2019macro Outlook PDF

ECONMARK: NO MORE EXCUSES
ECONMARK
Mandiri Group Research | April 2017
Mandiri Group Research | January 2019
ECONMARK The 2019 Game Plan: Narrowing the Investment

Research Team Contributors Gap
Anton Gunawan
2018: Domestically Stable; Externally Volatile. Amid the global headwinds last year,
Leo Putera Rinaldy
Indonesia’s economic growth was able to sail steady. Economic growth reached 5.17% in
Andry Asmoro 9M18 and inflation ended on a low note of 3.1% in YE18, maintaining a strike of below 4%
Dendi Ramdani inflation in the last 4 years. The biggest head wind came from the widening of the current
Moekti P. Soejachmoen account deficit of -2.9% in 9M18, followed by global financial instability, resulting in high
exchange rate volatility. This has triggered policy makers to lower their box to stability
Handy Yunianto
gear. Bank Indonesia aggressively increased its policy rate by 175 bps, whereas the
Adrian Joezer Government introduced measures to improve the balance of payment structure, including
Faisal Rachman maintaining a low fiscal budget deficit.
Reny Eka Putri
Aziza Nabila Amani Better macro picture this year. The good news is, the measures introduced last year will
start to bear real fruits, in our opinion. The current account deficit is expected to narrow to
Rully Arya Wisnubroto -2.8% of GDP, which is supported by the good luck factor of lower oil price. On the other
Andre Simangunsong hand, we believe economic growth will tick up to 5.22% on the back of benign inflation of
Andrian Bagus Santoso 3.8%. Fiscal spending is also hefty on supporting consumers’ purchasing power. Therefore,
Mamay Sukaesih as the domestic inflation remains manageable, the current account deficit is expected to
narrow, supported by a less likely monetary tightening environment among advanced
Nadia Kusuma Dewi countries, we see that Bank Indonesia will only increase its policy rate by one time this year
Adjie Harisandi to 6.25%. Or in other words, the policy rate hike cycle is near its peak.
Policy Focus: narrowing the investment gap. In a more structural note, we think the
Government’s focus ahead will be on striking the right balance between achieving higher
economic growth and maintaining macro stability by narrowing the investment gap.
Specifically, the policy makers will prioritize by providing incentives that could guide the
investment flows to manufacturing export-oriented sectors. The goal: besides increasing
the contribution of net export to GDP and creating higher value-added to the BoP
structure, the fact that the ability of 1% economic growth to absorb employment has
gradually declined post-commodity boom, this insists for a more concentrated policy to
achieve not only higher economic growth but also a more inclusive growth.
Exchange rate swing remains the biggest risk. The biggest headwind will remain on the
potential imbalance from the Balance of Payment structure. Even when imports have
started to slow down, the wider current account deficit risk could not be ruled out if the
global economic growth slowdown intensifies, hitting the export part. If the tit-for-tat on
trade war continues to intensify, it could speed up the risk faster. Therefore, we estimate
an average exchange rate at Rp14,908/USD this year.
Please see important disclosure at the back of this report

ECONMARK: 2019 ECONOMY OUTLOOK
EXHIBIT 1. MANDIRI MACRO FORECASTS

2013 2014 2015 2016F 2017F 2018F 2019F 2020F
Real GDP (% yoy) 5.6 5.0 4.8 5.0 5.07 5.16 5.22 5.37
GDP (Rp tn) - nominal 9,525 10,543 11,541 12,407.0 13,588.8 14,778.8 16,108.1 17,572.0
GDP (US$ bn) - nominal 911 888 861.9 932 1,015 1,036 1,077 1,179
GDP per capita (US$) - nominal 3,662 3,520 3,377 3,589 3,847 3,886 3,996 4,327
Current Account (% of GDP) (3.2) (3.0) (2.0) (1.8) (1.7) (2.5) (2.8) (2.9)
Rp/US$ (period average) 10,452 11,878 13,458 13,308 13,398 14,267 14,908 14,750
BI 7 days reverse repo rate (% year end) 4.75 4.25 6.00 6.25 6.25
Headline Inflation (% yoy, period average) 6.4 6.4 6.4 3.5 3.81 3.2 3.4 3.7
Headline Inflation (% yoy, year end) 8.08 8.36 3.35 3.00 3.61 3.13 3.8 3.7
Source: Mandiri Group
Please see important disclosure at the back of this report Page 2 of 71

Global Economic Outlook:
No Bright Spot Ahead
The current global economic condition reconfirms that the risk of a slowdown path could
likely happen. Several leading indicators hinted that the cloudy outlook across the globe
rather than the bright spots. As we moved back to early 2018, the US was the major hope
for a better global economy while others become the risk, especially China and the Euro
Area. The sentiment on a “better U.S. economy” was solid as reflected in the market
expectation on a more ‘hawkish’ policy tone to dempen the inflationary risk ahead.
EXHIBIT 2. FLAGGING GLOBAL ECONOMIC GROWTH

12.0
10.0
8.0
6.6
6.2 6.2 6.0 5.8 5.6
6.0
3.7 3.7 3.7 3.6 3.6 3.6
4.0
2.0 2.9
2.5
1.8 1.7 1.5
0.0 1.4
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
US: Real GDP growth (%) China: Real GDP growth (%) World: Real GDP growth (%)
Source: IMF, World Economic Outlook (Oct-18)
Monetary normalization by the Fed, which became more hawkish in 2018, led global
financial conditions to tighten, and elevated uncertainty in the financial markets. Fed
Funds Rate (FFR) hike caused investors to prefer safe haven assets, leading to appreciating
USD exchange rate and trigger many other central banks, mostly in Emerging Markets
(EMs), to increase their benchmark rates in order to maintain positive spread, preventing
massive capital flight. At the end of 2018, many EM currency exchange rates were
depreciating against USD and cost of borrowing for real sector became more expensive.
On the other side, China decided to continue its rebalancing program, shifting the growth
driver from excessive reliance on inefficient debt-fuelled investment to domestic
consumption. This has caused China’s demand on imported raw materials, mostly from
EMs in Asia region, to decline, which in the end of the day led commodity prices to drop,
giving pressure to external sector performance of EMs.
The condition was aggravated by the heating trade war tension between the two
countries, sparked by US allegation to China saying that its unfair trade practices have
caused US trade balance deficit to keep growing. Under Trump administration, US has
become more protective of its domestic market leading to tariff wars with China and some
of its trading partners. In consequent, this has been not only weakening trade between US
and China, but also weakening global trade and industrial activity as both US and China
are traditional export destination for EMs.
Economic growth momentum in Japan and Eurozone countries, meanwhile, tended to be

waning. Year 2018 was a challenging year for Japan’s economy. The growth was volatile
since it was hit hard by severe natural disasters (flooding and earthquakes) disrupting

production activities. Economic condition of Eurozone countries also faced some issues.
Ongoing the UK’s Brexit talk arose uncertainty for European financial market, and unstable
political condition in some European countries hindered the region to grow in higher
pace. These, indeed, contributed to the declining global volume trade affecting the
external sector performance of EMs.
Going forward, the IMF has projected that the global economic growth shall be
moderating with tendency of slowing down in the coming years ahead. Flagging growth is
led by the slowdown of the two largest economies, namely the US and China.
Where the guidance leads us?
In 2019, the condition will be not much changing, but the tone is predicted to be easing.
The US shall keep continuing its monetary tightening by reducing its balance sheet, and
hiking FFR albeit with a more dovish view (see Figure 2). European Central Bank (ECB) also
has stopped its asset purchase program (APP) since December 2018 and planned to
increase its policy rate after the summer of 2019. Thus, global monetary tightening will
remain the main issue for EMs in 2019 since the trade-off between maintaining stability
and pursuing growth shall not be fading away.
EXHIBIT 3. G3 POLICY GUIDANCE
Source: Bloomberg
The tit-for-tat trade war between the two countries, moreover, is projected to endure, and
to reach the deal will be a very difficult task since President Trump repeatedly sets a high
bar for President Xi Jinping by insisting structural changes in Chinese external sector.
Trump is also unpredictable leader and favors populist policy, and this alone actually can
be enough reason to say that uncertainty regarding the trade war will remain high in 2019.
Japan’s economy is also prone to decline. It is because Japan is moving to raise its
consumption tax rate, and must face slowing global smartphone market, which shall
suppress demand for semiconductor-related equipment, a major driver of the economy. In
addition, spreading political disturbance in Eurozone including Italy’s heating political
turmoil, the Brexit talks and the choice of a new ECB president has added uncertainty to
the region. Therefore, it is believed that global and these domestic issues may lead the
economy of the region to slowdown in 2019.

Economic Outlook 2019

The Need of Investment for Higher Economic Growth and Rupiah
Stabilization
The need of investment flows has become more apparent for Indonesia as the availability
of conventional financing has become tighter in the last several years. Loan to deposit
ratio (LDR) has reached 93% in Nov18 and money supply grew only by 8% in 2H18, lower
than the average of in the 2010-2016 at 13% (see exhibit 1 & 2). Furthermore, new
investment has also become imminent in context of plugging the country’s current
account deficit as portfolio flow – which accounts 50% of Indonesia’s financial account
surplus in the past – has become unsustain amid the global economic dynamic (see
exhibit 5). The perfect example was last year, when the country’s Balance of Payment
recorded a deficit on the back of large portfolio outflows. On the flip side, foreign direct
investment contribution has remained stagnant, resulting a basic balance (current account
added by net foreign direct investment) reaching 0.4% of GDP in 2017, one of the lowest
level compare to peers (see exhibit 6). Fiscal has and will still play an essential role on
financing the investment cycle. Nevertheless, public investment has its limitation
considering the maximum budget deficit allowed by the law is -3.0% of GDP. To put in
perspective, if Indonesia wants to increase its economic growth to even 5.5%, it has to
reach an investment to GDP ratio of 34% (vs. current ratio at 32%) (assuming Indonesia’s
ICOR at 6.0) (see exhibit 7). Therefore, this is why it is not surprising that the government is
focusing on investment-driven policies after closing the infrastructure gap, because
private investment contribution is necessary to achieve higher economic growth and also
achieve better Balance of Payment structure.
EXHIBIT 4. BANKING LDR LEVEL CONTINUES TO INCREASE EXHIBIT 5. MONEY SUPPLY GROWTH CONTINUES TO
DECELERATE
Bank LDR (%) Money Supply Growth (M1) YoY%
110 18
15.5 15.816.0
16
100 13.9 14.214.414.013.3
13.0 13.1
14 12.3 12.4 13.011.9
90 12 11.4
10.210.1
10 8.2 8.6 8.2
80
8 7.0
70 6
Commercial banks Bank BUKU I 4
60 Bank BUKU II Bank BUKU III
2
Bank BUKUIV
50 0
Jul-17
Jul-18
Jun-17
Oct-17
Dec-17
Jun-18
Dec-14
Dec-15
Dec-16
Dec-17
Apr-17
Apr-18
Jun-15
Jun-16
Jun-17
Jun-18
Nov-17
Jan-17
Feb-17
Sep-17
Jan-18
Feb-18
Sep-18
Aug-17
Aug-18
Sep-15
Sep-16
Sep-17
Sep-18
Mar-17
May-17
Mar-18
May-18
Mar-15
Mar-16
Mar-17
Mar-18
Source: CEIC Source: CEIC

EXHIBIT 6. PORTFOLIO INVESTMENT ACCOUNTS A BIG SHARE EXHIBIT 7. INDONESIA HAS ONE OF THE LOWEST BASICE
OF THE FINANCIAL ACCOUNT SURPLUS BALANCE COMPARE TO PEERS
Indonesia's Financial Account Structure (USD bn) 50.0 CA + FDI 2017
50
40.0 38.5
4.3
40 Other investment CA to GDP
30.0
Portfolio investment FDI to GDP
30 20.6
26.1 20.0 Basic Balance to GDP (%)
Direct investment 2.3 1.9 19.0 12.8
2.4 4.5 9.0
20 9.2 10.9 16.2 10.0 2.5 6.0 6.2
13.2 -0.4 0.4 0.5
3.8
10 0.0
4.2 10.3 16.1 19.4
4.3 5.6 1.8 11.1 11.5 13.7 12.2 14.7 10.7
4.4 5.3 3.4 -10.0
0 2.2 2.3 2.6 -0.8
-1.5
-1.0 -3.8 -4.8 -7.3 -1.8
-9.4 -8.2 -5.8 -20.0
-10.1 -10.8
India
Laos
Indonesia
Cambodia
Vietnam
Philippines
Thailand
Malaysia
-10
Korea
Australia
Singapore
-20
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Source: Bank Indonesia Source: CEIC, Mandiri Sekuritas
EXHIBIT 8. INDONESIA STILL WILL NEED LARGE ADDITIONAL FINANCING IF IT WANTS TO PUSH GROWTH BEYOND THE 5% LEVEL
No. Indicator 9M18 Scenario I Scenario II Scenario III Scenario IV
1 Economic Growth 5.2 5.5 6.0 6.5 7.0
2 Investment to GDP ratio 32 33.6 36.6 39.7 42.7
3 Additional Investment to GDP ratio needed (%) 1.6 4.6 7.7 10.7
4 Additional Investment needed (USD bn) 16 46 76.5 107
Assumption: Figure
Indonesia's Incremental Output Ratio (ICOR) 6.1
Source:
A Brief Look on Indonesia’s Investment Condition
Before going deeper into policies and impact assessment, we want to layout the current
investment state of foreign and domestic direct investments. On the former, the tertiary
sector has dominated the foreign investment pie. It accounts 47.3% of the FDI profile last
year led by investment in the electricity, gas & water supply sector. Meanwhile, Asian
countries have dominated the investment portion to Indonesia where Japan and China sat
in top two in the last two years (see exhibit 8 & 9). In context of trend, however, the FDI has
not yet improve since the end of commodity boom era (it is even contracting by -32% in
9M18 from 49% growth in 2010) (see exhibit 10). As a result, the FDI into the primary sector
fell a lot due to the commodity bust followed by the slowdown in the manufacturing side
(the FDI portion in manufacturing has decreased from 47.9% in 2012 to 36.2% in 9M18).
FDI did picked up in 2016 after the government introduced the tax holiday regulation in
2H15, yet it decelerated afterwards partly due to the increasing uncertainty on the political
condition. The trend of the domestic direct investment does not look very different,
contracting by -8% in 9M18 from 60% in 2010.

EXHIBIT 9. FDI TO TERTIARY SECTOR CONTINUES TO ENLARGE
FDI Proportion to Total (%)

100%
33.0 27.9
80%
47.3
60%
47.9
40%
62.6 36.2
20%
24.2
16.5
0% 4.4
1 2 3
Primary Sector Secondary Sector Tertiary Sector
Source: CEIC
EXHIBIT 10. JAPAN AND CHINA HAS BEEN THE TOP TWO DIRECT INVESTORS WITH SOUTH KOREA FOLLOWING BEHIND
FDI value (USD bn)
No. Country 9M18 No. Country 2017 No. Country 2010
1 Japan 3.75 1 Japan 5.00 1 USA 0.93
2 China 1.83 2 China 3.36 2 Japan 0.71
3 Hong Kong 1.64 3 Hong Kong 2.12 3 Netherlands 0.61
4 South Korea 1.37 4 South Korea 2.02 4 Hong Kong 0.57
5 Malaysia 1.18 5 USA 1.99 5 Malaysia 0.47
6 USA 1.00 6 Netherlands 1.49 6 South Korea 0.33
7 Netherlands 0.78 7 Malaysia 1.21 7 United Kingdom 0.28
8 Australia 0.34 8 United Kingdom 0.77 8 Australia 0.21
9 Thailand 0.32 9 Australia 0.51 9 China 0.17
10 United Kingdom 0.24 10 Taiwan 0.40 10 Germany 0.16
11 Belgium 0.15 11 Germany 0.29 11 Canada 0.15
12 Germany 0.15 12 India 0.29 12 Phillipines 0.05
13 Taiwan 0.14 13 France 0.25 13 Taiwan 0.05
14 Canada 0.12 14 Brazil 0.23 14 Thailand 0.05
15 India 0.07 15 Thailand 0.22 15 Spain 0.04
16 Austria 0.06 16 Belgium 0.13 16 Czech Republic 0.03
17 United Arab Emirates 0.06 17 Canada 0.09 17 Italy 0.02
18 France 0.04 18 Phillipines 0.07 18 Belgium 0.02
19 Brazil 0.03 19 Italy 0.06 19 India 0.01
20 Phillipines 0.01 20 United Arab Emirates 0.03 20 Norway 0.01
Source: CEIC, Mandiri Sekuritas

EXHIBIT 11. FDI GROWTH HAS YET TO RECOVER SINCE THE EXHIBIT 12. …WHICH HAS ALSO BEEN THE CASE FOR DDI
COMMODITY BOOM ERA...
FDI Growth (%) DDI Growth (%)
150 60 150 80
Secondary sector Primary Sector
120 120
Tertiary Sector Total FDI-RHS 40 60
90 90
20 60 40
60
30 0 30 20
0 0
(20) 0
(30) (30) Secondary sector Primary Sector
(60) (40) Tertiary Sector Total DDI-RHS
(60) (20)
2010 2011 2012 2013 2014 2015 2016 2017 9M 2010 2011 2012 2013 2014 2015 2016 2017 9M
2018 2018
Source: CEIC Source:
Investment Driven Policies and Their Past Impact
Fortunately, after five year on closing the infrastructure gap, the stars are aligning for a
better investment in this year, why? Because of the supportive policies, infrastructure
completion, and political clarity. Logistic cost has decreased to 23.5% in 2017 from 25.7%
in 2013 while as after four years of construction, the length of toll roads has increased from
794 to 1,254km. Specifically in Java, the construction of Trans Java toll road has improved
transportation activities significantly. Five years ago, travelling by car from Jakarta to
Surabaya (816 km distance) would take around 14 hours, now it only take only about 9
hours (see exhibit 12 & 13).
Investment that requires sea-connectivity will also be supported along with our rapid
acceleration of ports construction. By 2017, 27 new ports have been built, which increased
cargo capacity from 21.3 to 27.1 million twenty-foot equivalent units (TEUs). In context of
air connectivity, the opening of 7 new airports in 2015 to 2017 has been able to increase
number of passengers climbed from 158 million in 2014 to 195 million in 2017. In the first-
half of 2018, the number of passengers went up by 11 percent (from 83 to 92 million)
compared to the same period last year as 4 new airports started operations. Nowadays if
you would like to visit Lake Toba, one of our main tourist destinations in North Sumatera, it
would take a total of 3 hours in total from Jakarta by flying direct to Silangit Airport.
Therefore, after closing the infrastructure gap, we strongly believe the government will
shift its policy direction to be more investment-driven ahead. In fact, several investment
incentives have already been introduced in 2018, such as the revision on the tax holiday
rule, the negative investment list, and other incentives. Historically, there are two main
incentives being the forefront of the government’s strategy to accelerate investment,
which are tax allowance and tax holiday. Tax allowance itself has been effective since 1994
and has been revised for multiple times, the last being in 2015. Likewise, tax holiday is not
something new; it was approved initially in 2011, starting off with only five sectors covered
(the latest revision covers 18 sectors) (see exhibit 15 & 16). On top of those two, the
government has also continued to ease the negative investment list for investment, and
now the total business areas in the negative list have decreased to 392 (from 515 sectors in
2016), indicating higher openness for foreign direct investment. In 2016, for example, the
government made available for 100% FDI in several industries, such as e-commerce, cold
storage, creative industry (film making, cinema, etc.), health, and tourism sectors.

EXHIBIT 13. INDONESIA’S LOGISITC COST TO GDP CONTINUES EXHIBIT 14. SEVERAL EVIDENCE OF THE IMPACT OF
TO GO DOWN INFRASTRUCTURE
Progress in infrastructure development
No. Area Evidence
1 Land In under four years, the length of toll roads has increased from 794 to 1,254
26.0 25.70 kilometers.

Jakarta ‐ Surabaya (816 km)
‐ 5 years ago: 14 hours
‐ Now: 9 hours
25.0 2 Sea 2017: 27 new ports have been built. Cargo capacity increasing from 21.3 to 27.1
million twenty‐foot equivalent units (TEUs).
‐ Since late 2015, a container ship sailing from Makassar port in the eastern part of
24.0 23.50 Indonesia to Japan has been able to cut its average voyage time by 50% from 28 days
to 14 days. A direct route from Balikpapan to Shanghai starting in April 2018 slashed
23.10 the average voyage time by more than two thirds from 30 days to 9 days.
23.0 22.60 3 Air The opening of 7 new airports in 2015 to 2017 has significantly improved
Indonesia’s air connectivity.
‐ Number of passengers climbed from 158 million in 2014 to 195 million in 2017.
‐ In the first‐half of 2018, the number of passengers went up by 11 percent (from 83
22.0 to 92 million) compared to the same period last year as 4 new airports started
operations.
‐ Visit Lake Toba: total of 3 hours in total from Jakarta by flying direct to Silangit
21.0 Airport (2 hours of flying + 1 hour drive to get to Lake Toba). Previously it used to
take up to 6 hours to reach there including 2 hours of flying from Jakarta to Medan,
2013 2017 2018P 2019P followed by 4 hours of driving time to Lake Toba.
4 Electrification During 2014 to 1H18, electrification rate rose from 84 to 97 percent. Around 24
million households or 80,377 villages are now connected to national electric grids.
Source: Indonesia Logistics and Forwarder Association (ALFI), Mandiri

estimate Source: Ministry of SoE
EXHIBIT 15.
Number of Business Areas
Openness
Description Presidential in the last 2
DNI
Regulation No. DNI
2018
44/2016
329 303
FDI portion in DNI Increasing
(64%) (83%)
Increasing FDI in DNI 2018: 90 87 177
1. FDI 100% (out of the DNI) 41 54 95
2. Reserved for SMEs for Partnerships (FDI and/or DDI) 2 16 18
3. From DDI to FDI 51% 13 7 20
4. From FDI 33% increased to FDI 67% 2 - 2
5. From FDI 49% increased to FDI 51%/67%/75% 21 6 27
8. From FDI 67% increased to FDI 75% - 3 3
9. From FDI 67% increased to be with Special Requirements - 1 1
Source: Coordinating Ministry of Economic Affairs

EXHIBIT 16. SUMMARY OF TAX ALLOWANCE CHANGES

PP No. 34 (1994) PP No. 148 (2000) PP No. 1 (2007) PP No. 52 (2011) PP No. 18 (2015)
Accelerated depreciation and amortization
Reduction to taxable income amounting to 5% of total investment value p.a. for 6 years
Tax loss carry
Additional 1-2 years of carry forward tax
forward for 5 years, Additional 1 year of carry forward tax loss period from the base
Tax allowance loss period from the base period of 5
but not more than period of 5 years, but not more than 10 years
years, but not more than 10 years
10 years
10% dividend tax, payable to international taxpayer or
less according to double taxation rules applicable
Any form of investment, both from
international or domestic companies
Addition of fixed assets incl. land for new
Capital definition None having high investment value or
investment or expansion
export-oriented business, large number
of employees, or high local content.
Capital investment
None 1000 None
threshold (Rp bn)
Source: Ministry Regulation, Mandiri Sekuritas Research
EXHIBIT 17. SUMMARY OF TAX HOLIDAY CHANGES

