Indonesia Economic Update QNB Group October 214
Indonesia Overview The economy has enormous long-term potential based on a rich endowment of natural resources and a large population; the new Jokowi administration will need to address chronic underinvestment that leads to crippling supply bottlenecks Overview Data (213) GDP (bn USD) 869. % GDP related to Services 39.8 Real GDP Growth (%) 5.8 Per Capita GDP (k USD, PPP) 5.2 CPI Inflation (%) 6.6 Current Account Balance (% of GDP) -3.4 FX Reserves (months of import cover, end-213) 5.9 Exchange Rate (USD:IDR, end-213) 12,27 Fiscal Balance (% of GDP) -2.1 Government Debt (% of GDP) 26.1 Broad Money Growth (%) 12.7 Banking Assets (% of GDP) 54.5 3-Month Interbank Rate (%) 7.8 Population (m) 248. Population aged 15-64 Years (% share, 21) 67.4 Population growth (%) 1.4 Unemployment (%) 6.3 Religion (% Muslim) 87.2 Doing Business Rank out of 189 12 Competitiveness Rank out of 144 38 Moody s Rating (Long-term FX debt) Baa3 Nominal GDP by sector (213) Agriculture Industry Services Manufacturing Agriculture Trade, Hotels & Restaurants Mining & Quarrying Other Services Construction Finance & Business Transport & Comms. Other Total 23.7% 14.4% 14.3% 11.2% 11.% 1.% 1.% 7.5% CAGR 29-13 7.%.9% 1% 11% 15% 15% 11% 13% 14% 16% 15% 13% Sources: Central Bank of Indonesia (BI), CIA World Factbook, International Monetary Fund (IMF), Statistics Indonesia (BPS) World Bank, World Economic Forum and QNB Group analysis 2
Indonesia GDP Growth A combination of lack of structural reforms and slower investment growth owing to reduced investor confidence are likely to dampen real GDP growth over the medium term, thus increasing unemployment despite a moderate population growth Real GDP Growth (%) Investment (bn USD) CAGR 2.5% 6.3 5.8 5.1 4.5 5.2 34.7 292.3 286.2 32.5 337. Unemployment (%) Population (m) CAGR 1.4% 6.1 6.3 6.4 6.7 6.9 244.5 248. 251.5 255.1 258.7 Sources: Bloomberg, IMF, BPS and QNB Group analysis and forecasts 3
Indonesia Balance of Payments A persistent current account deficit and capital outflows are key macroeconomic risks in the short-term; the central bank has recently intervened to support the currency, eroding international reserves; trade is mostly with other Asian countries Current Account (% of GDP) Exchange Rate (USD:IDR) -1 Exports (RHS) Balance (LHS) Imports (RHS) 25. 24. 23. 13, 12, 11, 1,454 11,8 12,39 12,514-2 -3-2.8-3.4-3.2-2.9-2.6 22. 21. 2. 1, 9, 9,384-4 19. 8, International Reserves (months of import cover) Directions of Trade (213) 7 6.1 6.2 6.4 6 5.5 5.9 5 4 3 2 IMF recommends > 3 months for fixed FX regimes 1 Exports Imports Destination (bn USD) Source (bn USD) Japan 27.1 China 29.8 China 22.6 Singapore 25.6 Singapore 16.7 Japan 19.3 United States 15.7 Malaysia 13.3 India 13. South Korea 11.6 Sources: Bloomberg, BI, BPS and QNB Group analysis and forecasts 4
Indonesia Fiscal Policy Fiscal policy aims to eliminate the fiscal deficit over the medium term, alleviating public spending constraints; low levels of capital expenditure are insufficient to make up for the infrastructure gap, public debt remains relatively low Government Budget (% of GDP) Government Expenditure (% of GDP) 25 Expenditure Revenue Balance Current Expenditures Capital Expenditures 2 25% 21.8% 22.% 22.% 21.6% 21.1% 15 2% 2.% 2.% 2.% 2.% 1.9% 1 15% 5-1.7-2.1-2.4-2. -1.5 1% 5% 19.7% 2.% 2.% 19.7% 19.1% -5 % Public Debt (% of GDP) Fiscal Policy 28. 26.9 27.1 27. 26.1 26.6 26. 25. 24. 24. 23. 22. Fiscal policy aims to eliminate the fiscal deficit over the medium term The fiscal deficit is projected to widen to 2.4% of GDP in 214 owing to weak revenue deficit reduction beyond 214 will require public spending restraint, dragging down growth over the medium term Public debt levels are expected to remain relatively low over the medium term, anchored by a fiscal rule limiting the general government deficit to no more than 3% of GDP per year Sources: IMF, BI, BPS and QNB Group analysis and forecasts 5
Indonesia Monetary Policy Monetary policy remains focused on anchoring inflation expectations and reducing balance of payments pressures; lower investor confidence has pushed up interest rates whilst broad money growth has slowed on weaker economic activity Inflation (%) 7 6.6 6. 6 5.5 5. 5 4.3 4 3 2 1 Broad Money Change (%) Interbank Interest Rates (%, 3-Month) 1 Indonesia US 8 7.1 6.6 7.8 6 5.3 5. 4 2.3.3.6.3.2 Monetary Policy Monetary policy remains focused on anchoring inflation expectations and reducing balance of payments pressures The Central Bank has raised its main policy rate numerous times to combat inflation and the weak exchange rate 13. 15.4 16.4 15. 12.7 This has been combined with other monetary measures (such as reserve and capital requirements as well as loan to deposit caps), which has led to tighter liquidity and higher interbank interest rates Sources: Bloomberg, BI, BPS and QNB Group analysis and forecasts 6
