BUSINESS SURVEY QUARTER IV A. Business Activity. Business Survey

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1 Business BUSINESS SURVEY QUARTER IV-2017 The Bank Indonesia Business revealed slower business growth in the fourth quarter of 2017, mirroring cyclical trends. Such developments were reflected by a decline in weighted net balance (WNB) from 14.32% in the third quarter of 2017 to 7.40% in the fourth quarter of By sector, respondents confirmed the slump was precipitated by less business activity in the agricultural, plantation, livestock and forestry sector, with the corresponding WNB contracting by -1.40% due to seasonal factors and inclement weather. Furthermore, declining business activity was reported in the manufacturing industry, as demonstrated by the WNB sinking from 1.76% to -0.12% in the reporting period. The survey also highlighted that congruent with business moderation, average production capacity utilisation declined to 75.05% in the fourth quarter of 2017, down slightly from 75.99% in the previous period. In addition, respondents confirmed that labour utilisation slowed in the fourth quarter of 2017, reflected by a WNB contraction of -0.89%, decreasing from 0.13% in the third quarter of Notwithstanding, respondents expected businesses to rebound in the first quarter of 2018, indicated by a bump in the WNB to 13.96%. Optimism also stemmed from predicted gains in terms of labour utilisation and investment on the previous period. By sector, respondents predicted business activity to accelerate in all sectors, especially the financial, real estate and corporate services sector, services sector and manufacturing industry. A vibrant manufacturing industry outlook was substantiated by Prompt Manufacturing Index data, which pointed to an expansionary phase at 51.95% in the first quarter of A. Business Activity Respondents reported slower business growth in the fourth quarter of Respondents reported slower business growth in the fourth quarter of 2017, mirroring cyclical trends. Such developments were reflected by a significant decline in the WNB from 14.32% in the third quarter of 2017 to 7.40% in the fourth quarter of 2017 (Graph 1). By sector, respondents confirmed the slump was precipitated by less business activity in the agricultural, plantation, livestock and forestry sector, with the corresponding WNB contracting by -1.40%. Furthermore, the food crop subsector was the main drag on the agricultural, plantation, livestock and forestry sector. Most respondents (55.96%) cited seasonal factors and inclement weather for the business contraction experienced in the fourth quarter of Methodology The Business has been conducted quarterly since the first quarter of In Quarter III-2017, the was extended to 3,039 enterprises spread throughout all regions of the Indonesian archipelago, selected using purposive sampling. Statistically, the respondents have a sampling error of 2% at a 5% level of significance. Data is collated through respondent questionnaires either by hardcopy or by online on BI website. The data is calculated using the net balance method, namely by calculating the difference between the percentage of respondents whose answers increased, those whose answers decreased and those whose answers remained the same. In the case of calculating the net balance of business activity, selling price and labour utilization are calculated using the net weighted balance method. The weight reflected the contribution of each sector to GDP. Since Quarter I-2014, the has been conducted in the last month of the current quarter (one month earlier than usual). In addition, the questionnaire improvement and integrated web-based application both were developed. Real Sector Statistics Division 1

2 Business In addition to the agricultural, plantation, livestock and forestry sector, respondents from the manufacturing industry also reported a contraction (WNB -0.12%), while five other sectors also confirmed a downswing, in particular the mining and quarrying sector (WNB falling from 1.60% to 0.08%). Graph 1. Business Activity Respondents expected businesses to rebound in the first quarter of Respondents expected businesses to rebound in the first quarter of 2018, indicated by a bump in the WNB from 7.40% to 13.96%. All economic sectors were expected to rebound in the first quarter of 2018, with the financial, real estate and corporate services sector (WNB 3.16%), services sector (WNB 2.56%) and manufacturing industry (WNB 2.41%) referred to as the main drivers of growth. In general, the respondents expected business activity to accelerate in the first quarter of 2018 to satiate domestic demand, supported by the availability of diverse production means. B. Production Capacity Average production capacity utilisation declined on the previous period. Respondents confirmed that average production capacity utilisation had declined on the previous period. The revealed that congruent with business moderation, average production capacity utilisation stood at 75.05% in the fourth quarter of 2017, down slightly from 75.99% in the previous period (Graph 2). By sector, respondents from the utilities sector (electricity, gas and water supply) reported the highest level of production capacity utilisation (81.14%), contrasting the lowest reported in the agricultural, plantation, livestock and forestry sector (71.42%). Real Sector Statistics Division 2

