2

Jakarta20 July 2016

Political Transition and Implication for Financial Institutions

Presented at 1st Asian Financial Leaders ProgramPrasetiya Mulya Executive Learning Institute

Winang Budoyo(winang.budoyo@cimbniaga.co.id)Chief EconomistPT Bank CIMB Niaga Tbk

Fiscal Sector

Indonesia’s Political and Economic Transition

Before 1998Bank Indonesia (BI) was part of cabinet

Since 1999, BI is an independent Central Bank

1 Jan 2014, Separation of bank’s supervision from BI to FSA (OJK)

4.7

-13.1

0.8

4.93.8

6.3

4.6

6.5

4.85.0

GDP Growth (% yoy)

BIMacroprudential

FSA (OJK)Microprudential

2002,Establishment of The Corruption Eradication Commission (KPK)

Asian Financial

Crisis

Global Financial

Crisis

Global Commodity Supercycle

China Slowdown

2004,SBY was elected as President through the first direct election.

2009,SBY was re-elected as President

5

Indonesia’s Economic Team

CABINET

Darmin Nasution(Coordinating Minister for Economic Affairs)

Bambang P.S. Brodjonegoro

(Minister of Finance)

Thomas Lembong(Minister of Trade)

Rini Soemarno(Minister of State

Owned Enterprise)

Agus DW Martowardojo(Governor of Bank Indonesia)

Muliaman D. Hadad(Chairman of Board of Commissioners of the

Financial Services Authority)

BIMacroprudential

FSA (OJK)Microprudential

6

Jokowi’s Key Initiaves

1.Food self-sufficiency2.Energy self-sufficiency3.Maritime-based economy4. Accelerating Infrastructure

5.Public welfare

6.Cleaner government &bureaucracy reform

Jokowi’s Initiatives geared to fix the domestic problems

Positive Impacts

Source: Harvard Kennedy School, “The Sum is Greater than the Parts” & Jokowi’s Nawa Cita

1. Lower dependency on imported foods2. Less dependency on imported oil3. Land-interconnection to solve the fragmentation4. The development of highways, railroads, seaports, and

airports5. Rollout of health-care (Indonesia Sehat), public education

(Indonesia Pintar), and housing improvement6. Improvement on Investment Climate

Reducing the binding constraints

Indonesia’s binding constraints

1. It is a collection of disconnected local and regional markets rather than an integrated single market

2. Dependent on commodities and old industries instead of high value-added products in the global supply chain

Jokowi’s Focus areas

Key initiatives of the new administration would be on food, maritime, andenergy sectors through accelerated budget disbursement and licenses.

Infrastructure: accelerating the development of highways (i.e. Trans-Javahighway), railroads, seaports, and airport

Public welfare: accelerating the rollout of the universal health coverage scheme(Jaminan Kesehatan National – JKN), public education, and housing improvement

Cleaner government = bureaucracy reform: Jokowi's popularity withvoters is very much due to his ability to negotiate with the rank and file, persuadingofficials to deliver better services to the public as well as avoid the abuse of power andmisuse of public funds.

Source: CSI and CIMB Niaga

Jokowi’s focus areasJokowi offers pledges of better welfare, infrastructure, and cleaner government

8

Fiscal Policy: Budget Re-AllocationAllocation of Energy Subsidy Spending to Education, Infrastructure and Regional Development for Sustainable Economic Growth

2016 Budget Allocation Plan Compared to 2015 Revised Budget

Energy-12%

Education+4%

Infrastructure+8%

Transfer to Regional+17.5%

Source: Ministry of Finance

Monetary Sector

1998

835%

690% 689%582% 552% 510%

432%

Korea Singapore Taiwan Malaysia Thailand Hong Kong Indonesia

In 1993, the World Bank published a book entitled “The East Asian Miracle”. The story was an apparently compelling one, of eight nations – Japan, Korea, Hong Kong, Singapore, Taiwan, Indonesia, Malaysia, and Thailand. These countries had grown faster than other regions of the world: 2x as fast as the rest of East Asia. 3x as fast as Latin America and South Asia. 25x faster than Sub-Saharan and Africa. More than 2x as fast as the OECD economies, or the United States.

GDP Growth of Selected Countries since 1970 – 1996 (prior to the crisis)

345%

145%110%

81%53% 36% 27%

Hong Kong Malaysia Singapore Taiwan Indonesia Thailand Korea

Stock Indices growth of Selected Countries since 1990-1996 (prior to the crisis)

Source: Arwin Rasyid

Beginning in summer of 1997, the economic picture of the Asian Miracle began rapidly change. Initiated by two rounds of currency depreciation. First round was a precipitous drop in the value of Thai Baht, Malaysian Ringgit, Philippine Peso, and Indonesian Rupiah. Second round began with downward pressures hitting Taiwan Dollar, South Korea Won, Brazilian Real, Singaporean Dollar, and Hong Kong Dollar….

