toll Road (75 km) East Java
20 Titab dam, Buleleng Bali Medan – Kualanamu – Lubuk Pakam – Tebing
43 North Sumatera
Tinggi (62 km)
2017
44 Rotiklod Dam East Nusa Tenggara
21 Soreang- Pasirkoja Toll Road (11 km) West Java
45 Logung Dam Central Java
22 Mojokerto – Surabaya Toll Road (36.3 km) East Java
46 Talaud Marine and Fishery Integrated Centre North Sulawesi
23 Tanjung Priok Access Road (16.7 km) DKI Jakarta
24 Raden Inten II Airport Lampung
Sources: KPPIP
The infrastructure projects have positive impact to the economy. As seen in graph 1, the average dwelling time has decreased
from 5.16 days in 2014 to 3.2 days in 2018. Besides that, Indonesia’s logistic cost to GDP has also improved from 25.7% of GDP in
2013 to 23.5% of GDP in 2017.
FIGURE 91. AVERAGE DWELLING TIME (DAYS) FIGURE 92. LOGISTICS COST IN INDONESIA IMPROVED (% TO
GDP)
6.0 26.0 25.70
5.16 25.5
5.0
4.35 25.0
4.0 24.5
3.36 3.45
3.20 3.06 24.0
23.50
3.0 23.5 23.10
23.0 22.60
2.0
22.5
1.0 22.0
21.5
0.0
2014 2015 2016 2017 2018P 2019P 21.0
2013 2017 2018P 2019P
Source: Indonesia Logistics and Forwarder Association (ALFI), OCE

Sources: Pelindo II, Ministry of Transportation, OCE Estimates Estimates
Furthermore, as seen in the table above, most of the completed national strategic projects are located in East Java. Based on our
calculation using Inter Regional Input Output (IRIO), infrastructure development in East Java province will boost East Java
Economy. Infrastructure development creates an output multiplier in East Java of 1.95. It means that for every IDR 1tn increase in
investment in construction sector would increase total output for the economy by IDR 1.95tn.
FIGURE 93. THE IMPACT OF INCREASING CONSTRUCTION SECTOR BY IDR 1TN IN EAST JAVA (IDR TN)
East Java Other Provinces (Outside East Java)
Sector Output Multiplier Sector Output Multiplier
Construction 1.04 Rubber and Crumb Rubber Industry 0.04
Trade 0.19 Wood, Rattan and bamboo industry 0.02
Other Services 0.09 Financial Services 0.02
Basic Metal and Steel Industry 0.08 Other Services 0.01
Coal mining, metal ore and other excavations 0.07 Trade 0.01
Total 1.78 Total 0.17
Source: IRIO, OCE Calculation
ECO BOX 3. SEI MANGKEI ECONOMIC ZONE
One of the Special Economic Zones (SEZ) which has been completed is Sei Mangkei in Simalungun, Sumatera Utara. Sei
Mangkei SEZ was launched by President Joko Widodo in January 2015. PT Perkebunan Nusantara III (PTPN III), through PT Kinra,
is the Management Business Entity of Sei Mangkei SEZ, which has land area of 2,002.7 ha. Sei Mangkei SEZ’s main businesses
are in palm oil and rubber industries. Besides those, there are also supporting industries, such as logistics, energy, electronics,
production supporting facilities, multi industry, and tourism. The main products to be produced are fatty acid, fatty alcohol,
surfactant, biodiesel, and biogas.
Some companies have large investments in Sei Mangkei SEZ, i.e. PT Industri lestari, PT Unilever Oleochemical Indonesia, and PT
Alternatif Protein Indonesia. PT Industri Lestari has realized the development of a factory with an investment of IDR1.1 trillion on
a seven-hectare land area in the Sei Mangkei SEZ. The factory has a production capacity for cooking oil at 456,000 tons per year,
for fatty acid distillate at 27,000 tons per year, and for starch at 114,000 tons per year.
Meanwhile, PT Unilever Oleochemical Indonesia has also invested IDR 3 trillion to develop a factory on twenty seven hectare
land area in KEK Sei Mangkei. The factory has produced fatty accid and esther. Another investor is PT. Alternatif Protein
Indonesia which would invest to develop a factory in 51 hectare land area. The factory would produce protein, fats, chitin, lauric
acids, and bio-fertilizer.
FIGURE 94. MASTER PLAN OF SEI MANGKEI SPECIAL ECONOMIC ZONE

Percentage (%)
No Zones Width (Ha)
Industry Facility Road Green Area
1 Palm Oil Industry 245.49 12.69
2 Various Industry 579.50 29.97
3 Production Supporting Facilities 85.06 4.40
4 Rubber Industry 84.10 4.35
5 Electronic Industry 155.40 8.04
6 Commercial Zones 31.91 1.65
7 Office Area 42.57 2.20
8 Logistic & Warehousing 67.67 3.50
9 Public Facilities (Hospital, School, Mosque) 24.50 1.27
10 Housing (Employee, expatriate) 111.80 5.78
11 Tourism 117.50 0.61 5.47
12 Electricity Industry 38.32 1.98
13 Standard Factory Building 19.40 1.00
14 Small & Medium Enterprises 16.30 0.84
15 WWTP 13.24 0.68
16 WTP 10.90 0.56
17 Row Road/Utility 185.10 9.57
18 Green Park 105.04 5.43
Total Area (Ha) 1,933.80
Area Percentage (%) 100.00 69.78 9.75 9.57 10.90
Sumber: PT. Perkebunan Nusantara III
ECO BOX 4. AUTOMOTIVE EXPORT PERFORMANCE
Indonesia automotive sector is steadily improving in the last decade. Indonesia cars production in 2018 is estimated at 1.3 million
units or back to its highest level in 2014. Rank wise, Indonesia is considered as top 20 car producer countries in the world
th th
(approximately ranked at 18 place). In Asia, Indonesia itself is the 9 biggest car producers after China, Japan, India, South
Korea, Thailand, Turkey, Russia and Iran. However, Indonesia car production growth in 2010-2017 is the biggest among the 9
countries. This might indicate that Indonesia is one of the most favorable countries in Asia to invest in automotive factory.
Furthermore, Indonesia car production can still grow as the total installed capacity is 2.2 million units in 2018, but the used
capacity is only 1.4-1.5 million units.
In term of car sold, Indonesia domestic market is also huge at 1.1 million units in 2018. This number placed Indonesia as
th
approximately the 15 biggest car market in the world. Higher production than domestic sales means that Indonesia also exports
some of its cars. Interestingly, Indonesia car export performance is also steadily growing over time. In 2018, Indonesia car export
is projected reach more than 250 thousand units or grew 12% (yoy). Compared to the 8 other countries, Indonesia car export is
also solid as its value grew 16.8% in 2010-2017 only lose to Russia that can reach 18.8%.
Vast domestic market alongside with growing export market, makes Indonesia viable for manufacturing base for some car
brands, especially Japan’s brands. Daihatsu has the biggest capacity currently at 530 thousand units, followed by Toyota and
Suzuki both at 320 thousand units. In total, there are at least 16 car brands that already have manufacturing base in Indonesia
with total capacity reaching 2.2 million units. With production rate at only 1.3 million, leaving around 0.9 million idle capacity.
This idle capacity can be focused to serve more export markets.
Other than optimizing its capacity, Indonesia also attracts new investment in automotive sector. Last year, Wuling comes to
Indonesia and builds its USD 700 manufactory with capacity over than 120 thousand units. New investment might hints that
Indonesian labours skills and support from local supplier are adequate enough to meet the investor’s standards. Following
Wuling, Hyundai also planning to invest USD 800 mn in Indonesia within two years. The funds will be used to build complete
manufacturing plant with capacity more than 160 thousand units. While Wuling mostly aims for Indonesia domestic market, half
of Hyundai production is designed to fulfil export market, especially for Australia. With few incentives and support from the
Government and stakeholders, Indonesia might become the main car production base in ASEAN, even overtaking Thailand.
FIGURE 95. CAR SALES IN ASEAN (000 UNITS)

No Brand Capacity (Unit)
1 Daihatsu 530,000
2 Suzuki 320,000
3 Toyota 320,000
4 Honda 240,000
5 Mitshubishi Motors 160,000
6 Nissan 150,131
7 Mitshubishi 120,000
8 Wuling 120,000
9 Hino 75,000
10 Gaya Motor 65,000
11 Sokon 50,000
12 Isuzu 45,000
13 Hyundai 27,000
14 Mercedes Benz 25,000
15 Chevrolet 6,000
16 UD Trucks 5,000
Total 2,258,131
Source: BKPM
FIGURE 96. CAR PRODUCER COUNTRIES IN ASIA

World Asia Production (mn units) 2017 Gr. CAGR 2010-
Country
Rank Rank 2010 2011 2012 2013 2014 2015 2016 2017 (yoy) 2017
World 77.63 80.09 84.14 87.51 89.75 90.78 95.06 97.30 2.4% 3.3%
1 1 China 18.26 18.42 19.27 22.12 23.72 24.50 28.12 29.02 3.2% 6.8%
3 2 Japan 9.63 8.40 9.94 9.63 9.77 9.28 9.20 9.69 5.3% 0.1%
5 3 India 3.56 3.93 4.17 3.90 3.84 4.16 4.52 4.78 5.8% 4.3%
6 4 South Korea 4.27 4.66 4.56 4.52 4.52 4.56 4.23 4.11 -2.7% -0.5%
12 5 Thailand 1.64 1.46 2.43 2.46 1.88 1.92 1.94 1.99 2.3% 2.8%
14 6 Turkey 1.09 1.19 1.07 1.13 1.17 1.36 1.49 1.70 14.1% 6.5%
15 7 Russia 1.40 1.99 2.23 2.18 1.89 1.38 1.30 1.55 19.0% 1.4%
16 8 Iran 1.60 1.65 1.00 0.74 1.09 0.98 1.16 1.52 30.1% -0.8%
18 9 Indonesia 0.70 0.84 1.05 1.21 1.30 1.10 1.18 1.22 3.3% 8.2%
25 10 Malaysia 0.57 0.53 0.57 0.60 0.60 0.61 0.51 0.46 -10.4% -3.0%
30 12 Vietnam 0.04 0.03 0.04 0.04 0.05 0.05 0.24 0.24 0.0% 27.9%
Source: Organization Internationale des Constructeurs d’Automobiles (OICA)
FIGURE 97. CAR PRODUCER COUNTRIES IN ASIA

Export Value (USD bn) 2017 Gr. CAGR
Country
2010 2011 2012 2013 2014 2015 2016 2017 (yoy) 2010-2017
World 662.1 766.5 790.8 817.8 851.3 808.0 832.0 896.5 7.8% 4.4%
China 5.72 9.15 11.42 10.79 11.52 10.12 9.91 12.67 27.9% 12.0%
Japan 103.41 101.52 113.39 104.98 102.11 98.58 103.35 104.61 1.2% 0.2%
India 5.52 4.73 5.80 6.46 6.72 6.43 7.35 7.81 6.2% 5.1%
South Korea 34.91 44.67 46.44 47.83 47.91 44.67 39.86 41.37 3.8% 2.5%
Thailand 12.89 11.67 16.24 17.24 16.91 17.58 18.12 18.20 0.5% 5.1%
Turkey 10.39 11.49 10.48 11.81 12.51 12.35 14.44 18.25 26.4% 8.4%
Russia 0.52 0.86 1.60 2.19 2.07 1.60 1.49 1.74 16.6% 18.8%
Iran 0.40 0.15 0.33 0.08 0.11 0.02 0.04 0.02 -48.1% -34.4%
Indonesia 1.10 1.53 2.49 2.40 2.92 2.66 2.74 3.26 18.9% 16.8%
Malaysia 0.26 0.23 0.30 0.36 0.37 0.30 0.35 0.40 15.9% 6.2%
Vietnam 0.00 0.01 0.02 0.00 0.01 0.00 0.01 0.00 -45.7% 12.3%
Source: Organisation Internationale des Constructeurs d’Automobiles (OICA)
FIGURE 98. CAR SALES IN ASEAN FIGURE 99. INDONESIA CAR EXPORT MARKETS
1,200
Philippines
1,000 Saudi Arabia
Thailand
800 Japan
Oman
600
UAE
400 Viet Nam
Pakistan
200 South Africa
Malaysia
-
2015 2016 2017 9M17 9M18 0 10 20 30 40
Thailand Indonesia Malaysia Philippines Vietnam 8M18 2017
Source: ASEAN Automotive Federation (AAF) Source: BPS, Trademap
ECO BOX 5. STRUCTURAL TRANSFORMATION AND STRUCTURAL PROBLEMS IN LABOR MARKET: WHAT NEEDS TO
BE DONE?
The labor market of Indonesia show positive progress in recent years with the expansion of its labor force and sub-6%
unemployment rate. Unemployment rate (TPT) in August 2018 reduced to 5.34% (5.50% in August 2018) and a full-time
employment rate reached 67.5% - the highest in the last 10 years. A low level of unemployment rate could be attributed to the
overall improvement of economy, and therefore real sectors are willing to absorb more labor. However, we need to look
deeper into the composition of the 131 million Indonesian labor force.
FIGURE 100. EMPLOYMENT BY SECTORS

29%
Share of employment
25% CAGR (2014-2018)
2018's growth
21%
17%
13%
9%
5%
1%
-3%
Source: Sakernas, BPS
Analyzing sectoral growth of employment provides an explanation on how structural transformation prevails in Indonesia.
With declining employment in agriculture, services and industry has become the source of job creation. The landscape of
employment has now been dominated by services (49%), agriculture (29%), and industry (22%). Compare to other sectors,
services has benefited larger expansion of labor and investment, and therefore absorb more workers. Employment in ICT
(Information, Communication, and Technology) and accommodation and F&B increased more than 10% during 2014-2018. On
the other hand, manufacturing steadily grow below 4%, while employment in agriculture shrink annually by 2.1%. With almost
64 million people working in services sectors and high employment growth, these figures lay out opportunity for Indonesia that
the country need to keep the momentum of increasing employment demand in service sectors to maintain its contribution to
the economy.
This structural transformation corresponds with the evolution of global employment as the countries move up from low
income to high income category, the share of employment in agriculture decline. ILO (2018) report that deindustrialization has
occurred in developed and upper-middle countries while level of employment in developing and lower middle-income
countries is expected to be stagnating. The report also mentions that services sector will become the main driver of
employment growth, particularly in middle income countries where the forecast of growth reach 5%.
In addition to the transformation, the labor force has faced a challenging situation with the recent increased of automation and
the disruption of technology. The waves of going digital and automated require an adjustment and an upgrade to set of skills
to be competitive. Technical and practical skills are projected to be the most affected skills in all industries. World Economic
Forum report that 50% of companies surveyed project the automation has a consequences of reduction to full-time workers in
2022. The push factor is the shift on the frontier between workers and machine, which increase the tasks perform by
automation from 29% in 2018 to 42% in 2022. The shift from human to machine will accelerate with the bolster from high-
speed mobile internet, artificial intelligence, big data analytics, and cloud technology (WEF, 2018).
The fact that automation will affect set of skills required in the industry need to be anticipated by all stakeholders. Comparing
the demand of skills with regional peers informs that occupations offered and set of skills required in Indonesia are lack behind
other countries in ASEAN. Taking example of ICT, the trend in Indonesia still demands lower level of jobs with basic skills, such
as front-end developer and system analyst with the ability to operate Java or CCS programming. While in ASEAN, according to
LinkedIn, the trend has moved to advanced programming languages required as data scientist which are R, Node.JS, and
Python.
Back to the jobs market in Indonesia, the unemployment rate and percentage contribution by level of education provide initial
findings on the structural problem in jobs market. Unemployment rate of the top group education level hit the lowest of 5.15%
in 2016, yet continues to climb to 5.57% and 5.92% in two consecutive years. Furthermore, across all level of education, the
highest level of unemployment rate is coming from secondary schools graduate. Particularly with vocational graduates the
contribution of which to the number of unemployment increase, from 20.8% in 2016 to 24.7% in 2018. Vocational graduates
also possess highest unemployment rate of 11.2%. In summary, people with lowest education level eventually have lower
unemployment rate even compare with those graduates from higher education level. Therefore, it raises the question on why
workers with this background relatively more difficult to find jobs.
FIGURE 101. UNEMPLOYMENT AND UNDEREMPLOYMENT BY LEVEL OF EDUCATION
Unemployment Rate by Level of Education Underemployment Rate by Level of

