Sponsors

Media Partner

Authors Prof. Dr. Adler Haymans Manurung He currently serves as Dean of Sampoerna School of Business (SSB). He has over 20 year experiences in financial management. He is also an advisor for Jakarta Future Exchange (PT. Bursa Berjangka Indonesia), a permanent committee for fiscal and monetary side at the Indonesia Chamber of Commerce (KADIN), and an assessor of the National Accreditation Body of Higher Education (BAN-PT). He was a Director of Fund Management in PT. Nikko Securities Indonesia from 1996 to 2010. He brings real world experiences, especially in research analysis and discussion to his students. He is a prolific writer, and has written over 35 books on capital markets, investment, finance, and banking. He also has published research works in both national and international journals. He has spoken at various symposia, seminars, conferences, and discussions, both nationally and internationally. He has received the award as “The Most Popular Analyst in 2005” by Prospektif magazine.

Dr. Wahyoe Soedarmono

Dr. Muhammad Gunawan Alif

He is a full-time lecturer and coordinator of banking research and laboratory at Sampoerna School of Business (SSB). He holds a PhD in Money, Finance and Banking from the Université de Limoges, France. His research topics include bank risk management and prudential regulations, corporate governance, econometrics, financial crisis, market microstructure, and macroeconomics. Some of his papers have been published in prominent journals such as Journal of Asian Economics; Journal of International Financial Markets, Institutions and Money; Economics Bulletin; and Revue Economique. Prior to joining SSB, he was an economic policy analyst at the World Bank Indonesia Country Office involved in supporting the process of developing a crisis management protocol for the Government of Indonesia.

He is a Head of Department of Management at SSB. He holds a PhD in Management from the University of Indonesia. He has more than 20 years in marketing, marketing communication and media businesses. He was a resource person for media in the context of marketing communications and media management. He was a team leader in several government projects, for instance in developing City Branding Program for the Ministry of Home Affairs. He also has conducted continuous corporate training for senior executives of private and public companies and also as speaker at various public seminars. He served as Head of Operational Team in Matari Advertising, the top five ad agencies in Indonesia, and President of PT Duta Cakrawala before working as an academician.

Nuruzzaman, M.Sc

Romora Edward Sitorus, M.Sc

He earned his Master degree in Economics from Tilburg University, the Netherlands in 2010. He is now a full-time lecturer at SSB, where he teaches economics and econometrics. He also serves as coordinator of Indonesia Stock Exchange’s Investment Gallery (Pojok Bursa) in SSB, cooperation between SSB and Indonesia Stock Exchange. Prior to joining SSB, he worked at the ASEAN Secretariat as a research officer in the Market Integration Directorate. His paper has been published in Journal of Asia Business Studies. His research interests include econometrics, financial integration, financial market, and international finance.

He is a full-time lecturer at Sampoerna School of Business (SSB), where he teaches corporate finance and business statistics. He also serves as managing editor of Journal of Business and Entrepreneurship, an SSB academic publication that aims to widely disseminate manuscripts on business and entrepreneurship issues. He earned his Master degree in Finance and Investment from Durham Business School, UK. His research interests are corporate finance, banking, investments, and market microstructure. He is currently a research fellow at INDEF and Bank Indonesia.

Preface

Indonesia Economic and Market Outlook (IEMO) is an initiative of the Faculty of Business (Sampoerna School of Business / SSB) at Universitas Siswa Bangsa Internasional (USBI), aiming to bring together business professionals, academics, policy makers, mass media and general public to discuss ongoing issues on the Indonesian economy that may affect business activities. The report attempts to provide insights for business entities to adjust activities based on recent economic and market dynamics, as well as to deal with policy changes undertaken by the Government of Indonesia. The current volume emphasizes on highlighting recent dynamics that occur in the Indonesian economy, and on projecting the Indonesia’s macroeconomic performance in 2013 and 2014. The report consists of five sections. The first section highlights global and domestic environments that directly and indirectly affect Indonesia. The second section emphasizes on fiscal aspects, national account and balance of payment. The third section sheds light on monetary and market dynamics. The fourth section discusses a specific issue in which this current volume focuses on banking and entrepreneurship development. The fifth section attempts to identify risks and project outlook for Indonesia in 2013 and 2014 under three different scenarios (baseline, optimistic, and pessimistic scenarios). The report is compiled by the economic and market outlook team of Sampoerna School of Business under the overall supervision of Prof. Dr. Adler Haymans Manurung (Dean of SSB). The authors comprise Prof. Dr. Adler Haymans Manurung, Dr. Wahyoe Soedarmono, Dr. Muhammad Gunawan Alif, Nuruzzaman, M.Sc, and Romora Edward Sitorus, M.Sc. Additional inputs and suggestions were also received from Dr. Rima Agristina (the role of access to finance to increase productivity, and the influence of a growing middle class in boosting domestic demand and investment in 2014). Administrative supports have been provided by Maryke Ayu Kinasih. The team has also benefited from the participation of SSB lecturers and staffs as organizing committees for the workshop. The workshop is sponsored by PT. Bank Mandiri Tbk; PT. Nikko Securities Indonesia; Jakarta Future Exchange (PT. Bursa Berjangka Jakarta); Indonesia Stock Exchange (PT. Bursa Efek Indonesia); and PT. Danawibawa Arthacemerlang. Media partner of this workshop is Bisnis Indonesia. Finally, the team extends the highest appreciation to Prof. Dr. Aman Wirakartakusumah (Rector of USBI) as the steering committee coordinator of this program.

Table of Contents Executive Summary................................................................................................................... 1 Global and Domestic Environments……..…………………………………………………………………………….…. 3 Fiscal Aspects, National Account, and Balance of Payment…………………………………….……….…... 6 Monetary and Market Dynamics…………………………………….………………………………………………..…… 11 Banking and Entrepreneurship Development…………………….………………………………………….……… 17 Risk and Outlook for Indonesia..…………………………………………………………………………………….…….. 23

List of Tables Table 5.1 Nominal growth of GDP components under three scenarios (percent)……………..

26

Table 5.2 GDP growth forecast by various institutions……………………………………………………….

26

List of Figures Figure 1.1 VIX index………………………………………………………………………………………………………………. 3 Figure 1.2 Emerging Market Bond Index (EMBI)…………………………………………………………………… 3 Figure 1.3 Price of Indonesia’s major export commodities…………………………………………………..

3

Figure 1.4 The GDP growth rate of Indonesia’s major trading partners (year-on-year, percent)...........................................................................................................………. 3 Figure 2.1 Growth rate of capital expenditure and fuel subsidies (percent)…………………………. 6 Figure 2.2 Share of capital expenditure and fuel subsidies to government spending (percent)……………………………………………………………………………………………………………….. 6 Figure 2.3 Government Rev/GDP (percent, Government rev. in trillions Rp-RHS)………………..

6

Figure 2.4 Budget deficit/GDP (percent-Budget deficit in trillions Rp-RHS)………………………….

6

Figure 2.5 Domestic demand growth (percent)………………………………………………………………….... 7 Figure 2.6 Share of domestic demand (percent)…………………………………………………………………… 7 Figure 2.7 Export and import value (billion USD)………………………………………………………………….. 8 Figure 2.8 Indonesia trade balance and current account (billion USD)………………………………...

8

Figure 2.9 Current account in ASEAN 5 Countries (billion USD)……………………………………………. 8 Figure 2.10 ASEAN 5 industrial production (US$ millions, line chart for Indonesia Industrial Production Index-RHS)………………………………………………………………………………………… 8 Figure 2.11 Growth of export by commodities groups (percent)………………………………………….

9

Figure 2.12 Export values by commodities groups (billion USD)…………………………………………..

9

Figure 2.13 Import values by economic categories (billion USD)………………………………………….

9

Figure 2.14 Growth of import by economic categories (percent)…………………………………………

9

Figure 2.15 Growth of tradable vs non-tradable sectors (percent)………………………………………. 10 Figure 2.16 Net FDI and net portfolio investment inflows (billion USD…………………………………

10

Figure 3.1 Foreign exchange reserves in selected ASEAN Countries (in million USD)………….… 11 Figure 3.2 Inflation rate in selected ASEAN countries (in percent)………………………………..……… 11 Figure 3.3 BI Rate, interbank rate (3 months), and interbank overnight rate (in percent)….… 12 Figure 3.4 Indonesia unemployment level (million people, line chart for percentage of unemployment/labor force-RHS)…………………………………………………………………………. 12 Figure 3.5 Benchmark equity index in selected countries (January 2012=100)………………..…..

13

Figure 3.6 Indonesia equity index per sector…………………………………………………………………….…. 13 Figure 3.7 Exchange rates to USD in selected Asian countries (January 2012=100)……………..

14

Figure 3.8 Indonesia Government Bond Benchmark Yield Rate (percent)……………………………

14

Figure 3.9 West Texas Crude Oil, Brent Crude Oil, and Coal Prices………………………………………. 15 Figure 3.10 Gold and Soybean Prices…………………………………………………………………………………… 15 Figure 4.1 Return on assets from six different bank types (percent)……………………………………. 17 Figure 4.2 Cost-to-income ratio from six different bank types (percent)………………………………

17

Figure 4.3 Net interest margin (NIM) from six different bank types (percent)……………………..

18

Figure 4.4 Capital adequacy ratio (CAR) from six different bank types (percent)………………….

18

Figure 4.5 Loans-to-core deposits ratio (LDR) from six different bank types (percent)…………

18

Figure 4.6 Core deposits-to-assets ratio (DTA) from six different bank types (percent)……….

