Global Economy in 2015World Overview

Global economy growth until September 2015 is remain moderate, but growth are uneven accross the world. Some causative factor that drives the economy limit are : Financial market volatility, declining commodity prices, emerging market slow down, weaken currency towards US Dollar accross the world. While most country experience slow growth, the US has managed to recover from economic downturn. The global productivity are growing slower year on year since 2010 in which the global economy recover from 2008 Global crisis which accelerate at 5.4% increase from 2009 to 2010, but become stagnant from 2012 to 2014 at 3.4% productivity growth range. While in 2015 the global economy slowing down to 3.1%.

Exhibit 1: World Economic Output Growth

Source: IMF Economic Outlook

Advanced economy recover, emerging market growth hurt. The advanced economy mostly are growing faster at 2014, the largest contribution on the growth is United States as the economy are climbing out of crisis in which the inflation rate of US is rising to 0.5% in November 2015 supported by robust Non-Farm Payroll at 211.000 in November 2015 beats expectation which is at 200.000 according to Trading Economics data. The US decided to rise the interest rate by 0.25% to pump up their inflation rate faster . The interest rate now stands at 0.5% which drives the US Dollar stronger than emerging market currency.

1997 - 2006

Average

2007 2008 2009 2010 2011 2012 2013 2014 2015F

4

5.7

3.1

0

5.44.2

3.4 3.3 3.4 3.12.8 2.8

-0.2

-3.4

3.11.7 1.2 1.1

1.8 2

5.4

8.7

5.8

3.1

7.56.3

5.2 5 4.6 4

Output Growth

Global Advanced Economy Emerging Market

Commodity price halt emerging market growth.The advanced economy rapid growth made the USD stronger than other emerging market currency and the falling commodity price that is mainly hurt by falling oil price since 2013 which drops from $105,87 on average to $50,14 on 2015. As the lower exchange rate and prices down, the oil producing country will suffer greater loss on their trade balance. This has the same impact to other commodities producing country.

Exhibit 2 : Average Yearly World Oil Price

Source : Opec Basket Price

China import demand slower. China imports mainly are electromechanical product which contributes around 43% of total imports, Crude oil contributes 12% of total imports and iron ore contributes 5% of total import. China import has been declining for 13 month straight mostly on commodities due to weak demand. The declining China demand has main impact to China main trading partner such as European Union, ASEAN, Japan, South Korea , taiwan and Australia.

Exhibit 3 : Monthly China Import

Source : Tradingeconomics.com, China General Administration of Customs

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

24.36 28.136.05

50.64

61.0869.08

94.45

61.06

77.45

107.46 109.45 105.87

96.29

50.14

Average Yearly Oil Price

Oil Price

Indonesia Overview

Rupiah performance weight down trade balance. The Rupiah is weakening since June 2013 which suddenly hike from Rp 9,925 per USD to Rp 10,278 per USD or a 3.55% growth and keep hiking to Rp. 13,905 per USD at the start of December 2015. This higher exchange rate effect directly to company’s corporate bond that uses USD to pay for the bond maturity and coupon which in the end increases company’s cost of fund. Oil price and other commodities which contributes 33.9% and 25% with total of 58.9% of total Indonesia exports are getting double pressure as the declining price and exchange rate are weakening.

Exhibit 4 : USD to Indonesia Rupiah Exchange Rate

Source : Bank Indonesia

Indonesia annual GDP Growth Slowing since Januari 2015. Indonesian annual GDP growth decreases from 5.01% to 4.67% as the lowest point in second quarter 2015. Breaking down the GDP components, the government spending and investment in Indonesia are the contributor of GDP growth in 2015 while the balance of trade declining and private consumption growths lowing down from early 2015. Government spending in 2015 is IDR 2,039.5 Trillion rupiah, Indonesia investment reached IDR 92.5 Trillion on Q3 which is 16.75% growth on average from Q4 2014. Indonesia balance of trade reached deficit on November 2015 and Consumer spending rises to IDR 1,250 Trillion from IDR 1,075 Trillion early 2015.