3 Business Graph 2. Capacity Utilisation ( % ) Q I QII QIII QIV QI QII QIII QIV QI QII QIII QIV T O T A L MINING & QUARRYING ELECTRICITY, GAS AND WATER SUPPLY AGRICULTURE, LIVESTOCK, FORESTRY & FISHERY MANUFACTURING INDUSTRY C. Financial Condition and Access to Credit Corporate liquidity and profitability were maintained in the fourth quarter of In general, corporate financial performance remained sound in the fourth quarter of 2017, confirmed by a net balance (NB) of 37.62% for corporate liquidity, which was down slightly on the previous period at 37.86%. The majority of survey respondents (54.20%) acknowledged that liquidity conditions were adequate in the fourth quarter of 2017, while 41.71% stated that liquidity had improved and only 4.09% conceded that corporate liquidity had deteriorated on the previous period. In terms of profitability, however, the survey revealed that the NB of corporate profitability increased from 41.41% to 42.16% in the reporting period. More than half of the respondents (51.66%) confirmed that corporate profitability was sound in the fourth quarter of 2017, while 45.25% stated that profitability had improved on the previous period and just 3.09% confessed that corporate profitability had declined in the reporting period. Respondents still considered access to credit as relatively normal. In terms of access to credit, the Business demonstrated that access to bank loans was generally considered normal, with the corresponding NB for the past 3 months recorded at 4.30%. Consistent with maintained corporate financial conditions, most respondents (69.18%) confirmed that access to bank loans was still normal, while 17.56% thought that access to credit had improved and 13.26% argued that access was becoming more difficult compared to conditions three months earlier. D. Labour Utilisation Respondents confirmed that labour utilisation slowed in the fourth quarter of In line with business moderation, respondents confirmed that labour utilisation slowed in the fourth quarter of 2017, reflected by a WNB contraction of -0.89%, down from 0.13% in the third quarter of Respondents from four economic sectors reported declines in labour utilisation, particularly the manufacturing industry (WNB -1.19%), followed by the mining and quarrying sector (WNB -0.89%) and the agricultural, plantation, livestock and forestry sector (WNB -0.16%). Real Sector Statistics Division 3

4 Business Graph 3. Labour Utilisation % WNB Realisation Espectation (0.89) -4.0 I II III IV I II III IV I II III IV I* *) Expectation Respondents predicted labour utilisation to increase in the first quarter of 2018, evidenced by an uptick in the WNB to 5.80%. By sector, the mining and quarrying sector reported the largest increase in labour utilisation (WNB 2.74%), followed by the financial, real estate and corporate services sector (WNB 1.56%), with all other sectors also reporting labour utilisation gains. E. Selling Prices Respondents acknowledged a build-up of inflationary pressures. Respondents acknowledged a build-up of inflationary pressures in the fourth quarter of 2017, reflected by an increase in the WNB from 12.03% in the previous period to 13.45%. The mining and quarrying sector enjoyed the strongest selling price gains (WNB 3.34%), followed by the trade, hotels and restaurants sector (WNB 3.26%) and the agricultural, plantation, livestock and forestry sector (WNB 3.23%). In general, respondents in the mining and quarrying sector as well as the agricultural, plantation, livestock and forestry sector blamed rising selling prices on more expensive raw materials and relatively limited supply, while respondents from the trade, hotels and restaurants sector explained that seasonal demand factors during the school and national holidays had pushed up prices. Graph 4. Selling Price % WNB Realisation Espectation 5.0 I II III IV I II III IV I II III IV I* *) Expectation Real Sector Statistics Division 4