PMK No. 130 (2011) PMK No. 159 (2015) PMK No. 103 (2016) PMK No. 35 (2018)
Applicant requirements Must be Indonesian legal entity
Industry pioneer
New capital investment
DER ratio in compliance with MoF's regulation
New taxpayer New and existing taxpayer
Deposit 10% of total investment to banks in Indonesia for the investment
period
Capital investment threshold
1000 1000 1000 500
(Rp bn)
Tax reduction 100% 10-100% 10-100% 100%
Tax holiday period (years) 5 to 10 5 to 15 5 to 15 5 to 20
No. of pioneer industries given 5 9 8 17 --> 18
List of pioneer industries 1. Base metals 1. Base metals - 1. Base metals - 1. Base metals – upstream
2. Petroleum refining upstream upstream 2. Oil and gas refining, with or without its
and/or basic organic 2. Petroleum refining 2. Petroleum or derivatives
chemicals sourced industry industrial refining 3. Petrochemical based on natural gas, with or
from petroleum and 3. Basic organic industry and without its derivatives
natural gas chemical industry petroleum refining 4. Basic inorganic chemistry
3. Machineries sourced from infrastructure 5. Basic organic chemistry
4. Renewable resources petroleum and including the ones 6. Pharmaceutical - raw materials
5. Communication natural gas using PPP scheme 7. Main components of electronics and
equipment 4. Machinery industry 3. Basic organic telecommunications (merged)
that produces chemical industry 8. Main components of medical devices
industrial machinery sourced from (irradiation, electromedical or
5. Agriculture-based petroleum and electrotherapy)
processing industry, natural gas 9. Main components of industrial machineries
forestry, and fisheries 4. Machinery industry (electric motors or internal combustion
6. Telecommunication that produces motors which is integrated with machinery
industry, information industrial machinery manufacturing industry)
and communication 5. Agriculture-based 10. Main components of machineries (piston,
7. Marine processing industry, cylinder head, cylinder block integrated
transportation forestry, and fisheries with the vehicle manufacturing industry for
industry 6. Telecommunication four-wheelers and more)
8. Processing industry industry, information 11. Main components of robotics
which is the main and communication 12. Main components of ship
industries in the 7. Marine 13. Main components of aircaft (engine,
Special Economic transportation propeller, rotor, or component
Zones industry infrastructure intergrated with aircraft
9. Economic 8. Economic manufacturing industry)
infrastructure other infrastructure other 14. Main components of train
than those using the than those using the 15. Main components of electric power
PPP scheme PPP scheme (including power plant machinery from
garbage)
16. Economic infrastructure
17. Manufacturing indsutry based on
agriculture, plantation, forestry-based
processing industries
18. Digital economy
Source: Various sources

Eco Box 1. Comparing Indonesia’s tax holiday incentive with peer countries
Tax holiday in brief. The Ministry of Finance signed a new regulation of tax holiday on March 29, 2018 under the MOF
Regulation No. 35/PMK.010/2018 (PMK-35) with the aims to further incentivize business activities in Indonesia. The regulation
now applies a 100% corporate tax exemption for investment (new and existing taxpayers are eligible to apply) at a minimum
value of Rp500bn, with the period of up to 20 years long. In the previous regulation, tax holiday is set at a range of 10 – 100%
exemption and for new taxpayers. As the regulation being at the forefront of the government’s strategy to support
investment appetite towards the country, a comparison with peer countries which apply similar tax holidays becomes
relevant in order to see our relative attractiveness (see exhibit x). Note that we try to conduct brief assessment solely on each
country’s tax holiday scheme, in other words, the 100% corporate income tax (CIT) exemptions and any other complementary
tax incentives implemented are not discussed here. In general, we see Indonesia’s tax holiday requirement is easier for
investors and attractive for large-scale investment, although many potential sectors are still untapped.
Strength 1: Less stringent requirements. First, Indonesia’s tax holiday requirement is less stringent and relatively easier to
comprehend than peers. In order to qualify for the tax holiday incentive, a tax payer must be an Indonesian legal entity
conducting new investment in a pioneer industry, with a minimum capital investment of Rp500bn (US$36mn). Additionally, a
taxpayer must also comply with the Indonesian thin-capitalization rules (i.e. 4:1 debt-to-equity ratio). In contrast, other
countries require more specific requirements. Vietnam, for example, specifically targets large investment in manufacturing
sectors which uses high technology and/or meeting requirements regarding investment capital, minimum revenue and
minimum headcount. Philippines and Singapore also require specific calculation for the companies to be eligible, such as
capital to labor ratio as well as incurred expenses. Less rigid countries compared are Thailand – which does not require any
threshold of investment for their targeted sectors, and China - which requires only US$5mn investment from companies that
have operated for 10 years or more. Under this perspective, Indonesia’s tax holiday registration is relatively easier for investors
rather than peers.
Strength 2: Attract large-scale investment. Secondly, with the length of tax holiday period depending on capital investment
threshold - meaning that the larger the amount, the longer the companies can enjoy the incentive, Indonesia’s tax holiday is
definitely more attractive towards large-scale investment. A flat 100% tax exemption up until 20 years makes Indonesia’s
scheme really worthy of a re-look. Even Singapore only offers a maximum of only 10 years exemption depending on
industries. Furthermore, our maximum tax holiday period is even longer even compared to Vietnam’s maximum length of tax
holiday incentive at 13 years which already include the period of transition (4 years + transition of 9 years of 50% CIT
reduction),
Strength 3: Concrete period of transitions. Indonesia offers 50% CIT reduction for 2 years after the company enjoy the tax
holiday in any pioneer sectors that are eligible. Other countries have a more complicated extensions – Vietnam and Thailand
provide transitions but depending on the project or zones. Other countries such as Philippines have a lower transition rates
compared to Indonesia, which is at 30% of CIT. We believe that Indonesia’s concrete period of tax transition for any value of
investment makes Indonesia’s tax holiday system more attractive.
Area that could be upgraded ahead: More sector coverage. We believe the sector coverage could be widened going forward.
Currently, the sectors that are eligible for tax holiday are restricted to only 19 pioneer industries. Pioneer industries in this
context is defined as an industry that has broad connection and/or linkage, provides value added and high positive economic
consequences to surrounding areas, introduces new technology and provides strategic value for the national economy (the
list of industries are presented in exhibit x). In our assessment, we see that other countries appeal to wider sectors. For
example, Vietnam targets wider manufacturing landscape such as textile, leather/footwear, electronics/IT, and mechanical
engineering, which we think are sectors that are classified as the country’s strength to further boost exports with domestic
productions. Philippines also include tourism industry under their tax holiday scheme, while Thailand and Singapore
underlines the research and development industries. Strategically speaking, the government could target sectors that have
high level of exports yet low imports, such as food products, rubber, furniture, and wood under the list. Although so, the
government has tried to cover the important sectors through the revision of the sector list in the latest economic policy
package as it adds two sectors: manufacturing industry based on agriculture, plantation, and forestry-based processing
industries, as well as the digital economy.

EXHIBIT 18. TAX HOLIDAY COMPARISON TABLE

Indonesia Vietnam Thailand Philippines Singapore China
Domestic and
resident foreign
Private company,
corporations
which:
registered with the
1. is incorporated in
Board of
New and existing Singapore
Applicant New enterprise/ Investments (BOI), New and existing
taxpayers Taxpayers 2. is tax resident in
requirements taxpayers Philippine taxpayers
(new investment) Singapore for the
Economic Zone
year of assessment
Authority (PEZA)
3. No more than 20
and Cagayan
shareholders
Economic Zone
Authority (CEZA)
• Capital Equipment
to Labor Ratio
Criterion does not
exceed US$10,000
• The net foreign
exchange savings
• Projects with
or earnings for the
investment capital
first three (3) years
of USD 546.8 mn or
of commercial
more, spent within
operation should at
5 years of being
least be US$500,000
licensed and using
• None for activity- • The indigenous
high technology First SGD 400,000 of
based incentives raw materials used
• Projects with qualifying expenses
• Minimum ratio of in the manufacture US$5 million and
Capital investment capital incurred during
Rp 500 bn (USD 36 qualified eligible or processing of the operation period of
investment of USD 268.4 mn, years of assessment
mn) and above investment/expend registered product more than 10 years
threshold spent within 3 years 2011-2018 on each
iture for additional is at least fifty and above
of being licensed, of six qualifying
income tax percent (50%) of
meeting activities
exemption the total cost of raw
requirements
materials for each
regarding
of the taxable year
investment capital,
beginning the start
minimum revenue,
of 8 Investment
minimum
Incentives in the
headcount.
Philippines 2015
commercial
operation up to
when the extension
using this criterion
was applied for.
Tax reduction 100% 100% 100% 100% 100% 100%
2 to 4 years, where
the enterprise has
- BOI: 4-8 years
Rp 500 bn to < Rp1 not derived taxable
income tax holidays
tn: 5 years profits within 3
and 4-6 years
Rp 1 tn to < Rp5 tn: years of the
exemption from
7 years commencement of 2, 3, or 5 years,
3 to 8 years local business taxes 5 to 10 years
Tax holiday Rp 5 tn to < Rp 15 generating revenue depending on the
depending on for pioneer and depending on
period (years) tn: 10 years from the projects or
location non-pioneer industries
Rp 15 tn to < incentivised industries
industries
Rp30tn: 15 years activities, the tax
- PEZA: 4,6 or 8
≥ Rp 30 tn (USD 2.1 holiday/tax
years
bn): 20 years reduction will start
- CEZA: 4-6 years
from the fourth year
of operation.
• 4 years of tax -For BOI, the - ‘2 + 3 years tax
exemption and 9 company is subject holiday’: two years
subsequent years of to regular 30% of exemption from
50% reduction income tax after the Partial exemption CIT followed by
• 4 years of tax income tax holiday of 75% on the first three years of 50%
50% CIT reduction 50% reduction for 5
exemption and 5 period. SGD 10,000 oand reduction of CIT.
for 2 years after years of enterprises
Transition subsequent years of -For those 50% exemption on - ‘3 + 3 years tax
enjoying tax in investment
50% reduction registered by PEZA the next SGP holiday’: three years
holiday promotion zones
• 2 years of tax and CEZA - they are 290,000 of normal of exemption plus
exemption and 4 subject to special chargeable income three years of 50%
years subsequent 5% tax on gross reduction of CIT.
years of 50% income after the tax - ‘5 + 5 years tax
redcution holiday period holiday’: five years

Indonesia Vietnam Thailand Philippines Singapore China

(depending on ends, in lieu of all of exemption plus
projects) local and national five years of 50%
taxes reduction of CIT.
17 pioneer
New/high
industries,
technology
extended to 19 in
- BOI: Infrastructure, enterprises,
the new policy
Business Powered Pioneer industries advanced
package.
Manufacturing of Outsourcing (BPO), (R&D, IPR, technology service
Upstream base
industrial products Activity-based R&D Registration of IPR, enterprises,
metal, oil and gas,
prioritised for incentives - PEZA: Economic approved industrial encouraged
petrochemical,
development (knowledge-based, Zone Export or product design industries in certain
electronics,
(support high tech infrastructure, high- Manufacturing carried out in regions, certain
Criterias/sector machineries,
sector, support technology, etc), Enterprise, Singapore, sectors (agriculture,
s given robotic, electric
garment, textile, merit-based Information acquisition or forestry, animal
power, economic
footwear, IT, incentives (RnD, Technology leasing of husbandry, fishery),
infrastructure,
automobiles intellectual Enterprise, Tourism equipment or integrated circuit
manufacturing
assembly or property), etc. Economic Zone software, training of industries,
indsutry based on
mechanics, etc.) Enterprise employees) and infrastructure
agriculture,
- CEZA: Tourism- plant expansion projects,
plantation, forestry-
related activities environmental
based processing
projects, transfers
industries, digital
of technology
economy.
Normal
corporate
25 20 20 30 17 25
income tax rate
(%)
Tax holiday will
start from the fiscal
year when the Tax holiday starts
Tax holiday applies
taxpayer reaches Tax holiday applies running from the Tax holiday starts
When tax to a new company
the commercial in the beginning date of commercial from the first
holiday is in - for its first three
operation stage after the enterprise operation, or target income-generating
effect consecutive years
(COS), or when the first makes profits date of operation, year
of assessment
taxpayer uses its whichever earlier.
own products for
further processing.
Source: Various sources
Overall, we believe that tax holiday revision last year will be more appealing for
investment, and the effect should start to materialize in 2019. For information, the tax
holiday introduced in April 2018 has successfully attracted new investment worth of
Rp161tn, dominated to the mineral and consumer sectors. So, what is the potential impact
of the tax holiday to investment? We try to estimate the impact based on the result of the
previous tax holiday, which is implemented in 2011, and when it was revised in 2015. We
selected sectors of FDI which are likely to be classified categorized as the pioneer
industries in both of the periods (excluding refined petroleum products as well as
transportation and communication, as both tend to be affected by commodity price
fluctuations). We found that on average, FDI improved +44.2% YoY on the year after the
regulation is introduced or revised (t+1) (see exhibit 18 & 19). However, bear in mind that
the number of pioneer industries eligible for tax amnesty in 2011 and 2015 only account
for around 10% of the total 315 sectors of the FDI, while the latest revision in 2018
increased the share by around 20% of total, with its revision on the number of pioneer
industries. This suggests that, taking into account the same FDI growth at 44.2%, tax
holiday contribution to total FDI would rise from 4.45% to 9.17% of total growth next year.

EXHIBIT 19. THE IMPACT OF TAX HOLIDAY IN 2011 EXHIBIT 20. THE IMPACT OF TAX HOLIDAY IN 2015
FDI in pioneer industries (2011) FDI in pioneer industries (2015)
3.0 2.8 250%
212.4% 4.5 34.6% 34.0% 40%
2.5 200% 4.0 30%
2.0 4.0 13.3%
150% 3.5 20%
2.0 3.6
3.0 10%
100%
1.5 1.3 2.5 0%
50% 2.7 2.5
2.0 2.3 -10%
1.0 -12.9% 54.3%
37.4% 0% 1.5 -20%
0.5 0.4
0.5 -50% 1.0 -30%
-29.1%
-52.2% 0.5 -40%
0.0 -100% -41.5%
T-2 T-1 T T+1 T+2 0.0 -50%
T-2 T-1 T T+1 T+2
Value (US$ bn) % YoY Value (US$ bn) % YoY
Source: CEIC, Mandiri Sekuritas Source: CEIC, Mandiri Sekuritas
Furthermore, larger investment flows should also be supported by the political clarity after
the completion of presidential election in Apr18 and large infrastructure projects such as
the Trans Java toll road will be completed (Based on KPPIP data, around Rp239tn toll road
projects will be completed in 2019, most of it is part of the Trans Java project).
Furthermore, several studies have quantified the impact of tax competition and FDI.
Broekman and Vliet (2001) using the aggregate EU inbound FDI in 1989 – 1998 found that
a 1% reduction on effective tax rate will increase the FDI inflow by 0.5% per year. A more
update study in 2008 by Feld and Heckemeyer found that 1% reduction in the corporate
tax rate will increase the FDI inflow by 1.7% per year, while the study of De Mooij and
Ederveen in the same year found a higher result of 3%.
What are the sectors that will be pushed by the government next year?
Obviously, the Industries that will benefit the most are the 19 pioneer industries in the tax
holiday list. The focus is to revive the basic industry and also implement the import-
substitution program. Several industries that are included in the tax holiday are
components that the country imports the most (see exhibit 20). Furthermore, we also think
that the government will focus on the manufacturing sector. The question now, is what
type of manufacturing sector does the government wants to focus on? We believe at least
industries that could achieve to goals. First, increasing the export contribution. Indeed,
FDI flows that goes into the domestic oriented industries will have an impact to economic
growth, yet the effect to the exchange rate will be mostly neutral as the FDI flows will
offset by the rising import needs. The story will be different with export-oriented
industries, where the impact will not only be on economic growth, but also improving the
current account balance structure. Interestingly, this focus is in-line with government’s
plan of Indonesia’s 4.0 Industrial Revolution plan or so-called, making Indonesia 4.0, where
one of the targets is to increase Indonesia’s net export to GDP to 10% (vs. current level at
2%) (see exhibit 21). Second, increasing the labour absorption. After the commodity
boom, we have seen that quality of the growth in context of labor absorption has not
improved a lot. Based on our calculation, every 1% economic growth increase, will absorb
labor around 280 thousand persons (vs. 2000 – 2009 at 677 thousand persons) (see
exhibit 22). The reason is because large part of Indonesia’s GDP is dominated by non-
tradable sectors (see exhibit 23 & 24) where the sector tends to absorb low employment
and requires high-skill labour, which does not match Indonesia’s current labour structure.
Instead, in context of education, the labour structure has not changed a lot where almost
25% of Indonesia’s labour is still dominated by elementary school level (see exhibit 26).

EXHIBIT 21. TOP 10 NON-OIL AND GAS IMPORTS

2015 2016 2017 2018 YTD
No. Commodities Value % Total % Total Commodities Value % total Commodities Value % total
(USD bn) (USD bn) (USD bn)
1 Electrical apparatus, measuring instruments and optical 16.3 14.5% 14.8% Electrical apparatus, measuring instruments and optical 19.2 15.1% Electrical apparatus, measuring instruments and optical 18.9 15.0%
2 Base metal products 14.2 12.7% 11.9% Base metal products 16.2 12.8% Base metal products 16.3 13.0%
3 Chemicals 7.5 6.7% 6.3% Chemicals 8.1 6.4% Chemicals 8.2 6.5%
4 Artificial resin, plastic materials 7.0 6.2% 6.3% Artificial resin, plastic materials 7.8 6.2% Artificial resin, plastic materials 7.7 6.1%
5 Textile and textile products 6.9 6.1% 5.9% Textile and textile products 7.5 5.9% Textile and textile products 7.1 5.7%
6 Processed food 3.9 3.5% 4.9% Processed food 5.5 4.3% Processed food 5.7 4.5%
7 Parts of vehicles 3.0 2.7% 2.8% Parts of vehicles 3.8 3.0% Parts of vehicles 3.8 3.1%
8 Cattle fodder 2.7 2.4% 2.2% Motor vehicle 4 wheels and more 3.1 2.4% Motor vehicle 4 wheels and more 3.2 2.5%
9 Computer and parts 2.3 2.1% 1.9% Cattle fodder 2.7 2.1% Cattle fodder 2.6 2.1%
10 Motor vehicle 4 wheels and more 2.2 2.0% 1.8% Computer and parts 2.4 1.9% Computer and parts 2.3 1.8%
Total imports 112.2 100.0% 100.0% Total imports 127.1 100.0% Total imports 125.9 100.0%
Source: CEIC
EXHIBIT 22. INDONESIA’S NET EXPORT TO GDP IS ONE OF THE EXHIBIT 23. THE QUALITY OF GROWTH HAS BEEN STAGNANT IN
LOWEST COMPARED TO PEERS CONTEXT OF THE ABILITY TO ABSORB LABOR
Net Export to GDP 9M18 (%) Nominal change in additional employment
60 (thousand person) given 1% change in Real GDP
49.7 growth
50 800
677
700
40
600
29.9
30 500
400
297
20 300
8.3 7.8 200
10
1.1 100
0 0
Philippines Singapore Malaysia Thailand Indonesia 2000-2009 2010-2018
Source: CEIC Source: Mandiri Sekuritas estimate
EXHIBIT 24. THE SIZE OF THE NON-TRADABLE CONTINUES TO EXHIBIT 25. THE BREAKDOWN ON PRODUCTIONS SIDE GDP
INCREASE
GDP structure (% total real GDP)
GDP by sectors (% of total Real GDP)
100%
100% 10.5% 10.3% 10.0% 9.7% 9.3% 8.5% 8.2% 7.9% 7.7%
90% Mining & Quarrying
90% 9.1% 9.4% 9.4% 9.5% 9.7% 9.8% 9.8% 10.0% 9.9%
80%
80% 13.5% 13.3% 13.2% 13.0% 12.8% 12.7% 13.1%
70% 53.6% 54.0% 54.6% 55.3% 55.9% 56.9% 57.6% 58.2% 58.1% 70% 13.9% 13.6% Construction
60% 60% 13.5% 13.9% 13.8% 13.7% 13.7% 13.4% 13.3% 13.2% 13.2%
50% 50% Agriculture, Forestry and
21.5% 21.4% 21.2% 21.1% Fisheries
40% 40% 22.0% 22.1% 22.0% 21.7% 21.6%
30% Wholesales and Retail
46.4% 46.0% 45.4% 30%
20% 44.7% 44.1% 43.1% 42.4% 41.8% 41.9% Trade, Repair of Motor
20% Vehicles and Motorcycles
10% 31.0% 30.7% 31.3% 32.1% 32.5% 33.7% 34.5% 35.0% 35.0% Manufacturing Industry
0% 10%
2010 2011 2012 2013 2014 2015 2016 2017 2018 0%
2018 YTD
2010
2011
2012
2013
2014
2015
2016
2017
YTD Others
Tradables Non‐tradables

EXHIBIT 26. THE QUALITY OF GROWTH HAS BEEN STAGNANT IN EXHIBIT 27. INDONESIA’S LABOR FORCE IS MOSTLY DOMINATED
CONTEXT OF THE ABILITY TO ABSORB LABOR BE MIDDLE TO LOW SKILL
Nominal change in additional employment 2018 Labour Force Share Based on Education (%)
(thousand person) given 1% change in Real GDP Total Labour 2018 = 131 mn
growth Senior High
800 School
677 Senior High
700 (Vocational)
School
11.8
600 (General)
18.5 Academy
500 High School 2.8
400 18.0
297 University
300 9.5
200 No schooling
2.6
100 Primary school
24.5 12.3, not yet
0 complete
2000-2009 2010-2018 primary school
Source: Mandiri Sekuritas Source: CEIC
Therefore, based on the two targets mentioned above, we believe that the government
will focus more on manufacturing export-oriented sectors such as textile, food beverage,
processed rubber (see exhibit 28). One of the reasons is both of the industries have high
labour absorption and have big export portion compare to other industries. If we look at
the composition of Indonesia’s manufacturing export-oriented industries, textile has
become the top three non-oil and gas export for Indonesia in the last several years (see
exhibit27). This is followed by other industries, such as processed rubber, base metal and
processed food. Furthermore, this is in-line with the government’s 4.0 plan that focus on 5
sectors which also included automotive sector.
EXHIBIT 28. INDONESIA TOP TEN MANUFACTURING EXPORT

No. Product 2012 No. Product 2015 No. Product 2018
(USD mn) (USD mn) (USD mn)
1 Textile and textile products 12,510,222 1 Textile and textile products 12,338,750 1 Textile and textile products 11,121,025
2 Electrical apparatus, 11,157,423 2 Electrical apparatus, 8,777,604 2 Base metal products 10,476,188
measuring instruments and measuring instruments and
3 Electrical apparatus, 7,760,338
optical optical
measuring instruments and
3 Base metal products 9,303,974 3 Base metal products 7,580,115 optical
4 Processed food 5,089,625 4 Processed food 6,284,553 4 Processed food 6,433,843
5 Paper and paper products 3,938,382 5 Processed rubber 5,843,690 5 Processed rubber 5,260,303
6 Chemicals 3,634,536 6 Footwear 4,507,503 6 Footwear 4,201,696
7 Footwear 3,518,257 7 Processed wood products 3,813,415 7 Chemicals 3,838,468
8 Processed wood products 3,338,150 8 Paper and paper products 3,599,154 8 Paper and paper products 3,818,050
9 Motor vehicle 4 wheels and 2,491,899 9 Articles of gold 3,292,902 9 Processed wood products 3,472,099
more
10 Chemicals 2,805,673 10 Motor vehicle 4 wheels and 2,844,247
10 Artificial resin, plastic materials 2,475,062 more
Total Manufacturing Export 112,171,467 Total Manufacturing Export 104,774,489 Total Manufacturing Export 105,181,855
Source: CEIC

