THE PROSPECT OF INDONESIAS ECONOMY

2015 AND 2016

Business Luncheon
Indonesia Netherlands Association (INA)

By Anthony Budiawan

Jakarta, Financial Cub

8 September 2015

Page | 1

INDONESIAS CURRENT ECONOMIC CONDITION

Is it already at the bottom?

Page | 2

Indonesias economic growth declining

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?
Can government spending improve
the economy?

Page | 3

Indonesias economic growth declining

GDP growth 2014: 5.02%

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

Page | 4

GDP growth 2015

Description
Q1 2015
Q2 2015
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%

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
Indonesias growth largely depends on imports performance
If imports increase, the economic growth will be depressed
Page | 5

Rupiah continues to depreciate

2 Aug 2011
USD 1 = Rp 8,460

- 66.28%

25 Aug 2015
USD 1 = Rp 14,067

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?
Page | 6

Rupiah continues to depreciate

Why Rupiah depreciate

since 2011?

Why Rupiah appreciate

between 2009 2011?

Page | 7

Rupiah and monetary policy of the FED

2015:
Rupiah still depressed,
uncertainty if the FED
rate increase

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 mortgagebacked securities
Impact of QE: Net money inflow to EM economies, EM currencies up, inflationary:
commodity prices up
Page | 8

Rupiah and monetary policy of the FED

Average
rate

Average Rate
Change

2008
9,692

Exchange rate (Rupiah to USD)

2009
2010
2011
2012
2013
2014 1H2015
10,408 9,087
8,776
9,384 10,459 11,869 12,968
-7.38% 12.69%
3.42% -6.93% -11.45% -13.48% -9.26%

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

Page | 9

Impact of QE on commodity prices

Palm oil average price (USD per metric ton)

2008
2009
2010
2011
2012
2013
Average price 862.92 644.07 859.94 1,083.79 942.08 760.33
Change
-25.36% 33.52% 26.03% -13.08% -19.29%

2014 1H2015
743.71 613.87
-2.19% -17.46%

Palm oil price in 2009 rebound, but in average still below 2008 price
Page | 10

Impact of QE on commodity prices

Coal average price (USD per metric ton)

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 price in 2009 rebound, but in average still below 2008 price
Page | 11

Impact of QE on commodity prices

Rubber average price (USD per pound)

Rubber
2008
2009
2010
2011
2012
2013
2014 1H2015
Average price 118.56
87.17 165.72 218.51 153.19 126.76
88.75
79.91
Change
-26.48% 90.12% 31.86% -29.89% -17.25% -29.98% -9.97%

Rubber price in 2009 rebound, but in average still below 2008 price
Page | 12

Trade Balance and Current Account

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

attributed to the free fall of crude oil
price in 2H 2014

Page | 13

Fundamental of Indonesias economy

The government tend to say that Indonesias economic fundamentals are

strong enough
I would challenge that opinion:
on what basis is Indonesias economic fundamentals regarded as strong
Indonesias current economic condition is fundamentally weak:
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
Indonesias industry structure is fundamentally weak: dependent on
commodities, import of intermediary goods as well as capital goods,
industrial goods less competitive than the neighboring countries
Page | 14

Dependent on commodity
Indonesias economy is increasingly dependent on commodities as a result of
commodity boom in mid 2000s
(1) FATS, OILS AND WAXES
(2) MINERAL FUELS AND OILS
(3) RUBBER AND RUBBER ARTICLES
HS

Description

2007
15 FATS, OILS AND WAXES
10,227
27 MINERAL FUELS AND OILS
7,123
40 RUBBER AND RUBBER ARTICLES
6,249
TOTAL 3 COMMODITIES
23,598
SHARE OF EXPORT (%) 25.6%

2008
15,624
10,656
7,637
33,918
31.4%

EXPORT (Million USD)

2009
2010
2011
2012
12,220 16,312 21,655 21,300
13,934 18,726 27,444 26,408
4,913 9,373 14,352 10,475
31,066 44,411 63,452 58,183
31.9% 34.2% 39.2% 38.0%

2013
19,225
24,780
9,394
53,399
35.6%

2014
21,060
21,058
7,100
49,217
33.7%

Three groups of commodity contribute 39.2% of the total export in 2011

Further fall of commodity prices will hurt exports and the economy

Page | 15

Depreciation of Rupiah: good or bad?