(%) Education (%)
12 9
8
10
7
8 6
5
6
4
4 3
2
2
1
0 0
Never Primary Secondary Higher Never Primary Secondary Higher
attended School School Education attended School School Education
school school
2016 2017 2018 2016 2017 2018
Source: Sakernas, BPS
In addition, underemployment rate across education level may indicate the same problems in the jobs market. In summary, it is
easier for people who only obtain primary school certificate or do not have certificate at all to go for part-time job compare to
secondary schools graduate. Although other factors such as job preference may play in, the combined figures from
unemployment and underemployment rate indicates the structural problems of the supply and demand in job market already
exist. Hence, relate to global and regional trends on demand of skills, there is urgency to formulate policy actions to improve
quality of labors, training materials and qualifications as well as formal education curriculum. Otherwise, structural problems
become even worse because of the mismatch from changing skills demand.
Still relevant to the discussion on the shifting from agriculture to services and industry, the government has challenging tasks
to ensure that the structural problem will not disturb the structural change in jobs market. The rapid development of
technology adoption and changing business needs in industries has to be anticipated by aligning the curriculum and methods
of education in Indonesia. The adjustment should begin as soon as possible with focus on the curriculum for vocational
education and higher education. The main objective is ensuring the skills acquired from vocational schools and university align
with the latest developments in the market. A pilot project for this effort could be prioritized for tourism and ICT vocational
and professional education. Those sectors are priority considering high employment growth and the nature of the industry,
which are global consumers for tourism and technology-intensive for ICT.
For bigger efforts, Indonesia can follow the examples from other countries to establish the strategy and forward-looking
formula of skills needed in the future. The formulation includes details of assignments, general and specific expertise needed,
as well as the competency level of each type of work. This requires the collaboration between government, education
institutions, and private sectors to align the characteristic of demand and supply. The Government has started this effort by
setting up the Indonesia National Work Competency Standards (SKKNI), which already reached 487 SKKNI in 2017. However,
the implementations in job markets need to be monitored in order to check whether the set of requirement are still relevant
and to make sure all stakeholders comply with those requirements.
Furthermore, the Government could start the initiative to promote the university-industry partnership. The partnership could
be a key strategy for innovative and sustainable economic growth. This collaboration will benefit private sectors through
access to new research and possibilities of obtaining new patents. On the other hand, academics staff and researches could
take advantages from the collaboration to conduct field test theory and empirical research with up to date data and
information. Moreover, with relatively low expenditure on tertiary education and vocational program, this program could
facilitate funds from private sectors to be channeled to research program in vocational schools and university. In 2015, total
expenditure on both type of education was less than 1% of GDP, far lower than all other OECD countries. The role of the
government then stimulates the collaboration by providing incentives to private sectors in order to reduce the cost of research
and development. The research tax credit mechanism that was first introduced in United States is an example on how the
Government to promote this collaboration. By this mechanism, business is rewarded with 79% credit benefit from the research
expenses spent to qualified educational institutions.
FIGURE 102. EXPENDITURE FOR VOCATIONAL PROGRAM
3.0
%
Vocational programmes
Expenditure on vocational programmes
2.5
2.0
1.5
1.0
Tertiary
0.5
NA
0.0
NLD
NOR
MEX
LUX
EST
NZL
FIN
BEL
CZE
TUR
SWE
FRA
ESP
SVN
SVK
ITA
USA
CAN
KOR
CHL
AUT
AUS
JPN
ISR
PRT
DEU
GBR
DNK
HUN
BRA
IDN
LVA
CHE
POL
ISL
RUS
IRL
OECD
Source: Education at Glance 2017, OECD
Banking outlook 2019: To remain cautious on

liquidity and asset quality
Banking indicators kept showing an improvement up to Nov-18. Latest data showed that
banking loans was growing by 12.1% yoy in Nov-2018, slightly lower than October position
when the loan was posted at the highest figure in the past four years. Asset quality has been
stable as the ratio of non-performing loans (NPL) gradually decreased in the past four
months from 2.79% in May-18 to 2.65% in Nov-18. In line with the improvement in loan
growth and asset quality, earnings performances of Indonesian banks were also increasing.
Both the return on asset (ROA) and net interest margin (NIM) increased steadily from 2.3%
and 5.09% to 2.52% and 5.12% respectively. We see that the improvement of Indonesian
banking industry will continue this year. Given the latest data, we expect that loan will grow
around 11-12% and deposit will grow approximately 7-8% in 2018.
Liquidity slightly eased in Nov-18 but LDR remained high. LDR and LFR each slid to
92.6% and 90.8% respectively (vs 93.1% and 91.2% in Oct-18). Deposit growth improved,
but remained slow. Latest data showed that in Nov-18, deposit grew by 7.2% yoy, much
lower compared to loan growth. Year to date loan growth improved to 8.9% (vs 5.2% in Jan-
Nov 2017) while deposit growth for the same period slowed to 6.6% (vs 7.3% in 2017). All
types of deposit (current account, saving account and time deposit) grew mixed to 11.9%,
7.9% and 4.3% (vs 10.0%, 10.1% and 4.7% in Oct-18) respectively. We see that liquidity will
still be the biggest risk ahead. If deposit growth is not improving significantly then banks
will have to slow their loan growth, or else liquidity will continue to tighten and LDR will
continue to go higher.
Liquidity was not evenly distributed across banks. Tightest liquidity experienced mostly
by mid sized banks in BUKU 3. Those banks had an average LDR of 102.8% while the larger
banks in BUKU 4 had an average LDR of 89.6%. Meanwhile, banks in BUKU 2 and BUKU 1
had an average LDR of 88.0% and 83.0% respectively. Those banks, however, were exposed
to higher liquidity risk. Although they had lower LDR, they had a limited access to short
term funding, both in interbank market and funding from the central bank, because they
had a small amount of securities, especially government bonds and notes, relative to their
assets. Banks in BUKU 1 and BUKU 2 only had ratio of securities-owned to total assets of
2.6% and 6% respectively. Meanwhile, even though BUKU 3 banks had high LDR, they had
the securities to asset ratio of 10%, while the BUKU 4 banks have the ratio of 13.8%. To
obtain short term funding from interbank market, banks need securities as an underlying.
The more they have government bonds and notes, the more they have access to short term
funding. Therefore, smaller banks should be encouraged to own more securities so that
they have better access to funding in the interbank market as well as central bank’s open
market operation instruments.
Deposit growth remained subdued, especially for the highest tier. By tiering of deposit in
Oct-18, the growth of the highest tier (accounts having nominal deposit of more than IDR5
bn) improved quite significantly to 7.2% (vs 5.6% in Sep-18), contributing to the
improvement in total deposit growth by 3.4%. This, however, was still relatively slow.
Meanwhile the lowest tier, accounts with nominal deposit of less than IDR100 mn, grew by
10.5% (vs 10.2% in Sep-18). Overall, deposit growth remained relatively slow, causing
liquidity to tighten.
Increasing investment allocations of insurance and pension fund in bond and stock had
an impact in deposit growth. Investment allocation of insurance companies and pension
funds in stocks and bonds (government and corporate bonds) increased from IDR405.2
trillion (51% of its total portfolio) in Jan-15 to IDR751.5 trillion (60% of its total portfolio) in
Sep-18. Meanwhile, their investment allocation in banks deposit (time deposits, savings,
deposit on call and certificate of deposits) at the same period decreased from IDR201.2
trillion (25% of its total portfolio) to IDR177.4 trillion (14% of its total investment). In our
opinion, this contributed to slow growth of banks’ third party funds.
Higher government’s revenue contributed to tighter liquidity. The realization of

government’s revenue up to Nov-18 increased by 18.6% yoy in 11M18 (vs 6.2% in the same
period last year). Tax and non-tax revenue grew by 15.6% and 28.4% yoy respectively. Fiscal
deficit was reportedly around 1.76% of GDP in 2018 (vs 2.0% in 2017). Despite of the fact
that 2018 liquidity was not as ample as 2107, we believe that 2019 liquidity will be better on
the back of faster government spending acceleration. Spending acceleration is the key to
maintain stability of the liquidity this year, especially in 1H19, as the government targets for
14.2% of tax revenue in 2019 (8.3% yoy growth in 2018).
Placement in BI’s open market operation (OMO) instruments remained low. Liquidity
shown by banks’ placement at BI’s open monetary operation (OMO) instruments picked up
th
slightly but remained at a very low level of IDR197.6 trillion up to Dec 6 2018. As a
comparison in Feb-18, the placement reached its highest level of IDR516.7 trillion. In other
words, the liquidity in the banking system deteriorated by IDR319 trillion from its peak.
Theoretically, placement in BI’s OMO depends on two things: banks’ excess liquidity and
Central Bank’s intervention in FX market. If we assume that Rupiah will not weaken as deep
as 2018, Rupiah liquidity would be much better this year. It is worth noting that our Rupiah
baseline forecast is around 5% weakening in 2019 (vs 6% weakening in 2018).
Interbank money market rates for IDR were stable but still at a high level. As liquidity
still be the main issue, interbank money market rate for IDR remained high and continued
to increase for USD interbank rate. The overnight money market rate for IDR (overnight
JIBOR) stood at 5.91%, slightly below end of Nov-18 level of 5.96%. Meanwhile, the
th
overnight interbank rates for USD (LIBOR overnight) reached 2.18% as of Dec, 14 ,
increasing by 73.7 bps compared to the end of Nov-18.
Time deposit rate continued to increase to anticipate further liquidity tightening. Banks
BUKU IV have been increasing 1M deposit rate quite aggressively by more than 110 bps
from May-18 to Oct-18. According to Mandiri Sekuritas’ Deposit Rate Tracker, BCA was the
most aggressive to adjust deposit rates. BCA increased the deposit rate by another 25 bps
in Dec-18 while the other banks in BUKU IV kept their deposit rate unchanged. Other banks
that have been quite aggressive in increasing deposit rate were Panin Bank and BTPN.
Panin has adjusted its deposit rate by 125 bps in 2018, while BTPN has adjusted its deposit
rate by 100 bps year to date.
BI had undertaken a several steps to overcome liquidity tightening, including liquidity

injection of IDR115 trillion through FX swap and term repo. First, they increased the
average reserve requirement for rupiah from 2% to 3% while at the same time reduced the
fixed reserve requirement from 4.5% to 3.5%. Second, they increased the macroprudential
liquidity buffer or PLM (penyangga likuiditas makroprudensial), replacing the previous
secondary reserve requirement regulation. PLM regulation should encourage banks to build
up more high quality liquid assets that would be usable in times of stress. BI has also been
providing short term liquidity via foreign exchange swap (FX swap) and term repo. BI has
been injecting as much as IDR115 trillion short term liquidity through those instruments.
These steps were meant to loosen short term liquidity, preventing sharp hike in both
deposit and interbank market rates as well as increasing interbank money market activities.
Macroprudential loosening helps preventing short term liquidity shock. Macroprudential

loosening is meant to loosen short term liquidity, preventing sharp hike in both deposit and
interbank market rates as well as increasing interbank money market activities. BI doesn’t
want deposit and interbank market rates to increase more than the increase in the policy
rate because it will also cause lending rate to increase sharply and has a negative impact to
the stability of the financial sector and overall economy. However, it will have no significant
impact increase deposit growth. Banks need a long term and more stable financing. More
stable financing is obtained through retail funding while financing from the corporate
segment is considered to be less stable because it can be withdrawn at any time by large
amount. Furthermore, banks should have better strategies to boost their deposit growth,
instead of just relying on higher deposit rates.
Liquidity in 2019 will be less tight compared to 2018 due to less tight monetary policy
and less government bond issuance. In our view, liquidity will improve due to : (1) less
hawkish the Fed’s guidance, (2) less volatility in the financial market, (3) less aggressive
monetary tightening by BI and (4) less net government bond issuance and lower growth of
tax revenue. BI will remain at its frontloading and preemptive strategies but not as
aggressive as in 2018. We expect that there will be one more BI-7 days reverse repo hike by
25 bps to 6.25% in 2019.
Lower fiscal deficit target lead lower government bond issuance. The government fiscal
policy will remain focusing on stability and targeting lower fiscal deficit. Hence, the
government lowers the government bond net issuance target to IDR389 trillion in 2019 (vs
IDR407.5 trillion in 2018). Lower government bond issuance will help to ease liquidity in the
banking industry.
Large banks are targeting loan growth of 10-15% loan growth in 2019. Loan growth in
2019 will still be dominated by the largest banks. They are still optimist that loan growth
will improve. Bank Mandiri, BRI, BCA, and BNI are targeting loan growth of 10-12%, 12-14%,
10-12%, and 13-15% respectively in 2019. Large banks in BUKU IV still have room to
increase loan growth because they still have sufficient liquidity with average LDR of 89.4%.
But BUKU III banks will have more limited room to boost loan growth due to high LDR of
103.2%. Overall we expect that loan will be growing by 10-11% in 2019.
Asset quality was stable but NPL of mining sector increased. NPL ratio slightly increased
to 2.67% in Nov-18 (vs 2.65% in Oct-18). Special mentioned (category 2) loans also slid to
IDR255 tn (vs 243 tn in Oct-18). Hence, the ratio of NPL+special mention loans climbed to
7.6% (vs 7.4% in the previous month). By sector, asset quality of most industries was stable.
NPL of wholesale and retail trade sector (contributes 18.6% to total loans) was maintained
at stable level of around 4.07% in Nov-18, while NPL of processing industry and home
ownership (contribute 16.9% and 8.4% to total loans) fell each to 2.72% and 2.62% (from
2.62% and 2.65% in Oct-18).
Smaller banks still need to work harder to improve their asset quality. NPL across all size
of banks were mostly stable. NPL of BUKU IV and BUKU II banks slid each to 2.40% and
3.59% (vs 2.42% and 3.61% in Sep-18), while NPL of BUKU III and BUKU I banks were stable
at 2.59% and 3.22%. Overall, NPL of BUKU IV and BUKU III banks were showing a declining
trend, mainly driven by write-offs. However, NPL of BUKU II and BUKU I banks were still
trending higher. BUKU II and BUKU I banks also had an increasing special mentioned loans.
The ratio of NPL plus special mentioned loan of BUKU IV and BUKU III banks both fell to
6.25% and 8.56% (vs 6.49% and 9.11% in Sep-18) respectively, while the ratio for banks in
BUKU II and BUKU I were still increasing, each to 9.76% and 11.53% (vs 9.62% and 10.46%
in Sep-18) respectively.
FIGURE 103. LOAN AND DEPOSIT GROWTHS REMAINED SUBDUED
Loan and deposit Growth% yoy Loan to deposit ratio % Loan to Funding ratio %
94 92
24%
92.6 90.8
93 91
21% Loan growth (YoY %)
92
90
18% Deposit growth (YoY
%) 91
15% 89
12.05% 90
12% 88
89
9% 87
88
6% 86
7.19% 87
3% 86 85
0% 85 84
Jan-17
Jul-17
Jul-18
Jul-17
Jul-18
Nov-17
Jan-18
Nov-18
Jan-17
Nov-17
Jan-18
Nov-18
Sep-18
Mar-17
May-17
Sep-17
Mar-18
May-18
Mar-17
May-17
Sep-17
Mar-18
May-18
Sep-18
Jul-12
Jul-13
Jul-14
Jul-15
Jul-16
Jul-17
Jul-18
Nov-12
Nov-14
Nov-13
Nov-15
Nov-16
Nov-17
Nov-18
Mar-13
Mar-14
Mar-15
Mar-16
Mar-17
Mar-18
Source: OJK
FIGURE 104. LOAN GROWTH AND NPL BY INDUSTRY
Wholesale and retail trade Processing industry For home ownership Agriculture
50% 6% 40% 5% 40% 3% 30% 2.4%

30% 4% 2.2%
40% 5% 30% 3%
20% 2.0%
4% 20% 3% 3% 1.8%
30% 20%
3% 10% 2% 2% 1.6%
20% 3.0% 10%
2% 10% 1.4%
0% 1% 2%
10% 1% 1.2%
-10% 0% 0% 2% 0% 1.0%
0% 0%
Jan-18
Jul-15
May-16
Jun-18
Dec-15
Mar-17
Oct-16
Aug-17
Apr-14
Nov-13
Sep-14
Feb-15
Nov-18
Jan-18
May-16
Jul-15
Dec-15
Mar-17
Jun-18
Dec-15
Mar-17
Oct-16
Aug-17
Oct-16
Apr-14
Aug-17
Jan-18
Apr-14
Sep-14
Feb-15
Nov-13
Nov-18
Jul-15
May-16
Nov-13
Nov-18
Sep-14
Feb-15
Jun-18
Dec-15
Mar-17
Oct-16
Aug-17
Apr-14
Jan-18
Sep-14
Feb-15
Nov-13
Nov-18
Jul-15
May-16
Jun-18
Construction Real Estate Financial Intermediate Mining

30% 6.0% 40% 3.5% 30% 2.0% 30% 10.0%
5.0% 30% 3.0% 20% 8.0%
20% 1.5%
20% 20% 10%
4.0% 2.5% 6.0%
10% 10% 1.0% 0%
3.0% 2.0% 4.0%
10% -10%
0%
2.0% 0% 0.5% -20% 2.0%
-10% 1.5%
0% 1.0% -30% 0.0%
-20% 1.0% -10% 0.0%
Dec-15
Jun-18
Oct-16
Nov-13
Nov-18
Apr-14
Jul-15
Sep-14
Feb-15
Mar-17
Jan-18
Dec-15
Mar-17
Oct-16
Aug-17
Aug-17
Apr-14
Jan-18
May-16
Nov-13
Nov-18
Sep-14
Feb-15
May-16
Jul-15
Jun-18
Dec-15
Dec-15
Jun-18
Jun-18
Oct-16
Oct-16
Nov-13
Jul-15
Nov-18
Nov-13
Jul-15
Nov-18
Apr-14
Apr-14
Sep-14
Feb-15
Sep-14
Feb-15
Mar-17
Mar-17
Jan-18
Jan-18
Aug-17
Aug-17
May-16
May-16
Loan growth (LHS)

