tinjauan ekonomi, keuangan, & fiskal...3rd edition 2019 | tinjauan ekonomi, keuangan, dan fiskal...

Edisi Triwulan II 2018 | Tinjauan Ekonomi, Keuangan, & Fiskal 1

The Role of Domestic in Supporting Economic Growth

3rd Edition 2019

Special Analysis: Pension Funds as an Alternative for Long-Term Financing Source

TINJAUAN EKONOMI, KEUANGAN, & FISKAL

Published by: Fiscal Policy Agency

Director: Chairman of Fiscal Policy Agency

Lead Author: Director of Center for Macroeconomics Policy

Managing Editors: Executive Secretary of Fiscal Policy Agency, Director of Center Macroeconomics Policy, Director of Center for Budget Policy, Director of Center for Financial Sector Policy

Editorial Boards:

Andriansyah, Brian Thomas, Endang Larasati, Evy Mulyani, Ronald Yusuf, Thomas N.P.D Keraf, Wahyu Utomo, Widiyanto, Yoopi Abimanyu

Editors: Abdul Aziz, Achmad Budi S., Ahmad Wira Kusuma, Aktiva Primananda, Ali Moechtar, Alfan Mansur, Asep Nurwanda, Dwi Anggi Novianti, Immanuel Bhekti H., Indra Budi Sucahyo, Pipin Prasetyono, Putri Rizki Yulianti, Raditiyo Harya P., Rahadian Zulfadin, Roni Parasian, Tuti Sarinigsih Budi Utami, Yasir Niti Samudro

Graphic Designers:

Abraham Putra Agung, Arif Taufiq, Bramantiyo, Fatima Medina Septiyanti

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Website: www.fiskal.kemenkeu.go.id

Tinjauan Ekonomi, Keuangan, dan Fiskal is

published quarterly by Fiscal Policy Agency,

Ministry of Finance. It contains recent economic,

fiscal, and finance development.

3rd Edition 2019 Photo Cover: Fabric Market

Edisi Triwulan II 2018 | Tinjauan Ekonomi, Keuangan, & Fiskal 3

INDONESIA ECONOMIC, FINANCE, AND FISCAL REVIEW The Role of Domestic in Supporting Economic Growth

3rd Edition 2019

VISION

“Become a trusted unit in the formulation of anticipatory and responsive fiscal and financial sector policy to create a prosperous Indonesian society”

3rd Edition 2019 | Tinjauan Ekonomi, Keuangan, dan Fiskal 1

FOREWORD

he global economic outlook will continue sluggish with escalating pressures. The trade

war tension was increased in early August and shows no signs of reconcilement shortly.

In Indonesia, these dynamics have begun to have a negative impact on investment

performance and international trade. However, Indonesia was able to maintain its

healthy macroeconomic fundamentals with solid economic growth, especially supported by

strong domestic consumption; manageable inflation; stable banking sectors; and capital flows

that still recorded a net inflow.

These fundamental conditions must be maintained and improved because of the increasing

uncertainty in future global economic development. Consumption as an engine of economic

growth must be maintained along with encouraging investment. Fiscal policy and the State

Budget must continue to support these efforts to achieve economic stability. Until July 2019,

the realization of the state budget still shows good absorption performance with a manageable

deficit. Going forward, the Government will focus on accelerating the competitiveness and

quality of human resources through the 2020 Budget Plan.

Having The Role of Domestic Demand in Supporting Economic Growth as the theme for this 3rd

edition of Tinjauan Ekonomi, Keuangan, dan Fiskal in 2019, we want to emphasize the strong

domestic consumption in Indonesia amid global uncertainty. There is a special chapter in this

edition about long-term financing strategies to support sustainable development. The report

also includes two boxes that discuss poverty rates and inverted yield curves in the US.

The TEKF is a quarterly economic report that provides recent data and information on the

macroeconomy, financial sector, and fiscal policy. TEKF is expected to be a reference for

stakeholders to review recent developments in Indonesia’s economic performance and fiscal

policies.

T

2 3rd Edition 2019 | Tinjauan Ekonomi, Keuangan, dan Fiskal

In conclusion, we would like to extend our high appreciation and gratitude to all contributors

to the TEKF. We also welcome constructive advice from readers to assist us in continuing to

improve the TEKF for the future.

Best Regards,

September 2019

Suahasil Nazara

Chairman of Fiscal Policy Agency


CONTENTS

FOREWORD ....................................................................................................................................................................... 1

CONTENTS .......................................................................................................................................................................... 3

ABBREVIATIONS ........................................................................................................................................................... 4

SNAPSHOT OF INDONESIA’S ECONOMY 2019 ............................................................................................... 6

EXECUTIVE SUMMARY .............................................................................................................................................. 7

MACROECONOMIC DEVELOPMENT ANALYSIS ....................................................................................... 10

A. GLOBAL ECONOMIC DEVELOPMENT ................................................................................................. 12

B. FINANCIAL AND MONETARY SECTOR IN INDONESIA ........................................................... 15

C. INDONESIA’S TRADE .................................................................................................................................... 21

D. INDONESIA’S BALANCE OF PAYMENTS ........................................................................................... 22

E. INDONESIA’S GDP GROWTH IN 2ND QUARTER 2019 .................................................................. 24

F. INDONESIA’S INFLATION .......................................................................................................................... 27

G. INDONESIA’S BANKING SECTOR PERFORMANCE ...................................................................... 29

BUDGET PERFORMANCE ANALYSIS AND FISCAL POLICY ................................................................ 40

A. FISCAL PERFORMANCE AS OF JULY 2019 ....................................................................................... 42

B. 2020 BUDGET PLAN: COMPETITIVENESS ACCELERATION THROUGH INNOVATION

AND STRENGTHENING HUMAN CAPITAL .................................................................................................. 46

SPECIAL ANALYSIS: PENSION FUNDS AS AN ALTERNATIVE FOR LONG TERM

FINANCING SOURCE ................................................................................................................................................. 52

A. BACKGROUND ................................................................................................................................................. 54

B. PENSION FUND INDUSTRY IN INDONESIA ..................................................................................... 54

C. CURRENT PROBLEMS ................................................................................................................................... 54

D. POLICY RECOMMENDATIONS ................................................................................................................ 59

MACROECONOMIC INDICATOR DATA .......................................................................................................... 60

BUDGET REALIZATION JULY 2018 AND JULY 2019 ................................................................................ 60


ABBREVIATIONS

APBN : Anggaran Pendapatan dan Belanja Negara

AS : Amerika Serikat

ATMR : Aktiva Tertimbang Menurut Risiko

BI : Bank Indonesia BKF : Badan Kebijakan Fiskal

BOPO : Belanja Operasional terhadap Pendapatan Operasional

BOS : Bantuan Operasional Sekolah

BPJS : Badan Penyelenggaraan Jaminan Sosial

BPS : Badan Pusat Statistik

bps : basis points

BUMN : Badan Usaha Milik Negara

CAR : Capital Adequacy Ratio

CHT : Cukai Hasil Tembakau

CPO : Crude Palm Oil

DAU : Dana Alokasi Umum

DJIA : Dow Jones Industrial Average

DJPK : Direktorat Jenderal Perimbangan Keuangan

DJS : Dana Jaminan Sosial

DN : Dalam Negeri

DPK : Dana Pihak Ketiga

DPLK : Dana Pensiun Lembaga Keuangan

DPPK : Dana Pensiun Pemberi Kerja

DRFI : Disaster Risk Financing and Insurance

7DRR : 7 Days Repo Rate

DTK : Dana Transfer Khusus

DTU : Dana Transfer Umum

FDI : Foreign Direct Investment

FFR : Fed Fund Rate

FOB : Freight on Board

FTSE : Financial Times Stock Exchange

G-20 : Kelompok 20 ekonomi utama

GFC : Global Financial Crisis

GDP : Growth Domestic Product

GWM : Giro Wajb Minimum

HBKN : Hari Besar Keagamaan dan Nasional

HS : Harmonized System

IBS : Industri Manufaktur Besar dan Sedang

ICT : Information and Communications Technology

IHPR : Indeks Harga Properti Residensial

IHSG : Indeks Harga Saham Gabungan

IKK : Indeks Keyakinan Konsumen

IKNB : Industri Keuangan Non-Bank

IMD : International Institute for Management Development

IMF : International Monetary Fund

IPM : Indeks Pembangunan Manusia

IPR : Indeks Penjualan Riil

Jamsostek : Jaminan Sosial Tenaga Kerja

JHT : Jaminan Hari Tua

JP : Jaminan Pensiun

K/L : Kementerian/Lembaga

KI : Kredit Investasi

KIP : Kartu Indonesia Pintar

KK : Kredit Konsumsi

KLCI : Kuala Lumpur Composite Index

KMK : Kredit Modal Kerja

KN : Kekayaan Negara

KND : Kekayaan Negara Dipisahkan

KPSH : Ketersediaan Pasokan dan Stabilisasi Harga

LCC : Low Cost Carrier

LDR : Loan to Deposit Ratio

LNPRT : Lembaga Non Profit yang melayani Rumah Tangga


Migas : Minyak dan Gas

MODI : Minerba One Data Indonesia

MSCI : Morgan Stanley Capital International

mtd : month-to-date

NBER : National Bureau of Economic Research

NIM : Net Interest Margin

NPI : Neraca Pembayaran Indonesia

NPI : Nickel Pig Iron

NPL : Non-Performing Loan

NPWP : Nomor Pokok Wajib Pajak

OECD : Organisation for Economic Co-operation and Development

OJK : Otoritas Jasa Keuangan

OP : Orang Pribadi

PARB : Pembiayaan dan Asuransi Risiko Bencana

PDB : Produk Domestik Bruto Pemda : Pemerintah Daerah

PHK : Pemutusan Hubungan Kerja

PIBC : Pasar Induk Beras Cipinang

PICE-BT : Penerbitan Impor, Cukai, dan Ekspor Berisiko Tinggi

PKH : Program Keluarga Harapan

PMA : Penanaman Modal Asing

PMDN : Penanaman Modal Dalam Negeri

PMI : Purchasing Managers’ Index PMK : Peraturan Menteri Keuangan

PMTB : Pembentukan Modal Tetap Bruto

PNBP : Pendapatan Negara Bukan Pajak

PNS : Pegawai Negeri Sipil

POLRI : Kepolisian Negara Kesatuan Republik Indonesia

PPh : Pajak Penghasilan

PPN : Pajak Pertambahan Nilai

PT : Perseroan Terbatas

qoq : quarter on quarter

RAPBN : Rancangan Anggaran Pendapatan dan Belanja Negara

RHS : Right Hand Side

RIT : Rencana Investasi Tahunan

RMB : Renminbi

ROA : Return on Asset

RPJMN : Rencana Pembangunan Jangka Menengah Nasional

RT : Rumah Tangga

S&P : Standard & Poor

SBN : Surat Harga Berharga

SD : Sekolah Dasar

SDA : Sumber Daya Alam

SDM : Sumber Daya Manusia

SJSN : Sistem Jaminan Sosial Nasional

SET : Stock Exchange of Thailand

SMA : Sekolah Menengah Atas

SML : Special Mention Loan

SMP : Sekolah Menengah Pertama

SPI OJK : Statistik Perbankan Indonesia Otoritas Jasa Keuangan

SPT : Surat Pemberitahuan Tahunan

STI : Straight Times Index

TEKF : Tinjauan Ekonomi, Keuangan dan Fiskal

The Fed : The Federal Reserves

TKDD : Transfer ke Daerah dan Dana Desa

TMF : Transaksi Modal dan Finansial

TNI : Tentara Nasional Indonesia

UE : Uni Eropa

UEA : Uni Emirat Arab

UK : United Kingdom

ULN : Utang Luar Negeri

US : United States

USD : United States Dollar

UU : Undang-Undang

WTI : West Texas Intermediate

yoy : year-on-year

ytd : year-to-date


SNAPSHOT OF INDONESIA’S ECONOMY 2019

USD123.8 miliar

Rp14,237 Exchange Rate as of 30th August

6,328 JCI as of 30th August

3.49% 5.05%

5.39% Inflation in August (yoy) GDP Growth in Q2 (yoy)