18

Figure 4.7 Non-performing loans (NPL) by bank types (percent)………………………………………….

19

Figure 4.8 Non-performing loans (NPL) by economic sectors (percent)……………………………….

19

Figure 4.9 Non-performing loans (NPL) by loan utilization type (percent)…………………………..

20

Figure 4.10 Non-performing loans by business orientation (percent)………………………………….

20

Figure 4.11 Loan growth by economic sectors (percent, year-on-year)……………………………….

20

Figure 4.12 Loan amounts by economic sectors by (billion Rp)…………………………………………….. 20 Figure 4.13 Loan growth by the type of utilization (percent, year-on-year)……………………….… 21 Figure 4.14 Loan distribution by the type of utilization (percent)………………………………………... 21 Figure 4.15 MSMEs loan growth by the type of utilization (percent, year-on-year)…………….

22

Figure 4.16 MSMEs loan distribution by the type of utilization (percent, year-on-year)……..

22

Figure 4.17 MSMEs loan distribution by economic sector (percent, line chart for the trade sector-RHS)………………………………………………………………………………………………………………… 22 Figure 5.1 Advertising expense & advertising exp. growth (Advertising expense in trillion RpLHS; advertising exp. growth in percent-RHS)…………………………………………………………….. 27 Figure 5.2 Demand for ICT services (Internet users-LHS, mobile cellular subscription-RHS)…. 28 Figure 5.3 Actual versus One-Step ahead Forecast of Jakarta Composite Index…………………… 28

Executive Summary This report aims to highlight major trends in the Indonesian economy that allows business entities to adjust activities based on economic and market situations. The report consists of five sections. The first section highlights the recent trends in global and domestic environments that affect Indonesia’s business cycles. The second section emphasizes on fiscal aspects, national account and balance of payment. The third section underlines monetary and market dynamics. The fourth section provides a specific issue in which banking and entrepreneurship development are highlighted in this volume. Finally, the fifth section elaborates major risks and outlook for 2014, where the forecast of real GDP growth and Jakarta Composite Index are also presented. Section 1 highlights that the US stock market volatility during the last few years has brought emerging countries to slightly benefit from the global slowdown, in which EMBI slightly improves and may signal higher resilience on emerging market economies. Despite these opportunities, challenges remain due to a significant decline in various commodity prices over time, causing the contraction of commodity exports from emerging countries. However, such challenges in emerging countries are moderated by a deeper contraction in the US economy that forces the US government to be shut down from October 01 to 16, 2013. In this regard, foreign capital inflows from the US and other advanced economies will enter emerging countries in general, providing rooms for a better growth trajectory in the future, if well managed. For Indonesia, a policy package that has been issued in August 2013 will facilitate the development of value-added products for non-commodities related exports. The international market for value-added products also remain very large, since the Indonesia’s major trading partners start to recover in terms of their economic growth. Section 2 underlines the recent development of fiscal aspects, national account and balance of payments. It is highlighted that government expenditure remains under pressure due to projected fuel price surge. Furthermore, an increase in interest rate combined with general election will cause uncertainty and thus can hamper domestic investment in 2014. On the other hand, rupiah depreciation and the recovery of major trading partner are projected to put trade balance back to its increasing trajectory. Government policy package issued in August 2013 may further contribute to the positive growth of export. Meanwhile, the import growth of capital goods exhibit the highest rate compared to other import categories, and thus may support the improvement of Indonesia’s productivity in the future. In contrast, foreign direct and foreign portfolio investments are predicted to decelerate in 2014 due to the global economic downturns. Portfolio investments remain substantial in terms of the share to total foreign investments, heightening risks in the Indonesian economy. Section 3 focuses on monetary side and market dynamics, highlighting particularly Indonesian rupiah during turbulence period in 2013 and the dynamics of Jakarta Composite Index (JCI). Ever since The Fed tapers its monetary stimulus on May 22, 2013, foreign investors began to sell off emerging market assets, resulting in the major decline of JCI. Risk aversion around the globe combined with sustained vulnerabilities in domestic markets also drives rupiah underperformance against the rest of Asian region. Domestically, investor is particularly cautious about Indonesia inflation and sustained current account 1

deficit. Finally, a slackening global demand tends to put pressure to Indonesia’s major commodities’ price such as coal, resulting to a sharp fall of the mining sector index. In Section 4, the trend of Indonesian banking is highlighted. Although external environments keep widening pressures on the Indonesian economy, the banking sector resilience remains. Bank profitability and capital ratios are strong, although they vary across different types of banks. Several performance measures also exhibit stable movements over time. Concerning the recent performance of economic sectors, non-performing loans mostly come from construction sector. Meanwhile, three sectors receiving the biggest support from banking include manufacturing; construction and real estate; and trade. A closer attention might be needed, since loan growth in construction and real estate is higher than in manufacturing or trade. Loans by utilization type also show a considerable threat. Although investment loan growth exceeds consumption loan growth, the amount of consumption loans distributed is much higher than investment loans from time to time. Overall, the efforts to support micro, small and medium enterprises (MSMEs) remain important, not only because they merely focus on short-term goals as demonstrated by a domination of working capital loans; but also because most of them are in retail trade sector as a non-tradable sector. Such a trend can also highlight that MSMEs’ access to finance becomes an important problem, precluding MSMEs to receive a higher portion of investment loans to support long-term projects generating valued added. Section 5 presents risks associated with external and domestic environments, in which outlook for 2014 is projected. The baseline scenario under the current state of the Indonesian economy projects that Indonesia’s GDP growth rate will only reach 5.49 percent in 2013 and 5.27 percent in 2014. These levels are then compared with forecasts by different institutions such as The Economist, IMF, World Bank, Bank Indonesia, Bank Danamon, ADB, and revised government budget. Our GDP growth projection for 2013 is relatively close to the projection of Bank Indonesia and the revised government budget. Finally, our GDP growth projection for 2014 is very close to the World Bank projection.

2

1. Global and Domestic Environments In the aftermath of the 2008 global crisis, the US economic outlook remains uncertain, particularly during the second and third quarter of 2013. Uncertainty in the US market could be shown by large volatility in the US stock market as depicted by VIX index built from S&P 500, or the Wall Street’s fear index (Figure 1.1).VIX is an index that indicates the expected level of volatility (implied volatility) in the US market over the next 30 days. Higher stock market volatility precludes traders and investors to decide whether or not, it is time to take profit or cut losses because stocks could suddenly resume bullishness or collapse. Figure 1.1.VIX index

Figure 1.2. Emerging Market Bond Index (EMBI)

22

1200 1000 800 600 400 200 0

20

2011M01 2011M03 2011M05 2011M07 2011M09 2011M11 2012M01 2012M03 2012M05 2012M07 2012M09 2012M11 2013M01 2013M03 2013M05 2013M07 2013M09

18 16 14

Developing Asia Brazil Latin America & Caribbean World (WBG members)

12 10

Source: Thomson-Reuters(DataStream)

Source: Global Economic Monitoring Data (World Bank)

Figure 1.3. Price of Indonesia’s major export commodities 1400

Figure 1.4. The GDP growth rate of Indonesia’s major trading partners (year-on-year, percent)

1200

25

1000

20

800 15

600 400

10

200 5 2011M01 2011M03 2011M05 2011M07 2011M09 2011M11 2012M01 2012M03 2012M05 2012M07 2012M09 2012M11 2013M01 2013M03 2013M05 2013M07

0

-5 Coal, Australia, $/mt, nominal$

2009Q4 2010Q1 2010Q2 2010Q3 2010Q4 2011Q1 2011Q2 2011Q3 2011Q4 2012Q1 2012Q2 2012Q3 2012Q4 2013Q1 2013Q2

0

Palm oil, $/mt, nominal$

Japan

China

Rubber, Singapore, cents/kg, nominal$

Singapore

Korea, Rep.

Source: Global Economic Monitoring Data (World Bank)

USA

Source: Global Economic Monitoring Data (World Bank)