Exhibit 5 : Indonesia GDP Annual Growth Rate

Dec-12

Feb-13Apr-1

3Jun-13

Aug-13Oct-

13

Dec-13

Feb-14Apr-1

4Jun-14

Aug-14Oct-

14

Dec-14

Feb-15Apr-1

5Jun-15

Aug-15Oct-

15

Dec-159000

10000

11000

12000

13000

14000

15000USD/IDR Exchange Rate

USD/IDR Exchange Rate

Source : Trading Economics, Indonesia Statistic

Government release stimulus package in response to slowing economic growth. Indonesian government responding by releasing 7 stimulus packages to push economy growth faster. The 7 stimulus are including :

Stimulus Package Summary

1 Deregulation, Investment in property sector and rural economy focus2 Push export, Tax allowance and holiday, facility incentive3 Decrease in industrial electricity fee, decrease in people business credit4 Increase in minimum labor wage alligned with inflation5 Tax for asset revaluation, erase double taxationfor property and infrastructure

sector, easing syariah banking permit6 Tax incentive for special economic region, faster permit for pharmacutical material

import, regulating natural water resource for private sector7 Tax incentive for labor intensive industry, faster land certification process8 Reduce fuel price and improve logistic in Indonesia to reduce basic needs priceExhibit 6 : Government Stimulus Summary 2015

Source : Indonesia Ministry of Fiannce

Government Spending in Q3 still far from target. The spending budget only marked a deficit in Q3 as there are only 62.43% Revenue, while total spending has reached 69.73%. Government suffer Total Deficit of 283.7 Trillion Rupiah per October 2015.

Government Income and Spending Budget in Trillion Rupiah January – Octrober 2015

State Income Budget Realization PercentageIncome Tax 679,3 440,8 64,89%

Value added Tax 576,5 308,2 53,46%Property Tax 26,7 13,8 51,69%Custom Tax 145,7 98,5 67,60%Other Tax 11,7 4,4 37,61%

Import Duty 37,2 25,3 68,01%Export Duty 12,1 3,1 25,62%State owned

Enterprise 37 35,5 95,95%Natural Resource

Income 119 92 77,31%Non State Tax

Revenue 90,1 56,9 63,15%Public service

Income 23,1 20,6 89,18%Grant 3,3 0,8 24,24%

Total Income 1761,7 1099,9 62,43%State Spending Budget Realization Percentage

Employee Expenditure 299,3 234,2 78,25%Equipment

Expenditure 259,7 131,5 50,64%Capital Expenditure 252,8 99,1 39,20%Domestic Interest

Expense 141,2 122,1 86,47%Foreign Interest

Expense 14,5 11,2 77,24%Total Subsidy 212,1 151,4 71,38%

Grant Expenditure 4,6 0,6 13,04%Social assistance 103,6 76 73,36%

Other Expenditure 31,7 3,7 11,67%Regional Transfer 643,8 537,2 83,44%

Rural Fund 20,8 16,6 79,81%Total Spending 1984,1 1383,6 69,73%

Total Surplus/Deficit -222,4 -283,7 127,56%

Exhibit 7 : Government Income and Spending Budget

Source : Indonesia Ministry of Finance

Indonesia stock performing badly in 2015. Jakarta composite index were openned at 5233.796 in early January 2015, peaked at April 2015 reaching 5524.036 and reached the lowest point at September 2015 with 4,033.587. Jakarta Composite per 1 December 2015 were closed lower by -14.62% from 2015 opening . Indonesia capital market booked a total of IDR 22 Trillion of net sell. The global sentiment to emerging market that rely on commodity export are waning as the commodity price are declining since mid 2014.