EXHIBIT 29. TEXTILE AND FOOD BEVERAGE SECTOR HAS THE EXHIBIT 30. TOP FIVE SECTOR PRIORITAZE BY THE
LARGEST SHARE OF EXPORT AND EMPLOYMENT GOVERNMENT
Correlation between Export and Labor
14
Export share to total export (%)
12
Textile
10
Food and Beverage
8
Plastic and Rubber
6
0
0 5 10 15 20 25
Labor share to total labor (%)
Source: CEIC, Mandiri Sekuritas estimate Source: Ministry of Industry
Moreover, the positive investment environment followed by infrastructure completion will

also pave the way for tourism sector development (a long-time long hanging fruit for
Indonesia), which is essential to improve the structure of the country’s current account
balance in the medium term. As a comparison, one of the main reasons why Thailand
could record a current account surplus of 11% to GDP in 2017 is due to the big surplus on
the services balance (see exhibit 30), especially driven from travel services or related with
tourism sector. This is different from Indonesia where the country has a deficit on the
services balance with travelling service only generating a small surplus. Therefore, we
think that tourism sector has a big potential for the country as Indonesia’s tourism revenue
only reached 1.4% of GDP (vs. Thailand and Malaysia at 11.8% and 6.1% of GDP), or
equivalent with USD13.7bn (which almost four times lower than Thailand’s) (see exhibit
32 & 33). The good news is visitor arrival has increased significantly in the past years. Total
visitor arrival increased by 38% in 2010 compare to 2000 and increased by 100% in 2017
than 2010. What is more interesting is the growth of China visitor to Indonesia has jumped
by 346% in 2017 and ranked number two when it was not even in the radar in 2000 (see
exhibit 34). We believe that the jump on China visitor was partly as a consequence of
China’s direction to gradually change its GDP structure to be more private consumption
base.
EXHIBIT 31. THAILAND’S CURRENT ACCOUNT SURPLUS IS SUPPORTED EXHIBIT 32. INDONESIA’S SERVICES BALANCE REMAINS ON
BY THE LARGE SURPLUS IN THE SERVICES BALANCE DEFICIT TERRITORY WITH SMALL SURPLUS ON TRAVELLING
Thailand's Current Account Balance (USD mn) Indonesia's Current Account Balance (USD mn)
150 50
40
120
30
90 20
60 10
0
30 -10
0 -20
-30
-30
-40
-60 -50
2010
2011
2012
2013
2014
2015
2016
2017
2018
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Goods Services Primary Income Secondary Income Goods Services Primary Income Secondary Income
Source: Bank Indonesia Source: Bank Indonesia

EXHIBIT 33. INDONESIA’S TOURISM REVENUE TO GDP IS ONE OF EXHIBIT 34. …INCLUDING IN CONTEXT OF NOMINAL TERMS
THE LOWEST…
Tourism Revenue to GDP (%) Tourism Revenue (USD bn)
18.0 16.4 60
51.1
15.0 50
11.8
12.0 40
9.0 30
6.1 6.0 20.8 19.5
6.0 20
13.7
3.0 1.8 10 5.7

1.4 3.5
0.0 0
Cambodia Thailand Malaysia Singapore Philippines Indonesia Thailand Malaysia Singapore Indonesia Philippines Cambodia
EXHIBIT 35. INDONESIA’S VISITOR ARRIVAL DATA BASED ON COUNTRY

No. Country Visitor Arrivals 2017 Country Visitor Arrivals 2010 Country Visitor Arrivals 2000
1 Malaysia 2,121,888 Singapore 1,373,126 Singapore 1,427,886
2 China 2,093,171 Malaysia 1,277,476 Japan 643,794
3 Singapore 1,554,119 Australia 771,792 Malaysia 475,845
4 Australia 1,256,927 China 469,365 Australia 459,994
5 Other Asia 1,027,685 Japan 418,971 Taiwan 356,436
6 Japan 573,310 South Korea 274,999 South Korea 213,762
7 India 536,902 Taiwan 213,442 USA 176,379
8 South Korea 423,191 United Kingdom 192,259 United Kingdom 161,662
9 United Kingdom 378,131 Philippines 189,486 Germany 151,897
10 USA 344,766 USA 180,361 Netherlands 105,109
Total Visitors 13,964,761 7,002,944 5,064,217
Source: CEIC
Therefore, in order to maintain the positive momentum, the government has planned the
“10 New Bali” growth strategy, planning to replicate the effects of tourism in Bali to be
more broad based (the ten sites are Lake Toba, North Sumatra, Tanjung Lesung, Banten,
Seribu Island (Jakarta), Tanjung Kelayang Beach (Bangka Belitung), Borobudur Temple
(Central Java), Mount Bromo (East Java), Mandalika (West Nusa Tenggara), Labuan Bajo
(East Nusa Tenggara), Wakatobi (South Sulawesi), and Morotai Island (North Maluku) (see
exhibit 35). The Ministry of Tourism specifically targets the tourism sector to be the highest
contributor of the foreign exchange in 2020, and its contribution has actually increased
significantly from 2013 to 2016 at USD13.6bn (11.7% of total USD116.0bn FX exchange
receive during the year) (see exhibit 36). For the 10 New Bali, the Ministry of Tourism
calculates the program to add USD10bn to the foreign exchange reserves in 2019, which is
a considerable amount, on top of the average USD11.8bn of tourism reserves in 2013-
2016. Despite that, investment value of US20bn in 2019 is needed to establish the New 10
Bali, for which the Ministry of Tourism explicitly stated that half of them (USD10bn) must
be sourced from private investment – that is the main challenge.

EXHIBIT 36. THE NEXT 10 BALI

2019 Projection
No. Destinations Investment Additional FX reserves Foreign tourists visits
(USD billion) (USD billion) (million people)
1 Lake Toba, North Sumatera 1.6 1 1
2 Tanjung Lesung, Banten 1.4 0.5 0.5
3 Kepulauan Seribu, Jakarta 4 1 1
4 Tanjung Kelayang Beach, Bangka Belitung 1.5 1 1
5 Borobudur Temple, Central Java 1.5 2 2
6 Mount Bromo, East Java 1.4 1 1
7 Mandalika, West Nusa Tenggara 3 2 2
8 Labuan Bajo, East Nusa Tenggara 1.2 0.5 0.5
9 Wakatobi, South Sulawesi 1.5 0.5 0.5
10 Morotai Island, North Maluku 2.9 0.5 0.5
Total 20 10 10
Source: Ministry of Tourism, Presentation material - Head of Development Acceleration in 10 Priority Tourism Destination, Dec 18, 2017
EXHIBIT 37. THE FX RECIEVABLE FROM TOURISM COUNTIUES TO INCREASE
Source: Ministry of Tourism

2019 Economic Growth: Domestic Demand Driven

Indonesia’s economic growth was solid last year as it averaged 5.17% YoY until the
third quarter, advancing relative to the FY17 growth at 5.07%. Private consumption was
stable (5.03% average until 9M18), passing the 5% threshold after showing muted
numbers since end of 2016. Government expenditure was more rapid than the previous
year’s, with the big push on social spending. Additionally, investment significantly
increased by 7% in 9M18 (vs. 6.0% in 2017), supported by infrastructure projects
completion, while net exports performance was non-stellar as domestic demand spawned
higher imports while external demand to boost exports was moderate on global
uncertainties. Overall, we forecast a 5.16% economic growth for FY18, as the 4Q18 GDP
numbers will be released this month.
We expect economic growth to reach 5.22% in 2019 due to solid domestic demand.
Private consumption would remain solid at 5.1% this year on the back of manageable
inflation risk and still supportive fiscal spending. Re-iterating our view, any fuel price
increase post-election will be small followed by limited pass through of producers cost to
consumer prices (see in our inflation side explanation). Besides low inflation, the
consumption booster is expected to be supported by government-consumption-driven
expenditure and this is reflected on the 2019 budget. The social spending and village fund
are the only two posts (outside other expenditure) that recorded a higher growth
compared to total spending growth this year. Economically, we believe that the higher
social spending is logical due to two factors: first, if we want to maintain the economic
growth level above 5%, then private consumption is the key as it accounts 56% of
Indonesia’s GDP pie, second, actually the purchasing power of low-class consumers has yet
fully recovered. The employment growth in labour intensive sectors such as
manufacturing, agriculture and whole sale (accounting 63% of total labor) has been
subdued in 2018. Based on working hour, the employment of part time jobs continues to
increase higher compare to full time job (see exhibit 38 & 40). Meanwhile, the highest
employment growth occurred in services sector such as electricity, information &
communication, and transportation, which has less labor absorption and requires high
skill.
EXHIBIT 38. THE CORRELATION BETWEEN EMPLOYMENT EXHIBIT 39. EMPLOYMENT GROWTH DATA
GROWTH AND LABOR PROPORTION
Employment Growth and Labor Proportion 2018 Employment Growth
35 30 27.8
30 25
Agriculture
20
25
15 11.0 11.9
Wholesale & Retail 9.2
20 10 6.6
Manufacturing 3.7 3.9 4.2 4.9
5 2.0 2.2 2.7
15 0.1 0.2 0.6 1.5
0
10 -5
5 Electricity & Gas
Real Estate
0
-5 0 5 10 15 20 25 30
-5
Employment Growth 2018

EXHIBIT 40. MONTHLY AVERAGE WAGE (RP) EXHIBIT 41. THE GROWTH OF FULL AND PART TIME JOBS
No Sector 2018 2015 Growth for Full and Part time Job (%)
1 Financial and Insurance Activities 4,338,277 3,265,825 8.0
2 Information and Communication 3,928,092 3,306,611
3 Electricity and Gas Supply 3,926,869 2,740,334 4.0
4 Real Estate Activities 3,759,729 3,044,011
5 Public Services 3,739,742 2,999,404
0.0
6 Mining 3,496,989 2,518,958
7 Business Activities 3,472,259 2,664,187
-4.0
Human Health Services and Social
8 3,434,559 3,094,524 Part time job (1-34 hours)
Services
Full time job >35 hours
9 Transportation and Storage 3,202,843 2,357,391 -8.0
10 Education 2,892,613 2,322,991 2014 2015 2016 2017 2018
11 Construction 2,653,434 2,135,859

12 Manufacturing 2,484,821 1,731,475
Wholesale and Retail Trade; Repair of
13 2,278,614 1,591,648
Vehicles
Water Supply, Sewerage, Waste
14 2,236,787 1,676,460
Mangement,
Accomodation and Food Services
15 2,145,032 1,605,714
Activities
16 Other Service Activities 1,638,021 1,096,217
17 Agriculture 1,259,728 903,780
Source: Source:
1H19 would be private consumption; 2H19 on investment. Overall, we believe that

private consumption will be dominant in the first semester supported by low inflation and
social spending stimulus. If we see the social spending distribution last year, 2019
spending will likely be front-loaded in the first half, but not by that much. The proportion
of realization between 1H18 and 2H18 for social spending is 53.6% and 47%, respectively.
We also believe that the election related spending would have an additional contribution
to economic growth, reflected from the contribution of non-profit institution variable to
the GDP. Based on past experience, the non-profit institution tends to contribute 0.2ppt
higher to growth during the election year. Investment growth is expected to remain flat
along 1H19 due to tighter Rupiah liquidity and pre-election period. The story will change,
however, as the economy will be more push by investment in the second semester. 1.)
Diminishing political uncertainty 2.) tax incentives 3.) infrastructure completion, are the
trident factors supporting the higher investment. Furthermore, the level of liquidity
condition should improve due to better inflows from both portfolio and foreign direct
investment, with government’s material and capital spending realization tends to be large
in the second half in the last several years.

EXHIBIT 42. THE FISCAL REALIZATION PATTERN SINCE 2014

Social Spending (Rp tn) Personnal Expenditure (Rp tn)
70 65.3 200
180 170.9 175.8
60 53.9 155.3 156.9 157.3 155.4
160 148.2
50 140 133.8
43.1 45.1 125.8
38.8 120 109.9
40
32.4 100
29.5
30 26.7 25.8
22.9 80
20 60
40
10
20
0 0
1H14 2H14 1H15 2H15 1H16 2H16 1H17 2H17 1H18 2H18 1H14 2H14 1H15 2H15 1H16 2H16 1H17 2H17 1H18 2H18
Material Expenditure (Rp tn) Capital Expenditure (Rp tn)

250 230.6 200
178.8
180
194.4 161.2
200 160
172.3 144.2
164.8
140
122.0
150 120 110.0
120.4
106.4 100
94.6 97.1
100 80
55.6 60.1 60 44.4 47.5
40.7
50 40 28.3 30.2
20
0 0
160 Interest Payment (Rp tn) Energy Subsidy (Rp tn)

200
137.5 175.5
140 180 166.3
120.6 160
120 106.8 109.8
140
95.6
100 87.2
81.7 120
80 74.3 94.0
65.1 68.3 100
80 71.6
60 60.0 59.5
51.1 55.7
60 47.5
40 37.6
40
20 20
0 0
Source: CEIC, MoF

2019 Inflation: a Manageable Inflation Year

Low inflation saga to continue. It has been a good four years for inflation as its trend has
continued to be below 4%; in fact, it marked 3.13% YoY in YE18, lower than 3.61% in YE17.
Food prices have been very manageable, marking a 0.69ppt contribution to FY18 inflation,
distinctive compared to 1.29ppt average contribution in 2012 – 2018. Besides the more
subtle weather condition, this achievement was also due to government’s effort to
manage the supply side inflation. The government has taken reforms on managing the
distribution of prominent food while also being more open on imports for supply and
demand management. Additionally, administered components such as the subsidized fuel
prices and electricity, have been unchanged 2018.
For next year, we expect inflation to remain manageable at 3.8%. Indeed, there is a
possibility of administered price adjustment post-presidential election, nevertheless any
adjustment will be limited in our opinion thanks to the lower energy prices (the potential
price adjustment of RON 88 (or premium product) only 10% - 15% (vs. 40% - 50% in 1H18).
Based on our estimation, every 10% increase on RON 88 price, there will be an additional
inflation contribution of 0.3ppt – 0.5ppt. We also think that the risk of pass through cost
from producers to consumers have subsided amid the lower oil price and stable exchange
rate. The Whole Sales Price Index – non-oil and gas – has eased to 3.8% YoY in Dec18 from
4.3% YoY in Jul18.
The volatility of food inflation could decrease ahead due to rebasing of Indonesia’s
CPI basket and infrastructure. Keep in mind that Indonesia would likely conduct a CPI
rebasing in 2H19, changing from 2012 base year to 2017 base year. If we look at the
pattern of the last three rebasing, the share of food inflation continues to go down, which
this pattern would mostly continue considering the increasing income per capita. If this is
indeed the case, technicality inflation could be lower. For instance, the average 2007
monthly inflation is 0.10% lower using the 2007 CPI base year compare the 2002 CPI base
year (see exhibit 42 & 43). Meanwhile, the better infrastructure condition should also
lower inflation volatility through lower logistic cost (as explained in the previous post).
Based on our observation, countries with high infrastructure score tends to have lower
inflation volatility (see exhibit 47). Every 1 score improvement in infrastructure score is
estimated to reduce the inflation volatility by 0.76%.

EXHIBIT 43. THE WEIGHT OF THE FOOD COMPONENTS DECREASED ALONG THE CPI REBASING
Weights
Inflation component
2002 2007 2012
Foods 25.5 19.6 18.9
Processed Foods, Beverages, Tobacco 17.9 16.6 16.2
Housing, Water, Electricity, Gas, and Fuel 25.6 25.4 25.4
Clothing 6.4 7.1 7.3
Health 4.3 4.4 4.7
Education, Recreation, and Sport 6.0 7.8 8.5
Transportation, Communication, and Finance 14.3 19.1 19.2
Total 100 100 100
Source: CEIC, BPS
EXHIBIT 44. MONTHLY AVERAGE INFLATION TENDS TO BE EXHIBIT 45. …WHICH IS ALSO THE CASE IN 2007
LOWER USING THE NEW CPI BASE YEAR IN 2012
2012 Monthly Average Inflation (%) 2007 Monthly Average Inflation (%)
0.36 0.35 0.50 0.49

0.35
0.34 ‐0.05% ‐0.10%
0.45
0.33
0.32
0.40 0.39
0.31 0.30
0.30
0.29 0.35
0.28
0.27 0.30
CPI base year 2007 CPI base year 2012 CPI base year 2002 CPI base year 2007
Source: CEIC, Mandiri Sekuritas estimate Source: CEIC, Mandiri Sekuritas estimate
EXHIBIT 46. WPI INFLATION HAS EASED IN-LINE WITH THE DECLINE ON EXHIBIT 47. THE INFLATION RISK: UNSTABLE WEATHER CONDITION
OIL PRICE
Nino Index
2.5
El Nino (dry)
2
1.5
1 1.0
0.5
-0.5
-1
La Nina (wet)
-1.5
May-13 Feb-14 Nov-14 Aug-15 May-16 Feb-17 Nov-17 Aug-18 May-19F
Source: CEIC Source: BMKG

EXHIBIT 48. BETTERINFRASTRUCTURE SCORE RESULTS TO LOWER INFLATION VOLATILITY
The correlation between Infrastructure Core with

Inflation Volatility
2.5
Average StDev of YoY inflation (monthly)

2.0
Y=2.7088-0.5971*X
1.5
1.0 Indonesia
0.5
Thailand Germany
0.0
2 2.5 3 3.5 4 4.5
Average LPI Score of 49 countries
Source:LPI, CEIC, Mandiri Sekuritas estimate

2018 Fiscal Realization and Outlook

2018 budget deficit reached -1.76% of GDP. Total revenue reached 102.5% compared to
target, as non-tax revenue recorded a significant windfall due to higher oil price and
exchange rate depreciation, offsetting the tax shortfall. The realization of government
expenditure, on the other hand, reached 99.2% of target with energy subsidy above target
at 162.4%, while capital spending realization reached 90.7%, implying a contraction of -
11% in 2018. Overall, last year’s positive fiscal achievement was a combination of tax
reform, manageable spending, and also partly supported by higher energy prices. Going
forward, the challenge will still be on tax, as it is set to grow by 17.4% this year vs. nominal
GDP growth of around 10% (keep in mind there was a tax shortfall of Rp97tn in 2018). On
the flip side, although it is unlikely to repeat the large windfall on non-tax revenue, we
believe the target could be achieved due to last year’s high base effect. As a description,
the non-tax realization will be safe as long as the non-tax revenue does not contract
beyond 7%.
Total revenue reached 100%, the first time since 2011. It reached Rp1,942tn (vs.
Rp1,895tn in APBN 2018), accelerating by 17% from 7% in 2017, as non-tax revenue
recorded a significant surplus of Rp132tn than target (almost three times bigger than the
surplus in 2017), offsetting the tax shortfall of Rp97tn. Despite the shortfall, the amount is
lower than the Rp129tn in 2017, and tax actually grew by 13.2% (vs. 4.6% in 2017). The
high energy prices also contributed to the tax revenue growth, considering mining is one
of the two sectors that recorded higher tax growth in 2018 (see exhibit 49). As a
description, plantation and mining accounts 6% of total tax revenue in 2018. All in all, the
tax to GDP ratio improved to 11.5% of GDP in 2018 (vs. 10.7% in 2017) (see exhibits 50).
FY18 government expenditure reached 99.2% of target or increased by 10% (vs. 8%

in 2017). Consumption-driven-spending increased the most, such as for social spending
and energy subsidy (both increased by 52% and 57% in FY18) with their realization
reaching above 100% than target. “Other expenditure” section also recorded a large
increase of 77%, likely owing to the natural disaster fund along last year. Meanwhile,
capital expenditure declined by -11% (vs. 25% growth in 2017), which is not surprising due
to the Government’s target to reduce import pressure. All in all, budget deficit reached -
1.76% of GDP (the lowest deficit since 2011), whereas the primary fiscal deficit narrowed
significantly to –Rp2tn from –Rp124tn in 2017 (see exhibit 51 & 52).

EXHIBIT 49. 2018 FISCAL REALIZATION
25 Tax Revenue Growth (%) 40

Non-Tax Revenue Growth (%)
30.8
20.8 30 23.3
20 18.4 18.8
17.4 20
16.7 12.4
10 6.1
15 13.2 0.8 2.5
12.2
0
9.9
10 8.2 -10 -7.1
6.5
-20
4.6
5 3.6
-30
-40 -35.9
0
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 T
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 T
Social Spending Growth (%) Personnel Spending Growth (%)
60 51.7
20 18.7
40 18
16.0
21.8 21.6 16 15.4
20 11.5
3.6 6.4 6.3 14 12.6 12.0
0 12 10.9
9.9 10.1
-0.8
-7.0 10 8.5
-20
8
-40 6
-48.9 4 2.5
-60
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 T 2
0
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 T
Material Spending Growth (%) 60

Capital Spending Growth (%)
35 32.1
50 46.8 46.2
30 27.7
40
25
21.0 30 23.1 24.6 23.1
20.5
20 20
15.6
10 5.8
15 13.0 12.3 2.4
11.3
0
10
-10
4.1 -11.4
5 2.4 -20
-18.5
-21.3
0 -30
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 T 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 T
Interest Payment Growth (%)

Energy Subsidy Growth (%)
25
100
82.6
18.5 19.2
80 20 18.1 17.1
16.9
57.2
60 48.0 15 12.5
40
19.9 10 7.8
20 10.3 6.9
1.1 4.2 5.5
0 5
-20 -10.3 -8.6 0
-40
-5
-60
-5.8
-80 -65.2 -10
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 T 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 T
Source: MoF, CEIC

EXHIBIT 50. MINING SECTOR RECORDED HIGHER TAX REVENUE EXHIBIT 51. TAX RATIO TO GDP INCREASED AFTER A SERIES OF
GROWTH IN 2018 COMPARE TO 2017 DECLINE
Tax Revenue Growth based on Sector (%) Tax Ratio to GDP (%)
15 14.6
40.8 14.3
Mining
51.2
14 13.7
Trade 25.1
23.7
13
Agriculture 28.8
21.0
12 11.6 11.5
Financial Sector 8.6
11.9 10.8 10.7
11
Manufacturing 18.3
11.1 2017
10
7.2 2018
Construction & Real Estate
6.6
9
0 20 40 60 2012 2013 2014 2015 2016 2017 2018
Source: MoF Source: CEIC
EXHIBIT 52. BUDGET DEFICIT REACHED A LOW LEVEL LAST YEAR EXHIBIT 53. PRIMARY FISCAL BALANCE IMPROVED SIGNIFICANTLY
Budget Deficit to GDP (%) Primary Fiscal Balance (Rp tn)
0.0 84
100
-0.08 51 50 42
-0.5 39
50 30
-0.52 9
-0.68 5
-1.0 -0.87
-0.94 0
-1.04 -1.08 -2
-1.16
-1.5 -1.26
-50
-1.58 -53
-2.0 -1.74 -1.78 -1.75
-1.84 -100
-2.14 -99 -93
-2.5 -2.22
-150 -126 -124
-2.46 -2.49
-2.59 -2.51 -142
-3.0
-200
2019 F
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019: Tax revenue will be the challenge this year. Tax is expected to increase by 17.4%
using the 2018 realization, higher than the initial plan at 10.4%. Therefore, the task will be
challenging as it is less likely that average oil price would surpass USD70/bbl this year due
to the global slowdown risk. Based on our observation, tax revenue growth tends to be
below nominal GDP growth on the absent of commodity price hike (see exhibit 54). The
positive factor will come from the non-tax revenue target considering this year’s target is
7% below the 2018 realization. As a description, even if non-tax revenue even grows by
0%, the government will still obtain a windfall around Rp30tn. Furthermore, any fiscal risk
could be absorbed from the low budget deficit set at -1.84% of GDP next year (every 0.1%
of GDP is equivalent with Rp16tn).
Consumption-driven-expenditure will still dominate the Government’s spending in

1H19. On the other hand, the Government’s total expenditure is expected to grow by
11.8% this year (vs. 10.8% in 2018 budget plan). Specifically, the expenditure post to
support consumption is planned to grow much higher. Social spending and personal
expenditure are expected to increase by 28% and 10.1%, respectively, in 2019 (see exhibit
53). We believe the realization of the social spending will be front-loaded in the first
semester. Meanwhile, capital and material expenditures are only planned to increase each
by 2.4% this year, suggesting the Government’s focus on maintaining exchange rate
stability. The largest expenditure post increase is in “other spending” (increasing by
around 600%), which we believe is a potential source of financing for disaster risk
management and mitigation.