Consumption Growth in Q2 (yoy)

5.01% Gross Fixed Capital Formation

Growth in Q2 (yoy)

5.5% BI 7 DRR as of 30 Agustus

-8.0% Export Growth in July (ytd) Import Growth in July (ytd)

-9.0%

7.9% Spending Growth in July

Current Account Deficit to GDP in Q2

3.04%

1.14%

Foreign Reserves in Q2

Rp25.1triliun Budget Deficit to GDP in July Primary Balance Deficit in July


EXECUTIVE SUMMARY

lobal economic pressures remain high due to slowing real activity and uncertainty

over the trade war. Trade tensions increased after the US Government increased

import tariffs by 10 percent on Chinese imports worth USD300 billion. The US

government also gave the Chinese Government the label of currency manipulator in response

to the Chinese Government letting the Yuan weaken to RMB7 for the first time since 2008,

which was considered an intentional step to boost China's competitiveness. The continuing

trade war and indications towards a currency war received a negative response on global

financial markets. The trade war also creates risks to the economic prospects of the US and

China, which are already facing a slowdown. Concerns over the outlook for the US economy

have been reflected in an inversion of the US yield curve.

Even amid global uncertainty, up to August 2019, the Indonesian financial market recorded

quite a positive performance. JCI recorded a growth of 2.16 percent (ytd, as of August 30, 2019)

with foreign funds recorded in the amount of Rp59.25 trillion. Meanwhile, yields for 10-year

government securities (SBN) fell by 69 bps with incoming foreign funds reaching Rp116.35

trillion. These positive developments underpinned the rupiah exchange rate performance

which appreciated by 1.7 percent throughout 2019. To stimulate domestic economic activity, BI

has lowered the 7DRR interest rates by 25 bps each in July, August and September.

Weak global demand has also hurt Indonesia's international trade performance. As of July

2019, Indonesia's exports recorded negative growth of -8.02 percent (ytd). On the other hand,

import growth continued to contract, -9.00 percent (ytd). The deepening decline in imports was

caused by the decline in oil and gas imports in line with the Government's policy to utilize

domestic oil, and limited growth in industrial and mining performance. With these

developments, the trade balance up to July 2019 recorded a deficit of 1.90 billion US dollars.

Inadequate performance of international trade contributed to the widening of the current

account deficit in the second quarter of 2019 at a rate of 2.6 percent of GDP. Nevertheless,

external conditions were maintained marked by adequate foreign exchange reserves that were

able to meet the needs of 6.8 months of imports and payment of the Government's foreign debt.

Indonesia's economic fundamentals are still very stable, marked by GDP growth in quarter II

2019 of 5.05 percent (yoy) and controlled inflation on target. This growth was mainly driven

by strong consumption performance and the support of countercyclical Government spending

policies. Pressure from global economic conditions and the downward trend in commodity

prices have an impact on moderation in investment performance and negative growth in

G


international trade. From the production side, the performance of all sectors grew positively,

except for the contracted mining and quarrying sector. Economic growth is supported by stable

inflation at 2.48 percent (ytd) or 3.49 percent (yoy) in August 2019. On the other hand, the

performance of the Indonesian banking industry has been observed to be stable with the

support of solid asset growth and positive intermediation performance.

The positive fiscal and APBN performance was marked by positive growth in almost all

components of the APBN until July 2019. State revenue recorded a growth of 5.9 percent which

was driven by growth in Non-Tax Revenues (PNBP). Meanwhile, state expenditure was

recorded to grow by 7.9 percent, among others supported by an increase in the distribution of

Transfer to Regions and Village Funds (TKDD) which grew 5.9 percent (yoy). With global risks

increasing, the Government implemented a front-loading strategy, so that financing was

recorded to grow by 10.5 percent. The government also continues to pursue a financing strategy

with minimal and managed risk, one of which is by optimizing domestic financing. However,

the impact of global pressure also influenced several components such as revenue sourced from

imports and commodities.

In the framework of accelerating competitiveness, the Government encourages innovation

and improvement in the quality of human resources, including through optimal support of

fiscal policy and the National Budget in 2020. The government will prioritize spending better

programs in the context of increasing quality state spending that is focused on programs that

have a multiplier effect on the national economy. To support the program, the Government will

promote innovative state revenues, both in terms of taxation and PNBP. However, this effort

will be carried out with due regard to the business world and environmental sustainability. The

2020 Draft State Budget deficit is set at Rp307.2 trillion or 1.76 percent of GDP. The government

debt ratio will also be maintained at a safe level, which is below 30 percent, or far below the

debt levels of other countries in the world.

To support sustainable development financing, the Government also continues to encourage

the optimization of pension funds. To optimize managing pension funds as a source of long-

term financing, some options for improvement are through optimizing the management of

pension fund assets and improving the pension system. By making improvements on pension

fund management in the form of changes in management performance measurements and

minimizing withdrawal of pension funds before retirement age, the simulation shows that

there is a potential long-term fund of Rp226 trillion. A full review of this topic can be found in

Chapter III of this TEKF.


[ This page is intended to be blank ]


MACROECONOMIC DEVELOPMENT ANALYSIS

PART I


A. GLOBAL ECONOMIC DEVELOPMENT

The uncertainty in the global economy re-emerged over recent months due to a number of

issues, particularly the trade tensions between the United States and China. Tensions

reignited following US President Donald Trump’s statement in early August 2019 that the US

would impose an additional 10 percent tariff for USD300 bn imports from China. This additional

tariff was planned to be implemented in September (the US subsequently decided to postpone

the tariff increases for some commodities until December). China announced it planned to

retaliate to the US’s move by increasing tariffs on USD75 bn in imports from the US. The re-

escalation of the trade war has created additional uncertainty and it is a backward step after

the US-China meeting in Osaka G-20 forum provided some optimistic signs that tensions were

thawing.

Figure 1. (a) Yuan Movement as of 30th August 2019; (b) Emerging and Advanced Countries Stock Index Movement (MSCI Stock Index)

(a)

(b)

Source: Bloomberg

The sharp depreciation in the Chinese Yuan, which surpassed its RMB7 limit, also contributed

to the global tensions. This depreciation was the first depreciation in the Yuan since May 2008.

The US responded by accusing China of manipulating its currency to boost its export

competitiveness. Therefore, the US has given the “currency manipulator” label to China which

would lead to the implementation of additional trade barriers. The US has noted that China has

fulfilled three criteria of a “currency manipulator”, those are a high current account surplus, a

significant trade surplus to the US, and one-way intervention in the foreign exchange market.

The continuation of the trade war and signs of a currency war were negative for global

financial markets. The value of stock markets, both in advanced and emerging countries,

experienced sharp falls, reflected by movements in the MSCI stock index. Furthermore,

currencies in some emerging countries depreciated as capital flowed out from their capital

markets. This volatility has also driven increased demand for safe haven assets, such as gold

and Japanese Yen. In the period July-August, the global gold price increased 10.4 percent, while

the Japanese Yen appreciated 1.5 percent.

5,5

6

6,5

7

7,5

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

850

900

950

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1050

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2100

2200

2300

Jan-19

Feb-19

Mar-19

Apr-19

May-19

Jun-19

Jul-19

Aug-19

Emerging Market Developed Market (rs)


Figure 2. (a) Gold Price (USD/Troy Ons) As of 30th August 2019; (b) US Government Bonds Yield

(a) (b)

Source: Bloomberg

The trade war has placed additional pressure on the economic prospects of China and the US,

as well as for the global economy. In the midst of a moderation in China’s economic growth,

the trade war has created additional risks for the country. In the second quarter of 2019, China’s

economy recorded relatively modest growth of 6.2 percent, slightly lower than the previous

quarter (6.4 percent). Moreover, China’s international trade performance remained weak with

the Purchasing Manager Index in contraction territory. The IMF projects China’s economy to

grow by 6.2 percent in 2019, decelerating to 6.0 percent in 2020.

Figure 3. (a) Global PMI Manufacture; (b) Advanced Economies PMI Manufacture as of July 2019

(a) (b)

Source: Bloomberg

On the other hand, the US economy has been facing many challenges, with an inversion of

the US yield curve leading a number of commentators to speculate an imminent recession.

The inverted yield curve is a condition when the interest rates on US Treasury short-term

securities are higher than the yield on its long-term bonds (under normal circumstances, it

happens otherwise). Inverted yield curves usually occurs when the market expects an economic

slowdown in the near future and is thus often treated as a signal of economic recession. Several

past economic recessions in the US were preceded by an inverted yield curve occurring in the

1000

1200

1400

1600

Jan-18

Apr-18

Jul-18

Oct-18

Jan-19

Apr-19

Jul-19 0

0,5

1

1,5

2

2,5

3

3,5

1M3M6M12M2Y3Y5Y7Y10Y 15Y 20Y 30Y

31-Des-16

31-Des-17

49,3

46

48

50

52

54

56

Jan Apr Jul Okt Jan Apr Jul Okt Jan Apr Jul

2017 2018 2019

PMI Manufacture Index Limit

40

45

50

55

60

65

Jan

Mar

Mei Ju

l

Sep

Nov Ja

n

Mar

Mei Ju

l

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Nov Ja

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Mei Ju

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2017 2018 2019

US UK Limit

EU Japan


prior 12 months. Some real indicators also showed signals of economic slowdown, such as the

2.3 percent annualised growth in the second quarter of 2019. The PMI manufacturing index also

decelerated, and exports have been contracting since April 2019. Signs of economic downturn,

and subdued inflationary pressures, led the US Fed to cut the official interest rate by 25 bps to

2-2.5 percent in July 2019, followed by another 25 basis point cut in mid-September.

The weakening of real economic activity happened broadly across advanced economies.