Exhibit 8 : Jakarta Compostie Index Monthly Data 2015

Source : Yahoo Finance

Jakarta Composite are relatively flat from October 2015 to December 2015. Market sentiment towards Indonesia still questioned as the capital foreign outflow mostly done between September to December 2015. All indonesian sectors per 22 December 2015 are in red zone. Mining and Agriculture sector are

Index by Sector Changes in 2015Agriculture -33,03%Basic-IND -25,26%Consumer -8,05%Finance -8,38%Infrastructure -15,95%Manufacture -15,00%Mining -41,67%Property -10,33%Trade -7,65%

Exhibit 9 : Sectoral Indices changes in 2015

Source : Indonesia Stock Exchange (IDX)

Dec-15Nov-15Oct-15Sep-15Aug-15Jul-15Jun-15May-15Apr-15Mar-15Feb-15Jan-15400042004400460048005000520054005600

Jakarta Composite Index Performance 2015

Adjusted Closing Price

What to Expect in 2016

Federal Reserve Potentialy Raise the Interest Rate. The Fed most likely will increase more interest rate in 2016 as the inflation target of US still far from target at 2% which currently stands on 0.5%. The Fed are looking for Personal Consumer Expenditure (PCE) as the indicator of inflation. To increase the inflation rate, central bank interest rate hike can help to pump the inflation as the cost of fund from other businesses are going up which influenced the business owner to raise consumer price and lead to cost push inflation in the end. It is expected that the Fed will have another increase of 0.25% in Q1 2016, but we expect that it will not stop there. The Fed will use Non-farm Payroll (NFP) and PCE data for inflation indicator and effectiveness of interest rate hike. Most likely the impact of interest rate hike will affect the currency of other country that heavily depends on USD for their trades.

China Demand Remain Low in 2016. As China is shifting into consumption country rather than manufacturing focus. As the consumption raising from year to year reaching all time high in 2014 at 241,541.70 Chinese Yuan per person while the import and export of China declines since 2013 from 207,742 Million USD to 197,242 Million USD in November 2015 for Export. China import declines since 2013 from 182,101 Million USD and reached 143,139 Million USD by the end of November 2015. China import component according to China general administration of customs are 48% import of electromechanical product mostly are from European Union, Japan, South Korea and Taiwan while the Commodity import have 17% of the portion mostly are from Australia, ASEAN country, South Africa and Brazil will be affected from China demand.

Nov-15

Oct-15

Sep-15

Aug-15

Jul-15

Jun-15

May-15

Apr-15

Mar-15

Feb-15

Jan-15

Dec-14

Nov-14

Oct-14

Sep-14

Aug-14

Jul-14

Jun-14

May-14

Apr-14

Mar-14

Feb-14

Jan-14

Dec-13

90000000

110000000

130000000

150000000

170000000

190000000

210000000

230000000

250000000

$197,242,316 $207,742,423

$143,139,253

$182,101,573

China Export and Import 2013 - 2015

Export Import

Exhibit 10 : Monthly China export and import from 2013

Source : China bureau of statistics

Commodity will remain pressured in 2016. Oversupply of oil in 2015 still cannot be resolved and keep the pressure under $40 per USD until end of December 2015 and drive other production cost lower which lead to commodity price under pressure. Stronger USD exchange rate with raising interest rate hike outlook in 2016 can harm commodity demand as the commodity are mostly priced using USD. Mining product got hit from China demand, mostly hit Australia, Indonesia, and other mineral producing country.

Advanced Economy Trying to Trail Up With US Economy. The European Union is looking to ease more on their currency by lowering more on deposit interest rate into -0.3% to stimulate more on consumption and investment in Euro Zone. In 2016 it is expected that European Central Bank will not cut rate in the future as the main goal is to weaken the currency exchange rate towards USD which the USD is getting stronger as they will rise further interest rate in the future. In other advanced economy, Japan did not change their interest rate as expected and focus more on financial market. Japan outlook in 2016 will see a slow increase as demand from China as their main export target is slowing down and consumer spending will increase which help the output of Japan to 1%.