-79% -75% -69% -65% -65% -64% -60%-38%

Malaysia Thailand Philippines Indonesia Korea Singapore Hong Kong Japan

Governments have countered the weakness in their currencies by selling foreign exchange reserves and raising interest rates, which, in turn, slowed economic growth and made interest-bearing securities more attractive than equities…

The Change in Exchange Rates against USD for selected Asian Economies, Jan1997–Dec1998.

-86%

-58% -57% -48% -42%-24% -22%

Indonesian Rupiah Malaysian Ringgit Philippine Peso Thai Baht Japanese Yen South Korea Won Singaporean Dollar

-13% -11%-7% -6% -6%

-2% -1%

Indonesia Thailand Malaysia Hong Kong Korea Japan Singapore

The Change in Annual GDP during 1997 – 1998

The Change in Stock Market during Jan 1997 – Dec 1998.

Source: Arwin Rasyid

13

The causes of financial problems in The Asian Tigers economies are many and differ . Their fast economy growth achieved by opening their economies to FDIs, foreign good and services, capital flows, and were relying heavily on US Dollar market to absorb their exports. In order to attract FDIs and facilitate capital flows, their currency exchange rates were kept fairly close alignment with the US Dollar or a basket of currencies dominated by US Dollar….

The financial services sector in these countries had been developing rapidly and without sufficient regulations, oversight , and Government control

As capital markets were liberalized, banks in these countries could borrow abroad at relatively low rates of interest in USD and re-lend the funds domestically mostly in local currency

Over the past decade, foreign borrowing by these countries had shifted from Government to Private sector borrowing. In 1990s, a local bank mightborrow directly from a large New York money center bank

The financial crisis in Asia began in currency markets, but this exchange

rate instability was caused primarily inthe banking sectors of the countries in question..

The causes and structural factors contributing to the financial crisis:

Private-sector debt problems and poor loan quality

Rising external liabilities for borrowing countries

The close alignment between local currency and the USD

Weakening economic performance and balance-of-payments difficulties

Currency speculation

Technological changes in financial market, and

A lack of confidence of the governments to resolve their problems

The Banking Crisis

GCGIssues

Source: Arwin Rasyid

Initial Closed Merged Private & JV Nationalized State &

Regional

State Banks 7 3 4

Regional Development Banks 26 26

Private Banks 157 65 9 79 4

Closed in 1997 16 16

Nationalized in 1998 4 2 2

Audited in March 1999

Category A 73 1 72

Category B

Closed in March 1999 21 21

Eligible for recapitalization 9 7 2

Nationalized*) 7 7

Category C 17 17

Joint Venture Bank 32 2 30

Audited in March 1999

Category A 15 15

Category B 17 2 15

TOTAL 222 67 12 109 4 30

LOST REMAINING

BANK MERGERS, CLOSURES, AND SURVIVALS During The Crisis 1997-1999

Indonesia’s banking sector was devastated by the crisis that began in October 1997. The massive real depreciation of the rupiah, combined with sharp rise in interest rates and the refusal of creditors to roll-over loans, lead to insolvency of many Indonesian banks and businesses

Category A: those that did not need to be recapitalizedCategory B: those deemed to be potentially worth saving, but in need of recapitalizationCategory C: those that were to be liquidated

Note:

*) The seven banks nationalized (taken over) in 1999 were subsequently merged with Danamon, which had already been nationalized in 1998.

Source: Arwin Rasyid

106

222

143

12

67

1988 1997 1999

By types of banks…

The number of private-banks declined from 157 to 83 in 1999

79 Banks were closed / merged….

CLOSED

MERGED

527

63

11726

157

32

426

83

30

State Bank Reg Dev Bank Private Bank JV Bank

1988 1997 1999

October Package1988

Source: Arwin Rasyid

2012

Amending SPP - Holding Function and Bank Holding Company

Only allowed if the controlling shareholder (PSP) is Indonesian

Legal Entity

Source: Bank Indonesia Annual Banking Meeting 2012

Bank XYZ

Bank Holding Function

Should be established by individual, non-bank financial entity, and foreign controlling

shareholder

Bank Holding Company / Financial Holding Company

Bank A Bank B

Holding Function

Individual / Company / Bank

XYZ

Bank / Financial Holding Company

Bank A Bank B

18

Classification of Multiple License Rule

ClassificationNumber

of BanksExample of Banks

> IDR 30 Trilion 4 Bank Mandiri, BNI, BRI, BCA

IDR 5-30 Trilion 15CIMB Niaga, BTN, Danamon, BII, Bank Mega, Bank

NISP, Permata Bank, UOB Indonesia, BTPN

IDR 1-5 Trilion 39 Bank Kaltim, Bank DKI, DBS, Bukopin, Bank ANZ

IDR 100 Billion-1 Trillion 62Bank Artha Graha, Bank Ganesha, Bank Saudara,

Bank Maspion, Bank Mutiara, Bank Jasa Jakarta

Category 1 Category 2 Category 3 Category 4

Core Capital Rp 100 billion-Rp 1 trillion Rp 1 trillion-Rp 5 trillion Rp 5 trillion-Rp 30 trillion >Rp 30 trillion

Productive credit targetsMinimum 55% including at least 20% allocated to Micro & SME

