VICE FINANCE MINISTER S KEYNOTE SPEECH. Prof. Dr. Mardiasmo, MBA., Akt. 4th ASIAN FIXED INCOME SUMMIT. SOFITEL HOTEL, THURSDAY 7th SEPTEMBER 2017

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1 VICE FINANCE MINISTER S KEYNOTE SPEECH Prof. Dr. Mardiasmo, MBA., Akt. 4th ASIAN FIXED INCOME SUMMIT SOFITEL HOTEL, THURSDAY 7th SEPTEMBER 2017 Bismillahirrahmanirrahim. Assalamu alaikum Wr. Wb. Good Morning and peace be for all of us. My warm welcome to you: Mr. Basuki Hadimuljono, Minister of Public Works & Housing Mr. Wimboh Santoso, Chairman of OJK Board of Commissioners (TBC) Asian Secondary Mortgage Market Association (ASMMA) Members And all speakers and participants Thank you for all of you to attend this event I especially want to express my gratitude to PT Sarana Multigriya Finansial (PT SMF) for their commitment and passionate energy to arrange this summit.

2 First of all, let us praise and thank the presence of Allah Almighty, for the abundance of grace and the joy of all of us can still gather in this place without any barriers at all and in good health to have beneficial discussion about ASIAN Fixed Income especially in its relation to the role of ASIAN Secondary Mortgage Market Association. I thank you all who attend and show enthusiasm and commitment in this event for helping and building one of the most important sectors in a country which is housing sector. IMF s Regional Economic Outlook shows that the Asia-Pacific region remains vigorous as the strongest economy in the world. The growth is estimated to increase to 5.5% this year from 5.3% in 2016 and will continue to be strong at 5.4% in 2018 as the region continues to be the leader of global growth. The challenge is to strengthen and sustain this momentum, as said by Director of the IMF s Asia and Pacific Department. The positive region outlook is supported with a more favourable global environment. However, due to its openness and integration to the global value chain, Asian economies are dependable to global economies, any

3 unfavourable changing in the global economy will impact Asian economies through the decrease in foreign direct investment to Asia. Based on ADB s report, developing Asia will need to invest $1.7 trillion per year (5.9% projected GDP), or $26.2 trillion over the 15-years from 2016 to It is necessary to maintain Asia s growth momentum, eradicate poverty, and respond to climate change. The details on the amount are $14.7 trillion (56%) for power infrastructure, $8.4 trillion (32%) for transport infrastructure, $2.3 trillion (9%) for telecommunications infrastructure, and $800 billion (3%) for water and sanitation infrastructure. The raising concern in environment increase the costs of infrastructure since there are additional elements to be concerned, such as controlling carbon emissions for power infrastructure and more carbon-intensive modes of travel to less carbon-intensive modes for transport infrastructure. To keeping with the growth momentum, Asian countries need lots of money to invest in infrastructure. Thus, the countries short in the capabilities to support such big needs, which will create infrastructure investment gap for the region. Based on the estimated data by ADB the region currently invest $881 billion in infrastructure, which currently finances through public sector for 92%. Public sector finance covers tax and nontax revenues, borrowing via bonds and loans, assistance and

4 support from donor countries and Multilateral Development Banks (MDBs). To overcome the investment gap in infrastructure, the government can reform the public finance by evaluating the availability of fiscal space to increase investment in infrastructure through various options such as by innovative financings such as securitizations and other types of funding to support the investment gap. The government can also increase revenue through tax reform and improving tax administration. However, the state budget will still be insufficient to cover all the necessary funding for the major infrastructure development, and support from private funding both from domestic and international sources is still needed. As for Indonesia, I am happy to share with you that as a country with the fourth largest population in the world, our economy has grown positively in recent years with a 5.5 percent growth on average in the last five years. We expect to grow by 5.2 percent and 5.6 percent in 2017 and 2018, respectively. This level of growth is the third largest among G20 countries

5 after China and India. Our foreign direct investment has shown a positive trend of increase by 20,8 percent average in the last ten years and increases by 8,4 percent in Even though international trade is shrinking, domestic household consumption continues to increase by 5 percent in However, the falling of the commodity prices has stricken Indonesian economy over the last few years, and inequality still becomes an important issue in Indonesia which represented by quite high Gini ratio. Indonesia fiscal deficit as of July 2017 is around % which is greater compared to the last ten years where the deficit was much lower in 1.5-2% since there was no push on big spending such as infrastructure. Starting 2015, Government has changed its mindset to build infrastructure hence deficit is greater. However, infrastructure development is something that is necessary and will support productivity. Meeting these challenges, several strategies are taken by the government. The 2017 State Budget was formulated to support the implementation of strategic priorities of infrastructure acceleration and to improve state budget s effectiveness in promoting inclusive growth. However, the current State Budget could only fulfil 41.3 percent of Indonesia s total infrastructure needs of Rp4,796.2 trillion. From the

