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Contents Benefit from Biodiesel Mandatory Program Jan14 External Debt Update: Not Yet Alarming The Impact of High Fuel Dependency on the Sustainability of Economic Growth Mandiri Leading Economic Index Mandiri Banking Pressure Index Indonesia Current Data (Table) p.02 OFFICE OF CHIEF ECONOMIST p.08 April 2014 p.12 Indonesia Update p.18 p.20 p.23 Chief Economist Destry Damayanti [email protected] Analyst Faisal Rino Bernando Andry Asmoro M. Ajie Maulendra Nadia Kusuma Dewi Nurul Yuniataqwa Karunia Sindi Paramita Reny Eka Putri Andrian Bagus Santoso Adjie Harisandi Mamay Sukaesih Romauli Panggabean Rully Arya Wisnubroto Fitri Yunita Publication Address: Bank Mandiri Head Office Office of Chief Economist 18th Floor, Plaza Mandiri Jalan Jend. Gatot Subroto Kav.36-38 Jakarta 12190, Indonesia Phone: (62-21) 524 5516 / 5272 Fax: (62-21) 5210430 Email: [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] Benefit from Biodiesel Mandatory Program Energy security is the crucial agenda that Indonesia has to resolve in the near future. Growing middle class population has triggered development of transportation industry as rapid sales of numerous vehicles and demand more goods and services which also drives rapid growth of consumers based manufacturing sectors. Indonesia has been relying on oil fuel to fulfill its energy needs and the domination of oil fuel as energy source was projected to continue in the future. Oil import is unavoidable and it is obviously unfavorable condition from macroeconomic perspective in term of current account performance that leads to a pressure on Rupiah recently. Jan14 External Debt Update: Not Yet Alarming Total external debt increased in January 2014, yet remains below average. It rose to USD269.3 bn in January 2014 from USD264.1 bn in December 2013 and slightly pushed up the external debt to GDP to 31% from 30%. Indonesia’s external debt level of 31% of GDP remains safe as it is under the conventional level of 40% of GDP, according to the IMF’s paper “Assessing Sustainability”, 2002). Indonesia’s growth pick up in the medium term, rising external debt will need to be controlled, especially for companies not having natural hedge. Increasing investment of manufacturing sector, which is partly financed using external source whereas its earning is rupiah denominated, has enhanced and will likely continue ahead as a consequence of rising middle income class. The Impact of High Fuel Dependency on the Sustainability of Economic Growth The whole process of production and consumption in the economy would require energy. Several empirical studies also mention the existence of a very close connection between economic growth and energy demands. Stern (2010) in Stern (1997) states all economic processes must require energy and there must be limits to the substitution of other factors of production for energy so that energy is always an essential factor of production. Indonesia’s economic growth is accelerating, the country’s future energy demands are expected to increase. The BPPT (Indonesia’s Government technological research insitution) report titled Outlook Energi Indonesia 2013 (Indonesia’s Energy Outlook 2013) shows that in 2011, Indonesia’s energy demands only reached 1.044 billion barrels of oil equivalent. Indonesia Energy Needs Projection (in Million BOE) 3,000 2,518 CAGR : 4,5% 2,500 1,960 2,000 1,535 1,500 1,207 1,044 1,000 See important disclaimer at the end of this material 500 0 2011 2015 2020 2025 2030 Benefit from Biodiesel Mandatory Program M. Ajie Maulendra ([email protected]) Why do we need to develop biodiesel ? Energy security is the crucial agenda that Indonesia has to resolve in the near future. Growing middle class population has triggered development of transportation industry as rapid sales of numerous vehicles. Also, middle class population demand more goods and services which also drives rapid growth of consumers based manufacturing sectors. Therefore, energy usage in the upcoming years will be mainly absorbed by transportation and industry sector. Energy usage in the upcoming years will be mainly absorbed by transportation and industry sector Indonesia Energy Needs Projection (in Million BOE) Proportion of Energy Source by Its Type (%) 3,000 100% 9.6 2,518 CAGR : 4,5% 2,500 26.8 19.6 17.5 80% 13.5 1,960 2,000 9.3 60% 15.2 14.8 20.7 1,535 14 1,500 40% 1,207 13.9 11.6 34.6 34.1 2011 2015 1,044 1,000 20% 500 42.1 0% 0 2011 2015 2020 2025 2030 Oil Fuel Coal Gas + LPG Electricity 2025 Biomass Figure 1. High dependence on fossil fuel. As energy needs continue to climb up, the source of energy still dominated by fossil fuel. In 2025, fossil fuel will still be the biggest portion of energy source (42%) while the rest of it will be coming from electricity (17.5%), Gas and LPG (14.8%), coal (14%) and biomass (9.6%). (Source: BPPT Indonesia Energy Outlook, 2013). Indonesia oil refinery capacity can’t match oil consumption Indonesia has been relying on oil fuel to fulfill its energy needs and the domination of oil fuel as energy source was projected to continue in the future. In the mean time, Indonesia has been facing serious issue about declining oil production in recent years. In fact, Indonesia oil refinery capacity can’t © Office of Chief Economist Page 2 of 24 match oil consumption as shown by 2012 data where Indonesia oil refinery capacity was only 1,032 MBPD, less than 1,300 MBPD of oil fuel consumption. As a result, oil import is unavoidable and it is obviously unfavorable condition from macroeconomic perspective in term of current account performance that leads to a pressure on Rupiah recently. According to that current energy issue, we obviously need to