Weekly Report. Weekly highlights. The rupiah stabilized on the back of positive data flows. Weekly Economic Research 22 January 2013 Economic Research

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1 Weekly Report Weekly Economic Research 22 January 213 Economic Research 22 January 213 The rupiah stabilized on the back of positive data flows Economic Forecast Weekly highlights E 214F GDP growth (%) GDP per capita (US$) 3,562 3,766 3,82 Inflation (%) BI rate (%) Current account/gdp (%) Exch. rate (Rp/US$) 9,67 12,189 11,4 The rupiah is in better shape than peer currencies. As exhibit 1 depicts, last week the rupiah appreciated.6% to Rp12,9/US$. It is among the best performer among peer emerging currencies given encouraging macro data particularly trade and FX reserve and returning inflow in both the stock and bond markets. Year-to-date, equity attracted Rp3.1tn inflow while in government bond by Rp4.2tn. Concurrently in neighboring countries, Thailand is dealing with political issue while Philippines is experiencing equity outflow of US$36.6mn, year-to-date, thus undermining their currencies. Going forward poised to appreciate further on narrowing CAD. Beyond, we think the rupiah has the scope to strengthen further as external performance advances to compress the deficit in current account. Trade surpluses have returned and increasing so far in 4Q13 guided by monetary tightening and weak rupiah dampening non-oil & gas import. Fiscal steps have been taken as well to lessen import though it will take longer to be effective. At the same time, the USA is firming its footing to drive global economic recovery and Indonesia should benefit from enhanced export to the country. In 212 export to US was US$14.9bn (7.8% of total) with rubber being the most demanded (US$2.4bn). We estimate the CAD to narrow to 2. and 2.5% in 214 and 215 from 3.6% FY13F with raw mineral ore export ban being the risk factor. Over the same time span, we expect the Rp/US$ to appreciate to Rp11,4/US$ and Rp11,/US$. Aldian Taloputra aldian.taloputra@mandirisek.co.id Leo Rinaldy leo.rinaldy@mandirisek.co.id Wisnu Trihatmojo Research Assistant wisnu.trihatmojo@mandirisek.co.id The World Bank raises global growth prospect. It is forecast to accelerate from 2.4% this year to 3.2% and 3.4% in 214 and 215, respectively, driven by USA-led rising advanced economies. Meanwhile, emerging economies growth is firm with China stabilizing at around 7.5% expansion until 216. Domestically, a downturn is expected in Indonesia with growth projected to drop from 5.6% in 213 to 5.3% in 214 before going up to 5.5% in 215.The IMF has recently released its latest forecast suggesting similar message. Watch the incoming Fed meeting. Its policy meeting will be conducted on Jan14. The economic situation it faces now is somewhat less strong with data rally seems to pause lately. Jobless rate fell.3ppt to 6. in Dec13 affected by job leavers instead of nonfarm payroll gain which disappoint. Such unfavorable underlying cause might be the reason why the Fed will maintain the current FFR for an extended time. In addition, the once rapidly accelerating ISM manufacturing cools off to 57. in the same month from previous Bloomberg consensus expects the Fed to cut QE by US$1bn to US$65bn/month while maintaining.25% policy rate. Total investment in 213 accelerated yet tricky to interpret in US$ term. The Indonesia Investment Coordinating Board (BKPM) reported that last year s total investment accelerated 27.3% to Rp399tn. FDI actually eased to 22.4% last year from 26.1% in 212 yet DDI recorded otherwise (27.3% in 213 vs. 24.6% in 212). On the other hand, using BKPM s currency assumption, FDI in US$ term only grew 18.8% from 22.% in the corresponding period. Nevertheless, FDI growth is much slower if we use the actual average currency rate at Rp11,8/US$ in 4Q13 (depreciation of 22.3% yoy). FDI only grew by 2.3% yoy in 4Q13 from 3.3% in 3Q13 whereas for the whole year, it decelerated to 9.6% from 17.3% in 212. More details below. Page 1