NPL (RHS)
Source: OJK
FIGURE 105. BANK’ NON-PERFOMING LOAN (NPL)
Non Performing Loans NPL + Special Mention Credit Quality (IDR) tn
450
3.5 9.0
400
3.3 8.5
3.1 8.0 350
2.9 7.5
2.7
2.7 7.0 300
2.5 6.5
250
2.3 6.0
2.1 5.5 200
1.9 5.0
150
1.7 4.5
Jul-17
Jul-18
Jun-18
Nov-16
Dec-16
Jan-17
Jun-17
Jan-18
Nov-18
Mar-17
Apr-17
Aug-17
Sep-17
Oct-17
Nov-17
Dec-17
Apr-18
Aug-18
Sep-18
Oct-18
Feb-17
May-17
Feb-18
Mar-18
May-18
1.5 4.0
Jul-14
Jul-15
Jul-16
Jul-17
Jul-18
Nov-13
Aug-13
Aug-14
Aug-15
Feb-14
Nov-14
Feb-15
Nov-15
Aug-16
Aug-17
Feb-16
Nov-16
Feb-17
Nov-17
Aug-18
Feb-18
Nov-18
Nov-13
Mar-14
Nov-14
Mar-15
Nov-15
Mar-16
Nov-16
Mar-17
Nov-17
Mar-18
Nov-18
May-13
May-14
May-15
May-16
May-17
May-18
Special mention Sub-standard

Doubtful Loss
Source: OJK
FIGURE 106. LOAN TO DEPOSIT RATIO BY BUKU (%) FIGURE 107. SECURITIES OWNERSHIP BY BUKU (%)
105 101.5
100 3 (0%)
95 51
90.0
90
89.0 (7%)
BUKU IV
85 83.5
BUKU III
80 234 BUKU II
(32%) 407
75 BUKU I
(55%)
70
65
60
BUKU IV BUKU III BUKU II BUKU I
Source: OJK Source: OJK
Notes : BUKU is group of banks by their core capital, BUKU IV are banks with core capital of IDR30 tn or more, BUKU III are banks with core capital
between IDR5 -30 tn, BUKU II are banks with core capital between IDR1-5 tn, BUKU I are banks with core capital below IDR1 tn.
FIGURE 108. DEPOSIT GROWTH BY TIERING FIGURE 109. DEPOSIT GROWTH BY BUKU
25%
30
20%
20
15% 10 10.6
7.7
0 0.8
10%
-10 (8.3)
5% -20
-30
0%
-40
-5% -50
Nov-14
Feb-15
Nov-15
Nov-16
Nov-17
Nov-18
May-18
May-14
Aug-14
May-15
Aug-15
Aug-17
Aug-18
Feb-16
May-16
Aug-16
Feb-17
May-17
Feb-18
-60
Jul-17
Jul-18
Aug-17
Dec-17
Jun-17
Sep-17
Jan-18
Jun-18
Aug-18
Sep-18
Feb-17
Mar-17
Apr-17
Oct-17
Nov-17
Feb-18
Mar-18
Apr-18
Oct-18
Nov-18
May-17
May-18
0-100 Million 101-200 Million
201-500 Million 501 Million-1 Billion
1.01-2 Billion 2.01-5 Billion
BUKU I BUKU II BUKU III BUKU IV
Source: Mandiri Sekuritas Source: CEIC
FIGURE 110. PLACEMENT AT BI OPEN MARKET OPERATION FIGURE 111. INTERBANK MONEY MARKET RATE
INSTRUMENT
600
8.5
400
7.5 7.56
200
7.27
6.5 6.50
0
5.88
5.5
-200
JIBOR
4.5 ON
-400 JIBOR
15-Aug
24-Jan
4-Oct
1-Nov
1-Aug
13-Oct
27-Oct
10-Nov
24-Nov
11-Dec
27-Dec
10-Jan
30-Aug
14-Sep
29-Sep
7-Feb
22-Feb
6-Apr
7-May
7-Jun
29-Jun
13-Jul
7-Sep
18-Oct
15-Nov
30-Nov
14-Dec
2-Jan
8-Mar
22-Mar
22-May
27-Jul
10-Aug
28-Aug
24-Sep
20-Apr
1W
JIBOR
3.5
1M
SBI 9M+SDBI
Reverse Repo SBN 2.5
Swap BI
Jul-18
Jul-18
Jan-18
Jan-18
Jun-18
Jun-18
Jan-19
Dec-17
Aug-18
Aug-18
Sep-18
Sep-18
Nov-18
Nov-18
Dec-18
Dec-18
Feb-18
Mar-18
Mar-18
Mar-18
Apr-18
Apr-18
Oct-18
Oct-18
May-18
May-18
Term Deposit
LF/Term Repo
FIGURE 112. ESTIMATION OF LIQUIDITY FROM FISCAL POLICY
Quarterly (accumulative) estimation for fiscal expansion-contraction in 2018 (IDR tn)
Government spending Tax Revenue Gov bond issuance Liquidity =

(Expansionary) (Contractionary) (Contractionary) (Expansionary -
Contractionary)
2,338 1,656 361.8 328 304
1,676 280.7
1,056
213.1
1,046 148
678 139.6
465 289 34
Mar-19 Jun-19 Sep-19 Dec-19 Mar-19 Jun-19 Sep-19 Dec-19 Mar-19 Jun-19 Sep-19 Dec-19 Mar-18 Jun-18 Sep-18 Dec-18
Quarterly estimation for fiscal expansion-contraction in 2018 (IDR tn)
Government spending Tax Revenue Gov bond issuance Liquidity =

(Expansionary) (Contractionary) (Contractionary) (Expansionary -
Contractionary)
576 140 175
571
507 407 382
483 81
289 74 68 96
414
34
-
Mar-18 Jun-18 Sep-18 Dec-18 Mar-18 Jun-18 Sep-18 Dec-18 Mar-18 Jun-18 Sep-18 Dec-18 Mar-18 Jun-18 Sep-18 Dec-18
Source: Ministry of Finance
FIGURE 113. NPL BY BUKU (% TOTAL LOANS) FIGURE 114. NPL + SML BY BUKU (% TOTAL LOANS)
4.5 17.0
4.0 15.0
13.0
3.5
11.0
3.0
9.0
2.5
7.0
2.0
5.0
1.5 3.0
1.0 1.0
Nov-15
Nov-16
Nov-17
Nov-18
Nov-15
Nov-16
Nov-17
Nov-18
May-15
Aug-15
Aug-16
Aug-17
Aug-18
Aug-15
May-16
Aug-16
Aug-17
Aug-18
Feb-15
Feb-16
May-16
Feb-17
May-17
Feb-18
May-18
Feb-15
May-15
Feb-16
Feb-17
May-17
Feb-18
May-18
Total BUKU 1 BUKU 2 Total BUKU 1 BUKU 2

BUKU 3 BUKU 4
BUKU 3 BUKU 4
FX Market Review: Maintaining Rupiah Stability
In 2018 the rupiah currency experienced fluctuations in the range of 13,268 and 15,284 with
0.36% daily Rupiah volatility. The rupiah closed at the level of 14,390 per US dollar at the
end of 2018. Various pressures that had brought the weakening rupiah began to diminish
towards the end of the year. External factors tend to be insignificant as the tension of trade
wars eases, the Federal Reserve's dovish statement and the dollar index decline. In 2019,
the Bank Indonesia policy mix to stabilize the rupiah will continue. With the prospect of a
solid domestic economic indicator, investor confidence will increase so that foreign funds
flow back into the domestic market. However, external pressure that arises at any time
must be well anticipated.
In 2018, the rupiah weakened to its lowest position at 15,284 on October 9, 2018. This level
is the weakest since July 1998 or since the last 20 years. The appreciation of Greenback
against almost all global currencies was affected by improving US economic growth
forecasts and the potential for more aggressive increases in US interest rates. This also
boosted the yield of US Treasury notes for a 10-year tenor to reach the level of 3.2% (which
is the highest position since 2013). The geopolitical crisis in several countries also triggered
a shift in the flow of funds to the US dollar as a safe haven currency. Rising demand for the
US dollar is reflected in the increase in the dollar index to its highest position at 97.5 in 2018.
In addition, expectations of normalization of economic policies and tightening of liquidity in
developed countries also have an impact on currencies in developing countries, including
Indonesia.
One factor that causes depreciation of the Rupiah from the domestic side is the potential
for widening the current account deficit (CAD / Current Account Deficit) and the decline in
foreign exchange reserves. The widening of the CAD was due to Indonesia's not yet optimal
export performance and the import value which tended to increase. Foreign funds outflow
from the domestic capital market also added pressure to the rupiah. This was reflected in
foreign ownership in the stock market and the domestic bond market which reported a
decline. Throughout 2018 there was a net outflow of IDR50.7 trillion in the stock market
while net inflow was IDR57.1 trillion in the bond market.
Facing turmoil in the rupiah market, several policies were made to secure the rupiah
position since mid-2018.
1. Reactivation of 9-month SBI and 12-month SBI
Bank Indonesia (BI) made other efforts to make Indonesia's financial market more
competitive and more attractive to investors. One of them is the reactivation (reactivation)
of Bank Indonesia Certificates (SBI) with a tenor of 9 and 12 months. Through the SBI
auction, foreign funds are expected to re-enter the domestic market. Foreign capital to
Indonesia is believed to be able to maintain rupiah volatility against US dollar. This SBI
instrument was deactivated in the previous era because of the reason that the Central
Banks have to spent more money on SBI interest payments. Reissuing SBIs can be a special
attraction for the Indonesian financial market. SBI is one of the mechanisms of Open
Market Operations (OPT) which is used by BI to control the stability of the Rupiah exchange
rate. By selling SBIs, Bank Indonesia can absorb excess outstanding base money. In its first
auction on July 23, 2018, the total SBI auctions won reached IDR 5.97 trillion, consisting of
IDR 4.18 trillion for 9-month SBI (70%) and IDR 1.795 trillion for 12-month SBI (30%).
In the development of SBI auctions from July 23, 2018 to mid-January 2019, the nominal
volume won varies by an average of around IDR 8.6 trillion per auction out of a total of 7
auctions for both tenors. SBI auctions with a 12-year tenor are more in demand so they are
still being auctioned until early 2019, while 9-month SBIs have not been auctioned since
August 16, 2018. This shows that the market response to SBI auctions is not always high
with bid frequencies ranging from 39 times to 132 times in each auction. The
implementation of SBI auctions is still not optimal amid high global uncertainty. The risk of
sudden reversal of foreign capital in the short term is still difficult to avoid. If that happens,
in the end SBI will have low demand. The current SBI instrument is one of BI's monetary
operations steps. These 9-month and 12-month tenor SBIs have features that are more
flexible and can be transacted on the secondary market (selling outright & repo) both by
banks and non-banks. However, the central bank must ensure that the issuance schedule is
different from the issuance of state bond auctions (SBN) to attract SBIs transaction.
FIGURE 115. BANK INDONESIA CERTIFICATES (SBI) AUCTION RESULTS AFTER REACTIVATION
25,000 7.00 7.00 7.00

6.75 6.75 7.00
20,000
20,000 6.55
6.45
6.35 6.50
6.25 15,003
15,000
9,755 10,000 10,000 6.00

10,000
4,180 4,443 5.50

5,000 2,650
1,795
- 5.00
SBI 9-mth
SBI 9-mth
SBI 12-mth
SBI 12-mth
SBI 12-mth
SBI 12-mth
SBI 12-mth
SBI 12-mth
SBI 12-mth
23-Jul-18 16-Aug-18 28-Sep-18 26-Oct-18 16-Nov-18 4-Jan-19 18-Jan-19
Nominal Awarded (IDR bn) - lhs Stop Out Rate (%) - rhs
2. Policy to raise benchmark interest rates
Facing external pressure that has continued since the end of the second quarter of this year,
BI continues to carry out a series of policy steps including interest rate hike decision. BI was
increased BI 7-drrr by 50 bps to 5.25% from 4.75% which was decided by the BI Board of
Governors' Meeting on 28-29 June 2018. This step received a quite positive response from
investors, thus pushing foreign capital inflows back to domestic market. This step was also
welcomed by market participants and helped reducing the depreciation of the Rupiah. In
2018, the accumulated increase in BI 7-drr reached 175 bps to 6% until the end of 2018. The
decision to increase the interest rate was part of the short-term policy steps of Bank
Indonesia which prioritized monetary policy on stability especially for the rupiah exchange
rate.
3. Domestic Non-Delivery Forward Transactions
BI continues to pursue a monetary operations strategy directed at maintaining adequate

liquidity both in the Rupiah market and the foreign exchange market. One of new strategies
undertaken by BI is to implement DNDF transactions at the beginning of November 2018.
DNDF transactions are standard foreign currency derivative transactions against rupiah
(plain vanilla) in the form of forward transactions with fixing mechanism (settlement of
transactions without movement of principal funds by calculating the difference between
forward transaction rate and reference rate on the specified date specified in the contract)
carried out in the domestic market.
FIGURE 116. NDF, DNDF AND USDIDR CURRENCY
15,200
15,000
14,800 14,795
14,672
14,600 14,582
14,530
14,400 14,455
14,200
14,000
13,800
7-Nov-18
12-Nov-18
17-Nov-18
22-Nov-18
27-Nov-18
2-Dec-18
7-Dec-18
12-Dec-18
17-Dec-18
22-Dec-18
27-Dec-18
DNDF 1-mo DNDF 3-mo NDF 1-mo NDF 3-mo USDIDR
Source: Reuters
After the DNDF was implemented, the rupiah exchange rate strengthened starting to the
level of 15,000 against the USD. BI’s policy in the effort of financial deepening through
currency futures trading in the domestic foreign exchange market was appreciated by
banking sectors. There are at least 30 banks participating in DNDF trading since the
beginning of its implementation in early November last year. Transactions on the foreign
exchange market which were previously concentrated in the spot market then developed in
the swap market are now being developed in the DNDF. With the great enthusiasm for the
use of hedging instruments, it has also helped to deepen the foreign exchange market in
the country so that Indonesia's need for foreign exchange will be fulfilled. Based on data
from Bank Indonesia, DNDF transactions from 14-21 January 2019 reached USD621 million
or around IDR8.82 trillion. In addition, DNDF with a 1-month tenor is more active than a 3-
month tenor.
FIGURE 117. DNDF TRANSACTION VOLUME
14,300 400
14,245
14,250
14,209 300
14,192 270
14,200 14,181
14,144
14,150 186 200
14,089
14,100 103
100
14,050 47
15
14,000 0
14-Jan-19 15-Jan-19 16-Jan-19 17-Jan-19 18-Jan-19 21-Jan-19
DNDF Auction Transaction Volume (USD mn) DNDF 1-month
With the implementation of DNDF, short-term investors can enjoy the opportunity to
hedge on the rupiah market. DNDF transactions are basically aimed at increasing liquidity
and efficiency in the domestic foreign exchange market and reducing the fluctuating risk of
the rupiah exchange rate. The reference rate used is JISDOR for US dollar against rupiah
and BI transaction middle rate for non-US dollar against rupiah. DNDF transactions can be
carried out by banks with customers and foreign parties to hedge against the risk of rupiah
exchange rates, and must be supported by underlying transactions in the form of trade in
goods and services, investments and bank loans in foreign exchange.
4. The government launches the XVI economic policy package
On November 16, 2018, the Government released the latest economic policy package in
order to increase foreign investor confidence and cover the trade balance deficit, including
through direct investment and investment in financial markets. The XVI economic policy
package includes policies related to expanding facilities for reducing corporate income tax
(tax holiday), relaxing the Negative Investment List (DNI), and providing tax incentives for
export proceeds (DHE) based on natural resource industries. DNI relaxation also opens
opportunities for Domestic Investment (PMDN), including Micro, Small and Medium
Enterprises (MSMEs), and cooperatives to be more advanced and cooperate in increasing
domestic investment.
Other policies that basically maintain stabilization of macroeconomic indicators that

include fiscal and structural policies are also carried out by government and Bank Indonesia.
Some of the policy mixes have proven effective in maintaining domestic indicators to
remain healthy amid global uncertainty.
FIGURE 118. SAFEGUARDING MACROECONOMIC INDICATORS
MONETARY POLICY
• Monetary policy stance