diversify our energy usage in order to release our dependence on fossil fuel in the long term. One comes to mind in observing alternative energy source is biodiesel. The form of this energy can be produced from particular edible oil such as soybean oil and palm oil. Compare to other renewable energy forms, biodiesel will have advantages to be developed in Indonesia regarding to palm oil abundant in Indonesia. In fact, it is currently the biggest palm oil producer in the world with 26 million tons of palm oil production in 2013. Moreover, palm oil price is lower than soybean oil price. The average of palm oil and soybean oil price between year of 2009 and 2013 is USD951 per ton and USD1133 per ton respectively. That comparison shows that palm oil is cheaper than soybean oil in term of raw material in producing biodiesel. Indonesia is currently the biggest palm oil producer in the world with 26 million tons of palm oil production in 2013 Million tons 30 28.2 27,722 27.6 28,038 30000 23.2 24.5 25 21.9 20.9 20 18.3 19.0 19,964 25000 22,852 22,637 19.1 22.2 20000 17,654 15.8 15 USD Million 15000 13.2 12,619 10,581 10 10,963 10,841 10000 5,832 5 5000 3,407 0 0 2003 2004 2005 2006 2007 Oil Import Volume (lhs) 2008 2009 2010 2011 2012 10M12 10M13 Oil Import Value (rhs) Figure 2. Indonesia Oil Product Import . The lack of improvement of oil refinery capacity makes import of oil product continue to increase as rising oil fuel demand. (Source: Central Berau of Statistics) © Office of Chief Economist Page 3 of 24 Consuming more biodiesel as alternative energy is expected to have better impact for our trade balance sustainability In addition, consuming more biodiesel as alternative energy is expected to have better impact for our trade balance sustainability. By increasing the usage of biodiesel in transportation and industry sector, import of oil is expected to decrease and therefore the trade balance will be gradually improved. Equally important, biodiesel as one of renewable energy source is believed to be more environmentally friendly than fossil fuel based energy. The CO2 emission from combustion using biodiesel is considerably lower than CO2 emission resulted from fossil fuel. Acceleration of biodiesel mandatory The latest biodiesel mandatory program was issued in order to accelerate biodiesel usage as a fuel mixture Government had implemented biodiesel mandatory program in 2008 (MEMR No. 32) before the latest one released in September 2013 (MEMR No. 25). The latest biodiesel mandatory program was issued in order to accelerate biodisesel usage as a fuel mixture. For instance, minister of energy and mineral resources (MEMR) regulation in 2008 obliged 10% biodiesel usage that must be implemented in 2015 while the latest biodiesel mandatory regulation advancing the schedule to 2014. One of the reason is based on fact that in 2013 biodiesel usage has already reached 7.5%, that was higher than 5% biodiesel usage obliged in first regulation (2008). In addition, this policy was taken to support government effort in reducing fuel import and fixing the current account deficit. Government predicted 5.6 million kl of diesel fuel import can be reduced between 2013 and 2014 since biodiesel mandatory regulation has implemented. In other word, it is equal to save USD4 million of our foreign reserve. © Office of Chief Economist Page 4 of 24 MEMR Regulation No.25/2013 Sector 2013 Transportation PSO Transportation non PSO Industry and Commercial Power Plant 2014 10% 3% 5% 7.5% 10% 10% 10% 20% 2015 10% 10% 10% 25% 2016 20% 20% 20% 30% 2020 20% 20% 20% 30% 2025 25% 25% 25% 30% MEMR Regulation No.32/2008 Sector 2013 Transportation PSO Transportation non PSO Industry and Commercial Power Plant 2014 1% 2.50% 0.10% 1% 1% 2.50% 0.25% 2015 2.50% 3% 5% 1% 2016 5% 7% 10% 10% 2020 10% 10% 15% 15% 2025 20% 20% 20% 20% Figure 3. Biofuel Regulation. The latest regulation is expected to save the import of diesel fuel by 1.3 million kl and 4.4 million kL in year of 2013 and 2014 respectively. Therefore, total diesel fuel import can be reduced by 5.6 million kl or it will provide foreign exchange savings of USD4.096 million. (Source: MEMR Government of Indonesia) Government targetted 4 million kl of biodiesel usage this year, which is higher than actual biodiesel usage in two previous years, 1.07 million kl in 2013 and 669 thousand kl in 2012 respectively. Four million kl of biodiesel usage will be allocated to 1,644 million kl of PSO (public service obligation) transportation sector, 808 thousand kl of power plant and 1,567 million kl of non PSO transportation sector. Impact on CPO industry Increasing biodiesel production would limit CPO export volume in 2014 By assuming 4 million kl biodiesel will be produced domestically and considering that production ratio of biodiesel from CPO is equal 1:1, then 4 million kl biodiesel production will demand around 4 million kl of CPO (equal 3.5 million tons) in 2014. In other words, demand of CPO for biodiesel production will experience sharp increase by around 43% (YoY) in 2014. Increasing biodiesel production would limit CPO export volume in 2014. Considering Indonesia Palm Oil Producers Association projection of domestic CPO consumption in 2014 that will reach 11 million tons (including 3.5 million tons of CPO for biodiesel), we estimate a slight increase of CPO export volume by only 7.9% this year. The growth shows recovery from drop in 2013 (-19.7%) but it is lower than growth in 2012 (14.6%). © Office of Chief Economist Page 5 of 24 27.3 26 24.7 Market Share of Palm Oil Consumption by Country (%) 16.3 15.1 Country 18.8 23.5 16.4 21.8 16.3 16.8 21 19.2 14.3 17.3 11.9 16 12.1 Indonesia Palm Oil Production and Export (Million ton) India Indonesia