Adaptive Responses to Rapid Economic Change

Indonesia Economic Outlook 218 Adaptive Responses to Rapid Economic Change Hendri Saparini, Ph.D Senior Economist and Founder of CORE Indonesia Presented at KEB Hana Bank Economic Outlook 218 November 16, 217

Global Economic Growth 218 Weak recovery in advanced economies; solid pickup in developing countries Eurozone China 6.8 6.5 USA 2.2 2.3 217 218 15,3% 2.1 1.9 217 218 11,6% 217 218 18,3% Japan 1.5.7 World 6.7 India 7.4 217 218 4,3% 3.6 3.7 217 218 217 218 7,4% share of GDP Source: IMF, WEO October 217

Feb-8 Oct-8 Jun-9 Feb-1 Oct-1 Jun-11 Feb-12 Oct-12 Jun-13 Feb-14 Oct-14 Jun-15 Feb-16 Oct-16 Jun-17 Modest Rebound of Commodity Prices Price increases are not supported by solid and sustained demand 16 Commodity Price Index (28=1) Global GDP growth 14 Wheatear OPEC production decision 12 1 Agricultural Raw Materials Metals Price 8 6 Investment/ speculation OIL PRICE Non-OPEC Production 4 Fuel (Energy) 2 Geopolitical Risk Source: IMF

Changes in Commodity prices Commodity Prices 217 218 % change Oil (US$/bl) 53 56 5.7% Natural Gas (US$/mmbtu) 5.6 5.7 1.7% Coal (US$/mt) 85 7-17.6% Palm Oil (US$/mt) 72 732 1.7% Rubber (US$/kg) 2.2 2.1-1.4% Cocoa (US$/kg) 2. 2.1 5.% Coffee (Arabica) (US$/kg) 3.3 3.3.% Copper (US$/mt) 6,5 6,118 1.1% Nickel (US$/mt) 1,1 1,559 4.5% Tin (US$/mt) 2,225 2,426 1.% Commodity price increase marginally in 218 Oil Price US$53--US$56 (+) strong global demand increase (+) OPEC production cut agreement (-) recovery in U.S. shale oil production (-) expanding output of oil producers like Iran, Libya, and Venezuela Natural Gas US$5,6 US$5,7 (+) strong demand especially from chemical and fertilizer industries (+) China gov. encouragement to coal-to-gas switching to reduce emissions Coal US$ 89--U$ 7 (-) Weak demand from China as it tackle its air pollution (-) increase of supply from producers countries Palm Oil U$ 72--U$732 (+) Strong demand of India and China (+) lower soybean production in Brazil and Argentina (-) Increase production of palm oil in Indonesia and Malaysia Source: World Bank

Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14 Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16 Jan-17 May-17 Sep-17 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 INDEX, 21=1 INDEXK, 21=1 High Growth of Financial Sector Low pressure of monetary policies on financial stability 25 Stock Market Indices of developed countries 25 Stock Market Indices of developing countries 2 2 15 15 1 1 5 5 Japan United Kingdom United States Euro area (19 countries) China India Indonesia Russia Source: OECD

GDP Growth and Distribution Driven by exports and investment GDP Distribution (Q1-Q3 217) GDP Growth (Q1-Q3 217) 9.53% 7% 3% 4.99% 5.5% 4.36% 5.77% 6.79% 33% 57% 1.97% 1.28% Private Consumption Fixed Investment Government Consumption Net Export Private Consumption Government Consumption -3.71% -4.1% Investment Export Import Q1-Q3 216 Q1-Q3 217 Source: BPS