2 EXHIBIT 1. THE RUPIAH STARTS 214 BETTER THAN PEER ASEAN avg PHP SGD KRW MYR THB CNY INR IDR BRL JPY USD Local currency/us$ (as of January 17, 214) % ytd % wow (1.5) (.7) (.6) (.8) (.7) (.9) (.4) (.6) (.7) (.6) (.2) (.1) (.) EXHIBIT 2. AND LIKEWISE ITS STOCK INDEX Indonesia Stock index (as of 17 Jan14) Philippines % ytd % wow Singapore Thailand US India Malaysia South Korea Japan China Brazil (5) (3) (1) EXHIBIT 3. PROPERTY AND FINANCE SECTORS DROVE THE JCI Property Oct3 - Week 1 Basic Industry YtD Weekly Finance Consumer Goods JCI Misc. Industry Infrastructure Source: Bank Indonesia, Ministry of Finance, Bloomberg EXHIBIT 4. INFLOW TO EQUITY AND BOND IS RETURNING (1) (7.4) (2) (6.4) 7 Trade & Service Mining Agriculture -12% -9% -6% -3% % 3% 6% 9% EXHIBIT 5. THE WORLD BANK RAISED GLOBAL PROSPECT (3) Net foreign buy (sell) (Rp tn) (4) SBI Government bond (4.) Stock (5) Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 EXHIBIT 6. CHANGE IN GLOBAL MONETARY POLICY RATE World Bank global outlook summary, Jan14 Difference with previous (percent change from previous year) estimates in Jun13 212e 213f 214f 215f 216f 213e 214f 215f Real GDP growth World High income Euro Area Japan United States Developing countries China Indonesia Thailand Brazil India % 1% 8% 6% 4% 2% % Current policy rate (LHS) Change since Jan13 (bps, RHS) Hungary Latvia Serbia Poland Romania Egypt Mexico Sri Lanka Ukraine Colombia Turkey Moldova Israel Chile Thailand Euro Jordan Australia Sweden Peru South Korea Mauritius India Pakistan Indonesia Brazil Source: World Bank Page 2

