the prospect of indonesia economy 2015 and 2016

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THE PROSPECT OF INDONESIA’S ECONOMY

2015 AND 2016

Business Luncheon

Indonesia Netherlands Association (INA)

Jakarta, Financial Cub 8 September 2015 By Anthony Budiawan

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INDONESIA’S CURRENT ECONOMIC CONDITION

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Indonesia’s economic growth declining

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GDP growth continues to decline:

• Last two quarters below 5%

However, the government estimates the economy in 2016 will grow 5.5%

Why is the government so optimistic?

• Will consumption increase?

• Will investment increase?

• Will exports increase?

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Indonesia’s economic growth declining

Projection 2015: 4 times revised

• 5.8% (APBN)

• 5.7% (APBN-P)

• 5.4% (May 2015)

• 5.0% - 5.2% (July 2015)

4.5% growth (2015) is considered good

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GDP growth 2015

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GDP growth from domestic Q1 2015: 4.33%

Q2 2015: 3.07%

GDP growth from international trade

• Q1 2015: 0.39%

• Q2 2015: 1.60%

• Export 2015 decrease

• Import 2015 decrease faster than export

• (Export – import) contribute significantly to the GDP growth

• I do esia’s gro th largel depe ds o i ports perfor a e

• If imports increase, the economic growth will be depressed

Description

Household Consumption 2.65% 2.56%

Government spending 0.14% 0.18%

Investment 1.40% 1.14%

Inventory change and discrepancy statistics 0.14% -0.81%

Growth from Domestic 4.33% 3.07%

Export -0.13% -0.03%

Import -0.51% -1.63%

Net Export (export - import) 0.39% 1.60%

GDP growth 4.72% 4.67%

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Rupiah continues to depreciate

• What would be the value of Rupiah: Rp 15,000? Rp 16,000? • What are the consequences of further decline in Rupiah to

the economy?

2 Aug 2011

USD 1 = Rp 8,460

25 Aug 2015

USD 1 = Rp 14,067

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Rupiah continues to depreciate

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Why Rupiah appreciate between 2009 – 2011?

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Rupiah and monetary policy of the FED

• QE = Quantitative Easing: monetary policy used by the FED to stimulate US economy

• QE: creates new money to buy financial assets such as treasury notes and mortgage-backed securities

• Impact of QE: Net money inflow to EM economies, EM currencies up, inflationary: commodity prices up

2015:

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Rupiah and monetary policy of the FED

Page | 9 2008 2009 2010 2011 2012 2013 2014 1H2015

Average Rate 9,692 10,408 9,087 8,776 9,384 10,459 11,869 12,968 Change -7.38% 12.69% 3.42% -6.93% -11.45% -13.48% -9.26%

Exchange rate (Rupiah to USD)

Rupiah rebound in 2009, but in average still below the 2008 average rate Average

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Impact of QE on commodity prices

2008 2009 2010 2011 2012 2013 2014 1H2015

Average price 862.92 644.07 859.94 1,083.79 942.08 760.33 743.71 613.87 Change -25.36% 33.52% 26.03% -13.08% -19.29% -2.19% -17.46%

Palm oil average price (USD per metric ton)

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Impact of QE on commodity prices

Page | 11 2008 2009 2010 2011 2012 2013 2014 1H2015

Average price 136.18 76.98 106.04 130.12 103.25 90.60 75.14 64.41 Change -43.48% 37.75% 22.72% -20.65% -12.25% -17.07% -14.29%

Coal average price (USD per metric ton)

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Impact of QE on commodity prices

Rubber price in 2009 rebound, but in average still below 2008 price

Rubber 2008 2009 2010 2011 2012 2013 2014 1H2015

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Trade Balance and Current Account

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Trade balance deficit since 2012

• 2012: deficit USD 1.67 billion • 2013: deficit USD 4.06 billion • 2014: deficit USD 1.89 billion

• Current Account until 2011: Surplus

• Current Account since Q4 2011: Deficit

Surplus Non Oil & Gas < deficit Oil & Gas

• Fall of commodity prices

2015: surplus USD 5.74 billion (7 months)

• Exports decrease, Imports decrease faster

• Declining oil price: reduce the deficit in Oil & Gas sector

Reduction in the deficit 2014 is

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Fundamental of Indonesia’s economy

The go er e t te d to sa that I do esia’s e o o i fu da e tals are

strong enough

I would challenge that opinion:

• o hat asis is I do esia’s e o o i fu da e tals regarded as stro g

I do esia’s urre t e o o i o ditio is fu da e tall eak:

• Current account deficit is chronic and therefore difficult to fight because it is structurally dependent on commodity prices, including oil price

• Balance of payment is dependent on the financial and capital accounts: capital inflow to Indonesia is mostly short-term in nature i.e. hot money