3

From March to May 2013, VIX exhibited a lower volatility. Such trend signals the US prospective recovery, calling for the tapering of quantitative easing (QE) policy in May 2013. However, the US stock market volatility widened again as of June 2013, and the QE tapering has been cancelled in September, 2013. In the first stage, the QE tapering has made US dollar stronger, capital outflows intensified and pressures on emerging market currencies mounted. For Indonesia, rupiah depreciated significantly from 9,658 in January 2013 to 11,134 in September 2013 per 1 US dollar. Foreign exchange reserves to repay foreign investors who flew away from Indonesia deteriorated from USD 104 billion on January 2013 to USD 95.7 billion in September 2013. Such pressures have been moderated recently after the Fed’s decision to continue its quantitative easing to the US economy. The Fed rates are expected to remain near zero until 2015 and US dollar depreciation will likely to continue in the medium run. An increase in volatility in the US stock market has made the performance of emerging market economies slightly improves, though it is too early to consider an improvement. Figure 1.2 presents the JP Morgan Emerging Bond Market Index (EMBI) for several emerging market economies. Higher EMBI is associated with an increase in external financing costs. In May 2013, EMBI slightly increased, partly due to a reduction in the US Federal Reserve’s bond purchase (or the QE tapering). However, EMBI starts to decline as of September 2013, given that the US Federal Reserve has decided to continue its QE policy until 2015. This decision occurs mostly due to the deterioration in US financial market as of July 2013 that depicts a higher volatility (Figure 1.1). Due to the recent deterioration in the US economy, the US government shutdown was inevitable. A government shutdown is a situation in which a government ceases all or many of its functions. In the case of the US, the government shutdown from October 01 to 16, 2013 was due to the government debt that continues to mount after the 2008 financial crisis and a bill raising the debt limit has been recently rejected by the US congress. If the US situation worsens in the near future (possibly in February 2014, if the US budget is restricted again), a massive inflow of foreign capital to emerging markets will probably occur, which may be detrimental or beneficial for emerging markets depending on the characteristics of foreign capital inflows and institutional development within each country. Following the US economic downturn, Japan also experiences downturn periods, calling for the implementation of a fiscal stimulus of 5 trillion Japanese yen (USD 50 billion) in 2014. This policy is expected to offset a decline in Japan’s exports to the US by making Japanese yen competitive and diversifying export destination to other countries. Other countries that have similar major trading partners with Japan may follow the same strategy with Japan, namely “race to the bottom” by depreciating their local currency compared to US dollar. “Currency war” may lurk and hence, appreciating US dollar and depreciating local currencies even more including for Indonesian rupiah. The low rate of inflation and high rate of unemployment in 17-nation euro zone implies that economic recovery in the region is sluggish. Euro area’s annual inflation rate is 0.7 percent in October 2013, the slowest in about four years, and far below European Central Bank (ECB)’s target ceiling of 2 percent. Moreover, the unemployment across the euro zone hit record of 12.2 percent in September 2013, the highest since monetary union began at 4

the end 0f 1990s, with the highest rates can be found in Greece (27.6 percent) and Spain (26.6 percent) based on Eurostat data. The situation put pressure to ECB to further cut interest rates and depreciate the Euro to protect economic recovery. From trading perspective, the Indonesian economy has not been too much affected by Eurozone situation, given that Europe is not Indonesia’s main export destination. On the other hand, Indonesia may be influenced by Europe, if there is financial turbulence in the EU region resulting into foreign-fund withdrawal from the Indonesian market. Thus, going forward, Indonesian investor and market participants still need to watch closely the development of European economic outlook. Political instability in the middle-east region can also be potential threat to Indonesian government spending, as fuel subsidies remain dominant in the government spending decomposition. The Syria’s civil war, unstable regime in Egypt and Lybia, and potential war between Israel and other Middle-East countries, such as Iran, may cause fuel price hike in the future. The decision of US government to delay military intervention in Syria contributes to the short-term decline in fuel price, but such military threat in the Middle East region tends to drive fuel price up as what happened in the past when the US declared war against Iraq and Afghanistan. To withstand the possible consequences of global uncertainties, Indonesia has prepared to minimize risks from external environments by issuing a policy package in August 2013. The decline in selected major export commodities (Figure 1.3) shows that risks are indeed apparent from international markets that may in turn deteriorates Indonesia’s export based on commodities. To deal with external imbalances, the Government of Indonesia has issued a policy package as of August 2013 aiming: (a) to support foreign direct investment by promoting an “investor-friendly” environment by simplifying license requirements and revising negative investment list; (b) to reduce the current account deficit and strengthen rupiah stability by promoting export and discouraging imports1; (c) to support employment through various approach such as tax breaks for labor-intensive sectors, easing restrictions in bounded zones, and improving wage-setting mechanisms; (d) to achieve stable inflation by replacing import restrictions based on quantity with price-based mechanisms, particularly for beef and horticultural products. At the end of October 2013, the government further issued another policy package to stimulate business environment. This new policy package aims to simplify export and import procedures, to reduce costs and days to export, to reduce cost and time needed to obtain water and electricity and other government services. In terms of encouraging exports, the Indonesia policy package has been suitable with the trend of major trading partners. Figure 1.4 presents that the major trading partners of Indonesia start to improve their economic growth as of the second quarter of 2013. In percentage of total Indonesia’s exports, Indonesia’s exports to Japan, China, USA, Singapore and South Korea account for 16 percent, 10 percent, 10 percent, 9 percent and 8 percent, respectively. Hence, the economic recovery in those countries is likely to benefit Indonesia, and vice versa. 1

Some examples to promote export are tax deductions for labor-intensive sectors (textiles, footwear, furniture, etc) and a reduction in corporate income taxes by 25-50 percent of total taxable income. Some measures to discourage imports are restrictions to preclude fuel imports and luxury consumer goods.

5

2. Fiscal Aspects, National Account and Balance of Payment Despite the recovery of Indonesia’s major trading partners, the government spending to productive sectors in Indonesia remains sub-optimal. As shown in Figure 2.1, capital expenditure is expected to decline despite its positive trend over the last five years. Although the share of capital expenditure was exceeding the share of fuel subsidies in 2012, the increasing fuel price in 2013 may push the fuel subsidies up above the capital expenditure (Figure 2.2). The approved government budget for 2014 confirms the escalation of fuel subsidies, which can be seen as potential risk in 2014. Despite the pressure over government budget and risk of rising fuel price, the Ministry of Finance targets the ratio of fiscal deficit over GDP to decline to 1.69 percent in 2014. From the revenue side, tax revenue has been contributing more than 67 percent of the government revenue over the last five year, and is projected to grow in a faster pace than non-tax revenue. The entry into force of Government Decree No. 46 2013 that applies 1 percent income tax for small and medium enterprises as per July 2013 will contribute to increase tax revenue (Figure 2.3). However, general election that will take place in 2014 will further add pressure to government spending (Figure 2.4). Figure 2.1 Growth rate of capital expenditure and fuel subsidies (percent) 150%

Figure 2.2 Share of capital expenditure and fuel subsidies to government spending (percent) 16% 14% 12% 10% 8% 6% 4% 2% 0%

100% 50% 0% 2008 2009 2010 2011 2012 2013b 2014b -50% -100%

2008 fuel subsidies

capital expenditure

15%

(percent, 1,500

10%

2010

Share of Capital Exp.

Source: Authors’ calculation from Indonesia Economic and Financial Statistics (Bank Indonesia). 2013b and 2014b are data budget data.

Figure 2.3 Government Rev/GDP Government Rev. in trillions Rp-RHS)

2009

1,000

2011

2012 2013 b 2014b Share of Fuel Subsidies

Source: Authors’ calculation from Indonesia Economic and Financial Statistics (Bank Indonesia). 2012b and 2013b are budget data.

Figure 2.4 Budget deficit/GDP (percent – Budget deficit in trillions Rp – RHS) 2.50%

0

2.00%

-50

1.50%

5%

500

0%

-

Non Taxes Revenues

Tax Rev/GDP

Non Tax/GDP

-150

0.50%

2008 2009 2010 2011 2012 2013b2014b Tax Revenues

-100

1.00%

0.00%

-200 2008 2009 2010 2011 2012 2013b 2014b Budget Deficit

Source: Authors’ calculation from Indonesia Economic and Financial Statistics (Bank Indonesia). 2013b and 2014 are budget data

6

Budget Deficit/GDP

Source: Authors’ calculation from Indonesia Economic and Financial Statistics (Bank Indonesia). 2013b and 2014b are budget data

Moreover, the 2014 general election agenda combined with a recent increase in interest rates tend to hamper investment measured by gross domestic capital formation. Indeed, investment has been growing at the rate of 9 percent to 10 percent for the last three years, and consistently exceeding the growth rate of GDP and government expenditure as shown in Figure 2.5. However, higher interest rates plus the slowing down of the world economy is expected to decelerate investments in 2014. In addition, private investments in particular tend to slow down during election year as in 2009 (private investments only reached 4 percent), thus the identical trend is expected for 2014. On the other hand, households’ consumptions tend to have the steady growth rate of 5 percent year-on-year over the last five years, and household consumptions still become the major driver of domestic demand (Figure 2.6). Figure 2.5 Domestic demand growth (percent)

Figure 2.6 Share of domestic demand (percent)

20%

100% 90%

15%

80% 70% 60%

10%

50% 40%

5%

30% 20%

0% 2008

2009

2010

2011

10%

2012

0%

Growth of Gross Dom Capital Formation Growth of Household Cons Growth of Government Spending GDP Growth

2008

2009

Household Cons

Source: Authors’ calculation from Indonesia Economic and Financial Statistics (Bank Indonesia)

2010

2011

Government Exp

2012 Investment

Source: Authors’ calculation from Indonesia Economic and Financial Statistics (Bank Indonesia)

In the meantime, due to rupiah depreciation as well as the recovery of major trading partners in the second quarter of 2013 (Figure 1.4), external demand is projected to grow after falling significantly since the first quarter of 2013. Export values have been declining since the last quarter of 2012. In June 2013, export values exhibited the highest declining rate of 7.25 percent month on month (Figure 2.7). On the other hand, import values have shown positive trend since the beginning of 2013 at the average rate of 2.03 percent, where the highest peak was in July 2013 with 6.5 percent growth rate (Figure 2.7). A decline in exports along with higher imports over the last three quarters has caused current account deficit (Figure 2.8). Other ASEAN 5 countries such as Malaysia, Philippines, and Thailand have also suffered from current account deficit, since the beginning of 2012 as in Figure 2.9, but Indonesia is the worst performing country in terms of current account deficit compared to those countries. The only exception in ASEAN 5 is Singapore where the current account remains positive in 2013. Despite the recent slowdown, export is projected to rise as the Indonesia Industrial Production Index in July 2013 advanced by 1.63 percentage point (Figure 2.10). The decline of industrial production index in August 2013 was due to seven 7

days break following the Moslem’s Idul Fitri celebration. The industrial production index in other ASEAN 5 countries also seems to improve since July 2013, which indicates that industrial output of those countries have moved up. Figure 2.7 Export and import value (billion USD)