China EU-28 Malaysia Pakistan Thailand Total (000 ton) 2012 14.5% 13.7% 11.7% 10.9% 4.3% 3.9% 2.6% 52206 2013 14.7% 13.9% 11.0% 11.4% 4.2% 3.8% 2.6% 56971 2006 2007 2008 2009 2010 2011 2012 2013 2014F Production Export Figure 4. Strong domestic demand . Currently Indonesia is the second biggest palm oil consumer in the world after India. Further, it is possibly to become the biggest palm oil consumer with assumption that biodiesel usage in Indonesia will have significant increase. (Source: International Trade Statistics, Oil World) Further impact of biodiesel usage acceleration program in Indonesia will be seen in bullish price of palm oil through this year. After the announcement of the latest biodiesel program in September 2013, CPO price has increased by 12% ,from USD798 per ton to USD895 per ton, between 3Q13 and 1Q14. By considering an increase of CPO demand for biodiesel, we expect average CPO price in 2014 will hover around USD900 – 950 per ton which is higher than average price in 2013 (USD849 per ton). © Office of Chief Economist Page 6 of 24 Indonesia Biodiesel Production (Million kl) 4 2.8 2.2 1.8 0.2 0.24 2009 2010 2011 2012 2013 2014F Figure 5. Biodiesel production will continue to increase. Production capacity of biodiesel is predicted to reach 8.8 million kl in 2015 from 5.6 million kl of its current capacity. (Source: APROBI) What’s next ? Despite government seems very eager to encourage biodiesel usage as fuel mixture, there are some challenges to be addressed properly as follows : 1. Support of good infrastructure in order to distribute biodiesel to all provinces in Indonesia. 2. Dissemination to all stakeholders about the importance of shifting to biodiesel as energy sources. 3. Price determination mechanism of biodiesel in domestic market need to be reviewed in order to provide sufficient incentives for both Pertamina (as buyer) and producers. 4. Concistency of government policy in implementing biodiesel mandatory program regardless of any political interests. 5. In the medium and long term, reducing subsidy on oil fuel gradually is necessary to create competitiveness of biodiesel as alternative energy. © Office of Chief Economist Page 7 of 24 Jan14 External Debt Update: Not Yet Alarming Aldian Taloputra ([email protected]) Leo Putera Rinaldy ([email protected]) Wisnu Trihatmojo ([email protected]) Total external debt increased in January 2014, yet remains below average. It rose to USD269.3 bn in January 2014 from USD264.1 bn in December 2013 and slightly pushed up the external debt to GDP to 31% from 30%. Private external debt portion remains higher than public’s (52% vs. 48%). In terms of growth, total external debt accelerated 7.1% YoY from 4.6% YoY in corresponding period. In our view it is still benign and below the average growth of 11%. The source was global bond issuance. January 2014 total external debt acceleration was significantly contributed by the public side. Driven by the government’s USD4 bn global bond issuance, public external debt grew 1.9% YoY in Jan14 from 2.7% YoY contractions in December 2013. Meanwhile, private external debt grew 12.2% YoY from 11.0% in the same period, propelled by banks external debt. Wider funding gap from the banking sector has likely caused higher needs of external financing. We believe, however, the condition should get better ahead as interbank USD average daily transaction has increased recently. Is it alarming? We think Indonesia’s external debt level of 31% of GDP remains safe as it is under the conventional level of 40% of GDP, according to the IMF’s paper “Assessing Sustainability”, 2002). It is also lower than peers; the figures for Korea, Thailand, and Malaysia are 34%, 37%, and 38%of GDP, respectively. Private sector used some of external debt for direct investment. We think private external debt remains sound as well. Part of the debt is related with long term productive purpose which is direct investment. This is because the loan from parent and affiliated companies accounts 35% of total external debt. Moreover, more than two-third of private external debt has a maturity above 1 year, suggesting minor risk on debt instability near time. © Office of Chief Economist Page 8 of 24 Corporate bond outstanding remains relatively low. As percentage of GDP, corporate bond outstanding is still small at 6% of GDP (USD45.1 bn) in 2013 or increased 7% YoY. In detail, local currency corporate debt accounted to 2.4% of GDP. The remainder is foreign currency denominated debt at 3.6% of GDP. External debt trajectory should remain benign. In our view, external debt position should not yet be harmful for the economy this year, especially considering easing financing needs for investment. Based on our estimate, total external debt to GDP is expected to hover around 30% - 32% of GDP in 2014. Although there would be some government debt repayment in the road, this is expected to be manageable. We also see further increase of interbank USD supply, reducing the risk of FX liquidity shortage in the system. The average USD daily transaction continues to increase and in month-to17Mar14 reached USD1.2 bn, up from USD460 mn in December 2013, and is a 30 month high. Nevertheless, as Indonesia’s growth pick up in the medium term, rising external debt will need to be controlled, especially for companies not having natural hedge. Increasing investment of manufacturing sector, which is partly financed using external source whereas its earning is rupiah denominated, has enhanced and will likely continue ahead as a consequence of rising middle income class. The Association of Banks Singapore (ABS) discontinued its offshore IDR/ USD fixing rate and recommended JISDOR to traders as the new benchmark to