Exhibit 11 : Euro Zone GDP Growth Rate Quarter on Quarter

Source : Trading Economics

Indonesia in 2016

Focus on consumption and investment. As the balance of trade component in GDP has weaken from month to month which both export and import are falling and reached -350 Million USD for November trade, and Government spending in 2015 marked a total deficit of IDR 284 Trillion and primary balance of IDR -150.6 Trillion. Government is looking increase the utilization of the budget for rural area targeted to reach 100% by end of year.

Exhibit 12 : Indonesia Balance of Trade

Source : Trading Economics

With this data, we conclude that in 2016 we see the USD strength will extend furthermore as the interest rate of Fed rate will increase while the commodity price will remain low in 2016 which will drive Indonesian total export and import pressured. With higher USD exchange rate, this drive Indonesian manufacturer to export which alligned with government stimulus package number 1 which gives easy access for exporters.

2016 government income and spending budget improved 5.62%. The government spending budget from 2015 to 2016 did not change much from 1,984.1 Trillion Rupiah budgeted at 2015 and in 2016 it is 2,095.7 Trillion Rupiah Budgeted which has 5.62% changes from 2015. The concern in 2016 is more on the income tax which only improve bye 3.45% on budget. The realization of tax income in 2015 per October shows that the tax collection is slowing down, only 60% of the budget even the government eases the tax payment to the tax payer. In 2016 we predict that tax payment should be better as the government still hold the tax amnesty project, but there is no sign that government can collect taxes above 90% if the GDP remain growth keep slowing down at 4.7%. As the budget spending increase mostly on rural fund and regional funding, we conclude that the economy in suburban area will grow faster than current big urban city such as Jakarta, Medan, Yogyakarta, Surabaya and others.

Government Budget and SpendingIncome 2015 2016 Changes

Tax Income 1526,2 1546,7 1,34%Non Tax Income 232,2 273,8 17,92%

Grant 3,3 2 -39,39%Total Income 1761,7 1822,5 3,45%

Spending

Ministry Spending811,8 784,1 -3,41%

Non Ministry Spending 507,7 541,4 6,64%

Regional Spending643,8 723,2 12,33%

Rural Fund20,8 47 125,96%

Total Spending1984,1 2095,7 5,62%

Total Deficit or Surplus -222,4 -273,2 22,84%

Exhibit 13 : Government spending and income budget comparison 2015 and 2016

Source : Indonesia Ministry of Finance

Consumption and investment focus for GDP. As the government spending and balance of trade outlook in 2016 don’t improve significantly, we expect only consumption and investment in the GDP component can increase. With lower inflation rate target at 4% in 2016, BI will have room to cut rate about 0.5% to push lending and financing for investment component, while in the same time will improve indonesian consumer spending as Indonesian banking seen to target more on consumer credit as the big 4 banks are said to focus more on mortgage, small business enterprise, and car loans.

Performance Jakarta Composite 2016 PE Ratio Forecast. The jakarta composite index Price to Earning Ratio will increase to 13,9x in 2016. Current market P/E Ratio is 12,3x with standard deviation on 2,42x . We assume that the economy will stay flat in the 1st half. Some positive consideration are lower fuel price, lower BI Rate Outlook and higher company performance. While the positive side is hindered by the outlook of Fed Rate hike, we assume the composite will move only 0,68% form it’s standard deviation while earnings can increase inline with the GDP growth of 5,2%. The conclusion is that PE Ratio will reach 13,9x while earnings will increase 5,2% in which result the compostie will reach 5488 for 2016.

Forward P/E Ratio 2016

Exhibit 14 : Price to Earning Projection 2016

source : Author, IDX Statistic

2015 2014 2013 2012 2011 2010 2009 2008 2007 2006Average PER 12,3 19,61 17,89 14,71 12,74 16,29 15,07 12,2 17,88 14,7

Sttd Deviation 2,425491497