Figure 2.8 Indonesia trade balance and current account (billion USD)

18 16

6

14

4

12

2

10

Q2 2013

Q1 2013

-4

4

Q4 2012

6

Q3 2012

-2

Q2 2012

Q1 2012

-

8

-6

2

-8

Export

Jul-13

May-13

Mar-13

Jan-13

Nov-12

Sep-12

Jul-12

May-12

Mar-12

Jan-12

-

-10 -12 Trade Balance

Import

Current Account

Source: Authors’ calculation from Indonesia Economic and Financial Statistics (Bank Indonesia)

Source: Authors’ calculation from Indonesia Economic and Financial Statistics (Bank Indonesia)

Figure 2.9 Current account in ASEAN 5 Countries (billion USD)

Figure 2.10 ASEAN 5 industrial production (US$ millions, line chart for Indonesia Industrial Production Index – RHS)

20.0

12000

15.0

10000 8000

10.0

6000

5.0

4000 2000

Q2 2013

Malaysia Thailand

Philippines

Singapore

Indonesia

Aug-13

Jul-13

Jun-13

Apr-13

May-13

-15.0

Mar-13

Feb-13

0 Jan-13

Q1 2013

Q4 2012

Q3 2012

-10.0

Q2 2012

-5.0

Q1 2012

-

Malaysia IP

Philippines IP

Singapore IP

Thailand IP

117 116 115 114 113 112 111 110

Indonesia IP Index

Source: Authors’ calculation from Indonesia Economic and Financial Statistics (Bank Indonesia)

Source: Authors’ calculation from Indonesia Economic and Financial Statistics (Bank Indonesia)

In boosting exports, agricultural products seem to contribute to reduce current account deficit, but the contribution remains limited compared to the export of manufacturing product. The export growth rate of agricultural products has been negative since March 2013, but bounce back by 28.87 percent in July 2013 (Figure 2.11). In August 2013, the government issued policy to deduct export tax by 30 percent. This policy has been successful to stimulate the growth of exports and to initiate a positive trend in trade balance starting in August 2013. However, the declining trend of price of commodities may again slow down the growth of agricultural export. Moreover, manufacturing products remain as the major contributor of exports, maintaining the share of 64.47 percent to total exports as 8

(Figure 2.12). The relatively stable price of manufacturing products is expected to maintain, or even stimulate, the export growth that matters in reducing current account deficit. In terms of imports, raw materials and auxiliary goods are the major import component with the share of 70.9 percent, compared to consumption goods with the share of 15.91 percent and capital goods with 15.29 percent (Figure 2.13). Over-reliance on raw materials imports may expose Indonesia to external pressure from the world market because commodities’ prices are vulnerable. In contrast, although its share to total import is small, the import of capital goods has been growing at a faster pace with the rate of 19.93 percent in July 2013, compared to consumption goods with 15.12 percent, and raw material and auxiliary goods with 7.13 percent (Figure 2.14). Policies to stimulate the import of capital goods are therefore necessary to help advancing domestic production in the future. Figure 2.11 Growth of export by commodities groups (percent)

Jul-13

Jan-13

Jul-13

Jun-13

Apr-13

May-13

-20%

Mar-13

Feb-13

-10%

Jan-13

0%

Jun-13

10%

May-13

20%

Apr-13

30%

Mar-13

12 10 8 6 4 2 0 Feb-13

40%

Figure 2.12 Export values by commodities groups (billion USD)

Agricultural products

Agricultural products Manufacture products Mining and other sector products

Manufacture products Mining and other sector products

Consumption Goods

Jul-13

Jun-13

-10%

May-13

Jul-13

Jun-13

0%

May-13

10%

Apr-13

20%

5 Mar-13

10

Feb-13

30%

Jan-13

15

Apr-13

Figure 2.14 Growth of import by economic categories (percent)

Mar-13

Figure 2.13 Import values by economic categories ( billion USD)

Feb-13

Source: Authors’ calculation from Indonesia Economic and Financial Statistics (Bank Indonesia)

Jan-13

Source: Authors’ calculation from Indonesia Economic and Financial Statistics (Bank Indonesia)

Consumption Goods

Raw Materials and Auxiliary Goods

Raw Materials and Auxiliary Goods

Capital Goods

Capital Goods Source: Authors’ calculation from Indonesia Economic and Financial Statistics (Bank Indonesia)

9

Source: Authors’ calculation from Indonesia Economic and Financial Statistics (Bank Indonesia)

Overall, output from the non-tradable sector is projected to improve in the last quarter of 2013 following the downturn period from the beginning of 20132. The output of nontradable sectors has increased from 367 trillion rupiah in the first quarter of 2013 to 379 rupiah trillion in the second quarter of 2013, which implies a 3.03 percent growth rate (Figure 2.15). Despite the recent drop over the first two quarters of 2013, the tradable sector may be projected to grow due to the predicted growth of Indonesia’s exports and rupiah depreciation. However, the recent slowdown of global economy may also hold back the positive trend of tradable sector. Moving toward financial account, foreign direct and foreign portfolio investments in Indonesia are predicted to continue negative trends due to expected slowdown of the global economy. Foreign direct and foreign portfolio investments have started to fall since the last quarter of 2012 with the rate of -8.66 percent and -92.45 percent, respectively (Figure 2.16). Greater financial integration with other Asian countries3 is expected to decelerate the impact of financial crises in Europe and economic slowdown in the United States, and thus may prevent the significant drop of foreign portfolio investments inflow. Figure 2.16 Net FDI and net portfolio investment inflows (billion USD)

Q2 2013

Q1 2013

Q4 2012

Q3 2012

Q2 2012

-2%

Q1 2012

0%

-4%

Q1 2012

-6% -8% Tradable sector

Non-tradable sector

Source: Authors’ calculation from Indonesia Economic and Financial Statistics (Bank Indonesia)

Net FDI Inflow

Q2 2013

2%

Q1 2013

4%

Q4 2012

5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 Q3 2012

6%

Q2 2012

Figure 2.15 Growth of tradable vs non-tradable sectors (percent)

Net Foreign Portfolio Inv

Source: Authors’ calculation from Indonesia Economic and Financial Statistics (Bank Indonesia)

2

Non-Tradable sectors are utilities, trade and restaurant, transport and communication, finance and real estate, services and business services. Tradable sectors are agriculture, livestock, forestry, fishery, manufacturing, mining, and quarrying 3 For example, ASEAN+3 initiatives have been issued to focus on financial cooperation between ASEAN countries, China, Japan, and South Korea.

10

3. Monetary and Market Dynamics Due to a deep current account deficit (Figure 2.8), Indonesia’s foreign reserves fell significantly in recent months. The reserves stood at USD 104 billion in January 2013 USD, but only USD 95.7 billion in September 2013 (Figure 3.1). Despite its decline, the reserves remain sufficient to meet 5.4 month demand for imports and 5.2 month demand for imports plus external debt payments, above safe standards of the International Monetary Fund (IMF) of three months. Moreover, following a slumping currency, Bank Indonesia seeks to bolster short-term liquidity by extending bilateral currency-swap with China (100 billion Yuan or USD 16.3 billion), Japan (USD 12 billion), and South Korea (USD 10 billion). Although the reserves level is in a safe range, Indonesia exhibits the second lowest reserve asset among ASEAN-5 group countries. Bank Indonesia attributed the decline in the reserves to an increase in the demand for US dollars from local companies and its intervention to curb depreciation of the rupiah against the US dollar, since the beginning of the year. Bank Indonesia supplied the US dollars for state-owned energy companies such as PT Pertamina and PT PLN, as they are no longer allowed to buy dollars on the money market. PT Pertamina and PT PLN are the nation’s biggest dollar buyers due to the huge need for fuel imports in their operations. For instance, they require around USD 150 million and USD 20 million per day to finance its transactions, respectively. Bank Indonesia is currently discussing a new regulation to assist state-owned enterprises (SOEs) in carrying out hedging mechanisms to avert losses caused by foreign-exchange volatility. Figure 3.1 Foreign exchange reserves in selected ASEAN Countries (in million USD)

Figure 3.2 Inflation rate in selected ASEAN countries (in percent)

350,000

Indonesia Philippines Singapore

Malaysia Thailand

Source: Thomson-Reuters

Sep-13

Jul-13

May-13

Indonesia

Malaysia

Phillipines

Thailand

Vietnam

Singapore

Source: Thomson-Reuters

11

Mar-13

Jan-12

Sep-13

Jul-13

May-13

Jan-13

Mar-13

Nov-12

Sep-12

Jul-12

May-12

Mar-12

Jan-12

50,000

Jan-13

100,000

Nov-12

150,000

Sep-12

200,000

Jul-12

250,000

May-12

300,000

Mar-12

18 16 14 12 10 8 6 4 2 0

Along with a decline in foreign exchange reserves, Indonesia’s annual consumer price inflation climbed to four-year high in 2013 becoming the highest rate in ASEAN-5. From Figure 3.2, the inflation rose to 8.32 percent (year-on-year) in October 2013 from 5.9 percent (year-on-year) percent in June 2013, creating pressure to Bank Indonesia to continue raising interest rates when economic growth is slowing. Due to Indonesia’s reliance on fuel imports, rupiah depreciation may exert further inflationary pressures, which were aggravated by the government’s decision in June 2013, to lift administered fuel price cutting the ballooning fuel subsidies. Moreover, the nation’s policy of limiting some food imports, such as meat and soybean may also contribute to exacerbate the inflation. Finally, recent threats from capital outflows and inflation call for the implementation of a monetary tightening policy through increases in BI rate several times in 2013, after it previously stayed in 5.75 percent for 16 months (Figure 3.3). For instance, Bank Indonesia increases BI rate three times in three month span in the following fashion: 25 bps in June, 50 bps in July, and 50 bps in August 2013. In addition to that, on September 12, 2013, Board of Governors meeting (RDG) raise BI rate again by 25 bps to reach 7.25 percent. Bank Indonesia also raised another overnight deposit facility rate, or FASBI, by a quarter percentage point to 5.50 percent in September 2013. The decision to raise the benchmark interest rate was taken by Bank Indonesia to bring revival in capital inflows into Indonesia and stabilize rupiah.

