event slides (pdf)

1

Is Indonesia Changing Direction?

James Castle24 March 2016

Washington DC

24 March 2016

Jokowi’s Challenges – Wall of Reality

Source: The Jakarta Globe

INDONESIA OCTOBER 2014 – Jokowi Takes Office

2

Indonesia Oct 2014 & Today

GDP & the Budget

Macro – Debt, Inflation, Rupiah, Banking

The Real Sector – Trade and Investment

Doing Business

Politics

The Wall of Reality

The World 2016

Fragile Global Recovery

A Slowing China

Weak Commodity Prices

Asynchronous Monetary Policy

The Wall of Reality

Source: IMF

3

Growth has held up well relative to other EMs…..

5

Source: IMF WEO Database Source: IMF WEO Database

-6

-4

-2

0

2

4

6

8

GDP Growth in 2016(in percent)

-6

-4

-2

0

2

4

6

8

GDP Growth in 2015(in percent)

Indonesia weathered the challenging conditions in 2015 well……

5

6

Bank regulatory capital (% of RWA) Bank net income (% assets) Bank NPLs (% of total loans) Bank liquid assets (% of ST liabilities)

Corporate ProfitabilityReturn-on-Assets

Corporate LeverageTotal Liabilities/Total Assets

Corporate LiquidityLiquid Assets/Current Liabilities

%% %

And entered this downturn in a relatively strong position…..(Bank and Corporate indicators in 2014)

4

GDP Growth (%)2010 – 2015

Sources: CBS, CastleAsia

But -- slow, steady growth decline, forthe past 5 years – until Q4 2015

GDP Growth (%)Q4-2014 thru Q4-2015


5

GDP Growth by Industrial Origin (%)


2014 2015

Source: Bank Indonesia

Rupiah vs.US$January 2013 – 18 February 2016

9,685

12,212

12,900

12,625

13,211

13,481

14,128

14,728

13,288

13,840

13,795

9,250

9,750

10,250

10,750

11,250

11,750

12,250

12,750

13,250

13,750

14,250

14,750

2-Ja

n18

-Jan

6-F

eb22

-Feb

13-M

ar1-

Ap

r17

-Ap

r3-

May

22-M

ay10

-Ju

n26

-Ju

n12

-Ju

l30

-Ju

l22

-Au

g9-

Sep

25-S

ep11

-Oct

31-O

ct19

-No

v5-

Dec

23-D

ec13

-Jan

30-J

an18

-Feb

6-M

ar24

-Mar

11-A

pr

30-A

pr

20-M

ay9-

Jun

25-J

un

14-J

ul

6-A

ug

22-A

ug

9-S

ep25

-Sep

13-O

ct29

-Oct

14-N

ov

2-D

ec18

-Dec

8-Ja

n26

-Jan

11-F

eb2-

Mar

18-M

ar6-

Ap

r22

-Ap

r11

-May

28-M

ay16

-Ju

n2-

Jul

24-J

ul

11-A

ug

28-A

ug

15-S

ep2-

Oct

23-O

ct10

-No

v26

-No

v16

-Dec

6-Ja

n22

-Jan

10-F

eb

28 Mar, fuel increase

7.25%; 13,086

Rp/US$

2014

2 Jan 1412,242

2013

22 Jun 13, fuel price hiked

9,960

14 Mar 14Jokowi presidential candidate, 11,421

18 Nov 14, fuel price hiked

30.77%; 12,146

2015

1 Mar 15, fuelincrease

4.54%, 13,237

1 Jan 15, fuel decrease

10.59%; 12,440

2016

18 Feb 16US$ = 13,479

6

Inflation 2005 – 2016*

2005 – 2016* Monthly 2015 – 2016 (YoY)


Fuel Price HikesMar 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

Indonesia Stock Index (IDX)January 2012 to 26 February 2016

Sources: JSX, CastleAsia

3,809

5,215

4,121

4,6924,593

3,150

3,400

3,650

3,900

4,150

4,400

4,650

4,900

5,150

5,400

5,650

2-Ja

n-1

224

-Jan

14-F

eb6-

Mar

28-M

ar19

-Ap

r10

-May

4-Ju

n25

-Ju

n16

-Ju

l6-

Au

g31

-Au

g21

-Sep

12-O

ct5-

Nov

27-N

ov

18-D

ec14

-Jan

5-F

eb26

-Feb

20-M

ar11

-Ap

r2-

May

24-M

ay17

-Ju

n8-

Jul

29-J

ul

26-A

ug

16-S

ep7-

Oct

30-O

ct21

-No

v12

-Dec

8-Ja

n30

-Jan

21-F

eb14

-Mar

7-A

pr

29-A

pr

22-M

a y16

-Ju

n7-

Jul

5-A

ug

26-A

ug

16-S

ep7-

Oct

28-O

ct18

-No

v9-

Dec

5-Ja

n26

-Jan

16-F

eb10

-Mar

31-M

ar22

-Ap

r15

-Ma y

8-Ju

n29

-Ju

n24

-Ju

l14

-Au

g7-

Sep

29-S

e p21

-Oct

11-N

ov

2-D

ec28

-Dec

20-J

an11

-Feb

IDX

2012 2013

27 Aug 13 3,968

2014

7 Apr 15, 5,523

2015 2016

9 Jul Jokowi Elect, 10 Jul 14 IDX= 5,098

IDX High = 5,523 on 7 April 201526 February 16 = 4,733

7

Foreign Exchange Reserves

Sources: BI, CastleAsia

Foreign Exchange Reserves relatively high but under pressure due to intervention to stabilize rupiah, foreign liquidity volatility

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

8

Trade & Investment

2009 – 2015

Trade

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.