settle NDF contract starting next week is positive incentive to trigger hedging activity. However, further deepening and improvement of onshore hedging market by policy makers should be intensified. © Office of Chief Economist Page 9 of 24 External debt growth (yoy %) External Debt Position to GDP (%) Total external debt 64 Government and BI external debt 40 Government sector Private external debt Private sector 30 48 20 32 10 16 Oct-13 Dec-13 Jun-13 Aug-13 Apr-13 Feb-13 Oct-12 Dec-12 Jun-12 Aug-12 Apr-12 Feb-12 Oct-11 Dec-11 Jun-11 Aug-11 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014* Apr-11 -10 0 Feb-11 0 Figure 6. Total External Debt to GDP Ratio (%) and External Debt Growth (Source: Bank Indonesia) Total external debt of GDP (%) South Africa Malaysia Thailand Russia Korea Peru Philippines Indonesia Mexico Brazil Argentina India China 0 5 10 15 20 25 30 35 40 45 Figure 7. Comparison of Indonesia’s External Debt to Peers (Source: Bank Indonesia, IIF) © Office of Chief Economist Page 10 of 24 Figure 8. 35% of External Debt is related with FDI and Most of External Debt is Long term. (Source: Bank Indonesia) 0.4 0.7 61.3 84.9 Hong Kong 200 2.4 17.9 16.2 Thailand 15.0 400 92.1 125.7 Korea Malaysia Singapore China Indonesia Vietnam - Dec-13 Dec-13 Dec-13 Sep-13 Sep-13 Dec-13 Sep-13 Sep-13 LCY Corporate (in USD Billions) - LHS LCY Corp (in % of GDP) - RHS 100 50 0.9 1.47 2.2 3.6 3.6 10.0 13.59 27.19 29.4 10.7 47.52 - Dec- Dec- Sep13 13 13 Dec- Sep13 13 Sep13 Hong Kong 32.4 127.62 16.7 Singapore 31.3 600 129.7 150 Korea 42.6 800 200 Malaysia 1,000 204.55 Indonesia 963.4 47.0 250 Thailand 1,200 90 80 70 60 50 40 30 20 10 0 China 79.4 1,404.9 1,400 Vietnam 1,600 Dec- Sep13 13 FCY Corporate (in USD Billions) - LHS FCY Corp (in % of GDP) - RHS Figure 9. Indonesia Corporate Bond Size is Smaller Than Peers. (Source: ADB) © Office of Chief Economist Page 11 of 24 50 45 40 35 30 25 20 15 10 5 - The Impact of High Fuel Dependency on the Sustainability of Economic Growth Adjie Harisandi ([email protected]) Energy is very crucial to drive sustainable economic growth. The whole process of production and consumption in the economy would require energy. Several empirical studies also mention the existence of a very close connection between economic growth and energy demands. Stern (2010) in Stern (1997) states all economic processes must require energy and there must be limits to the substitution of other factors of production for energy so that energy is always an essential factor of production. For example, Indonesia’s economy, which recently continues to grow, implies on the increasing demands for energy. BPS data show that in the period 20092012, Indonesia’s economy continued to grow at a growth rate range of 4.63% to 6.49%. On the other hand, the growth rate of final energy consumption grew nearly double as compared to the economic growth in the range of 9.09% to 16.01%. Thus, it can be concluded that the use of energy in Indonesia is elastic to economic growth, meaning that to encourage the high economic growth needs relatively higher growth in energy supply. 18,0% 16,0% 16,0% 14,0% 12,0% 11,6% 10,0% 9,2% 9,1% 6,2% 6,5% 6,3% 5,8% 2009 2010 2011 2012 8,0% 6,0% 4,0% 2,0% 0,0% Economic Growth Energy Consumption Growth Figure 10. Economic and Energy Consumption Growth. Indonesia’s energy consumption growth always higher than an economic growth for period 2009 – 2012. © Office of Chief Economist Page 12 of 24 Indonesia’s economic growth is accelerating, the country’s future energy demands are expected to increase. The BPPT (Indonesia’s Government technological research insitution) report titled Outlook Energi Indonesia 2013 (Indonesia’s Energy Outlook 2013) shows that in 2011, Indonesia’s energy demands only reached 1.044 billion barrels of oil equivalent. However, in 2030, Indonesia’s energy demands will increase by less than 2.5 time of the total energy consumption in 2011, reaching 2.5 billion barrels of oil equivalent. By observing the energy use per sector, in 2011 the household sector still had a dominant role in energy use. However, in 2030, a sector to dominate the energy use will be the transportation and industrial sectors. 3,000 2,518 2,500 100% 90% CAGR : 4,5% 2,000 24 27 35 80% 1,960 70% 31 24 9 39 42 46 2011 2015 2030 60% 1,535 1,500 50% 1,207 40% 1,044 30% 1,000 20% 10% 500 0% 0 2011 2015 2020 2025 2030 Industry Commercial Households Transportation Others Figure 11a. (left side). Indonesia energy needs projections (in million barrel of oil equivalent). Indonesia energy needs will continue to increase with average growth reach 4,5% every year until 2030. Figure 11b. (right side). Indonesia energy usage by sector (%). In 2011, Household, Industry, and Transportation sectors still dominating the consumption of energy. In 2030, role of household sector will shrinking and only Industry and Transportation sectors will dominate an energy usage. © Office of Chief Economist Page 13 of 24 However, in order to meet these demands, Indonesia has experienced problems in the mix of energy sources. Currently, Indonesia is highly dependent on fuel-based energy. When referring to data in the Indonesia’s Energy Balance report 2008-2012 published by BPS, in 2012, despite declining trend, the final energy consumption derived from fossil fuels still reached 51%. (Figure: Development of Final Energy Consumption by Fuel Type). In terms of quantity, Indonesia’s fuel consumption continued to grow. In 2007, Indonesia’s fuel consumption was only 1.07 million bpd. In 2013, Indonesia’s fuel consumption has reached 1.3 million barrels per day, meaning that there has been an increase of 21.5% in the last 6 years. On the other hand, Indonesia’s oil production continued to