Fiscal Policy Outlook: Investment Driven Policies. We believe the Government’s policy
will be more investment driven in 2019 after the hefty infrastructure expenditure in the
last four years. The priority has shifted to the need to improve the funding of current
account deficit through a more sustainable financing, such as foreign direct investment,
and to increase private investment’s contribution. Several incentives have already been
introduced last year, such as the revision of the tax holiday rule for 18 pioneer industries,
the revision of the negative investment list, and several other policies in the pipeline. All of
these incentives are supported by the completion of big infrastructure projects such Trans
Java this year
EXHIBIT 54. FISCAL SPENDING GROWTH IN 2019 EXHIBIT 55. TAX REVENUE GROWTH TENDS TO BE LOWER THAN
NOMINAL GDP IN ABSENCE OF COMMODITY PRICE HIKE
2019 Government Spending Composition Growth (%) Tax, Nominal and Commodity Growth (%)
Other expenditures 630.8% 25 30
Tax
Social assistance 21.6%
Nominal GDP 20
Village fund 16.9% 20
Total expenditure Commodity Price Index-RHS
11.8% 10
Personnel expenditure 10.1%
15 0
Transfer to region 8.4%
Interest payment 6.9%
10 -10
Energy subsidy 4.2%
Subsidy 3.5% -20
Material expenditure 2.4% 5
Capital expenditure 2.4% -30
Non-energy subsidy 1.7%
0 -40
0% 10% 20% 30% 40% 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 T
Source: CEIC, MoF Source: CEIC, Mandiri Sekuritas

Negative Balance of Payments is likely in 2018

Indonesia’s poor export performance in 2018 had dragged down the Balance of Payments.
Despite its possibility of positive net balance due to USD2.9bn net capital inflows in 4Q18,
we believe that 2018 overall Balance of Payments will turn to negative (vs USD 11.6bn in
2017). Balance of Payment (BoP) is one of indicators for economic fundamental as it
measures the capability of a country to obtain foreign exchanges. The economy shall
suffer if it has persistent negative BoP since foreign currency is required in international
transactions, such as for import, foreign debt payment and other transfers. It, hence,
becomes necessary for a country to accumulate sufficient foreign reserves. Usually, it is
maintained above the international standard of reserve adequacy of three months of
imports. Foreign reserve is the net difference between the current account, which is
determined by net export and net income transfer, and capital and financial account,
which captures the traffic flow of investments.
EXHIBIT 56. INDONESIA’S BALANCE OF PAYMENT 2013 – 3Q18 (BILLION OF USD)

2018
Items 2013 2014 2015 2016 2017
Q1 Q2 Q3 Total
Current Account -29.11 -27.51 -17.52 -16.95 -17.31 -5.60 -7.98 -8.85 -22.42
Financial Account 21.93 44.92 16.84 29.31 29.36 2.30 4.53 4.16 11.00
Overall Balance -7.33 15.25 -1.10 12.09 11.59 -3.86 -4.31 -4.39 -12.55
Foreign Reserves 99.39 111.86 105.93 116.36 130.20 126.00 119.84 114.85
‐ In Months of Imports &
5.5 6.4 7.4 8.4 8.3 7.7 6.9 6.3
Official Debt Repayment
Current Account (% GDP) -3.19 -3.09 -2.22 -1.82 -1.70 -2.17 -3.02 -3.37 -2.86
Source: Bank Indonesia
EXHIBIT 57. INDONESIA’S BALANCE OF PAYMENT 2010 – 3Q18 (BILLION OF USD)

50 130.20 135
40 130
30 125
20 116.36 114.85 120
112.78 111.86
10 110.12 115
0 99.39 105.93 110
-10 105
-20 96.21 100
-30 95
-40 90
2010 2011 2012 2013 2014 2015 2016 2017 1Q-3Q18
Current Account (LHS) Capital Account (LHS)

Financial Account (LHS) Foreign Reserves (RHS)
BoP is one of indicators for economic fundamental as it measures the capability of a

country to obtain foreign exchanges. The economy shall suffer if it has persistent negative
BoP since foreign currency is required in international transactions, such as for import,
foreign debt payment and other transfers. It, hence, becomes necessary for a country to
accumulate sufficient foreign reserves. Usually, it is maintained above the international
standard of reserve adequacy of three months of imports. Foreign reserve is the net
difference between the current account, which is determined by net export and net
income transfer, and capital and financial account, which captures the traffic flow of
investments.

In 2018, Indonesia must experience negative BoP due to widening current account deficit
(CAD), reaching 2.86% of GDP in January – September 2018, caused by accelerating
domestic economy, thus increasing demand for goods from abroad (mostly raw material
and capital goods), and export deceleration due to lower commodity prices, China’s
economic rebalancing and the US-China trade war tension.
At the same time, Indonesia must deal with declining financial account surplus affected by
the high global financial market uncertainty, triggered by the Fed’s monetary policy
normalization, which has caused capital reversal. Accumulatively, overall balance up to the
third quarter this year booked USD 12.6 billion deficits, resulting foreign reserves to plunge
from USD 130.2 billion at the end of 2017 to USD 114.8 billion at 3Q18. The latest data,
however, showed that the foreign reserves has improved to USD 120.7 billion in 12M18,
equivalent to finance 6.7 months of imports or 6.5 months of imports and government
external debt service). It is still maintained to be above the international reserve adequacy
standard of 3 months of imports.
EXHIBIT 58. INDONESIA’S CAD TO GDP RATIO AND FORECAST
50 0.67 1
40 0.19
0.5
30 0
20
-0.5
10
USD mn
-1
%
0
-1.70 -1.5
-10
-2
-20 -1.82
-30 -2.22 -2.5
-40 -2.65 -3
-2.78
-50 -3.19 -3.09 -3.10 -3.5
2010 2011 2012 2013 2014 2015 2016 2017 2018F 2019F
Goods (LHS) Services (LHS) Primary Income (LHS)

Secondary Income (LHS) CA/GDP (RHS)
Source: Bank Indonesia, OCE Bank Mandiri’s calculation
Looking to trade data in 4Q18, we expect that CAD to GDP ratio in 4Q18 can be higher
than in 3Q18, or between -3.7% to -3.9%. This is well-above our previous forecast of -
2.89%. Total trade deficit of the quarter is already larger than the total trade deficit in the
third quarter. Thereby, full-year CAD to GDP ratio is projected to be around -3.10%, above
our initial forecast of -2.87% in 2018.
This, indeed, gives rising alert for the government to overcome this widening CAD issue.
The government actually has implemented various policies to curb the widening CAD, and
we see that these continuing efforts by providing export incentives, enhancing export
competitiveness, strengthening trade cooperation with non-traditional markets,
managing consumer good imports (rising PPh 22 tariff), imposing biodiesel use (B20) and
increasing the level of domestic components for infrastructure projects (TKDN) shall start
taking a full effect next year. We, thus, project that CAD to GDP ratio in 2019 to shrink to
around -2.78%.

EXHIBIT 59. INDONESIA’S GOODS BALANCE (BILLION OF USD)

60
50
40 31.00 33.83
30 18.79
5.83 6.98 14.05 15.32
20 8.68
2.22
10
0
-10
-20
-30
2010 2011 2012 2013 2014 2015 2016 2017 1Q-3Q18
Non-Oil and Gas Oil Gas Other Goods Goods Balance
Goods balance is prone to decline in 2018, breaking the upward trend of 2013 – 2017.
Latest data show that cumulatively, goods balance of 1Q18 to 3Q18 is around USD 2.22
billion surpluses, notably lower than 2017 full-year reading of USD 18.79 billion surpluses.
There are, at least, two key factors contributing to this decline. First, non-oil and gas
balance tends to shrink in 2018, mostly caused by non-oil and gas imports outpacing
exports, as a result of accelerating domestic economic growth that encourages the
demand for imported raw material and capital goods. Second, the perpetual deficit of oil
balance is apt to widen again in 2018 following the increasing trend of oil price, which has
begun in 2016. This reading, indeed, indicates the need for the government to
immediately boost non-oil and gas exports, and reduce oil imports.
EXHIBIT 60. INDONESIA’S SERVICES BALANCE (BILLION OF USD)

10
0
-5.73
-5 -7.08 -7.83
-8.70
-9.79 -9.80 -10.56 -10.01
-10 -12.07
-15
2010 2011 2012 2013 2014 2015 2016 2017 Q1-3Q18
Travel Transportation: Passenger Transportation: Freight

Other Services Services Balance
We see that services balance in 2018 will be not much changing that the 2017 reading. We
project that the balance will stay deficit around USD 7 – 8 billion in 2018. According to the
latest data, cumulatively to 3Q18, the deficit has reached USD 5.73 billion. The deficit is
mainly caused by the negative balance on transportation balance. Passenger
transportation in 2018 is projected to be still deficit around USD 1 billion as the number of
domestic tourists travelling abroad for vacation, business trips and pilgrimage remains
high. Meanwhile, the deficit on freight transportation in 2018 is forecasted to be higher
compared to the 2017 reading, following the increasing trend of good imports. On the
other side, travel balance is predicted to keep posting a surplus in 2018. Until 3Q18, the
balance has booked USD 4.04 billion surpluses. The surplus is mostly due to the increase in
both the number of foreign tourists visiting Indonesia, and amount of their spending per
person. 2018 Asian Games event in Jakarta and Palembang also has a major contribution
in the last year surplus.

Hence, this reading signals that there is a huge opportunity to improve and develop
domestic tourism sector as it has become one of the most potential sectors to accumulate
foreign reserves. The government, moreover, needs to optimize domestic freight services
in order to significantly reduce the deficit on services balance.
EXHIBIT 61. INDONESIA’S PRIMARY INCOME BALANCE (BILLION OF USD)

0
-5
-10
-15
-20.70
-20 -23.72
-26.55 -26.63 -27.05
-25 -28.38
-29.70 -29.65
-30 -32.76
-35
2010 2011 2012 2013 2014 2015 2016 2017 1Q - 3Q18
Direct Investment Portfolio Investment Other Investments

Others Primary Income Balance
Since 2008 Indonesia’s primary income balance always has a tendency to be persistently
deficit. Thus, it shall not surprisingly remain a deficit in 2018. Not changing from previous
years, all primary income groups in 2018 post a deficit with direct investment income
group, as expected, booking the highest deficit. It is mostly due to the growing equity
capital payments as Indonesia keeps booking direct investment surplus in the financial
account balance. The second highest deficit is contributed by portfolio investment income
group. It is due to the larger dividend payments and government bond’s interest payment,
following the historical patterns of portfolio investment surplus in the financial account
balance.
EXHIBIT 62. INDONESIA’S SECONDARY INCOME BALANCE (BILLION OF USD)

7
6
5
5.22 5.51
4 4.81
4.63 4.46 4.50
3 4.21 4.09 4.18
2
1
0
-1
-2
2010 2011 2012 2013 2014 2015 2016 2017 1Q - 3Q18
Government Personal Transfer

Other Current Transfer Secondary Income Balance
Secondary income balance performance has been remarkable. Historically, it always posts
surplus but the trend is weakening in 2016. In 2018, however, cumulatively to Q318, the
surplus (USD 4.81 billion) has surpassed the 2017 full-year reading (USD 4.50 billion). It can
be identified that the main source of the surplus comes from personal transfer balance. It is
mostly personal transfer receipt in the form of remittances, transferred from Indonesians
who work abroad.

This arises the necessary for the government to enhance education, skill and capability of
Indonesian migrant workers to meet the recent global labor market demand, and to
improve protections for them. By doing so, there will be more Indonesian migrant worker
able to work in professional and modern sectors, which promise higher income. This, in
consequent, may increase total remittance receipt, improving Indonesia’s recent current
account balance position.
Managing CAD for a more sustainable economic growth
To accelerate economic growth, it is pivotal for Indonesia to shrink its CAD. According to
Thirlwall (2011), a country may and can run CAD in a short period but it cannot be
persistent and sustained indefinitely since the deficit sooner or later shall hamper GDP to
grow. Furthermore, a country essentially cannot grow faster than its BoP equilibrium
growth rate for a very long period, compelling it to have a slower economic growth in
certain point of time in order to accumulate surpluses.
EXHIBIT 63. INDONESIA’S GDP GROWTH VS. BOP CONSTRAINED GROWTH
5.56
14 5.6
12 5.5
12.44
5.4
10
5.3
8 5.17
5.72 5.2
6
5.03 5.1
5.01
4
5.07 5.0
4.88
2 3.23 4.9
2.54 2.64
0 1.65 4.8
2013 2014 2015 2016 2017 1Q-3Q18
BoP Constrained Growth, % (LHS) GDP Growth, % (RHS)
Note: BoP constrained growth = export growth divided by domestic income elasticity of import (Thirlwall's
Law)
Source: Bank Indonesia and BPS, OCE Bank Mandiri’s calculation
This happens because financing an ever-growing deficit with borrowing from abroad
becomes more difficult to do. First, when the growth of the capital inflow is greater than
GDP growth, the international debt to GDP ratio will be greatly increasing causing foreign
investors become nervous and panic about the default risk (more severe in the less-
developed countries). Second, foreign investors tend to punish a country with widening
CAD triggering a massive short-term capital outflow which ends up in depreciating local
currency, and domestic liquidity problems. In summary, in the long run BoP becomes a
constraint for the economy to expand (BoP constrained growth). The growth, therefore,
must be consistent with the BoP equilibrium growth in the long run.
We can see from Exhibit 62 that GDP growth trend followed BoP constrained growth. It
can be identified that Indonesia experienced the slowing BoP constrained growth after the
end of the commodity boom era. Export growth was flagging because most of Indonesia’s
main exports are commodities. The constraint was tightening as BoP constrained growth
dropped from 12.44% in 2013 to 1.65% in 2015, resulting in a limited room for GDP to
grow faster. GDP growth consequently slowed down from 5.56% in 2013 to 4.88% in 2015.
In 2016 – 2017, the BoP constrained growth was improving indicating that the constraint
on growth is easing, allowing GDP to grow at a faster pace. The BoP constrained growth in
2017 (5.72%) even booked a higher rate than GDP growth (5.07%), which allowed
Indonesia to have lower CAD and accumulate higher foreign reserves, providing extra

room for the economy to grow faster in 2018. The concern, however, is that the BoP
constrained growth tends to decline again in 2018 (1Q-3Q18). This thereby signals that
without a solid effort of shrinking CAD (boosting export growth and curtailing import
growth), GDP growth rate next year may not be as high as targeted. In other words, this
shall disturb Indonesia’s growth momentum in 2019.
EXHIBIT 64. INDONESIA’S CA TO GDP RATIO VS. BOP CONSTRAINED GROWTH
14 0.0
12.44
12 -0.5
10 -1.0
-1.70
8 -1.82 -1.5
6 -2.22 -2.0
4 2.54 5.72 -2.5

2.64
-3.19
2 3.23 -2.86 -3.0
-3.09
0 1.65 -3.5
2013 2014 2015 2016 2017 1Q-3Q18
BoP Constrained Growth, % (LHS) CA, % of GDP (RHS)
Source: Bank Indonesia and BPS, OCE Bank Mandiri’s calculation
Thirlwall's Law also explains that widening CAD gives an indication that BoP constrained
growth is prone to decline. However, as long as it does not surpass -3% of GDP (the line
between an under control deficit and a serious deficit), GDP may still be growing at a faster
pace. This can be a bad signal for Indonesia’s next year economy as we project that FY2018
CAD will be slightly above -3%, or around -3.10% of GDP deficit. Thus, this supports our
forecast of limited GDP growth in 2019, or at 5.22% (vs. 5.16% GDP growth forecast for
2018).
The key concept of the law is actually straightforward. When an open economy’s growth
rate keeps accelerating from time to time, and this is not followed by a notable rise in
export growth, the long run outcome will be a BoP crisis, inevitably resulting in the return
of slower growth. Based on the concept, for an open economy, the attempt of increasing
GDP growth must be backed up by policies that may boost export growth in order to have
more sustained foreign exchange inflow.
Developing countries like Indonesia require to earn sufficient foreign exchange to be able
to keep importing intermediate and capital goods, which are needed to increase domestic
investment formation (the engine of growth). When it is true that the need for foreign
exchange can be obtained from capital inflow, the history shows that it is very vulnerable
to the short-term capital flow volatility (portfolio investment). Meanwhile, in order to
sustain foreign exchange inflow, the long-term capital (foreign direct investment) also
must be managed optimally to support export-oriented sectors.
The government in fact has initiated various policies and strategies to foster Indonesia’s
export growth, which are:
a. Export incentives, such as export facilities including import facility for export
purposes (KITE) and bonded zone, access to raw materials, export financing and
standard and non-tariff measure (NTM) fulfillment in export destination countries;
b. Optimizing the existing FTA agreement utilization, increasing market access through
international trade cooperation with non-traditional export markets, and facilitating
market penetration to non-traditional export markets;

c. Fiscal incentives, such as tax holiday and tax allowance for export-oriented industries,
import duty exemption on capital goods and raw material (master list) for investment
purpose and import duty borne by the government (BMDTP);
d. Non-fiscal incentives, including ease for export financing, human resources training,
professional competency certification, transfer of production right, investment
security guarantee in national vital object category in industrial sector (OVNI),
product certification, infrastructure development, promotional assistance, and ease
of doing business acceleration;
e. Export competitiveness enhancement through export diversification and higher
value-added products;
f. Revising Negative Investment List (DNI) to promote export-oriented sectors;
g. Encouragement of export proceeds (DHE) receipt, especially from sectors exporting
natural resources, to be put in the domestic financial market using a special account.
The receipt then must be converted to Rupiah. Currently, the amount of DHE receipt
put into domestic banks is around 93% of total export, but only 15% is converted to
Rupiah.
As some efforts of increasing exports also require structural reform to succeed, hence it
takes time to have a significant effect, the implementation has to be supported by import
reduction strategies in order to improve CAD. The government’s attempts to limit import
growth, include:
a. Restricting consumer goods import by rising PPh 22 tariff
The Ministry of Finance has issued PMK no.110/2018 to increase PPh 22 tariff to a range of
2.5 – 10% on 1,147 products since September 2018. The regulation is claimed to be
successful in delivering a positive result as the Ministry claimed that average daily import
payment for those products in November 2018 has decreased by 41.05%.
EXHIBIT 65. AVERAGE DAILY IMPORT PAYMENT FOR PRODUCTS SUBJECTED TO PPH 22 TARIFF
INCREASE
35
31.10
30
25
18.30
USD mn
20
15.90
15
10.70
9.60
10
5.40 4.80
5 3.22
0
All 1,147 Products Luxury Goods Supporting Goods Pure Consumer Goods
Jan - Sep 2018 Sep - Nov 2018
Source: The Ministry of Finance
Average daily import payment in January – September 2018 was around USD31.1 million,
while average daily import payment in September – November 2018 was reportedly
around USD18.3 million. The largest drop was seen at imported luxury consumer goods,
which plunged by 49.5% from USD10.7 million to USD5.4 million. Imported supporting
consumer goods came next. It decreased by 39% from USD15.9 million to USD9.6 million,
followed by pure consumer goods, which fell by 32% from USD4.8 million to USD3.22
million.

b. Imposing 20% biodiesel use (B20)
B20 policy has been applied for both public service obligation (PSO) and non-PSO since
September 2018 in order to curb the prone-to-widen CAD this year. The government
targets the foreign exchange saving from B20 implementation in September – December
2018 to be around USD1.02 billion (USD0.52 billion for PSO and USD0.5 billion for non-
PSO) by distributing around 1.91 million KL (0.97 million KL for PSO and 0.94 million KL for
non-PSO) volume of B20. Until October 2018, the realization of B20 utilization for non-PSO
has reached 0.27 million KL, or USD0.15 billion (29% of the target for non-PSO).
Based on our calculation, by replacing 20% of domestic diesel fuel consumption by

biodiesel, the government actually may reduce the full-year CAD to GDP ratio by around
0.1 – 0.2 percentage points. This supports our forecast for 2019 CAD, which is projected to
be back to below 3% of GDP, as we believe that the policy shall be fully and effectively in
force in 2019.
EXHIBIT 66. INDONESIA’S OIL AND GAS IMPORTS (OCTOBER – DECEMBER 2018)
Total (change, %)
Import Oct-18 Nov-18 Dec-18
yoy mtm yoy mtm yoy mtm Jan-Dec yoy
Oil and Gas 31.78 26.97 28.62 -2.80 -23.33 -31.45 22.59
- Crude Oil 13.2 23.72 62.61 -2.37 -41.90 -45.07 29.70
- Oil Products 44.27 30.46 21.92 -1.63 -13.01 -26.23 21.02
- Gas 29.88 18.28 -1.73 -10.51 -23.63 -21.90 12.49
Volume (change, %)
yoy mtm yoy mtm yoy mtm Jan-Dec yoy
Oil and Gas -4.47 20.37 11.05 9.16 -19.77 -18.66 -2.49
- Crude Oil -22.88 18.44 12.29 -4.18 -34.23 -5.67 -5.67
- Oil Products 8.81 23.59 11.39 15.18 -13.41 -1.11 -1.11
- Gas 13.43 11.73 6.12 23.29 -2.95 1.07 1.07
Average Aggregate Price (change, %)

yoy mtm yoy mtm yoy mtm
Oil and Gas 37.96 5.48 15.81 -10.96 -4.44 -15.72
Source: BPS
Another challenge in decreasing fuel imports is that the global oil price and the Rupiah
exchange rate incline to be highly volatile, with an upward bias, due to a high global
market uncertainty. This may increase the need for foreign exchange to import fuel albeit
the import volume has notably declined. Oil product volume was reportedly decreasing by
1.11% YoY in 2018, but the value was soaring by 21.02% (see Exhibit 65).
To reduce import, the government also decided to increase the level of domestic
components (TKDN), specifically for infrastructure projects. This attempt is more an act to
shift the rising domestic demand for productive imported goods toward local production.
However, it takes time to be fully in force as it also requires some structural reform,
strengthening the value chain from the upstream to downstream sectors, therefore the
impact of the policy adoption mostly can be recognized at least in the middle to long run.

FX Market Review: Maintaining Rupiah Stability

In 2018 the rupiah currency experienced fluctuations in the range of 13,268
and 15,284 with 0.36% daily Rupiah volatility. The rupiah closed at the level
of 14,390 per US dollar at the end of 2018. Various pressures that had
brought the weakening rupiah began to diminish towards the end of the
year. External factors tend to be insignificant as the tension of trade wars
eases, the Federal Reserve's dovish statement and the dollar index decline. In
2019, the Bank Indonesia policy mix to stabilize the rupiah will continue.
With the prospect of a solid domestic economic indicator, investor
confidence will increase so that foreign funds flow back into the domestic
market. However, external pressure that arises at any time must be well
anticipated.
In 2018, the rupiah weakened to its lowest position at 15,284 on October 9, 2018. This level
is the weakest since July 1998 or since the last 20 years. The appreciation of Greenback
against almost all global currencies was affected by improving US economic growth
forecasts and the potential for more aggressive increases in US interest rates. This also
boosted the yield of US Treasury notes for a 10-year tenor to reach the level of 3.2% (which
is the highest position since 2013). The geopolitical crisis in several countries also triggered
a shift in the flow of funds to the US dollar as a safe haven currency. Rising demand for the
US dollar is reflected in the increase in the dollar index to its highest position at 97.5 in
2018. In addition, expectations of normalization of economic policies and tightening of
liquidity in developed countries also have an impact on currencies in developing
countries, including Indonesia.
One factor that causes depreciation of the Rupiah from the domestic side is the potential
for widening the current account deficit (CAD / Current Account Deficit) and the decline in
foreign exchange reserves. The widening of the CAD was due to Indonesia's not yet
optimal export performance and the import value which tended to increase. Foreign funds
outflow from the domestic capital market also added pressure to the rupiah. This was
reflected in foreign ownership in the stock market and the domestic bond market which
reported a decline. Throughout 2018 there was a net outflow of IDR50.7 trillion in the stock
market while net inflow was IDR57.1 trillion in the bond market.
Facing turmoil in the rupiah market, several policies were made to secure the rupiah
position since mid-2018.
1. Reactivation of 9-month SBI and 12-month SBI

Bank Indonesia (BI) made other efforts to make Indonesia's financial market more
competitive and more attractive to investors. One of them is the reactivation (reactivation)
of Bank Indonesia Certificates (SBI) with a tenor of 9 and 12 months. Through the SBI
auction, foreign funds are expected to re-enter the domestic market. Foreign capital to
Indonesia is believed to be able to maintain rupiah volatility against US dollar. This SBI
instrument was deactivated in the previous era because of the reason that the Central
Banks have to spent more money on SBI interest payments. Reissuing SBIs can be a special
attraction for the Indonesian financial market. SBI is one of the mechanisms of Open
Market Operations (OPT) which is used by BI to control the stability of the Rupiah
exchange rate. By selling SBIs, Bank Indonesia can absorb excess outstanding base money.
In its first auction on July 23, 2018, the total SBI auctions won reached IDR 5.97 trillion,
consisting of IDR 4.18 trillion for 9-month SBI (70%) and IDR 1.795 trillion for 12-month SBI
(30%).

