A Global Recession

A Briefing Exclusively for Indonesia

Dr. Steve Cochrane Dr. Dimitrios Papanastasiou

Chief Economist APAC Head of Risk & Finance Solutions

Dr. David Hamilton Dr. Olga Loiseau-Aslanidi

Head of Credit Risk Solutions Head of Risk Modelling & Consumer
Credit Analysis

April 2020
Topics for Discussion
1. Economic Outlook
2. COVID-19’s Projected Impact on Corporate Credit Risk
3. Taking Action to Mitigate Risk

April 2020 2
1 Economic Outlook and
Forecast Assumptions
Global Economy Engulfed In a Severe Downturn
2020 economic outlook

Recession
Sources: Moody’s Analytics

COVID-19, April 2020 4

Global Epidemiological Assumptions (March 27, 2020)
COVID-19: Upside
S1 Scenario
• 5-10 mil confirmed global infections
• New infections peak in April
• 1.0% case fatality rate
• 8% hospitalization rate
• Infections abate by June
COVID-19
Baseline Forecast
• 10-15 mil confirmed global
infections
• New infections peak in May
• 1.5% case fatality rate
• 10% hospitalization rate
• Infections abate by July
COVID-19: Downside
S3 Scenario
• 15-20 mil confirmed global
infections
• New infections peak in June
• 4.5% case fatality rate
• 20% hospitalization rate
• Infections abate by September
COVID-19, April 2020 5
Regional Policy Responses
Country Fiscal policy Monetary policy

Repo rate (seven-day) cut 25 basis points to 4.5%

Indonesia $8.8 bn (0.8% of GDP) fiscal measures

Overnight policy rate cut 25 basis points to 2.5%; reserve

Malaysia $62.9 bn (19.7% of GDP) fiscal measures ratios cut 100 bps to 2%; new lending facilities to support
SMEs

Policy rate cut 75 basis points (cumulative) to 3.25%

Philippines $4.4 bn (1.2% of GDP) fiscal stimulus

Established $60 bn swap facility with Federal Reserve.

Lowered central band of the nominal effective exchange rate
Singapore $44.4 bn (11.7% of GDP) fiscal measures (NEER) target and reduced rate of depreciation of the NEER
to 0%; previously monetary authorities aimed to boost the
NEER.

Policy rate cut 25 basis points to 0.75%. Low-interest rate

loans to banks; six-month debt moratorium; backstop for
Thailand $43.3 bn (8.0% of GDP) fiscal support
corporate bonds; lower banks' contributions to financial bail-
out fund.

Refinance rate cut 100 basis points to 5%; discount and

repurchase rates cut 50 bps to 3.5%; overnight lending rate
Vietnam $8.8 bn (3.4% of GDP) fiscal measures
reduced 100 bps to 6%; additional cuts to short-term lending
rates

COVID-19, April 2020 6

Global Oil Glut
Mil barrels per day
20 110
Global balance (L)
16 Global demand (R) 105
Global supply (R)
12
100
8
95
4

0 90

-4 85
17Q1 18Q1 19Q1 20Q1
Sources: International Energy Agency, Moody’s Analytics

COVID-19, April 2020 7

Global Economic Outlook Worsens
Global real GDP by forecast vintage, % change yr ago
8
6
4
2
0
Jan baseline
-2
Mar 3 baseline
-4 Mar 13 downside
Mar 28 baseline
-6
Apr 10 baseline
-8
19Q1 19Q3 20Q1F 20Q3F 21Q1F 21Q3F
Source: Moody’s Analytics

COVID-19, April 2020 8

…and Intensifying in the Large Global Economies…
Real GDP growth, annualized % change
2020Q1 2020Q2 2020Q3 2020Q4 2019 2020
January base 2.7 2.9 2.7 2.6 2.5 2.6
World March base 0.7 1.6 3.5 2.8 2.4 1.9
April Base -10.9 -22.1 19.9 4.5 2.4 -4.2
January base 1.5 2.2 1.5 1.2 2.3 1.8
United States March base 1.1 -0.4 1.7 2.4 2.3 1.3
April Base -8.0 -30.2 16.7 1.1 2.3 -5.8
January base 7.2 6.6 5.5 5.8 6.1 6.2
China March base -0.9 5.1 11.4 5.8 6.1 4.4
April Base -29.0 10.3 27.7 12.1 6.1 -1.0
January base 2.0 2.4 2.5 2.6 11.0 2.2
Brazil March base 1.3 2.0 2.5 2.6 1.1 2.0
April Base -8.8 -24.3 0.4 7.0 1.1 -6.0
January base 1.2 1.1 1.1 1.1 1.3 1.0
United Kingdom March base 0.6 0.5 1.2 1.1 1.4 0.7
April Base -3.1 -36.7 25.8 5.8 1.4 -5.7
January base 1.4 1.5 1.8 1.4 1.2 1.3
Euro Zone March base 0.7 0.8 1.2 1.3 1.2 0.8
April Base -14.8 -40.0 59.3 1.6 1.2 -7.0
Source: Moody’s Analytics