• Monetary operation strategy
MACROPRUDENTIAL POLICY
GDP
• Financial stability
FISCAL POLICY INFLATION RATE • Financing
• Financial infrastructure
EXCHANGE RATE
STRUCTURAL PAYMENT SYSTEM POLICY
POLICY BALANCE OF
• Digitalization for inclusiveness
PAYMENT and productivity
• Higher Service Level
FINANCIAL DEEPENING POLICY
• Effective transmission
• Economic financing
With various policies implemented, since November 2018, the rupiah has begun to
appreciate. The strengthening of the rupiah was also influenced by more conducive external
sentiments. Reducing the tension of the trade war between the US and China following the
Fed's statement which tends to be "dovish" in the December 2018 FOMC meeting are the
two main external factors that support the rupiah appreciation. The Fed continued to raise
interest rates for the fourth time during 2018 to 2.5% in its December 2018 meeting. This
decision is considered to have been "priced in or no surprise effect" to the market in general.
Based on December 2018 dot plot projection, the Fed reduced the plan to increase the
benchmark interest rate, the Fed Funds Rate, in 2019 to two times (25 bps each) so that at
the end of next year the Fed Funds Rate will reach 3%. This is not as aggressive as the
previous target in the FOMC meeting in September 2018 with a three times increase rate
hike to 3.25% in 2019.
Rupiah Outlook 2019: Keep a close watch on global developments

In 2019 we estimate rupiah volatility to remain high. We expect the rupiah to fluctuate in
2019 because some external risks will continue this year. The domestic economy is still
quite solid so that economic growth is still maintained above 5.1%. External factors such as
a new round of trade war between the US and its trading partners, especially China will still
influence global foreign exchange movements. The slowdown in world economic growth
and the delay in tightening monetary policy in developed countries such as European Union
and Japan is also the reason that make the US dollar still be a safe haven currency and still
possible to attract investors rather than other major currencies.
In the first quarter of 2019, we estimated the pressure on the rupiah tended to decline due
to optimism that foreign fund continues to enter the domestic market. The Federal
Reserve's policies which tend to dovish also reduce the pressure of the weakening of the
rupiah. Rupiah volatility is expected to increase at the end of the second quarter of this year
along with the Indonesia’s holding the general elections. Based on historical data, the
election year will affect the investor's risk appetite. Therefore, consistent and sustainable
efforts are still needed to maintain investor confidence.
In anticipating further risks, a greater role is needed from the Government, Bank Indonesia,
and business actors. In the short term, some policies that can quickly reduce the volatility of
the Rupiah on the market will still important. The policy relates to the steps of the Central
Bank in market control such as foreign exchange transactions, hedging swaps, and DNDF
transactions. For the medium and long term, the Central Bank must continue balance policy
mix which includes interest rate policies, exchange rate policies, regulation of investment
fund flows, macro-prudential policies, and monetary policy. We also see that there is still
room to increase the benchmark interest rate in 2019. From the government side, it is
necessary to seek policies that encourage exports and control imports more optimally. The
Government's have to provide export incentives, expand new export markets, and policies
that further strengthen the domestic industrial sector that encourages the use of locally
produced goods and not tied to imported products. The Bank Mandiri Economic Research
Team estimates the rupiah target at the end of 2019 at the level of 14,548 against the US
dollar. We see this level is still competitive in supporting this year's domestic economy.
Anticipating pressures
Rupiah/USDfrom external
Shooting Star Bullish Harami

- End of indicates a
Bearish Harami, Inverted future bullish
uptrend
indicates a future Hammer to trend
bearish trend determine a
bottom trend
Evening star as an
early indication of Tweezer top,
bearish reversal indicates minor
bearish reversal
Bearish Harami,
Bearish Harami, Long-legged Doji, indicates a future
indicates a future indicates supply and bearish trend
bearish trend, demand near
confirmed down equilibrium
Upside Tasuki Gap -
Bullish continuation
Downside Tasuki Gap - Morning Star

Bearish continuation as an early
indication of Inverted Hammer to
bullish determine a bottom
reversal trend
RenyEkaPutrireny.putri@bankmandiri.co.id
Rupiah Fluctuation Against USDollar

Rupiah traded between 13,268 - 15,284 in 2018
14548 against US Dollar. RSI indicator recently
14390
13788
triggered an overbought reading and has
13568
12385 13473 dipped back into negative (sell) territory from
11120
12170
65 to 30 level or IDR14,200 - IDR14,700 per
10400
9830 USD in a short term.
9675 9270 9393 9067
9404 9638
8000 8950 8995 9013 MACD indicator, which is a measure
8420 momentum, tends to move lower. We expect
5403
7100 in the short term (January 2019), Rupiah will
fluctuate from 13,950 to 14,350 against US
Dollar.
2287
1995 2102
st
2363 For the 1 quarter of 2019, we predict that
2067 2199
Rupiah will trade between 13,800 and 14,700
against USD. We forecast Rupiah to reach
2019F
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
15,548 at the end of 2019 against USD or

14,555 per US Dollar on average.
Currency Forecast 1Q19 2Q19 3Q19 4Q19
USD/IDR 14,443 14,544 14,562 14,548
note: RSI = Relative Strength Index

MACD = Moving Average Convergence/Divergence
DMI = Directional Movement Index
FIGURE 119. MACRO ECONOMIC FORECASTS

2013 2014 2015 2016 2017 2018F 2019F 2020F
National Account
Real GDP (% yoy) 5.6 5.0 4.8 5.0 5.07 5.16 5.22 5.37
Real Consumption: Private (% yoy) 5.4 5.1 5.0 5.0 4.95 5.00 5.10 5.23
Real Consumption: Government (% yoy) 6.9 2.0 5.4 (0.1) 2.14 5.00 4.50 4.00
Real Gross Fixed Capital Formation (% yoy) 5.3 4.1 5.1 4.5 6.15 6.50 7.10 7.50
Real Exports (% yoy) 4.2 1.0 (2.0) (1.7) 9.09 7.50 6.80 6.70
Real Imports (% yoy) 1.9 2.2 (5.8) (2.3) 8.06 9.00 7.00 7.10
GDP (IDR tn) - nominal 9,525 10,543 11,541 12,407.0 13,588.8 14,778.8 16,108.1 17,572.0
GDP (USD bn) - nominal 911 888 858 932 1,014 1,036 1,115 1,221
GDP per capita (USD) - nominal 3,662 3,520 3,377 3,589 3,847 3,886 4,137 4,501
External Sector
Exports (% yoy) - Merchandise (2.8) (3.7) (15.4) (3.2) 17.0 10.5 3.1 1.6
Imports (% yoy) - Merchandise (1.4) (4.5) (19.7) (4.6) 16.0 14.7 (1.3) 2.5
Trade Balance (USD bn) 5.8 6.9 13.3 15.4 18.8 12.2 7.5 6.0
Current Account (% of GDP) (3.2) (3.0) (2.0) (1.8) (1.7) (2.5) (2.8) (2.9)
Current Account (USD bn) (29.1) (26.2) (17.6) (16.3) (17.3) (25.3) (29.9) (33.8)
International Reserves ( USD bn) 99 112 106 116 130 121 125 128
IDR/USD (period average) 10,439 11,875 13,394 13,304 13,384 14,247* 14,555 14,392
IDR/USD (year end) 12,170 12,385 13,788 13,463 13,568 14,390* 14,548 14,375
Other
BI rate (% year end) 7.50 7.75 7.50
BI 7 days reverse repo rate (% year end) 4.75 4.25 6.00* 6.25 6.25
Headline Inflation (% yoy, period average) 6.4 6.4 6.4 3.5 3.81 3.2* 3.4 3.7
Headline Inflation (% yoy, year end) 8.08 8.36 3.35 3.00 3.61 3.13* 3.8 3.7
S&P's Rating - FCY BB+ BB+ BB+ BB+ BBB- BBB- BBB- BBB-
S&P's Rating - LCY BBB- BBB- BBB- BBB- BBB- BBB- BBB- BBB-
*) data realization for 2018

Source: Mandiri Group
IDR Bond Market Outlook 2019: Turning Point to

Positive Returns
What went wrong in 2018? The 10-yr government bond yield closed at 8.03% (+171 bps
compared to 2017 vs. 6.64% our upper range forecast), sending INDOGB total returns to
post losses of 2.2% in 2018 (vs. +17.7% and +14% in 2017 and 2016). Some positive catalysts
for INDOGB that we mentioned in our strategy report last year have actually happened, but
we underestimated global risk sentiment to Emerging Markets. We missed a lot on BI7drrr,
5-yr CDS, and rupiah outlook that we used in our fair yield model calculation.
The 10-yr INDOGB projected to lower to 7.50 - 7.78% by YE 2019 (vs. 8.03% in Dec
2018). Our base scenario assumes the 10-yr UST yield has peaked for this cycle and is
unlikely to reach the Oct 2018 highs again at 3.24%, as we are expecting only a mild net
increase in yields to 2.8% (vs. 2.68% by YE 2018). BI rate is expected to increase by only 25
bps to 6.25% (vs. 175 bps in 2018). The 5-yr CDS will go lower to 90 on prudent fiscal policy
and expectation on upgrade rating in 2020 (vs. 137 in YE 2018), while rupiah might stabilize
at IDR14,000 against US dollar by YE 2019 (vs. IDR14,417 in YE 2018).
Five catalysts to support positive total returns of INDOGB in 2019. 1) Better bond yield
entry level compared to early 2018. 2) BI7drr rate near peak level with dovish Fed
communication, narrowing
CAD expectation, and manageable inflation, thus will stabilize rupiah currency in 2019. 3)
Prudent fiscal and monetary policies will be positive for sovereign rating outlook. 4) More
long term foreign investors in INDOGB market than “hot money”. 5) High support from
onshore investors with the Government’s plan to reduce withholding tax for bond
instrument.
The 2019 gross issuance target is projected to go higher by IDR51.4tn (+6.6% yoy) than
in 2018. The Government targets to issue bonds totaling IDR826tn-gross in 2019
(IDR774.6tn from actual 2018 or +6.6%yoy)–but note that the initial gross issuance target
for early 2018 was IDR846.4tn, assuming budget deficit of 2.19% of GDP or IDR325.9tn. No
significant changes on the Government’s strategy in financing the budget deficit this year.
1) The Government still maintains its front loading policy for 2019–aimed to issue 50-60% of
target in 1H (vs. 59% in 1H 2018). This is also inline with maturing government bonds that
are heavily skewed to 1H 2019. 2) The Government is also issuing more on domestic bonds
(targeted global bonds outstanding portion to total outstanding bonds continued to lower
to 14-17% in 2019 vs. 18% in 2018). The new initiative in debt management policy in 2019 is
the Government’s plan to offer more retail bonds, i.e. 10 times, with 2x via offline book
building and 8x via online channels.
Review 2018: When the Easy Money Ended

In our strategy report last year, we noted that the chance of repeating double-digit returns
performance–as what happened in the last two years–was likely to be small, especially with
low entry levels of government bond yields in 2018, increasing US Treasury yield outlook,
and no more BI rate cut. We stated the returns on investment in INDOGB in 2018 will mostly
be driven by coupon income rather than price appreciation. The fact, the 10-yr government
bond yield closed at 8.02% (+171 bps compared to 2017 vs. 7.7% our upper range forecast),
sending INDOGB total returns to post losses of -2.2% in 2018 (vs. +17.7% and +14% in 2017
and 2016)–meaning that coupon income can’t offset the capital loses. This is the second
time INDOGB posted negative returns in the last eleven years, but still better than when the
taper tantrum sentiment in 2013 when it posted returns of –13.3%.
What went wrong in 2018? Some positive catalysts for INDOGB that we mentioned in our
strategy report last year have actually happened. We correctly predicted the following: (1)
there will be low inflation due to political year. The fact, Indonesia’s inflation only reached
3.13% in 2018 (vs. 3.61% in 2017 and still in the middle of BI’s range target of 2.5-4.5%). (2)
Expectation of Moody’s sovereign rating upgrade to Baa2 following prudent fiscal policy,
effective and credible policy on macroeconomic stability, and increasing FX reserve as
upgrade catalysts. The fact, Moody’s rating agency has upgraded Indonesia’s sovereign
rating to Baa2 on 13-April. (3) Inclusion of INDOGB into the Bloomberg Global Aggregate
Bond Index would attract foreign fund inflows. The fact, foreign investors still reported net
inflow of IDR57.2tn to INDOGB in 2018–although still much lower compared to inflows in
2016 and 2017, which reached IDR107.3tn and IDR170.3tn, respectively. So why are
government bond yields finally closing higher than our estimation? The answer is, we
underestimated global risk sentiment to Emerging Markets (EMs). We missed a lot on
BI7drrr, 5-yr CDS, and rupiah outlook that we used in our fair yield model calculation.
FIGURE 120. HIGHER THAN OUR EXPECTATION ON BI7DRRR, CDS, AND RUPIAH AGAINST
USD PUSHED BOND YIELDS HIGHER THAN OUR INITIAL FORECAST EARLY 2018
2018_
2018_
2014 2015 2016 2017 Initial
Actual
Forecast
10-yr US Treasury 2.17 2.27 2.44 2.41 2.60 2.68
7drr BI Rate 7.75 7.50 4.75 4.25 4.25 6.0
5yr CDS 160 230 158 85 80 137
IDRUSD 12,435 13,856 13,492 13,588 13,600 14,417
10-yr INDOGB 7.80 8.99 7.97 6.32 6.40 8.03
Source: Bloomberg and Mandiri Sekuritas Estimate
All the domestic good sentiments above were offset by global emerging bond market
sell-off. The sell-offs in EMs were mostly triggered by the end of the easy money period,
indicated by the Fed being hawkish–increasing FFR by 100bps and reducing its balance
sheet totaling USD 375.8bn in 2018, this also supported for stronger DXY index by 4.4%.
Similarly, the European Central Bank (ECB) was also tapering its bond purchases and ended
its quantitative easing program in Dec 2018. Even the Bank of Japan (BOJ) had shifted its
focus to buying just enough bonds to keep bond yields near zero or slightly above, after
having driven yields into negative territory in 2016. Another concern was also coming from
soaring trade tensions between the US and China.
FIGURE 121. WHEN THE EASY MONEY ENDED: FFR HIKED 175 FIGURE 122. STRONGER DXY GIVES NEGATIVE SENTIMENT TO
BPS AND THE FED REDUCED ITS BALANCE SHEET BY USD EM CURRENCY MARKETS
375.8BN IN 2018
USD Bn %
4.6 3.0 Argentina 102.3%
4.5 Turkey 39.3%
2.5 Russia 20.2%
4.4
Brazil 17.2%
2.0
4.3 South Africa 15.9%
4.2 1.5 India 9.2%
Indonesia 6.1%
4.1
1.0 China 5.5%
4.0
Philippines 5.4%
0.5
3.9 DXY 4.4%
3.8 - S. Korea 4.4%
Jul-15
Jul-16
Jul-17
Jul-18
Sep-17
Jan-15
Sep-15
Nov-15
Jan-16
Sep-16
Nov-16
Jan-17
Nov-17
Jan-18
Sep-18
Nov-18
Mar-15
Mar-16
Mar-17
Mar-18
May-15
May-16
May-17
May-18
Malaysia 2.2%
Mexico 0.0%
Thailand -0.8%
Total Asset of Federal Reserves FFR
-50.0% 0.0% 50.0% 100.0% 150.0%
Source: Bloomberg Source: Bloomberg
The above caused a worsening in global sentiment, which in turn triggered foreign fund
outflows from EMs, thus some central banks in EMs–including Bank Indonesia–had to
increase benchmark interest rates to curb weakening local currencies against US dollar.
Although inflation was still very manageable, Bank Indonesia had to increase its 7-day-
reverse-repo rate by 175 bps to 6% in 2018, as rupiah depreciated by 6.1% against US dollar.
BI has also been consistently mentioning “preemptive, front loading, and ahead of the
curve”. All thus factors pushed INDOGB bond yields higher in 2018, with 10-yr rupiah
government bond yields peaking at 8.88% (+256bps ytd) as of 15-Oct, before lowering to
8.03% by end of Dec 2018. Thus, the returns of INDOGB reported losses of -2.2%,
significantly lower compared to 2017 and 2016 performances, which posted gains of 17.7%
and 14%, respectively. We missed a lot on BI7drrr that we expected flat 4.5%, 5-yr CDS
lower to 80, and rupiah outlook at IDR13,600 against USD- that we used in our fair yield
model calculation. We believe global factors had the biggest impact to rupiah
government bond this year, as increasing bond yields and local currency depreciation
against USD also happened in most EMs in 2018 due to foreign sell-off.
FIGURE 123. ALMOST ALL EMS’ CENTRAL BANK INCREASED FIGURE 124. ALMOST ALL EMS’ LOCAL CURRENCY
BENCHMARK INTEREST RATE TO RESPOND TO THE GOVERNMENT BOND YIELD ALSO INCREASED IN 2018
DEPRECIATION OF LOCAL CURRENCY AGAINST USD IN 2018
Peru (50)
Colombia (50) Argentina 652
Brazil (50)
Hungary Turkey 475
-
South Africa - Philippines 197
Russia -
Poland - Indonesia 171
South Korea 25 Russia 114
Thailand 25
Malaysia 28 Mexico 100
India 50
Mexico 92 Malaysia 17
Czech Rep. 125 Thailand 16
Philippines 175
Indonesia 175 bps India 4
Turkey 1,600
Argentina 3,050 S. Korea (51)
(500) - 500 1,000 1,500 2,000 2,500 3,000 3,500 China (59)
Brazil(102) bps
-200 0 200 400 600 800
FIGURE 125. THE 10YR INDOGB YIELD HAS HIGHER FIGURE 126. THE 10-YR INDOGB YIELDS VS. TOTAL RETURNS
CORRELATION WITH RUPIAH CURRENCY THAN WITH INDEX
INFLATION
12.0 15,500 % 9.0 %