In the development of SBI auctions from July 23, 2018 to mid-January 2019, the nominal
volume won varies by an average of around IDR 8.6 trillion per auction out of a total of 7
auctions for both tenors. SBI auctions with a 12-year tenor are more in demand so they are
still being auctioned until early 2019, while 9-month SBIs have not been auctioned since
August 16, 2018. This shows that the market response to SBI auctions is not always high
with bid frequencies ranging from 39 times to 132 times in each auction. The
implementation of SBI auctions is still not optimal amid high global uncertainty. The risk of
sudden reversal of foreign capital in the short term is still difficult to avoid. If that happens,
in the end SBI will have low demand. The current SBI instrument is one of BI's monetary
operations steps. These 9-month and 12-month tenor SBIs have features that are more
flexible and can be transacted on the secondary market (selling outright & repo) both by
banks and non-banks. However, the central bank must ensure that the issuance schedule
is different from the issuance of state bond auctions (SBN) to attract SBIs transaction.
EXHIBIT 67. BANK INDONESIA CERTIFICATES (SBI) AUCTION RESULTS AFTER REACTIVATION
25,000 7.00 7.00 7.00

6.75 6.75 7.00
20,000
20,000 6.55
6.45
6.35 6.50
6.25 15,003
15,000
9,755 10,000 10,000 6.00

10,000
4,180 4,443 5.50

5,000 2,650
1,795
‐ 5.00
SBI 9‐mth
SBI 9‐mth
SBI 12‐mth
SBI 12‐mth
SBI 12‐mth
SBI 12‐mth
SBI 12‐mth
SBI 12‐mth
SBI 12‐mth
23‐Jul‐18 16‐Aug‐18 28‐Sep‐18 26‐Oct‐18 16‐Nov‐18 4‐Jan‐19 18‐Jan‐19
Nominal Awarded (IDR bn) ‐ lhs Stop Out Rate (%) ‐ rhs
2. Policy to raise benchmark interest rates

Facing external pressure that has continued since the end of the second quarter of this
year, BI continues to carry out a series of policy steps including interest rate hike decision.
BI was increased BI 7-drrr by 50 bps to 5.25% from 4.75% which was decided by the BI
Board of Governors' Meeting on 28-29 June 2018. This step received a quite positive
response from investors, thus pushing foreign capital inflows back to domestic market.
This step was also welcomed by market participants and helped reducing the depreciation
of the Rupiah. In 2018, the accumulated increase in BI 7-drr reached 175 bps to 6% until
the end of 2018. The decision to increase the interest rate was part of the short-term policy
steps of Bank Indonesia which prioritized monetary policy on stability especially for the
rupiah exchange rate.
3. Domestic Non-Delivery Forward Transactions

BI continues to pursue a monetary operations strategy directed at maintaining adequate
liquidity both in the Rupiah market and the foreign exchange market. One of new
strategies undertaken by BI is to implement DNDF transactions at the beginning of
November 2018. DNDF transactions are standard foreign currency derivative transactions
against rupiah (plain vanilla) in the form of forward transactions with fixing mechanism
(settlement of transactions without movement of principal funds by calculating the
difference between forward transaction rate and reference rate on the specified date
specified in the contract) carried out in the domestic market.

EXHIBIT 68. NDF, DNDF AND USDIDR CURRENCY

15,200
15,000
14,800 14,795
14,672
14,600 14,582
14,530
14,400 14,455
14,200
14,000
13,800
7‐Nov‐18
12‐Nov‐18
17‐Nov‐18
22‐Nov‐18
27‐Nov‐18
2‐Dec‐18
7‐Dec‐18
12‐Dec‐18
17‐Dec‐18
22‐Dec‐18
27‐Dec‐18
DNDF 1‐mo DNDF 3‐mo NDF 1‐mo NDF 3‐mo USDIDR
Source: Reuters
After the DNDF was implemented, the rupiah exchange rate strengthened starting to the
level of 15,000 against the USD. BI’s policy in the effort of financial deepening through
currency futures trading in the domestic foreign exchange market was appreciated by
banking sectors. There are at least 30 banks participating in DNDF trading since the
beginning of its implementation in early November last year. Transactions on the foreign
exchange market which were previously concentrated in the spot market then developed
in the swap market are now being developed in the DNDF. With the great enthusiasm for
the use of hedging instruments, it has also helped to deepen the foreign exchange market
in the country so that Indonesia's need for foreign exchange will be fulfilled. Based on data
from Bank Indonesia, DNDF transactions from 14-21 January 2019 reached USD621 million
or around IDR8.82 trillion. In addition, DNDF with a 1-month tenor is more active than a 3-
month tenor.
EXHIBIT 69. DNDF TRANSACTION VOLUME
14,300 400
14,245
14,250
14,209 300
14,192 270
14,200 14,181
14,144
14,150 186 200
14,089
14,100 103
100
14,050 47
15
14,000 0
14‐Jan‐19 15‐Jan‐19 16‐Jan‐19 17‐Jan‐19 18‐Jan‐19 21‐Jan‐19
DNDF Auction Transaction Volume (USD mn) DNDF 1‐month

With the implementation of DNDF, short-term investors can enjoy the opportunity to
hedge on the rupiah market. DNDF transactions are basically aimed at increasing liquidity
and efficiency in the domestic foreign exchange market and reducing the fluctuating risk
of the rupiah exchange rate. The reference rate used is JISDOR for US dollar against rupiah
and BI transaction middle rate for non-US dollar against rupiah. DNDF transactions can be
carried out by banks with customers and foreign parties to hedge against the risk of rupiah
exchange rates, and must be supported by underlying transactions in the form of trade in
goods and services, investments and bank loans in foreign exchange.
4. The government launches the XVI economic policy package

On November 16, 2018, the Government released the latest economic policy package in
order to increase foreign investor confidence and cover the trade balance deficit, including
through direct investment and investment in financial markets. The XVI economic policy
package includes policies related to expanding facilities for reducing corporate income tax
(tax holiday), relaxing the Negative Investment List (DNI), and providing tax incentives for
export proceeds (DHE) based on natural resource industries. DNI relaxation also opens
opportunities for Domestic Investment (PMDN), including Micro, Small and Medium
Enterprises (MSMEs), and cooperatives to be more advanced and cooperate in increasing
domestic investment.
Other policies that basically maintain stabilization of macroeconomic indicators that

include fiscal and structural policies are also carried out by government and Bank
Indonesia. Some of the policy mixes have proven effective in maintaining domestic
indicators to remain healthy amid global uncertainty.
EXHIBIT 70. SAFEGUARDING MACROECONOMIC INDICATORS

MONETARY POLICY
• Monetary policy stance
• Monetary operation strategy
MACROPRUDENTIAL POLICY
GDP
• Financial stability
FISCAL POLICY INFLATION RATE • Financing
• Financial infrastructure
EXCHANGE RATE
STRUCTURAL PAYMENT SYSTEM POLICY
POLICY BALANCE OF
• Digitalization for inclusiveness
PAYMENT and productivity
• Higher Service Level
FINANCIAL DEEPENING POLICY
• Effective transmission
• Economic financing
With various policies implemented, since November 2018, the rupiah has begun to
appreciate. The strengthening of the rupiah was also influenced by more conducive
external sentiments. Reducing the tension of the trade war between the US and China
following the Fed's statement which tends to be "dovish" in the December 2018 FOMC
meeting are the two main external factors that support the rupiah appreciation. The Fed
continued to raise interest rates for the fourth time during 2018 to 2.5% in its December
2018 meeting. This decision is considered to have been "priced in or no surprise effect" to
the market in general.
Based on December 2018 dot plot projection, the Fed reduced the plan to increase the
benchmark interest rate, the Fed Funds Rate, in 2019 to two times (25 bps each) so that at

the end of next year the Fed Funds Rate will reach 3%. This is not as aggressive as the
previous target in the FOMC meeting in September 2018 with a three times increase rate
hike to 3.25% in 2019.
Rupiah Outlook 2019: Keep a close watch on global developments
In 2019 we estimate rupiah volatility to remain high. We expect the rupiah to fluctuate in
2019 because some external risks will continue this year. The domestic economy is still
quite solid so that economic growth is still maintained above 5.1%. External factors such as
a new round of trade war between the US and its trading partners, especially China will still
influence global foreign exchange movements. The slowdown in world economic growth
and the delay in tightening monetary policy in developed countries such as European
Union and Japan is also the reason that make the US dollar still be a safe haven currency
and still possible to attract investors rather than other major currencies.
In the first quarter of 2019, we estimated the pressure on the rupiah tended to decline due
to optimism that foreign fund continues to enter the domestic market. The Federal
Reserve's policies which tend to dovish also reduce the pressure of the weakening of the
rupiah. Rupiah volatility is expected to increase at the end of the second quarter of this
year along with the Indonesia’s holding the general elections. Based on historical data, the
election year will affect the investor's risk appetite. Therefore, consistent and sustainable
efforts are still needed to maintain investor confidence.
In anticipating further risks, a greater role is needed from the Government, Bank Indonesia,
and business actors. In the short term, some policies that can quickly reduce the volatility
of the Rupiah on the market will still important. The policy relates to the steps of the
Central Bank in market control such as foreign exchange transactions, hedging swaps, and
DNDF transactions. For the medium and long term, the Central Bank must continue
balance policy mix which includes interest rate policies, exchange rate policies, regulation
of investment fund flows, macro-prudential policies, and monetary policy. We also see that
there is still room to increase the benchmark interest rate in 2019. From the government
side, it is necessary to seek policies that encourage exports and control imports more
optimally. The Government's have to provide export incentives, expand new export
markets, and policies that further strengthen the domestic industrial sector that
encourages the use of locally produced goods and not tied to imported products. The
Bank Mandiri Economic Research Team estimates the rupiah target at the end of 2019 at
the level of 15,185 against the US dollar. We see this level is still competitive in supporting
this year's domestic economy.

Anticipating pressures from external
Shooting Star Bullish Harami

- End of indicates a
Bearish Harami, uptrend Inverted future bullish
indicates a future Hammer to trend
bearish trend determine a
bottom trend
Evening star as an
early indication of Tweezer top,
bearish reversal indicates minor
bearish reversal
Bearish Harami,
Bearish Harami, Long-legged Doji, indicates a future
indicates a future indicates supply and bearish trend
bearish trend, demand near
confirmed down equilibrium
Upside Tasuki Gap -
Bullish continuation
Downside Tasuki Gap - Morning Star

Bearish continuation as an early
indication of Inverted Hammer to
bullish determine a bottom
reversal trend
Rupiah Fluctuation Against US Dollar

15185
Rupiah traded between 13,268 - 15,284 in
14390
13788 2018 against US Dollar. RSI indicator recently
12385 13568 triggered an overbought reading and has
13473
11120 dipped back into negative (sell) territory from
10400 12170 65 to 30 level or IDR14,200 - IDR14,700 per
9830
9675 9270 9393 USD in a short term.
9067
9404 9638
8000 8950 8995 9013
8420
MACD indicator, which is a measure
momentum, tends to move lower. We expect
7100 in the short term (January 2019), Rupiah will
5403
fluctuate from 13,950 to 14,350 against US
Dollar.
2287
1995 2102
2363 For the 1st quarter of 2019, we predict that
2067 2199
Rupiah will trade between 13,800 and 14,800
against USD. We forecast Rupiah to reach
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018F
2019F
15,185 at the end of 2019 against USD or

14,908 per US Dollar on average.
Currency Forecast 1Q19 2Q19 3Q19 4Q19
USD/IDR 14,722 14,910 15,023 15,185
note: RSI = Relative Strength Index

MACD = Moving Average Convergence/Divergence
DMI = Directional Movement Index

Banking outlook 2019: To remain cautious on

liquidity and asset quality
Banking indicators kept showing an improvement up to Oct-18. Latest data showed
that banking loans was growing by 13.3% yoy in Oct-2018, the highest growth in the past
four years. Asset quality has been stable as the ratio of non-performing loans (NPL) to total
loans gradually decreased in the past four months from 2.79% in May-18 to 2.65% in Oct-
18. In line with the improvement in loan growth and asset quality, earnings performances
of Indonesian banks were also increasing. Both the return on asset (ROA) and net interest
margin (NIM) increased steadily from 2.3% and 5.09% to 2.52% and 5.14% respectively. We
see that the improvement of Indonesian banking industry will continue this year. Given
the latest data, we expect that loan will grow around 12-14%, and deposit will grow
approximately 7-8%. Liquidity, however, will remain tight, and LDR will be within the range
of 93-94% at the end of 2018.
Liquidity slightly eased in Oct-18 but LDR remained high. LDR and LFR each slid to
93.1% and 91.2% respectively (vs 93.4% and 91.5% in Sep-18). Deposit growth improved,
but remained slow. Latest data showed that in Oct-18, deposit grew by 7.6% yoy, much
lower compared to loan growth. Year to date loan growth improved to 9.1% (vs 4.2% in
Jan-Oct 2017) while deposit growth for the same period slowed to 5.0% (vs 6.7% in 2017).
All types of deposit (current account, saving account and time deposit) grew higher to
10.0%, 10.1% and 4.7% (vs 9.6%, 9.5% and 3.2% in Sep-18) respectively. We see that
liquidity will still be the biggest risk ahead. If deposit growth is not improving significantly
then banks will have to slow their loan growth, or else liquidity will continue to tighten
and LDR will continue to go higher.
Liquidity was not evenly distributed across banks. Tightest liquidity experienced
mostly by mid sized banks in BUKU 3. Those banks had an average LDR of 102.8% while the
larger banks in BUKU 4 had an average LDR of 89.6%. Meanwhile, banks in BUKU 2 and
BUKU 1 had an average LDR of 88.0% and 83.0% respectively. Those banks, however, were
exposed to higher liquidity risk. Although they had lower LDR, they had a limited access to
short term funding, both in interbank market and funding from the central bank, because
they had a small amount of securities, especially government bonds and notes, relative to
their assets. Banks in BUKU 1 and BUKU 2 only had ratio of securities-owned to total assets
of 2.6% and 6% respectively. Meanwhile, even though BUKU 3 banks had high LDR, they
had the securities to asset ratio of 10%, while the BUKU 4 banks have the ratio of 13.8%. To
obtain short term funding from interbank market, banks need securities as an underlying.
The more they have government bonds and notes, the more they have access to short
term funding. Therefore, smaller banks should be encouraged to own more securities so
that they have better access to funding in the interbank market as well as central bank’s
open market operation instruments.
Deposit growth remained subdued, especially for the highest tier. By tiering of
deposit in Oct-18, the growth of the highest tier (accounts having nominal deposit of more
than IDR5 bn) improved quite significantly to 7.2% (vs 5.6% in Sep-18), contributing to the
improvement in total deposit growth by 3.4%. This, however, was still relatively slow.
Meanwhile the lowest tier, accounts with nominal deposit of less than IDR100 mn, grew by
10.5% (vs 10.2% in Sep-18). Overall, deposit growth remained relatively slow, causing
liquidity to tighten.
Increasing investment allocations of insurance and pension fund in bond and stock
had an impact in deposit growth. Investment allocation of insurance companies and
pension funds in stocks and bonds (government and corporate bonds) increased from
IDR405.2 trillion (51% of its total portfolio) in Jan-15 to IDR751.5 trillion (60% of its total
portfolio) in Sep-18. Meanwhile, their investment allocation in banks deposit (time
deposits, savings, deposit on call and certificate of deposits) at the same period decreased

from IDR201.2 trillion (25% of its total portfolio) to IDR177.4 trillion (14% of its total
investment). In our opinion, this contributed to slow growth of banks’ third party funds.
Higher government’s revenue contributed to tighter liquidity. The realization of

government’s revenue up to Nov-18 increased by 18.6% yoy in 11M18 (vs 6.2% in the same
period last year). Tax and non-tax revenue grew by 15.6% and 28.4% yoy respectively.
Fiscal deficit was reportedly around 1.76% of GDP in 2018 (vs 2.0% in 2017). Hence,
liquidity from fiscal policy in 2018 wouldl not be as ample as the last year reading due to a
lower fiscal deficit.
Placement in BI’s open market operation (OMO) instruments remained low. Liquidity
shown by banks’ placement at BI’s open monetary operation (OMO) instruments picked up
slightly but remained at a very low level of IDR197.6 trillion up to Dec 6th 2018. As a
comparison in Feb-18, the placement reached its highest level of IDR516.7 trillion. In other
words, the liquidity in the banking system deteriorated by IDR319 trillion from its peak.
Interbank money market rates for IDR were stable but still at a high level. As liquidity
still tight, interbank money market rate for IDR remained high and continued to increase
for USD interbank rate. The overnight money market rate for IDR (overnight JIBOR) stood
at 5.91%, slightly below end of Nov-18 level of 5.96%. Meanwhile, the overnight interbank
rates for USD (LIBOR overnight) reached 2.18% as of Dec, 14th, increasing by 73.7 bps
compared to the end of Nov-18.
Time deposit rate continued to increase to anticipate further liquidity tightening.

Banks BUKU IV have been increasing 1M deposit rate quite aggressively by more than 110
bps from May-18 to Oct-18. According to Mandiri Sekuritas’ Deposit Rate Tracker, BCA was
the most aggressive to adjust deposit rates. BCA increased the deposit rate by another 25
bps in Dec-18 while the other banks in BUKU IV kept their deposit rate unchanged. Other
banks that have been quite aggressive in increasing deposit rate were Panin Bank and
BTPN. Panin has adjusted its deposit rate by 125 bps in 2018, while BTPN has adjusted its
deposit rate by 100 bps year to date.
BI had undertaken a several steps to overcome liquidity tightening, including

liquidity injection of IDR115 trillion through FX swap and term repo. First, they
increased the average reserve requirement for rupiah from 2% to 3% while at the same
time reduced the fixed reserve requirement from 4.5% to 3.5%. Second, they increased the
macroprudential liquidity buffer or PLM (penyangga likuiditas makroprudensial), replacing
the previous secondary reserve requirement regulation. PLM regulation should encourage
banks to build up more high quality liquid assets that would be usable in times of stress. BI
has also been providing short term liquidity via foreign exchange swap (FX swap) and term
repo. BI has been injecting as much as IDR115 trillion short term liquidity through those
instruments. These steps were meant to loosen short term liquidity, preventing sharp hike
in both deposit and interbank market rates as well as increasing interbank money market
activities.
Macroprudential loosening helps preventing short term liquidity shock.

Macroprudential loosening is meant to loosen short term liquidity, preventing sharp hike
in both deposit and interbank market rates as well as increasing interbank money market
activities. BI doesn’t want deposit and interbank market rates to increase more than the
increase in the policy rate because it will also cause lending rate to increase sharply and
has a negative impact to the stability of the financial sector and overall economy.
However, it will have no significant impact increase deposit growth. Banks need a long
term and more stable financing. More stable financing is obtained through retail funding
while financing from the corporate segment is considered to be less stable because it can
be withdrawn at any time by large amount. Furthermore, banks should have better
strategies to boost their deposit growth, instead of just relying on higher deposit rates.

Liquidity in 2019 will be less tight compared to 2018 due to less tight monetary
policy and less government bond issuance. In our view, liquidity will improve due to : (1)
less hawkish the Fed’s guidance, (2) less volatility in the financial market, (3) less aggressive
monetary tightening by BI and (4) less net government bond issuance and lower growth of
tax revenue. BI will remain at its frontloading and preemptive strategies but not as
aggressive as in 2018. We expect that there will be one more BI-7 days reverse repo hike by
25 bps to 6.25% in 2019.
Lower fiscal deficit target lead lower government bond issuance. The government
fiscal policy will remain focusing on stability and targeting lower fiscal deficit. Hence, the
government lowers the government bond net issuance target to IDR389 trillion in 2019 (vs
IDR407.5 trillion in 2018). Lower government bond issuance will help to ease liquidity in
the banking industry.
Large banks are targeting loan growth of 10-15% loan growth in 2019. Loan growth in
2019 will still be dominated by the largest banks. They are still optimist that loan growth
will improve. Bank Mandiri, BRI and BCA are targeting loan growth of 13-15%, 12-14% and
10-12% respectively. Large banks in BUKU IV still have room to increase loan growth
because they still have sufficient liquidity with average LDR of 89.4%. But BUKU III banks
will have more limited room to boost loan growth due to high LDR of 103.2%. Overall we
expect that loan will be growing by 10-11% in 2019.
Asset quality was stable but NPL of mining sector increased. NPL ratio improved to
2.65% in Oct-18 (vs 2.66% in Sep-18). Special mentioned (category 2) loans also slid to
IDR243 tn (vs IDR255 tn in Sep-18). Hence, the ratio of NPL+special mention loans fell to
7.4% (vs 7.6% in the previous month). By sector, asset quality of most industries was stable.
NPL of wholesale and retail trade sector (contributes 18.6% to total loans) went up slightly
from 3.97% in Sep-18 to 4.08% in Oct-18, while NPL of processing industry and home
ownership (contribute 16.9% and 8.4% to total loans) fell each to 2.62% and 2.65% (from
2.89% and 2.70% in Sep-18). Unfortunately, asset quality of the mining sector turned worse
as NPL increased sharply from 3.73% in Sep-18 to 4.85% in Oct-18.
Smaller banks still need to work harder to improve their asset quality. NPL across all
size of banks were mostly stable. NPL of BUKU IV and BUKU II banks slid each to 2.40% and
3.59% (vs 2.42% and 3.61% in Sep-18), while NPL of BUKU III and BUKU I banks were stable
at 2.59% and 3.22%. Overall, NPL of BUKU IV and BUKU III banks were showing a declining
trend, mainly driven by write-offs. However, NPL of BUKU II and BUKU I banks were still
trending higher. BUKU II and BUKU I banks also had an increasing special mentioned loans.
The ratio of NPL plus special mentioned loan of BUKU IV and BUKU III banks both fell to
6.25% and 8.56% (vs 6.49% and 9.11% in Sep-18) respectively, while the ratio for banks in
BUKU II and BUKU I were still increasing, each to 9.76% and 11.53% (vs 9.62% and 10.46%
in Sep-18) respectively.