GDP by Sectors and Its Distribution Supported by non-tradable sectors Manufacturing Industries 23% Financial Service 4% Transportation 4% Information & Communicatio n 5% Information & Communication Transportation GDP Growth by Its Sectors 9.8% 9.2% 8.3% 8.2% Mining 6% Construction 6.7% 5.7% Financial Service 6.1% 7.% Agriculture 14% Construction 11% Accomodation; Food & Beverage Trade Agriculture Manufacturing Industries 4.9% 4.6% 4.8% 3.7% 4.3% 2.8% 4.2% 4.6% Q1-Q3 217 Q1-Q3 216 Trade 14% Others 19% Real Estate Mining 1.2%.1% 3.7% 3.7% Source: BPS

Consumer s Purchasing Power Decline? Growth of Vehicle Sales Mobil 2.38% 2.67% Sepeda Motor 7.82% Growth of Power Sales 6.36% 2.4% -.26% Jan-Sep 216 Jan-Sep 217-9.74% Semester-1 215 Semester-1 216 Semester-1 217 Growth of Cement Consumption Growth of Retail Sales (yoy, %) 16.3 216 217 Jan-Sep 216 12.9 2,9% 1.6 11.1 11.2 13.6 6.3 11.4 1.6 8.1 9.9 1.5 Jan-Sep 217 6,6% 6.3 3.7 4.2 4.2 4.3 6.3 2.2 2.4-3.3 Jan Feb Mar Apr May June July Aug Sep Oct Nov Dec

Weakening Purchasing Power of Low Income Consumers Expenditure Distribution by group of income 46,6% 17,1% Rp 4% lowest 36,3% Rp 4% middle Rp 2% highest Index, Farmer Exchange Rate (21=1) 11 Food 18 16 14 12 1 Holticulture 98 96 Plantation 94 92 9 Jan-1 Jul-1 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Index 216=1 12. 11. 1. Wage Real Index Housemaid Construction worker 16 % 14 12 1 8 6 Administered Price Annual Inflation (yoy) Volatile Food Headline 99. 98. Farmworker 4 2 Core 97. Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17-2 -4 Source: BPS

Low Growth Sales for Retailers and Manufacturers Retail Trade Sales Growth, (9M,yoy) Food and Household Sales Growth, (9M, yoy) 25% 3% 2% 2% 25% 24% 15% 1% 5% % 13% 1% 7% 1% % 2% 15% 1% 1% 8% 9% 6% -5% -4% -4% -5% 5% 3% 4% 3% -1% Sumber Alfaria Trijaya Matahari Putra Prima Ramayana Lestari Sentosa 216 217-7% Hero Supermarket Matahari Department Store % Indofood CBP Sukses Makmur Mayora Indah 216 217 Unilever Indonesia Tbk. Ultrajaya Milk Industry & Trading

Rapid decline of Fast Moving Consumer Goods (FMCG) sales Fast Moving Consumer Goods has been growing very slowly at 2,7% in 217 (ytd) while annual average was 11%. 3 25 2 15 1 +15.2% Inflation 17% +14.3% +13.8% +17.7% Inflation 11% +21.1% +4.7% +11% Inflation 8.4% +11.1% +9.6% +14% +1.5% +11.5% 7.7% YTD +2.7% 45% 4% 35% 3% 25% 2% 15% 1% 5% Total Key Account 75 Festive Categories 38.7% 29.8% 2.6% 16.3% 13.4% 5.% 5 23 24 25 26 27 28 29 21 211 212 213 214 215 216 217 % Fest 212 Fest 213 Fest 214 Fest 215 Fest 216 Fest 217 Source : Nielsen

% % Impact of E-commerce Expansion? Market share of online sales is below 4% in 217 25. 2. 22.4 Growth of Retail E-Commerce Sales in Indonesia 23.3 22.1 21.7 19.8 16.8 Number of people purchasing via e-commerce E-commerce penetration (number of purchaser vs total population) Jan 217 Total value of national e-commerce 216 (US$) Average annual e- commerce revenue per user in 216 (US$) 15. 1. 5. 24.74 Million 9 % $5.6 Billion $228. 216 217* 218* 219* 22* 221* 7.8% 7.1% 5.8% Europe China United States Percent of Retail Sales Mode Online (214, % of total retail sales) 4.5% around or below 1% Singapore Malaysia Thailand Philippines Indonesia Vietnam 5. 4.5 4. 3.5 3. 2.5 2. 1.5 1..5. Share of E-commerce from Total Retail Sales In Indonesia 4.4 3.9 3.1 2.2 1.4.8 214 215 216* 217* 218* 219* Sumber: Statista, Wearesocial.org, Asosiasi E-Commerce Indonesia (IdEa)