COVID-19, April 2020 9

The Outlook for ASEAN
Real GDP, quarterly annualized % change, larger ASEAN economies, April baseline
25
Indonesia Malaysia Philippines Singapore Thailand Vietnam
20
15
10
5
0
-5
-10
-15
-20
19Q1 19Q3 20Q1 20Q3 21Q1 21Q3
Source: Moody’s Analytics

COVID-19, April 2020 10

ASEAN Growth Rates
Real GDP growth, annualized % change, April baseline forecast
2020Q1 2020Q2 2020Q3 2020Q4 2019 2020

Indonesia 2.0 -3.9 3.0 2.8 5.0 2.1

Malaysia -5.4 -14.5 20.3 9.3 4.4 -0.3

Philippines 1.8 -9.5 0.8 10.0 5.9 2.3

Singapore -9.5 -18.0 8.4 4.3 0.7 -4.5

Thailand -2.6 -17.1 10.3 3.4 2.4 -2.3

Vietnam -9.2 2.7 14.0 5.9 7.0 3.1

Global Output -10.9 -22.1 19.9 4.5 2.4 -4.2

Source: Moody’s Analytics

COVID-19, April 2020 11

Emerging Markets Rough Run So Far in 2020
Nonresident cumulative portfolio flows to emerging markets, $ bil
120
2017 2018 2019 2020
100
80
60
40
20
0
-20
Jan Mar May Jul Sept Nov
Sources: Institute of International Finance, Moody’s Analytics

COVID-19, April 2020 12

 Putting Pressure on Rupiah
Rupiah per USD
17,000
16,500
16,000
15,500
15,000
14,500
14,000
13,500
13,000
Jan 18 Jan 19 Jan 20
Sources: Bank Indonesia, Moody’s Analytics

Presentation Title, Date 13

Debt Must Dealt With After Covid-19
Total debt-to-GDP ratio, % (x-axis), 5-yr change, ppts, (y-axis)
100
ARG ARE 2019Q4
SAU ZAF CHN KOR CHE World
BRA
50 CAN HKG
PAK COL LBN FIN
MEX CHL
GHA TUR AUS FRA JPN
THA NOR GBR
NGA
0 IDN USA SGP
EGY IND DEU GRC
KEN PHL NZL ITA BEL
POL CZE MYS SWE DNK
-50 RUS ISR AUT
UKR HUN ESP PRT

-100
APAC
Developed Economies NLD
World
Emerging Markets
-150
0 100 200 300 400 500 600
Sources: IIF, Moody’s Analytics

COVID-19, April 2020 14

Indonesia Less Exposed to China Tourism…
2018
U.S. Travel and tourism as direct % of
Canada GDP
Malaysia China as share of total tourist
arrivals by country, %
Indonesia
Australia
Singapore
Philippines
Thailand
Vietnam
0 5 10 15 20 25 30
Sources: World Travel and Tourism Council, National statistics offices, Moody’s Analytics

COVID-19, April 2020 15

…As Well as to Direct Trade with China
Exports to China, % of GDP, 2018
India
U.S.
Hong Kong
Canada
Indonesia
Australia
Philippines
Singapore
Thailand
Korea
Malaysia
Vietnam
Taiwan

0 5 10 15 20 25 30
Sources: IMF, National Statistics Offices, Moody’s Analytics

COVID-19, April 2020 16

Indonesia’s Risks Are Weighted to the Downside
Real GDP, April forecast and estimated scenarios, quarterly annualized % change
10
8
6
4
2
0
-2
-4
Baseline S1 S3
-6
-8
19Q1 19Q3 20Q1 20Q3 21Q1 21Q3

Sources: Moody’s Analytics

COVID-19, April 2020 17

 COVID-19’s Projected

2 Impact on Corporate Credit

Risk
The Corporate Credit Risk Environment Has Turned
Suddenly Risky In Indonesia, Amid Volatility
The Average Probability of Default For Indonesian …And All Industry Sectors Have Seen
Companies Has Jumped to 4.9%... Their Average PDs Rise Sharply

