1

Maintaining Domestic Economic Recovery Momentum Executive Summary • After experiencing three consecutive trade deficits since Dec 2017, Indonesia recorded USD 1,092

mn trade surplus in Mar 2018, due to higher increase of export relative to import. Overall, 1Q 2018’s trade balance still managed to record surplus of USD 283 mn (although lower by 93% vs. 1Q 2017). In our view, the higher export was mostly driven by improved demand from Indonesia’s major trading partners such as China and Japan. Meanwhile, the higher growth of import (as impacted by higher import of productive goods) is a positive sign of growing domestic production in the near to medium term.

• Statistics Indonesia reported inflation rate in Mar 2018 at 0.20% MoM and 3.40% YoY, moderately higher than Feb 2018 of 0.17% MoM and 3.18% YoY, primarily caused by increase in fuel, spices and filtered clove cigarette. In the short term, prices of goods approaching Ramadhan and Eid Al Fitr might only slightly increase as it concurs with the big harvest season.

• We are still optimistic that the retail sales during Ramadan and Eid Al Fitr this year could surpass the growth in the same period last year. The potential increase was mostly due to the following factors, namely the implementation of elections in June 2018, improving coal and oil commodity prices, and disbursement of village funds which is expected to be timely distributed in the first half of 2018.

• Moody’s has upgraded Indonesia Sovereign Credit Rating from Baa3 with a Positive Outlook to Baa2 with a Stable Outlook on April 13th 2018. The key reasons of the upgrade are increasingly credible and effective fiscal and monetary policies. Going further, the upgraded ratings along with relatively stable economy will boost investor’s confidence, and may lower Indonesia’s cost of financing.

April 2018 Edition TALITHA NADIA AUDITA

RESEARCH ANALYST

RESEARCH UNIT

INVESTMENT BANKING DEVELOPMENT DEPARTMENT

+6221 5706185 EXT 2957

talitha_nadia_audita@id.mufg.jp

Indonesia Monthly Economic Update

MUFG Bank, Ltd. Jakarta Branch A member of MUFG, a global financial group 362/IBDD-RU/2018/TN

Indicators (Quarterly) * 3Q 2016 4Q 2016 1Q 2017 2Q 2017 3Q 2017 4Q 2017 GDP Growth 5.03% 4.94% 5.01% 5.01% 5.06% 5.19% Current Account / GDP (%) -2.03% -0.75% -0.90% -1.90% -1.73% -2.23%

Indicators (Monthly)* Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Trade Balance (USD mn) 1,772* 993* 207* (231)* (756) (53)* 1,092 Foreign Exchange Reserve (USD bn) 129 127 126 130 132 128 126

USD/IDR Exchange Rate (IDR per USD) 13,492 13,572 13,514 13,548 13,413 13,707 13,756

Inflation ( YoY) 3.72% 3.58% 3.30% 3.61% 3.25% 3.18% 3.40% BI Rate / 7 Day RR Rate 4.25% 4.25% 4.25% 4.25% 4.25% 4.25% 4.25%

Source: Statistics Indonesia, Bank Indonesia, CEIC, IBDD Research Unit Note: *) The figures above are subject to change in line with any revisions by Statistics Indonesia

Table 1: Indonesia Macroeconomic Indicators*

2

TRADE BALANCE 1Q2018’s trade balance still managed to record surp lus, owing to March export performance

• After experiencing three consecutive trade deficits since Dec 2017, Indonesia recorded USD 1,092 mn trade surplus in Mar 2018 (Figure 1). March’s trade balance turned to positive due to higher increase of export relative to import (Table 2).

• Owing to strong export in March, 1Q 2018’s trade balance still managed to record surplus of USD 283 mn (although lower by 93% vs. 1Q 2017 due to trade deficit in the first two months of 2018). Meanwhile, the cumulative export and import in 1Q 2018 grew by 9% YoY and 20% YoY respectively, as compared to 1Q 2017.

Export

• In Mar 2018, export increased to USD 15,580 mn (10% MoM), owing to increase in non-O&G export (e.g. mineral fuels; iron & steel; ore, crust, & metal ash).

• The higher export was mostly driven by improved demand from Indonesia’s major trading partners such as China and Japan.

Import

• Likewise, import increased to USD 14,488 mn (2% MoM) due to higher non-O&G import (e.g. machinery & mechanical planes and iron & steel).