2013

2013

2012

2011

2009

2010

Millions

Figure 3.4 Indonesia unemployment level (million people, line chart for percentage of unemployment/labor force - RHS) 120 10% 9% 100 8% 7% 80 6% 60 5% 4% 40 3% 2% 20 1% 0 0%

Sep-13

Jul-13

May-13

Mar-13

Jan-13

Nov-12

Sep-12

Jul-12

May-12

Mar-12

Jan-12

Figure 3.3 BI Rate, interbank rate (3 months), and interbank overnight rate (in percent) 8 7.5 7 6.5 6 5.5 5 4.5 4 3.5 3

BI rate Indonesia Unemployment Indonesia Employment ratio unemployment to labor force

Indonesian Interbank 3 Months Indonesian Interbank overnight Source: Thomson-Reuters

Source: Thomson-Reuters

Meanwhile, the recent interest rates hikes to tackle inflation problem may drag down economic growth and potentially increase unemployment, although the ratio of unemployment to labor force in Indonesia currently stands at 6.2 percent in 2013, which 12

slightly decrease compared to 6.3% in 2012 (Figure 3.4). The recent BI policy to increase BI rate does not seem to be accompanied by a drastic change in the unemployment rate yet. However, the pressure from trade unions that keep clamoring for higher minimum wage recently in October 2013 may be a potential challenge, since it creates the risk of wage/price spiral and results in higher long-lived unemployment rate. For instance, DKI Jakarta has recently increased minimum wage to 2.4 million rupiah. If such a trend continues in other regions, it may further decline Indonesia’s competitiveness, hamper exports, and increase expected inflation. Figure 3.5 Benchmark equity index in selected countries (January 2012=100)

Figure 3.6 Indonesia equity index per sector 2500

120 115

2000

110 1500

105 100

1000

95 90

500

85 0 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13

Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13

80

MSCI All Country Index MSCI Emerging Market Index Hong Kong Hang Seng S&P BSE Sensex Straits times Dow Jones Industrials IDX Composite Source: Thomson-Reuters

IDX AGRICULTURE

IDX BASIC INDUSTRY

IDX FINANCE

IDX MANUFACTURE

IDX MINING

IDX MISC.INDUSTRIES

IDX TRADE & SERVICE

IDX INFRASTRUCTURE

Source: Thomson-Reuters

Despite the adverse impact on employment, an increase in BI rate may also potentially increase capital inflows to Indonesia. In parallel, a quantitative easing (QE) policy – a USD 85 billion bond-buying program per month by the US government which began in 2008 – has pushed US interest rates to very low levels and set investors to choose emerging countries like Indonesia for higher yields. However, since May 22, 2013, the announcement of Federal Reserve (The Fed) decision to taper the QE makes many emerging economies suddenly find themselves in a vise. The tapering news sparks a wave of portfolio rebalancing, triggering a massive unwinding of long positions in emerging markets. Currency and stock markets in emerging markets with current account deficit like India and Indonesia are plunging. In August 2013, Jakarta Composite Index (JCI) dropped significantly to more than 20 percent of its May 2013 level (Figure 3.5).

13

In September 18, 2013, the Fed refrained from QE tapering policy, rendering Jakarta Composite Index (JCI) to recover. Following this development, JCI improved and recorded 4,432 level at the beginning of October 2013 (Figure 3.5). Meanwhile, MSCI emerging market index has increased 7.2 percent since June this year, Hang Seng rose 11.4 percent, India’s S&P BSE climbed 3 percent, and Brazil’s Ibovespa added 6.1 percent. A closer look shows that the best performing sector in Indonesia from the beginning of 2013 to October 2013 is infrastructure sector with an increase in equity index of 9.9 percent (Figure 3.6). This positive development is followed by trade, finance and manufacturing with 7.8, 6.2, and 5.4 percent, respectively. The worst performing industry is mining with a decline in equity index by 18.8 percent. Following this, other industries that experience setback are agricultural, miscellaneous, and basic industry with 11.1, 6.2 and 4.9 percent drops. Figure 3.7 Real exchange rates to USD in selected Asian countries (January 2012=100)

Figure 3.8 Indonesia Government Bond Benchmark Yield Rate (percent)

140

10

130

9 8

120

7

110

6

100

Indonesian rupiah Indonesian rupiah 1M forward Malaysian ringgit Thai baht Singapore dollar Vietnam dong Philippine peso Indian rupee Chinese yuan

3 Year 10 Year 20 Year

Sep-13

Jul-13

May-13

Mar-13

Jan-13

Nov-12

Sep-12

Jul-12

May-12

Jan-12

Sep-13

Jul-13

May-13

Mar-13

Jan-13

Nov-12

Sep-12

Jul-12

3

May-12

80 Mar-12

4 Jan-12

90

Mar-12

5

5 Year 15 Year

Source: Authors’ calculation from Thomson-Reuters

Source: Authors’ calculation from Thomson-Reuters

In terms of exchange rates, Figure 3.7 shows that from being one of the best performing currencies in the world in 2012, rupiah recently experienced intense pressure and became one of the worst performing currencies in 2013. Indonesia’s currency has fallen out about 18 percent this year due to foreign investor exodus from emerging-market assets starting in May 2013. Currencies of neighboring ASEAN countries also weaken this year as Malaysian ringgit and Philippines peso undergo the next largest depreciation of 4.99 and 4.69 percent from the beginning of the year to October 2013, respectively.

14

Following rupiah depreciation, the yield of Indonesia’s 10-year government bonds is surging by more than 290 basis points to 7.3 percent between the beginning of the year and October 2013 (Figure 3.8). The high-yield bond may still not be attractive enough to investor due to rupiah bearish and deteriorating inflation that erode investor return when holding rupiah-denominated bonds. The implication of government bond yield surge is the increase in government borrowing costs and potentially lower economy growth. This recent headwinds in the bond market, however, may only last in the short term if Indonesia could provide solid macroeconomic fundamentals to attract future inflows. Figure 3.9 West Texas Crude Oil, Brent Crude Oil, and Coal Prices 140 130 120 110 100 90 80 70 60

Figure 3.10 Gold and Soybean Prices 1800 1600 1400 1200 1000 800

Crude Oil-WTI Spot (USD/BBL)

Sep-13

Jul-13

May-13

Mar-13

Jan-13

Nov-12

Sep-12

Jul-12

May-12

Gold Bullion LBM (USD/Troy Ounce) Soybean, No.1 Yellow (C/Bushel)

Australian steam coal (USD/metric tonne) Crude Oil-Brent Cur. Month (FOB USD/BBL) Source: Thomson-Reuters

Mar-12

Jan-12

Sep-13

Jul-13

May-13

Mar-13

Jan-13

Nov-12

Sep-12

Jul-12

May-12

Mar-12

Jan-12

600

Source: Thomson-Reuters

In the commodities market, some of the major global commodities prices such as coal, palm oil and crude oil tumbled significantly because of slackening demand from China and India. This makes Indonesia’s main revenue from such commodities decreased a lot. During 2013, West Texas Intermediate (WTI) and Brent crude oil prices range around 86-110 USD per barrel and 97-119 USD per barrel, respectively (Figure 3.9). The crude oil price, in particular, is also influenced by the geopolitical tensions over Syria and Iran and the confidence of stable supply to the market. On the other hand, Gold prices decline by 22.3 percent from the beginning of the year to October 2013 as its safe-haven appeal dimmed and USD exchange rates climbed off in past several months. Other commodities prices show a mixed picture. Soybean No. 1 price has spiked from 13.93 (USD/bushel) in the beginning of the year to 15.65 (USD/bushel) in June 2013 (Figure 3.10). In particular, the soybean prices in Indonesia market recently surged due to multi-year low domestic stock and reliance on soybean imports from United States. In contrast, coal prices have declined to 78.55 USD/metric ton in October 2013 due to

15

depressed global demand, particularly from China and India. In the long run, the increasing supply of shale gas energy may also depress coal prices4. While commodities prices remain under pressures, the prices of property for both residential and commercial purposes keep mounting. Bank Indonesia’s recent property survey documents that property prices in the primary market keep increasing with a growth rate of 12.1 percent (year-on-year) in the second quarter and 11 percent (year-on-year) in the first quarter of 2013. The price of residential properties with small size grows with the fastest pace, reaching 16.7 percent in August 2013 (year-on-year). Price increases also occur for properties for commercial purposes, especially in the Jabodebek area (Jakarta, Bogor, Depok and Bekasi). Sell prices for office buildings and retail shopping centers rose to 4.9 percent and 6.23 percent (year-on-year) in the second quarter of 2013, respectively. Rental rates of office buildings and shopping centers in the same area also increase by 3.3 percent.