Minimum 60% including at least 20% allocated to Micro & SME

Minimum 65% including at least 20% allocated to Micro & SME

Minimum 70% including at least 20% allocated to Micro & SME

Foreign exchange activities

Only as a foreign exchange traders

Only as a foreign exchange traders & Plain vanilla

Only as a foreign exchange traders & full foreign exchange activity

Only as a foreign exchange traders & full foreign exchange activity

Network Expansion:

To other financial institutions

Not allowedMax 15% of core capital (domestic only)

Max 25% of core capital (domestic & foreign)

Max 35% of core capital (domestic & foreign)

To other syariah commercial banks

Not allowed Max 20% of core capital Max 30% of core capital Max 35% of core capital

Source: Bank Indonesia (BI), CIMB

Revised Structure Linked to Each Bank’s Health Level

Source: Bank Indonesia (BI), CIMB

Stock Ownership Based on Bank’s GCG and Composite Grade

Revised Ownership Limitation for Grade 3, 4, 5

Indonesia was one of the few developing countries in Asiawithout single-ownership limitation for banks, which helpedpromote investment inflow to the banking industry post-1998 monetary crisis

On 13 July 2012, Bank Indonesia (BI) published a newregulation on bank’s share holding structure and aligning itwith each bank’s Good Corporate Governance (GCG) scoreand Composite Rating

BI Regulation Num. 14 / 8 / PBI /2012 is classified as non –retroactive and will only affect future deals

Banks with composite and GCG rating of 1 and 2 will not beimpacted to this limitation, since they are considered strongin facing negative impediments from changes in businessenvironment and other external factors

Other exemption to this rule include Government-ownedfinancial institutions (SOEs) and distressed banks under thesupervision of Deposit Insurance Corporation

Existing banks with GCG level 3 or lower are given time toimprove health levels until end 2013. Failing to do so willresult in ownership adjustment within 5 years, before fullycomplying by January 2019

Grade Risk Level

1 Low

2 Low-Moderate

3 Moderate

4 Moderate-High

5 High

Type of OwnersPrevious

Maximum LimitRevised

Maximum Limit

Individuals / Families 99% 20%*

Non-financial Institutions

99%

30%

Financial Institution 40%

*) 25% for Sharia Banks

Number of bank has declined but still excessiveNumber of banks in 2005 was 131 banks, it then declined to 118 banks currently

Source: OJK

5

3437

26

18

11

4

39

27 26

1210

State Owned BanksForeign Exchange Commercial BanksNon-Foreign Exchange Commercial BanksRegional Development BanksJoint Venture BanksForeign Owned Banks

2005 Jan-16

Country Banking Structure Capital Regulation

Malaysia

Domestic Banking Groups RM 2 Billion (US$621 million)

Locally-incorporated Foreign Banks RM 300 Million (US$93million)

Stand-alone Investment Banks RM 500 Million (US$155 million)

Thailand

Universal Banking (Commercial Bank) Baht 5 billion (US$157 million)

Foreign-Owned Financial InstitutionSubsidiaries : Baht 4 billion (US$126 million)Full Branches: Baht 3 billion (US$95 million)

Restricted License Bank (Retail Bank) 250 million Baht (US$7.9 million)

Philippines

Universal Banking P 2.5 Billion (US$55.5 million)

Commercial Bank P 1.25 Billion (US$28 million)

Thrift Banka. Head Office at Metro Manila P 150 million (US$3.3 million)b. Head Office outside Metro Manila P 40 million (US$888 th)

Rural Bank and Koperasi

Singapore

Full Bank S$ 1.5 Billion (US$1,100m)

Wholesales Bank S$ 200 Million (US$147m)

Off-shore BankNet head office funds minimal S$ 10 million (US$7.3m) – including S$ 5m (US$3.7m) in term of asset approved by MAS

IndonesiaCommercial Bank Rp 3 trillion (new) / Rp 100 b (existing) or (US$330m or US$11m)

Rural Bank Rp 5 Billion (province) or US$550 th

Current Domestic Regulation on Market Access in ASEAN

Source: Halim Alamsyah, Bank Indonesia

Country Bank Ownerships by Individuals Bank ownerships by Corporations

Indonesia– No limits of ownerships by individuals

for banks with good credit health score

For banks with good credit health score:– No maximum limitation for ownership by a corporation– No regulation against a non financial company to own a bank– No limitation of ownership by non financial company– Affiliated Party may own a bank and there is no limitation of ownership

Singapore

– No limitation of ownership by individual owners, but authorization must be obtained from MAS for certain thresholds (5%, 12% and 20%)

– No maximum limitation for ownership by a corporation– No limitation of ownership by non financial company, but an authorization from MAS is

required if ownership is above 5% and 20%. However, it is discussed to require authorization when the ownership is above 12%

Malaysia– Limitation of ownership by individual,

both an affiliated party or non-affiliated party is 10% max

– Limitation of ownership by a corporation both affiliated and non affiliated company is set on 20% maximum