Triliun Rp Upper-Middle Class Holding Back Consumption Third party deposit for above Rp 2 billion accounts grows faster Third Party Deposit by Nominal % usage Composition of income household usage 3,5 3, 2,5 2, N>2B 1,5 1, N<2B Growth of Third Party Deposit By Nominal Segment 26% 24% 22% 2% 18% 16% 14% 12% 1% 8% 6% 4% 2% % N<2B N>2B Source : LPS dan BI

Direct Investment Growth Domestic investment grows faster, mostly supported by government expenditure 4.% 35.% Domestic & Foreign Direct Investment Growth 36.5% FDI DDI Highest Direct Investment Sectors Realization (Q1-Q3 217) Mining 62.62 3.% Metal, Machinery & Electronic Industry 51.61 25.% 21.7% 2.% 18.6% 17.1% 16.3% 16.9% 16.7% Food Industry 47.46 15.% 1.% 7.8% 7.8% 1.5% 12.% Chemical and Pharmaceutical Industry 39.44 5.%.9% Food Crops & Plantation 26.59.% Q1-216 Q2-216 Q3-216 Q1-217 Q2-217 Q3-217 Triliun Rupiah

Triliun Rp Triliun Rp Investment in manufactures is slowing down DDI Growth by Sector (yoy) DDI by Sector (in Trillions Rupiah) 7% 6% 5% 4% 3% 2% 1% % -1% 61% 41% 42% 2% 12% Primary Secondary Tertiary -3% Jan-Sep 216 Jan-Sep 217 1 9 8 7 6 5 4 3 2 1 32.6 2.2 Primary 75.4 73 Secondary Jan-Sep 216 Jan-Sep 217 62.6 Tertiary 89.1 FDI Growth by Sector (yoy) FDI by Sector (in Trillions Rupiah) 8% 6% 4% 2% % -2% -4% 65% 5% 58% -3% -22% -25% Primer Primary Sekunder Secondary Tersier Tertiary Jan-Sep 216 Jan-Sep 217 2 18 16 14 12 1 8 6 4 2 18.1 139.8 118.3 6.4 74.9 4.2 Primary Primer Secondary Sekunder Tersier Tertiary Jan-Sep 216 Jan-Sep 217

Triliun Rupiah % GOVERNMENT AND SOE Capital Expenditure Capital Expenditure by Government and SOEs Realization of Government Capital Expenditure 7 6 9 8 7 37.2 4 45 4 35 5 6 27.8 3 4 45 5 21.5 23.1 25 3 2 1 268 212 255 143 118 118 145 215 181 27 111 147 47.5 75 211 212 213 214 215 216 Jun-17 Aug-17 4 3 2 1 15.4 11 4.3 5.1 5.7 1.4 Q1 Q2 Q3 Q1 Q2 Q3 Q1 Q2 Q3 Q1 Q2 Q3 214 215 216 217 2 15 1 5 Gov. Capital Exp. BUMN Capital Exp. Realization (in Trillions Rp) Realization (in %)

Indonesia Export Rebound Supported by increased commodity prices Export growth by Sectors Import Growth by Broad Economy Categories 37,8% 18,4% 14,5% Consumption Goods 12,8% 12,4% Jan-Sep 217 Raw Material Goods -9,8% 15,21% Agriculture Manufacture Mining -12,6% Jan-Sep 216-3,5% Capital Goods 9,2% -17,4% -18,% Jan-Sep 216 Jan-Sep 217 Source: BPS, IMF

Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 TRILIUN RUPIAH Next Year Goverment Budget Increased allocation for infrastructure, minimum short-term impacts on economy 48 Budget Allocation for Infrastructure 7% Index 216=1 Average Index of Riil Labour Wage 4 32 62% 29 317 41 41 6% 5% 12. 11. Housekeeper Construction Labour 4% 24 16 27% 146 156 178 27% 3% 2% 1. 99. 8 7% 14% 9% 6% 1% 98. Farmer Labour 212 213 214 215 216 217F 218F % 97. Goverment Infrastructure Budget Growth (%YoY)

Tn Rupiah Better Targeting Subsidies Improving the accuracy of electricity subsidy (9 VA) 45 Goverment Subsidy Spending 4 35 3 Energy Subsidy Rp 95 Tn 25 2 15 1 5 27 28 29 21 211 212 213 214 215 216 217 218 Fuel And LPG Subsidy Rp 46,9 Tn Electricty Subsidy Rp 47,7 Tn Total Energy Subsidy Total Non Energi Subsidy

27 28 29 21 211 212 213 214 215 216 217 218 Tn Rupiah Increased Allocation for Social Assistance Require close supervision to improve effectiveness 12 Social Assistance Spending 6% Program Keluarga Harapan 1 Million Family 1 8 6 22% 16% 28% -7% 4% 6% 22% 6% -1% 17% 23% % Contribution for the poor in JKN 92,4 Million Family 4 2-49% -6% Program Indonesia Pintar 19,7 Million Student Social Assistance Growth (YoY)

Trlion Rupiah Axis Title Revenue Target for 218 Increased target will require extra efforts 18 16 1489 Tax Revenue 3.3% 1539-4.3% 1472 9.9% 1618 16 Revenue realization increase due to Lower Target and Tax Amnesty Program 1489 153 1472 14 12 1 1246 19.5% 3% 8.2% 24% 3.5% 14.6% 12 1246 34 595 516 481 8 8 6 4 4 96 894 987 991 2 214 215 216 APBNP 217 218 Okt 14 Okt 15 Okt 16 Okt 17 Realization Remaining Target Target Realization Remaining Target Target

Trillions Rupiah % of GDP Tn Rupiah Higher risk for budget deficit leading to increased debts High foreign ownership in government bonds is vulnerable to sudden capital outflow 4 Budget Surplus/Deficit. 9 75 Foreign Holding in Goverment Bonds Percentage 818 42 4 3 2 1 -.5-1. 6 45 Value 3 15 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 38 36 34 32 3 % -1.5-1 -2-3 -4 213 214 215 APBN-P 216 Outlook 217 RAPBN 218 Primary balance Surplus/Deficit % of GDP -2. -2.5-3. Meksiko Afrika Selatan Indonesia Polandia Rusia Hungaria Malaysia Turki Thailand Filipina Korea Brazil Israel Cina % Foreign Holding in Goverment Bonds by Country 5.2 3.9 15 13.9 13.5 13.3 19.9 31.9 3.1 29.4 28.4 38.3 38.2 64.5 1 2 3 4 5 6 7

Trilion Rupiah Millions People % Redesign Fiscal Policy to Reduce Income Inequality Poverty Line Poverty budget VS poverty reduction 45 2 -.8 4 18 35 16 +.3 3 25 2 15 1 5 14 12 1 8 6 4 2-2.4-1.5 79.9 81.5 -.9 96.1 -.9 19.2-1.1 119 +.1 131.2 172.4 214.4 26 27 28 29 21 Mar 11 Mar 12 Mar 13 Mar 14 Mar 15 Mar 16 Mar 17 29 21 211 212 213 214 215 216 Number Percentage