9

2004 – 2016 January

Capital Goods Imports


Capital goods imports continue to decline highlighting investment

slowdown

ASEAN 4-Wheeler Sales2012 – 2015

% 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

(unit)

10

ASEAN 2-Wheeler Sales2012 – 2015

% 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

(unit)

Source: ASI

2010 – 2016* 2014 - 2016

Cement Consumption

11

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

12

Current economic conditions compared to last year…

2.5

25.8

33.531.2

1.45.7

1.4

30.1

39.1

22.4

1.95.0

0

5

10

15

20

25

30

35

40

45

Much worse Worse No change Better Much better Don't know

Oct'14

Jun'15

Source: Saiful Mujani Research & Consulting, June 2015

%


%

Jokowi vs SBY: Satisfaction … June 2015

13

Public confidence in Jokowi’s competency… June 2015

21.7

52.8

17.5

1.96.15.6

49.3

33.8

4.17.2

0

10

20

30

40

50

60

Very sure Sure Not so sure Not at all Don't know

Oct'14

Jun'15

%


Regret voting for Jokowi?


%

14

The best performing ministries…


%

August 2015 – Something Old, Something New...

Darmin Nasutionreplaced Sofyan Djalil

as Coordinating Minister of Economic

Affairs

Luhut Panjaitanreplaced Tedjo Edhi

Purdijatno as Coordinating Minister

of Security Affairs

Teten Masdukireplaced LuhutPanjaitan as

Presidential Chief of Staff

Pramono Anungreplaced Andy

Widjajanto as Cabinet Secretary

Rizal Ramlireplaced Indroyono

Soesilo as Coordinating Minister

of Maritime Affairs

Sofyan Djalilreplaced Adrianof

Chaniago as Head of the National Planning

Agency/Bappenas

Thomas LembongReplaced Rahmat

Gobel as Minister of Trade

15

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 (%)


16

Who would you Vote for if Presidential Elections were held today (%) Jan 2016


KIH vs. KMPDPR Seats

TOTAL = 560

Source: Compiled from DPR website & The Jakarta Post, 2015

KIH / PDI-P Coalition (256 = 46%)

Neutral(61 = 11%)

Disputed(130 = 23%)

KMP / Gerindra Coalition (113 = 20%)

17

The Future ?

34

Nawa Cita

(Economic related)

Mental revolution

New mindset

Quality of life

Raising Living Standards

Increasing Opportunities

Self Sufficiency (?)

Dynamic Comparative Advantage

Competitiveness

Improving productivity

Support the Nawa Cita Framework(Successful implementation of the framework is key to the MT outlook….)

18

Raise Growth Reform the Economy

o Reduce Inequality

o Increase employment opportunities

o Raise living standards

o Make Indonesia Competitive

35Source: IMF WEO Database

500

1000

1500

2000

2500

3000

3500

4000

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

2003 2005 2007 2009 2011 2013 2015

Per Capita GDP ($, RHS)

GDP Growth

Nawa Cita: The Challenge

The Policy Challenge

19

Two Political Myths Dominate

CA-

Two important myths have dominated elite political thinking and economic policy-making over the past decade

Indonesia has too much foreign investment

Indonesia imports too much

Myth #1: Indonesia has too much Foreign Investment

Source: World Bank

In Indonesia net FDI equals about 2% of GDP, well behind its ASEAN peers

Vietnam and Malaysia and slightly more than Argentina and India

Foreign Direct Investment, net inflows (2009-2013 - % of GDP)

20

Myth #2: Indonesia imports too much

Source: World Bank

Imports of Goods & Services as % GDP. The share in Indonesia (22%) is much less than in other major ASEAN

economies, India and China

Imports of Goods and Services (2009–2013 - % of GDP)

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

21

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

22

Summary: IMF 2015 Article IV Advice (1)

Implement growth reforms, while managing short term liabilities

Fiscal Policy

Reinvigorate revenue mobilization within a coherent medium‐term plan

Revise 2016 Budget early, protecting the fiscal rule

Monetary and exchange rate policy

Easing cycle should be implemented gradually and patiently

Continue exchange rate flexibility and market‐determined bond yields

Source: IMF

Summary: IMF 2015 Article IV Advice (2)

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)

Source: IMF

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