10.0 8.5 8.0 8.0 25.0
7.6 6.0 7.8
15,000 8.0 6.3 20.0
10.0 5.2
14,500 6.0 15.0
8.0 4.0
14,000 10.0
2.9
14.0
22.6
22.0
13.4
13.2
17.7
2.0
6.0 13,500 5.0
0.0
13,000 -
4.0 (2.0)
(13.3)
(2.2)
(5.0)
12,500 (4.0)
2.0 (6.0) (10.0)
12,000
(8.0) (15.0)
0.0 11,500
(10.0) (20.0)
Jul-15
Jul-16
Jul-17
Jul-18
Jan-15
Jan-16
Jan-17
Oct-17
Jan-18
Apr-15
Oct-15
Apr-16
Oct-16
Apr-17
Apr-18
Oct-18
2010
2011
2012
2013
2014
2015
2016
2017
2018
INDOGB 10Y CPI (YoY) BINDO Index (RHS) INDOGB 10YR

IDR USD Currency (RHS)
However, global pressure has eased since October 2019. Indonesia’s asset class has
improved quite significantly since October 2018, with rupiah appreciating by 5.5%
compared to end of 2018 and the 10-yr rupiah government bond yields also dropping by
almost 100 bps to trade at 7.8%. The rally also happened in other EM markets–but
Indonesia’s has the best performance. It means that besides from positive sentiment
coming from global factors to EMs, there are also improvements in domestic factors.
Positive sentiment from global came from lower US Treasury yield from the peak in 2018,
which reached 3.24% as of 8-Nov, following Fed Chairman Powel easing the FFR hike fears
after slowing economic outlook globally and lowering oil price–which also eased rising
inflation concerns. Meanwhile, positive sentiment from domestic was coming from the
fiscal, which has been projected to have lower deficit than the Government’s initial forecast,
so the Government has room to cancel the bond auctions scheduled for December.
FIGURE 127. EM BOND YIELDS HAVE ALSO LOWERED SINCE FIGURE 128. LOWERING BOND YIELDS IN OCTOBER ALSO IN
OCTOBER, IN LINE WITH LOWERING US TREASURY BOND LINE WITH FOREIGN FUND INFLOWS TO INDOGB
YIELDS
% Rp tn
Argentina 208
10.0 50.0
Russia 10
9.5 40.0
Philippines 0
9.0
Malaysia (2) 30.0
8.5
Mexico (22)
8.0 20.0
China (23)
S. Korea 7.5 10.0
(29)
Thailand (35) 7.0 0.0
United States (46) 6.5
(10.0)
India (48) 6.0
5.5 (20.0)
Indonesia (52)
Brazil (98) 5.0 (30.0)
Jul-15
Jul-16
Jul-17
Jul-18
Jan-15
Jan-16
Jan-17
Jan-18
Apr-15
Oct-15
Apr-16
Oct-16
Apr-17
Oct-17
Apr-18
Oct-18
Turkey (204) bps
(300) (200) (100) 0 100 200 300

Foreign Fund Flows (RHS) INDOGB 10Y
Fiscal deficit lower than initial target, the Government canceled December’s auction.
Budget deficit reached only 1.76% of GDP, much lower than the Government’s initial target
of -2.12% of GDP in 2018. Both revenue and expenditure were improving compared to
budget realization in 2017. Total revenue reached 102.5% compared to target,
supported by significant windfall profit on non-tax revenue that reached IDR407.1tn (vs.
IDR275.4tn target), offsetting the tax shortfall of IDR97tn. The realization of government
expenditure also improved, reaching 99.2% of target (vs. 96.5% in 2017). The energy
subsidy was above target, at 162.4%–as the Government increased diesel price subsidy to
IDR153.5 per liter following higher oil price; meanwhile, capital spending post realization
reported reaching 90.7%, implying a contraction of -11% in 2018.
Better fiscal deficit gave the Government room to cancel the bond auction scheduled in
December. Note that the Government has revised gross issuances from IDR845tn to
IDR799tn since it reduced SPN issuances for cash management, following sufficient tax
revenue collection and cash buffer. Lower gross issuances in 2018 were also triggered by
lowering net issuance target to IDR384.2tn (vs. IDR414.5tn initial estimate), as the
Government is optimizing the multilateral loan program.
FIGURE 129. LOWER GOVERNMENT BOND ISSUANCES DUE TO LOWER FISCAL DEFICIT
REALIZATION IN 2018
Initial Budget
Government budget deficit financing 2018 (IDR Revision Revision
Budget Realization
tn) 1 2
2018 2018
Budget deficit % of GDP 2.12 2.00 1.80 1.76
Redemption, Cash Management & Buyback (431.9) (414.8) (415.8) (416.2)
Government bond nett issuances 414.5 407.5 383.2 358.4
Government bond gross issuances 846.4 822.3 799.0 774.6
Realized issuance as of 28-Dec-2018 774.6

Domestic bonds 635.4
Auction conventional FR/ VR and T-Bills/ ZC 410.5
Retail bonds (ORI & Sukuk) 46.0
Domestic sukuk 136.3
Private placement 42.5
Global bonds 139.3
Source: MoF, DMO and Mandiri Sekuritas Estimate
Institutional non-banks and Bank Indonesia supported bond

market when foreign outflow happened
In terms investors by institution type, the biggest net buyers of government bonds in 2018
were onshore investors, as foreign only reported net buy of 21.3% of net rupiah government
bond issuances. In the last five years, on average the foreign net buy’s portion to total net
issuance of rupiah government bonds is 44% (range: 30-64%). Specific for onshore
investors, onshore banks are the biggest net buyers, totaling IDR63.8tn or 23.7% of net
bond issuances this year. This is still slightly lower than in 2017, when banks reported net
buy of IDR77.8tn. The significant increase in onshore net buyers compared to last year came
from institutional non-banks (pension funds and insurance companies), which reported net
buy totaling IDR65.6tn or almost 25% of net bond issuances (vs. only IDR23.4tn in full year
2017).
To mitigate lower issuance on auctions and increase onshore participation, this year the
Government also optimizes non-auction issuances by private placement and retail bond
issuances. Ytd, the Government has already issued IDR88.5tn from non-auction issuances
or 11.4% of gross issuance realization in 2018 (vs. only 5% in 2017). Retail and other
investors also increased their portion to government bonds, as they reported net buy of
IDR30tn in 2018 (+203% yoy).
FIGURE 130. ONSHORE INVESTORS WERE THE BIGGEST NET BUYERS OF GOVERNMENT
BONDS IN 2018
Net Buy/(Sell)
28-Dec-18 % of outs
2018 2017 2016
Bank (excl. reverse repo) 517.4 21.8% 63.8 77.8 26.9
Bank Indonesia 217.4 9.2% 37.5 22.0 7.8
Mutual Fund 118.6 5.0% 14.6 18.3 24.1
Insurance and Pension Fund 414.5 17.5% 65.6 23.4 104.0
Foreign 893.4 37.7% 57.2 170.3 107.3
Retail 73.1 3.1% 13.2 2.1 15.2
Others 134.2 5.7% 16.7 12.6 26.1
Total 2,368.6 100% 268.7 326.5 311.4
Source: DMO and Mandiri Sekuritas Estimate
Outlook 2019: Turning Point to Positive Returns
We have positive view for Indonesia’s bond market in 2019, as we expect total returns to
potentially be much higher than in 2018. We believe the direction for yields may lower
following some positive catalyst factors: 1) Better bond yield entry level compared to early
2018. 2) BI7drr rate near peak level with dovish Fed communication, narrowing CAD
expectation, and manageable inflation, thus will stabilize rupiah currency in 2019. 3)
Prudent fiscal and monetary policies will be positive for sovereign rating outlook. 4) More
long term foreign investors in INDOGB market than “hot money”. 5) High support from
onshore investors with the Government’s plan to reduce withholding tax for bond
instrument. In our base scenario, the 10-yr INDOGB is projected to lower to 7.78% by YE
2019 (vs. 8.03% in Dec 2018). The main risk factors are still coming from global rather than
domestic, in our view, i.e. tightening global liquidity (if there are more balance sheet
reductions, they may be happening not only in the US, but potentially widening to Euro
Zone and Japan) and higher global interest rate hikes–although the probability is likely
small due to weakening global economic outlook in 2019.
Base Scenario: 10-yr INDOGB projected to lower to 7.5-7.78% by YE 2019

(vs. 8.03% in Dec 2018)
We are still comfortable using our Shapley value regression index to forecast fair yields for
INDOGB this year, as it has proven to give robust results historically. There are five key
drivers explaining rupiah government bond yield, they are as follows from the most
important to the least important: UST yield, BI rate, 5-yr CDS, inflation, and rupiah
currency. A regression model using those five variables gives us the R-square of 80%,
meaning that only 20% came from other variables in the model.
FIGURE 131. THE 10-YR FAIR YIELD REGRESSION MODEL FIGURE 132. THE 10-YR BOND YIELD ACTUAL VS. MODEL
Model Input Coefficients P-value 10.00

GIDN10yr
Intercept (1.10) 0.072 9.50
GIDN10yr-Fit
BIRate (%) 0.85 0.000 9.00
% Change IDR (0.02) 0.010
8.50
CDS-5yr 0.57 0.001
8.00
US 10Y 0.87 0.000
7.50
Regression Statistics
7.00
Multiple R 0.87
6.50
R Square 0.76
6.00
Adjusted R Square 0.75
Standard Error 0.57
5.50
Observations 94.00 5.00

Dec-10 Dec-12 Dec-14 Dec-16 Dec-18
Source: Bloomberg and Mandiri Sekuritas Source: Bloomberg and Mandiri Sekuritas
Our base scenario assumes the 10-yr UST yield has peaked for this cycle and is unlikely to
reach the October 2018 highs again at 3.24%, as we are expecting only a mild net increase
in yields to 2.8% (vs. 7.9% by YE 2018). BI rate is expected to increase by only 25 bps to
6.25% (vs. 175 bps in 2018). The 5-yr CDS will go lower to 90 on prudent fiscal policy (vs. 137
in YE 2018), while rupiah might stabilize at IDR14,000 against US dollar by YE 2019 (vs.
IDR14,417 in YE 2018). If the forecast is correct, then the total returns of investing in
INDOGB this year will turn to positive, around +10.3% (vs. –2.2% in 2018).
US Treasury yield outlook 2019: (Still) expecting only a mild

net increase in yields
The 10-yr US Treasury yield is the most significant variable that has high correlation with
INDOGB yields. After more than two years of steadily rising bond yields, the 10-year US
Treasury bond yields may have peaked for this tightening cycle at the 3.25% level, as we are
expecting only a mild net increase in yields to 2.8% (vs. 2.68% by YE 2018). Tighter global
monetary policy, a strong US dollar, and sluggish global growth worsened by trade war
conflicts are likely to weigh on economic growth and inflation, thus limiting the rise in US
Treasury bond yields. The US economic projection from the latest FOMC meeting in
December also shows that the median forecast sees only two more rate hikes in 2019 (vs.
three times increase in previous meeting). It is also in line with Powell having stated the
current interest rate was "just below neutral" at the December meeting, which was different
from the statement at the October meeting of "a long way from neutral". The Fed members
have also lowered their forecast of US GDP to 2.3% and 2% in next two years (vs. 2.5%
previously) and inflation is also expected slowing to 1.9% in 2019 (vs. 2% previous estimate).
Low oil price also supports inflation expectation to remain low this year. It will be
interesting to see the development of the Fed’s projection in the FOMC meeting on 19-20
March 2019.
FIGURE 133. FOMC DECEMBER 2018: FED ECONOMIC PROJECTIONS (UPDATE FOMC DECEMBER VS. SEPTEMBER)
FOMC Meeting Target Projection Median

Variable
2018 2019 2020 2021 Longer run
Change in real GDP 3.0 2.3 2.0 1.8 1.9
(vs. September projection) 3.1 2.5 2.0 1.8 1.8
Unemployment rate 3.7 3.5 3.6 3.8 4.4
PCE Inflation 1.9 1.9 2.1 2.1 2.0
Core PCE Inflation 1.9 2.0 2.0 2.0
(vs. September projection) 2.0 2.1 2.1 2.1
Federal funds rate 2.4 2.9 3.1 3.1 2.8
Source: Fed
FIGURE 134. FFR AND 10-YR UST YIELDS: IN PAST CYCLES, 10- FIGURE 135. DOT PLOT AND MARKET EXPECTATION
YR UST YIELDS AND FFR HAVE PEAKED AROUND THE SAME
LEVEL
Fed Fund Rate 10-year Treasuries

12.0%
10.0
8.0
6.0
4.0
2.0
0.0
Nov-88 Nov-93 Nov-98 Nov-03 Nov-08 Nov-13 Nov-18
FIGURE 136. LOWER OIL PRICE SENDING INFLATION LOWER, FIGURE 137. IMPLIED FED FUND FUTURES: PROBABILITY OF
ALTHOUGH US WAGE GROWTH IS ON RISING TREND FFR HIKE THIS YEAR CONTINUES TO LOWER
PCE Core Inflation US Wages YoY

3.5 3.5
WTI Crude Oil (RHS)
3.0
3.0
2.5
2.5 2.0
2.0 1.5
1.0
1.5
0.5
1.0 0.0
Jul-15
Jul-16
Jul-17
Jul-18
Jan-15
Jan-16
Jan-17
Jan-18
Apr-15
Oct-15
Apr-16
Oct-16
Apr-17
Oct-17
Apr-18
Oct-18
Source: Bloomberg Source: Bloomberg as of 6-Feb-2019
Five positive catalysts to support positive total returns of INDOGB in 2019

Below are five positive catalysts that support our view of positive total returns of investing
in INDOGB in 2019:
1) Better bond yield entry level compared to early 2018
There’s high correlation between entry government bond yields to bond returns in the
next one year. We also calculate the average, highest, and lowest returns based on
beginning entry level based on historical data. With the entry of government bond yield
early this year at 8.03% (vs. 6.30% in 2018), the average returns is 11% (ranging: -1% to
22%)–higher than when the entry level was 6-7%. In terms of real yield and yield spread
over US Treasury, the current 10-yr INDOGB yield valuation is also much better
compared to early 2018. With Indonesia’s CPI still expected to be below the upper
range of BI’s inflation projection at 4.5% and the expectation of only mild increase in
US Treasury yield, we also believe Indonesia’s bond yield is attractive for both domestic
and offshore investors.
FIGURE 138. THE LOWER THE STARTING YIELD, THE LOWER FIGURE 139. THE AVERAGE ENTRY LEVEL YIELD AND AVERAGE
THE FUTURE RETURNS TOTAL RETURNS 1YR FORWARD
40.0 1-yr forward return 11.0
(LHS) 40.0
10.0
30.0
9.0
30.0
20.0
8.0
10.0 7.0 20.0 18.8

14.5
6.0 11.1
0.0 10.0
5.0 6.2
-10.0 -
4.0
(4.6)
-20.0 3.0
(10.0)
Jul-11
Jul-12
Jul-13
Jul-14
Jul-15
Jul-16
Jul-17
Jul-18
Jan-16
Jan-11
Jan-12
Jan-13
Jan-14
Jan-15
Jan-17
Jan-18
Jan-19
Avg Min Max

