Indonesian Economic

Outlook
2017

M. Chatib Basri

ANU and University of Indonesia

Creco Research
 2

Unchartered waters
3
 GDP growth:
Indonesia is one of the least unattractive
countries in Asia

Source: World Bank, 2017

 0.000
2.000
4.000
6.000
8.000

-8.000
-6.000
-4.000
-2.000
03/2013
04/2013
05/2013
06/2013
07/2013

Australia
08/2013
09/2013
10/2013

Source: CEIC, OECD (2016)

11/2013

Brazil
12/2013
01/2014
02/2014
03/2014
04/2014
05/2014

Indonesia
06/2014
07/2014
08/2014
09/2014
10/2014
11/2014

Malaysia
12/2014
GDP Growth

01/2015
02/2015
03/2015
04/2015
05/2015
least unattractive countries

06/2015
South Africa

07/2015
08/2015
GDP growth: Indonesia, one of the

09/2015
10/2015
11/2015
Mexico

12/2015
01/2016
02/2016
03/2016
Nigeria

04/2016
05/2016
06/2016
 6

New normal growth?

Success story of East Asia: Industrialization and
trade

A world with creeping protectionism

Services is not a perfect substitute to

manufacturing
 Why services are not
like manufactures
Taken from Dani Rodrik (2014)

High-productivity
(tradable) services
sector cannot absorb
as much labor
Preimum skill-intensive
Requires good institution

Low productivity (non-tradable)

services cannot act as growth poles
since they cannot expand without turning their
terms of trade against themselves
continued expansion in one segment relies on
expansion on others
limited gains from sectoral winners
 8
Trump Effect

Too early to conclude

Short term, volatility in financial market

Protectionist policy, world trade will shrink

Boost domestic demand through tax cut and govt

spending

Medium term: every President will become a

normal President after a while
Commodity prices stabilized in 2016 9
and and are expected to grow
gradually in 2017
 The macroeconomic impact of the
global volatility

Negative Exchange Trade balance/

interest
capital
rate current account
rate inflow ? deficit

Risks of assets commodity

Trump Effect
re pricing price (?)

Short fall of
Economic
Government
growth
Revenue

10
 11

Domestic economy
Indonesian GDP Growth Contribution to GDP Expenditure 12
(% of GDP) (Contribution to real GDP Growth yoy,
percent)
Household Expenditure
6.21 12 Government Spending
6.11 Investment
6.01
5.94 5.94
5.87 10 Statistic Discrepancy
Net Export
8 Gross Domestic Product
5.545.595.525.58

6
5.14 5.19
5.04 5.04 5.02 4
4.964.97 4.91
4.73 4.74 2
4.66

-2

-4
Sep-11 Sep-12 Sep-13 Sep-14 Sep-15 Sep-16
Sep-11 Sep-12 Sep-13 Sep-14 Sep-15 Sep-16

GDP Growth by Expenditure Contribution to GDP by Industrial Origin

(yoy growth, percent) (Contribution to real GDP Growth yoy,
8percent) Agriculture
25 Gross Domestic Product
Mining and constr
20
Manufacturing
15
gov't spending
Investment Household
10
4
consumption
5

0
Sep-11 Sep-12 Sep-13 Sep-14 Sep-15 Sep-16
-5

Import Export 0
-10
Sep-11 Sep-12 Sep-13 Sep-14 Sep-15 Sep-16
Source: CEIC (2016)
Industrial production indicators Motor vehicle sales 13
(seasonally-adjusted sales growth yoy,
(PMI diffusion index; industrial
percent)
production growth yoy, percent)
60 20 40

30

20
Motor Vehicle Sales
55
Industrial production, RHS 10
10

-
Nov-12 Nov-13 Nov-14 Nov-15 Nov-16
50 0 (10)

(20)
Manufacturing PMI (30)
45 -10 Motorcycle sales
Oct-14 Oct-15 Oct-16 (40)

Consumer indicators Balance of Payment Current account

Financial account
(retail sales index 2010=100) (USD billion) Net Error & Omissions
Overall Balance
200 BI Retail sales index 20

180 BI Consumer 15
Survey Index
10
160
5
140
0
120
-5

100 -10

80 -15
Nov-12 Nov-13 Nov-14 Nov-15 Nov-16 Sep-12 Sep-13 Sep-14 Sep-15 Sep-16

Source: CEIC (2016)

 Indonesia: GDP growth and 14

ICOR
ICOR=6.2-64 (ratio Investment/GDP)
Current Account Goods
(USD billion) Services
1% GDP growth will require Primary Income
Investment/GDP 6.2-6.4% 8 Transfer
Current Account

S=I 4

The Indonesia Gross Domestic 0

Savings/GDP 33.8% (World Bank) Sep-13 Sep-14 Sep-15 Sep-16

-4
Thus GDP Growth more or less 5-
5.5% -8

If Indonesia wants to achieve 6% GDP -12

growth:

I/GDP should be 6%x6.2-6.4%=37.2-

38.4 %

S/GDP=34% S-I= - 3% (current

account deficit)

To get higher growth: we should

increase S or lower ICOR (improve
productivity and efficiency)
 Recent development 15

Improvement in export:
thanks to commodity prices
Indonesia: export growth
40

30

20

10

-10

-20

-30

-40

-50

-60

Exports: Non Oil and Gas: Total Exports: Oil and Gas: Total
 16

Financial sector
 Stock Index Movement Data as of 3 Composite Index and Market Capitalization
17
(percent, ytd) Jan 2017 (Market Capitalization in IDR bn, For index
10Aug1982=100)
3.60 Japan Composite Index
6,000 6,500,000
11.16 United Kingdom
17.44 United States 5,500 6,000,000
-1.08 Malaysia 5,000
5,500,000
6.53 Korea 4,500
-4.86 China 5,000,000
4,000
2.22 Singapore Market Capitalization, RHS 4,500,000
3.86 Hong Kong 3,500
4,000,000
22.13Thailand 3,000
0.41 Philippines 2,500 3,500,000
16.57 Indonesia
2,000 3,000,000
-10 -5 0 5 10 15 20 25 Dec-13 Dec-14 Dec-15 Dec-16

Policy Rate Price to Earning Ratio Japan

(percent) China
50
India
20 45
18 Indonesia
40
16 Korea
14 35
Malaysia
12 30
Singapore
10 25
8
Indonesia 20
6
4
United Stated 15
2 China 10
0 5
EU Japan
Dec-08

Dec-11
Dec-00
Dec-01
Dec-02
Dec-03
Dec-04
Dec-05
Dec-06
Dec-07

Dec-09
Dec-10

Dec-12
Dec-13
Dec-14
Dec-15
Dec-16

-2
0
2009 2010 2011 2012 2013 2014 2015

Source: CEIC (2016),

*from Aug 2016 Bank Indonesia adopt 7-days repo rate as new benchmark of monetary tool
Reserve and Capital Inflow Inflation Contribution Volatile
(yoy growth, percent) Administered
(USD billion) Core
9 Headline
Central Bank Gov Private Sector
8
10 7
140
8 International 6
Reserves (RHS)) 120
6 5
100
4 4
80
3
2 60
2
0 40
Sep-13 Sep-14 Sep-15 Sep-16 1
-2 20
0
-4 0 Dec-13 Dec-14 Dec-15 Dec-16
-1

Inflation comparison across countries Regional equity indices

(as of Oct 2016; change yoy) (daily index in local currency, Oct 1 2013=100)

India 4.9 250

Indonesia 3.5 Shanghai-China
Philippines 1.8
200
China 2
Malaysia 1.9 BSE-India
US 1.3 150

Britain 0.6 JSI-Indonesia

Thailand 0.2 100
SET-Thailand
Japan
-0.2
SGX-Singapore
Singapore
-0.6
50
-1.0 0.0 1.0 2.0 3.0 4.0 5.0 6.0 Jan-15 Jan-16 Jan-17

Source: CEIC, Economist Intelligence Unit (2016)

Exchange Rates Data as of 3 Nominal and Real Effective Exchange Rate
19
(IDR/USD Jan: 13,485 Index
(Des 2010 = 100)
140
15,000
120
14,000 REER Index
100
13,000
80
NEER Index
12,000
60
11,000
40

10,000 20

Oct-01

Oct-06
Oct-02
Oct-03
Oct-04
Oct-05

Oct-07
Oct-08
Oct-09
Oct-10
Oct-11
Oct-12
Oct-13
Oct-14
Oct-15
Oct-16
9,000
Jan-14 Jan-15 Jan-16 Jan-17

Currency Movement Data as of 3 Selected currencies against USD

(Exchange rates apperciation, % , ytd) Jan 2017 (monthly index May 2013=100)
Appreciatio
n 100
-2.44 India
-21.10 Turkey
-3.41 Swiss 90 India
16.83 Russia
12.24 South Africa
-1.69 Singapore 80
Indonesia
-20.16 Mexico
-3.05 Korea 70
-3.91 Malaysia
South Africa
2.27 Japan
60
2.97 Indonesia
-4.81 Euro
19.20 Brazil 50 Brazil Turkey
-0.69 Australia
-6.58 China
40
-30 -20 -10 0 10 20 30 Jan-14 Jan-15 Jan-16 Jan-17

Source: CEIC (2016)

Currency and Reserve 10-year local currency gov. bondyields 20
(Monthly, Currency: IDR/USD, Reserve: USD (percent)
mn)
12
Reserve (LHS)
120,000 15,000
10
110,000 14,000 Indonesia

13,000 8
100,000
IDR/USD (RHS) 12,000 6
90,000 Malaysia
11,000
4
80,000
10,000 Thailand
2
70,000 9,000
Singapore United States
60,000 8,000 0
Oct-13 Oct-14 Oct-15 Oct-16 Dec-14 Dec-15 Dec-16