Manufacturing index of the United Kingdom (UK), European Union (EU), and Japan have

tumbled into contraction territory as sluggish global demand and slowing trade growth

continued. Germany was one of the big countries in Europe that experienced high pressure on

its manufacturing sector. Germany’s PMI manufacturing index dropped to 40.5, the lowest level

since the global financial crisis and European debt crisis. In addition to softening global demand,

Germany's policy to reduce emissions from the automotive industry also added pressure on the

German manufacturing sector. With manufacturing industries in a number of other advanced

economies also struggling with contractions, the Global PMI manufacturing index was also

driven below 50 in July 2019.

Figure 4. Commodity Price Index

Source: Bloomberg

Amidst a weakening global economy, policymakers in advanced economies were expected to

hold their expansive economy policy stances. The European Central Bank (ECB), launched its

latest round of quantitative easing by announcing it will purchase EUR20 billion of bonds

starting in November 2019. The ECB has also cut its deposit rate from -0.4 percent to -0.5

percent. Meanwhile, the ECB stated that interest rates will be maintained at the current level,

or lower, until the inflation rate reaches the institution’s target (The ECB aims at inflation rates

below, or close to, 2 percent over the medium term) and economic conditions improve.

Currently, the inflation rate in the European Region is still lower than 2 percent.

Deceleration of global economic activity and weakening global demand also gave effect to

lower commodity prices. The global commodity price index slowed down over the July-August

period, particularly for oil and agricultural commodities. Oil prices had initially surged due to

heightened tensions between the US and Iran but then declined along with the decreasing

demand and the US commitment to keep their production levels high. Agricultural commodity

prices declined as a consequence of a stronger US dollar (amidst trade war tension) that made

60

80

100

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160

Jan-

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b-17

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-17

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Global Commodity Price Index

Global Crude Oil

Food and Agriculture

Coal

Metal


US agricultural commodity prices to less competitive. Meanwhile, global coal prices increased

moderately, although still considerably low, supported by increasing coal imports by China and

declining US coal production. Nickel prices showed significant price increases with Indonesia,

as the world's biggest nickel exporter, announcing its plan to ban nickel ore exports.

B. FINANCIAL AND MONETARY SECTOR IN INDONESIA

Foreign Capital Flow

Indonesia’s financial markets have performed quite well recently, reflected by positive

performance of Jakarta Composite Index (JCI) (2.16 percent, ytd as of 30th August). It was

followed by a decrease in the 10-year Government bond yield of 69 basis points (bps). Therefore,

the accumulation of foreign funds which have flowed into Indonesia’s capital market over that

period was Rp175.59 trillion. Strong capital inflows to the domestic market indicates positive

perceptions of investors to Indonesia’s financial market and economy.

Figure 5. Foreign Funds Flow in Stock Market as of 30th August 2019 (ytd)

Source: Bloomberg, CEIC, processed

Jakarta Composite Index and Global Stock Exchange Performance Most stock markets in the world experienced positive performances over 2019. The S&P 500

in the United States and China’s Shanghai index benefitted the most, rising 16.7 percent (ytd)

and 15.7 percent (ytd) respectively. Meanwhile, there were three stock markets which

weakened in 2019: The Kospi Korea (3.6 percent), Hangseng Hongkong (0.5 percent), and KLCI

Malaysia (4.6 percent).

Figure 6. Global Stock Market Performance as of 30th August 2019 (ytd, %)

87,76

27,10 47,66 53,31

137,52 97,17

107,29

170,34

57,10 116,35

22,85

25,66 15,88

(20,65)

45,09

(22,70)

16,27

(39,10) (49,89)

59,25

(100)

(50)

-

50

100

150

200

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019*

Rp tr

illio

n

SBN Saham TotalStock


Source: Bloomberg, processed

JCI Sectoral Performance

Most sectors in the JCI recorded

positive performances in 2019,

particularly infrastructure and

construction. Several sectors that drove

JCI positive performance are financial,

trade, and basic industry sector.

However, consumption goods,

miscellaneous industry, mining,

agriculture, and manufacturing sectors

went through cumulative pressure over

2019.

Financial Sector

The Financial Sector Index declined

4.54 percent (yoy) in August 2019 even

though this sector, in aggregate,

performed positively in 2019 (7.79 percent, ytd). It is reflected by financial service performance

which recorded positive growth in July 2019. Moreover, banking credit recorded 9.58 percent

(yoy) growth driven by the improvement of Non-Performing Loan (NPL) with 2.55 percent ratio.

The Third-Party Fund grew at 8.04 percent (yoy). In the third quarter, banking credit growth is

expected to increase as the optimism in the economic condition is strengthening as well as the

political stability after the election.

Consumer Goods Sector

7,1%

13,2%

16,7%

2,1%

-3,6%

15,7%

-0,5%

3,4%

5,8%

1,2%

-4,6%

2,2%

-10,0% -5,0% 0,0% 5,0% 10,0% 15,0% 20,0%

Table 1. Stock Performance by Sectors as of August 2019 (%)

Sektor May Jun Jul Aug Ytd.*

JCI -3.81 2.41 0.50 -0.97 2.16

Financial -3.96 4.23 1.37 -4.54 7.79

Consumer Goods -2.67 -2.12 -1.64 1.86 -6.63

Infrastructure -1.46 5.25 -0.70 2.03 15.22

Trade -3.50 0.80 1.55 -2.30 2.04

Basic Industry -6.81 2.08 7.73 5.59 4.57

Construction and Property -5.67 6.25 2.28 0.12 11.56

Various Industries -2.24 0.09 -4.13 -4.14 -14.89

Mining -7.30 4.01 -4.64 -1.47 -8.81

Agriculture -2.94 0.58 -3.32 0.03 -13.21

Manufacture -3.68 -0.70 0.37 1.95 -5.16


JCI KLCI Malaysia STI Singapore SET Thailand Nikkei 225 Japan Hangseng Hongkong Shanghai China Kospi Korea MSCI Asia exc. Japan S&P 500 DJIA FTSE 100


Consumer goods sector index recorded a substandard performance in August 2019, recording

a fall of 6.63 percent. However, the Consumer Confidence Index in July 2019 was at an

optimistic level (124.8). This optimistic sentiment was supported by consumer expectations to a

better economic condition going forward. Meanwhile, retail sales in June 2019 decreased by 1.8

percent (yoy), driven mainly by fuel, cultural goods, and recreational goods consumption

normalization after Ramadan and Eid-Al Fitr period. The Consumption sector is predicted to be

positive as 2020 Budget Plan is expected to support people’s purchasing power.Kinerja indeks

sektor konsumsi mencatatkan pertumbuhan negatif sebesar 6.63 percent (ytd).

Infrastructure Sector

Infrastructure sector index recorded 15.22 percent growth in the January-August period. The

solid growth of this sector was supported by telecommunication and transportation sub-sectors

due to transportation expansion, such as car producers entrance. However, the high debt of

some infrastructure companies might lead this sector to be high risk, particularly if currency

and trade wars continue or escalate. As a result, banks started to be more selective in financing

those companies and avoiding other high risk sectors.

Construction and Property Sector

Similarly with infrastructure sector, the construction and property sector also recorded

positive performance (11.56 percent, ytd). The government solution to encourage and facilitate

state-owned enterprises to build affordable housing is a factor that contributed to the sector’s

performance. However, there are some warnings in this sector, such as revenue of construction

companies decreasing in the first semester and the Residential Property Price Survey from Bank

Indonesia (BI) which indicated the deceleration of property prices increasing in the second

quarter.

Mining Sector

In the January-August 2019 period, this sector performed badly by falling 8.81 percent. The

weakening in this sector was due to negative sentiment from external factors, such as the

strengthening of the US dollar that created global commodity price competition and the re-

escalation of the trade war between the US-China. Moreover, the Government also introduced

a nickel ore export policy, which means nickel ore exports will effectively stop on January 1,

2020. The policy is to maintain nickel reserves and to take nickel smelters into consideration,

which have commenced operations in Indonesia. It is predicted to have led to a decline in the

global nickel supply due to the lower production of Nickel Pig Iron (NPI/low-grade ferronickel),

particularly to China. The mining sector needs special attention related to the potential

weakening in Chinese demand.

Agriculture/Horticulture Sector

This sector weakened by 13.21 percent during the January-August 2019 period, affected by

an EU announcement that biofuel containing crude palm oil (CPO) was labelled as

unsustainable. However, this sector continued to record a positive performance in the second


quarter of 2019 (5.41 percent without Forestry and Fisheries). It was supported by the

Government’s success in increasing agricultural production, particularly in the crop sub-sector

food, horticulture, livestock and plantations.

Manufacturing Sector

The manufacturing sector index fell by 5.16 percent January-August 2019. The weakening of

Indonesia’s PMI index contributed to poor performance of this sector. In managing this issue,

the Government, BI, and OJK have agreed on six strategic steps to strengthen the

manufacturing industry, 1) infrastructure improvement; 2) ease of licensing; 3) enhance

industry productivity; 4) support the smooth operation of international trade payment system;

5) support green financing; and 6) facilitate negotiation to be suppliers of international brands.

In addition, they have agreed on a manufacturing industry development strategy which was

supported by the involvement of active industry players.

The Government Bonds Market Development

In the government bonds (SBN) market, the yield of 10 year bonds fell by 27 bps during the

second quarter of 2019 and fell 4 bps as of 30th August 2019. After rising in the second quarter

2019, foreign capital continued to flow into the SBN market from July to August 2019 (IDR20.84

trillion). Furthermore, non-resident investors’ holdings of SBN were recorded at IDR1,009.60

trillion (equal to 38.45 percent of total traded securities (SBN) worth of IDR2,625.62 trillion as of

August 2019).

Figure 7. Government Bonds Yield Curve as of August 2019 (%)


The decrease in 10-year government bonds yields has affected the Indonesian bond market.

Trading volume recorded IDR2,625.62 trillion (23.16 percent absorbed by bank and 69.74

percent owned by non-banks). Moreover, BI bought IDR230.75 trillion worth of SBN at the end

of second quarter 2019 to stabilize the exchange rate, this led to a rise in BI’s ownership of SBN

as of 30th August (from 6.08 percent to 7.10 percent in the same period). It was a part of BI’s

monetary operation to maintain the exchange rate by controlling the supply of Rupiah in the

Figure 8. Government Bonds Owener: (a) December 2018; (b) August 2019

(150)

(50)

50

150

250

4,00

5,00

6,00

7,00

8,00

9,00

10,00

0,1 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30

perc

ent

tenor, tahun

Perubahan yield ytd (bps, rhs) 28-Dec-18 28-Jun-19 30-Aug-19Yield change ytd (bps, rhs)


(a) (b)

Source: DG of Budget Financing and Risk

market. In the primary market, the average incoming bid in 2019 was IDR36.18 trillion, higher than

last year’s auction period. This was followed by fundraising activities of the public through debt

securities issuance by corporations which grew during 2019.