5 Business Respondents predicted that the inflationary pressures would persist into the first quarter of 2018, reflecting a WNB of 15.76%. Inflationary pressures were expected to be most intense in the manufacturing industry (WNB 4.33%), followed by the trade, hotels and restaurants sector (WNB 4.07%) as well as the agricultural, plantation, livestock and forestry sector (WNB 2.50%). In general, the respondents specified rising prices of raw materials and other materials for the upside pressures on selling prices in the first quarter of F. Inflation Respondents predicted inflation in 2017 at 3.45%. On average, respondents predicted inflation in 2017 at 3.45% (yoy), lower than actual inflation in 2017 (3.61%, yoy) but still within the inflation target of 4.0±1%. Respondents from the electricity, gas and water supply sector as well as the financial, real estate and corporate services sector predicted the highest rate of inflation at 3.60% (yoy) respectively. G. Investment Respondents were more inclined to invest in the fourth quarter of Despite lacklustre business investment activity in the fourth quarter of 2017, respondents were more inclined to invest, reflecting a moderate increase in the WNB of investment realisation from 10.66% to 10.68%. By sector, respondents from the manufacturing industry were most inclined to invest, with the corresponding WNB rising from 1.31% to 2.44% in the reporting period (Appendix Table 7). Furthermore, respondents predicted more intense investment activity in the first quarter of The prediction was explained by an increase in the WNB of expected investment to 15.21%, with the mining and quarrying sector as well as the manufacturing industry most inclined to boost investment, registering a WNB of 3.07% and 3.04% respectively. Businesses confirmed less investment activity in the first half of 2017 compared to the second semester of By semester, fewer respondents were engaged in investment activity during the second half of 2017 but the investments were worth more. The results of the Business revealed that 17.88% of respondents conducted investment activity in the second semester of 2017, down from 18.72% in the first half of the year. Nevertheless, the value of those investments was higher compared to the previous period, indicated by a NB of 66.67%, up from 53.82% in the first semester of Most businesses invested in machinery and buildings/factories, confirmed by 29.12% and 25.17% of respondents respectively. The majority of respondents (54.81%) engaged in new investments, while 21.72% favoured replacement investments. According to the respondents, several factors impeded planned investment, including licensing constraints (21.98% of respondents), interest rates (14.13%) and infrastructure conditions (13.30%). Respondents predicted investment activity to pick up in the first semester of The showed that 19.44% of respondents will invest in the first half of 2018, up from 17.88% in the second semester quarter of Nominally, Real Sector Statistics Division 5

6 Business respondents expected the value of investments to decrease on the previous period but surpass that achieved in the first semester of The NB of investment in first semester of 2018 stood at 56.16%, down from 66.67% in the second semester of 2017 but up from 53.82% in the first semester of H. Prompt Manufacturing Index (PMI)* Prompt Manufacturing Index data pointed to a fourthquarter slowdown in the manufacturing industry. Prompt Manufacturing Index (PMI) data pointed to a fourth-quarter slowdown in the manufacturing industry, indicated by a contractionary index of 48.75%, slipping from an expansionary 50.51% in the previous period (Graph 5). Such dynamics were in line with moderating business activity in the manufacturing industry, as demonstrated by the WNB sinking from 1.76% to -0.12% in the reporting period. All PMI components contributed to the manufacturing industry contraction in the fourth quarter of 2017, most significantly the labour index (47.95%), followed by inventories (48.30%) and speed of supplier deliveries (48.73%). Graph 5. Prompt Manufacturing Index EXPANSION CONTRACTION (Index) (% qtq) I II III IV I II III IV I II III IV I II III IV I II III IV I* *) Expectation PMI (LHS) GDP growth - Manufacturing Industry In the first quarter of 2018, respondents predicted manufacturing industry performance to improve, as evidenced by the PMI pushing back into expansionary territory (51.95%) in line with increasing business activity in the sector (WNB 2.41%). By component, the manufacturing industry will expand on the back of production volume (60.69%) as well as labour index and inventories index, which remain in a contractionary phase at 49.85% and 49.49% respectively but have improved from 47.95% and 48.30% *) PMI-BIBS represents a composite indicator designed to provide an overview of manufacturing sector performance in Indonesia. PMI-BIBS is a composite index comprised of five other indices, namely new order volume (input), production volume (output), employment, supplier delivery times and inventory. PMI calculation is based on a pre-assessment of benchmarked Purchasing Manufacturing Indices from a number of other countries. An index reading of above 50 signals business expansion, while a reading of below 50 indicates a contraction. Real Sector Statistics Division 6

7 Business Graph 6. PMI Indicators Production Volume Index Percentage Response in Q IV-2017 Inventory Index Order Volume Index Supplier Delivery Time Index Real Sector Statistics Division 7