– Non financial company is allowed to own a bank with maximum ownership 20%

Thailand– Limitation of ownership by both an

affiliated party or non-affiliated party is 5% max

– Non financial company is allowed to own a bank with maximum ownership 5%

Philippines – Limitation of ownership 40% max

– Affiliated parties may own a bank and there is no limitation of ownership.– Non financial company company is allowed to own a bank with the following:• Individual/Family max 20%• Corporation max 30%• Foreign ownership up to 40% is allowed with the consent from the President of the

Philippines

Market Access in Relations to Domestic Regulation -Ownership

Source: Halim Alamsyah, Bank Indonesia

Indonesia Malaysia Thailand Singapore Philippines

• Foreign, Local, and JV

• Foreign could own ≤

99%

• Single Presence Policy (majority shareholder is only able to have one bank)

• Rural Bank 0%

• Foreign, Local, and JV

• Limitation of ownerships:

– Commercial Bank ≤

30%

– Investment Bank ≤

70%

– Islamic Bank ≤ 70%

• Foreign, Local, and JV

• Foreign Bank could own Thai Bank:

– ≤ 25% (no need BOT approval)

– ≤ 49% (BOT approval)

– > 49% (MOF approval)

• Foreign, Local, and JV

• Foreigners could own ≤ 40% local bank

• Joint Venture could only occurred with local bank and the local bank that control the JV

• Individual could own ≤

5% from local bank

• Foreign ownerships limitation (voting stock) in Phil Banks:

– Commercial Bank ≤

40%

– Thrift Bank ≤ 60%

– Rural Bank 0%

Market Access in Domestic Regulation – Foreign Ownerships

Currently need special permission for foreigners

Source: Halim Alamsyah, Bank Indonesia

SINGAPORE

UOB Buana Indonesia OCBC NISP Danamon DBS Indonesia Bank Amin

99% 84% 67.4% 99% 80%

UOB Int'l Invst + UOB Limited OCBC Group Asia Fin. Ind DBS Spore Whishart Ltd

CHINA

ICBC Indonesia

90%

ICBC China

TAIWAN

Chinatrust Ind

99%

Chinatrust

MALAYSIA

CIMB NiagaBank Mestika

DharmaBumiputera Bank Maybank Indonesia

97.90% 80% 58% 97.35%

CIMB Group RHB Capt. Berhad ICB Finan Hold Maybank Group

JAPAN

Nusantara

ParahianganSumitomo Mitsui Resona Perdania Mizuho Ind

75.41% 99% 43% 99%

BTMU & Acom SMBC Resona Bank MCB Ltd.

AUSTRALIA

Commonw Ind Bank ANZ Indonesia

95% 99%

Commonwealth ANZ Group

INDIA

Swadesi Indomonex

76% 76%

Bank of India State BOI

USA

BTPN Sripartha

71.60% 40%

Texas Pacific Mercy Corps

NEDERLAND

Rabobank International Indonesia

56.94%

Rabobank Nederland

FRANCE

BNP Paribas Ind

99%

BNP Paribas SA

UNITED KINGDOM

SCB Indonesia Permata Akita B. Ekonomi

100% 45% 99% 99%

Standchard Bank Barclays HSBC

QATAR

QNB Kesawan

69.59%%

Qatar National Bank

Indonesia has the most liberal banking sector

Hanabank KEB IndWoori

Saudara

70% 99% 33%

Hana Bank KEBWoori

Saudara

SOUTH KOREA

Source: Bank Indonesia (BI), CIMB

2014

Function & Objectives

FSA

Consumer Protection

1 Roof for Financial Authority

Micro Prudential Policy Mix

Maintain Systemic Stability

Role in the Economic System

Financial System & Micro Prudential

Policy Mix(FSA)

Monetary & Macro

Prudential Policy Mix

(BI)

Fiscal Policy(MoF)

Source: State Law num. 21 / 2011, Tempo

Introduction to Financial Services Authority (FSA) on 1 Jan 2014Indonesia Selected an Unified Supervisory Model, which are also adopted by the United Kingdom and South Korea

FSA

Banking(integrated from

BI in 2014)Capital Market

Insurance Pension Fund

Multi – Finance Other Financial Services

Integrated in 2013

Source: State Law num. 21 / 2011, Media

Under one roof, the financial industry can expect clear business guidelines for each sectors that would not overlap anddevelop constructive yet healthy competition

More transparant and comprehensive data for non-bank financial institutions, which would enhance business activities andsustainable growth

Potential risk coming from the division of policy-makers for monetary purpose and financial sector purpose. Communication isdefinetly the key success factor

Establishment of the Financial Services AuthorityFSA is an Independent body that regulates and monitors the financial sector

Other Financial Services:

Pawnbrokers

Guarantor (e.g. IndonesiaDeposit Insurance Corp.)

Indonesia Eximbank

Financial Safety Netorganizations for social securityand health purposes

2015 - Current

29

Divergence of Monetary PolicyECB & BoJ are adopting a negative interest-rate strategy while the Fed is changing gearfor a tightening monetary policy. The moves raise questions about the Fed’s ability tofurther raise interest rates in the face of a rising dollar.