ECO BOX .... STRUCTURAL TRANSFORMATION AND STRUCTURAL PROBLEMS IN LABOR MARKET: WHAT NEEDS TO BE DONE?
The labor market of Indonesia show positive progress in recent years with the expansion of its labor force and sub-6%
unemployment rate. Unemployment rate (TPT) in August 2018 reduced to 5.34% (5.50% in August 2018) and a full-time
employment rate reached 67.5% - the highest in the last 10 years. A low level of unemployment rate could be attributed to
the overall improvement of economy, and therefore real sectors are willing to absorb more labor. However, we need to look
deeper into the composition of the 131 million Indonesian labor force.
EXHIBIT 71. EMPLOYMENT BY SECTORS

29%
Share of employment
25% CAGR (2014-2018)
2018's growth
21%
17%
13%
9%
5%
1%
-3%
Source: Sakernas, BPS
Analysing sectoral growth of employment provides an explanation on how structural transformation prevails in Indonesia.
With declining employment in agriculture, services and industry has become the source of job creation. The landscape of
employment has now been dominated by services (49%), agriculture (29%), and industry (22%). Compare to other sectors,
services has benefited larger expansion of labor and investment, and therefore absorb more workers. Employment in ICT
(Information, Communication, and Technology) and accommodation and F&B increased more than 10% during 2014-2018.
On the other hand, manufacturing steadily grow below 4%, while employment in agriculture shrink annually by 2.1%. With
almost 64 million people working in services sectors and high employment growth, these figures lay out opportunity for
Indonesia that the country need to keep the momentum of increasing employment demand in service sectors to maintain its
contribution to the economy.
This structural transformation corresponds with the evolution of global employment as the countries move up from low
income to high income category, the share of employment in agriculture decline. ILO (2018) report that deindustrialization
has occurred in developed and upper-middle countries while level of employment in developing and lower middle-income
countries is expected to be stagnating. The report also mentions that services sector will become the main driver of
employment growth, particularly in middle income countries where the forecast of growth reach 5%.
In addition to the transformation, the labor force has faced a challenging situation with the recent increased of automation
and the disruption of technology. The waves of going digital and automated require an adjustment and an upgrade to set of
skills to be competitive. Technical and practical skills are projected to be the most affected skills in all industries. World
Economic Forum report that 50% of companies surveyed project the automation has a consequences of reduction to full-
time workers in 2022. The push factor is the shift on the frontier between workers and machine, which increase the tasks

perform by automation from 29% in 2018 to 42% in 2022. The shift from human to machine will accelerate with the bolster
from high-speed mobile internet, artificial intelligence, big data analytics, and cloud technology (WEF, 2018).
The fact that automation will affect set of skills required in the industry need to be anticipated by all stakeholders. Comparing
the demand of skills with regional peers informs that occupations offered and set of skills required in Indonesia are lack
behind other countries in ASEAN. Taking example of ICT, the trend in Indonesia still demands lower level of jobs with basic
skills, such as front-end developer and system analyst with the ability to operate Java or CCS programming. While in ASEAN,
according to LinkedIn, the trend has moved to advanced programming languages required as data scientist which are R,
Node.JS, and Python.
Back to the jobs market in Indonesia, the unemployment rate and percentage contribution by level of education provide
initial findings on the structural problem in jobs market. Unemployment rate of the top group education level hit the lowest
of 5.15% in 2016, yet continues to climb to 5.57% and 5.92% in two consecutive years. Furthermore, across all level of
education, the highest level of unemployment rate is coming from secondary schools graduate. Particularly with vocational
graduates the contribution of which to the number of unemployment increase, from 20.8% in 2016 to 24.7% in 2018.
Vocational graduates also possess highest unemployment rate of 11.2%. In summary, people with lowest education level
eventually have lower unemployment rate even compare with those graduates from higher education level. Therefore, it
raises the question on why workers with this background relatively more difficult to find jobs.
EXHIBIT 72. UNEMPLOYMENT AND UNDEREMPLOYMENT BY LEVEL OF EDUCATION
Unemployment Rate by Level of Education Underemployment Rate by Level of Education

(%) (%)
12 10
10
8
8
6
6
4
4
2 2
0 0
Never attended Primary School Secondary Higher Never attended Primary School Secondary Higher
school School Education school School Education
2016 2017 2018 2016 2017 2018
Source: Sakernas, BPS
In addition, underemployment rate across education level may indicate the same problems in the jobs market. In summary, it
is easier for people who only obtain primary school certificate or do not have certificate at all to go for part-time job compare
to secondary schools graduate. Although other factors such as job preference may play in, the combined figures from
unemployment and underemployment rate indicates the structural problems of the supply and demand in job market
already exist. Hence, relate to global and regional trends on demand of skills, there is urgency to formulate policy actions to
improve quality of labors, training materials and qualifications as well as formal education curriculum. Otherwise, structural
problems become even worse because of the mismatch from changing skills demand.
Still relevant to the discussion on the shifting from agriculture to services and industry, the government has challenging tasks
to ensure that the structural problem will not disturb the structural change in jobs market. The rapid development of
technology adoption and changing business needs in industries has to be anticipated by aligning the curriculum and
methods of education in Indonesia. The adjustment should begin as soon as possible with focus on the curriculum for
vocational education and higher education. The main objective is ensuring the skills acquired from vocational schools and

university align with the latest developments in the market. A pilot project for this effort could be prioritized for tourism and
ICT vocational and professional education. Those sectors are priority considering high employment growth and the nature of
the industry, which are global consumers for tourism and technology-intensive for ICT.
For bigger efforts, Indonesia can follow the examples from other countries to establish the strategy and forward-looking
formula of skills needed in the future. The formulation includes details of assignments, general and specific expertise needed,
as well as the competency level of each type of work. This requires the collaboration between government, education
institutions, and private sectors to align the characteristic of demand and supply. The Government has started this effort by
setting up the Indonesia National Work Competency Standards (SKKNI), which already reached 487 SKKNI in 2017. However,
the implementations in job markets need to be monitored in order to check whether the set of requirement are still relevant
and to make sure all stakeholders comply with those requirements.
Furthermore, the Government could start the initiative to promote the university-industry partnership. The partnership could
be a key strategy for innovative and sustainable economic growth. This collaboration will benefit private sectors through
access to new research and possibilities of obtaining new patents. On the other hand, academics staff and researches could
take advantages from the collaboration to conduct field test theory and empirical research with up to date data and
information. Moreover, with relatively low expenditure on tertiary education and vocational program, this program could
facilitate funds from private sectors to be channelled to research program in vocational schools and university. In 2015, total
expenditure on both type of education was less than 1% of GDP, far lower than all other OECD countries. The role of the
government then stimulates the collaboration by providing incentives to private sectors in order to reduce the cost of
research and development. The research tax credit mechanism that was first introduced in United States is an example on
how the Government to promote this collaboration. By this mechanism, business is rewarded with 79% credit benefit from
the research expenses spent to qualified educational institutions.
EXHIBIT 73. EXPENDITURE FOR VOCATIONAL PROGRAM
3.0
%
2.5
Expenditure on vocational programmes NA
Vocational programmes
2.0
1.5
1.0
Tertiary, 2005
Tertiary
0.5
0.0
NZL
AUT
BEL
EST
DEU
DNK
CAN
KOR
GBR
FRA
TUR
MEX
RUS
ITA
HUN
BRA
ESP
SVN
CHL
NLD
SWE
PRT
CHE
POL
ISL
CZE
IRL
USA
AUS
OECD
SVK
FIN
NOR
JPN
ISR
LVA
IDN
LUX
Source: Education at Glance 2017, OECD

Regional & Sector Economic Outlook

Regional outlook 2019. The main challenge for regional economic growth in 2019 is
normalization of commodity prices, as many provinces are relatively dependent on the
commodity sector. Our view on commodity would say that the price would be corrected to
lower the average price level next year. However, this price is slightly higher than in the
end of 2018. The price drop in the end of 2018 was due to overshoot and different issues in
each commodity. The commodity prices in 2019 may be not too high and not too low, but
we believe this level still gives a sufficient incentive for efficient producers.
EXHIBIT 74. REGIONAL ECONOMIC GROWTH
Economic Contribution and Growth by Island (%)
Jawa Sulawesi
5.72 5.74
8.19 7.42
5.59 5.61 6.99 6.77 6.94
5.47 6,1%
58,6%
2015
2016
2017
9M18
2019P
9M18
2019P
2015
2016
2017
Bali‐Nusa Tenggara
Sumatera
10.45
3.53 4.29 4.30 4.58 4.54
3,0% 5.89
3.73 4.56
2.22
21,5%
2015
2016
2017
9M18
2019P
9M18
2019P
2015
2016
2017
Kalimantan
Maluku-Papua
4.33 2,5%
3.33 3.25 11.82
8,1% 1.37 2.01 6.35 7.45
5.30
4.89
2015
2016
2017
2019
9M18
2019P
9M18
2015
2016
2017
Proportion of Economic Size Economic Growth
Sources: BPS and OCE’s forecast.
Accordingly, we predict that economic growths in provinces on Kalimantan and Sumatera

islands are likely to be slightly lower. The main reason is the price correction for CPO and
coal. Sumatera and Kalimantan in 2019 are likely to grow by 4.54% and 3.25%, respectively.
We estimate that crude palm oil (CPO) and coal prices are each USD 535.5 per ton and USD
85.6 per ton, both are lower than their average price in 2018 (see below for our analysis in
more details).
Conversely, we expect economic growth in Java to be slightly higher due to the

acceleration in manufacturing sector and the positive impact of completed infrastructures
starting to emerge. We think manufacturing is starting to accelerate, indicated by its high
investment growth trend as well as by high import of raw materials and capital goods. We
realize that high import of raw materials and capital goods may create a deficit in the
current account problem, however, in the short term, this issue is hard to resolve. Instead,
there is another way to reduce the current account deficit, which is to accelerate export.

EXHIBIT 75. ECONOMIC GROWTH 1Q-3Q2018
Aceh
4.33 Kaltara
Sumut 5.01 Sulut
5.16 Sulteng 6.01
Riau 6.42
Kepri Kaltim Malut
2.74 Kalbar Gorontalo
Sumbar 4.24 1.79 7.80
5.09 6.25 Pabar
5.01 Jambi
Babel Kalteng Sulbar 8.45
4.70
Sumsel 5.56 Kalsel 6.74
4.72 Sultra
Bengkulu 6.03 4.95 Maluku
5.05 6.21 Papua
DKI Sulsel 5.76
Lampung 18.34
5.22 6.12 Jateng 7.29
Banten Jabar
5.38 Bali
5.76 5.73 Jatim
DIY 5.99
5.48 NTT
5.79 NTB
5.14
-5.40
Source: BPS.
Meanwhile, we may see that economic growths in Sulawesi and Bali-Nusa Tenggara are
continuing to accelerate. We predict their growths are slightly higher; 6.94% in Sulawesi
and 4.56% in Bali-Nusa Tenggara in 2019. Yet, we think the engine of growth in Sulawesi
comes from manufacturing industry and infrastructure construction. Further, we predict
the economic growth in Bali and Nusa Tenggara is 4.56%, which is much higher than in
2018. The main reasons are tourism sector recovery and mining sector production. The
tourism sector has been hit by Mount Agung’s eruption and Lombok’s earthquake, causing
a tourist visit drop in 2018. In 2019, we expect the tourism sector in Bali and Nusa
Tenggara will recover, assuming no other natural disasters in 2019. At the same time, we
also expect the mining production in PT Amman Mineral Nusa Tenggara (PT AMNT), which
is the main economic engine in Nusa Tenggara Barat, is likely to increase. It will likely
create another source of growth in Nusa Tenggara.


EXHIBIT 76. SECTORAL ECONOMIC GROWTH
2011 2012 2013 2014 2015 2016 2017 2018P 2019P c3Q17 c3Q18
Agriculture. Forestry and Fisheries 3.95 4.59 4.2 4.24 3.77 3.25 3.81 4.08 3.72 4.25 3.91
Mining & Quarrying 4.29 3.02 2.53 0.43 ‐3.42 1.06 0.69 2.15 2.38 0.89 2.05
Manufacturing Industry 6.26 5.62 4.37 4.64 4.33 4.29 4.27 4.26 4.31 4.21 4.24
Electricity & Gas Supply 5.69 10.06 5.23 5.9 0.9 5.39 1.54 5.67 5.78 1.29 5.48
Water Supply. Sewerage. Waste & Recycle 4.73 3.34 3.32 5.24 7.07 3.6 4.61 4.82 4.65 4.3 4.6
Construction 9.02 6.56 6.11 6.97 6.36 5.22 6.79 6.65 6.25 6.63 6.27
Wholesales and Retail Trade. Repair of Motor Vehicles 9.66 5.4 4.81 5.18 2.59 3.93 4.44 5.27 5.32 4.43 5.14
and Motorcycles
Transportation & Storage 8.31 7.11 6.97 7.36 6.68 7.74 8.49 7.89 8.76 8.59 7.59
Accommodation & Food Beverages Activity 6.86 6.64 6.8 5.77 4.31 4.94 5.55 5.91 6.20 5.57 5.7
Information & Communication 10.02 12.28 10.39 10.12 9.69 8.87 9.81 7.92 8.10 10.1 7.8
Financial & Insurance Activity 6.97 9.54 8.76 4.68 8.59 8.9 5.48 4.02 4.56 6.03 3.59
Real Estate 7.68 7.41 6.54 5 4.11 4.3 3.68 3.63 3.61 3.67 3.4
Business Services 9.24 7.44 7.91 9.81 7.69 7.36 8.44 8.50 8.55 8.16 8.54
Gov't Administration. Defense & Compulsory Social
6.43 2.13 2.56 2.38 4.63 3.19 2.06 7.06 7.10 0.3 6.98
Security
Education Services 6.68 8.22 7.44 5.47 7.33 3.84 3.66 5.70 5.85 2.82 5.51
Human Health & Social Services 9.25 7.97 7.96 7.96 6.68 5 6.79 6.61 6.94 6.96 6.88
Other Services 8.22 5.76 6.4 8.93 8.08 7.8 8.66 8.82 8.55 8.58 8.95
Gross Domestic Product (GDP) 6.17 6.03 5.56 5.01 4.88 5.02 5.07 5.16 5.20 5.03 5.17
Source: BPS and OCE’s forecast.
Going further on sectoral economic growth, we may see that manufacturing and mining
growths are likely to increase to 4.31% and 2.38, respectively, because of large investments
in these two sectors, implying production increase in 2019. Conversely, we predict that
agriculture and construction sectors are likely to grow slower in 2019 because of El Nino
disturbing agriculture production and due to deceleration in the number of infrastructure
projects. Note also that low CPO price in the end of 2018 has caused low expenditure for
maintenance (including for fertilizer), which could cause low production level of CPO in
2019.
Meanwhile, transportation and storage, wholesale and retail trade, electricity and gas
supply, accommodation, and information and communication sectors would grow slightly
higher in 2019 than 2018. We may see that transportation, trade, electricity, and
information and communication will grow as the movement of goods and people will
increase due to more activities in spending and consumption, tourism, and manufacturing
production. Note that the information and communication sector in 2019 is likely to
recover after lower economic growth in 2018 compared to 2017. The lower information
and communication sector growth in 2018 was due to a mobile phone number identity
registration policy which caused the SIM (Subscriber Identification Module) production
and its sales to decrease. In 2019, we think it is going to normalize, because the transition
period of subscriber registration has been completed.
Commodity outlook 2019. By and large, we think commodity prices in the next coming
years will be lower, because we are now entering a normalization of monetary policy in the
US, indicated by tightening policy and increase of Fed Fund Rate (FFR). As the pressure of
FFR increase may be lower in 2019, commodity prices may not be decreasing much. Our
investigation into the prices of five important commodities to Indonesia (crude palm
oil/CPO, crude oil, coal, rubber, and nickel) shows that their prices are negatively
associated with the additional US dollar money supply (M2). This evidence may indicate
speculative motive of the money which drives the price higher. In addition, out plot
between DXY index and commodity price index also shows that stronger USD is negatively
correlated to commodity price. As the USD in 2019 may be less strong, the commodity
prices would be slightly increasing compared to the end of 2018.

EXHIBIT 77. COMMODITY PRICE IS HIGHLY ASSOCIATED WITH EXHIBIT 78. COMMODITY PRICE IS ALSO ASSOCIATED WITH
USD M2 DXY INDEX
600 140
600 450
400
120
500 500
350
1st Difference M2 (USD Billion)
Commodity Index (2000 = 100)
100
300
400 400
DXY Index
250
80
300 200 300
150 60
200 200
100
40
50
100
100
0 20
0 ‐50
0 0
1Q00
4Q00
3Q01
2Q02
1Q03
4Q03
3Q04
2Q05
1Q06
4Q06
3Q07
2Q08
1Q09
4Q09
3Q10
2Q11
1Q12
4Q12
3Q13
2Q14
1Q15
4Q15
3Q16
2Q17
1Q18
4Q18
1Q00
4Q00
3Q01
2Q02
1Q03
4Q03
3Q04
2Q05
1Q06
4Q06
3Q07
2Q08
1Q09
4Q09
3Q10
2Q11
1Q12
4Q12
3Q13
2Q14
1Q15
4Q15
3Q16
2Q17
1Q18
4Q18
Commodity Price Index 1st Difference M2 Index Commodity Price Index DXY Currency
Source: Trademap Source: Bloomberg and OCE Forecast.
In addition, another factor which may drive commodity prices lower is demand from
China. As China is a very large market for commodity sector and the largest for some
commodities, the demand from China is a game changer for commodity prices. According
to Bloomberg forecast, China’s economic growth is in downward trend to 6.2-6.1% in
2019-2020. Note that China’s economic growth in 2018 was respectively 6.8, 6.7, and 6.5 in
1Q, 2Q, and 3Q18. So, the declining trend of China’s economic growth likely implies
weaker demand for commodities. It means commodity prices would be under pressure to
go lower in coming years.
EXHIBIT 79. RATIO OF CHINA’S DEMAND TO GLOBAL DEMAND EXHIBIT 80. COMMODITY PRICE IS HIGHLY CORRELATED TO
FOR EACH COMMODITY CHINA’S ECONOMIC GROWTH
600 16
14
500
47.0% China Economic Growth yoy (%)
57.0% 56.0%
12
Coal Aluminum Nickel 400
10
#1 #1 #1
300 8
6
200
4
100
2
0 0
50.0% 50.0% 14.0%
1Q00
1Q01
1Q02
1Q03
1Q04
1Q05
1Q06
1Q07
1Q08
1Q09
1Q10
1Q11
1Q12
1Q13
1Q14
1Q15
1Q16
1Q17
1Q18
1Q19
1Q20
Steel Cooper Crude Oil

Commodity Price Index
#1 #1 #2 Commodity Price Index Forecast
China Economic Growth YoY (%)
China Economic Growth Forecast (%)
Note: Commodity price index consists of crude oil, CPO, coal, rubber
and cooper.
Source: Trademap Source: Bloomberg and OCE Forecast.


To sum up, we predict the average commodity prices are likely to be slightly lower in 2019
than 2018. However, compared to the end of 2018, we think the commodity prices in 2019
would be slightly higher. In more details, we predict for 2019 that the average crude oil
price is likely to be USD 65.6 per barrel; CPO (FOB Malaysia) at USD 535.8 per ton; coal at
USD 85.6 per ton, and rubber at USD 1.3 per kg.

EXHIBIT 81. COMMODITY PRICE INDEX MOVEMENT
US Subprime Mortgage Crisis Europe Financial Crisis &
900
China Economic Slowdown
800 Divergen – Supply Side Issue
700
Price Index (100=January 2000)
600
Normal Period
500
400
300
200
100
0
1Q00
2Q00
3Q00
4Q00
1Q01
2Q01
3Q01
4Q01
1Q02
2Q02
3Q02
4Q02
1Q03
2Q03
3Q03
4Q03
1Q04
2Q04
3Q04
4Q04
1Q05
2Q05
3Q05
4Q05
1Q06
2Q06
3Q06
4Q06
1Q07
2Q07
3Q07
4Q07
1Q08
2Q08
3Q08
4Q08
1Q09
2Q09
3Q09
4Q09
1Q10
2Q10
3Q10
4Q10
1Q11
2Q11
3Q11
4Q11
1Q12
2Q12
3Q12
4Q12
1Q13
2Q13
3Q13
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
3Q16
4Q16
1Q17
2Q17
3Q17
4Q17
1Q18
2Q18
3Q18
4Q18
Brent Oil Price CPO Malaysia Price LME Copper Price Rubber Price TOCOM Coal Price Newcastle
EXHIBIT 82. IMPORTANT COMMODITIES FOR INDONESIA, PRICE FORECASTS 2019-2020

End of Period
Average Price 2019 2020
Price
OCE OCE
Bloomberg Bloomberg
2017 2018 2017 2018 Forecast Forecast
Consensus Consensus
(avg) (Average)
Oil (Brent)
66.9 53.8 54.8 71.7 65.6 70 67.6 69.0
USD/bbl
CPO (FOB Malaysia)
601.8 484.8 647.7 559.5 535.8 555.8 582.7 573.8
USD/Ton
Coal
100.8 102.1 88.1 107.2 85.6 91.5 89.4 84.6
(Newcastle)
Rubber
1.5 1.2 1.7 1.4 1.3 NA 1.2 NA
(TSR)
Sources: Bloomberg and OCE’s Forecast.
In relation to the price trend in the end of 2018, we observe that the price drop in this
period was due to overshoot responding to the expectation of the US economic slowdown
and due to different external shocks for each commodity. In more details, crude oil price
drop in the end of 2018 was due to more additional supply from the US shale oil
responding to high price in the beginning of 2018. CPO price drop was due to trade war
between the US and China, causing the soybean price drop, as China charged tariff to
soybean from the US. Rubber price has been staying at a low level due to low demand
from China because its import has been substituted by synthetic rubber. Rubber price
drop in the end of 2018 was likely due to negative sentiment from oil price. Different from

other commodities, coal price stayed at USD 100 per ton, which was fairly high, because of
strong demand from China and India.