(20.0)
5-6 6-7 7-8 8-9 9-10
Source: Bloomberg and Mandiri Sekuritas Source: Bloomberg as of 6-Feb-2019
2) Inflation might still be in line with BI’s range target of 2.5-4.5%; BI rate is
already near peak level
Inflation was reported at only 3.13% in 2018, supported by manageable food price and
lower administered price inflation, as the Government did not increase electricity tariff
in 2018 (vs. +90% in 2017)– this is four years consecutively that Indonesia’s inflation has
been below 4%. Our economist strongly believes the inflation trend will continue to
below 4% in 2019. There are at least four factors to support low inflation expectation
this year:
1) Although there is a possibility of administered fuel price adjustment post-

presidential election, the impact to inflation might still be relatively small,
since the potential price adjustment of RON 88 (or premium product) is
expected to only range between 10-15%, assuming oil price is stable at USD
50-60 pbrl and rupiah at IDR13,700 – 14,100 against USD. The sensitivity is for
every 10% increase on RON 88 price, there will be an additional inflation
contribution of 0.3 ppt.
2) The risk of pass through cost from producers to consumers has also subsided
amid the lower oil price and stable exchange rate. For example, the Whole
Sales Price Index–non-oil and gas–has eased to 3.8% yoy in Dec18 from 4.3%
yoy in Jul18.
3) Potentially lower inflation due to CPI rebalancing. Indonesia would likely
conduct a CPI rebasing in 2H19, changing from 2012 base year to 2017 base
year. In the last three rebasing inflation, the share of food components has
continued to go down, in line with increasing income per capita, and it has
pushed inflation lower; for example the average 2007 monthly inflation was
0.10% lower using the 2007 CPI base year compared the 2002 CPI base year.
4) Better infrastructure condition should lower inflation volatility through lower
logistic cost.
Thus on the BI7DRR rate outlook, with BI having already been “pre-emptive, front
loading, and ahead the curve”, with relatively stable rupiah due to lowering CAD
outlook in 2019, and with not much increase on inflation outlook for 2019-2020, thus
we believe BI rate will be increasing at a much lower pace compared to last year. The
narrowing CAD deficit is partly driven by the Government’s policies implemented since
last year to stabilize the rupiah, i.e. increasing BI7drr rate by 175 bps in 2018, tightening
fiscal as budget deficit was reported only at 1.75% of GDP (vs. -2.2% of GDP in initial
forecast 2018), and the Government’s plan to reduce imports. The top two lowering
imports will be sourced from the following: i.) bio-fuel program (B-20 program). If the
program is properly implemented, it could reduce oil imports by USD 2bn (0.2% of
GDP) this year. ii.) delay on selective infrastructure projects, especially power plants;
thus could reduce the current account deficit by around USD 1bn-2bn per year (0.1-
0.2% of GDP). Overall, our economist expects CAD to narrow to -2.8% of GDP from an
estimate of -3% in 2018, meanwhile balance of payment is expected to turn back to
surplus from deficit in 2018, as the financial account surplus should improve on the back
of better portfolio flows and foreign direct investment this year. As a conclusion, we
expect BI7drrr will potentially increase only by 25 bps to 6.25% by YE 2019 (vs. +175
bps in 2018), reconfirming BI’s statement that interest rate is nearly at peak level.
FIGURE 140. INFLATION MIGHT STILL BE IN LINE WITH BI’S FIGURE 141. BI7DRR RATE IS NEARLY AT PEAK LEVEL
RANGE TARGET OF 2.5-4.5%
Inflation (YoY%) BI's target, end of year BI 7DRR Rate Fed Fund Rate
10.00 7.00 3.50
Headline inflation (%,
9.00 6.00 3.00
YoY)
8.00 Core inflation (%, YoY)
5.00 2.50
7.00 4.00 2.00
6.00 3.00 1.50
5.00 2.00 1.00
4.00 1.00 0.50
3.00 - -
Jul-16
Jul-17
Jul-18
Jul-19
Jul-20
Jan-17
Jan-18
Jan-19
Jan-20
Apr-16
Oct-16
Apr-17
Oct-17
Apr-20
Apr-18
Oct-18
Apr-19
Oct-19
Oct-20
2.00
1.00
-
Jan-09 Aug-10 Mar-12 Oct-13 May-15 Dec-16 Jul-18 Feb-20 Sep-21
Source: Bloomberg Source: Bloomberg and Mandiri Sekuritas
3) Prudent fiscal and monetary policies will be positive for government bond supply
outlook and sovereign rating outlook. On the 2019 fiscal posture, fiscal policy will still
focus on stability by targeting to maintain low budget deficit and primary fiscal deficits.
We think this is also positive for government bond supply outlook and Indonesia’s
sovereign rating.
Budget deficit targeted at -1.84% of GDP in 2019–inline with medium term

government budget outlook. The fiscal has been prudently managed in 2018, as it
reported a deficit of only 1.76% of GDP, much lower than the Government’s initial
target of -2.2% of GDP in 2018. Both revenue and expenditure were improving
compared to budget realization in 2017 by 16.6% and 14.8%, respectively. In the 2019
budget, total revenue is targeted to increase by 11.5%, with tax revenue expected to
increase by 17.4% using the 2018 realization. Although tax revenue growth target
might be challenging this year, as the average oil price seems less likely to surpass
USD70/bbl this year (budget target assumption) due to the global slowdown risk, the
gap may still be closed by increasing non-tax revenue, as it has been targeted at -7%
below the 2018 realization. Improving tax administration and data access should
continue to boost tax collection. On the other hand, the Government’s total
expenditure is expected to grow by 11.8% this year (vs. 10.8% in 2018 budget plan). We
still believe the budget deficit target in 2019 is still achievable.
FIGURE 142. BUDGET DEFICIT TARGETED AT -1.84% OF GDP 2019
APBN APBN
Items FY15 FY16 FY17 FY18
2018 2019
Budget Balanced (292.0) (305.3) (341.0) (259.9) (326.0) (296.0)
(% of GDP) -2.52% -2.46% -2.53% -1.75% -2.20% -1.84%
Total Revenue 1,504.5 1,555.0 1,666.3 1,942.4 1,894.7 2,165.1
(% of GDP) 13.0% 12.5% 12.4% 13.1% 12.8% 13.5%
(% change) -3.0% 3.4% 7.2% 16.6% 13.7% 11.5%
Tax revenue 1,240.4 1,284.9 1,343.5 1,521.4 1,618.1 1,786.4
(% of GDP) 10.7% 10.4% 10.0% 10.3% 10.9% 11.1%
(% change) 8.2% 3.6% 4.6% 13.2% 20.4% 17.4%
Total Expenditure 1,796.5 1,860.3 2,007.4 2,202.3 2,220.7 2,461.1
(% of GDP) 15.5% 15.0% 14.9% 14.8% 15.0% 15.3%
(% change) 1.7% 3.6% 7.9% 9.7% 10.6% 11.8%
Energy Subsidies 119.1 106.8 97.6 153.5 94.5 160.0
Non-Energy Subsidy 66.9 67.4 68.8 63.3 61.7 64.3
Primary balance (136.0) (122.5) (124.5) (1.8) (87.4) (20.1)
(% of GDP) -1.2% -1.0% -0.9% 0.0% -0.6% -0.1%
Source: MoF and Mandiri Sekuritas
FIGURE 143. MEDIUM TERM OUTLOOK OF INDONESIA’S FISCAL BUDGET
2018 Budget
Description (% GDP) APBN 2019 2020 2021 2022
Realization
Revenue & Grants 13.1 13.5 12.7 - 13.9 13.5 - 14.0 13.6 - 14.4
Tax Ratio 10.3 11.1 11.4 - 12.5 11.6 - 13.0 11.8 - 13.6
Total Spending 14.8 15.3 14.3 - 15.6 15.0 - 15.7 15.1 - 16.0
Capital Expenditure 1.3 1.2 1.8 - 2.3 2.2 - 2.7 2.3 - 3.0
Primary Balance 0.0 -0.1 0.05 - 0.01 0.10 - 0.01 0.1 - 0.05
Budget Deficit -1.8 -1.8 (1.6) - (1.7) (1.5) - (1.7) (1.5) - (1.6)
Debt Ratio 30.0 30.4 28.50 - 28.61 27.81 - 28.30 26.25 - 27.87
FY2019, the 2019 gross issuance target is projected to go higher by IDR51.4tn

(+6.6% yoy) than in 2018. The Government targets to issue bonds totaling IDR826tn-
gross in 2019 (IDR774.6tn from actual 2018 or +6.6%yoy)–but note that the initial gross
issuance target for early 2018 was IDR846.4tn, assuming budget deficit of 2.19% of
GDP or IDR325.9tn. The gross issuance target has been lowered in 2018 since the
Government reduced SPN issuances for cash management, following sufficient tax
revenue collection and cash buffer and lowering net issuance target to IDR384.2tn (vs.
IDR414.5tn), as the Government is also optimizing the multilateral loan
program. Meanwhile, in terms of net issuances, the Government will issue IDR389tn in
2019 (vs. IDR358.4tn realization in 2018 or +8.5%yoy).
No significant changes on the Government’s strategy in financing the budget
deficit in 2019. The Government still maintains its front loading policy for 2019–aimed
to issue 50-60% of target in 1H (vs. 59% in 1H 2018). This is also inline with maturing
government bonds that are heavily skewed to 1H 2019. According to calendar issuance
data from the DMO, the Government targeted to issue IDR185tn in 1Q2019 (vs.
IDR194.5tn target and IDR211tn realization in 1Q2018). However, in terms of net bond
issuance, target issuance in the first quarter is higher by 42% compared to 1Q2018
(IDR89.4tn in 1Q2019 vs. IDR62.8tn in 1Q2018). Note that, in December 2018, the
Government has already issued IDR43.7tn from prefunding global bonds (USD 3bn).
The Government is also issuing more on domestic bonds (targeted global bonds
outstanding portion to total outstanding bonds continued to lower to 14-17% in 2019
vs. 18% in 2018). The new initiative in debt management policy in 2019 is the
Government’s plan to offer more retail bonds, i.e. 10 times, with 2x via offline book
building and 8x via online channels. The Government targeted IDR60tn retail bond
issuances this year (vs. IDR46tn in 2018 and only IDR23tn in 2017). Including private
placement, the portion of government issuances excluding auction mechanism is
targeted at 9-10% of total issuances (vs. 11.4% in 2018 and 5.1% in 2017).
FIGURE 144. OPTIMIZING DOMESTIC MARKET BY ISSUING FIGURE 145. FRONT LOADING POLICY STILL CONTINUES
MORE RUPIAH BONDS
Global Issuances
Rp tn Q1 Q2 Q3 Q4
900 22.2% 25.0% 100%
800 20.6% 19.9% 19.7% 90%
18.2% 20.0% 80%
700
70%
600 18.0% 17.0%
15.0% 60%
500 50%
400 40%
10.0%
300 30%
200 20%
5.0%
100 10%
0%
0 0.0%
2013 2014 2015 2016 2017 2018 2019F
2013 2014 2015 2016 2017 2018 2019F
Source: DMO and Mandiri Sekuritas Source: DMO and Mandiri Sekuritas
FIGURE 146. MATURITY PROFILE OF 2019 GOVERNMENT FIGURE 147. ESTIMATION OF BOND ISSUANCES BY TYPE OF
BONDS BONDS IN 2019
FCY bonds
Q4 Retail
Sukuk Private Placement + Retail
20
Q3 Tbills
Tbonds INDOGB/PBS
364
Q2
SPN/ SPNS
-60
Gross
Q1
Global bond/sukuk Netto
64
- 50 100 150 200
-200 0 200 400 600
IDR Trillion
Source: DMO and Mandiri Sekuritas Source: DMO and Mandiri Sekuritas
FIGURE 148. ESTIMATION OF BOND ISSUANCES BY TYPE OF BONDS IN 2019
Budget
Government budget deficit financing 2019 (IDR tn) (Baseline)
2019
Budget deficit % of GDP 1.8
Budget deficit (IDR tn) 296
Redemption, Cash Management & Buyback (437)
Government bond nett issuances 389
Government bond gross issuances 826
Realized issuance as of 6-Feb-2019 156.8

Domestic bonds 113.4
Auction conventional FR/ VR and T-Bills/ ZC 79.2
Retail bonds (ORI & Sukuk) 4.0
Domestic sukuk 28.8
Private placement 1.4
Global bonds 43.4
Remaining Sukuk issuances (21 auction @IDR 8tn absorbed) 168.0

Retail bond and Private placement (assumption 9.5% of gross issuances) 73.1
Global Bond (assumption 15.5% of gross issuances) 84.6
Total 325.7
Remaining rupiah conventional issuances 500.3
Average issuance on every auction (21 auction left) 23.8
Source: DMO and Mandiri Sekuritas
FIGURE 149. NEW GOVERNMENT IN BENCHMARK BOND SERIES 2018
Benchmark Series (2019)

Tenor
Series Coupon Maturity Size (IDR billion)
5yrs FR0077 8.13% 15-May-24 52,995
10yrs FR0078 8.25% 15-May-29 46,720
15yrs FR0068 8.38% 15-Mar-34 98,900
20yrs FR0079 8.38% 15-Apr-39 13,550
Source: DMO and Mandiri Sekuritas as of 1-Feb-2019
2019 demand outlook 2019: (Still) net excess supply, need at least IDR60-70tn
of foreign fund inflows to INDOGB
Onshore bank still the biggest potential buyer. We suspect banking will still be the
biggest potential buyer for INDOGB this year, totaling IDR60-70tn–although it would still be
below last year's realization of+ IDR63.8tn- as. The government bond yields are still
attractive and BI's concern on high Loan to Deposit Ratio (LDR) will likely push banks to
continue holding government bonds as secondary reserves. The latest data from BI, the
LDR number has reached 93.6% as of Nov-2018 (vs. 89.3% same period last year), while
total outstanding deposit was IDR5,573tn (+7.2%yoy) and total credit was IDR5,218tn
(+12.3%yoy). Our demand projection based on assumptions for this year is that LDR will
stable at 93.6% and that credit growth and deposit growth will also rise 10%, respectively
FIGURE 150. BANKS' COST OF FUND STILL LOW FIGURE 151. AVERAGE YTM GOVERNMENT BOND STILL
ATTRACTIVE FOR ONSHORE BANKS
9.0%
8.0% Rp tn
7.0% 700.0 10.0

6.05%
600.0
6.0% 8.0
6.00% 500.0
5.0% 6.0
400.0
4.0%
300.0 4.0
3.0% 2.19% 200.0
Avg. Current Account and Savings
2.0
2.0% BI rate 100.0
1.0% 7RRR 0.0 0.0
2012
2013
2014
2015
2016
2017
2018
Avg. Time Deposit 1mo
0.0%
1Q13
3Q13
1Q14
3Q14
1Q15
3Q15
1Q16
3Q16
1Q17
3Q17
1Q18
3Q18
YoY Changes Credit

YoY Changes Deposit
YoY Changes Govt Ownership
ATD1MO (RHS)
Source: Bank Indonesia Source: Bank Indonesia, Bloomberg, and Mandiri Sekuritas
Bank Indonesia's demand for government bonds is projected at IDR50-60tn (vs.

IDR37.5tn in 2018). Bank Indonesia’s ownership in government bonds has continued to
increase, as it reported net buy of IDR37.5tn–much higher than in 2017 and 2016 that
reported only IDR22tn and IDR7.8tn, respectively. Bank Indonesia's plan to replace SBI has
been successful, as now the total outstanding SBI reported is only at IDR48tn as of Dec-
2018. We believe BI has enough capacity to absorb if there’s selling pressure happening,
considering: (1) the total ownership of government bonds by BI is still relatively low at 9%
compared to 13% during the 2013 taper tantrum. Every 1 ppt of ownership increase gives
potential net buy of about IDR25tn from Bank Indonesia. (2) If we look at the term deposit
amount on OMO instrument, which is also still high at IDR90tn, this could be replaced by
government bonds. (3) Positive carry, as the yield offering by the Government is still higher
than BI’s cost of fund.
FIGURE 152. SUCCESSFULLY REPLACING SBI WITH FIGURE 153. HOWEVER, TOTAL GOVERNMENT BONDS OWNED
GOVERNMENT BONDS BY BI TO TOTAL OMO IS STILL BELOW 50%
BI's (After Reverse repo) SBI Outstanding

IDR tn 400 SBI Outs 90%
IDR Trilion
400 Government bonds owned by BI

BI's SUN % of OMO 80%
350
70%
300 300
60%
250
50%
200 200
40%
150
100 30%
100
50 20%
- 10%
Jan-10 Jan-12 Jan-14 Jan-16 Jan-18
- 0%
Jan-10 Jan-12 Jan-14 Jan-16 Jan-18
Source: Bloomberg and Mandiri Sekuritas Source: Bank Indonesia
Cash level of non banks institutional investors still high. Pension Funds' and Insurance
Companies' demand for government bonds projected at IDR50-60tn (vs. IDR65.6tn in
2018).We still see that their demand can potentially as the cash level from pension funds
and insurances is still relatively high at 15% of total investment. This calculation is based on
the assumption that the total investment of pension fund and insurance companies will
increase by 15%yoy (reaching IDR1,492tn) this year, and the Government's portion to total
investment will be maintained at 26%. There are least two factors which we believe support
pension fund and insurance companies to remain solid in government bonds:
1) Most pension fund and insurance companies in Indonesia are at net inflow. Thus,
the aim is mostly to buy instruments, not to sell. In the last eight years, on average
the total investment of insurance and pension funds has grown by 14.3% CAGR.
The government portion increased significantly in 2016, since the OJK has
mandated their portfolio in government bonds to at least be 20% of their
investment, and has continued to increase the portion to 30% in 2017.
2) Most pension fund and insurance companies’ investment portfolio are hold to
maturity, meaning that their portfolio are not impacted positively if the
government bond market rallies (no mark to market when portfolio is hold to
maturity), in fact that will hurt due to lower yield on their reinvestment rate. Some
of the biggest institutional non-banks mentioned their target investment is around
8-8.5%.
FIGURE 154. TOTAL INVESTMENT OF PENSION FUND AND FIGURE 155. WITH GOVERNMENT BONDS' PORTION EXPECTED
INSURANCE COMPANIES PROJECTED TO INCREASE 18%YOY AT 26% IN 2018
TO IDR1,492TN IN 2019
1,600 1,492
29.0%
1,400 1,297.6
1,226.6
27.0%
1,200
1,009.2
1,000 25.0%
863.5
790.6
800 23.0%
650.9 662.7
600
482.3 497.8 21.0%
400
19.0%
200
17.0%
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019F
0
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019F
Source: OJK Source: OJK and Mandiri Sekuritas
FIGURE 156. MEDIUM TERM OUTLOOK OF INDONESIA’S FISCAL BUDGET
Insurance and Pension Fund (IDR tn)