Figure 9. Total Amount of Corporate Bonds Outstanding as of August 2019

Source: Indonesia Central Securities Depository (KSEI (processed)

Rupiah and Monetary Developments

Global economic uncertainty remains the main factor affecting exchange rate movements.

The uncertainty is caused by re-escalation in the trade war between US and China. The trade

war continued to impact global capital flows as investors moved from developing countries to

perceived safe-haven assets such as the Yen, thus putting pressure on exchange rates of

developing countries. Another factor is the shift in the US Fed’s policy direction. For the first

time since 2008, the Fed lowered its benchmark interest rate to boost the US domestic economy.

Previously, the Fed had signalled a tightening bias through the early part of 2019.

Figure 10. US and Indonesia Interest Rate (%)

Bank20%

BI11%

Mutual Funds5%Insurance

8%

Foreign38%

Pension Funds

9%

Individual3%

Others6% Bank

23%

BI7%

Mutual Funds

5%Insurance8%

Foreign39%

Pension Funds

9%

Individual3%

Others6%

LembagaKeuanganNonbank

Bank Telekomunikasi EnergiKonstruksibangunan

Properti danReal Estate

Kertas

Ags 19 156,68 143,64 37,75 32,55 22,37 18,89 17,26

Jun 19 147,69 142,34 33,37 28,34 22,13 18,51 17,26

Ags 18 151,54 139,67 30,62 5,33 12,01 16,77 12,95

0,00

20,00

40,00

60,00

80,00

100,00

120,00

140,00

Rp tr

illio

n

Telecommunication

Non-bank financial institutions

Energy Building Construction

Property & Real Estate

Pulp Bank


Source: Bloomberg

The US Federal Reserve has shifted its focus and policy direction to overcome the US economic

slowdown. For the first time since 2008, the Fed lowered its benchmark interest rate to boost

the US domestic economy. This change in policy direction towards a more dovish stance is the

opposite of their previous stance where the Fed had signalled a tightening bias through the

early part of 2019.

Figure 11. Exchange Rate Performance: (a) 30th August 2019 (Ytd, %); (b) 30th August (Mtd, %)

(a) (b)

Notes: Depreciation Appreciation

Source: Bloomberg

Bank Indonesia (BI) also began to relax its monetary policy to be more accommodating to

domestic economic growth. In July, August, and again in September BI cut the 7 day Repo Rate

(BI’s benchmark interest rate) by 25 bps. In the beginning of September 2019, the 7DRR interest

rate was at 5.25 percent (Figure 10). Over the same period, BI also reduced the lending facility

interest rate by 50 bps to 6.25 percent. These steps were taken after considering the dynamics

of the global economy and the forecast of domestic inflation which was maintained at a low and

stable level. Also, since July, BI has enacted a 50 bps reduction in the reserve requirement to

maintain adequate liquidity in the financial system to provide an impetus for bank credit

expansion.

2

5,25

0

2

4

6

8

Apr-16 Aug-16 Dec-16 Apr-17 Aug-17 Dec-17 Apr-18 Aug-18 Dec-18 Apr-19 Aug-19

FFR 7DDR

-40 -30 -20 -10 0 10-50 -40 -30 -20 -10 0 10

Thailand Russia Japan Indonesia Philippines Vietnam Malaysia Singapore India Euro China Brazil South Korea Turkey Argentina


With these dynamics, on 27 August 2019, the Rupiah exchange rate against the US Dollar

was recorded at Rp14,235, a 1.7 percent appreciation compared to the end of 2018. The

performance of the Rupiah exchange rate was relatively favourable compared to other

developing countries’ currencies and was supported by the increase in Indonesia's sovereign

credit rating by S&P at the end of May 2019 and an increasing in Indonesia's competitiveness

rank based on the IMD World Competitiveness Ranking 2019. Meanwhile, net purchases of

government bonds (SBN) by foreigners in the June-August period were recorded at Rp59.4

trillion and net purchases on the stock market by foreigners were recorded at Rp1.8 trillion.

C. INDONESIA’S TRADE

Up to July 2019, Indonesia’s exports reached USD95.79 billion and still recorded a negative

growth of -8.02 percent (ytd). This condition was affected by unstable prices and also the

declining demand from trading partner countries. Commodity prices such as coal, palm oil, and

kernel oil showed a declining trend. The two factors mentioned above have impacted on the

contracting non-oil and gas export performance of Indonesia. As of July 2019, the non-oil and

gas sector declined 6.58 percent (ytd), while the oil and gas export sector recorded an even

deeper contraction, at 21.77 percent (ytd). The condition was in line with the continuing

fulfilment of the domestic oil and gas policy.

Figure 12. Growth Contribution of Export Component

Source: Central Bureau of Statistics

By sectors, exports from the three non-oil and gas sectors contracted. The most severe

contraction was experienced by the mining sector (-17.09 percent, ytd), followed by the

manufacturing sector (-4.28 percent, ytd) and the agriculture sector (-0.16 percent, ytd) .

Although contracting, the manufacturing sector and agriculture sectors both showed

improvement, especially the agriculture sector. The improvement in the export performance of

the agriculture sector was driven by increasing exports of medicinal plants, aromatics, and

spices (HS09). Meanwhile, the positive export of apparel and clothing not knitted (HS62) drove

the improvement in manufacturing sector exports. The mining commodity price that was on a

declining trend has impacted on mining sector export performance, especially the export of

metal ores, slag, and ash (HS26), and mineral fuels (HS27).

-40,0%

-20,0%

0,0%

20,0%

40,0%

60,0%

Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 Jul-18 Oct-18 Jan-19 Apr-19 Jul-19

Agriculture (ytd) Manufacture (ytd) Mining (ytd) Oil & Gas (ytd)


On the other hand, import growth contracted even more deeply than exports. Up to July 2019,

imports were recorded at USD97.68 billion and contracted 9.00 percent (ytd). The deep

contraction was a result of a decline of oil and gas imports which was in line with the

government policy to use domestic oil and the limited performance growth of industry and

mining sector, which has impacted on the import decline of both sectors.

Moreover, the decline in imports was visible in the utilization categories. All import

utilization categories until July 2019 recorded declines, particularly on consumption good

imports followed by raw materials and capital goods. The three utilization categories contracted

respectively 10.22 percent (ytd), 9.5 percent (ytd), and 5.71 percent (ytd). Out of ten main non-oil

and gas commodities, the deepest contraction was experienced by iron or steel articles (HS73),

organic chemicals (HS29), and vehicles and parts (HS87).

Figure 13. Growth Contribution of Import Component


From the export and import developments above, the trade balance until July 2019 recorded

a deficit of USD1.90 billion, which consisted of a non-oil and gas surplus of USD3.03 billion,

and oil and gas deficit of USD4.92 billion. The cumulative non-oil and gas trade balance is lower

than the previous year which recorded at USD3.65 billion. The lack of diversification in

Indonesia’s exports, and Indonesia’s export development focus has made its competitiveness in

global market limited. Meanwhile, the cumulative oil and gas deficit showed improvement at

about USD1,94 billion deficit (cumulative oil and gas deficit Jan-Jul 2018 of USD6.86 billion), in

line with the decline of global oil price since 2018 and the effect of oil and gas import control

policies.

D. INDONESIA’S BALANCE OF PAYMENTS

Indonesia’s Balance of Payment (BoP) in 2nd quarter 2019 recorded USD2.0 billion, affected

by an increase in the current account deficit as well as decreasing in capital and financial

account surplus. The increase in current account deficit mainly affected by dividend payments,

the impact of the global economic slowdown, and decreasing commodity prices. However, the

-40,0%

-20,0%

0,0%

20,0%

40,0%

60,0%

Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 Jul-18 Oct-18 Jan-19 Apr-19 Jul-19

Consumption goods (ytd) Raw materials (ytd) Capital goods (ytd)


BoP remained supported by capital and financial account surplus along with maintained

positive perception of foreign investors to Indonesia’s economy.

The Current Account Balance experienced a widened deficit in the second quarter of 2019

compared with first quarter of 2019. The deficit in Q2 2019 was USD8.4 billion (3.04 percent to

GDP), wider compared to a deficit in the previous quarter of USD7.0 billion (2.60 percent to GDP).

The increasing deficit in the services account and primary account occurred amidst the

declining surplus in the trade balance of goods.

Figure 14. Indonesia’s Balance of Payments (USD Billion)


The Goods Trade Balance recorded a surplus of USD187 million in Q2 2019, relatively small

compared with the last ten years. The modest surplus in the goods balance was due to an

increase in the deficit in oil and gas that was offset by an increasing surplus of the trade balance

of non-oil and gas. According to the Free-On-Board (FOB) method, in Q2 2019, the non-oil and

gas surplus increased slightly to USD3.0 billion from USD2.9 billion in the previous quarter.

The deeper decline in the import of non-oil and gas compared to non-oil and gas export in this

period has supported the performance of non-oil and gas balance.

The primary income component recorded an increased deficit. The payment of portfolio

investments increased compared to Q1 2019. The increase in portfolio and other investment

payments were caused by a seasonal pattern in dividend payments by corporations. Aside from

that, the increase in foreign loan interest also contributed to the widening of the primary

income deficit.

Along with the increasing trade tension between the US and China, the uncertainty in global

financial markets also increased and caused pressure on the performance of Capital and

Financial Account (CFA) in Q2 2019. The CFA was still able to record a surplus of USD7.1 billion

(2.5 percent of GDP), lower than Q1 2019 which recorded a surplus of USD9.9 billion. The

pressure on the CFA mainly came from the decrease of portfolio investment performance, and

the seasonal pattern of government and private debt payments which caused a deficit in other

investments. On the other hand, the increase in direct investment surplus helped the CFA

0

20

40

60

80

100

120

140

-15,00

-10,00

-5,00

0,00

5,00

10,00

15,00

20,00

25,00

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2

2016 2017 2018 2019

Capital & Financial Transaction (LHS)

Overall Balance (LHS)

Current Account (LHS)

Foreign Reserves (RHS)


record a surplus. This meant that investors still had positive perspective regarding long term in

Indonesia, along with an improvement of the investment climate.

Based on the development of Indonesia’s Balance of Payments in Q2 2019 which recorded a

deficit of USD2.0 billion, the foreign exchange reserves at the end of June 2019 was recorded

at USD123.82 billion, slightly lower than the Q1 2019 position (USD124.5 billion). The total

reserves were equal to 7.1 months import financing or 6.8 months import financing and

government’s foreign debt payment, still above the international adequacy ratio standard

which is 3 months of import. The decrease in reserves was accompanied by a weakening

exchange rate in Q2 2019. The average exchange rate during Q2 2019 was Rp14,261 per USD, 0.9

percent weaker compared to Q1 2019 that was Rp14,139 per USD. However, at the end of July

2019, the reserves have been increased to USD125.9 billion.

E. INDONESIA’S GDP GROWTH IN 2ND QUARTER 2019

Indonesia's economy grew 5.05 percent (yoy) in the second quarter of 2019, driven by strong

consumption and countercyclical government expenditure. Pressure from the weakening in

global economic conditions impacted on investment and the negative growth of Indonesia’s

international trade. On the production side, all sectors grew positively, except for the Mining

and Quarrying Sector which contracted. Hence, Indonesia’s economic growth in the first

semester of 2019 reached 5.06 percent.