4

Winarko, B., Mahadewi, L., 2013. “Shale gas energy alternative towards a rapid growth of coal energy demand: An analysis and proposed energy diversification model”. Proceeding, IAMB Conference, Saint Antonio, Texas, USA, 21-23 January 2013.

16

4. Banking and Entrepreneurship Development Following pressures on the Indonesia economic outlook, banking profitability also exhibits a mixed picture. Return on assets (ROA) for state-owned banks (SOB) shows the highest level followed by regional development banks (RDB), private non-foreign exchange banks (PNFB), joint venture banks (JVB), foreign-owned banks (FOB) and private foreign exchange banks (PFB). FOBs show a significant drop in ROA from 3.56 percent (June 2012) to 2.42 percent (July 2013), but it increases again in August 2013 (Figure 4.1). Meanwhile, JVBs exhibit the highest ROA at the beginning of the year, but ROA declines continuously until August 2013, rendering JVBs become the most unprofitable banks as of June 2013. Further, FOBs also exhibit the highest cost-to-income ratio (CTI) with an increasing trend, suggesting that FOBs is the most inefficient banks, where high operational costs in FOBs seem to limit profitability (Figure 4.2). In contrast, RDBs and SOBs are relatively more efficient than other bank types, since CTI exhibits the first and second lowest with a decreasing trend, respectively. With low CTI, both RDBs and SOBs can thus generate profits more efficiently.

SOB

PFB

PNFP

RDB

JVB

FB

Source: Authors’ calculation from Indonesian Banking Statistics (Bank Indonesia)

SOB

PFB

PNFB

RDB

JVB

FB

Jul-13

Aug-13

Jun-13

Apr-13

May-13

Feb-13

Mar-13

Jan-13

Dec-12

Oct-12

Nov-12

Jul-12

Aug-13

Jul-13

60.00 Jun-13

2.00 Apr-13

65.00 May-13

2.50 Mar-13

70.00

Jan-13

3.00

Feb-13

75.00

Dec-12

3.50

Oct-12

80.00

Nov-12

4.00

Sep-12

85.00

Aug-12

4.50

Jul-12

90.00

Jun-12

5.00

Sep-12

Figure 4.2. Cost-to-income ratio from six different bank types (percent)

Aug-12

Figure 4.1. Return on assets from six different bank types (percent)

Source: Authors’ calculation from Indonesian Banking Statistics (Bank Indonesia)

With regards to intermediation activities, FOBs tend to face higher constraints to boost lending than other bank types, since FOB’s cost-to-income ratio is the highest (Figure 4.2) and their net interest margin is the lowest (Figure 4.3). Higher cost-to-income ratio reflects higher inefficiency which might be due to costs related to lending operations, particularly in screening and monitoring loans. Higher cost-to-income ratio which is not offset by higher net interest margin further indicates that the capacity of banks to increase profit through loan expansion is limited. In term of capital adequacy ratio (CAR), FOBs is the highest reaching 32.06 percent in August 2013, followed by PNFBs and JVBs that reach 21.22 percent and 20.29 percent, respectively (Figure 4.4). In the meantime, the minimum CAR requirement stipulated by Bank Indonesia is only at the 8-10 percent level in average. Higher capital buffer (i.e. difference between CAR held by banks and that is stipulated by Bank Indonesia) highlights 17

that FOBs, PNFBs and JVBs are relatively more stable than other bank types. However, a higher capital buffer also means that intermediation activities tend to be more limited. In parallel, the ratio of total loans to total deposits (LDR) for JVBs and FOBs is the highest, followed by PNFB (Figure 4.5). For JVBs and FOBs, higher LDR is specifically due to lower core third-party deposits (Figure 4.6). Finally, RDBs have the lowest capacity in extending loans based on core third-party deposits (Figure 4.5), since their cost of intermediation is also among the highest (Figure 4.3). In August 2013, PNFBs unexpectedly experience a shortfall in the ratio of third party funds to total assets, possibly due to an increase in total assets, while the amount of third party funds remains stable (Figure 4.6). Figure 4.3. Net interest margin (NIM) (percent)

Figure 4.4. Capital adequacy ratio (CAR) (percent)

10.00

35.00

9.00

30.00

8.00

25.00

7.00 6.00

20.00

5.00 15.00

3.00

10.00 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13

Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13

4.00

SOB

PFB

PNFB

SOB

PFB

PNFB

RDB

JVB

FOB

RDB

JVB

FB

Source: Authors’ calculation from Indonesian Banking Statistics (Bank Indonesia)

Source: Authors’ calculation from Indonesian Banking Statistics (Bank Indonesia)

Figure 4.5. Loans-to-core deposits ratio (LDR) from six different bank types (percent)

Figure 4.6. Core deposits-to-assets ratio (DTA) from six different bank types (percent)

Jul-13

Aug-13

Jun-13

Apr-13

May-13

Mar-13

30.00

Jan-13

40.00

50.00 Feb-13

50.00

60.00 Dec-12

60.00

70.00

Oct-12

70.00

80.00

Nov-12

80.00

90.00

Sep-12

90.00

100.00

Jul-12

100.00

110.00

Aug-12

110.00

120.00

Jun-12

130.00

SOB

PFB

PNFB

SOB

PFB

PNFB

RDB

JVB

FOB

RDB

JVB

FOB

Source: Authors’ calculation from Indonesian Banking Statistics (Bank Indonesia)

Source: Authors’ calculation from Indonesian Banking Statistics (Bank Indonesia)

Overall, non-performing loans (NPL) by bank types are manageable within a range between 1.2 percent and 2.7 percent in August 2013 (Figure 4.7). A closer look shows that 18

the highest NPL ratio is in RDBs followed by SOBs, PNFBs, PFBs, FOBs and JVBs. With the lowest LDR, RDBs also have the highest NPL rate. In parallel, FOBs face higher constraints than other banks in boosting loans (Figure 4.2). Since NPLs in FOBs is the lowest (Figure 4.7), this evidence lends support to the notion that banks with foreign ownership might follow a “cherry-picking” strategy by selecting high quality borrowers and leaving low quality borrowers for local banks5. Such strategy will enhance the quality of loan portfolios held by JVBs and FOBs, but their role in boosting loans to risky borrowers which are mainly smaller businesses remains unclear at this stage. In terms of NPLs by sectoral breakdown, selected economic sectors perform differently rendering NPL ratios differ from one sector to another. NPL trends can also be differentiated based on loan utilization type and business orientation. From February 2013 to June 2013, aquaculture sector has the highest level of NPL ratio (Figure 4.8). Starting from July 2013, it is construction sector that exhibits the highest NPL ratio. Manufacturing sector shows a significant drop in NPL ratio from June 2012 to July 2013 (Figure 4.8), while other sectors show a relatively stable trend in NPLs. In relation to loan utilization type, non-performing loans are mainly driven by working capital loans followed by investment and consumption loans, respectively (Figure 4.9). Loans based on business orientations show a decreasing trend in general. NPL ratio is mainly driven by export-oriented loans followed by import-oriented loans and loans for other purposes (Figure 4.10). The highest NPL ratio from export-oriented loans is mostly due to the fact that Indonesia’s export orientation is based on raw commodities. Commoditiesbased exports are risky, because commodity prices are volatile in international markets. Such fluctuation in commodities’ prices may in turn affect the quality of loan repayments from export-oriented borrowers. Figure 4.7.Non-performing loans (NPL) by bank types (percent)

Figure 4.8. Non-performing economic sectors (percent)

loans

(NPL)

by

7

3.00 2.80 2.60 2.40 2.20 2.00 1.80 1.60 1.40 1.20 1.00

SOB

PFB

PNFP

RDB

JVB

FB

-3

Source: Authors’ calculation from Indonesian Banking Statistics (Bank Indonesia)

5

Jul-13

Aug-13

Jun-13

Apr-13

May-13

Jan-13

Feb-13

Dec-12

Oct-12

Nov-12

Sep-12

Jul-12

Aug-12

Mar-13

Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13

Jun-12

2

Agriculture Aquaculture Mining Manufacturing Construction Real eatate, rents and company services

Source: Authors’ calculation from Indonesian Banking Statistics (Bank Indonesia)

Jeon, BN., Olivero, M.P., Wu, J., 2011. Do Foreign Banks Increase Competition? Evidence from Emerging Asian and Latin American Banking Markets. Journal of Banking and Finance 35, 856-875.