Indonesia Banking Sector Overview The banking sector is broadly competitive, with an abundant level of banks and relatively low market shares; the banking sector is one of the most profitable in the world as low penetration leads to high interest margins Assets to GDP (213) Asset (bn USD) Loans (bn USD) Bahrain UK France Lebanon China Singapore Switzerland Jordan Iran Morocco UAE Qatar S Africa Turkey Kuwait Tunisia Egypt Libya India Oman Saudi Arabia Mauritania Indonesia Iraq Yemen Nigeria Sudan Syria S Sudan 586% 457% 373% 351% 268% 261% 218% 178% 136% 134% 132% 124% 113% 111% 1% 98% 96% 88% 78% 73% 67% 55% 55% 46% 37% 3% 25% 23% 15% CAGR 1.6% 269.6 334.7 42.8 44.8 43.8 Deposits (bn USD) CAGR 9.4% 23.6 256.4 31.8 327.1 291.4 Analysis CAGR 15.2% 153.9 198.4 245.2 283.1 27.8 Profit 1 (bn USD) CAGR 15.7% Despite experiencing robust growth in recent years, assets, loans and deposits all slowed in 213 on tight liquidity and rising interest rates this trend is expected to continue in the near term Over the medium term, low banking penetration suggests considerable scope for strong growth 6.1 8.4 8.8 1.8 1.9 1 Implied estimates from average assets and return on average assets Sources: Bankscope, Bloomberg, BI, BPS and QNB Group analysis and forecasts 7
Indonesia Banking Sector Ratios Loans are growing faster than deposits, pushing up the loan to deposit ratio; returns on assets and equity is high albeit on a downward trend; capital adequacy is strong with low and falling non performing loans Loan to Deposit Ratio (%) 75.6 77.4 81.3 86.6 92.9 Return on Average Assets and Equity (%) 3 26.8 25.9 25 2.3 21. 19.8 2 2.6 2.7 2.6 15 2.3 2.5 1 5 ROAE (LHS) ROAA (RHS) 5 4 3 2 1 Capital Adequacy Ratio (%) Non-Performing Loans (% of Gross Loans) 22 19.8 2 17.8 18 17.3 16.2 16.1 16 14 Basel III Guideline for 219 12 1 3.5 3.3 3. 2.5 2.5 2.1 2. 1.8 1.7 1.5 1..5. Sources: BI, IMF and QNB Group analysis and forecasts 8
Indonesia Banking Sector Competitor Analysis The top 3 banks are government-owned and account for 29.9% of total assets with strong profitability and low nonperforming loans; foreign ownership of banks has been limited since July 212, restricting competition Financials for Top 5 Banks (213)* Market Share by Assets Net Income Equity ROE Assets ROA Loan to Deposit Ratio Non-Performing Loans (%) (bn USD) (bn USD) (%) (bn USD) (%) (%) (%) Bank Mandiri 11.6 1.5 7.3 21.2 6.1 2.6 84.8 4.5 Bank Rakyat Indonesia 1.1 1.8 6.5 26.9 51.4 3.4 9.7 3. Bank Central Asia 8.2 1.2 5.2 22.3 4.7 2.9 77.9.2 Bank Negara Indonesia 6.5.7 3.9 19. 31.7 2.3 85.9 2.2 PT Bank CIMB Niaga 3.8.4 2.1 16.6 18. 2. 96. 3.2 Analysis There are 12 commercial banks in Indonesia: the top 3 are government owned accounting for 29.8% of total assets; 66 are private; 26 are regional development banks; 14 are joint venture banks; and ten are foreign banks There are also 1,641 rural banks, but these are not permitted to take demand deposits and are confined to limited areas of operation The top five banks account for half of banking sector assets and three of them are owned by government New Central Bank regulations introduced in July 212 limit foreign ownership of banks to 2% 4%, down from 99% which could restrict foreign investment in the sector and delay industry consolidation * Consolidated balance sheet of each bank, including international operations Source: Bankscope, BI, Moodys, IMF and QNB Group analysis 9
Indonesia Financial Markets The Jakarta Stock Exchange is up 2.2% in 214 on higher investor confidence and on improving economic fundamentals; sovereign yields and CDS spreads have fallen as capital flight risks have receded while sovereign risks remain stable Indonesia Stock Exchange Index Sovereign USD 1-Yr Bond Yield (%) 5,5 PE Ratio 16.3 1 Market Cap 51.9% of GDP 2 5, 4,5 4, 3,5 3, 1-12 5-12 9-12 1-13 5-13 9-13 1-14 5-14 9-14 1. 9. 8. 7. 6. 5. 4. 1-12 5-12 9-12 1-13 5-13 9-13 1-14 5-14 9-14 3 25 2 15 1 5 Sovereign Credit Default Swap Spreads (basis points) 1-12 5-12 9-12 1-13 5-13 9-13 1-14 5-14 9-14 1 Price to Earnings (PE) ratio, 12-month forward 2 Market Capitalization as at September 214 as a share of 213 GDP Sources: Bloomberg, BI, BPS and QNB Group analysis and forecasts Sovereign Ratings (July 214) Rating Outlook Moody's Baa3 Stable Standard & Poor's BB+ Stable Capital Intelligence BB- Stable Fitch BBB- Stable 1
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