3 EXHIBIT 7. WEEKLY INTEREST RATE SUMMARY 17-Jan-14 O/N 1mo 3mo 6mo 9mo/12mo JIBOR Term Deposit SBI* Avg Deposit (Rp) Avg Deposit (US$) Interest rate (%) 17-Jan 1-Jan WtD (bps) MtD (bps) YtD (bps) BI rate JIBOR O/N Term Deposit 1mo Term Deposit 3mo SBI 9mo Avg Deposit 1mo (Rp) Avg Lending rate (Rp) Y Govt Bond ; Note: *SBI rate is for 9 months maturity EXHIBIT 8. WEEKLY COMMODITY PRICES SUMMARY Commodities Bloomberg Ticker 17-Jan 1-Jan WTD (%) MTD (%) YTD (%) Brent (US$/barrel) CO CPO (US$/ton) PALMROTT Coal (US$/mt) API2YR1 TNRG Gold (US$/troy ounce) GOLDS 1,254 1, Metals (Index) LMEX 3,181 3, Rupiah liquidity is still tight. As the central bank steps up its tightening, the price of liquidity measured by the one month Jakarta interbank market rate (JIBOR) crept up to 7.6% in the second week of Jan14 from 7.4% in Dec13 while the < 1 month tenured JIBORs are relatively flat. We believe that difference in movement between < 1 months and > 1 months JIBOR has something to do with rising bank placement in SBI instrument because of its rising average yield. Meanwhile, the interbank money market transaction has contracted 16% yoy to Rp9.8tn in Nov13 from previously recording a positive growth of 2 yoy and 11% yoy in Sept13 and Oct13, respectively. Optimizing monetary instruments... Given wider tolerance of currency depreciation, BI s intervention has eased and resulting in higher FX reserve. Such easing leaves monetary instruments as the dominant weapon to absorb rupiah liquidity. Since FX reserve rose to US$99.4bn in Dec13 from US$95.7bn in Sept13, the central bank has in net absorbed Rp29tn in the corresponding period, generating monetary operation instruments outstanding to Rp321tn in end of last year. Moreover, the outstanding of BI s instruments remains relatively unchanged at Rp317tn in the second week of Jan14. On the details, SBI became the most favorable placement for banks in the past several months as it contributed 9% for the monetary operation instruments increase. On the other hand, US$ transaction has been improving. The 3 month moving average (3mma) of US$ daily average transaction has increased in the last four months. The 3mma average US$ transaction hiked to US$533mn per day in Dec13 from US$397mn per day in Sept13 while the US$ interbank market rate has been in a downward trend. We believe gradual positive development was the consequence of trade balance improvement. Indonesia recorded a trade surplus in Oct13 and Nov13 and will likely register a surplus in Dec13. Bank Indonesia continues to absorb US$ liquidity. In month-to-jan 2, 214, the outstanding of central bank FX instruments (FX term deposit + FX swap) decreased US$8.2bn from Rp1.9tn in Dec13. Therefore, we think that for the rest of this month, BI will absorb at least US$3-4bn to square its position. BKPM: 4Q13 FDI and total investment growth is higher than the previous quarter. The Investment Coordinating Board (BKPM) reported that FDI grew 25.4% yoy in 4Q13 from 18.4% yoy in the previous quarter while DDI recorded otherwise (28. in 4Q13 vs. 32.9% in 3Q14). Adding both of them, total investment accelerated 26.4% yoy from 22.9% yoy in the same period. For the whole 213, total investment rose 27.3% from 24.6% in 212. FDI growth actually eased to 22.4% from 26.1% in 212 yet it was compensated with higher DDI growth (39.% yoy in 213 vs 21.3% in 212). We have to remember that the calculation is done in Rupiah term. The devil is on the exchange rate assumption. If we convert FDI to US$ term, it only accelerated 17.5% yoy in the 4Q13 (vs 11% in 3Q13). This, however, is using BKPM s currency assumption. The institution uses rupiah assumption of Rp9,/US$ for Page 3

4 whereas it use Rp9,3/US$ and Rp9,6/US$ for 2Q13 and 3Q13, respectively. Therefore, FDI growth is actually much slower if we use the actual average currency rate at Rp11,8/US$ in 4Q13 (depreciation of 22.3% yoy). FDI only grew by 2.3% yoy in 4Q13 from 3.3% in 3Q13 whereas for the whole year, it decelerated to 9.6% from 17.3% in 212. What are the sectors contributing to the FDI slowdown in 213? Based on BKPM s data, oversea investment to the primary and secondary sectors slowed last year with the latter contributing the most. FDI to primary and secondary sectors eased to 9.5% yoy and 21.1% yoy in 213 from 34. yoy and 73.4% yoy in 212, respectively. In details, paper & printing, chemical & pharmaceutical, and food beverage sectors were the culprit for the slowdown in the secondary sector whereas food crops & plantation and mining sectors were the culprit in the primary sector. Our view: We believe the 213 FDI slowdown, especially in the secondary sectors, was mostly due to the weakening rupiah. Sectors such as pharmaceutical and food & beverage are sensitive to exchange rate movement as a consequence of high portion of raw material imports. Food sector import content can reach 5% - 6% of total raw material cost while pharmaceutical could reach 9%. Ahead, total investment is expected to remain in a downward trend in 1H14 owing to the tightening stance and weakening rupiah pressure. EXHIBIT 9. BI HAS PICKED UP ITS LIQUIDITY ABSORPTION BI's monetary instrument outstanding (Rp tn) SDBI FASBI Reverse repo SUN SBI syariah Rupiah term deposit SBI Feb I Mar I Apr I Mei I Jun I Jul I Ags I Sep I Okt I Nov I Des I Jan I Feb I Mar I Apr I May I JunI Jul I AugI Sept I Oct I Nov I Dec I Jan I Source : Ministry of Finance EXHIBIT 11. PRICE FOR US$ LIQUIDITY REMAINS IN THE DOWNWARD TREND EXHIBIT 1. CAUSING THE INTERBANK MARKET RATE TO INCREASE JIBOR (%) O/N 1 month 3 month 1 week 12 month 6 month Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 EXHIBIT 12. FDI GROWTH USING ACTUAL CURRENCY RATE IS SLOWER THAN USING BKPM S RUPIAH ASSUMPTION JIBOR USD O/N (%) 4 3 FDI growth (yoy%) FDI (using actual average currency rate) FDI (using BKPM's currency assumption) Q1 211Q2 211Q3 211Q4 212Q1 212Q2 212Q3 212Q4 213Q1 213Q2 213Q3 213Q4 Jan-1 Apr-1 Jul-1 Oct-1 Source : Bank Indonesia Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Page 4