Yield Curve of Indonesia Government Bond

(percent)
29-Feb-16
9.5 31-Mar-16
29-Apr-16
9.0
31-May-16
8.5 30-Jun-16
29-Jul-16
8.0
31-Aug-16
7.5 30-Sep-16
31-Oct-16
7.0
30-Nov-16
6.5 30-Dec-16
6-Jan-17
6.0
1y 5y 10y 15y 20y 30y

Source: CEIC (2016)

Indonesia and USA Government Bond
21
Indonesia Government Bond Ownership:
(10y, percent) Foreign
(percentage of total government bond)
11 2.6
45
10 2.4 38.1 38.2 38.4
IDR Gov Bond, LHS 40
9 2.2 35 33.0 32.5
30.5 30.8
30
8 2.0
25
18.6
7 1.8 20
15
6 T-Bond, RHS 1.6
10
5 1.4 5
0
4 1.2 2009 2010 2011 2012 2013 2014 2015 2016
Nov-14 Nov-15 Nov-16 (NOV)

Government Debt External Debt

(percent of GDP; USD billion) (percent of GDP; USD billion)
60 320 60 320
External Debt, RHS Private External
Debt
45 240 45 240

30 160 30 160

15 80 15 80

0 0 - 0
2007 2008 2009 2010 2011 2012 2013 2014 2015 2007 2008 2009 2010 2011 2012 2013 2014 2015

Source: CEIC (2016)

 22

Credit growth, consumption and

interest rate (Zahro, 2016)
Consumption positively affect credit growth

Investment does not significantly affect credit growth.

BI rate does not significantly affect credit growth.

Fed fund rate significantly affects credit growth. When the

fed fund rate goes up, credit growth falls. This also explains
the role of liquidity inflow.

The short term problem is on the demand side

Banking sector indicators Deposit Growth 23
(Monthly, percent) (yoy growth, percent)
100 5
Loan to deposit ratio 30
Demand Deposit
80 4 25
Return on assets (RHS)
20
60 3 Saving Deposit
15

40 2
10
Non performing loans (RHS)
5
20 1
Capital adeqacy ratio -
0 0 Sep-14 Sep-15 Sep-16
(5) Time Deposit
Sep-10 Sep-11 Sep-12 Sep-13 Sep-14 Sep-15 Sep-16

Credit Growth Real Interest Rate

total credit
(yoy growth, percent) (Monthly, Gov.Bond 10y, %)
18
7
16
6
Indonesia
14 Investment 5
12 4
China United States
Consumption 3
10
2 India
8 Working Capita 1 German
6 0

Jul-15
Mar-14

Jul-14

Mar-15

Mar-16

Jul-16
Jan-14

Jan-15

Jan-16

Sep-16
Sep-13

Sep-14

Sep-15
Nov-13

Nov-14

Nov-15
May-14

May-15

May-16
4 -1
2 -2
-3
0 Japan
Sep-14 Sep-15 Sep-16 -4

Source: CEIC (2016)

onesian Government Debt: maturity schedule
24
 25

Some risks

Fiscal risk due to the short fall

of tax revenue

NPL is rising

Liquidity tightening
 26
Government Budget
2015 2016 Growth
Rp trillion Rp trillion %
Government Revenue 1508 1551.8 2.90
Domestric Revenue 1496 1546 3.34
1. Tax Revenue 1240.4 1283.6 3.48
Tax incl oi and gas 1060.8 1104.9 4.16
2.Import duty and excise 179.6 178.7 -0.50
Non Tax Revenue 255.6 262.4 2.66

Grant 12 5.8 -51.67

Government Spending 1806.4 1859.5 2.94

Central Govt. 1183.3 1148.6 -2.93
Transfer to region and villag fund 623.1 710.9 14.09

Primary Balance -142.5 124.9

Surplus/Deficit -298.4 -307.7
2.46% of GDP
 27
Tax revenue and tax amnesty

Non oil Tax revenue 2016 : Rp 1069 T (incl. TA)

TA as of Dec 31, 2016: 107 T

Tax Revenue 2016 (without TA): Rp 962 T

Tax revenue, 2015: Rp1011.2 T

The economy still posts a positive growth,

however growth of tax revenue (without TA)
was -4.5% in 2016
 28

What about the next year?

Total assets declared Rp 4296 T

Domestic Rp 3143 T

Overseas Rp 1013 T

Assuming all assets are income generating

ROA 5%

Average tax 25%

 Outlook 2016 and 2017 29

Private consumption: bottoming out, may slightly improve,

thanks to some rebound in commodity prices

Exports: Exports: may improve thanks to higher commodity

prices, but global environment remain fragile

Investments: remain sluggish

Government spending: no much room for fiscal stimulus due

to short fall in the revenue

Interest rate: not much room for BI to cut the rate

Capital inflows: remain

Exchange rate: tend to weaken ?

Fiscal risk: revenue tends to decline unless there is a

significant reform on tax and re focusing on spending quality
 30

Thank you