Is Indonesia Changing Direction?

Is Indonesia Changing Direction? James Castle 24 March 2016 Washington DC 24 March 2016 Jokowi s Challenges Wall of Reality INDONESIA OCTOBER 2014 Jokowi Takes Office Source: The Jakarta Globe 1

Indonesia Oct 2014 & Today The Wall of Reality GDP & the Budget Macro Debt, Inflation, Rupiah, Banking The Real Sector Trade and Investment Doing Business Politics The World 2016 The Wall of Reality Fragile Global Recovery A Slowing China Weak Commodity Prices Asynchronous Monetary Policy Source: IMF 2

Indonesia weathered the challenging conditions in 2015 well Growth has held up well relative to other EMs.. 8 GDP Growth in 2015 (in percent) 8 GDP Growth in 2016 (in percent) 6 6 4 4 2 2 0 0-2 -2-4 -4-6 -6 Source: IMF WEO Database Source: IMF WEO Database 5 And entered this downturn in a relatively strong position.. (Bank and Corporate indicators in 2014) Bank regulatory capital (% of RWA) Bank net income (% assets) Bank NPLs (% of total loans) Bank liquid assets (% of ST liabilities) % Corporate Leverage % Corporate Profitability % Total Liabilities/Total Assets Return-on-Assets Corporate Liquidity Liquid Assets/Current Liabilities 6 3

GDP Growth (%) 2010 2015 But -- slow, steady growth decline, for the past 5 years until Q4 2015 Sources: CBS, CastleAsia GDP Growth (%) Q4-2014 thru Q4-2015 Sources: CBS, CastleAsia 4

GDP Growth by Industrial Origin (%) 2014 2015 Sources: CBS, CastleAsia Rupiah vs.us$ January 2013 18 February 2016 Rp/US$ 9,250 9,685 9,750 18 Feb 16 US$ = 13,479 10,250 10,750 11,250 11,750 12,250 22 Jun 13, fuel price hiked 9,960 2 Jan 14 12,242 14 Mar 14 Jokowi presidential candidate, 11,421 18 Nov 14, fuel price hiked 30.77%; 12,146 1 Jan 15, fuel decrease 10.59%; 12,440 28 Mar, fuel increase 7.25%; 13,086 12,212 12,625 12,750 13,250 13,750 14,250 12,900 1 Mar 15, fuel increase 4.54%, 13,237 13,211 13,288 13,481 13,795 14,128 13,840 14,750 14,728 2-Jan 18-Jan 6-Feb 22-Feb 13-Mar 1-Apr 17-Apr 3-May 22-May 10-Jun 26-Jun 12-Jul 30-Jul 22-Aug 9-Sep 25-Sep 11-Oct 31-Oct 19-Nov 5-Dec 23-Dec 13-Jan 30-Jan 18-Feb 6-Mar 24-Mar 11-Apr 30-Apr 20-May 9-Jun 25-Jun 14-Jul 6-Aug 22-Aug 9-Sep 25-Sep 13-Oct 29-Oct 14-Nov 2-Dec 18-Dec 8-Jan 26-Jan 11-Feb 2-Mar 18-Mar 6-Apr 22-Apr 11-May 28-May 16-Jun 2-Jul 24-Jul 11-Aug 28-Aug 15-Sep 2-Oct 23-Oct 10-Nov 26-Nov 16-Dec 6-Jan 22-Jan 10-Feb Source: Bank Indonesia 2013 2014 2015 2016 5

Inflation 2005 2016* 2005 2016* Monthly 2015 2016 (YoY) Fuel Price Hikes Mar 2005 +33% Oct 2005 +100% May 2008-33% 18 Nov 14 +30.77%; 1 Jan 15-10.59% Inflation trending sharply downwards but unexpected jump in January Sources: CBS, CastleAsia Indonesia Stock Index (IDX) January 2012 to 26 February 2016 IDX 5,650 5,400 5,150 IDX High = 5,523 on 7 April 2015 26 February 16 = 4,733 5,215 9 Jul Jokowi Elect, 10 Jul 14 IDX= 5,098 7 Apr 15, 5,523 4,900 4,650 4,692 4,593 4,400 4,150 3,900 3,650 3,809 27 Aug 13 3,968 4,121 3,400 3,150 2-Jan-12 24-Jan 14-Feb 6-Mar 28-Mar 19-Apr 10-May 4-Jun 25-Jun 16-Jul 6-Aug 31-Aug 21-Sep 12-Oct 5-Nov 27-Nov 18-Dec 14-Jan 5-Feb 26-Feb 20-Mar 11-Apr 2-May 24-May 17-Jun 8-Jul 29-Jul 26-Aug 16-Sep 7-Oct 30-Oct 21-Nov 12-Dec 8-Jan 30-Jan 21-Feb 14-Mar 7-Apr 29-Apr 22-May 16-Jun 7-Jul 5-Aug 26-Aug 16-Sep 7-Oct 28-Oct 18-Nov 9-Dec 5-Jan 26-Jan 16-Feb 10-Mar 31-Mar 22-Apr 15-May 8-Jun 29-Jun 24-Jul 14-Aug 7-Sep 29-Sep 21-Oct 11-Nov 2-Dec 28-Dec 20-Jan 11-Feb 2012 2013 Sources: JSX, CastleAsia 2014 2015 2016 6