19

Figure 4.9. Non-performing loans (NPL) by loan utilization type (percent) 3

Consumption

Jul-13

Aug-13

Jun-13

Apr-13

May-13

Feb-13

Import

Mar-13

Jan-13

Dec-12

Oct-12

Export

Source: Authors’ calculation from Indonesian Banking Statistics (Bank Indonesia)

Nov-12

Investment

Sep-12

Working capital

Jun-12

Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13

1.5

Jul-12

2

Aug-12

4.5 4 3.5 3 2.5 2 1.5 1 0.5 0

2.5

1

Figure 4.10. Non-performing loans by business orientation(percent)

Others

Source: Authors’ calculation from Indonesian Banking Statistics (Bank Indonesia)

On the one hand, the future prospect of each sector can be seen from bank loan growth in each sector. On the other hand, the current performance of each sector can be shown by banking support as seen in the portion of loan distribution. Figure 4.11 shows that trade sector exhibits the highest growth rate of loans in selected sectors in July 2013 (year-onyear). Loans to mining sector shows the lowest growth rate in July 2013 (year-on-year) and the mining sector loan growth rate also decreases from June to July 2013 (year-on-year). The agriculture and aquaculture sector loan growth rate (year-on-year) show a significant increase from in July 2013. Other sectors except construction and real estate sector, also show a slight increase in the loan growth rate from June to July 2013 (year-on year). In terms of banking supports, trade and manufacturing sectors are relatively better supported than other sectors, since both receive higher portion of loans than other sectors (Figure 4.12). Figure 4.11. Loan growth by economic sectors (percent, year-on-year) 35.00 30.00 25.00 20.00 15.00 10.00 5.00 -

Figure 4.12.Loan amounts by economic sectors (billion Rp) 700,000 600,000 500,000 400,000 300,000 200,000 100,000 -

June 2013 July 2013

Source: Authors’ calculation from Indonesian Banking Statistics (Bank Indonesia)

20

Jun-13 Jul-13

Source: Authors’ calculation from Indonesian Banking Statistics (Bank Indonesia)

Figure 4.13. Loan growth by the type of utilization (percent, year-on-year) 35.00 33.00 31.00 29.00 27.00 25.00 23.00 21.00 19.00 17.00 15.00

Figure 4.14. Loan distribution by the type of utilization (percent) 60.00 50.00 40.00 30.00 20.00

Investment loans

Aug-13

Jul-13

Jun-13

May-13

Apr-13

Mar-13

Feb-13

Jan-13

10.00 -

Consumption loans

Working capital loans

Investment loans

Source: Authors’ calculation from Indonesian Banking Statistics (Bank Indonesia)

Consumption loans

Working capital loans Source: Authors’ calculation from Indonesian Banking Statistics (Bank Indonesia)

Loan growth by the type of loan utilization shows that investment loans tend to dominate the trajectory of loan growth in recent months. Even though investment loans grow stronger than other types of loans (Figure 4.13), the significant portion of consumption loans distributed to the economy remains (Figure 4.14), putting the economy at risk. During June-July 2013, the growth of consumption loan growth exceeds the growth of working capital loan, but it is reversed as of August 2013. High growth rate of investment loans in June 2013 is due to a significant portion of investment loans distributed in June 2013 (Figure 4.14). Meanwhile, risks associated with high consumption loans lurk, such as the possible increase in current account deficit due to greater consumption and import in the near future. Figure 4.14 shows that the portion of consumption loans is higher than that of investment loans from time to time. The loan growth of micro, small and medium enterprises (MSMEs) is also dominated by investment loans, notably as of June 2013 (Figure 4.15). Meanwhile, the level of MSMEs loan distribution is dominated by working capital loans (Figure 4.16). Figure 4.16 may highlight that MSMEs still rely their business operation on a short-term basis, in which working capital loans are more proper than investment loans for such a purpose. On the other hand, a lower reliance on investment loans sheds light on the low capacity of MSMEs to realize long-term investment for business expansion. Figure 4.17 further confirms that MSMEs in trade sector including retail trade, which is less likely to require long-term investment, has received much higher portion of loans than other sectors. This trend may also reveal that MSMEs still face financial constraints to access a longer-term borrowing scheme (investment loans).

21

10 Aug-13

Jul-13

Jun-13

May-13

Apr-13

Mar-13

Feb-13

5

SME working capital loans

SME working capital loans

Source: Authors’ calculation from Indonesian Banking Statistics (Bank Indonesia)

Figure 4.17. MSMEs loan distribution by economic sector (percent, line chart for the trade sector - RHS) 12.00

54.00 53.00 52.00 51.00 50.00 49.00 48.00 47.00 46.00 45.00

10.00 8.00 6.00 4.00 2.00 Aug-13

Jul-13

Jun-13

May-13

Apr-13

Mar-13

SME investment loans

Source: Authors’ calculation from Indonesian Banking Statistics (Bank Indonesia)

SME investment loans

Feb-13

Aug-13

15

Jun-13

20

Apr-13

25

Feb-13

30

Dec-12

35

Oct-12

90 80 70 60 50 40 30 20 10 0

40

Aug-12

Figure 4.16. MSMEs loan distribution by the type of utilization (percent, year-on-year)

Jun-12

Figure 4.15. MSMEs loan growth by the type of utilization (percent, year-on-year)

Agriculture-Aquaculture

Mining

Manufacturing

Construction

Real estate

Services

Trade

Source: Authors’ calculation from Indonesian Banking Statistics (Bank Indonesia)

22

5. Risk and Outlook for Indonesia For 2014, short-run risks from international environments are apparent (Section 1), heightening pressures on the Indonesian economic resilience through three channels: 

The first channel comes from a possible increase in international fuel price due to a number of political turbulences in the Middle-East region. For a country with substantial fuel import and consumption like Indonesia, a higher fuel price may exacerbate fiscal deficit and current account deficit, at least in the short-run. In the meantime, the current levels of fiscal and current account deficit acquire a particular attention, if imports in the form of raw commodities with volatile prices continue to accelerate (Section 2).



The second channel is through spillover effects from the US economic downturns. A higher reliance on debt is required for the US government to continue fiscal expansion and to avoid default, although the process of increasing debt was challenging, forcing the US government shutdown during 16 days from October 1 to 16, 2013 with the final agreement to continue a QE policy. In parallel, when the Fed’s interest rate is close to zero, it may be time for investors to enter emerging countries like Indonesia. Vulnerability may occur shortly, given that short-term capital inflows remain substantial in Indonesia (Section 2).



The third channel is also through spillover effects from Japan’s expansionary fiscal policy in 2014, possibly causing a “currency war” that may end up in currency crises across countries including Indonesia. Though the implementation schedule is not yet determined, the Government of Japan has planned to provide a fiscal stimulus of JPY 5 trillion (USD 50 billion) in 2014. In order to offset a ballooning government spending due to fiscal stimulus, the government will also increase consumption tax from the current 5 percent to 8 percent in April 2014. The fiscal stimulus may be detrimental for the Japan’s economy, if it is not well managed to boost firms’ productivity that improves exports. Yet, the market may expect that the fiscal stimulus tends to deteriorate Japanese yen. Market expectation regarding Japanese yen’s depreciation will make US dollar even stronger, particularly when investors prefer US dollar to Japanese yen. Furthermore, Japan’s fiscal stimulus may be considered by other countries as a strategy of devaluating Japanese yen to offset the deterioration in Japan’s export to the US. Countries with the similar major trading partners with Japan may in turn devaluate their local currencies to gain export competitiveness. “Currency war” might be inevitable and thus, rendering US dollar stronger and depreciating Rupiah much deeper.



Other potential risks are the spillover effect from Eurozone slowdown and Middle East political turbulence. The uncertainty in Euro zone recovery may, to some extent, adversely affect Indonesian economy. Euro area’s annual inflation rate is 0.7 percent in October 2013, the slowest in about four years, and far below European Central Bank (ECB)’s target ceiling of 2 percent. Moreover, the unemployment across the euro zone hit record of 12.2 percent in September 2013, the highest since monetary union began at the end 0f 1990s, with the highest rates can be found in 23

Greece (27.6 percent) and Spain (26.6 percent) based on Eurostat data. Indonesia may be influenced by Europe if there is a financial turbulence in the EU resulting into foreign-fund withdrawal from Indonesia market. Thus, going forward, Indonesian investor and market participants still need to watch closely the development of European economic outlook. Risks can also come from domestic economic environments in the short run through the following channels: 

The government’s policy to support LCGC (“low cost green car”) products create further challenges, as it may encourage fuel consumption and consumption loans. An increase in fuel consumption may add burden to government budget, if subsidized fuel prices are not adjusted. Still, an increase in fuel consumption can also impede other government policies to deal with current account deficit, particularly if fuel import keeps increasing. Further, consumption loan applications may increase in the near term. However, risks can be managed when a proper macro-prudential tool by Bank Indonesia is implemented at the right time.



The 2014 general election tends to create uncertain economic environments. Direct investments – particularly from foreign counterparts – are expected to moderate. Despite this challenge, the 2014 election will boost domestic demand and increase consumption. This will also spur the supply side. When both are expected to grow, expected inflation may also increase. The 2014 inflation will likely to hike, especially if fuel prices keep increasing worldwide.



Competitiveness and productivity remain a major issue due to shortcomings in the subsidy scheme, particularly in electricity. For instance, the recent electricity crisis in Riau and North Sumatera as areas producing electricity will adversely affect firms’ productivity and competitiveness. During 2004-2013, electricity subsidies increase significantly from 3.4 trillion rupiah in 2004 to 46 trillion rupiah in 2009 and 80 trillion in 2013. Admittedly, spending on subsidies will clearly limit spending on other productive purposes, such as for infrastructure investment that matters for productivity improvement, competitiveness and economic growth.



Non-performing loans in construction and real estate sectors as of June 2013 combined with a persistent increase in property prices require a particular attention. The 1997 Asian crisis should have given a lesson in which loan concentration in one sector might be detrimental, especially if the macro situation is highly volatile. In this regard, all business entities need to be aware of the potential increase in systemic risk, when the aforementioned trend is persistent in several periods ahead and is combined with other deterioration in key indicators (e.g. current account deficit, foreign reserves shortfall, rupiah depreciation, high inflation, high leverage in banking, and high property prices).