Source: Bloomberg

Negative

Interest Rates

by ECB & BoJ

(More Dovish)

Tightening

Monetary policy

by The Fed

(Less Hawkish)

Thailand

LDR : 106.3%CAR : 16.5%Load to GDP : 104.3 %Deposit to GDP : 99.1%Loan growth : 5.6% YoY*Credit rating : BBB+

Malaysia

LDR : 87.7%CAR : 15.5 %Load to GDP : 122.9%Deposit to GDP : 156.8%Loan growth : 9.1% YoY*Credit rating : A

Philippines

LDR : 71.8%CAR : 16.5%Load to GDP : 39%Deposit to GDP : 52.6%Loan growth : 14.4% YoY*Credit rating : BBB

Indonesia

LDR : 88.5%CAR : 20.3%Load to GDP : 35.3%Deposit to GDP : 41%Loan growth : 10.4% YoY*Credit rating : BB+

Singapore

LDR : 85.5%CAR : 16%Load to GDP : 153.2%Deposit to GDP : 142.5%Loan growth : 0.5% YoY*Credit rating : AAA

Comparison of ASEAN-5 Banking Indicators

* S&P credit ratingSource: CEIC

31

ASEAN-5 Banking IndicatorsThe Government has been asking banks to reduce interest rates since 2015

Sources : CEIC

NIM, 2015 ROA, 2015

BOPO, 2015

81%

70%

54%

42% 40%

IND PHI THA SIN MAL

5.39%

3.28%2.60%

2.30%

1.50%

IND PHI THA MAL SIN

2.32%

1.49%1.30%

0.97%

0.54%

IND THA MAL SIN PHI

Loan per GDP, 2015

35.3% 39.0%

104.3%

122.9%

153.2%

IND PHI THA MAL SIN

32

Monetary Policy: Optimizing Space Easing, and StrengtheningTransmission

External

Domestic

Financing

Global StanceDovish

FFR, EU, and Japan

Oil Price Slump

Global Growth risk that

continues to weaken

China UncertaintyNT, Money

Market

Capital Inflows Fuel Price Export Fiscal

Exchange Rate InflationLimited

GDP, depends on DD

Corporate Risks

Credit

Interest RateTight Banking

Liquidity

Policy Responses

BI RateReserve

RequirementMacro

prudentialMoney

Circulation Coordination

Sources : Bank Indonesia

33

Bank Indonesia Policy Mix: 2015 - 2016Shift to More Accommodative Monetary Policies to Support Economic Growth

18 June 2015Loosening of Macro prudential Policy• Increase the Loan – to Value (LTV) ratio• Reduce down payments for automotive loans

14 January 2016• Cut BI Rate 25 bps to 7.25%• Cut DF & LF Rate at 5.25% & 7.75% respectively• BI lowers its monetary operation rates even further

ranging from 25 bps to 45 bps (O/N to 1Y)

17 March 2016• Cut BI Rate further by 25 bps to 6.75%• Cut DF & LF Rate to 4.75% & 7.25%

respectively

26 June 2015Reserve Req. Policy:

• RR – LDR RR – LFR• Accommodate bank’s SME loans in RR calculation

17 November 2015Lowering IDR Primary RR by 50 bps from 8.0% to

7.5%. Effective since 1 Dec 2015

18 February 2015• Cut BI Rate 25 bps to 7.00%• Cut DF & LF Rate to 5.00% & 7.50% respectively• BI Reduces the rupiah denominated primary

reserve requirement by 1%, from 7.5% to 6.5%, effective from 16 March 2016

• Room for monetary easing exists on the back of solid macroeconomic stability especially in terms of less intense inflationarypressures in 2016 as well as less uncertain global financial markets.

• The reduction of the BI Rate and primary reserve requirement is expected to strengthen efforts to boost the ongoing economic growth.

Sources : Bank Indonesia

34

BI continues the loose monetary policyBI Rate were cut for 3 months in a row (Jan-Mar 2016), on the back of the Fed’s less hawkish

Sources : Bank Indonesia

BI Rate and Reserves Requirements BI Rate, Lending Facility and Deposit Facility

6.50%

4.00%

6.75%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

8.00%

9.00%

Mar

-10

Jul-

10

No

v-1

0

Mar

-11

Jul-

11

No

v-1

1

Mar

-12

Jul-

12

No

v-1

2

Mar

-13

Jul-

13

No

v-1

3

Mar

-14

Jul-

14

No

v-1

4

Mar

-15

Jul-

15

No

v-1

5

Mar

-16

Primary RR Secondary RR BI Rate

6.75%

7.25%

4.75%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

8.00%

9.00%

Mar

-10

Jul-

10

No

v-1

0

Mar

-11

Jul-

11

No

v-1

1

Mar

-12

Jul-

12

No

v-1

2

Mar

-13

Jul-

13

No

v-1

3

Mar

-14

Jul-

14

No

v-1

4

Mar

-15

Jul-

15

No

v-1

5

Mar

-16

BI Rate Lending Facility Deposit FAcility

For 3 months in a row, (Jan-Mar 2016) BI cuts BI rate by 25bp each to 6.75% in the last meeting on 17 Mar 2016. BI acknowledges that US economy will be slower than previously predicted and the FFR hike is not expected until the second half of the year, with a lesser magnitude than previously (from 4 times to only 2 times).