Technology & IT Services 321%

Credit risk has been volatile…
Equipment 239%
….then the pandemic hit. REITS 145%
Utilities 139%
Media & Communication 133%
Consumer Durables and Services 110%
Construction & Real Estate… 103%
Consumer Non-durables and… 97%
Transportation & Transportation… 95%
Natural Resources 75%
Banks 75%

April 2020 19
Another GFC? We Are Not There ‒ Yet.
Average Corporate Credit Risk Varies Significantly Across Countries

US 10.8%

Singapore 8.9% US 7.5%

Indonesia 7.2%
Singapore 5.8%

Indonesia 4.8%

April 2020 20
 Early Warning of Credit Risk
An Early Warning Framework Provides Actionable Information

If a Company’s EDF is Above Its Sector Early Warning As of 15 April, 129 Indonesian Firms’
Trigger Level, It Should Be On a Watchlist EDFs Were Above Their Early Warning
Trigger Levels. Sectors with Most Alerts
Include:

Oil, Gas & Coal Expl. 10%

Food & Beverage 10%

Transportation 9%

Business Products & Svcs 6%

NB Financial 6%

April 2020 21
Projecting Corporate Credit Risk Under COVID-19
Economic Stress: Stressed EDF
Adaro Energy » Stressed EDFs allow us to explicitly
condition a firm’s PD on assumptions
Stressed EDFs reflect about macroeconomic variables.
projections of GDP, » BL is the PD projection based on the
unemployment, etc. most likely economic scenario.

» S4 is the PD projection based on the

most severe (but lower probability)
economic scenario.

Historical EDF » Stressed EDFs are vital to measuring

the impact of an economic scenario
on future credit risk for business
decision making.

April 2020 22
Default Risk is Projected to Rise Sharply Across
APAC Economies Under COVID-19 Stress
Average Corporate Default Probability Levels (%) by Country
» Going into 2020, average EDF
Country Q4 2019 Q1 2020 Q2 2020 Q3 2020 Q4 2020 Q4 2021 Q4 2022 levels varied greatly across
Indonesia 3.60 4.87 5.24 5.41 5.28 4.06 3.77 Asian economies.
Malaysia 2.13 2.99 3.09 2.91 2.70 2.61 2.85 » Average corporate PDs for most
Thailand 1.43 2.19 2.09 1.79 1.56 1.02 1.27 economies peak end of Q2/start
Singapore 5.00 6.07 6.48 6.82 6.56 3.93 3.72 of Q3 2020.
China 2.00 5.30 8.10 6.94 5.51 1.11 2.47
» If the scenario impact is borne
Hong Kong 4.79 10.62 15.75 15.91 14.59 4.02 7.35 out, average default risk
Japan 0.58 0.95 2.10 3.13 3.43 1.38 1.51 Indonesian companies would
return to pre-COVID-19 levels
around year-end 2022.

April 2020 23
3 Taking Action to Mitigate
Risk
What Do the Banks Do?
4 Important Pillars

Understand Identify Measure Act

Scenario Analysis Credit monitoring Capital planning and Portfolio Management

framework stress testing and Optimization
❖Quantify what
COVID-19 means ❖Which part of the book I ❖Scenario-based analysis ❖Identify vulnerable
for the economy should be worried about? of capital demand and exposures and portfolios
supply under stress
❖Generate multiple ❖Early warning system &
future paths for the triggers ❖Identify capital needs ❖Optimize capital
evolution of and at which point in time allocation on the back of
❖Identify vulnerable
COVID-19 COVID-19
industries and countries ❖Test different strategies

Actionable Output to Navigate through these Difficult Times

April 2020 25
Focus on Forward-looking Planning
Capital and liquidity planning
Interest rate term
structure

Market risk
COVID-19 Macroeconomic Scenarios

parameters

Credit risk
parameters

Operational risk
losses

Balance Sheet projections P&L projections RWA projections

• Assets (including credit • NII, NIR, NIE, • Market
lifecycle) • IFRS 9 Provisions • Credit
• Liabilities • Net profit/loss • Operational

Liquidity Capital
Own funds
ratios ratios

April 2020 26
The required analytics
Impact of COVID-19 on Average PDs per Sector