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

Access to finance remains a major issue in developing the productivity and competitiveness of MSMEs6. With a higher portion of working capital loans compared to investment loans, MSMEs still face constraints in accessing longer-term sources of finance to boost value-added products that matter for export development.



CPI inflation is still a considerable source of risk to the Indonesian economy. Even though Bank Indonesia has recently change BI rate to contain inflation, inflation may remain high due to recent fuel price increases and lower rupiah exchange rate that increase the cost of imported goods. Higher inflation means higher cost of living that may potentially erode consumer and business confidence and reduce economic growth.

Considering plausible external and domestic situations, under the baseline scenario, a decline in Indonesia’s economic growth compared to the previous level (6.2 percent in 2012) can be thus expected, where the 2013 annual real GDP growth rate is projected at 5.49 percent. This baseline projection is grounded on the current state of the Indonesian economy (Table 5.1). Considering opportunities from a significant export growth by 10.5 percent and import growth by 6 percent in the last quarter of 2013 will make a positive trade balance. Household consumption growth is at the 5.95 percent level. Another assumption is that investment only grows at 3.25 percent in the last quarter of 2013 following the uncertainty over international environments. Under a more pessimistic scenario, Indonesia’s annual real GDP growth is projected at 4.62 percent in 2013 and 4.88 percent in 2014. These levels are based on several assumptions in which investment growth is only at the 2 percent level, household consumption grows only by 4.98 percent. Moreover, export and import are assumed to grow only at 9.33 percent and 4.70 percent, respectively due to the slowing global demand. The potential risk of the last quarter of 2013 is indeed a prolonged reduction in investment following the volatile financial markets and political turbulences in the Middle-East region. For 2014, the external threat such as Japan fiscal stimulus and quantitative easing in the U.S may put more pressures that deteriorate Indonesia’s export. In addition to that, the volatility of fuel price will possibly moderate the consumption growth in 2014. Under a more optimistic scenario, Indonesia’s annual real GDP growth is projected at 5.91 percent in 2013 and 5.85 percent in 2014. Several assumptions are as follows. Investment will grow by 7.10 percent, while household consumption grows by 6.92 percent. Moreover, export and import are assumed to grow only at 11.47 percent and 5.17 percent, respectively. Potential opportunities from the issuance of government policy packages in the last quarter of 2013 may accelerate export growth. Moreover, such policy package is also expected to provide greater incentive for foreign direct investment inflows to Indonesia.

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Special issues on MSMEs development and access to finance will be elaborated in the seminar of MSME outlook that will be held by Sampoerna School of Business in the near future.

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Moreover, Table 5.2 presents different forecast undertaken by several institutions. Our forecast on GDP for 2013 is relatively close to Bank Indonesia’s projection and the revised government budget projection. Meanwhile, our GDP growth projection for 2014 is nearly equal to the World Bank projection. Table 5.1 Nominal growth of GDP components under three scenarios (percent) Growth component

Baseline

Pessimistic

Optimistic

Investment

3.25

2.00

7.10

Household consumption

5.95

4.98

6.92

Government spending

8.85

8.85

8.85

Export

10.50

9.33

11.47

Import

6.00

4.70

5.17

Source: Authors’ calculation

Table 5.2 GDP growth forecast by various institutions (percent) Institution

2013

2014

The Economist

5.1

5.4

IMF

5.3

5.5

Sampoerna School of Business (SSB): 

Baseline Scenario

5.49

5.27



Optimistic Scenario

5.91

5.85

 Pessimistic Scenario World Bank

4.62

4.88

5.6

5.3

Bank Indonesia

5.5 – 5.9

5.8 – 6.2

Bank Danamon

5.6

5.9

ADB

5.7

6

Government of Indonesia (Ministry of Finance) 5.5 – 5.9 Notes: Compilation from various sources. SSB forecasts are authors’ calculation.

6

With regards specifically to our optimistic scenario, opportunities from consumption channel may contribute to boost economic growth by 5.9 percent in 2013 and 2014. The 2014 general election will likely to bring higher aggregate private consumption especially from political entities, through for instance, the needs for marketing services. Specifically, service sector like advertising will be projected to grow in 2014. Over the 2001-2011 period, the growing importance of online and digital media combined with a robust economic performance after the 1997 Asian crisis has made the Indonesian advertising market grow by 400 percent7. In 2013 alone, total spending on advertisement in Indonesia’s media in the first semester has grown 25 percent to 51.16 trillion rupiah compared to the same semester last year (Figure 5.1). Specifically, 68 percent of the total advertising cost in Indonesia comes 7

The 2012 Euromonitor International country report on Advertising in Indonesia : ISIC 743

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from advertising in television, followed by advertising in newspapers (30 percent) and magazines/tabloids (2 percent). Overall, with the upcoming general election in 2014 in mind, such advertising cost borne by political entities will be bigger and contribute to boost aggregate consumption. Yet, political entities also seem to spend a substantial amount of funds in the sub-national areas for campaign purposes and hence, spurring a higher consumption pattern from households. On the other hand, this kind of political event will bring some benefits to the media, printing companies, event organizers, poll-tracking consultant, advertisement agencies and public relation counselors.

Trillions

Figure 5.1. Advertising expense & advertising expense growth (Advertising expense in trillion Rp – LHS; advertising expense growth in percent - RHS) 60

35

50

30 25

40

20 30 15 20

10

10

5

0

0 2009

2010

2011

2012

Ad. Spending in the 1st quarter

2013

Growth

Source: Nielsen Company

Another channel that may contribute to achieve our optimistic scenario is through an increase in private investment at the central and sub-national level. At the central level, private investment may increase as a response toward the ongoing development project of mass rapid transportation and monorail in Jakarta. At the sub-national level, the development of 24 new airports as an important infrastructure for an archipelago country like Indonesia will contribute to boost investment at the sub-national level, in which around 12 and 5 new airports start to operate in 2013 and 2014, respectively. Our high projected growth of investment under the optimistic scenario may also be generated from investment to meet consumption needs of a growing middle class. For instance, demand for ICT products such as electronic gadgets will increase shortly due to a growing middle class, i.e. people who spend from USD 2 to 20 dollars per day. The middle class in Indonesia now accounts for 50 million people, which is projected to become 150 million people by 20148. Figure 5.2 also show that mobile cellular subscriptions (per 100 people) as well as internet users (per 100 people) have increased from time to time. As people become part of the middle class, their reliance on information technology may also increase. The growth of demand side and investment to meet demand growth, for example in ICT sector, will thus likely to continue in 2014. The similar trend in investment can be expected for other sectors which provide services for the needs of middle class. 8

KPMG, 2012. The rise of the middle class in Asian emerging markets.

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Figure 5.2. Demand for ICT services (Internet users – LHS, mobile cellular subscription – RHS) 18

140

16

120

14 100

12 10

80

8

60

6

40

4 20

2 0

0

2009

2010

2011

2012

Internet users (per 100 people) Mobile cell subscription (per 100 people)

Source: World Bank Development Indicators

Finally, moving toward the financial market side, Jakarta Composite index (JCI) is projected to increase by 2.78 percent in average (year-on-year) to 4,502.7 in the first quarter of 2014, despite the exchange rate risk and inflation threat. The 95 percent level of confidence for the JCI forecast ranges from 4304.4 to 4737. As concerns about the US and China market slowdown looms, JCI is expected to rebound from its weakening trend due to increasing capital inflows entering Indonesia. The recent rise of VIX index also provides supportive evidence of future positive response from JCI. Higher JCI in the future will also be expected to boost aggregate investments that matter for growth. Figure 5.3 Actual versus One-Step Ahead Forecast of Jakarta Composite Index 6,000

Forecast: JCIF Actual: JCI Forecast sample: 1953Q4 2014Q1 Adjusted sample: 1983Q4 2014Q1 Included observations: 121

5,000 4,000 3,000

Root Mean Squared Error Mean Absolute Error Mean Abs. Percent Error Theil Inequality Coefficient Bias Proportion Variance Proportion Covariance Proportion

2,000 1,000 0 -1,000 1985

1990

1995 JCIF

2000

2005

2010

± 2 S.E.

Source: Authors’ calculation from Thomson-Reuters

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163.6936 108.1511 17.87721 0.049809 0.000000 0.027671 0.972329

References Euromonitor International, 2012. Country report on Advertising in Indonesia : ISIC 743. Euromonitor. Jeon, BN., Olivero, M.P., Wu, J., 2011. Do Foreign Banks Increase Competition? Evidence from Emerging Asian and Latin American Banking Markets. Journal of Banking and Finance 35, 856875. KPMG, 2012. The rise of the middle class in Asian emerging (http://www.kpmg.com/FI/fi/Ajankohtaista/Uutisia-ja-julkaisuja/Kehittyvatmarkkinat/Documents/The-Rise-of-a-Middle-Class-in-Asian-Emerging-Markets.pdf)

markets.

Studenmund, A.H., 2011. Using Econometrics: A Practical Guide. Pearson: United States of America. Winarko, B., Mahadewi, L., 2013. “Shale gas energy alternative towards a rapid growth of coal energy demand: An analysis and proposed energy diversification model”. Proceeding, IAMB Conference, Saint Antonio, Texas, USA, 21-23 January 2013 World Bank, 2013. Indonesia Economic Quarterly 2013: Continuing Adjustment (http://www.worldbank.org/content/dam/Worldbank/document/EAP/Indonesia/IEQ-Oct2013ENG.pdf)

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