Foreign Exchange Reserves Foreign Exchange Reserves relatively high but under pressure due to intervention to stabilize rupiah, foreign liquidity volatility Sources: BI, CastleAsia Banking: Credit Growth - Commercial Banks (y/y % change) 2009 2010 2011 2012 2013 2014 2015 Working capital 2.8% 26.4% 21.6% 23.4% 20.2% 10.6% 8.5% Investment 16.3% 16.8% 33.3% 27.6% 34.4% 12.5% 14.6% Consumption 19.1% 22.9% 24.3% 19.8% 13.8% 11.6% 9.1% Property* 10.5% 12.8% 24.7% 24.0% 26.5% 17.3% 11.9% Total Credits 10.1% 23.3% 24.7% 23.2% 21.4% 11.3% 10.1% Total NPL to total Credit 3.4% 2.6% 2.2% 1.9% 1.8% 2.2% 2.6% *working capital, investment and consumption credits Source: Bank Indonesia 7

Trade & Investment Trade 2009 2015 2014-2016 Trade balance turned positive in 2015 after 3 years in deficit, but total volume down 23% continuing decline since 2012 high of $381 bn. Exports down 21%. Imports down 26% at about 2010 levels. Sources: CBS, CastleAsia 8

Capital Goods Imports 2004 2016 January Capital goods imports continue to decline highlighting investment slowdown Sources: CBS, CastleAsia ASEAN 4-Wheeler Sales 2012 2015 (unit) % Change Country 2012 2013 2014 2015 2015/14 Singapore 37,247 34,111 47,443 78,609 65.7 Vietnam 80,453 98,649 133,588 209,267 56.7 Philippines 156,654 181,738 234,747 288,609 22.9 Malaysia 627,753 655,793 666,487 666,674 0.03 Thailand 1,436,335 1,330,672 881,832 799,632 (9.3) INDONESIA 1,116,212 1,229,901 1,208,019 1,013,291 (16.1) Brunai 18,634 18,642 18,114 14,406 (20.5) TOTAL 3,473,288 3,549,506 3,190,230 3,070,488 (3.8) Source: Asean Automotive Federation 9

ASEAN 2-Wheeler Sales 2012 2015 (unit) % Change Country 2012 2013 2014 2015 2015/14 Philippines 702,599 752,835 790,245 850,509 7.6 Thailand 2,130,067 2,004,498 1,701,535 1,639,090 (3.7) Singapore 9,923 11,650 8,145 7,459 (8.4) Malaysia 537,753 546,719 442,749 380,802 (14.0) INDONESIA 7,141,586 7,771,014 7,908,941 6,708,384 (15.2) TOTAL 10,521,928 11,086,716 10,851,615 9,586,244 (11.7) Source: Asean Automotive Federation Cement Consumption 2010 2016* 2014-2016 Source: ASI 10

CastleAsia Forecast March 2016 2013 2014 2015 2016* Forecast GDP Growth (real) 5.56% 5.02% 4.79% 5.00% CPI yoy 8.38% 8.36% 3.35% 4.50% X-rate to US$, year end 12,189 12,440 13,795 13,500 SBI (one month), year end 7.50% 7.75% 7.50% 6.75% Sources: CBS, BI, *CastleAsia forecast POLITICS Wall of Reality Source: The Jakarta Globe, Aug 2014 11

Current economic conditions compared to last year 45 40 35 30 25 20 15 10 5 0 % 2.5 1.4 30.1 25.8 33.5 39.1 31.2 22.4 1.4 1.9 Oct'14 Jun'15 5.7 5.0 Much worse Worse No change Better Much better Don't know Source: Saiful Mujani Research & Consulting, June 2015 Jokowi vs SBY: Satisfaction June 2015 % Source: Saiful Mujani Research & Consulting, June 2015 12

