KEYNOTE SPEECH THE MINISTER OF PUBLIC WORKS AND HOUSING, REPUBLIC OF INDONESIA ON FOURTH ASIAN FIXED INCOME SUMMIT (AFIS) Bali, September 7 th 2017

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1 KEYNOTE SPEECH THE MINISTER OF PUBLIC WORKS AND HOUSING, REPUBLIC OF INDONESIA ON FOURTH ASIAN FIXED INCOME SUMMIT (AFIS) Bali, September 7 th 2017 Assalaamu alaikum Wr. Wb., Good morning, Om Swasti Astu, Excellencies: Minister of Finance of the Republic of Indonesia, which is represented by Vice Minister of Finance, Mr. Mardiasmo;

2 Chairman Board of Financial Service Authority (OJK) Bapak Wimboh Santoso; Honourable Speakers; Distinguished Guests; Ladies and gentlemen, First of all, I would like to welcome all of you, to the 4 th Asian Fixed Income Summit (AFIS), in Nusa Dua Bali. Distinguished Guests, Ladies and Gentlemen,. Housing (including real estate) development constitutes the bulk of human settlement area. Consequently policy development concerning housing development is very critical in determining the sustainability of housing provision in a region, and even in a country. It is even more critical, considering that investments in housing and real estate have the potential to become the locomotive of a

3 country s national development. This relates to the fact that the investment generates multiplier effects resulting in backward and forward lingkages in more than 100 other industries. While it also functions as a machine for creating jobs (direct and indirect) as well as affecting positively the country s national income. Distinguished Guests, Indonesia, with its current population reaching close to 250 millions comprises of 60 millions households, has a staggering number of 13,6 million housing backlog. The backlog represents the number of households who do not own a house. The National Census of 2010 also shows that home ownership in Indonesia is declining compare to the previous decade. If we include occupancy if rental housing, the backlog is 7.4 million.

4 To meet the housing demand, the Government of Indonesia initiated a National Program called One Million Housing Program through which government pursuing policy to house every household in descent shelter either as unit s owner or as renters depending upon households ability and willingness to pay. Indonesia s economy, amidst the global economy and financial crisis, has maintained positive growth around 5% and outperformed its regional neighboors and together with China and India are the only G20 members posting growth. Consequently, Indonesia has also been able to gain income percapita increase of upto USD in 2016 and projected even more in 2020, while reducing steadily its unemployment and poverty rates from time to time.

5 While GDP growth promotes credit expansion, it is noticeable that eventhough inflation has been kept down as a single digit, the majority of households suffer from high interest rate mortgages as well as expensive long-term funds. It should be noted though that countries with virtually low interest rates mortgage such as USA and Germany suggest that low interest rate relate to the fact that long-term fund in those countries has been made available and is easily accessable through a welldeveloped capital market. It is worth noting that lower interest is also attributable to country s sovereign rating given by rating agencies. Sovereign ratings for those countries are considered HIGH CREDIT QUALITY, or INVESTMENT GRADE which means their ratings are at least Aa2 (Moodys), or AA (Fitch/Standard &Poor).

6 It is fortunate that Indonesia sovereign rating is lately considered as INVESTMENT GRADE as reflected in its BAA3 by Moodys, BBB- by both Standard & Poor Fitch with positive outlook. We can hope that the cost of fund for longterm fund in the near future would be significantly reduced resulting in lower mortgages interest rate. In the mean time, the need for long-term finance to support housing provision has been hampered, mostly in emerging economies, by the lack of financial instruments as well as the under developed capital market. The size of the mortgage market in most emerging markets is virtually small, often accounting for less than 10 5 percent of GDP. The common factors in these countries are a growing economy, high inflation and interest rates, and most importantly, while emerging economies account for a rising share of the

7 world s wealth, their corporate bond, securitization, and even equity markets remain underdeveloped. To support the One Million Housing Program in Indonesia, the development of debt instruments such as bonds or fixed income securities alike in capital market which provide long-term financal instruments is particularly crucial. The integration of capital market with the primary mortgage market to create an efficient and sustainable housing finance system in Indonesia has also been addressed by the Government through the establishment of Government Supported Enterprise called Sarana Multigriya Financial which is hosting this summit. Ladies and Gentlemen, The importance of developing a robust housing finance system is paramount as emerging economy governments, including