BI also cuts LF & DF by 25bp each to 7.25% and 4.75% respectively Last month BI reduced rupiah primary RR to 6.5% (effective on 16 Mar 2016) to reduce liquidity risk in the future A 1% reduction on IDR Primary RR to 6.5% will add rupiah liquidity by Rp34.4 trillion On a combination of a more dovish ECB & BoJ, a less hawkish Fed and stable rupiah, BI may cut IDR Primary RR further until

5%. While BI rate is likely to face 6.5% level until the end of 2016

35

BI Monetary Operation Rates (Term Structure) have declined in line with BI Rate cuts (75bp in 3 months) … but slower reaction from banking sector as tight liquidity hinders transmission of BI rate cut

6.25% 6.30% 6.40%

6.85%6.95%

7.10% 7.15%

5.50% 5.60%5.80%

6.20%

6.45%6.60%

6.75%

4.5%

5.0%

5.5%

6.0%

6.5%

7.0%

7.5%

8.0%

1W 2W 1M 3M 6M 9M 1Y

TS Dec 2015 TS Mar 2016

LF rate, 7.25%

BI rate, 6.75%

DF rate, 4.75%

BI Monetary Operation Rates (Term Structure) Deposit Rates by Type of Bank

Sources : Bank Indonesia

36

Jan-Feb 2016 – After 25bp cut on BI Rate

Jan-Mar 2016, after 75bp cut on BI Rate

-0.01-0.04 -0.04

-0.09 -0.09

-0.18

-0.01

0.01

-0.39

0

-0.04 -0.04

0.06

-0.08

0

-0.29

-0.01 -0.01

-0.16

0.060.09

0.010.04

0.01

24

M

12

M

6M

3M

1M

Stat

e B

ank

BP

D

Pri

vate

Ban

k

Fore

ign

Ban

k

Co

mm

erci

al B

ank

Stat

e B

ank

BP

D

Pri

vate

Ban

k

Fore

ign

Ban

k

Co

mm

erci

al B

ank

Stat

e B

ank

BP

D

Pri

vate

Ban

k

Fore

ign

Ban

k

Co

mm

erci

al B

ank

Stat

e B

ank

BP

D

Pri

vate

Ban

k

Fore

ign

Ban

k

Deposit Rate Working Capital Lending Rate Investment Lending Rate Consumption Lending Rate

-0.19

0.050.18

-0.23-0.16

-0.11-0.03

-0.21

Working Cap Investment Consumption 1M 3M 6M 12M 24M

Lending Rate Deposit Rate

Sources : Bank Indonesia

37

Behavior of interest rates in the loose monetary policy

BI rate and IDR Deposit rates

Source: Bank Indonesia

BI Rate LPS Rate rDepo1 rWorkCap BI Rate LPS Rate rDepo1 rWorkCap

Dec-08 9.25 10.00 10.75 15.22 -25 0 + + 74.6

Jan-09 8.75 10.00 10.52 15.23 -75 0 + + 73.8

Feb-09 8.25 9.00 9.89 15.08 -125 -100 -63 -15 73.5

Mar-09 7.75 8.25 9.42 14.99 -175 -175 -110 -24 73.1

Apr-09 7.50 7.75 9.04 14.82 -200 -225 -148 -41 72.9

May-09 7.25 7.75 8.77 14.68 -225 -225 -175 -55 73.2

Jun-09 7.00 7.50 8.52 14.52 -250 -250 -200 -71 73.2

Jul-09 6.75 7.25 8.31 14.45 -275 -275 -221 -78 74.1

Aug-09 6.50 7.25 7.94 14.30 -300 -275 -258 -93 74.0

Sep-09 6.50 7.00 7.43 14.17 -300 -309 -106 73.6

Oct-09 6.50 7.00 7.38 14.09 -314 -114 73.9

Nov-09 6.50 7.00 7.16 13.96 -336 -127 73.7

Dec-09 6.50 7.00 6.87 13.69 -365 -154 72.9

MonthInterest Rate Level (%) Accummulation (in bp)

LDR (%)

BI Rate LPS Rate rDepo1 rWorkCap BI Rate LPS Rate rDepo1 rWorkCap

Oct-11 6.50 7.00 6.75 12.36 -25 -25 -8 -8 81.9

Nov-11 6.35 6.75 6.56 12.31 -40 -50 -27 -12 81.9

Dec-11 6.00 6.50 6.35 12.16 -75 -75 -48 -23 79.6

Jan-12 6.00 6.50 6.26 12.14 -75 -75 -57 -25 79.4

Feb-12 5.75 6.00 5.97 12.02 -100 -125 -86 -37 80.2

Mar-12 5.75 5.50 5.66 12.01 -175 -117 -38 80.8

Apr-12 5.75 5.50 5.42 11.86 -141 -53 82.2

May-12 5.75 5.50 5.35 11.78 -148 -61 82.6

Accummulation (in bp)LDR (%)Month

Interest Rate Level (%)