6 remains, 22.2 percent is expected to come from our state owned enterprises and 36.5 percent from the private sector. To increase the government part of the financing, President Joko Widodo has cited higher tax revenues through tax amnesty as the key to boost infrastructure spending and growth. One primary strategy is to increase our national tax ratio since in 2016 our tax ratio was only 10.6 percent of the GDP. As a proof of Indonesia government seriousness in infrastructure, the government has issued a policy for mandatory allocation of at least 25% of central government transfers to the region for infrastructure development. Indonesia s efforts to protect macroeconomic stability by improving budget reform to enhance the fiscal stability and deepening domestic financial market resulted in better credit rating from S&P to investment grade in However, Indonesia already received investment grade from Moodys and Fitch since The efforts by the government not solely to keep the investment grade rank but also intended to create a healthy, inclusive, and sustainable

7 economic growth. Apparently, these efforts need supports from all stakeholders in Indonesia, including the private sector. Investment grade rank from international rating agency can increase the confidence of international community to the improvement of Indonesia s credit story which hopefully will increase investment in Indonesia. Indonesian government always support the development of the countries infrastructure development, as shown in the country infrastructure budget in 2017 and 2018 with amount approximately IDR388.3 trillion (Outlook 2017) and IDR409 trillion (RAPBN 2018) respectively. The budget are divided for various purposes and approaches, such as increasing in ministries/institutions allocations which relevant to the development of infrastructure, improving the role of local government for infrastructure, investing in order to support infrastructure through land procurement and addition to state capital in SOEs, and increasing the role of private sector through public private partnership. In conducting the government investment through the addition of state capital in SOEs, Indonesia has strategic policies in each of the priority sectors such as infrastructure; micro, small, and medium enterprises;

8 export; and housing. The strategic policies are to support the development of infrastructure, to support the program of providing houses for lowincome citizens, to increase access to development and investment to the wider community, and to boost SOEs' contribution in accelerating infrastructure development through increased in SOE capital expenditures by increasing SOEs leverage capacity and other corporate actions. Especially for the housing sector, government invest IDR5trillion to PT SMF as Indonesia Secondary Housing Finance Corporation as a leverage of funding in primary financing housing market to increase the capacity in supporting government program of one million house through the function of secondary housing financing, provide liquidity for mortgage distributors which run government program, and decrease government burden in providing low-cost housing. There is a substantial demand for affordable housing in Indonesia, a function of both new annual demand creation and an unmet deficit. There are approximately 64.1 million housing units in Indonesia, of which around 20 percent are in poor condition and an estimated 820,000 to 1 million

9 new units are needed each year to respond to annual housing demand from population growth, new household formation, and migration to urban areas. The private sector only produces approximately 400,000 units per year. Public sector programs, including incremental home improvement assistance, rental housing, and social housing programs, enable an additional 150,000 to 200,000 solutions. This leaves a gap of an estimated 220,000 to 370,000 households that must resort to informal solutions or overcrowding in existing units each year. Furthermore, government of Indonesia provide mortgage subsidies scheme such as FLPP and SSB. Under ministerial regulation no.20 year 2015, FLPP program target are people with monthly income up to IDR 4 million for landed house and IDR 7 million for apartment; interest rate fixed at 5% per year (tenor max 20 years); and there is maximum price for each house/apartment in each region. This subsidy scheme has been running using government budget. However, public support is needed in order to solve the backlog. SMF was created by the Indonesian government to mobilize long term resources, to support the growth of mortgage lending to low/middle and middle income households. To carry out its funding mandate, it acts both as (i) a liquidity facility that issues bonds and passes the proceeds on to primary lenders, and (ii) an issuer and partial guarantor of securitization

10 transactions. As an Issuer of EBA-SP, SMF transform the non-liquid asset (mortgages) into liquid asset through capital market. This process enable fund channeled from the capital market to mortgage market. Indonesia s mortgage market remains small and in its early stages. It is critical that as the market develops, participants are able to support Indonesian Housing Finance. I would like to encourage banks to securitize mortgage loans regularly so that banks will have ability to channeled stable mortgage rate, increase the capacity to provide new mortgages and open access to home financing for all Indonesians. Also, I would like to invite investors invest in mortgage-backed securities issued by SMF as it is one of the safest instrument with rating of AAA that has excellent quality of residential mortgage as an underlying. The public finance reforms and tax reforms can only cover a little part of the infrastructure investment gap, which strongly implies that the private financing is highly needed. To attract private investors (domestic and especially offshore), each country needs to improve its regulatory and institutional tools, expand the capital markets through channelling its region s savings into productive

11 infrastructure investment, and to promote high-quality projects' planning and design to increase its credibility. This is why in closing, I would like to express my sincere hope that this forum will successfully result in not only the strategies for Asian countries to be the investment target on the regional bond market and reaffirmed the position of secondary mortgage finance company in channelling the money market with capital market. But also, accommodate the discussion on how to support the affordable housing sector for developing countries. With this, I would like to close my speech and wish all of you a productive meeting and enjoyable stay in Bali. Thank You Wassalamualaikum Wr. Wb. Total Words [1859] in 12 pages Estimated delivery time minutes