In 2019, we predict these commodity prices would likely recover compared to the end of
2018. As we argued above that overshoot was the main reason for the price drop in the
end of 2018. In 2019, the price will rebound compared to the end of 2018. For oil price, we
believe the OPEC is very likely to maintain the price level and may cut its production quota
again to repulse the price. Meanwhile, the CPO price is likely to recover, as we think the
tension of the US-China trade war will reduce. For the rubber price, we think the price is
still under pressure, as technological progress makes synthetic rubber as good as natural
rubber. In contrast, we predict coal price is very likely to be lower compared to both the
average price in 2018 and the price at the end of 2018. The main reason is import
restriction in China, because it already has a large stock in 2018 and possibly more supply
from Indonesia and Australia.
What is the driving sector in 2019? We think manufacturing would be an important

sector that can push economic growth. Note that manufacturing is the largest sector,
contributing almost 20% or more precisely 19.66% in 3Q19. Consequently, this sector is a
larger contributor of GDP than any other sector to economic growth, which was 0.91% in
3Q18. In more details, we may see the following domestic oriented industries still grow at
a high rate: food and beverages, chemical and pharmacies, and basic metal. The domestic
oriented industries grow satisfactorily high because of high domestic demand supported
by a large proportion of young people, growing income, and infrastructure development,
and possibly property growth in the near future. Meanwhile, we also see some export
oriented industries have started to grow extraordinarily in 2018, i.e. textile and wearing
apparels, leather, rubber products, machinery equipment, and transportation equipment.
Greater export market opportunity in foreign market and rupiah depreciation in
combination are important to increase manufacturing export growth. These is combined
with an increase of investment in this sector, a part of infrastructure, and institutional
development may facilitate for the manufacturing sector to grow higher
EXHIBIT 83. MANUFACTURING GROWTH IN DETAILS AND ITS PROPORTION TO NON OIL AND GAS MANUFACTURING
Growth Proportions to Manufacturing
2015 2016 2017 c3Q17 c3Q18 2015 2016 2017 c3Q17 c3Q18
Food and Beverages 7,54 8,33 9,23 7,71 9,74 30,84 32,80 34,33 33,90 35,73
Tobacco Processing 6,24 1,58 ‐0,84 1,53 0,97 5,18 5,18 5,02 5,10 4,99
Textile and Wearing Apparels ‐4,79 ‐0,09 3,76 2,89 7,98 6,64 6,35 6,19 6,17 6,37
Leather. Leather Produts. and Footwear 3,97 8,36 2,22 3,95 8,55 1,50 1,56 1,52 0,57 1,60
Wood and Other Wood. Bamboo. and Rattan
‐1,63 1,74 0,13 ‐1,40 2,57 3,72 3,55 3,36 3,35 3,25
Products
Paper and Printing Products Industries ‐0,16 2,61 0,33 1,96 ‐1,34 4,18 3,97 3,99 4,04 3,94
Chemicals. Pharmaceuticals. & Traditional
7,61 5,84 4,53 8,05 ‐3,98 10,00 9,89 9,72 9,98 9,09
Medicine
Rubber. Rubber Products and Plastics 5,04 ‐8,50 2,47 2,25 8,96 4,10 3,50 3,53 3,53 3,60
Non Metallic Quarrying 6,03 5,47 ‐0,86 ‐1,71 2,99 3,97 3,94 3,69 3,65 3,53
Basic Metals 6,21 0,99 5,87 5,48 6,77 4,30 3,96 4,07 4,05 4,17
Metal Products. Computer. Electronics. Optic &
7,83 4,33 2,79 3,65 ‐1,27 10,80 10,70 10,40 10,50 9,81
Electricity
Machinery & Equipment 7,58 5,05 5,55 4,30 7,79 1,78 1,78 1,77 1,78 1,81
Transportation Equipment 2,40 4,52 3,68 3,10 4,59 10,51 10,47 10,16 10,14 9,95
Furniture 5,17 0,46 3,71 3,68 2,13 1,49 1,42 1,39 0,51 0,50
Other Manufacturing. Repair Services &
4,66 ‐3,04 ‐1,72 ‐1,55 ‐2,74 0,98 0,92 0,85 0,59 0,29
Machinery & Equipment Installation
Manufacturing (Non Oil & Gas) 5,05 4,43 4,84 4,73 4,78 100,00 100,00 100,00 100,00 100,00
We see some important indicators to argue that manufacturing sector will likely accelerate
in 2019. First, we find that investment expenditures (both domestic and foreign direct
investments) up to 9M19 have shown that manufacturing is one of the key sectors

targeted by investors, such as: food industry, chemical and pharmaceutical, metal,
machinery, motor vehicles, and electronics industries. Second, we also see that capital
goods import has been increasing in 2018, which indicates that production capacity would
continue to get larger. In line with this, raw materials import has been also increasing,
which indicates production increase in the following quarters. Third, in line with those two
indicators above, we find that capacity of utilization has had an increasing trend. We
believe that the growth momentum for the production increase exist in 2019 in particular
for manufacturing sector.
EXHIBIT 84. DOMESTIC DIRECT INVESTMENT

50,000
45,000
40,000
35,000
30,000
IDR Billion
25,000
20,000
15,000
10,000
5,000
0
2014 2015 2016 2017 9M18
Source: BKPM.
In addition to manufacturing sector, we may see that communication, and transportation

and warehousing are still continuing to grow at a higher rate in 2019. The need for
communication is high because the consumption of data per capita in Indonesia of only
2.6 GB per month per person is much lower than other comparable countries, such as
Thailand’s (7.7 GB) and Malaysia’s (8 GB). As a derivative sector, transportation and
warehousing is likely also enjoying high growth due to larger production, consumption,
and distribution activities because of the increase in investment and consumption.
Meanwhile, we see infrastructure construction grows at a high rate, but likely to decelerate
in 2019. The main reason is that some infrastructure projects have been completed;
implying the amount of new construction projects is smaller than before. Consequently, in
2019, the construction growth, which is mainly supported by infrastructure projects, is
slightly lower than in 2018.

EXHIBIT 85. FOREIGN DIRECT INVESTMENT

5,000
4,500
4,000
3,500
3,000
IDR Billion
2,500
2,000
1,500
1,000
500
0
2014 2015 2016 2017 9M18
EXHIBIT 86. CAPITAL AND RAW MATERIAL IMPORT GROWTH EXHIBIT 87. CAPACITY UTILIZATION INCREASING
60 85
50 83
40 81
79
30
77
20
(%)
75
10 73
0 71
‐10
69
67
‐20
65
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
9M18
‐30
‐40
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 10M17 10M18
Average capacity utilization Agriculture, livestock & fishery
Raw Material (Excl. Oil & Gas) Capital goods (Excl. Transportation Car & Other)
Mining & quarrying Manufacture
Capital Goods (Incl. Transportation Car & Other)
Source: BPS. Source: BPS
In addition to the factor that may spur manufacturing growth, we think industrial estates
and special economic zones could play an important role for higher manufacturing growth
in 2019 and afterward. To date, 87 existing industrial estates/parks have been operating to
produce various manufacturing goods. In the last four years, more industrial estates and
special economic zones have been developed to focus on manufacturing of commodities
to process mining (e.g. aluminum, alumina, cooper, and nickel), fishery, and plantation
(e.g. rubber and CPO). Down streaming policy of industrialization is indeed an important
strategy to boost manufacturing industry. The Government pushes to create more added
value from Indonesia’s commodities.

EXHIBIT 88. SPECIAL ECONOMIC ZONES (SEZ) & INDUSTRIAL ESTATES (IE) PLAN IN 2015-2019
Landak IE Palu IE/SEZ Bitung IE/SEZ

Rubber, CPO Rattan, Cacao, Smelter Logistic, Coconut, Fis Buli IE
Kuala Tanjung IE hery Smelter Ferronickel, stainless
Aluminium, CPO steel
Batu Licin IE Morotai SEZ

Stainless Steel Tourism, Logistic
, Fishery
Galang Batang SEZ
Bauksit, Logistic MBTK SEZ
CPO, Wood, Energy Teluk Bintuni IE
Arun SEZ Oil & Gas, Fertilizer
CPO, Petrochemi
cal, Energy
Ketapang IE Sorong SEZ

Sei Mangkei IE/SEZ Alumina Nickel, CPO, Sag
CPO, Tourism, Rubber o, Logistic
Tanjung Kelayang SEZ

Tourism
Tanjung Api‐Api SEZ
Morowali IE
CPO, Rubber, Petrokimia
Smelter
Ferronickel, stainl
ess steel
Tanggamus IE
Maritime & Logistic Bantaeng IE
Smelter Industrial Estate & SEZ
Tanjung Lesung SEZ Ferronickel, stainless steel
Industrial Estate
Tourism Konawe IE
Smelter SEZ
Mandalika SEZ
Ferronickel, stainles
Torism
s steel
Source: Coordinating Ministry for Economy Affairs & Indonesian Ministry of National Development Planning.
EXHIBIT 89. EXPORT IS STILL DEPENDING ON COMMODITY SECTOR

2015 2016 2017 8M17 8M18
HS Code Description Value Value Value Value Value
Share (%) Share (%) Share (%) Share (%) Share (%)
(USD bn) (USD bn) (USD bn) (USD bn) (USD bn)
270119 Coal, whether or not pulverised, non‐agglomerated (excluding anthracite and bituminous coal) 7.5 12.2 6.5 11.8 10.5 14.9 6.6 14.5 8.2 25.7
271111 Natural gas, liquefied 7.4 11.9 5.1 9.3 6.2 8.8 4.1 9.0 4.0 12.6
151190 Palm oil and its fractions, whether or not refined (excluding chemically modified and crude) 11.0 17.8 11.1 19.9 13.8 19.6 9.2 20.2 3.6 11.2
260300 Copper ores and concentrates 3.3 5.3 3.5 6.3 3.4 4.9 1.7 3.8 2.8 8.8
270900 Petroleum oils and oils obtained from bituminous minerals, crude 6.5 10.5 5.2 9.4 5.2 7.4 3.3 7.2 2.7 8.6
400122 Technically specified natural rubber "TSNR" 3.6 5.8 3.2 5.8 5.0 7.0 3.5 7.8 2.3 7.1
151190 Palm oil and its fractions, whether or not refined (excluding chemically modified and crude) 11.0 17.8 11.1 19.9 13.8 19.6 9.2 20.2 2.2 6.8
270112 Bituminous coal, whether or not pulverised, non‐agglomerated 7.2 11.7 6.4 11.5 7.4 10.5 4.7 10.3 2.1 6.7
270210 Lignite, whether or not pulverised, non‐agglomerated (excluding jet) 1.3 2.1 1.6 2.9 2.6 3.7 1.6 3.5 2.0 6.4
271121 Natural gas in gaseous state 3.0 4.8 1.8 3.3 2.6 3.7 1.6 3.5 2.0 6.2
Total top 10 products 61.6 100.0 55.5 100.0 70.5 100.0 45.4 100.0 31.9 100.0
Total export 150.4 243.9 144.5 260.1 168.8 239.4 108.8 239.6 120.2 376.9

How can manufacturing industries possibly grow to reduce current account deficit in
2019? We see some underutilized manufacturing industries have opportunities to grow
toward export, i.e. automotive and textile industries. Automotive industry has installed
capacity at 1.9 million units, but the car production reaches about 1.3-1.4 million units. So,
the unused capacity is about 0.5-0.6 million units. This large unused capacity can be
empowered quickly as long as the market can absorb the additional production.
Subsequently, the main problem of the underutilized industries is to find new markets. In
this context, the role of the Government is important to open new markets through G-to-G
bilateral trade negotiation. Generally, the key strategy to find a new market is market
diversification beyond traditional markets, which are countries in the Middle East, South
Asia, and Africa.
Moreover, another industry which is potentially able to reduce oil import is biodiesel and
bio-energy production. Note that in 2018, the amount of fuel import is USD 26.6bn or
15.5% of total import. Our calculation shows that a full implementation of B20 program is
able to reduce diesel import by 2.28 million kilo liter. Assuming rupiah exchange rate is
Rp14,000, we could save USD 1.9bn from the oil import reduction.

ECONBOX-2 – THE IMPACTS OF INFRASTRUCTURE DEVELOPMENT
The Government of Indonesia (GOI) has developed some infrastructure projects to accelerate economic growth. Infrastructure
creates output multiplier for the economy and boosts economic growth. Based on our calculation using Input Output Table
2010, all infrastructure types have >1 output multiplier, which means the development of infrastructure (final demand) will
increase all the output needed for the final demand to more than 1. For instance, as seen in graph 1, electricity has the largest
total output multiplier of 2.69. It means that for every IDR 1tn increase in final demands (such as investment) in construction
sector would increase total output for the economy by IDR 2.69tn.
EXHIBIT 90. OUTPUT MULTIPLIER BY TYPE OF INFRASTRUCTURE
Electricity 2.685
Other Buildings 2.034
Agriculture Infrastructure 1.998
Trash, Waste and Recycle Management 1.998
Building and Installation of Electricity, gas,

1.987
drinking water and communication
Road. Bridge and Port 1.880
Natural and artificial gas products, procurement

1.583
steam/hot water, cold air and ice products
Water Supply 1.258
Source: OCE Research Team calculation
In order to be more focused on the infrastructure project development, GOI has launched national strategic project since 2016.
To date, the national strategic project consists of 223 projects and 3 programs based on Presidential Regulation No.56/2018.
EXHIBIT 91. NATIONAL STRATEGIC PROJECT: IDR 4,150TN TOTAL INVESTMENT FOR 223 PROJECTS & 3 PROGRAMS
Sources: KPPIP
According to the data from KPPIP (Komite Percepatan Penyediaan Infrastruktur Prioritas/Committee for the Acceleration
Development of Prioritized Infrastructures), there are many infrastructure projects that are still under constructions. The total
value of these projects are IDR 2.5tn, which is distributed in all regions with the largest proportion in Java (IDR 502.7tn),
followed by Sulawesi (IDR 303.3tn) and Sumatera (IDR 282.7tn). The projects are also allocated in some sectors, with the largest
in energy sector (IDR 1.258.9tn), electricity (IDR 1,035tn), and road (IDR 684tn).

EXHIBIT 92. VALUE OF NATIONAL STRATEGIC PROJECTS BY ISLAND 2016-2018 (IN BILLION RUPIAH)
Investment Value of Projects
Region Total
Construction Preparation Transaction Completed
Bali-Nusa Tenggara 5,568 2,389 2,978 10,935
Jawa 502,708 231,866 208,026 89,884 1,032,484
Kalimantan 199,282 84,168 197,586 47,590 528,626
Maluku-Papua 140,311 323,700 1,637 465,648
Nasional 1,066,484 31,058 247,358 1,344,900
Sulawesi 303,298 5,121 2,159 310,578
Sumatera 282,717 254,847 14,140 551,704
Total 2,500,368 933,149 652,970 158,388 4,244,875
Sources: KPPIP
EXHIBIT 93. VALUE OF NATIONAL STRATEGIC PROJECTS BY SECTOR 2016-2018 (IN BILLION RUPIAH)
Investment Value of Projects
Sector Total
Construction Preparation Transaction Completed
Water and Sanitation 5,603 75,989 1,016 82,608
Airport 16,284 5,158 13,423 34,865
Dam 29,346 20,760 8,531 58,637
Energy 278,072 289,900 644,244 46,715 1,258,931
Aircraft Industry 24,138 24,138
Irrigation 2,747 1,078 3,825
Road 348,173 254,228 7,710 74,459 684,570
Economic Zone 362,890 55,520 418,410
Railway 203,608 189,572 1,133 394,313
Electricity 1,035,918 1,035,918
Seaport 109,903 10,964 12,000 132,867
Economic Equality Programme 0
Education 567 567
Agri/Marine 106 106
Housing 752 752
Cross Border Post 943 943
Smelter 95,548 95,548
Sea Dike 3,044 3,044
Technology 7,913 6,920 14,833
Total 2,500,368 933,149 652,970 158,388 4,244,875
Sources: KPPIP
Further, progress of the national strategic projects is still on the right track. During 2016-2018, there is a total of 46 national
strategic projects that have been completed with total investment value of IDR 159 trillion, including for toll roads, airports, sea
ports, railways, and dams.

EXHIBIT 94. 46 NATIONAL STRATEGIC PROJECTS COMPLETED, 2016-2018

No Projects Location No Projects Location
2016 25 Jangkrik and Jangkrik North East Field East Kalimantan
1 Gempol-Pandaan Toll Road (14 km) East Java 26 Nanga Badau Cross Border Post West Kalimantan
2 Sentani Airport, Jayapura Papua 27 Aruk Cross Border Post West Kalimantan
3 Juwata Airport, Tarakan North Kalimantan 28 Wini Cross Border Post East Nusa Tenggara
4 Fatmawati Soekarno Airport Bengkulu 29 Teritip Dam East Kalimantan
5 Mutiara Airport, Palu Central Sulawesi 30 Umpu irrigation system, Way Besai Lampung
6 Matahora Airport, Wakatobi South East Sulawesi 2018
7 Labuan Bajo Airport, Komodo Island East Nusa Tenggara 31 Prabumulih-Kertapati Railway (32 km) Sumatera
8 Soekarno Hatta Airport Development Banten 32 Raknamo dam East Nusa Tenggara
9 Kalibaru Sea Port DKI Jakarta 33 Tanju dam West Nusa Tenggara
10 Belawan-Sei Mangkei gas pipe, 75 mmscfd North Sumatera 34 Palembang-Simpang Indralaya Toll Road (22 km) South Sumatera
11 Entikong Cross Border Post, Sangau West Kalimantan 35 Pejagan-Pemalang Toll Road (57.5 km) Central Java
12 Motaáin Cross Border Post, Belu East Nusa Tenggara Central Java-East
36 Solo – Ngawi Toll Road (90.1 km)
Java
13 Motamassin Cross Border Post, Malaka East Nusa Tenggara
37 Pemalang-Batang Toll Road (39.2 km) Central Java
14 Skouw Cross Border Post, Jayapura Papua
38 Ngawi Kertosono Toll Road (87 km) East Java
15 Paya Seunara Dam, Sabang NAD
39 Kertosono-Mojokerto Toll Road (40.5 km) East Java
16 Rajui Dam, Pidie NAD
40 Semarang-Solo Toll Road (72.6 km) Central Java
17 Jatigede Dam, Sumedang West Java
41 Batang – Semarang Toll Road (75 km) Central Java
18 Bajulmati Dam, Banyuwangi East Java
42 Gempol – Pasuruan Toll Road (75 km) East Java
19 Nipah Dam, Madura East Java
Medan – Kualanamu – Lubuk Pakam – Tebing
43 North Sumatera
20 Titab dam, Buleleng Bali Tinggi (62 km)
2017 44 Rotiklod Dam East Nusa Tenggara
21 Soreang- Pasirkoja Toll Road (11 km) West Java 45 Logung Dam Central Java
22 Mojokerto – Surabaya Toll Road (36.3 km) East Java 46 Talaud Marine and Fishery Integrated Centre North Sulawesi
23 Tanjung Priok Access Road (16.7 km) DKI Jakarta
24 Raden Inten II Airport Lampung
Sources: KPPIP
The infrastructure projects have positive impact to the economy. As seen in graph 1, the average dwelling time has decreased
from 5.16 days in 2014 to 3.2 days in 2018. Besides that, Indonesia’s logistic cost to GDP has also improved from 25.7% of GDP
in 2013 to 23.5% of GDP in 2017.
EXHIBIT 95. AVERAGE DWELLING TIME (DAYS) EXHIBIT 96. LOGISTICS COST IN INDONESIA IMPROVED (% TO
GDP)
6.0 26.0 25.70

5.16 25.5
5.0
4.35 25.0
4.0 24.5
3.36 3.45
3.20 3.06 24.0
3.0 23.50
23.5 23.10
2.0 23.0 22.60
22.5
1.0
22.0
0.0 21.5
2014 2015 2016 2017 2018P 2019P 21.0
2013 2017 2018P 2019P
Source: Indonesia Logistics and Forwarder Association (ALFI), OCE

Sources: Pelindo II, Ministry of Transportation, OCE Estimates Estimates

Furthermore, as seen in the table above, most of the completed national strategic projects are located in East Java. Based on
our calculation using Inter Regional Input Output (IRIO), infrastructure development in East Java province will boost East Java
Economy. Infrastructure development creates an output multiplier in East Java of 1.95. It means that for every IDR 1tn increase
in investment in construction sector would increase total output for the economy by IDR 1.95tn.
EXHIBIT 97. THE IMPACT OF INCREASING CONSTRUCTION SECTOR BY IDR 1TN IN EAST JAVA (IDR TN)
East Java Other Provinces (Outside East Java)
Sector Output Multiplier Sector Output Multiplier
Construction 1.04 Rubber and Crumb Rubber Industry 0.04
Trade 0.19 Wood, Rattan and bamboo industry 0.02
Other Services 0.09 Financial Services 0.02
Basic Metal and Steel Industry 0.08 Other Services 0.01
Coal mining, metal ore and other excavations 0.07 Trade 0.01
Total 1.78 Total 0.17
Source: IRIO, OCE Calculation

ECONBOX 3 – Sei Mangkei Economic Zone
One of the Special Economic Zones (SEZ) which has been completed is Sei Mangkei in Simalungun, Sumatera Utara. Sei
Mangkei SEZ was launched by President Joko Widodo in January 2015. PT Perkebunan Nusantara III (PTPN III), through PT Kinra,
is the Management Business Entity of Sei Mangkei SEZ, which has land area of 2,002.7 ha. Sei Mangkei SEZ’s main businesses
are in palm oil and rubber industries. Besides those, there are also supporting industries, such as logistics, energy, electronics,
production supporting facilities, multi industry, and tourism. The main products to be produced are fatty acid, fatty alcohol,
surfactant, biodiesel, and biogas.
Some companies have large investments in Sei Mangkei SEZ, i.e. PT Industri lestari, PT Unilever Oleochemical Indonesia, and PT
Alternatif Protein Indonesia. PT Industri Lestari has realized the development of a factory with an investment of Rp1.1 trillion on
a seven-hectare land area in the Sei Mangkei SEZ. The factory has a production capacity for cooking oil at 456,000 tons per year,
for fatty acid distillate at 27,000 tons per year, and for starch at 114,000 tons per year.
Meanwhile, PT Unilever Oleochemical Indonesia has also invested Rp 3 trillion to develop a factory on twenty seven hectare
land area in KEK Sei Mangkei. The factory has produced fatty accid and esther. Another investor is PT. Alternatif Protein
Indonesia which would invest to develop a factory in 51 hectare land area. The factory would produce protein, fats, chitin,
lauric acids, and bio-fertilizer.
EXHIBIT 98. MASTER PLAN OF SEI MANGKEI SPECIAL ECONOMIC ZONE

Percentage (%)
No Zones Width (Ha)
Industry Facility Road Green Area
1 Palm Oil Industry 245.49 12.69
2 Various Industry 579.50 29.97
3 Production Supporting Facilities 85.06 4.40
4 Rubber Industry 84.10 4.35
5 Electronic Industry 155.40 8.04
6 Commercial Zones 31.91 1.65
7 Office Area 42.57 2.20
8 Logistic & Warehousing 67.67 3.50
9 Public Facilities (Hospital, School, Mosque) 24.50 1.27
10 Housing (Employee, expatriate) 111.80 5.78
11 Tourism 117.50 0.61 5.47
12 Electricity Industry 38.32 1.98
13 Standard Factory Building 19.40 1.00
14 Small & Medium Enterprises 16.30 0.84
15 WWTP 13.24 0.68
16 WTP 10.90 0.56
17 Row Road/Utility 185.10 9.57
18 Green Park 105.04 5.43
Total Area (Ha) 1,933.80
Area Percentage (%) 100.00 69.78 9.75 9.57 10.90
Sumber: PT. Perkebunan Nusantara III

EconBOX-4 – automotive export performance
Indonesia automotive sector is steadily improving in the last decade. Indonesia cars production in 2018 is estimated at 1.3
million units or back to its highest level in 2014. Rank wise, Indonesia is considered as top 20 car producer countries in the
world (approximately ranked at 18thplace). In Asia, Indonesia itself is the 9th biggest car producers after China, Japan, India,
South Korea, Thailand, Turkey, Russia and Iran. However, Indonesia car production growth in 2010-2017 is the biggest among
the 9 countries. This might indicate that Indonesia is one of the most favourable countries in Asia to invest in automotive
factory. Furthermore, Indonesia car production can still grow as the total installed capacity is 2.2 million units in 2018, but the
used capacity is only 1.4-1.5 million units.
In term of car sold, Indonesia domestic market is also huge at 1.1 million units in 2018. This number placed Indonesia as
approximately the 15th biggest car market in the world. Higher production than domestic sales means that Indonesia also
exports some of its cars. Interestingly, Indonesia car export performance is also steadily growing over time. In 2018, Indonesia
car export is projected reach more than 250 thousand units or grew 12% (yoy). Compared to the 8 other countries, Indonesia
car export is also solid as its value grew 16.8% in 2010-2017 only lose to Russia that can reach 18.8%.
Vast domestic market alongside with growing export market, makes Indonesia viable for manufacturing base for some car
brands, especially Japan’s brands. Daihatsu has the biggest capacity currently at 530 thousand units, followed by Toyota and
Suzuki both at 320 thousand units. In total, there are at least 16 car brands that already have manufacturing base in Indonesia
with total capacity reaching 2.2 million units. With production rate at only 1.3 million, leaving around 0.9 million idle capacity.
This idle capacity can be focused to serve more export markets.
Other than optimizing its capacity, Indonesia also attracts new investment in automotive sector. Last year, Wuling comes to
Indonesia and builds its USD 700 manufactory with capacity over than 120 thousand units. New investment might hints that
Indonesian labours skills and support from local supplier are adequate enough to meet the investor’s standards. Following
Wuling, Hyundai also planning to invest USD 800 mn in Indonesia within two years. The funds will be used to build complete
manufacturing plant with capacity more than 160 thousand units. While Wuling mostly aims for Indonesia domestic market,
half of Hyundai production is designed to fulfil export market, especially for Australia. With few incentives and support from the
Government and stakeholders, Indonesia might become the main car production base in ASEAN, even overtaking Thailand.
EXHIBIT 99. CAR SALES IN ASEAN (000 UNITS)