be in the declining trend. Indonesia’s oil production in 2006 was the last time when Indonesia reached the production of 1 million bpd (barrels per day). In 2013, Indonesia’s oil production reached 830 thousand barrels per day, a decline by 17% when compared to 2006. In addition to the declining oil production, Indonesia has a limited ability to process crude oil into fuel and other refined petroleum products due to the limited capacity of oil refineries in Indonesia. The capacity of Indonesia’s oil refineries is currently only able to process 1 million barrels per day. 100% 90% 80% 3,0% 9,1% 3,1% 2,7% 3,0% 2,5% 11,7% 13,6% 13,3% 11,0% 16,9% 15,3% 14,1% 13,6% 22,1% 21,3% 21,6% 27,2% 48,8% 48,6% 47,9% 2008 2009 2010 12,0% 70% 60% 23,5% 50% 40% 30% 20% 51,0% 42,9% 10% 0% Oil Fuel Coal Electricity 2011 LPG and Natural Gas 2012 Biomass Figure 12. Composition of energy consumption by fuel type. Oil fuel stil have a significant role in Indonesia’s energy consumption. © Office of Chief Economist Page 14 of 24 The economic impact arising from high dependency on petroleum products is quite significant. Firstly, the increasing demands for fuel without an increase in production capacity will increase imports of petroleum products. BPS data show that the volume and value of imports of petroleum products continue to have an increasing trend. In 2003, the value of imports of petroleum products amounted to only USD3.4 billion with a volume of 13.2 million tons. However, in 2012, the value of imports of petroleum products has reached USD28 billion with a volume of imports reached 27.6 million tons. This has led to a deepening trade balance deficit of petroleum products, and even has affected the surplus in the non-oil and gas sector that Indonesia’s whole trade balance was in deficit in 2012 and 2013. Secondly, the increasing demands for fuel oil will interfere with the quality of state spending. Annually, the government subsidizes fuel, while the subsidy tends to be non-productive. Energy and Mineral Resources Ministry data shows that private vehicles, i.e. cars and motorcycles, are the biggest consumers of subsidized fuels, reaching 93%. Meanwhile, transports of goods and public transports only consume subsidized fuels by 4% and 3%, respectively. Thirdly, dependency on fuel oil will give impact on the competitiveness of Indonesian economy. The use of fuel oil as an input in production raises a more expensive value compared to other energy sources, such as coal, gas and geothermal. For example, the production cost of electricity using fuel oil in 2012 reached IDR2,390 per KWh, while coal, natural gas, or geothermal costs were well below such cost of only IDR582 (natural gas), IDR359 (coal) and IDR660 (geothermal). Fourthly, Indonesia could not continue to rely on petroleum-based energy in the long run. With the current production level and the assumption that no new reserves would be found, Indonesian petroleum will be exhausted in 12 years. In view of the demands for oil in the short term, Indonesia still needs to boost production and increase oil refinery capacity in order to reduce imports of fuel oil. Exploration activities to find new oil reserves need to be increased. Petroleum fund is an interesting concept though in fact it can be said too late to be implemented in Indonesia because Indonesia’s oil production has been declining. Petroleum fund refers to a portion of funds from non-tax revenues of the oil and gas sector appropriated or deposited for long-term © Office of Chief Economist Page 15 of 24 investment needs. For example, the fund can be used to increase completeness of initial data for PSCs with an interest in an oil and gas block. This will help the sustainability of oil and gas production in the long term as investors have been complaining about the lack of data of oil and gas blocks offered by the government. In addition, the petroleum fund can be saved for future generations; thus, the result of oil and gas is not only felt by the current generation. The government also should realize that the business of oil and gas production is a long-term investment that certainty about regulations, rules, and taxation for PSCs is crucial as it will affect the calculation of their return on investment. In addition,to increase exploration activity, maybe government should change the scheme or giving more incentives to PSC contractors because exploration field are shifting to eastern part of Indonesia which is more difficult and need bigger investment cost. In addition to problems in upstream production, Indonesia should also be prepared to shift the consumption pattern to non-fuel energy sources in the long term. Industrial and electricity sectors had been shifting gradually towards nonfuel energy sources as the ban on the use of subsidized fuel on these sectors. However, to accelerate the shift, the government needs to prepare the infrastructure to make nonfuel alternative energy affordable, e.g. gas pipeline or regasification terminal like FSRU to bridge between gas producing areas and gas consuming areas. Differently, the heaviest fuel dependency problem is found in the transport sector as the government continuously subsidizes fuel usage for this sector. To reduce the dependency, there must be political will of the government to eliminate incentives in fuel usage by reducing fuel subsidies gradually. In addition, the need to create a road map or regulation for all major cities in Indonesia regarding the application of mass transit and other alternative energy options for modes of urban transportation in Indonesia, such as CNG (Compressed Natural Gas), electricity or biofuels. Essentially, energy problems cannot be solved partially. Energy problems