Stable economic performance in the second quarter of 2019 was primarily supported by the

improved performance across all consumption components. These are household

consumption, non-profit household agencies (LNPRT) consumption, as well as government

consumption. Robust household consumption, with 5.17 percent growth, was encouraged by

benign inflation in the range of 3 percent and increased activities during Ramadan, Eid Al-Fitr,

and the school holiday season. In addition, election-related activities also gave an indirect boost

to household consumption. The election period, which boosted consumption of political parties

and non-profit organizations, was the main driver of non-profit household agencies' high

growth (15.27 percent). Hence, the overall growth of household and non-profit household

agencies' consumption was 5.39 percent.

Likewise, government consumption recorded high growth of 8.23 percent, the highest growth

since 2014. It was supported by the improvement in expenditure disbursements at the

beginning of the year, which was reflected in the high disbursement in personnel, goods, and

other expenditures with 21.7 percent, 14.7 percent, 51.8 percent growth, respectively.

Government countercyclical policy amidst high uncertainties in the global economy has played

an important role in maintaining national economic growth momentum. As a consequence, the

good pattern of government expenditure disbursement was maintained in the second half of

2019.

Table 2. GDP Growth by Expenditures (%, yoy)

Expenditure Components 2017 2018 2019

Q1 Q2 Q3 Q4 Y Q1 Q2 Q3 Q4 Y Q1 Q2 Y

Total consumption 5.00 5.03 4.93 4.98 4.98 5.01 5.23 5.07 5.20 5.13 5.25 5.39 5.33


Hpusehold consumption 4.94 4.95 4.91 4.98 4.94 4.94 5.16 5.00 5.08 5.05 5.01 5.17 5.10

LNPRT 8.08 8.53 6.04 5.26 6.93 8.10 8.75 8.59 10.79 9.08 16.93 15.27 16.09

Government consumption 2.69 -1.94 3.46 3.80 2.13 2.71 5.20 6.27 4.56 4.80 5.21 8.23 6.93

GFCF 4.77 5.34 7.08 7.26 6.15 7.49 5.85 6.96 6.01 6.67 5.03 5.01 5.02

Export 8.36 2.73 16.48 8.42 8.91 5.94 7.65 8.08 4.33 6.48 -2.08 -1.81 1.84

Import 4.78 0.18 15.40 11.91 8.06 12.64 15.17 14.02 7.10 12.04 -7.75 -6.73 7.04

GDP 5.01 5.01 5.06 5.19 5.07 5.06 5.27 5.17 5.18 5.17 5.07 5.05 5.06


Nevertheless, the performance of Gross Fixed Capital Formation (GFCF) or fixed investment,

with a 5.01 percent growth, needs to be improved. Investors’ remained cautious about the

weakening global economy (and its effect on the domestic economy, after the election) was

presumed as the main driver of this moderate investment performance. Several indicators that

contributed to the slowing investment performance were the negative growth of capital goods

and raw materials imports, decreasing government capital expenditure, and contractions in

some other GFCF components.

On the contrary, building investment, which was the main component of GFCF, was able to

acquire stable growth. The condition indicated that investment activities on infrastructure and

building construction were maintained, though not as high as the previous periods (several

infrastructure projects were in the completion phase). Investment in machines and equipment

also grew positively but lower than in the previous period. It was caused by the lower price of

primary commodities that contributed to decreasing heavy equipment purchases in several

commodity sectors.

While GFCF performance was subdued, the good performance of direct investment raised an

expectation of investment improvement in the next period. Capital investment, which fell

sharply at the end of 2018, started to recover and accelerate in the second quarter of 2019. It

even recorded a double-digit growth of 13.7 percent (yoy). This good performance was supported

by the positive realization of both domestic and foreign investments. Foreign investment noted

a rebound after having contracted for the previous four quarters.

International trade in the second quarter of 2019 was still hindered. The expectation of

positive export growth could not be achieved due to the limited demand for Indonesia’s export

commodities from its main trading partners and declining commodity prices. Exports declined

by -1.81 percent but imports fell further, by -6.73 percent. The decline in investment and several

industrial sectors drove negative growth in all import components, with the deepest

contraction on capital goods with -9.7 percent growth (yoy), followed by raw materials with -

7.8 percent growth (yoy), and consumption goods with -4.6 percent growth (yoy).

On the production side, sectoral performance in the second quarter of 2019 was noted by

slowing attainment in the main sectors. The manufacturing sector moved relatively slow with

3.54 percent growth, a weakening from the previous quarter when it grew 3.86 percent. Several

industrial categories experienced decreasing production activities that led to slowing

manufacturing activities, among others the leather and footwear industry, metal industry,

machinery and equipment industry, and transportation equipment industry. On the other

hand, the food and beverage industry, was the main contributor, and was still able to grow

positively by 8 percent.


Table 3. GDP Growth by Sectors (%, yoy)

Sectors 2017 2018 2019

Q1 Q2 Q3 Q4 Y Q1 Q2 Q3 Q4 Y Q1 Q2 Y

Agriculture, Forestry, and Fisheries

7.11 3.32 2.83 2.39 3.87 3.34 4.72 3.66 3.87 3.91 1.81 5.33 3.66

Mining and Quarrying -1.30 2.11 1.83 0.04 0.66 1.06 2.65 2.67 2.25 2.16 2.23 -0.71 0.79

Manufacture 4.28 3.50 4.88 4.51 4.29 4.60 3.88 4.35 4.25 4.27 3.86 3.54 3.70

Construction 5.96 6.95 6.98 7.24 6.80 7.35 5.73 5.79 5.58 6.09 5.91 5.69 5.80

Wholesale & Retail Trade

4.61 3.47 5.22 4.53 4.46 4.99 5.22 5.28 4.39 4.97 5.26 4.63 4.95

Transportation & Warehousing

8.06 8.80 8.88 8.21 8.49 8.56 8.70 5.65 5.34 7.01 5.25 5.78 5.52

Accomodation, Food, and Beverage

5.35 5.60 5.52 5.11 5.39 5.17 5.60 5.91 5.95 5.66 5.87 5.52 5.69

Information & Communication

10.48 11.06 8.82 8.27 9.63 7.76 5.11 8.14 7.17 7.04 9.03 9.60 9.33

Financial Service and Insurance

6.01 5.93 6.13 3.82 5.47 4.23 3.06 3.14 6.27 4.17 7.33 4.55 5.93

GDP 5.01 5.01 5.06 5.19 5.07 5.06 5.27 5.17 5.18 5.17 5.07 5.05 5.06


The trade sector has also been slowing along with export-import performance and declining

vehicle sales. Nonetheless, increasing activities on vehicle repair services as well as increasing

sales of agricultural and manufacturing products (as holiday season approached) helped in

maintaining positive performance in the trade sector. A slowdown also occurred in the

transportation and warehousing service sector. This was caused by falling demand for air

transportation services as tariffs increased.

The mining sector became the only sector that went into contraction. The decline in mining

sector production was caused by lower production of metal ore mining, with a decline of -25.9

percent. It was even lower than the growth in the first quarter of 2019, which was -17.9 percent.

This poor performance was due to the operational transition period (from open-pit mining to

underground mining) of mining companies in Papua. However, the positive performance of coal

mining gave some relief to the mining sector, although lower coal prices also drove lower coal

sales value.

Geographically, Indonesia's economic structure remains dominated by Java island. Likewise,

Kalimantan and Sulawesi's growth were above the national rate. On the other hand, there were

three other regions with growth below the national rate, which were Sumatra, Maluku and

Papua. The slowdown in Sumatra’s economy was driven by its great reliance on coal and CPO

commodities. Meanwhile, Maluku and Papua experienced a deep contraction as the region

underwent s mining operation transition period.


F. INDONESIA’S INFLATION

Entering the second half of 2019, the rate of inflation has increased somewhat but remains in

a safe range. In the year to August 2019, inflationary pressures came from volatile food and core

prices, notably the increase in various kinds of chili, gold jewelry, and education costs. On the

other hand, the administered price component eased as transportation fees fell after Eid Al-Fitr.

The strong policy synergy between the Government and Bank Indonesia, both at the central

and regional level, in maintaining price stability and inflation expectations is expected to help

maintain inflation within the target range to the end of 2019.

As a consequence of the prolonged dry season, chili pepper production, which has a relatively

low resistance to poor weather conditions, decreased, leading to inflationary pressures in the

volatile food component. Therefore, the price of various chili production climbed significantly

during the June-July period, after going through decreasing supply and increasing demand

during Ramadan. More recently, inflationary pressure from chili peppers started to ease

towards the end of August as the harvest period commenced in several production centers.

Figure 15. Indonesia’s Inflation Rate (%, yoy)


The upward pressure from chili prices was been partially offset by downward pressure from

other food commodities. In addition to demand normalization after Eid Al-Fitr, the beginning

of the harvest period in some production centers in August led to generalised price falls in

shallot and several kinds of vegetables and fruits. The abundant stocks of garlic, which was also

supported by sufficient supply of imports, has driven garlic prices into deflation.

The price of rice was relatively stable, although grain prices in general have been increasing

since June. In August, the grain price increased by 3 percent compared to the month before.

Nevertheless, an adequate supply of rice in the Bulog and Cipinang Rice Wholesale Market

(Pasar Induk Beras Cipinang), along with the Bulog program’s availability and price stabilization

mechanism (KPSH) has been able to manage rice price volatility. Despite this, the price of

livestock commodities such as meat and purebred chicken eggs noted a decrease as demand

normalized after Eid Al Fitr.

Cumulatively, inflation in volatile food components was 5.86 percent in August 2019 (ytd),

noticeably higher than the last 5 year average of the same period, which was 2.87 percent. In

August 2019, inflation in the volatile food component was recorded at 5.96 percent (yoy), higher

3,61%

3,13%

3,49%

2,95%

3,07%

3,30%

8,70%

3,36%

1,87%

0,71%

3,39%

5,96%

-2,0%

0,0%

2,0%

4,0%

6,0%

8,0%

10,0%

12,0%

Jan Mar Mei Jul Sep Nov Jan Mar Mei Jul Sep Nov Jan Mar Mei Jul

2017 2018 2019

Headline

Core

Administered Price Volatile Food


than the 4.97 percent recorded in August 2018. The outcome of the long dry season and stock

availability over time and across regions will be a challenge to controlling inflation in the

volatile food component for the remainder of the year.

In the meantime, inflation in the administered price component recorded a declining trend

along with deflation in transportation tariffs. The normalization of demand for transportation

after Eid Al Fitr and the holiday season drove tariff decreases in intercity transportation, train,

and air transportation. Furthermore, the implementation of lower tariff policy for low cost

carrier (LCC) flights on particular days and times in July also helped to decrease air

transportation tariffs in a number of cities. This policy was expected to improve the

affordability of air transportation across Indonesia. The reduction of air transportation tariffs

has also been driven by the start of the low season period. Cumulatively, inflation in the

administered price component has been low at -0.19 percent in August 2019 (ytd) or 1.87 percent

(yoy), considerably lower than August 2018 outcome, 1.27 percent (ytd) and 2.55 (yoy).