• Broken down by category, import of raw materials/auxiliary goods and capital goods rose by 3% MoM and 9% MoM in Mar 2018, respectively. In contrast, import of consumption goods fell by 13% MoM, in line with the start of big harvest season which has maintained domestic food supply.

• The higher growth of import (as impacted by higher import of productive goods) is a positive sign of growing domestic production in the near to medium term.

Source: Statistics Indonesia, obtained from CEIC Note: *) The figures above are subject to change in line with any revisions by Statistics Indonesia

Figure 1: Indonesia Trade Balance

Source: Statistics Indonesia, obtained from CEIC Note: *) The figures above are subject to change in line with any revisions by Statistics Indonesia

Table 2: Indonesia Trade Balance*

in USD mn Feb-18

Mar-18

MoM Change YoY Change USD mn % USD

mn %

Total Exports 14,133 15,580 1,447 10% 901 6% Non-O&G Exports 12,742 14,242 1,500 12% 1,074 8%

O&G Exports 1,391 1,338 -53 -4% -173 -11%

Total Imports 14,186 14,488 303 2% 1,205 9% Non-O&G Imports 11,951 12,226 275 2% 1,219 11%

O&G Imports 2,235 2,262 28 1% -15 -1%

Trade Balance -53 1,092 1,145 2164% -304 -22% Non-O&G Balance 791 2,016 1,225 155% -145 -7%

O&G Balance -844 -925 -81 -10% -159 -21%

3

FOREIGN EXCHANGE RESERVES

Forex reserve to maintain the stability of Rupiah

• At the end of Mar 2018, BI reported a foreign exchange reserve position of USD 126 bn (Figure 2). This position decreased by approximately USD 2 bn from USD 128 bn posted at the end of Feb 2018.

• The lower forex reserves were influenced by the use of forex for external debt repayment and stabilization of the Rupiah. In addition, the declining placement of bank’s foreign exchange at BI was also affected by repayment of foreign currency liabilities.

• As per BI, outstanding forex reserves in Mar 2018 is sufficient to finance 7.9 months of import or 7.7 months of import and government’s external debt repayment, well above the international standards of reserves adequacy at 3 months of import (Table 3).

EXCHANGE RATE

Rupiah in depreciation territory

• During the first two weeks of Apr 2018, the Rupiah movement was relatively stable in the range of 13,747 – 13,771 per USD. The release of under-controlled domestic inflation was positively responded by the market (Figure 3).

• Entering the third week of April, USD/IDR was slightly pressured (weakened by around 1.9% YTD), primarily affected by external factors i.e. from the geopolitical tensions over Syria and trade war concerns during the first two weeks of the months.

• However, BI intervention had secured Rupiah from further depreciation.

Figure 2: Indonesia Foreign Exchange Reserves

Source: Bank Indonesia, obtained from CEIC

Figure 3: USD/IDR Exchange Rate

Source: Bank Indonesia, obtained from CEIC

(in months) Dec-17 Jan-18 Feb-18 Mar-18 Forex Reserves to Import 8.6 8.5 8.1 7.9 Forex Reserves to import and govt. external debt repayments

8.3 8.2 7.9 7.7

Table 3: Indonesia Forex to Import and Debt Repayment

Source: Bank Indonesia

4

BI RATE

• On Apr 2018’s Board of Governors Meeting, BI held the 7-day reverse repo rate (7-DRRR) unchanged at 4.25%, in line with market expectations. BI also keeps the deposit and lending facility rates at 3.50% and 5.00%, respectively (Figure 4).

• The current policy interest rate is considered to be sufficient to keep the inflation rate on track and the CAD at a healthy level. By keeping 7-DRRR unchanged, BI is striving to maintain macroeconomic and financial system stability, as well as supporting economic recovery.

• However, the risk of global uncertainty may force BI to redirect its benchmark rate policy as an effort to maintain IDR stability. Expectation of higher US inflation and rapid US economic recovery have been supporting the Fed's plan to raise its FFR two more times in the remaining 2018. Furthermore, an inward-oriented trade policy and a geopolitical issue in the Middle East could increase volatility in financial markets.

• In the medium term, we see that there is a room for 7-DRRR to be adjusted upward, if Rupiah continued to depreciate far beyond its fundamental. BI through its interest rate policy should be able to support IDR stability, although it would still consider domestic consumption growth.