5 EXHIBIT FDI STRUCTURE EXHIBIT FDI STRUCTURE Food Crops & Plantation Transport & Comm 11% Electricity,Gas & Water Supply 6% Other 11% Mining 1 Industry 4 Motor vehicles & Other Transport Equip 8% Chemical & Pharmaceutical 11% FDI by Sector, 212 Metal,Machine ry & Electronic 1% Other Industry 4% Source : Bank Indonesia EXHIBIT 15. QUARTERLY INVESTMENT DEVELOPMENT Food Paper & Printing 5% Rubber & Plastic 3% Food Crops & Plantation Electricity,Gas & Water Supply Other 12% Transport & Comm Mining 1 Industry 5% Motor vehicles & Other Transport Equip 14% Chemical & Pharmaceutical 1% Other Industry 2% FDI by Sector, 213 Metal,Machine ry & Electronic 1% Food Paper & Printing 4% Rubber & Plastic 3% Total investment development DDI (Rptn) FDI (Rptn) Total investment (yoy%)-rhs Q1 21Q2 21Q3 21Q4 211Q1 211Q2 211Q3 211Q4 212Q1 212Q2 212Q3 212Q4 Source: CEIC Page 5

6 MACRO ECONOMIC INDICATORS AND FORECAST F 214F 215F National Account Real GDP (% yoy) Domestic Demand (% yoy) Real Consumption: Private (% yoy) Real Consumption: Government (% yoy) Real Gross Fixed Capital Formation (% yoy) Real Exports (% yoy) 9.5 (9.7) Real Imports (% yoy) 1. (15.) (3.) GDP (Rp tn) - nominal 4,949 5,66 6,436 7,427 8,242 9,657 11,1 11,45 GDP (US$ bn) - nominal ,4 GDP per capita (US$) - nominal 2,234 2,328 2,977 3,498 3,562 3,766 3,82 4,39 External Sector Exports (%yoy,us$) - Merchandise 18.3 (14.3) (6.1) (3.6) Imports (%yoy,us$) - Merchandise 36.9 (24.) Trade Balance (US$ bn) Current Account (% of GDP) (3.) (3.5) (2.7) (2.5) Current Account (US$ bn) (24.4) (31.7) (25.3) (24.9) External Debt (% of GDP) International Reserves (US$ bn) Import cover (months) Rp/US$ (period average) 9,757 1,354 9,78 8,773 9,419 1,452 11,825 11,4 Rp/US$ (year end) 1,95 9,4 8,991 9,68 9,67 12,189 11,4 11, Other BI rate (% period average) BI rate (% year end) Headline Inflation (% yoy, period average) Headline Inflation (% yoy, year end) Fiscal Balance (% of GDP) (.1) (1.6) (.6) (1.5) (1.6) (1.8) (1.7) (1.7) S&P's Rating - FCY BB- BB- BB BB+ BB+ BB+ BB+ BBB- S&P's Rating - LCY BB+ BB+ BB+ BBB- BBB- BBB- BBB- BBB- Source: CEIC, Mandiri Sekuritas estimates Page 6

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