The increase in the core inflation component has also been influenced by the beginning of

the academic year. During Ramadan and Eid Al Fitr, the core inflation component was

increasing along with higher prices of general goods. After experiencing a decline after the Eid

Al Fitr period, core inflation started to increase as the new school year began. Inflation

pressures came from higher educational fees at all levels of elementary school, junior high

school, senior high school, college, and even from the price of private tutoring. This increase in

education fees occurred notably in July 2019 at the commencement of the new school year.

Increased core inflation was also driven by global economic uncertainties, which brought

about increasing demand from global investors and central banks for safe haven assets, such

as gold. The increased uncertainty has led to fluctuations in gold prices and contributed to

higher inflation since June 2019 as the domestic gold jewelry price also increased. The increase

in prices also occurred in other components, such as housekeeper and non-foreman wages after

the Eid Al Fitr period. Likewise, house rent tariffs drove higher core inflation due to the

increasing cost of building materials and house maintenance, among others and, asbestos, brick,

board, cement, and construction sector wages. As of August 2019, the core inflation component

reached 2.32 percent (ytd) or 3.30 percent (yoy), higher than August 2018, 2.09 percent (ytd) or

2.90 percent (yoy).

Figure 16. Inflation Rate by Component (%, ytd)


0,32 0,24 0,35

0,80

1,48

2,052,36 2,48

-0,4

0,0

0,4

0,8

1,2

1,6

2,0

2,4

2,8

Jan-19 Feb-19 Mar-19 Apr-19 May-19 Jun-19 Jul-19 Aug-19

Core Administered Price Volatile Food Overall


G. INDONESIA’S BANKING SECTOR PERFORMANCE

Financial sector stability was maintained amidst the uncertainty of the global economy at

the end of the second quarter. Indonesia’s banking industry performance was relatively stable,

supported by solid asset growth and a positive intermediation performance. Banking liquidity

also showed an improvement as third-party funds (Dana Pihak Ketiga) continued their growth

trend, although bank credit growth was relatively moderate.

Assets and Sources of Funding

Figure 17. Banking Asset (%, ytd)

Source: OJK’s Indonesia Banking Statistics, BI’s Indonesian Economic and Financial Statistics

Bank assets growth remains solid with the growth of third-party funds increasing and

relatively stable lending. In composition, the highest portion of assets and market share was

owned by BUKU IV at 53.22 percent, with assets recording 15 percent growth (yoy). It was

driven by Panin Bank migration to the BUKU IV group, BUKU III group assets growth sustained

its move to BUKU IV group, which caused an assets deceleration in BUKU III group at the end

of 2019’s second quarter.

Figure 18. (a) Growth of Third Party Funds Source (%, yoy) and (b) Third Party Funds by Currency (%, yoy)

(a) (b)

Sumber: OJK’s Indonesia Banking Statistics

8.243

0102030405060

5.5006.0006.500

7.0007.5008.000

Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov Jan Mar Mei

2017 2018 2019

53.57

7.74

7,42

7,24

6,34

8,30

-1

1

3

5

7

9

11

13

Jan

Mar

Mei Ju

lSe

pN

ov Jan

Mar

May Ju

lSe

pN

ov Jan

Mar

Mei

2017 2018 2019

-20

-15

-10

-5

0

5

10

15

20

Jan

Apr

Jul

Okt

Jan

Apr

Jul

Okt

Jan

Apr

Jul

Okt

Jan

Apr

2016 2017 2018 2019

Assets (Trillion) Growth (% yoy) - RHS %GDP - RHS

DPK

Savings

Current Account

Deposits Rupiah Foreign Exchange


The condition of bank liquidity improved as third-party funds grew 7.42 percent (yoy) in the

second quarter of 2019. This is the highest outcome in the last eight months, supported by an

increase of banking current account and time deposits. Meanwhile, time deposits grew at 8,30

percent (yoy) driven by the increase in time deposits tenor 6 and over 12 months (Figure 18).

Figure 19. Growth of Third Party Funds: (a) by Books (%, yoy) and (b) by Currency (%, ytd)

(a) (b)

Sumber: OJK’s Indonesia Banking Statistics

Foreign exchange of third-party funds recorded 3.11 percent growth (yoy) at the end of the

second quarter. The slow growth in 2019 indicated people’s behavior tends to increase their

savings in foreign exchange when the Rupiah depreciates. This was caused by an expectation

of increasing interest rates and further depreciation of Rupiah. Overall, third-party funds

growth recorded 3.00 percent growth (ytd) as of June 2019, supported by the increasing of

Rupiah third-party funds (3.44 percent, ytd) (Figure 19).

Figure 20. Average Interest Rate of Commercial Banks’ Third Party Funds

Source: OJK’s Indonesia Banking Statistics

Third-party funds growth in BUKU I and BUKU II groups recorded positive performances, 2

percent and 7 percent (yoy) respectively. This positive trend occurred as the disbursement of

government spending as well as global monetary conditions which had moved to lower interest

rate regimes led to foreign capital inflow. It was also supported by Transfer to Region and

Village Fund distribution through Regional Development Banks (Bank Pembangunan Daerah)

during the 2019 second quarter.

-15

-10

-5

0

5

10

15

20

Feb-

18

Apr-

18

Jun-

18

Aug-

18

Oct

-18

Dec-

18

Feb-

19

Apr-

19

Jun-

19

BUKU 1 BUKU 2 BUKU 3BUKU 4 Industri

4,99%3,27%

13,67%3,66%

6,28%-9,17%

4,33%5,19%

-0,42%2,07%

1,62%4,80%

3,00%3,44%

0,37%

TotalRp

ValasTotal

RpValasTotal

RpValasTotal

RpValasTotal

RpValas

2015

2016

2017

2018

2019

2,21

1,29

7,22

7,05

6,0

6,5

7,0

7,5

1,0

1,5

2,0

2,5

Jun Jul Ags Sep Okt Nov Des Jan Feb Mar Apr Mei Jun

2019Current Account

Rp Saving Rp 6-month deposit (RHS) >12-month deposit (RHS)


Furthermore, the increase of current accounts and long-term deposits growth also occurred

as the transmission impact of BI’s 75 bps interest rate increase during July 2018-June 2019. It

was driven by banks’ attempt to attract third-party funds by offering higher interest rates.

However, BI revised down the third-party funds growth in 2019 to the 7-9 percent range in line

with the deceleration of economic growth.

Use of Funds

Table 4. Credit Growth

Description Nominal Credit (Rp trillion) Credit Growth (% yoy)

Dec-18 Mar-19 Jun-19 Dec-18 Mar-19 Jun-19 Total credit 5,294.9 5,291.2 5,467.6 11.75 11.55 9.92 Based on Debtor Class Government 537.4 539.5 587.3 38.37 39.02 26.37 Private 4,751.9 4,747.3 4,868.8 9.49 9.18 8.18

Non Bank Financial Institution 196.2 184.1 193.2 8.41 -0.08 -1.30 Non Financial Institution 2,221.5 2,199.7 2,269.3 9.24 10.31 8.69 Individual 2,334.2 2,363.5 2,406.4 9.82 8.93 8.55

Others 5.5 4.5 11.6 -41.74 -37.19 30.33 Source: OJK’s Indonesia Banking Statistics

Bank credit growth (yoy) at the end of the second quarter of 2019 remained high even though

it tended to slow down compared to the two previous quarters (Table 4). At the same time,

banks tended to be selective and do more credit intensification due to high uncertainty in

finance and economic sectors. It was reflected in the deceleration of Indonesia’s export and

international trade activities.

Figure 21. Credit Disbursement: (a) by Type of Use (%, yoy) and (b) by Currency (%, ytd)

(a) (b) Source: OJK’s Indonesia Banking Statistics

Bank ownership of Government Securities continued to increase. Based on the debtor class,

credit disbursed to the government recorded a 26.37 percent (yoy) increase until the end of the

second quarter of 2019, while private credit recorded a rise of 8.18 percent (yoy). The

deceleration of private credit compared to the previous two quarters was due to the decrease in

Non-Bank Financial Institution lending. The slow growth in credit disbursement to non-

9,92

9,22

13,85

7,64

0

3

6

9

12

15

18

Jan

Mar

Mei Ju

lSe

pN

ov Jan

Mar

May Ju

lSe

pN

ov Jan

Mar

Mei

2017 2018 2019

4,184,144,42

2,724,43

-6,482,602,92

0,774,98

4,398,44

3,263,82

0,14

TotalRp

ValasTotal

RpValasTotal

RpValasTotal

RpValasTotal

RpValas

2015

2016

2017

2018

2019

Credit

Investment

Working Capital

Consumption


financial institutions and individuals also contributed to the deceleration of private sector

credit.

Figure 22. Working Capital Credit Growth (%, yoy)


According to credit categories, they all showed positive growth, even though there was a

decline in their growth rate (Figure 22). By sector, the growth of Working Capital Credit was

contributed to by the trade, financial services, manufacturing, and agriculture sectors. Those

sectors have around 75 percent share of the total credit disbursed by banks. Meanwhile, there

are some sectors which faced a sharp deceleration in their Working Capital Credit, such as

mining, electricity and gas, as well as the information and communication sectors.

Meanwhile, the growth of Investment Credit until the end of June 2019 slowed down

compared to the previous two months, although in general it remained on a stable trend

(Figure 23). Investment credit grew by 13.85 percent (yoy) at the end of the second quarter of

2019, dominated by agriculture, manufacturing, electricity and gas, and the trade sectors.

Meanwhile, the manufacturing sector's investment credit contracted, down by 5.31 percent

(yoy) until the end of June. This condition confirmed the challenges encountered by national

manufacturing industry, which only grew 3.62 percent (yoy) in the second quarter of 2019.

Figure 23. Investment Credit Growth (%, yoy)


The disbursement of Consumer Credit recorded 7.64 percent (yoy) growth. The slower

disbursement of Consumer Credit compared to the previous two quarters was due to the

declining vehicle credit, multipurpose credit, and housing credit. It was confirmed by the

wholesales car sales data, released by the Association of Indonesian Motor Industries (Gabungan

Industri Bermotor Indonesia) for the January-June 2019 period, which showed a decline of

around 13 percent. The slowdown in housing loans was also reflected in the slow growth in the

Residential Property Price Index (Indeks Harga Properti Residensial) in the second quarter of

2019 (1.47 percent, yoy).