Figure 4: BI Benchmark Rates

Source: Bank Indonesia, obtained from CEIC

BI’s 7-DRRR remain unchanged to maintain domestic m arket stability

5

INFLATION

Mar 2018 inflation: mainly impacted by fuel, spices and filtered clove cigarette price hike

• Statistics Indonesia reported inflation rate in Mar 2018 at 0.20% MoM and 3.40% YoY, moderately higher than Feb 2018 of 0.17% MoM and 3.18% YoY (Table 4).

• Inflation in Mar 2018 was primarily caused by increase of the following group indexes: o Transportation, Communication, and

Financial Service of 0.28% MoM, mainly due to inflation in transport infrastructures & services (e.g. fuel) by 0.47% MoM and transportations by 0.38%.

o Foodstuff of 0.14% MoM, mainly driven by inflation in spices (e.g. red chili, garlic, onion) of 7.74% MoM.

o Prepared Food, Beverages, Cigarette and Tobacco of 0.26% MoM, mainly driven by inflation in non-alcoholic drinks and tobacco & alcoholic drinks (e.g. filtered clove cigarette) of 0.35% MoM, each.

• Broken down by component groups, core inflation, the biggest contributor to March’s inflation, accelerated to 2.67% YoY in Mar 2018 (Figure 5). Volatile food component also increased from 3.10% YoY in Feb 2018 to 4.06% YoY in Mar 2018. Although rice experienced deflation of 2.04% MoM owing to the start of big harvest season, the impact of spices inflation has boosted volatile food price. Meanwhile, administered price slowed down from 5.29% YoY in Feb 2018 to 5.11% YoY in Mar 2018, showing that the impact of non-subsidized fuel increase (e.g. Pertalite) and PLN’s non-subsidized electricity tariff increase, both in Mar 2018 were relatively modest.

• According to Statistics Indonesia’s survey in 82 cities, 57 cities experienced inflation and the rest recorded deflation. Jayapura (Papua) still recorded the highest inflation of 2.10% MoM. In contrast, Tual (Maluku) recorded the highest deflation of 2.30% MoM.

Figure 5 : YoY Inflation

Source: Statistics Indonesia, obtained from CEIC

Period YoY* MoM**

Mar-17 3.61% -0.02%

Apr-17 4.17% 0.09%

May-17 4.33% 0.39% Jun-17 4.37% 0.69%

Jul-17 3.88% 0.22%

Aug-17 3.82% -0.07%

Sep-17 3.72% 0.13%

Oct-17 3.58% 0.01%

Nov-17 3.30% 0.20%

Dec-17 3.61% 0.71%

Jan-18 3.25% 0.62%

Feb-18 3.18% 0.17%

Mar-18 3.40% 0.20%

Table 4: Indonesia Inflation

Source: Statistics Indonesia, obtained from CEIC

6

OUTLOOK

• As released by BI, domestic retail sales performance improved in Feb 2018, growing by 1.5% YoY as mainly supported by increase in retail sales of other goods (Appendix 3, Page 9). The government would continue to provide stimulus to encourage household consumption by keeping inflation at manageable level and increasing social assistance targeted to lower income household. Under this backdrop, consumption (as reflected by retail sales index) are expected to continue to increase. We estimate the growth in household consumption in 2018 to reach 5.1% YoY, higher than the growth in 2017 at 4.9% YoY.

• We are still optimistic that the retail sales during Ramadan and Eid Al Fitr this year could surpass the growth in the same period last year. The potential increase was mostly due to the following factors, namely the regional elections in June 2018, improving coal and oil commodity prices, and disbursement of village funds which are expected to be timely distributed in the first half of 2018.

• In the short term, prices of goods approaching Ramadhan and Eid Al Fitr might

only slightly increase as it concurs at the same time with the big harvest season. Furthermore, inflation may reach approximately 3.60% YoY at the end of 2018 (within BI’s inflation target of 3.5% ± 1%, although slightly higher than the government’s assumption of 3.50% YoY). We consider Rupiah depreciation and higher oil prices may become the main factors influencing domestic inflation this year.

• The 2018 World Economic Forum (WEF) in Davos, Switzerland has brought an important message about the Fourth Industrial Revolution (Industrial Revolution 4.0). The Industrial Revolution 4.0 is a new era of industry that will involve more sophisticated virtual technology, such as Artificial Intelligence (AI), robotics development, Virtual Reality (VR) and three dimensional (3D) printing machines. The WEF estimates the Industrial Revolution 4.0 will give impacts in industrial processes and human life including job disruption, innovation and production capacity, business disruption, technology, as well as ethnic and identity issues.