April 2020 27
The required analytics
Impact of COVID-19 on ECLs per Sector

April 2020 28
The required analytics
Impact of COVID-19 on Capital per Sector

April 2020 29
Act: Portfolio/Balance Sheet Optimization
Optimal portfolio allocation – S4 Scenario
0% 5% 10% 15% 20% 25% 30%

Oil & Gas

Business Products
High stage 2 migration probability
for Oil & Gas, Hospitality and
Real Estate
Transportation sectors, make them
less appealing from a provisioning
Hospitality standpoint

Transportation

Consumer Products Low stage 2 migration probability for FI and

Consumer sectors, make them more attractive from
a provisioning standpoint
Financials

Technology/Electronics

Capital IFRS 9

April 2020 30
Retail Portfolios
Economic Stresses on Loan Performance, Predict NPL, Economic
Capital Calculation

DATA INPUTS MODELS OUTPUT

Economic Scenarios: Arrears, Default, Staging, Account-level, forward-
Prepayment, Cure, Impairment looking, scenario-
COVID-19 Deterministic Redefault conditional cash-flows
Calculations &
Simulations Forecasts
LGD
Bank’s Loan Level Data: Risks
simulations, Scenario projections for
Borrower Characteristics risk metrics, including
EAD cash-flow
Loan Characteristics ECL, Loss Distribution
calculations

31
Impact on PDs – Retail Portfolio
Illustrative Example for Mortgages, PD scenario forecast, %
3
March Baseline Downside Alternative Scenario S3 - 90th Percentile Downside Alternative Scenario S4 - 96th Percentile February Baseline April Baseline

2.5

1.5

0.5

0
2020M6 2020M12 2021M6 2021M12 2022M6 2022M12 2023M6 2023M12 2024M6 2024M12

Sources: Mortgage Portfolio Analyzer, Moody’s Analytics

32
Impact on Prepayments – Retail Portfolio
Illustrative Example for Mortgages, prepayment scenario forecast,%
12
March Baseline Downside Alternative Scenario S3 - 90th Percentile Downside Alternative Scenario S4 - 96th Percentile February Baseline April Baseline

10

0
2020M6 2020M12 2021M6 2021M12 2022M6 2022M12 2023M6 2023M12 2024M6 2024M12

Sources: Mortgage Portfolio Analyzer, Moody’s Analytics

33
Impact on lifetime PDs – Retail Portfolio
Illustrative Example for Mortgages, lifetime PD scenario forecast, %
60.0%

March Baseline Downside Alternative Scenario S3 - 90th Percentile Downside Alternative Scenario S4 - 96th Percentile February Baseline April Baseline

50.0%

40.0%

30.0%

20.0%

10.0%

0.0%
2020M6 2020M12 2021M6 2021M12 2022M6 2022M12 2023M6 2023M12 2024M6 2024M12

Sources: Mortgage Portfolio Analyzer, Moody’s Analytics

34
Impact on LGDs – Retail Portfolio
Illustrative Example for Mortgages, LGD scenario forecast, %
30

March Baseline Downside Alternative Scenario S3 - 90th Percentile Downside Alternative Scenario S4 - 96th Percentile February Baseline April Baseline

25

20

15

10

0
2021M5 2021M11 2022M5 2022M11 2023M5 2023M11 2024M5 2024M11

Sources: Mortgage Portfolio Analyzer, Moody’s Analytics

35
Impact on ECLs – Retail Portfolio
Macroeconomy, Payment Holidays and Longer Asset Life Contribute to
ECL Increase 4.0

February Baseline March Baseline April Baseline Downside Alternative Scenario S3 - 90th Percentile
3.5

3.0
5-year Expected Credit Loss,
% of Total Portfolio Balance

2.5

2.0

1.5

1.0

0.5

0.0
Current 30DPD 60DPD Defaulted

Sources: Mortgage Portfolio Analyzer, Moody’s Analytics

36
Support during these unprecedented times
Quick-win services to address the immediate requirements

Analytics as a service across 4 streams

Stress Testing/
Macro/Credit Outlook ECL Impact Assessment EWS Toolkit
Capital Planning

• Macro briefing and

discussion with Moody’s
regional economists
• Credit outlook for the
country & the region
• Range of COVID scenarios
• Delivered monthly
• ECL forecasting • Monthly EWS dashboard • Forecasted balance sheet
• Stage forecasting highlighting portfolio at risk • Forecasted income
• Range of COVID scenarios names • RWA & CAR forecast
• Produced monthly/quarterly • Produced monthly • Produced quarterly

April 2020 37
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April 2020 38