Average Rate
Change

2008
9,692

Exchange rate (Rupiah to USD)

2009
2010
2011
2012
2013
2014 1H2015
10,408 9,087
8,776
9,384 10,459 11,869 12,968
-7.38% 12.69%
3.42% -6.93% -11.45% -13.48% -9.26%

Palm oil average price (USD per metric ton)

2008
2009
2010
2011
2012
2013
Average price 862.92 644.07 859.94 1,083.79 942.08 760.33
Change
-25.36% 33.52% 26.03% -13.08% -19.29%

2014 1H2015
743.71 613.87
-2.19% -17.46%

Coal average price (USD per metric ton)

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%
Rubber average price (USD per pound)
Rubber
2008
2009
2010
2011
2012
2013
2014 1H2015
Average price 118.56
87.17 165.72 218.51 153.19 126.76
88.75
79.91
Change
-26.48% 90.12% 31.86% -29.89% -17.25% -29.98% -9.97%

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
Weak Rupiah helps reduce imports, restore trade balance

Page | 16

Indonesias monetary policy

Rupiah depreciates 22% from June 5, 2013 (Rp 9,856) to Dec 6, 2013 (Rp 12,020)
Bank Indonesias policy response: increase BI rate from 5.75% to 7.5% (in 5
months)
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

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
High interest rate will hurt the economy, will reduce private consumption and
investments
Other countries reduce the interest rate to stimulate the economy
Page | 17

Government spending

Indonesia GDP (Rp trillion)

1H 2014
Description
Consumption
2,927
Government spending
395
Investment
1,638
Inventory change and discrepancy statistics
187
GDP from domestic consumption
5,148
Export Goods and Services
Import Goods and Services

Net Export (Export - Import)

GDP

1,243
1,278

1H 2015
Change
3,159
7.92%
434
9.88%
1,817 10.90%
165 -12.03%
5,575 16.66%
1,220
1,199

(35)
5,113

-1.83%
-6.16%

21
5,596

9.44%

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

It is an illusion to expect government spending increases economic
growth this year
Page | 18

Factors influenced Indonesias economy

Global economic condition, particularly China, will determine the global demand
for Indonesian goods: weakening Chinas economy will depress exports
The development of commodity prices will influence exports: a further fall of
the prices will hurt exports and will hurt Indonesias economy
Indonesias monetary policy: the current level of BI rate is too high to stimulate
the economy, particularly private consumption, as well as the investment
Government spending does not play a significant role in Indonesias economic
development:
The most important thing is the total government spending, not the
substitution between the expenditures
The budget deficit is set to a maximum of 3% of GDP, the current level of
budget deficit is approaching the maximum
Page | 19

Factors influenced Indonesias economy

The FED monetary policy has a major influence on the development of

commodity prices and the exchange rate:
increase in the FED rate could result in the net capital outflow from EM
economies, including Indonesia, and the depreciation of Rupiah

Page | 20

OUTLOOK 2015 - 2016

Page | 21

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
Commodity prices will still depressed, especially if Chinas economic growth
decrease, which most likely will happen
Global economy is still weak, Chinas economic growth continues to decline
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
If Indonesia cannot compete with the neighboring countries, import will
increase, economy will decrease
Page | 22

Outlook (2)

If further fall of Rupiah and further decline in export resulted in bankruptcies then
Indonesias economy will certainly go into recession
Considering the above factors, I expect Indonesias economic growth:
2015: 4.5%
2016: less than 4.5%

Page | 23

THANK YOU

Page | 24