13,7

6

7,22

11,4

4

5,74

15,9

0

14,9

1

12,2

7

10,8

2

14,1

2 17,9

5

10,9

3

10,9

3

9,98

17,1

4

10,9

6

8,26

Q4 2017 Q4 2018 Q1 2019 Q2 2019

10,0

6

-0,5

0

8,41

1,759,

20

-4,4

3

15,3

8

6,3810

,71

-4,0

2

23,4

5

12,9

7

8,82

-5,3

1

37,9

2

10,0

5

Q4 2017 Q4 2018 Q1 2019 Q2 2019

Agriculture Manufacture Financial Services Trade

Agriculture Manufacture Electricity & Gas Trade


Banking Credit Risk Figure 24. Credit Risk: (a) Non Performing Loan and Special Mention Loan (%); (b) NPL by type (%)

(a) (b)


As credit growth slowed slightly, the bank credit risk profile remained benign, reflected in the

fall in the Non-Performing Loan (NPL) ratio in the second quarter of 2019. However, the Special

Mention Loan (SML) ratio increased to 5.62 percent at the end of the second quarter of 2019. The

decline in the NPL ratio indicated an increase in credit quality, however the increasing SML ratio

indicated an increase in credit risk that could trigger increased NPLs in the future. Even though

there was an increase in SMLs banking credit was relatively stable, supported by a decrease in the

BI benchmark interest rate followed by lower investment, working capital, and consumption credit

interest rates, suggesting companies repayment abilities have improved slightly.

Figure 25. Non Performing Loan by Books (%)


Based on credit usage, NPLs for working capital credit is the highest in the second quarter of

2019. NPLs of working capital credit was recorded at 3.12 percent, followed by NPLs for

Investment and Consumption credit (2.16 percent and 1.77 percent respectively). BUKU II banks

had high NPLs in June 2019 (3.52 percent), followed by BUKU I banks by 3.28 percent, then

BUKU III and BUKU IV banks (2.60 percent and 2.20 percent respectively).

Tabel 5. Credit by Sector

5,62

2,50

2

3

4

5

6

Jan Mar Mei Jul Sep Nov Jan MarMay Jul Sep Nov Jan Mar Mei

2017 2018 2019

SML(%) NPL (%)

3,12

2,16

1,77

2,50

1

2

3

4

Jan

Mar

Mei Juli

Sep

Nov Ja

nM

arM

ei Jul

Sep

Nov Ja

nM

arM

ei

2017 2018 2019

3,28

3,52

2,20

2,502

3

4

5

Jan-

18

Feb-

18

Mar

-18

Apr-

18

May

-18

Jun-

18

Jul-1

8

Aug-

18

Sep-

18

Oct-

18

Nov

-18

Dec-

18

Jan-

19

Feb-

19

Mar

-19

Apr-

19

May

-19

Jun-

19

BUKU 1 BUKU 2 BUKU 3 BUKU 4 Industri

Investment

Working Capital

Consumption

Total

Industry


No Sectors Credit

(% qoq)

NPL Nominal (%

qoq)

NPL (%) Delta NPL Credit Share Jun-19 (%) Mar-19 Jun-19 (% qoq)

1 Agriculture 2.40 1.14 1.34 1.32 -0.02 6.63

2 Mining -0.87 -18.28 4.34 3.58 -0.76 2.50

3 Manufacture 3.82 7.03 2.78 2.87 0.09 16.50

4 Electricity, Gas, and Water 11.81 -6.84 1.03 0.86 -0.17 3.82

5 Construction 7.59 7.64 3.67 3.67 0.00 6.37

6 Trade 2.79 1.81 3.78 3.74 -0.04 18.29

7 Financial Intermediary 7.65 14.97 1.21 1.29 0.08 4.57

8 Transportation, Warehouse, and Communication

8.64 -4.38 2.35 2.07 -0.28 4.25

9 Real Estate, Leasing, dan Company Services

1.83 12.23 1.82 2.01 0.19 4.73


Bank credit risk decreased in most sectors (Table 5). The decline in banking NPLs were

contributed to by the mining sector; electricity, gas and water sector; and the transportation,

warehousing and communication sectors, with a decrease in nominal NPLs (qoq) of 18.28

percent, 6.84 percent, and 4.38 percent respectively. The NPL percentages for those three

sectors were 3.58 percent, 0.86 percent and 2.07 percent respectively.

Banking Performance

It can be concluded that banking performance in the second quarter of 2019 was generally

improved with relatively high banking capital ratio, positive intermediary functions, and

banking efficiency showing improvements (Table 6). By composition, bank capital was still

dominated by core capital (Tier 1) with a 93 percent share, while the ratio of core capital to Risk

Weighted Assets (Aktiva Tertimbang Menurut Risiko) was recorded at 21.05 percent in the

second quarter of 2019. Meanwhile, the performance of banking intermediation remained

positive, although credit growth slowed slightly compared to the first quarter. Bank efficiency,

in general, also showed improvement as reflected in the BOPO’s conventional commercial bank

indicator which fell to 80.24 percent in the second quarter of 2019. Bank efficiency was

followed by increasing bank profitability through benign conventional commercial banks’ ROA

(2.51 percent in the second quarter of 2019).

Table 6. Summary of Banking Performance

Indicators Unit 2016 2017 2018 2019

Dec Dec Dec Jan Feb Mar Apr May Jun

Asset (IDR T) 6,729.8 7,387.1 8,068.3 7,913.5 7,964.6 8,130.6 8,119.6 8,132.8 8,243.0

DPK (IDR T) 4,836.8 5,289.4 5,630.4 5,563.2 5,600.4 5,672.9 5,670.0 5,671.3 5,799.5

DPK (yoy) (%) 9.60 9.36 6.45 6.39 6.57 7.18 6.63 6.27 7.42

Credit (IDR T) 4,377.2 4,738.0 5,294.9 5,186.6 5,228.0 5,291.2 5,306.0 5,418.7 5,467.6

Credit (yoy) (%) 7.87 8.24 11.75 11.97 12.13 11.55 11.05 11.05 9.92

LDR (%) 90.50 89.58 94.04 93.23 93.35 93.27 93.58 95.54 94.28

NPL (%) 2.93 2.59 2.37 2.56 2.59 2.51 2.57 2.61 2.50

CAR* (%) 22.93 23.18 22.97 23.22 23.45 23.42 23.21 22.43 22.63


BOPO* (%) 82.22 78.64 77.86 87.79 85.33 82.92 83.48 81.51 80.24

NIM* (%) 5.63 5.32 5.14 4.92 4.81 4.86 4.87 4.90 4.90

ROA* (%) 2.23 2.45 2.55 2.59 2.45 2.60 2.42 2.41 2.51

Source: OJK’s Indonesia Banking Statistics *) Conventional Commercial Banks


Box 1. US Inverted Yield Curve: Recession Signal?

With trade tensions continuing there have been some financial market analysts that have

raised concerns over the inverted yield curve. The inverted yield curve is seen by some as an

accurate predictor of an imminent economic downturn. So far, it has preceded all recessions in

the US since the 1950s, although it was referred to as a false positive in the mid-1960s, where

the inverted yield curve was only followed by a weakening of the economy, not by a recession

(Figure 26). Technically, according to NBER definition, a recession is a significant decline in

economic activity that lasts more than two consecutive quarters.

Figure 26. The Yield Difference between Long Term and Short Term US Bonds Started to be Negative (%)

Source : Bloomberg, NBER

An inverted yield curve is a condition where yields for long-term government bonds are

lower than the short-term securities. In a healthy economy, long-term bonds have higher

returns as compensation to investors who are willing to lock in their money for a longer period,

and with greater uncertainty and accept inflation eroding their real returns. Conversely, short-

term securities do not require as much sacrifice so that the yield is also lower, reflecting more

closely official policy rates. However, in some conditions, these rules might not apply so that the

yield curve which should have a positive slope turns negative as investors become pessimistic

over the short-to-medium term outlook.

The demand surge for long-term bonds triggered the inversion of the yield curve. The demand

surge was seen by some as signs the market was so concerned over short-term conditions that they

shifted from shorter term debt to safer longer-term debt. Consequently, the price of long-term bonds

has risen and yields have fallen. In the US, the yield on long-term bonds, especially ten year bonds,

are a good indicator of inflation expectations. Investor’s willingness to receive low yields for their

long-term investment indicates that people are willing to accept lower yields for the perceived extra

security relative to short-term debt. Implicitly, it also explains people's expectations of slowing

economic growth, which is usually accompanied by low inflation.

Figure 27. (a) Various Slopes of US Yield Curve (%); (b) The Highest US Performance in GDP Index (Q2 2009 = 100)

-5

-3

-1

1

3

5

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

2018

10Y-3M

10Y-2Y


(a) (b)

Source : Bloomberg, processed

There are several methods for calculating and reading the inverted yield curve. Typically,

analysts use a ten-year and two-year (10Y-2Y) bond yield spread. Another method is to use risk

premium adjustment after calculating 10Y-2Y. However, researchers from the US Fed San

Francisco in their journal “Information in the Yield Curve about Future Recessions” (Bauer &

Thomas, 2018) stated that from several measurement methods, the best summary measure is

the spread between ten-year and three-month yields (10Y- 3M). Furthermore, Campbell

Harvey, an economist who studies the inversion of the yield curve, explained that the crisis will

occur one to two years after the inverted yield curve lasts for a full calendar quarter. This

symptom also happened before the 2008 global financial crisis.

Figure 28. (a) US’ Unemployment Rate (%) and Inflation (%, yoy); (b) Consumer Confidence Level (Index)

(a) (b)

Source : Bloomberg

After recovering from the 2008 global financial crisis, the yield curve appears to have been

inverted since mid-May 2019 and has lasted until mid-September 2019. This is based on the

10Y-3M yield spread. Meanwhile, if you look at the 10Y-2Y bonds spread, the inversion only

occurs about one week in August and the spread is now back to positive. Considering the

previous study which explained that the 10Y-3M indicator is more reliable, and if it only sees

the inverted yield curve as a signal of crisis, some analysts believe that the recession is expected

to occur around the end of 2020 or early 2021, if the 10Y-3M negative spread survives the third

quarter or even continues until the fourth quarter of 2019.

0

1

2

3

4

5

6

7

1M 3M 1Y 2Y 3Y 5Y 10Y 30Y

Nov-00 Jan-04 Mar-07Agu-17 Agu-19

Inverted (before 2001 recession)

Inverted (before GFC)

Steep slope Less steep

End of Agustus 2019 90

100

110

120

130

Mar

-09

Dec-

09

Sep-

10

Jun-

11

Mar

-12

Dec-

12

Sep-

13

Jun-

14

Mar

-15

Dec-

15

Sep-

16

Jun-

17

Mar

-18

Dec-

18

Japan Germany France ItalyUK Canada US

-0,500,511,522,533,5

3

4

5

6

7

8

9

Jan-

13

Aug-

13

Mar

-14

Oct-

14

May

-15

Dec-

15

Jul-1

6

Feb-

17

Sep-

17

Apr-

18

Nov

-18

Jun-

19

50

60

70

80

90

100

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

Consumer confidence level is in increasing trend

Unemployment Inflation (RHS)


However, we also need to take other economic factors as considerations before reaching that

conclusion. In general, the US economy has been relatively stronger than its peers. We can see it in

several indicators such as relatively strong economic growth, low inflation, and low unemployment.