• The Ministry of Industry has prepared four strategies to join the Industrial Revolution 4.0

Table 5: Historical and Forecasted Economic Indicators Indicators 2014 2015 2016 2017 2018F*)

GDP Growth (% YoY) 5.01 4.88 5.02 5.07 5.20 Inflation (% YoY) 8.36 3.35 3.02 3.61 3.50-4.00 BI Rate (until 2015) / 7-Day RR Rate (%) 7.75 7.50 4.75 4.25 4.25-4.75 Current Account / GDP (%) -3.09 -2.04 -1.82 -1.70 -2.0 Exchange Rate (USD/IDR) 12,440 13,795 13,436 13,548 See Table 6

Source: Statistics Indonesia (obtained from CEIC), IBDD Research Unit’s Calculation Note : 2014 – 2017 figures are historical figures 2018 figures are forecast

Table 6: Exchange Rate Forecast*)

Indicator 2017

Quarter 1 Quarter 2 Quarter 3 Quarter 4 Exchange Rate (USD/IDR)

13,288 – 13,485 13,255 – 13,410 13,154 – 13,492 13,483 – 13,630

2018

Quarter 1 Quarter 2 (F)* Quarter 3 (F)* Quarter 4 (F)* Exchange Rate (USD/IDR) 13,290 - 13,794 13,700 - 14,200 13,700 –14,200 13,700 – 14,200

Source: BTMU Jakarta Branch’s forecast *) Note: We may revise our forecast depending on market and economic condition

Q1 2018 Budget: Lower fiscal deficit

7

era, including: (a) encourage Indonesian workforce to continuously improve its capabilities and skills especially in using internet of things technology or integrating internet with production lines in the industry; (b) utilization of digital technology to boost productivity and competitiveness of small and medium industries (IKM) to penetrate export markets through e-smart IKM program; (c) utilization of more optimal digital technology in national industries such as Big Data, Autonomous Robots, Cybersecurity, Cloud and Augmented Reality; (d) encourage technological innovation through startup development by facilitating business incubation to enable more technology-based entrepreneurs. Therefore, we expect that there will be more job opportunities and new businesses that improve GDP growth going forward, with GDP growth forecast to reach 5.2% YoY in 2018.

• As per Ministry of Finance, tax revenues reached IDR 262.4 tn 1Q2018, or higher by 10.3% YoY. The growth was mainly supported by non-O&G revenue of IDR 233.1 tn (up by 10.7% YoY). Furthermore, realization of government spending in 1Q2018 was recorded at IDR 419.6 tn or grew by 4.9% YoY. As a result, the budget deficit in 1Q2018 was recorded at 0.58% of GDP, better than the deficit realization in 1Q2017 and 1Q2016 that reached 0.76% and 1% respectively (Appendix 11, Page 13).

• As such, the government considers that the Indonesian State Budget is still in a healthy and reasonable level. The government aims to increase tax revenue to achieve the target of tax revenue at the end of 2018. Their

efforts on utilizing technology to simplify and improve the tax service (e.g. online services) should improve Indonesia's taxation ratio this year.

• Moody’s has upgraded Indonesia Sovereign Credit Rating from Baa3 with a Positive Outlook to Baa2 with a Stable Outlook on April 13th 2018 (Appendix 12, Page 13). The reasons among others are increasingly credible and effective policy framework that have strengthened macroeconomic stability. The relatively strong financial buffers (as reflected by Indonesia’s forex reserves that reached all-time records in the past year), and prudent fiscal and monetary policy have also improved sovereign’s resilience and capacity to respond to shocks. Going further, the upgraded ratings along with relatively stable economy will boost investor’s confidence, and may lower Indonesia’s cost of financing (in relation to bond issuance), thus it may be easier for the government to find funds for the massive infrastructure projects. We also expect that this upgrade will have positive impact on Rupiah exchange rate stability.

• In our view, Indonesia currently has a good foundation for FDI with investment grade from 5 rating agencies (i.e. S&P, Moody’s, Fitch, JCRA, and R&I), improved position in Ease of Doing Business (from 91 to 72), and improved position in Global Competitiveness Index (from 41 to 36). For Ease of Doing Business, Indonesia is also recognized as one of the Top Improvers, and Indonesia’s current position is already above India, Brazil and Philippines. We expect investment would remain to be the main driver for 2018’s GDP growth.