must be viewed from a national standpoint. If only energy affairs are supplemented to the seven central government affairs, which include foreign policy, defense, © Office of Chief Economist Page 16 of 24 security, justice, national monetary and fiscal and religion on Regional Autonomy Act, uniformity of understanding on the importance of energy in order not to be spent now but to be saved for future generations may occur. © Office of Chief Economist Page 17 of 24 Mandiri Leading Economic Index (MLEI) Economic Growth Outlook: Moderate Continues April 2014 In February 2014, MLEI has moved down by only 0.1% (MoM) to the 99.4 level, from an increase of 0.1% (MoM) in previous month. MLEI fluctuated in the range of 98.3 to 100.2 during the period of January 2013 to February 2014. Most of constituent indicators of MLEI showed an increase in February 2014 (see detailed data on the following tables). It predicts the economic growth to stay at ‘moderate’ level in 2Q14 and 3Q14. In our view, economic growth will reach 5.6% this year, slower than 5.8% last year. The Indonesia trade balance recorded a surplus of USD0.79 billion in February 2014, brought the January to February surplus of USD1.23 billion. Higher trade surplus was mostly driven by import deceleration rather than better export performance. Tighter monetary policies to dampen high import pressures has affected in 2014 lower import figure. The evidence of slower import, due to moderating domestic demand, was shown in the contraction of non-oil and gas imports. As a result, the the non-oil and gas trade surplus jumped to USD1.6 billion in February 2014 or higher than USD0.6 billion last month. Going forward, we expect the trade balance stay surplus this year and reached around USD6.2 billion on the back of recovery in advanced countries and better commodity prices. On the currency side, we view that Bank Indonesia will keep its tight monetary policy and favors an exchange rate that supports exporters as well as domestic economy. IMF has cut its projections for Indonesia’s economic growth in 2014 and 2015 to 5.4% (YoY) and 5.8% (YoY) respectively. The IMF also estimated Indonesia’s currentaccount deficit will reach 3% of GDP (Gross Domestic Product) in 2014 and 2.7% of GDP in 2015. In 2014, Bank Indonesia expected improvement in the current account performance and reaching below 3% of GDP. At this stage, Bank Mandiri’s economist team expected the current account deficit will be at 2.7% of GDP this year. 102.0 105.0 101.0 103.0 100.0 101.0 99.0 99.0 98.0 97.0 97.0 95.0 Apr-11 Aug-11 Dec-11 Apr-12 Aug-12 Dec-12 Apr-13 Aug-13 Dec-13 MLEI (lhs) © Office of Chief Economist MCEI (rhs) Page 18 of 24 MLEI Change (%MoM) MCEI Change (%MoM) Apr 99.6 0.3 100.4 (0.1) 2013 May 100.1 0.5 100.1 (0.3) Jun 99.5 (0.6) 100.3 0.2 Jul 99.4 (0.0) 100.2 (0.1) 2013 Aug 98.3 (1.2) 99.7 (0.4) Oct-13 Sep 99.4 1.1 101.1 1.4 Oct 99.3 (0.2) 101.3 0.1 Nov-13 2013 Nov 99.1 (0.1) 101.2 (0.1) Dec-13 Dec 99.5 0.3 99.5 (1.7) Jan 99.5 0.1 99.9 0.4 2014 Feb* 99.4 (0.1) 100.6 0.7 Feb-14* Jan-14 Feb-14* (% MoM) Mandiri Leading Economic Index (MLEI) 99.3 99.1 99.5 99.5 99.4 Indonesia Stock Market Index 98.5 97.6 97.2 98.7 100.0 1.3 Consumer Confidence Current Condition Index 98.9 98.8 98.1 98.4 99.7 1.4 Export Index 99.7 100.3 101.3 99.3 100.0 0.7 Import Index 99.2 99.1 99.2 100.1 98.9 (1.2) Rupiah to USD Index 97.8 98.4 100.0 100.0 100.0 0.0 Private Deposit Index 99.3 98.4 98.5 98.4 96.7 (1.7) Time Deposit Index 99.6 100.0 100.0 100.0 100.0 0.0 101.0 100.4 101.3 101.3 100.0 (1.3) Oct-13 Nov-13 Dec-13 101.3 101.2 99.5 99.9 100.6 Saving Deposit Index Mandiri Coincident Economic Index (MCEI) Jan-14 Feb-14* (0.1) Feb-14* (% MoM) 0.7 Business Activity Expectation Index 99.6 98.9 99.1 100.4 101.5 1.2 Usage of Labor Expectation Index 99.5 100.4 99.8 100.9 100.0 (0.9) 107.5 108.7 99.7 99.7 100.1 0.4 Industrial Production Index Retail Sales Index 99.9 98.3 98.8 100.2 102.5 2.2 Motorcycle Sales Index 101.3 101.3 99.8 98.3 99.8 1.5 Cement Consumption Index 100.0 99.7 99.6 99.7 99.8 0.1 note : *) preliminary Index > 100 and increasing indicates expansion Index > 100 but decreasing indicates downturn Index < 100 and decreasing indicates slowdown Index < 100 but increasing indicates recovery Changes in parentheses indicate negative numbers Mandiri Leading Economic Index (MLEI) and Mandiri Coincident Economic Index (MCEI) are composite indices for predicting the movement of GDP (Gross Domestic Product) so they can be useful as an early warning on the movement of Indonesian economy. MLEI is used to predict the movement of GDP in the next 6 months, while MCEI is used to predict the movement of GDP in the same month. MLEI and MCEI composite indices are formed from several indicators deemed important in studying the movement of Indonesian economy © Office of Chief Economist Page 19 of 24 Mandiri Banking Pressure Index (MBPI) Banking Sector Ahead: Back To Normal April 2014 Bank Mandiri considers the importance of being aware of the banking sector development as a whole; both in booming times, recessions and crises through a leading indicator. From the importance of being knowledgeable on the financial (banking) sector development in the country in a clearer and measurable manner, Bank Mandiri established the Mandiri Financial Performance Index (MFPI) which is a reflection of the service sector and financial business performance, both historical and real time. Bank Mandiri also composed an index that can project the direction of MFPI future movement, called Mandiri Banking Pressure Index (MBPI). Looking at the actual condition, MFPI in April 2014 reported at 86.7. This position indicates that the condition of the Indonesian banking sector is in alert