8 Business Labour Index Real Sector Statistics Division 8

9 Appendix Table 1. Business Activity (Weighted Net Balance - WNB) S E C T O R S Q I Q II Q III QIV Q I Q II Q III QIV Q I Q II Q III QIV Q I Q II Q III QIV Q I* 2018 Agriculture, livestock, forestry and fisheries Mining and Quarrying Manufacturing Industry Utilities (electricity, gas and water) Construction Trade, hotels and restaurants Transport and Communication Financial, real estate and corporate services Services * Expectation T O T A L Table 2. Production Capacity Utilisation (%) S E C T O R S Q I Q II Q III Q IV Q I QII QIII QIV QI QII QIII QIV QI QII QIII QIV AGRICULTURE, LIVESTOCK, FORESTRY & FISHERY Farm Food Crops Non-food Crops Livestock & Products Forestry Fishery MINING & QUARRYING MANUFACTURING INDUSTRY Food, Beverages and Tobacco Textile, Leather products and Footwear Wood products & Other wood products Paper and Printing Fertilizers, Chemicals and Rubber products Cement and Non metalic mineral products Iron and Basic steel Transport equipment, Machinery & Apparatus Other manufacturing products ELECTRICITY, GAS AND WATER SUPPLY T O T A L Table 3. Other Indicators (Net Balance - NB) I N D I C A T O R S Q I Q II Q III Q IV Q I Q II Q III Q IV Q I Q II Q III Q IV Q I Q II Q III Q IV Financial condition over past three months: - Liquidity Better Same Worse Net Balance (% Good - % Bad) Earnings Better Same Worse Net Balance (% Good - % Bad) Access to credit over past three months: Easy Normal Tight Net Balance (% Easy - % Tight) Real Sector Statistics Division 9

10 Table 4. Labour Utilisation (Weighted Net Balance WNB) S E C T O R S Q I Q II Q III QIV Q I Q II Q III QIV QI Q II Q III QIV QI Q II Q III QIV QI* Agriculture, livestock, forestry and fisheries Mining and Quarrying Manufacturing Industry Utilities (electricity, gas and water) Construction Trade, hotels and restaurants Transport and Communication Financial, real estate and corporate services Services * Expectation T O T A L Table 5. Selling Price (Weighted Net Balance WNB) S E C T O R S Q I Q II Q III QIV Q I Q II Q III QIV Q I Q II Q III QIV Q I Q II Q III QIV Q I* Agriculture, livestock, forestry and fisheries Mining and Quarrying Manufacturing Industry Utilities (electricity, gas and water) Construction Trade, hotels and restaurants Transport and Communication Financial, real estate and corporate services Services T O T A L * Expectation Table 6. Annual Inflation Expectations (% of respondents) EXPECTATION FOR 2015 EXPECTATION FOR 2016 EXPECTATION FOR 2017 S E C T O R S Q Q Q Q Q Q Q Q Q Q Q Q Agriculture, livestock, forestry and fisheries Mining and Quarrying Manufacturing Industry Utilities (electricity, gas and water) Construction Trade, hotels and restaurants Transport and Communication Financial, real estate and corporate services Services TOTAL Inflation Target 4.0 ± ± ± 1 Real Sector Statistics Division 10

11 Table 7a. Realisation of Investment** (Weighted Net Balance WNB) S E C T O R S QI QII QIII QIV QI QII QIII QIV QI QII QIII QIV QI* Agriculture, livestock, forestry and fisheries Mining and Quarrying Manufacturing Industry Utilities (electricity, gas and water) Construction Trade, hotels and restaurants Transport and Communication Financial, real estate and corporate services Services T O T A L * Expectation ** Realisation of investment start to be asked since QI-2014 Table 7b. Realisation of Investment(Semi annually) (Weighted Net Balance WNB) INVESTMENT Smt I Smt II Smt I Smt II Smt I Smt II Smt I* REALISATION Realization of Investment (% respondent) Amount of the investment (SB) Purpose of Investment (%) 1) New investment Replacement New investment and replacement Types of Investment (% respondent's answer) 1) Land Building / Factory Transportation Machinery Other Equipment Limiting factors of investment (%) Rate Security factor Tax Regulation Labour Administration Infrastructur Acces to bank loan Others** Real Sector Statistics Division 11

12 Table 8. Prompt Manufacturing Index (%) Component Period Production Volume Order Volume Speed of Supplier Delivery Tme Inventory Labour PMI 2011 I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I* Real Sector Statistics Division 12