38

Then OJK came with new ruleLower caps on deposit rates for BUKU 3 and 4

OJK lowers cap on deposit rate for BUKU 3 to 100bp and BUKU 4 to 75bp above BI rate OJK also wants loan rates to be single digit at the end of 2016. OJK’s view: lower loan rates will be compensated by higher loan volume

6.5%

7.0%

7.5%

8.0%

8.5%

9.0%

9.5%

10.0%

10.5%

Oct

-14

Nov

-14

Dec

-14

Jan-

15

Feb-

15

Mar

-15

Apr-

15

May

-15

Jun-

15

Jul-1

5

Aug-

15

Sep-

15

Oct

-15

Nov

-15

Dec

-15

Jan-

16

Feb-

16

Mar

-16

Max Deposit Rate Buku 3 Max Deposit Rate Buku 4

LPS Rate BI Rate

Sources : CEIC

39Sources : Bank Indonesia

BI Rate as Policy Rate

BI Rate as Policy Rate BI rate is policy rate that shows

monetary policy’s stance in responding to the inflation expectation

BI Rate is the anchor rate for money market rates that can influence banking sector’s interest rates

Challenge Transmission of monetary policy

is not effectively implemented, because of:1. Huge incoming flow post GFC

2008 has pushed down O/N Interbank rate to DF Rate. While BI Rate stayed at 12m market operation rate.

2. Shallow financial market

40

The Old & New Monetary Policy Framework

BI will change its policy rate from BI rate into the 7d Repo rate on 19 August 2016

Prior to 19 Aug, BI rate is still the policy rate and BI will announce BI 7d Repo rate as part of the term structure

After 19 Aug, BI rate will be abolished

BI will set the policy corridor symmetrical at 150bp

7.50

7.25

7.00

6.75

6.50

6.25

6.00

5.75

5.50

5.25

5.00

4.75

4.50

Lending Facility Rate

12M BI Reference Rate = BI Rate

Lending Facility Rate

7D Reverse Repo Rate 7D Reverse Repo Rate

Deposit Facility Rate Deposit Facility Rate

%

19 AugCurrent Policy Framework New Policy Framework

75 bps

75 bps

After 19 Aug, BI Rate is no longer the policy rate

After 19 Aug, this is the new policy rate

Sources : Bank Indonesia

41

Transmission of monetary easing, through the interest ratechannel, improved (Jan-Apr 2016)

BI rate 75bps

GWM150 bps

Monetary Policy

Deposit RateFaster

57 bps, ytd Apr 16

Credit RateSlower

22 bps, ytd Apr 16

Third Party FundWeak

April, 6.18% yoy

Credit GrowthWeak

April, 7.95%, yoy

Better Money Market Liquidity

NPL

Economic growth is

not solid yet

42Source: BI

Key Challenge: Vicious Circle of GDP and creditLag between GDP growth & loan growth was 1 quarter (2006), 2 quarter (2009), and

currently might be longer. To counter vicious circle, BI will use LTV aside from BI rate & RR

GDP Growth, Loan Growth & NPL

Loan Growth vs GDP Growth

Weak GDP

Higher NPL

Lower TPFWeak

Investment

Higher Lending

Standard

Lower Demand for Loan

Lower Supply of Loan

DECLINING LOANS

43

Monetary Policy Mix

Monetary Policy

Macro-prudential

Raise the floor on the Reserve Requirement - Loan to Funding Ratio (RR-LFR) from 78% to 80%, with the ceiling maintained at 92% (effective August 2016).

• Bank Indonesia (BI) cut its BI Rate by 25bp to 6.5%, while the 7-day reverse repo rate is also reduced to 5.25%. The Deposit Facility and Lending Facility rates were cut by 25bp each to 4.5% and 7%, respectively.

• BI said that the rate cut was to keep the growth momentum, and maintaining its FY16 growth forecast of 5.0-5.4%.

• Relaxing the loan-to-value ratio (LTV) and financing-to-value ratio (FTV) on housing loans/financing by 5%; • Relaxing partially prepaid loans/financing pursuant to regulations concerning phased loan/financing in line

with the construction progress of the associated property as a second loan/financing facility.

• To maintain economic growth momentum, on its meeting on 16 June 2016 BI also announced new policies:

BI Rate, Lending and Deposit Facility Rate

Meeting Date BI RateLending Facility

RateDeposit Facility

Rate

17-Dec-15 7.50% 8.00% 5.50%

14-Jan-16 7.25% 7.75% 5.25%

18-Feb-16 7.00% 7.50% 5.00%

17-Mar-16 6.75% 7.25% 4.75%

21-Apr-16 6.75% 7.25% 4.75%

19-May-16 6.75% 7.25% 4.75%

16-June-16 6.50% 7.00% 4.50%

Sources : Bank Indonesia

44

Intermediation of Banking Industry - Loan by Purposes & Sector

Loan Growth by Sectors (% yoy) Loan Growth by Purposes (% yoy)

Source: BI, Recent Development of Financial System Stability

Sectors related to Govt’s infra projects , construction & electricity sectors, posted double digit growth in 1Q16. However, these sectors have small contribution (only 6.8%) to the economy.