Type of Investment Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Dec-18
Bond 181.8 196.1 231.2 256.1 269.9 304.1 424.0 473.8 510.3
- Government Bond 108.6 118.0 128.9 135.8 169.4 188.1 277.0 307.8 342.9
- Corporate Bond 73.2 78.1 102.3 120.3 100.5 116.0 147.1 166.0 167.3
Deposit 107.6 111.1 140.8 145.5 205.5 218.5 179.8 203.5 196.4
Equity 91.8 95.0 121.4 136.2 166.1 173.8 206.0 248.6 258.3
Mutual Fund 75.4 74.0 111.6 103.9 108.4 119.2 146.8 241.7 262.3
Others 25.7 21.6 45.9 21.0 40.7 47.9 52.6 59.0 70.2
Total Investment Portfolio 482.3 497.8 650.9 662.7 790.6 863.5 1,009.2 1,226.6 1,297.6
Net of Investment of Insurance and Pension Fund

Type of Investment Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Dec-18
Bond 14.3 35.1 24.9 13.8 34.2 119.9 49.7 36.5
- Government Bond 9.4 10.9 6.9 33.6 18.7 88.9 30.8 35.1
- Corporate Bond 4.9 24.2 18.0 (19.8) 15.5 31.1 18.9 1.3
Deposit 3.5 29.7 4.7 60.0 13.0 (38.7) 23.7 (7.0)
Equity 3.2 26.4 14.8 29.9 7.7 32.2 42.6 9.8
Mutual Fund (1.4) 37.6 (7.7) 4.5 10.8 27.6 94.9 20.6
Others (4.1) 24.3 (24.9) 19.7 7.2 4.7 6.5 11.2
Total Investment Portfolio 15.5 153.1 11.8 127.9 72.9 145.7 217.4 71.0
High support from onshore investors with the Government’s plan to reduce withholding tax
for bond instrument this year. The Government’s aim is to have equal playing field between
investor and instrument. Note that the tax rate on the government coupon bonds is
regulated in the Government Regulation (PP) No. 16/2009, which sets two types of taxes for
bonds, they are: 1) 15% for domestic taxpayers and permanent establishments. Note that
before 2009, the final tax rate was 20%. 2) 20% for offshore taxpayers, or those which are
non-permanent establishment entities. But also note that offshore can benefit from tax
treaty with the lowest final tax at 10%. While the final tax rate for government bonds as
mutual funds’ underlying asset is applied in stages: 1) 0% for 2009 to 2010; 2) 5% for 2011-
2013; 3) 15% for 2014 and beyond. However, currently the final tax rate is still at 5%.
Meanwhile, deposit still has 20% withholding tax. In our base scenario, withholding tax for
government bond may lower to 10% and it might happen after the presidential election or
in 2H2019.
Overall, as we estimate that the Government might issue IDR324.4tn net in local currency
denomination, then we suspect it will still need at least IDR40-80tn of foreign fund inflows,
because we calculate the potential demand from onshore investors might only reach
IDR245-285tn.
FIGURE 157. PROJECTION DEMAND OF GOVERNMENT BOND 2019
Total Ownership - IDR Trillion

Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Dec-18 2019F
Bank (excl reverse repo) 260.3 285.8 348.9 375.8 453.6 517.4 555.2
Central Bank 119.5 131.4 150.1 157.9 179.8 217.4 223.6
Mutual Fund 42.5 45.8 61.6 85.7 104.0 118.6 134.3
Insurance and Pension Fund 169.0 193.9 221.4 325.5 348.9 414.5 458.5
Foreign 323.8 461.4 558.5 665.8 836.1 893.4 1,031.1
Others 80.0 91.7 121.3 162.6 177.3 207.3 233.5
IDR government bonds outstanding 995.3 1,210.0 1,461.8 1,773.3 2,099.8 2,368.5 2,636.1
Net Buy (sell) - IDR Trillion

Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Dec-18 2019F
Bank (excl reverse repo) 42.1 25.4 63.1 26.9 77.8 63.8 60-80
Central Bank 35.1 11.9 18.7 7.8 22.0 37.5 50-70
Mutual Fund (0.7) 3.3 15.8 24.1 18.3 14.6 15-25
Insurance and Pension Fund 29.1 24.9 27.5 104.1 23.3 65.6 45-65
Foreign 53.3 137.5 97.2 107.3 170.3 57.2 40-80
Others 16.1 11.7 29.6 41.3 14.7 30.0 50-70
Total Net Issuances IDR government bonds 175.0 214.7 251.9 311.4 326.5 268.7 325.0
Source: DMO and Mandiri Sekuritas
Our sovereign rating model suggests higher probability for Indonesia’s sovereign rating
to be upgraded to BBB in 2020. We did an ordinal logit model that precisely predicted the
upgrade rating by Moody’s, Fitch, and S&P. With positive fiscal posture in 2019,we believe
four independent variables–which are statistically significant in assessing sovereign rating
for all rating agencies, i.e. GDP per capita, inflation, government debt per government
revenue, and government fiscal balance to GDP–will slightly improve. We maintain
Indonesia’s sovereign rating outlook to be stable this year and possibly it will be upgraded in
2020 if tax revenue consistently increases further, thus reliance on bond issuances can be
reduced, current account deficit will be lower, and foreign exchange reserve will be higher.
FIGURE 158. OUTLOOK OF KEY RATING METRICS: HIGHER PROBABILITY FOR INDONESIA’S SOVERIGN RATING TO BE
UPGRADE TO BBB IN 2020
Economic Indicators 2016 2017 2018F 2019F 2020F

Nominal GDP (USD bn) 932 1,015 1,020 1,067 1,175
Current Account ( % of GDP) (1.8) (1.7) (3.0) (2.5) (2.3)
Inflation (% YoY) 3.5 3.6 3.13 3.8 3.7
Govt Debt per Govt Revenue (%) 1.9 2.0 2.0 2.0 2.0
Govt Primary Balance to GDP (%) (1.0) (0.8) (0.0) (0.13) 0.01
Govt Fiscal Balance to GDP (%) (2.4) (2.7) (1.7) (1.8) (1.7)
GDP per capita 3,604 3,859 3,888 4,110 4,319
FX reserve (USD bn) 116 130 120 125 130
Probability based on Ordinal logit model
Upgraded upper BBB 60.3% 61.6% 57.5% 63.6%
Stay at BBB 21.4% 20.9% 22.4% 20.1%
Downgraded below BBB 18.4% 17.5% 20.1% 16.3%
Total 100.0% 100.0% 100.0% 100.0%
Colour key
Improvement relative to previous year
Deterioration relative to previous year
Source: Bloomberg, IMF, CEIC and Mandiri Sekuritas Estimate
4) There’s indication that foreign ownership in LCY government bonds consists of long
term investors rather than “hot money”.
With rupiah stabilizing at 14,000 against USD, foreign selling pressure might ease
in 2019.We used a breakeven level calculation (derived from tracking at what yield and
rupiah level on which foreign bought government bonds) to see at what point there
would be another potential selling pressure from offshore investors. If rupiah hits
breakeven level, this means the yield that foreign got has already been erased by FX
losses, and historically this would create foreign selling pressure. We can see that the
biggest selling pressure based on breakeven level is when rupiah is at 14,200-14,400,
and this has already happened, while the next breakeven level that can potentially give
another foreign selling pressure is actually at 15,500-15,700.
FIGURE 159. NEXT BREAKEVENT LEVEL AT IDR 15,500-15,700 AGAINTS USD THAT MAY TRIGGER FOREIGN FUND OUTFLOW
Net
inflow/(outflow) Avg YTM Avg IDR Breakeven
IDR bn
Dec-16 9,749 8.16 13,415 14,510
Jan-17 19,698 7.68 13,352 14,378
Feb-17 6,384 7.59 13,360 14,374
Mar-17 31,332 7.16 13,337 14,292
Apr-17 22,595 7.09 13,306 14,250
May-17 10,334 7.05 13,319 14,258
Jun-17 14,402 6.97 13,306 14,234
Jul-17 4,985 7.08 13,340 14,285
Aug-17 9,608 6.73 13,339 14,237
Sep-17 34,224 6.54 13,309 14,179
Oct-17 (23,172) 6.82 13,525 14,448
Nov-17 34,617 6.49 13,518 14,396
Dec-17 5,334 6.34 13,558 14,418
Jan-18 33,623 6.25 13,372 14,207
Feb-18 (21,547) 6.59 13,594 14,490
Mar-18 10,564 6.54 13,759 14,659
Apr-18 (13,451) 6.92 13,820 14,776
May-18 (11,530) 7.19 14,034 15,043
Jun-18 (3,640) 7.92 14,042 15,154
Jul-18 9,200 7.89 14,390 15,525
Aug-18 16,525 8.11 14,568 15,750
Sep-18 (4,933) 8.12 14,878 16,085
Oct-18 13,464 8.54 15,188 16,486
Some positive catalysts for rupiah are as follows: (1) FFR hike is estimated to occur only
twice this year, compared to four times last year. (2) Investors’ confidence in
Indonesia’s economy is gradually recovering, as indicated by the significant capital
inflow to Indonesia through stocks and government debt papers—reaching IDR19tn
(USD 1.35bn)—since early January. (3) Indonesia’s fundamental economy has also been
strengthening, indicated by stable economic growth of around 5%, low inflation rate
(still) below BI’s upper range rate target (4.5%) and the narrowing fiscal deficit to 2.8%
of GDP in 2019 (vs. -3% of GDP in 2018). (4) Better foreign exchange market
mechanism marked by the increase in liquidity following Bank Indonesia introduced
DNDF (domestic non-deliverable forward) launched in Nov 2018
Hot money already declining significantly in 2018. Looking at foreign fund flows by
tenor, we also believe “hot money”, which usually buys on very short end tenors, is also
declining. In the last one month, almost all foreign fund inflows have come for medium
to longer tenors, i.e. 5-15yrs, this is different with the massive inflows in January 2018,
which reached IDR33.6tn but mostly coming for less than 2yr tenors (65% of total
inflows). Foreign ownership in government bonds for less than 2yr tenors has already
declined by IDR29tn in 2018. Thus the portion has dropped from 12.2% of total foreign
ownership to currently only at only 6% (as of 4-Feb). This supports our view that foreign
inflows to INDOGB are potentially long term investors rather than hot money. The
evidence is also seen on the foreign central banks’ ownership to total foreign ownership
data, which has also increased from less than 17% early this year to almost 19%.
FIGURE 160. FOREIGN FUND INFLOWS MORE ON THE MEDIUM FIGURE 161. FOREIGN CENTRAL BANKS’ PORTION TO TOTAL
TO LONGER TENORS FOREIGN OWNERSHIP ALSO INCREASED
120.0 Rp Trillion
Foreign Central Banks Ownership
100.0
Total Foreign ownership
80.0
>20 % Foreign Central Banks to Total Foreign Ownership (RHS)
60.0 >15-20
1,100 Rp 19.5%
40.0 >10-15 19.0%
1,000
>5-10 18.5%
20.0 900
>2-5 18.0%
- 800
>1-2 17.5%
700
(20.0) 0-1 17.0%
600
(40.0) 16.5%
500 16.0%
(60.0)
Jan-18 Apr-18 Jul-18 Oct-18 YTD2018 400 15.5%
Jan-17 Jul-17 Jan-18 Jul-18
FIGURE 162. INDONESIA’S LOCAL CURRENCY GOVERNMENT BOND YIELD IS ATTRACTIVE COMPARED TO OTHER EM BONDS
10Y Real Yield

FOREX Inflation (%) Current
YTM (Nominal
S&P 10-yr
Curren yield -
Country Ratin Expected Real
06-Feb- FY19 FY19 t exp.
g Spot (appreciation) Yield
19 Forecast Forecast Inflatio Inflation)
/depreciation (%)
n (yoy) (%)
Turkey BB-u 14.31 6.20 5.20 19.24 17.80 20.30 (5.99) (3.49)
Hungary BBB- 2.71 269.00 278.45 (3.39) 3.20 2.70 0.01 (0.49)
Czech
AA- 1.89 21.17 22.54 (6.09) 2.30 2.00 (0.11) (0.41)
Repub.
S. Korea AA 1.98 1,108 1,122 (1.29) 1.80 1.30 0.68 0.18
Poland BBB+ 2.75 3.52 3.76 (6.34) 2.26 1.10 1.65 0.49
Thailand BBB+ 2.40 32.45 31.25 3.84 1.30 0.36 2.04 1.10
Malaysia A- 4.04 4.12 4.09 0.66 2.00 0.20 3.84 2.04
Philippines BBB 6.08 54.00 52.35 3.15 4.00 5.10 0.98 2.08
Peru BBB+ 5.44 3.31 3.32 (0.45) 2.47 2.19 3.25 2.97
Russia BBB- 8.21 67.00 65.62 2.11 4.90 4.30 3.91 3.31
3,106.8
Colombia BBB- 6.88 3,050.0 (1.83) 3.50 3.18 3.70 3.38
8
India BBB-u 7.38 70.60 71.57 (1.36) 3.80 2.63 4.75 3.58
South Africa BB 9.11 14.20 13.37 6.17 5.30 4.50 4.61 3.81
Indonesia BBB- 7.75 14,325 13,920 2.91 3.77 3.13 4.62 3.98
Mexico BBB+ 8.38 19.50 19.04 2.43 4.10 4.83 3.55 4.28
Brazil BB- 8.80 3.80 3.67 3.63 4.00 3.75 5.05 4.80
What to watch?
The risks of our fair yield forecast’s missing for this year might come from global factors, i.e.
if Fed fund rate rose faster than expected (we forecast three hikes) and if the ECB reduced
quantitative easing more than expected (we forecast ECB will still do quantitative easing
until 3Q and maintain negative interest rate in 2018). Meanwhile, from domestic, the main
risk is coming from the increase in subsidized fuel price that could drive inflation and thus
trigger a rise in Bank Indonesia's benchmark rate and increase the government bond supply
if the budget deficit widened from 2.2% of GDP.
Inverted yield curve, recession, and impact to Indonesia’s bond market

Most investors are worried about the US Treasury yield curve being inverted. Historically,
an inverted US Treasury yield curve (2-10 years’ yield spread) is a leading indicator for US
economic recession in the next 20 months. If we look at historical pattern of what happened
in the US market from the inversion to the start of recession, on average the DXY index fell
4%, FFR fell 25 bps, and 10yr UST yields also fell 49 bps. The impact to Indonesia’s bond
market are, rupiah weakened slightly by 0.2%, meanwhile 5yr CDS improved by 52 bps, 10-
yr INDOGB yields fell 305 bps, and the stock market still jumped 123%.
FIGURE 163. INVERTED US TREASURY YIELD CURVE TO RECESSION ON AVERAGE NEEDS 20 MONTHS AND HISTORICALLY INDOGB
MARKET IS STILL POSITIVE
Month form Impact from inverted to recession