8 Indonesia, struggle to cope with population growth, rapid urbanization, and rising expectations from a growing middle class. As with Indonesia, the presence of capital markets which provide an attractive and potentially large source of long-term funding for housing has been bolstered with the alignment of business goals of pension funds and insurance under the Social Security Provider (BPJS) reform which promote the creation of large and rapidly growing pools of funds. Furthermore, in the near future, Indonesia will have a housing provident fund that takes an investor position in the long term funding for housing. This provident fund referred to as Tapera aims to collect and provide cheap long term fund that is sustainable for housing finance in order to meet the needs of livable and affordable housing for its Participants. On the other hand, capital market, especially the fixed income market, will get additional

9 investment fund from the Islamic based Hajj Fund that could be invested in Shariacompliant vehicles. This fund will finance infrastructure related projects that comply with sharia principles. The advent of this institutional investment has given rise to skills necessary to manage the complex risks associated with housing finance. Ladies and Gentlemen, Securitization as the one of the tools to channel funds from capital market into housing sector, has proven to be effective in many countries. It provides the originator with liquidity of long-term funds while tackling the issue of funding miss matched, thus more mortgage loans available and for investing it provides the safe investment instrument. In Indonesia, mortgage securitization which intends to broaden and deepen capital markets has been promoted by OJK through its regulation No 23 Year 2014 addressing

10 Mortgage Backed Securities called EBA-SP. Well-structured EBA-SP has been an attractive investments for pension funds and insurance companies. Nevertheless, there is still the need to educate the future investors to fully understand the risk and return of the MBS securitization products so that they eager to invest in that product. We strongly believed that securitization will remain a preferred road for mortgage lenders, subject to balance sheet pressure, forcing them to better manage their scarce capital, or to better manage their liquidity and market risks. As the success stories of Mortgage Backed Securities in many countries all involved important government support, we expect the government and regulators will further provide a strong legal and regulatory infrastructure.

11 It is no coincidence that the most successful emerging markets such as South Korea, Japan and Malaysia and developed markets such as Australia, Denmark, United Kingdom, United States, are examples of mortgage security issuance with the strongest infrastructure which has gained strong support from their government. Distinguished Ladies and Gentlemen, The Indonesian government, besides the regulation support, provides support to it s Mortgage-Backed Security (MBS) issuer with implicit government guarantee, through ownership. We avoid explicit guarantees which are considered at least at this time frame very risky as they can involve adverse selection and are detrimental to the governent, and the government could end up with large contingent liabilities. The government of Indonesia with its respective agencies involved in promoting

12 mortgage securitization: the Ministry of Finance, the Central Bank, the Indonesia Financial Servies Authority, and the Minsitry of Public Workls and Housing will keep on doing its best to promote the development of an efficient housing finance system in the country. To serve this purpose we will continue to build a proper legal and regulatory framework, ensure the safety and soundness of regulations for issuers, and clearly define the framework in which structures, treatment of issuers (for example, true sale), and investors (authority and incentive to invest) are cooperate with each other as well as proper tax treatment so that there is no double taxation of the security issuance vehicle, no excessive stamp duty or taxes on the registration of securities or their transfer to ensure that investors are better able to take long-term horizin in their investment decision.

13 On the other hand, we expect that all stakeholders, including investors, fund managers, investment consultants will be actively involved in creating, trading and investing new intermediaries and instruments geared toward the provision of long-term finance as well as with the regulator to develop debt and equity capital markets in order to promote a broad spectrum of financing instruments. We also believe that prudent growth of new bond, securitization, and equity markets, adequately overseen and supervised, must be part of the solution to the long-term finance problem. Ladies and Gentlemen, Finally, I would like to congratulate to PT SMF for the excellent arrangements on this event. I wish all the participants have a fruitful summit and enjoyable stay in Nusa Dua Bali.

14 Wassalamu alaikum Wr. Wb. Om Shati Shanti Om.. Denpasar, Bali September 7 th, 2017 The Minister of Public Works and Housing M. Basuki HadiMuljono