Continued low inflation rate since 216 Lower volatile foods inflation, but higher administered prices in 217 % 16 14 12 1 8 6 4 2-2 Core Administered Price Annual Inflation (yoy) Volatile Food Headline -4 Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16 Jan-17 May-17 Sep-17 Inflation Rate According to Expenditure Group General Transportation, Education, Recreation and Sports Health Clothing Housing, Water, Electricity, Gas, Finished food, beverages, Food material 2.7 2.1 3.4-1.9 3.2 2.7 2.5 3.3 3.7 3.5 4.8 1.6 3.6 4.6-1.3 3.4-4 -2 2 4 6 Jan-Okt 217 % Jan-Okt 216

Billion USD Bil. US$ Balance of payment Improved export performance and increased capital flows Balance of Payment Current Account 2 8 Goods Services Primary Income Secondary Income 15 1 Financial Transaction 6 4 2 5 Balance of Payment -2-5 -1-15 Current Account -4-6 -8-1

Stable Exchange Rate in 217 Foreign pressures decline, domestic economy is relatively stable 15 Rupiah/US$ Index 215:1 13 Exchange Rate of Asian Currency 145 125 14 Average S1-16 Rp 13.49 Average S1-17 Rp 13.328 12 115 11 Yuan Ringgit 135 13 125 15 1 95 9 85 Rupiah Won Bath Yen 12 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 8 Source: IMF

LOW Impact of Monetary Policy on Bank Lending Rate Time lag in monetary policy transmission BI 7 Repo Rate, Lending Rate, Deposito Rate Average of Bank Interest Rate Δ Ags 16 - Oct 17 % 9 8 7 6 5 4 3 BI Rate Deposit Facility Lending Facility BI 7 Day RR Rate 14 % 12 1 8 6 4 2 Lending Rate Deposit Rate Spread Reference Rate 1 bps Lending rate 62 bps Deposit Rate 67 bps 2 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Source : Bank Indonesia

Banking Credit Growth & Non Performing Loan Credit continues to grow one digit in 217 due to high NPL and low demand Construction Financial Intermediaries Electricity, gas and water Annual Credit Growth (yoy) 23% 18% 17% 9% 13% 29% Annual Credit Growth Ags-16 8.2% Ags-17 1.2% Mining Trade Transportation, warehousing Bank NPL 4.4% 4.1% 8% Agriculture 11% 16% Consumption Acomodation Provision 4.1% Real Estate 7% 13% Manufacturing 3.7% Acomodation Provision 6% 16% Construction 3.6% Manufacturing Mining Trade Transportation, warehousing and communication -2% -1% -2% 5% 3% 5% 4% 6% -3% -2% -1% % 1% 2% 3% 4% Aug-17 Aug-16 Ags-16 9.4% Investment Ags-17 7% Credit Working Capital Ags-16 4.7% Ags-17 7.8% Real Estate 3.2% Agriculture 1.9% Electricity, gas and water 1.5% Aug-17 Financial Intermediaries.8% % 2% 4% 6% 8% 1% Source : OJK

Apr-14 Jun-14 Aug-14 Oct-14 Dec-14 Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 Feb-16 Apr-16 Jun-16 Aug-16 Oct-16 Dec-16 Feb-17 Apr-17 Jun-17 Aug-17 Trilion Rp Incentive System by Bank Indonesia Important factors that causes ineffectiveness of monetary transmission 6 5 4 Placement of Banking Funds in Bank Indonesia Instruments 484 56 429 325 41 42 486 3% 25% 2% 15% 1% 5% Growth of Third Party Fund Valas Rupiah 3 2 191 % -5% -1% Total DPK 1-15% -2% 21 211 212 213 214 215 216 439 Source : Bank Indonesia

Bank Health Indicators 23.4 (Aug-16) 23.3 (Aug-17) 81.3 (Aug-16) 78.9 (Aug-17) CAR BOPO NIM LDR 5.6 (Aug-16) 5.3 (Aug-17) 9. (Aug-16) 89.2 (Aug-17) Source : OJK

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