(End of Report)

8

APPENDICES:

Appendix 1: 4W Monthly Sales

Source: GAIKINDO, Astra International

Appendix 2: 2W Monthly Sales

Source: AISI, Astra International

9

Appendix 3: Retail Sales Index

Source: Bank Indonesia

Appendix 4: Consumer Confidence Index

Source: Bank Indonesia, extracted from CEIC

10

Appendix 5: Manufacturing Purchasing Manager’s Inde x

Source: Nikkei, obtained from Bloomberg

Appendix 6: Indonesia Crude Oil Price

Source: CEIC

11

Appendix 7: Indonesia Coal Price Reference

Source: Ministry of Energy and Mineral Resources, obtained from CEIC

Appendix 8 : Malaysia Palm Oil Board – Crude Palm Oil Monthly Average Price

Source: Malaysia Palm Oil Board

12

Figure 12: Commodity Price Forecast

Appendix 9: Commodity Price Forecast

Source: World Bank Forecast

Appendix 10: NPL and Credit Growth in Commercial Ba nks

Source: OJK (Indonesia Financial Services Authority), obtained from CEIC

13

IDR tn APBN 2018 Realization up to 31 May 2018

2018 Realization

(% of Target)

YoY Realization

Growth

A. Revenue and Grant 1,894.7 333.8 17.6% 13.3%

1. Tax revenue 1,618.1 262.4 16.2% 10.3%

a. Domestic tax 1,424.0 244.5 17.2% 9.9%

b. International trade duty & Excise 194.1 17.89 9.2% 15.8%

2. Non-tax revenue 275.4 71.1 25.8% 22.2%

3. Grant 1.2 0.3 22% 78.1%

B. Expenditure 2,220.7 419.6 18.9% 4.9%

1. Central government expenditure 1,454.5 233.95 16% 14.2%

2. Transfer to region & Village fund 766.2 185.6 24.2% -4.9%

Fiscal Surplus/Deficit (A-B) (326.0) (85.8) 0.6% -18.7%

Budget Financing 326.0 149.8 46.0% -20.6%

Appendix 11: 2018 State Budget

Source: Ministry of Finance

Rating Agencies Indonesia Sovereign Credit Rating

Outlook

Standard & Poor's BBB- Stable

Fitch Ratings BBB Stable

Moody's Investor Service Baa2 Stable

Japan Credit Rating Agency BBB Stable

Rating and Investment Information Inc BBB Stable

Appendix 12: Indonesia Sovereign Credit Rating as of Apr 2018

Source: Bank Indonesia

14

MUFG Bank, Ltd. Jakarta Branch ECONOMIC RESEARCH TEAM

Budi Mulyono Rahmat Hendratama Head of Market Sales & Trading Dept Head of Investment Banking Development Dept budi_mulyono@id.mufg.jp rahmat_hendratama@id.mufg.jp

Ronald Charles Senior Research Analyst - IBDD ronald_charles@id.mufg.jp Talitha Nadia Audita Research Analyst - IBDD talitha_nadia_audita@id.mufg.jp

Disclaimer This report was prepared by MUFG BANK, LTD., Jakarta Branch (the “Bank”) for general distribution. The report does not represent the Bank’s view nor does it imply the Bank’s endorsement. This report is delivered to you on the basis of your agreement to preserve the confidentiality of the information contained herein and of the nature of the report, except to the extent that such information was already known to you or was public knowledge or in public literature generally available to the public or otherwise in the public domain, at the time of such disclosure to you, or otherwise become lawfully known to you without breach of any duty of confidentiality by any person. The Bank has endeavored to include in our report only such information as it believes to be correct, however we do not make any representation or warranty as to the accuracy or completeness of such information. Moreover, any past performance of related items shown in the report does not guarantee future performance of projection. The Bank does not pledge to the finalization and execution of the proposals illustrated herein. The information and data contained therein are not a substitute for the recipients’ independent evaluation and analysis. This report is not, nor should it be construed as, any financial commitment, either expressed or implied, by the Bank to lend or provide the Bank’s products and/or services to any other parties in any way whatsoever. This report is protected by copyright laws under applicable jurisdictions. Information contained herein may not be reproduced, distributed, transmitted, displayed or broadcasted without prior written consent of the Bank.