No Brand Capacity (Unit)
1 Daihatsu 530,000
2 Suzuki 320,000
3 Toyota 320,000
4 Honda 240,000
5 Mitshubishi Motors 160,000
6 Nissan 150,131
7 Mitshubishi 120,000
8 Wuling 120,000
9 Hino 75,000
10 Gaya Motor 65,000
11 Sokon 50,000
12 Isuzu 45,000
13 Hyundai 27,000
14 Mercedes Benz 25,000
15 Chevrolet 6,000
16 UD Trucks 5,000
Total 2,258,131
Source: BadanKoordinasiPenanaman Modal

EXHIBIT 100. CAR PRODUCER COUNTRIES IN ASIA

World Asia Production (mn units) 2017 Gr. CAGR 2010-
Country
Rank Rank 2010 2011 2012 2013 2014 2015 2016 2017 (yoy) 2017
World 77.63 80.09 84.14 87.51 89.75 90.78 95.06 97.30 2.4% 3.3%
1 1 China 18.26 18.42 19.27 22.12 23.72 24.50 28.12 29.02 3.2% 6.8%
3 2 Japan 9.63 8.40 9.94 9.63 9.77 9.28 9.20 9.69 5.3% 0.1%
5 3 India 3.56 3.93 4.17 3.90 3.84 4.16 4.52 4.78 5.8% 4.3%
6 4 South Korea 4.27 4.66 4.56 4.52 4.52 4.56 4.23 4.11 -2.7% -0.5%
12 5 Thailand 1.64 1.46 2.43 2.46 1.88 1.92 1.94 1.99 2.3% 2.8%
14 6 Turkey 1.09 1.19 1.07 1.13 1.17 1.36 1.49 1.70 14.1% 6.5%
15 7 Russia 1.40 1.99 2.23 2.18 1.89 1.38 1.30 1.55 19.0% 1.4%
16 8 Iran 1.60 1.65 1.00 0.74 1.09 0.98 1.16 1.52 30.1% -0.8%
18 9 Indonesia 0.70 0.84 1.05 1.21 1.30 1.10 1.18 1.22 3.3% 8.2%
25 10 Malaysia 0.57 0.53 0.57 0.60 0.60 0.61 0.51 0.46 -10.4% -3.0%
30 12 Vietnam 0.04 0.03 0.04 0.04 0.05 0.05 0.24 0.24 0.0% 27.9%
Source:Organisation Internationale des Constructeurs d’Automobiles (OICA)
EXHIBIT 101. CAR PRODUCER COUNTRIES IN ASIA

Export Value (USD bn) 2017 Gr. CAGR
Country
2010 2011 2012 2013 2014 2015 2016 2017 (yoy) 2010-2017
World 662.1 766.5 790.8 817.8 851.3 808.0 832.0 896.5 7.8% 4.4%
China 5.72 9.15 11.42 10.79 11.52 10.12 9.91 12.67 27.9% 12.0%
Japan 103.41 101.52 113.39 104.98 102.11 98.58 103.35 104.61 1.2% 0.2%
India 5.52 4.73 5.80 6.46 6.72 6.43 7.35 7.81 6.2% 5.1%
South Korea 34.91 44.67 46.44 47.83 47.91 44.67 39.86 41.37 3.8% 2.5%
Thailand 12.89 11.67 16.24 17.24 16.91 17.58 18.12 18.20 0.5% 5.1%
Turkey 10.39 11.49 10.48 11.81 12.51 12.35 14.44 18.25 26.4% 8.4%
Russia 0.52 0.86 1.60 2.19 2.07 1.60 1.49 1.74 16.6% 18.8%
Iran 0.40 0.15 0.33 0.08 0.11 0.02 0.04 0.02 -48.1% -34.4%
Indonesia 1.10 1.53 2.49 2.40 2.92 2.66 2.74 3.26 18.9% 16.8%
Malaysia 0.26 0.23 0.30 0.36 0.37 0.30 0.35 0.40 15.9% 6.2%
Vietnam 0.00 0.01 0.02 0.00 0.01 0.00 0.01 0.00 -45.7% 12.3%
Source: Organisation Internationale des Constructeurs d’Automobiles (OICA)

EXHIBIT 102. CAR SALES IN ASEAN EXHIBIT 103. INDONESIA CAR EXPORT MARKETS
1,200
Philippines
1,000 Saudi Arabia
Thailand
800 Japan
Oman
600
UAE
400 Viet Nam
Pakistan
200 South Africa
Malaysia
-
2015 2016 2017 9M17 9M18 0 10 20 30 40
Thailand Indonesia Malaysia Philippines Vietnam 8M18 2017
Source: ASEAN Automotive Federation (AAF) Source: BPS, Trademap

EXHIBIT 104. MACRO ECONOMIC FORECASTS

2013 2014 2015 2016F 2017F 2018F 2019F 2020F
National Account
Real GDP (% yoy) 5.6 5.0 4.8 5.0 5.07 5.16 5.22 5.37
Real Consumption: Private (% yoy) 5.4 5.1 5.0 5.0 4.95 5.00 5.10 5.23
Real Consumption: Government (% yoy) 6.9 2.0 5.4 (0.1) 2.14 5.00 4.50 4.00
Real Gross Fixed Capital Formation (% yoy) 5.3 4.1 5.1 4.5 6.15 6.50 7.10 7.50
Real Exports (% yoy) 4.2 1.0 (2.0) (1.7) 9.09 7.50 6.80 6.70
Real Imports (% yoy) 1.9 2.2 (5.8) (2.3) 8.06 9.00 7.00 7.10
GDP (Rp tn) - nominal 9,525 10,543 11,541 12,407.0 13,588.8 14,778.8 16,108.1 17,572.0
GDP (US$ bn) - nominal 911 888 861.9 932 1,015 1,036 1,077 1,179
GDP per capita (US$) - nominal 3,662 3,520 3,377 3,589 3,847 3,886 3,996 4,327
External Sector
Current Account (% of GDP) (3.2) (3.0) (2.0) (1.8) (1.7) (2.5) (2.8) (2.9)
Current Account (US$ bn) (29.1) (26.2) (17.6) (16.3) (17.3) (25.3) (30.4) (33.7)
Rp/US$ (period average) 10,452 11,878 13,458 13,308 13,398 14,267 14,908
Other
BI rate (% year end) 7.50 7.75 7.50
BI 7 days reverse repo rate (% year end) 4.75 4.25 6.00 6.25 6.25
Headline Inflation (% yoy, period average) 6.4 6.4 6.4 3.5 3.81 3.2 3.4 3.7
Headline Inflation (% yoy, year end) 8.08 8.36 3.35 3.00 3.61 3.13 3.8 3.7
Fiscal Balance (% of GDP) (2.2) (2.2) (2.3) (2.5) (2.5) (1.8) (2.1) (1.9)
S&P's Rating - FCY BB+ BB+ BB+ BB+ BBB- BBB- BBB- BB-
S&P's Rating - LCY BBB- BBB- BBB- BBB- BBB- BBB- BBB- BB-
Source: Mandiri Group

Equity Market Recap

JCI ended 2018 with negative 2% returns, as global concerns over rising yield
environment put Indonesia among the least preferred countries given its twin-deficit
status. With key central banks turning dovish, however, focus is shifting into weaker
global growth. This, in our view, raises Indonesia’s relative attractiveness given its
domestic-driven economy. We recently raised our country rating to O/W with a new
end-2019 index target of 7,000–as we see high probability of valuation re-rating this
year. We prefer Defensive Growth and Value stocks.
2018 performance. JCI Index ended 2018 with negative 2% returns, with a substantial
forward P/E de-rating from ~17x at the start of the year to ~14x at the end of the year. The
substantial multiple de-rating took place as the market EPS growth substantially slowed
down to a single-digit level in 1H18, while the rising pace of global monetary tightening
pressured Indonesia’s cost of equity, given its twin-deficit status. The mid-year’s spike in
crude oil prices further magnified the underperformance, though this reversed toward the
end of the year.
2019 outlook: a better risk-reward. We recently turned bullish on Indonesia, raising our
rating from Neutral to OVERWEIGHT with year-end index target of 7,000. Shifting global
focus from rising yield into weaker global growth makes Indonesia more attractive on
relative basis, given its domestic-driven economy. Five parameters suggest high
probability of JCI’s valuation re-rating this year; these are: 1) improving EPS growth
differential relative to key DM/EM countries; 2) attractive risk-free-rate spread relative to
key DM/EM countries (we used inflation-adjusted 10Y govt. bond yield as proxy here); 3)
investors have substantially de-risked their position in Indonesia, as seen from the
substantial valuation de-rating from 17x to 14x; 4) an almost record-low foreign ownership
level in equities; and 5) more dovish central bankers globally.
Accelerating EPS growth should support near-term sentiment. We expect 2019 EPS
growth acceleration into 11% from 8% last year, driven by Banks, Consumer Staples, and
Telecommunication as the top three drivers on a weighted basis. Overall, we expect a
stronger EPS growth in 1H19 relative to 2H19 given the much easier base in 1H18, in
particular for Telecommunication, Consumer Staples, and Building Materials. Key drivers
are the recent IDR appreciation and crude oil price weakness that would be margin-
positive, social spending acceleration that should support consumption, and the fewer
price wars within Building Materials (consolidation is happening) and Telecommunication
(peak was during the prepaid SIM card registration deadline in 1H18).
Foreign flows have started coming back. Foreign ownership in JCI has been on a
decline, touching an all-time low (based on our database) in 4Q18. Flows have started
reversing in January this year, reaching around Rp9trn up to the 17th. In terms of flows-to-
market-cap ratios, the largest inflows took place mostly within Value rather than Growth
stocks. This makes sense given the shifting focus from rising yield into weaker growth.
Prefer Defensive Growth and Value stocks. The Rp9trn inflows are miniscule relative to
the >Rp90trn outflows which occurred within the June 2017 to December 2018 period; yet
the market is not alarmingly cheap on a broad-based level. Hence, we are selective in
positioning. We like Defensive Growth and Value stocks, particularly the rate-sensitive
names. Our ten most preferred stocks are: BBRI, BBTN, CTRA, GGRM, HEAL, MAPI, PTPP,
TLKM, TOWR, and WIKA.

EXHIBIT 105. JC INDEXI EXHIBIT 106. TRADING SUB-INDEX OUTPERFORMED THE INDEX
(2018)
8,000 40 24.0%
JCI
7,000 35
6,000 30
11.4%
Billions
5,000 25
4,000 20 3.1%
1.0%
3,000 15
2,000 10 -2.5% -3.2%
1,000 5 -9.6% -10.1% -10.2%
0 0 -14.9%
Oct-10
Jul-11
Dec-12
Dec-15
Dec-18
Jun-14
Jun-17
Jan-10
Sep-13
Sep-16
Mar-12
Mar-15
Mar-18
JCI
JAKCONS
JAKMINE
JAKPROP
JAKBIND
JAKAGRI
JAKFIN
JAKTRAD
JAKINFR
JAKMIND
Volume (RHS) Index (LHS)
Sources: Bloomberg and Mandiri Sekuritas Source: Bloomberg, Mandiri Sekuritas
EXHIBIT 107. NET FOREIGN INFLOWS EXHIBIT 108. TOTAL TRADING BY INVESTOR TYPES
(Rpbn) 100%
20,000 90%
15,000 80%
10,000 70%
5,000 60%
0 50%
40%
-5,000
30%
-10,000
20%
-15,000
10%
-20,000
0%
-25,000
Jul-15
Jul-16
Jul-17
Jul-18
Nov-15
Nov-16
Nov-17
Nov-18
Jan-15
Sep-15
Jan-16
Sep-16
Jan-17
Sep-17
Jan-18
Sep-18
Mar-15
May-15
Mar-16
May-16
Mar-17
May-17
Mar-18
May-18
Jul-15
Jul-16
Jul-17
Jul-18
Nov-15
Nov-16
Nov-17
Nov-18
Jan-15
Sep-15
Jan-16
Sep-16
Jan-17
Sep-17
Jan-18
Sep-18
Mar-15
May-15
Mar-16
May-16
Mar-17
May-17
Mar-18
May-18
Domestic Investor Foreign Investor
Sources: IDX and Mandiri Sekuritas Sources: IDX and Mandiri Sekuritas
EXHIBIT 109. MONTHLY JCI PERFORMANCE EXHIBIT 110. REGIONAL MARKET VALUATION
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2019F PE(x)
2000 -6.0 -9.4 1.2 -9.7 -13.7 13.4 -4.4 -5.2 -9.7 -3.8 5.9 -3.0
PSEi - Philippine 15.6
2001 2.2 0.6 -11.0 -6.0 13.3 7.8 1.5 -1.9 -9.9 -2.2 -0.9 3.1
2002 15.2 0.4 6.3 10.9 -0.6 -4.9 -8.2 -4.3 -5.5 -12.0 5.8 8.8 FTSE Malay KLCI 15.9
2003 -8.6 2.8 -0.3 13.3 9.7 2.2 0.5 4.3 12.8 4.7 -1.4 12.1
2004 8.8 1.1 -3.3 6.5 -6.5 0.0 3.4 -0.3 8.7 4.9 13.6 2.3 JCI Index 14.5
2005 4.5 2.7 0.6 -4.7 5.7 3.1 5.3 -11.2 2.8 -1.2 2.9 6.0
SE Thai 13.5
2006 6.0 -0.1 7.5 10.7 -9.2 -1.5 3.2 5.9 7.2 3.1 8.6 5.0
2007 -2.7 -0.9 5.2 9.2 4.3 2.6 9.8 -6.6 7.5 12.0 1.7 2.1 FTSE Straits Times 11.7
2008 -4.3 3.6 -10.1 -5.8 6.1 -3.9 -1.9 -6.0 -15.4 -31.4 -1.2 9.2
2009 -1.7 -3.5 11.6 20.1 11.3 5.7 14.6 0.8 5.4 -4.0 2.0 4.9 Hang Seng 9.8
2010 3.0 -2.4 9.0 7.0 -5.9 4.2 5.3 0.4 13.6 3.8 -2.9 4.9
Shanghai Comp 9.2
2011 -7.9 1.8 6.0 3.8 0.5 1.3 6.2 -7.0 -7.6 6.8 -2.0 2.9
2012 3.1 1.1 3.4 1.4 -8.3 3.2 4.7 -2.0 5.0 2.1 -1.7 0.9 KOSPI 8.6
2013 3.2 7.7 3.0 1.9 0.7 -4.9 -4.3 -9.0 2.9 4.5 -5.6 0.4
2014 3.4 4.6 3.2 1.5 1.1 -0.3 4.3 0.9 0.0 -0.9 1.2 1.5
2015 1.2 3.0 1.3 -7.8 2.6 -5.9 -2.2 -6.1 -6.3 5.5 -0.2 3.3
2016 0.5 3.4 1.6 -0.1 -0.9 4.6 4.0 3.3 -0.4 1.1 -4.6 2.9
2017 0.0 1.7 3.4 2.1 0.9 1.6 0.2 0.4 0.6 1.8 -0.9 6.8
2018 3.9 -0.1 -6.2 -3.1 -0.2 -3.1 1.3 2.4 -0.7 -2.4 3.8 2.3
Sources: Bloomberg and Mandiri Sekuritas Sources: Bloomberg and Mandiri Sekuritas

Mandiri Research Team

Bank Mandiri Mandiri Sekuritas
Chief Economist Economic Research
Anton H. Gunawan Chief Economist Bank Mandiri Leo Putera Rinaldy Chief Economist
anton.gunawan@bankmandiri.co.id +62 21 30023693 leo.rinaldy@mandirisek.co.id +6221 5296 9406
Aziza Nabila Amani Economist
Macroeconomic and Financial Market Research aziza.amani@mandirisek.co.id +6221 5296 9688
Andry Asmoro Department Head
andry.asmoro@bankmandiri.co.id +62 21 5245088 Equity Research
Rully Arya Wisnubroto Banking & Financial Market Adrian Joezer Head of Equity Research, Strategy, Consumer
rully.wisnubroto@bankmandiri.co.id +62 21 5245935 adrian.joezer@mandirisek.co.id +6221 5296 9415
Reny Eka Putri FX & Quantitative Analyst Tjandra Lienandjaja Deputy Head of Equity Research, Banking
reny.putri@bankmandiri.co.id +62 21 5245516 tjandra.lienandjaja@mandirisek.co.id +6221 5296 9617
Faisal Rachman Economist Ariyanto Kurniawan Automotive, Coal, Chemical
faisal.rachman@bankmandiri.co.id +62 21 5245516 ariyanto.kurniawan@mandirisek.co.id +6221 5296 9682
Kresna Hutabarat Telecom, Media
Industry and Regional Research kresna.hutabarat@mandirisek.co.id +6221 5296 9542
Dendi Ramdani Department Head Laura Taslim Retail
dendi.ramdani@bankmandiri.co.id +62 21 5245087 laura.taslim@mandirisek.co.id +6221 5296 9450
Priscilla Thany Banking, Building Material
Nadia Kusuma Dewi Analyst
nadia.dewi@bankmandiri.co.id +62 21 52913501 priscilla.thany@mandirisek.co.id +6221 5296 9569
Adjie Harisandi Analyst Lakshmi Rowter Healthcare, Consumer
adjie.harisandi@bankmandiri.co.id +62 21 5245172 lakshmi.rowter@mandirisek.co.id +6221 5296 9549
Andrian Bagus Santoso Analyst Robin Sutanto Property
andrian.bagus@bankmandiri.co.id +62 21 29528608 robin.sutanto@mandirisek.co.id +6221 5296 9572
Mamay Sukaesih Analyst Edbert Surya Construction, Transportation
edbert.surya@mandirisek.co.id +6221 5296 9623
mamay.sukaesih@bankmandiri.co.id +62 21 52913501
Araminta Setyawati Analyst Silvony Gathrie Research Assistant
araminta.setyawati@bankmandiri.co.id +62 21 5245557 Silvony.gathrie@mandirisek.co.id +6221 5296 9544
Riyanto Hartanto Research Assistant
riyanto@mandirisek.co.id +6221 5296 9488
Strategic Research (Mandiri Institute) Henry Tedja Research Assistant
Moekti P. Soejachmoen Department Head henry.tedja@mandirisek.co.id +6221 5296 9434
moekti.soejachmoen@bankmandiri.co.id +62 21 29528605
Bobby Hermanus Analyst Fixed Income Research
bobby.hermanus@bankmandiri.co.id +62 21 29528606
Handy Yunianto Head of Fixed Income Research
Andre Simangunsong Analyst
Andre.simangunsong@bankmandiri.co.id +62 21 29528608 handy.yunianto@mandirisek.co.id +62 21 5296 9568
Andjarsari Paramaditha Analyst Teddy Hariyanto Senior Credit Analyst
andjarsari@bankmandiri.co.id +62 21 29528608 teddy.hariyanto@mandirisek.co.id +62 21 5296 9408
Elisabeth Carolina Analyst Ali Hasanudin Credit Analyst
elisabeth.carolina@bankmandiri.co.id +62 21 29528608 ali.hasanudin@mandirisek.co.id +6221 5296 9629
Yudistira Yudadisastra Credit Analyst
yudistira@mandirisek.co.id +62 21 5296 9698
Supporting Data Ariestya Putri Adhzani Research Assistant
Fitri Yunita ariesty.adhzani@mandirisek.co.id +62 21 5296 9465
fitri.yunita@bankmandiri.co.id +62 21 5245272
Andhi Prasetyo Hadi
andhi.hadi@bankmandiri.co.id +62 21 5245272
Istiqomah
istiqomah.oce@bankmandiri.co.id +62 21 5245272
Marsella Ayu Ariwandi
marsella.ayu@bankmandiri.co.id +62 21 5243024
DISCLAIMER: This report is issued by Mandiri Group (Bank Mandiri and Mandiri Sekuritas), registered and supervised by the Financial Services Authority
(OJK). Although the contents of this document may represent the opinion of Mandiri Group, deriving its judgment from materials and sources believed to
be reliable, Mandiri Group cannot guarantee its accuracy and completeness. Mandiri Group may be involved in transactions contrary to any opinion herein
to make markets, or have positions in the securities recommended herein. Mandiri Group may seek or will seek investment banking or other business
relationships with the companies in this report. For further information please contact our number 62-21-526 3445
ANALYSTS CERTIFICATION: Each contributor to this report hereby certifies that all the views expressed accurately reflect his or her views about the
companies, securities and all pertinent variables. It is also certified that the views and recommendations contained in this report are not and will not be
influenced by any part or all of his or her compensation.

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ECONMARK: NO MORE EXCUSES

Mandiri Group Research | January 2019

ECONMARK The 2019 Game Plan: Narrowing the Investment

Please see important disclosure at the back of this report

EXHIBIT 1. MANDIRI MACRO FORECASTS

Please see important disclosure at the back of this report Page 2 of 71

Global Economic Outlook:

No Bright Spot Ahead

EXHIBIT 2. FLAGGING GLOBAL ECONOMIC GROWTH

Source: IMF, World Economic Outlook (Oct-18)

Economic growth momentum in Japan and Eurozone countries, meanwhile, tended to be

Please see important disclosure at the back of this report Page 3 of 71

Where the guidance leads us?

EXHIBIT 3. G3 POLICY GUIDANCE

Please see important disclosure at the back of this report Page 4 of 71

Economic Outlook 2019

Source: CEIC Source: CEIC

Please see important disclosure at the back of this report Page 5 of 71

Source: Bank Indonesia Source: CEIC, Mandiri Sekuritas

A Brief Look on Indonesia’s Investment Condition

Please see important disclosure at the back of this report Page 6 of 71

EXHIBIT 9. FDI TO TERTIARY SECTOR CONTINUES TO ENLARGE

FDI Proportion to Total (%)

Please see important disclosure at the back of this report Page 7 of 71

Investment Driven Policies and Their Past Impact

Please see important disclosure at the back of this report Page 8 of 71

26.0 25.70 kilometers.

Source: Indonesia Logistics and Forwarder Association (ALFI), Mandiri

Source: Coordinating Ministry of Economic Affairs

Please see important disclosure at the back of this report Page 9 of 71

EXHIBIT 16. SUMMARY OF TAX ALLOWANCE CHANGES

EXHIBIT 17. SUMMARY OF TAX HOLIDAY CHANGES

Please see important disclosure at the back of this report Page 10 of 71

Please see important disclosure at the back of this report Page 11 of 71

EXHIBIT 18. TAX HOLIDAY COMPARISON TABLE

Please see important disclosure at the back of this report Page 12 of 71

Indonesia Vietnam Thailand Philippines Singapore China

Please see important disclosure at the back of this report Page 13 of 71

Source: CEIC, Mandiri Sekuritas Source: CEIC, Mandiri Sekuritas

Please see important disclosure at the back of this report Page 14 of 71

EXHIBIT 21. TOP 10 NON-OIL AND GAS IMPORTS

Source: CEIC Source: Mandiri Sekuritas estimate

Source: CEIC Source: CEIC

Please see important disclosure at the back of this report Page 15 of 71

Source: Mandiri Sekuritas Source: CEIC

EXHIBIT 28. INDONESIA TOP TEN MANUFACTURING EXPORT

Please see important disclosure at the back of this report Page 16 of 71

Source: CEIC, Mandiri Sekuritas estimate Source: Ministry of Industry

Moreover, the positive investment environment followed by infrastructure completion will

Source: Bank Indonesia Source: Bank Indonesia

Please see important disclosure at the back of this report Page 17 of 71

3.0 1.8 10 5.7

Source: CEIC Source: CEIC

EXHIBIT 35. INDONESIA’S VISITOR ARRIVAL DATA BASED ON COUNTRY

Please see important disclosure at the back of this report Page 18 of 71

EXHIBIT 36. THE NEXT 10 BALI

EXHIBIT 37. THE FX RECIEVABLE FROM TOURISM COUNTIUES TO INCREASE

Source: Ministry of Tourism

Please see important disclosure at the back of this report Page 19 of 71

2019 Economic Growth: Domestic Demand Driven

Source: CEIC Source: CEIC

Please see important disclosure at the back of this report Page 20 of 71