• I do esia’s i dustr stru ture is fu da e tall eak: depe de t o

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Dependent on commodity

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• I do esia’s e o o is i reasi gl depe de t o o odities as a result of

commodity boom in mid 2000s

 (1) FATS, OILS AND WAXES

 (2) MINERAL FUELS AND OILS

 (3) RUBBER AND RUBBER ARTICLES

• Further fall of commodity prices will hurt exports and the economy

2007 2008 2009 2010 2011 2012 2013 2014

15 FATS, OILS AND WAXES 10,227 15,624 12,220 16,312 21,655 21,300 19,225 21,060 27 MINERAL FUELS AND OILS 7,123 10,656 13,934 18,726 27,444 26,408 24,780 21,058 40 RUBBER AND RUBBER ARTICLES 6,249 7,637 4,913 9,373 14,352 10,475 9,394 7,100 TOTAL 3 COMMODITIES 23,598 33,918 31,066 44,411 63,452 58,183 53,399 49,217 SHARE OF EXPORT (%) 25.6% 31.4% 31.9% 34.2% 39.2% 38.0% 35.6% 33.7%

EXPORT (Million USD)

HS Description

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Depreciation of Rupiah: good or bad?

• Rupiah Depreciate: more Rupiah for exporters, the revenue in Rupiah does not drop as much as the drop of the revenue in dollar, it helps them stay in business

• The fall of commodity prices (partly) compensated by the fall of Rupiah

•

2008 2009 2010 2011 2012 2013 2014 1H2015

Average Rate 9,692 10,408 9,087 8,776 9,384 10,459 11,869 12,968 Change -7.38% 12.69% 3.42% -6.93% -11.45% -13.48% -9.26%

2008 2009 2010 2011 2012 2013 2014 1H2015

Average price 862.92 644.07 859.94 1,083.79 942.08 760.33 743.71 613.87 Change -25.36% 33.52% 26.03% -13.08% -19.29% -2.19% -17.46%

2008 2009 2010 2011 2012 2013 2014 1H2015

Rubber 2008 2009 2010 2011 2012 2013 2014 1H2015

Exchange rate (Rupiah to USD)

Palm oil average price (USD per metric ton)

Coal average price (USD per metric ton)

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Indonesia’s monetary policy

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• Rupiah depreciates 22% from June 5, 2013 (Rp 9,856) to Dec 6, 2013 (Rp 12,020)

• Ba k I do esia’s poli respo se: i rease BI rate fro 5.75% to 7.5% (i 5

months)

Can the increase of BI rate fight the inflation?

• The 2013 inflation is a non-monetary inflation (i.e. cost push inflation), most likely cannot be solved with high interest rate

• Other countries reduce the interest rate to stimulate the economy Can the increase of BI rate prevent Rupiah from the depreciation?

• Rupiah is still depressed in 2014

• Depressed Rupiah is good for exporters, good for the economy,

• Depressed Rupiah will reduce import and restore the deficit of trade balance

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Government spending

Government spending 1H 2015 is 9.88% higher than 1H 2014

It is an illusion to expect government spending increases economic growth this year

Description Change

Consumption 2,927 3,159 7.92%

Government spending 395 434 9.88%

Investment 1,638 1,817 10.90% Inventory change and discrepancy statistics 187 165 -12.03% GDP from domestic consumption 5,148 5,575 16.66%

Export Goods and Services 1,243 1,220 -1.83% Import Goods and Services 1,278 1,199 -6.16%

Net Export (Export - Import) (35) 21

GDP 5,113 5,596 9.44%

Indonesia GDP (Rp trillion)

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Factors influenced Indonesia’s economy

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• Global economic condition, particularly China, will determine the global demand

for I do esia goods: eake i g Chi a’s e o o ill depress e ports

• The development of commodity prices will influence exports: a further fall of

the pri es ill hurt e ports a d ill hurt I do esia’s e o o

• I do esia’s o etar poli : the urre t le el of BI rate is too high to sti ulate

the economy, particularly private consumption, as well as the investment

• Go er e t spe di g does ot pla a sig ifi a t role i I do esia’s e o o i

development:

• The most important thing is the total government spending, not the substitution between the expenditures

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Factors influenced Indonesia’s economy

• The FED monetary policy has a major influence on the development of commodity prices and the exchange rate:

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OUTLOOK 2015 - 2016

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Outlook (1)

Sooner (2015) or later (2016) the FED will increase the FED rate:

• Rupiah will further depreciate: Rp 15,000 per USD is not surprising, Rp 16,000 per USD is not impossible

• Co odit pri es ill still depressed, espe iall if Chi a’s e o o i gro th

decrease, which most likely will happen

Glo al e o o is still eak, Chi a’s e o o i gro th o ti ues to de li e • Global demand for Indonesian product decrease, export decrease

• In response to the increase of the FED rate, I expect Bank Indonesia will increase, or hold, the BI rate: domestic economy will weaken, private consumption and investment will decrease

AEC, ASEAN Economic Community, is in effective in 2016

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Outlook (2)

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If further fall of Rupiah and further decline in export resulted in bankruptcies then

I do esia’s e o o ill ertai l go i to re essio

Co sideri g the a o e fa tors, I e pe t I do esia’s e o o i gro th: • 2015: 4.5%

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