While two biggest contributors, trade & manufacture sectors (almost 40%), experienced a declining trend since early 2015. Investment loan growth retarded, while working capital loan and consumption loan slightly grew, mainly in trade and other

sectors.

12%9%7%

45

Credit Risk of Banking Industry

Development of Credit risk Credit Restructuring and Write Off

Source: BI, Recent Development of Financial System Stability

NPL (Gross) by Economic Sectors

Non Performing Loan of banking industry was recorded at 2.83% in March 2016 Trade, transportation and construction sectors

have a dominant contribution to NPL hike. In order to reduce NPL rise, banks continued to

apply special mention loan restructuring in trade, manufacture and business services sectors.

46

MSME credit growth was slightly dwindled to 6.2% yoy with retained risk level at 4.63%

MSME Credit Growth (% yoy) MSME Credit Risk

Source: BI, Recent Development of Financial System Stability

MSME NPL by Bank Categories

47Source: BI & Central Bureau of Statistics

2015 GDP Growth per ProvinceMain engines of growth –i.e. Java & Sumatera- have revived, while the commodity-driven provinces still face setbacks. Regions with local content products , such as Sulawesi (sea products), were benefited from Rupiah depreciation

48

GDP Growth and Loan Growth in 2015

Agriculture, Hunting & Forestry

3.1%

20.0%

1.9%

Fisheries

8.4%

14.9%

3.0%

Electricity, Gas Supply and Water Supply

1.6%

22.6%

2.3%

Construction

6.6%

17.4%

4.1%

Manufacturing Industry (Mfg)

4.2%

15.1%

2.5%

Wholesale and Retail Trade

2.5%

10.6%

3.5%

Transportation, Warehousing and Communication 8.5%

3.3%

3.8%

Financial Intermediaries 8.5%

-0.9%

0.6%

Real Estate, Business Services

5.8%

11.7%

2.6%

Accommodation, Food & Beverages Activity,

4.4%

16.7%

2.3%Govt Admin, Defense and Social Security

4.7%

17.4%

0.1%

Education Services

7.4%

22.3%

1.7%

Other Services

8.1%

-15.4%

3.4%

Health Services & Social Activity

7.1%

74.3%

0.7%

GDP 2015 Growth (yoy) 2015 Credit Growth (yoy) 2015 NPL Ratio Good Perfomance

Source: CBS, CEIC, Statistik Perbankan Indonesia

-5.1%

-4.6%

4.1%

Mining and Quarrying

49

GDP Growth, Loan Growth and NPL ratio in 2015

Loan Growth Rank NPL Ratio Rank GDP Growth Rank

1 Agricultures, Hunting and Forestry 20.0% 4 1.9% 3.1%

2 Fishery 14.9% 3.0% 6 8.4% 3

3 Mining and Quarrying -4.6% 4.1% 1 -5.1%4 Procesing Industry 15.1% 2.5% 4.2%

5 Electricity, Gas and Water 22.6% 2 2.3% 1.6%

6 Construction 17.4% 5 4.1% 2 6.6% 7

7 Wholesale and Retail Trade 10.6% 3.5% 4 2.5%8 Provision of accomodation and the provision of eating and drinking 16.7% 2.3% 4.4%

9 Transportation, Warehousing and Communications 3.3% 3.8% 3 8.5% 2

10 Financial intermediaries -0.9% 0.6% 8.5% 1

11 Real Estate, Business, Ownership, and Business Services 11.7% 2.6% 5.8% 8

12 Government administration, Defese and Compulsory social security 17.4% 0.1% 4.7%

13 Education Services 22.3% 3 1.7% 7.4% 5

14 Health Services and Social Activities 74.3% 1 0.7% 7.1% 6

15 Other Services -15.4% 3.4% 5 8.1% 4

10.4% 2.5% 4.8%

Sectors

TOTAL

Source: CBS, CEIC, Statistik Perbankan Indonesia

Conclusion Previous government focussed on stabilizing demand side in order to maintain people’s purchasing

power. Such policies were fuel and electricity subsidies and direct cash to the poor with intention to boost short term consumption. Somehow, there is no extra budget for a more productive spending, such as infrastructure, and therefore neglecting the supply side.

President Jokowi started his administration with key focus on infrastructure development. The government sets a high target for infrastructure projects, arguably focusing more on the supply side, somewhat neglecting the demand side of the economy. The next question is what should be taken to minimize the gap between the supply and demand sides?

One of the things that Indonesia needs at the moment is balance: 1) between monetary and fiscal policies; 2) between consumption and production; 3) as well as a balance between the financial and real sectors.

Bank Indonesia’s monetary policy has been supportive of the market, in particular the counter cyclical measures have helped to buffer a slowing economy growth. The question is how to balance between monetary policy and fiscal policy as there’s always time-lag for the latter.

Under current condition, Indonesia’s banking system is relatively stable and resilience. Hence, banks will focus on managing asset quality and liquidity. For loans, banks will focus on sectors related to Government’s infra projects, trading & manufacturing sectors. While from funding side, banks will be flushed with liquidity from Tax Amnesty program.

Thank You

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