situation. Credit growth to the private sector cooled off from 20.9% (YoY) in January 2014 to 19.9% (YoY) in February 2014, as domestic demand moderated. Credit growth is expected to decelerate post tighter monetary policies and reaching around 15% 17% this year. Meanwhile, capital market performance in March 2014 improved (+13% YTD), as depicted by gains on the IDX Composite Index and lower yields (around 7%) of tradable government securities (SBN). Mandiri Banking Pressure Index (MBPI) is a leading indicator of the banking sector in Indonesia. It is an indicator that provides a predicted direction of MFPI’s movement in the next 6-9 months. In February 2014, it decreased to level 98.8 (9.4% MoM). At that level, we expect Indonesian banking entering normal condition in the period from August to November 2014, as the result of monetary and macro prudential policy mix. This prediction is expected to be a reference to taking appropriate pre-emptive measures and crisis mitigation efforts. Bank Indonesia kept its benchmark interest rate at 7.5% in April 2014, consistent with ongoing efforts to steer inflation back towards its target corridor of 4.5±1% in 2014 and 4.0±1% in 2015. This decision along with a more-balanced domestic economic structure along with improvements in external sector performance is helping to strengthen the Rupiah exchange rate. In our view, the current monetary policy was still ideal to help balancing the external and internal factors, unless there’s a change in government policies such as an increase in subsidized fuel prices. At this juncture, we see a possibility of BI Rate hike by another 25bps to 7.75% this year due to Rupiah volatility, current account deficit, slower China economy and global commodity prices fluctuation. © Office of Chief Economist Page 20 of 24 Mandiri Financial Performance Index (MFPI) 200 160 120 80 40 Jan-08 Sep-08 May-09 Jan-10 MFPI May-11 Jan-12 Prospective Signal 2012 Period Sep-10 2013 Sep-12 May-13 Jan-14 Alert Signal 2014 MFPI Threshold Nov Dec Nov Dec Mar Apr* Prospective : MFPI > 113 MFPI 95.1 95.1 88.2 86.2 85.6 86.7 Normal : 88 < MFPI < 113 Chg (%MoM) (1.6) 0.0 (4.2) (2.3) (0.3) 1.3 Alert : MFPI < 88 note: * preliminary Mandiri Banking Pressure Index (MBPI) 250 200 150 100 50 0 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 MBPI Jan-11 Jul-11 Prospective Signal 2011 Period Jul-10 2012 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Alert Signal 2014 MBPI Threshold Nov Dec Nov Dec Jan Feb* Prospective : MBPI > 103 MBPI 89.3 100.0 63.1 74.7 109.0 98.8 Normal : 61 < MBPI < 103 Chg (%MoM) (11.0) 11.9 4.7 18.3 -0.3 -9.4 Alert : MBPI < 61 note: * preliminary Mandiri Banking Pressure Index (MBPI) and Mandiri Coincident Banking Pressure Index (MCBPI) are composite indices for predicting Mandiri Financial Performance Index (MFPI) which is a reflection of the service sector and financial business performance, so they can be useful as an early warning on the movement of Indonesian banking sector. MBPI is used to predict the movement of banking condition in the next 6-9 months, while MCBPI is used to predict the movement of banking condition in the same month. MBPI and MCBPI composite indices are formed from several indicators deemed important in studying the movement of Indonesian financial condition © Office of Chief Economist Page 21 of 24 MACROECONOMIC INDICATORS AND FORECAST National Account Real GDP (% yoy) Domestic Demand (% yoy) Real Consumption: Private (% yoy) Real Consumption: Government (% yoy) Real Gross Fixed Capital Formation (% yoy) Real Exports (% yoy) Real Imports (% yoy) GDP (Rp tn) - nominal GDP (US$ bn) - nominal GDP per capita (US$) - nominal External Sector Exports (%yoy,US$) - Merchandise Imports (%yoy,US$) - Merchandise Trade Balance (US$ bn) Current Account (% of GDP) Current Account (US$ bn) External Debt (% of GDP) International Reserves (US$ bn) Import cover (months) Rp/US$ (period average) Rp/US$ (year end) Other BI rate (% period average) BI rate (% year end) Headline Inflation (% yoy, period average) Headline Inflation (% yoy, year end) Fiscal Balance (% of GDP) S&P's Rating - FCY S&P's Rating - LCY © Office of Chief Economist 2008 6.0 7.5 5.3 10.4 11.9 9.5 10 4,949 513 2,234 2009 4.6 5.4 4.9 15.7 3.3 -9.7 -15 5,606 543 2,328 2010 2011 2012 6.2 5.3 4.7 0.3 8.5 15.3 17.3 6,436 710 2,977 6.5 5.7 4.7 3.2 8.8 13.6 13.3 7,427 846 3,498 6.3 6.1 5.3 1.3 9.7 2.0 6.7 8,229 877 3,583 2013 5.8 5.1 5.3 4.9 4.7 5.3 1.2 9,084 871 3,500 2014F 2015F 5.6 4.5 5.1 4.0 3.5 3.8 1.0 11,100 939 3,820 5.7 5.3 5.0 4.5 6.5 4.5 3 11,450 1,004 4,039 18.3 36.9 22.9 0 0.1 30.2 50 5.1 9,757 10,950 -14.3 -24 30.9 2.0 10.6 31.8 66.1 8.9 10,354 9,400 32.1 43.7 30.6 0.7 5.1 28.5 96.2 9.1 9,078 8,991 27.0 30.3 34.8 0.2 1.7 26.6 110 8 8,773 9,068 -6.1 8.4 8.6 -2.8 -24.4 28.8 113 7.5 9,419 9,670 -2.6 -1.4 6.1 -3.3 -28.5 30.3 99 5.6 10,452 12,189 4.3 1.8 6.2 -2.7 -25.3 29.8 102 6.0 11,825 11,400 5.0 4.5 7.4 -2.5 -24.9 32.8 110 6.1 11,400 11,000 8.8 9.3 10.3 11.1 -0.1 BBBB+ 6.9 6.5 4.3 2.8 -1.6 BBBB+ 6.5 6.5 5.3 7 -0.6 BB BB+ 6.6 6 5.1 3.8 -1.5 BB+ BBB- 5.8 5.8 4.3 4.3 -1.6 BB+ BBB- 6.5 7.5 7.0 8.4 -2.2 BB+ BBB- 7.7 7.8 6.2 5.3 -2.3 BB+ BBB- 7.8 7.8 5.7 6 -2.0 BBBBBB- Page 22 of 24 INDONESIA CURRENT DATA Indicators Unit 2007 2008 2009 2010 2011 2012 2014 2013 Jan Feb Mar Apr May 11,675.00 11,536.00 Exchange Rate End of Period Average IDR/USD IDR/USD 9,393.00 9,354.10 10,900.00 1,167.09 9,390.00 9,461.91 8,978.00 9,021.26 9,069.00 9,059.00 9,658.00 9,634.00 12,224.00 12,023.00 12,213.00 12,099.00 11,615.00 11,921.00 11,400.00 11,428.00 11,562.00 11,430.00 Monetary Sector Base money M0, eop Narrow money M1 Broad Money M2 Outstanding Loan Outstanding Deposit Lending rate (working capital) 3-month deposit