Public confidence in Jokowi s competency June 2015 % 60 50 40 52.8 49.3 33.8 Oct'14 Jun'15 30 20 21.7 17.5 10 0 5.6 6.1 7.2 1.9 4.1 Very sure Sure Not so sure Not at all Don't know Source: Saiful Mujani Research & Consulting, June 2015 Regret voting for Jokowi? % Source: Saiful Mujani Research & Consulting, June 2015 13

The best performing ministries % Source: Saiful Mujani Research & Consulting, June 2015 August 2015 Something Old, Something New... Darmin Nasution replaced Sofyan Djalil as Coordinating Minister of Economic Affairs Luhut Panjaitan replaced Tedjo Edhi Purdijatno as Coordinating Minister of Security Affairs Teten Masduki replaced Luhut Panjaitan as Presidential Chief of Staff Pramono Anung replaced Andy Widjajanto as Cabinet Secretary Rizal Ramli replaced Indroyono Soesilo as Coordinating Minister of Maritime Affairs Sofyan Djalil replaced Adrianof Chaniago as Head of the National Planning Agency/Bappenas Thomas Lembong Replaced Rahmat Gobel as Minister of Trade 14

How do you view Economic Conditions over the Past 4 months (%) Source: Indikator Politik, 18-19 Jan 16 Public Satisfaction with Jokowi s Performance? Jan 2016 (%) Source: Indikator Politik, 18-19 Jan 16 15

Who would you Vote for if Presidential Elections were held today (%) Jan 2016 Source: Indikator Politik, 18-19 Jan 16 KIH vs. KMP DPR Seats KIH / PDI-P Coalition (256 = 46%) Neutral (61 = 11%) TOTAL = 560 Disputed (130 = 23%) KMP / Gerindra Coalition (113 = 20%) Source: Compiled from DPR website & The Jakarta Post, 2015 16

The Future? Support the Nawa Cita Framework (Successful implementation of the framework is key to the MT outlook.) Quality of life Raising Living Standards Competitiveness Improving productivity Increasing Opportunities Mental revolution Nawa Cita (Economic related) Self Sufficiency (?) New mindset Dynamic Comparative Advantage 34 17

Nawa Cita: The Challenge Raise Growth Reform the Economy 7.0 6.5 Per Capita GDP ($, RHS) GDP Growth 4000 3500 o Reduce Inequality 6.0 5.5 5.0 3000 2500 o Increase employment opportunities 4.5 4.0 2000 1500 o Raise living standards 3.5 1000 3.0 2003 2005 2007 2009 2011 2013 2015 500 o Make Indonesia Competitive Source: IMF WEO Database 35 The Policy Challenge 18

Two Political Myths Dominate Two important myths have dominated elite political thinking and economic policymaking over the past decade Indonesia has too much foreign investment Indonesia imports too much CA- Myth #1: Indonesia has too much Foreign Investment Foreign Direct Investment, net inflows (2009-2013 - % of GDP) In Indonesia net FDI equals about 2% of GDP, well behind its ASEAN peers Vietnam and Malaysia and slightly more than Argentina and India Source: World Bank 19

Myth #2: Indonesia imports too much Imports of Goods and Services (2009 2013 - % of GDP) Imports of Goods & Services as % GDP. The share in Indonesia (22%) is much less than in other major ASEAN economies, India and China Source: World Bank Political Myths These myths also reflect the belief that the international system is inherently unfair to developing countries and that Indonesia is uniquely vulnerable. Confronting these myths will be the most serious obstacle to growth for the Jokowi administration The confrontation with these myths began in August 2015. Its outcome will determine Indonesia s economic future 20

Thank You Nawur Cita Nine Aims Protect Indonesian citizens Carry out good governance Develop Indonesia bottom up from the village level Eradicate corruption Improve the quality of life for all citizens Improve productivity and boost global competitiveness Achieve economic independence Initiate a mental revolution Strengthen Indonesia s unity in diversity 21

Summary: IMF 2015 Article IV Advice (1) Implement growth reforms, while managing short term liabilities Monetary and exchange rate policy Easing cycle should be implemented gradually and patiently Continue exchange rate flexibility and marketdetermined bond yields Fiscal Policy Reinvigorate revenue mobilization within a coherent medium term plan Revise 2016 Budget early, protecting the fiscal rule Source: IMF Summary: IMF 2015 Article IV Advice (2) Source: IMF Implement growth reforms, while managing short term liabilities Financial Sector Strengthen risk assessment of pockets of vulnerabilities among corporates and banks Close gaps in financial safety net via passage of draft FSSN Law Structural Closing infrastructure gaps to address supply side bottlenecks (e.g. logistics Improve business and investment climate; revise negative investment list for FDI Leverage international trading arrangements (incl. Trans Pacific Partnership) 22