2-10yr yield curve Recession
inversion to 10yr UST 10-yr
inverts start date DXY FFR IDR CDS JCI
recession yields INDOGB
18-Aug-78 1-Feb-80 17.7 -4.0% 6.0 2.8
12-Sep-80 1-Aug-81 10.8 31.3% 5.5 3.3
13-Dec-88 1-Aug-90 19.9 -4.6% (0.4) (0.9) 266%
26-May-98 1-Apr-01 34.7 17.7% (0.5) (0.7) -0.2% -12%
31-Jan-06 1-Jan-08 23.3 -13.8% (0.3) (0.5) 0.2% (51.7) (3.1) 123%
Median 19.9 -4.0% (0.3) (0.5) 0.0% (51.7) (3.1) 122.8%
Average 21.3 5.3% 2.1 0.8 0.0% (51.7) (3.1) 125.7%
Source: Bloomberg and Mandiri Sekuritas
Equity Market Recap
JCI ended 2018 with negative 2% returns, as global concerns over rising yield environment
put Indonesia among the least preferred countries given its twin-deficit status. With key
central banks turning dovish, however, focus is shifting into weaker global growth. This, in
our view, raises Indonesia’s relative attractiveness given its domestic-driven economy. We
recently raised our country rating to O/W with a new end-2019 index target of 7,000 as we
see high probability of valuation re-rating this year. We prefer Defensive Growth and Value
stocks.
2018 performance. JCI Index ended 2018 with negative 2% returns, with a substantial
forward P/E de-rating from ~17x at the start of the year to ~14x at the end of the year. The
substantial multiple de-rating took place as the market EPS growth substantially slowed
down to a single-digit level in 1H18, while the rising pace of global monetary tightening
pressured Indonesia’s cost of equity, given its twin-deficit status. The mid-year’s spike in
crude oil prices further magnified the underperformance, though this reversed toward the
end of the year.
2019 outlook: a better risk-reward. We recently turned bullish on Indonesia, raising our
rating from Neutral to OVERWEIGHT with year-end index target of 7,000. Shifting global
focus from rising yield into weaker global growth makes Indonesia more attractive on
relative basis, given its domestic-driven economy. Five parameters suggest high probability
of JCI’s valuation re-rating this year; these are: 1) improving EPS growth differential relative
to key DM/EM countries; 2) attractive risk-free-rate spread relative to key DM/EM countries
(we used inflation-adjusted 10Y govt. bond yield as proxy here); 3) investors have
substantially de-risked their position in Indonesia, as seen from the substantial valuation
de-rating from 17x to 14x; 4) an almost record-low foreign ownership level in equities; and 5)
more dovish central bankers globally.
Accelerating EPS growth should support near-term sentiment. We expect 2019 EPS
growth acceleration into 11% from 8% last year, driven by Banks, Consumer Staples, and
Telecommunication as the top three drivers on a weighted basis. Overall, we expect a
stronger EPS growth in 1H19 relative to 2H19 given the much easier base in 1H18, in
particular for Telecommunication, Consumer Staples, and Building Materials. Key drivers
are the recent IDR appreciation and crude oil price weakness that would be margin-positive,
social spending acceleration that should support consumption, and the fewer price wars
within Building Materials (consolidation is happening) and Telecommunication (peak was
during the prepaid SIM card registration deadline in 1H18).
Foreign flows have started coming back. Foreign ownership in JCI has been on a decline,
touching an all-time low (based on our database) in 4Q18. Flows have started reversing in
th
January this year, reaching around IDR9trn up to the 17 . In terms of flows-to-market-cap
ratios, the largest inflows took place mostly within Value rather than Growth stocks. This
makes sense given the shifting focus from rising yield into weaker growth.
Prefer Defensive Growth and Value stocks. The IDR9trn inflows are miniscule relative to
the > IDR90trn outflows which occurred within the June 2017 to December 2018 period; yet
the market is not alarmingly cheap on a broad-based level. Hence, we are selective in
positioning. We like Defensive Growth and Value stocks, particularly the rate-sensitive
names. Our ten most preferred stocks are: BBRI, BBTN, CTRA, GGRM, HEAL, MAPI, PTPP,
TLKM, TOWR, and WIKA.
FIGURE 164. JC INDEXI FIGURE 165. TRADING SUB-INDEX OUTPERFORMED THE

INDEX (2018)
8,000 40 24.0%
JCI
7,000 35
6,000 30
11.4%
Billions
5,000 25
4,000 20 3.1%
1.0%
3,000 15
2,000 10 -2.5% -3.2%
1,000 5 -9.6% -10.1% -10.2%
0 0 -14.9%
Jul-11
Dec-12
Dec-15
Oct-10
Dec-18
Jun-14
Jun-17
Jan-10
Sep-13
Sep-16
Mar-12
Mar-15
Mar-18
JAKCONS
JAKMINE
JAKINFR
JAKPROP
JCI
JAKBIND
JAKFIN
JAKAGRI
JAKTRAD
JAKMIND
Volume (RHS) Index (LHS)
Sources: Bloomberg and Mandiri Sekuritas Source: Bloomberg, Mandiri Sekuritas
FIGURE 166. NET FOREIGN INFLOWS FIGURE 167. TOTAL TRADING BY INVESTOR TYPES
(Rpbn) 100%
20,000 90%
15,000 80%
10,000 70%
5,000 60%
0 50%
40%
-5,000
30%
-10,000
20%
-15,000
10%
-20,000
0%
-25,000
Jul-15
Jul-16
Jul-17
Jul-18
Nov-15
Nov-16
Nov-17
Nov-18
Jan-15
Jan-16
Jan-17
Jan-18
Sep-15
Sep-16
Sep-17
Sep-18
May-15
May-16
May-17
May-18
Mar-15
Mar-16
Mar-17
Mar-18
Jul-15
Jul-16
Jul-17
Jul-18
Nov-15
Nov-16
Nov-17
Nov-18
Jan-15
Sep-15
Jan-16
Sep-16
Jan-17
Sep-17
Jan-18
Sep-18
May-16
May-17
May-18
Mar-15
May-15
Mar-16
Mar-17
Mar-18
Domestic Investor Foreign Investor
Sources: IDX and Mandiri Sekuritas Sources: IDX and Mandiri Sekuritas
FIGURE 168. MONTHLY JCI PERFORMANCE FIGURE 169. REGIONAL MARKET VALUATION
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2019FPE(x)
2000 -6.0 -9.4 1.2 -9.7 -13.7 13.4 -4.4 -5.2 -9.7 -3.8 5.9 -3.0
PSEi - Philippine 15.6
2001 2.2 0.6 -11.0 -6.0 13.3 7.8 1.5 -1.9 -9.9 -2.2 -0.9 3.1
2002 15.2 0.4 6.3 10.9 -0.6 -4.9 -8.2 -4.3 -5.5 -12.0 5.8 8.8 FTSE Malay KLCI 15.9
2003 -8.6 2.8 -0.3 13.3 9.7 2.2 0.5 4.3 12.8 4.7 -1.4 12.1
2004 8.8 1.1 -3.3 6.5 -6.5 0.0 3.4 -0.3 8.7 4.9 13.6 2.3 JCI Index 14.5
2005 4.5 2.7 0.6 -4.7 5.7 3.1 5.3 -11.2 2.8 -1.2 2.9 6.0
SEThai 13.5
2006 6.0 -0.1 7.5 10.7 -9.2 -1.5 3.2 5.9 7.2 3.1 8.6 5.0
2007 -2.7 -0.9 5.2 9.2 4.3 2.6 9.8 -6.6 7.5 12.0 1.7 2.1 FTSE Straits Times 11.7
2008 -4.3 3.6 -10.1 -5.8 6.1 -3.9 -1.9 -6.0 -15.4 -31.4 -1.2 9.2
2009 -1.7 -3.5 11.6 20.1 11.3 5.7 14.6 0.8 5.4 -4.0 2.0 4.9 Hang Seng 9.8
2010 3.0 -2.4 9.0 7.0 -5.9 4.2 5.3 0.4 13.6 3.8 -2.9 4.9 Shanghai Comp 9.2
2011 -7.9 1.8 6.0 3.8 0.5 1.3 6.2 -7.0 -7.6 6.8 -2.0 2.9
2012 3.1 1.1 3.4 1.4 -8.3 3.2 4.7 -2.0 5.0 2.1 -1.7 0.9 KOSPI 8.6
2013 3.2 7.7 3.0 1.9 0.7 -4.9 -4.3 -9.0 2.9 4.5 -5.6 0.4
2014 3.4 4.6 3.2 1.5 1.1 -0.3 4.3 0.9 0.0 -0.9 1.2 1.5
2015 1.2 3.0 1.3 -7.8 2.6 -5.9 -2.2 -6.1 -6.3 5.5 -0.2 3.3
2016 0.5 3.4 1.6 -0.1 -0.9 4.6 4.0 3.3 -0.4 1.1 -4.6 2.9
2017 0.0 1.7 3.4 2.1 0.9 1.6 0.2 0.4 0.6 1.8 -0.9 6.8
2018 3.9 -0.1 -6.2 -3.1 -0.2 -3.1 1.3 2.4 -0.7 -2.4 3.8 2.3
Sources: Bloomberg and Mandiri Sekuritas Sources: Bloomberg and Mandiri Sekuritas
Mandiri Research Team

Bank Mandiri Mandiri Sekuritas
Chief Economist Economic Research
Anton H. Gunawan Chief Economist Bank Mandiri Leo Putera Rinaldy Chief Economist
anton.gunawan@bankmandiri.co.id +62 21 30023693 leo.rinaldy@mandirisek.co.id +6221 5296 9406
Aziza Nabila Amani Economist
Macroeconomic and Financial Market Research aziza.amani@mandirisek.co.id +6221 5296 9688
Andry Asmoro Department Head
andry.asmoro@bankmandiri.co.id +62 21 5245088 Equity Research
Rully Arya Wisnubroto Banking & Financial Market Adrian Joezer Head of Equity Research, Strategy, Consumer
rully.wisnubroto@bankmandiri.co.id +62 21 5245935 adrian.joezer@mandirisek.co.id +6221 5296 9415
Reny Eka Putri FX & Quantitative Analyst Tjandra Lienandjaja Deputy Head of Equity Research, Banking
reny.putri@bankmandiri.co.id +62 21 5245516 tjandra.lienandjaja@mandirisek.co.id +6221 5296 9617
Faisal Rachman Economist Ariyanto Kurniawan Automotive, Coal, Chemical
faisal.rachman@bankmandiri.co.id +62 21 5245516 ariyanto.kurniawan@mandirisek.co.id +6221 5296 9682
Kresna Hutabarat Telecom, Media
Industry and Regional Research kresna.hutabarat@mandirisek.co.id +6221 5296 9542
Dendi Ramdani Department Head
Laura Taslim Retail
dendi.ramdani@bankmandiri.co.id +62 21 5245087 laura.taslim@mandirisek.co.id +6221 5296 9450
Nadia Kusuma Dewi F&B, Cigarette, Pharmacy, Retail
Priscilla Thany Banking, Building Material
nadia.dewi@bankmandiri.co.id +62 21 52913501 priscilla.thany@mandirisek.co.id +6221 5296 9569
Adjie Harisandi Oil & Gas, Electricity, Petrochemical & Coal
Lakshmi Rowter Healthcare, Consumer
adjie.harisandi@bankmandiri.co.id +62 21 5245172 lakshmi.rowter@mandirisek.co.id +6221 5296 9549
Andrian Bagus Santoso Rubber, Palm Oil, Animal Feed & Fertilizer
Robin Sutanto Property
andrian.bagus@bankmandiri.co.id +62 21 29528608 robin.sutanto@mandirisek.co.id +6221 5296 9572
Mamay Sukaesih Sea Transportation, Telco, Toll Road, Cement
Edbert Surya Construction, Transportation
mamay.sukaesih@bankmandiri.co.id +62 21 52913501 edbert.surya@mandirisek.co.id +6221 5296 9623
Araminta Setyawati Heavy Equipment, Pulp &Paper & Sugar
Silvony Gathrie Research Assistant
araminta.setyawati@bankmandiri.co.id +62 21 5245557 Silvony.gathrie@mandirisek.co.id +6221 5296 9544
Mufti Faisal Hakim Hotel& Property
Riyanto Hartanto Research Assistant
mufti.hakim@bankmandiri.co.id +62 21 29528608 riyanto@mandirisek.co.id +6221 5296 9488
Astari Adityawati TPT, Automotive, Steel
Henry Tedja Research Assistant
Astari.adityawati@bankmandiri.co.id +62 21 5245557 henry.tedja@mandirisek.co.id +6221 5296 9434
Strategic Research (Mandiri Institute) Fixed Income Research

Moekti P. Soejachmoen Department Head
Handy Yunianto Head of Fixed Income Research
moekti.soejachmoen@bankmandiri.co.id +62 21 29528605 handy.yunianto@mandirisek.co.id +62 21 5296 9568
Bobby Hermanus Analyst
Teddy Hariyanto Senior Credit Analyst
bobby.hermanus@bankmandiri.co.id +62 21 29528606 teddy.hariyanto@mandirisek.co.id +62 21 5296 9408
Andre Simangunsong Analyst
Ali Hasanudin Credit Analyst
Andre.simangunsong@bankmandiri.co.id +62 21 29528608 ali.hasanudin@mandirisek.co.id +6221 5296 9629
Andjarsari Paramaditha Analyst
Yudistira Yudadisastra Credit Analyst
andjarsari@bankmandiri.co.id +62 21 29528608 yudistira@mandirisek.co.id +62 21 5296 9698
Elisabeth Carolina Analyst
Ariestya Putri Adhzani Research Assistant
elisabeth.carolina@bankmandiri.co.id +62 21 29528608 ariesty.adhzani@mandirisek.co.id +62 21 5296 9465
Supporting Data
Fitri Yunita
fitri.yunita@bankmandiri.co.id +62 21 5245272
Andhi Prasetyo Hadi
andhi.hadi@bankmandiri.co.id +62 21 5245272
Istiqomah
istiqomah.oce@bankmandiri.co.id +62 21 5245272
Marsella Ayu Ariwandi
marsella.ayu@bankmandiri.co.id +62 21 5243024
Giffari Al Hadi
giffari.alhadi@bankmandiri.co.id +62 21 5245172
DISCLAIMER: This report is issued by Mandiri Group (Bank Mandiri and Mandiri Sekuritas), registered and supervised by the Financial Services Authority
(OJK). Although the contents of this document may represent the opinion of Mandiri Group, deriving its judgment from materials and sources believed to be
reliable, Mandiri Group cannot guarantee its accuracy and completeness. Mandiri Group may be involved in transactions contrary to any opinion herein to
make markets, or have positions in the securities recommended herein. Mandiri Group may seek or will seek investment banking or other business
relationships with the companies in this report. For further information please contact our number 62-21-526 3445
ANALYSTS CERTIFICATION: Each contributor to this report hereby certifies that all the views expressed accurately reflect his or her views about the
companies, securities and all pertinent variables. It is also certified that the views and recommendations contained in this report are not and will not be
influenced by any part or all of his or her compensation.

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ECONMARK

ECONMARK: NO MORE EXCUSES

Mandiri Group Research| January 2019

ECONMARK 2019 Outlook and Strategy

Please see important disclosure at the back of this report

FIGURE 1. MANDIRI MACRO FORECASTS

The Need of Investment for a More Sustainable Growth 3

The History of Indonesia’s Investment Driven Policies 2018 6

What are the sectors that will be pushed by the government? 13

2019 Economic Growth: Domestic Demand Driven 18

Expecting Manageable Inflation 20

2018 Fiscal Realization and Outlook 23

2019 Improving Balance of Payment Condition 27

Negative Balance of Payments is likely in 2018 31

Regional & Sector Economic Outlook 41

Banking Outlook 2019: To Remain Cautious on Liquidity and Asset Quality 64

FX Market Review: Maintaining Rupiah Stability 72

IDR Bond Market Outlook 2019 : Turning Point to Positive Return 80

Equity Market Recap 104

Economic Outlook 2019

Source: CEIC Source: CEIC

Source: Bank Indonesia Source: CEIC, Mandiri Sekuritas

No. Indicator 9M18 Scenario I Scenario II Scenario III Scenario IV

A Brief Look on Indonesia’s Investment Condition

60% 28.1 23.8

Source: CEIC Source: CEICs

FDI value (USD bn)

Source: CEIC, Mandiri Sekuritas

The History of Indonesia’s Investment Driven Policies

Source: Indonesia Logistics and Forwarder Association (ALFI), Mandiri

Number of Business Areas

Source: Coordinating Ministry of Economic Affairs

FIGURE 15. SUMMARY OF TAX ALLOWANCE CHANGES

FIGURE 16. SUMMARY OF TAX HOLIDAY CHANGES

Source: Various sources

FIGURE 17. TAX HOLIDAY COMPARISON TABLE

Indonesia Vietnam Thailand Philippines Singapore China

Indonesia Vietnam Thailand Philippines Singapore China

Source: CEIC, Mandiri Sekuritas Source: CEIC, Mandiri Sekuritas

What are the sectors that will be pushed by the government?

FIGURE 20. TOP 10 NON-OIL AND GAS IMPORTS

2015 2016 2017 2018 YTD

Source: Bank Indonesia

Source: CEIC Source: Mandiri Sekuritas estimate

Source: CEIC Source: CEIC

FIGURE 25. INDONESIA TOP TEN MANUFACTURING EXPORT

Source: CEIC, Mandiri Sekuritas estimate Source: Ministry of Industry

Moreover, the positive investment environment followed by infrastructure completion will

Source: CEIC Source: Bank Indonesia

3.0 1.8 10 5.7

Source: CEIC Source: CEIC

FIGURE 32. INDONESIA’S VISITOR ARRIVAL DATA BASED ON COUNTRY

FIGURE 33. THE NEXT 10 BALI CONTRIBUTION

FIGURE 34. THE FX RECIEVABLE FROM TOURISM HAS CONTINUED TO INCREASE

Source: Ministry of Tourism

2019 Economic Growth: Domestic Demand Driven

1H19 would be private consumption; 2H19 on investment. Overall, we believe that

Source: CEIC Source: CEIC

Expecting Manageable Inflation

0.36 0.35 0.50 0.49

Source: CEIC Source: BMKG

FIGURE 44. BETTERINFRASTRUCTURE SCORE RESULTS TO LOWER INFLATION VOLATILITY

The correlation between Infrastructure Core with