rate, eop Overnight rate, eop IDRtn IDRtn IDRtn IDRtn IDRtn % p.a % p.a % p.a 379.58 450.06 1,649.66 995.11 1,459.44 13.00 7.42 4.50 344.69 456.79 1,883.85 1,313.87 1,673.82 15.22 11.97 9.40 402.12 515.82 2,141.38 1,446.81 1,914.11 13.69 6.85 6.24 518.45 605.38 2,469.40 1,783.60 2,208.72 12.83 7.06 5.72 613.49 733.99 2,877.22 2,223.69 2,596.33 12.16 6.81 4.55 704.84 841.70 3,304.65 2,738.05 2,942.55 11.49 5.76 4.19 821.68 887.06 3,727.70 3,322.68 3,327.66 12.12 7.61 6.03 781.50 842.67 3,649.27 3,287.39 3,269.07 12.23 7.95 5.89 755.17 834.53 3,639.49 3,296.10 3,271.4 12.33 8.03 5.86 771.36 853.49 3,656.44 3,334.92 3,278.77 12.37 8.28 5.88 778.58 886.62 3,732.09 5.84 5.85 111.37 111.35 111.53 7.32 7.25 7.32 0.26 0.08 (0.02) 0.16 1.07 1.33 1.41 1.39 1.56 121.52 124.17 124.89 125.70 126.42 126.76 15.40 2.97 12.43 15.58 3.71 11.88 (0.18) 16.97 3.41 13.56 15.46 4.22 11.23 1.51 14.47 2.50 11.97 14.92 3.55 11.37 (0.44) 14.63 2.73 11.90 13.79 3.46 10.33 0.84 15.19 2.64 12.55 14.52 3.99 10.53 0.67 14.29 2.63 11.66 16.26 3.69 12.56 (1.96) 1,921.56 623.96 6.49 2,095.69 662.00 6.11 2,367.93 699.90 5.72 3,703.51 3,965.38 3,959.30 3,821.99 3,496.38 2,684.29 4,316.68 3,861.68 4,078.36 4,274.18 3,011.27 3,331.35 4,418.76 2,952.32 4,153.35 4,620.22 3,579.68 4,795.29 4,768.28 4,410.18 5,952.82 4,840.15 3,895.67 5,714.42 4,893.91 3,498.73 5,174.81 109.30 116.60 116.40 116.50 116.70 116.20 118.20 113.90 116.90 Prices Headline CPI (2012=100) Index n.a n.a 88.31 94.46 98.03 101.61 109.82 110.99 111.28 Year on year inflation rate % 6.59 11.06 2.78 6.96 3.79 4.30 8.08 8.22 7.75 Month on month inflation rate % 1.10 -0.04 0.33 0.92 0.57 0.43 0.45 1.07 Year to date inflation rate % 6.96 3.78 3.65 8.08 Wholesale Price Index (2005=100) Index 217.00 238.00 167.35 177.87 185.76 192.06 Trade Export Oil Non oil Import Oil Non oil Trade Balance USDbn USDbn USDbn USDbn USDbn USDbn USDbn 10.86 2.51 8.36 6.81 2.39 4.42 4.06 8.69 1.24 7.45 6.29 0.98 5.31 2.40 13.35 2.50 10.85 10.33 2.10 8.22 3.02 16.83 3.26 13.57 13.15 2.64 10.50 3.68 17.20 3.60 13.60 16.34 3.63 12.71 0.86 Output GDP (current price) GDP (constant price at 2000) Real Growth IDRtn IDRtn % YoY 1,034.86 493.37 5.88 1,274.29 518.94 5.20 1,450.82 547.54 5.43 1,670.52 585.10 6.89 Capital Market JCI Index, eop Volume, avg Value, avg Index shares mn IDRbn 2,745.83 3,155.65 4,340.55 1,355.41 1,743.25 1,454.61 2,534.36 3,422.10 2,332.42 99.10 90.60 108.70 Consumer Confidence Index 2,401.25 706.56 5.21 Disclaimer: This material is for information only, and we are not soliciting any action based upon it. This report is not to be construed as an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. The information herein has been obtained from sources believed to be reliable, but we do not warrant that it is accurate or complete, and it should not be relied upon as such. Opinion expressed is our current opinion as of the date appearing on this material only, and subject to change without notice. It is intended for the use by recipient only and may not be reproduced or copied/photocopied or duplicated or made available in any form, by any means, or redistributed to others without written permission of PT Bank Mandiri Tbk. Additional information is available upon request. For further information please contact: Office of Chief Economist, Ph. (021) 524 5516/5272 or Facs. (021) 521 0430. © Office of Chief Economist Page 23 of 24 Head Office Overseas Offices Plaza Mandiri Jl. Jend. Gatot Subroto Kav. 36-38 Jakarta 12190, Indonesia Tel: (62-21) 526 5045 – 526 5095 Fax: (62-21) 526 8372 – 526 5008 Website: www.bankmandiri.co.id Hongkong Branch th 7 Floor, Far East Finance Centre 16 Harcourt Road, Hongkong Tel: 852-2527-6611 Fax: 852-2529-8131 Budi G. Sadikin President Director & CEO Tel: (62-21) 3002 3067, Fax: (62-21) 526 3459 Riswinandi Deputy President Director Tel: (62-21) 3002 3028, Fax: (62-21) 526 3408 Abdul Rachman Director Institutional Banking Tel: (62-21) 3002 3839, Fax: (62-21) 526 3671 Sentot A. Sentausa Director Risk Management Tel: (62-21) 3002 3454, Fax: (62-21) 526 8213 Ogi Prastomiyono Director Compliance & Human Capital Tel: (62-21) 3002 3666, Fax: (62-21) 252 1585 Pahala N. Mansury Director Finance & Strategy Tel: (62-21) 3002 3089, Fax: (62-21) 526 8213 Fransisca N. 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Bondan SEVP Internal Audit Tel: (62-21) 3002 3722, Fax: (62-21) 5296 4116 Ventje Raharjo SEVP Change Management Office Tel: (62-21) 3002 3076, Fax: (62-21) 526 8213 Tardi SEVP Consumer Finance Tel: (62-21) 3002 3075, Fax: (62-21) 5296 4116 Rico Usthavia Frans SEVP Transaction Banking Tel: (62-21) 524 5355, Fax: (62-21) 5296 4116 © Office of Chief Economist Singapore Branch 12 Marina View#19-01, Asia Square Tower 2 Singapore 018961 Tel: 65-6213-5688 Fax: 65-6844-9833 Cayman Islands Branch rd Cardinal Plaza 3 Floor 30 Cardinal Avenue, PO Box 10198, Grand Cayman, KY1-1002, Cayman Islands Tel: 1-345-945-8891 Fax: 1-345-945-8892 Bank Mandiri (Europe) Limited, London nd Cardinal Court (2 Floor), 23 Thomas More Street London EIW IYY, United Kingdom Tel: 44-207-553-8688 Fax: 44-207-553-8699 Shanghai Representative Office 3401, Bank of China Tower 200 Yin Cheng (M) Road, Pudong New Area, Shanghai, 200120 People’s Republic of China Tel: 86-21-5037-2509 Fax: 86-21-5037-2507 Dilli Branch – Timor Leste Avenida Presidente Nicolao Lobato No.12, Colmera Dilli – Timor Leste Tel: +670-331-7777 Fax: +670-331-7190/74444 Mandiri International Remittance Sdn.Bhd. Wisma Mepro, 29 & 31 Jalan Ipoh 51200 Kuala Lumpur, Malaysia Telp : +60-3-4045-988 Shanghai Branch 1201-1204 Bank Of Shanghai Tower 168 Yin Cheng Zhong Road , Pudong, Shanghai 200120 People’s Republic Of China Phone : (86-21) 20332603 Fax : (86-21) 20282817 Page 24 of 24