In global terms, the oil price was also lower, and this is why some other analysts believe that the

coming recession is unlikely to happen. Data since 1970 showed that every recession had also been

preceded by high—even doubling of— oil prices at least twelve months earlier. The increase in oil

prices would suppress consumption, which was the main driver of the economy in the US with a

share of about two-thirds of its economy. Meanwhile, the current data still shows moderate oil

prices and strong consumption. Interestingly, oil prices were also low in the mid-1960s, where the

inverted yield curve turned to be a false positive for the US recession. Another consideration was

that the recent extraordinary monetary expansion after the global financial crisis may have

distorted the debt market. Thus, the inverted yield curve as an accurate predictor of recession may

have been reduced.

However, if the inverted yield curve is accurate in predicting a looming US recession, this adds

another downside risk at the global economic level. If a US recession were to happen, then the

weakening of the global economy is something that must be anticipated in the future. In this

scenario, enacting policies to strengthen the domestic economy will be crucial. With global economic

uncertainty, Indonesia must focus on maintaining domestic consumption and investment, as well

as optimizing government spending as a driver of economic growth.


BUDGET PERFORMANCE ANALYSIS AND FISCAL POLICY

PART II

Boks 2. Tugas Berat Tim Reformasi Perpajakan


A. FISCAL PERFORMANCE AS OF JULY 2019

Even though Indonesia faced a weakening of economic growth in the second quarter, most

budget components were able to grow positively in July 2019. Revenue recorded 5.9 percent

growth, encouraged by growth in non-tax revenues (Penerimaan Negara Bukan Pajak).

Meanwhile, expenditure grew 7.9 percent as the Transfer to the Region and Village Fund

(Transfer ke Daerah dan Dana Desa) rose over the period. However, as global risks increased,

the Government implemented a front loading strategy. As a result, financing recorded 10.5

percent growth in July 2019.

Table 7. Budget Performance as of July 2019 (trillion Rupiah)

Source: Ministry of Finance

Revenue realization, in nominal terms, showed a positive performance, driven by growth in

domestic revenue. However, the realization was lower compared to the same period in 2018

(2019: 48.6 percent of budget target; 2018: 52.5 percent). The uncertainty in the global economy

had a major impact on revenue, particularly from import taxes and other taxes related to

commodities.

Tax revenue was able to record 2.68 percent (yoy) growth in July 2019, supported by non-oil

and gas Income Tax performance which grew 5.27 percent. The increase in this component

came from Income Tax Article 21 that recorded double-digit growth, indicating the stable

employment conditions in this area. This contributed to an improvement in the gini ratio,

which recorded a 0.002 point decrease compared to September 2018. Another tax component

that achieved double-digit growth was personal income tax, encouraged by an expanded

taxpayer base as a result of the tax amnesty program.

Table 8. Tax Revenue Realization; Figure 30. Tax Revenue Growth


Income Tax Art. 21

Rp 91.56 T 13.0 %

Import Income Tax

Rp 32.39 T 4.6 %

Personal Income Tax

Rp 8.50 T 1.2 %

Corporate Income Tax

Rp 139.19 T 19.7 %

Income Tax Art. 26

Rp 33.63 T 4.8 %

Final Income Tax

Rp 65.28 T 9.3 %

Domestic VAT Rp 143.93 T 20.4 %

Import Tax Rp 97.3 T 13.8 %


Revenue realization, in nominal terms, showed a positive performance, driven by growth in

domestic revenue. However, the realization was lower compared to the same period in 2018

(2019: 48.6 percent of budget target; 2018: 52.5 percent). The uncertainty in the global economy

had a major impact on revenue, particularly from import taxes and other taxes related to

commodities.

Table 9. Non-tax Realization (trillion Rupiah)


Tax revenue was able to record 2.68 percent (yoy) growth in July 2019, supported by non-oil

and gas Income Tax performance which grew 5.27 percent. The increase in this component

came from Income Tax Article 21 that recorded double-digit growth, indicating the stable

employment conditions in this area. This contributed to an improvement in the gini ratio,

which recorded a 0.002 point decrease compared to September 2018. Another tax component

growth y-o-y 2019

growth y-o-y 2018

12,3%

1,2%

15,9%

0,9%

6,4%

4,5%

-4,7%

-4,5%

16,1%

28,3%

20,5%

23,3%

13,9%

11,9%

8,1%

27,5%


that achieved double-digit growth was personal income tax, encouraged by an expanded

taxpayer base as a result of the tax amnesty program.

Meanwhile, customs and excise revenue realization grew 13.21 percent (yoy) driven by

significant growth in excise revenue. The performance of Tobacco Excise Receipts (Cukai Hasil

Tembakau) was the main contributor to excise revenue supported by the excise duty

postponement policy. It was also supported by the High Risk Import, Excise, and Export Issuance

(Penerbitan Impor, Cukai, dan Ekspor Berisiko Tinggi) which encouraged favorable business

conditions.

Non-tax revenue also recorded an increase in realization (14.21 percent, yoy), driven by the

increase in restricted state assets (Kekayaan Negara Dipisahkan). The increase in this

component was influenced by Bank Indonesia’s remaining surplus deposit in May 2019 and the

realization of its dividend deposit as of July 2019. However, the performance of natural resource

revenues were affected by the downward trend of commodity prices, reflected in a decreasing

trend in July 2019. Moreover, the decrease in metal ore mining which recorded -25.9 percent

(yoy) also affected the decrease in exports as well as oil and gas non-tax revenue. As a result, the

realization of oil and gas non-tax revenue from mineral and coal mining declined -8.15 percent

(yoy).

Table 10. Central Government Expenditure Realization (trillion Rupiah)


Furthermore, expenditure realization as of July 2019 recorded a 7.9 percent increase (yoy).

This shows the Government’s commitment to increase budget management quality and an

improvement in expenditure absorption. This increase is also reflected in its component

growth, both in central government expenditure and the transfer to regions and village fund

realization.

Central government expenditure recorded 9.2 percent growth (yoy) in its realization,

supported by an increase in social assistance expenditure performance. Social assistance

expenditure has been disbursed through some programs, such as the disbursement of Family

Hope Program (Program Keluarga Harapan) which has reached 82.4 percent of its allocation as

well as food assistance (52.3 percent of its allocation). The strong performance in the social


assistance component shows the Government’s commitment to maintain the purchasing power

of poor people to fulfill their basic needs.

Meanwhile, the realization of Transfers to Region and Village fund was able to grow 5.89

percent compared to the previous year. It was influenced by an increase in the general transfer

funds (Dana Alokasi Umum) component. The resolution of health insurance debt to the Social

Insurance Administration Organization (Badan Penyelenggaraan Jaminan Kesehatan) by 11

Local Governments was the main factor in the strong performance of the general transfer

funds.

Table 11. Transfer to Region and Village Funds Realization (trillion Rupiah)


Generally, Transfer to Region and Village Fund performance continues to increase, growing

nominally at 1.12 percent. It shows the Government’s commitment in establishing equal

growth across regions. However, there was a slight decrease in its realization (39.3 percent of

2019 budget target compared to 42.0 percent in 2018). The increase in the Transfer to Region

and Village Fund realization was driven by the increase in the General Transfer Fund.

The realization of debt financing reached 65.2 percent of the budget target as of July 2019.

This increase was driven by net government securities realization, which was part of the front

loading strategy undertaken by the Government in capitalizing on the strong financial market

conditions in the first semester of 2019. However, the net loan realization was negative in this

period, influenced by the repayment of foreign debt principal that was higher than the

domestic.

The Government will continue to implement its financing strategy with minimal and benign

risk, through such means as domestic funding optimization. The Government is also deepening

the domestic market by the online issuance of government bonds (Surat Berharga Negara ritel).

Until the end of July 2019, government bonds have been issued six times, SBR005, ST003. SR011,

SBR006, ST004. and SBR007. In sharia financing, the Government has also developed some

breakthroughs with the issuance of Green Global Sukuk and Project Financing Sukuk. As a

result, those financing strategies should keep the debt to GDP ratio below 30 percent.

Table 12. Financing Realization (trillion Rupiah)



B. 2020 BUDGET PLAN: COMPETITIVENESS ACCELERATION THROUGH INNOVATION AND STRENGTHENING HUMAN CAPITAL

Background

The 2020 Budget has a different focus compared to previous years. It is the beginning of the

national development policy implementation set out in the National Mid-term Development

Plan (Rencana Pembangunan Jangka Menengah Nasional) 2020-2024. The focus of the 2020

Budget is to improve infrastructure provision and human capital improvement in supporting

the ability to support innovation and develop technology.

Therefore, economic reform will be undertaken to strengthen the fundamentals of the

national economy. The Government will utilize all policy instruments to support the economy’s

stability and growth performance. However, in the medium term, the Government will focus

its policy on four main fields: human capital and infrastructure productivity, institutional

reform, economic transformation, and financial sector deepening.

Fiscal Policy in Medium Term

In the medium term, fiscal policy will be directed to empower productivity and national

competitiveness through healthy, sustainable, and effective fiscal management. Therefore,

over the medium term fiscal policies are to: First, continue to conduct expansive, directed, and

measured policies to improve productive capacity as well as competitiveness. The budget deficit

will be kept at a secure level but able to support the economy optimally. Second, managing the

debt risk by keeping the debt to GDP ratio at a secure level and continuing to reduce it over the

medium term. Third, encouraging a tax ratio improvement through policy innovations while

continuing to provide fiscal incentives for competitiveness and investment. Fourth, achieving

a positive primary balance, starting from 2020.

In support of these policies, the Government will undertake strategies to strengthen spending

quality, widen fiscal space, and manage risk. Strengthening spending quality could be achieved

by focusing the spending on strengthening human capital, accelerating infrastructure

development, increasing social assistance and subsidies effectively, and supporting regional


independence, including the improvement of public service quality. Widening fiscal space will

be undertaken both in revenue and spending components.

On the revenue side, the Government will continue to increase the tax ratio while keeping

the investment climate positive and optimizing the revenue from state wealth management.

For spending, widening fiscal space will be achieved by non-priority spending efficiency. The

Government will also develop creative and innovative financing and deepen the domestic

financial market. The strengthening of spending quality and widening fiscal space strategies

will be performed by considering the fiscal risk to ensure the budget remains healthy and

sustainable.

Fiscal Policy 2020

As written in Macro Economic Framework and Fiscal Policy (Kerangka Ekonomi Makro dan

Pokok-Pokok Kebijakan Fiskal) 2020, Fiscal Policy in 2020 is designed as a policy instrument

that ensures the direction of the development target, both in the short, medium, and long

term. Consequently, the formulation of the fiscal policy direction is undertaken through three

approaches. First, fiscal policy will be directed to stimulate the economy to grow at a high level,

drive the real sector, boost investment and competitiveness. Second, it is directed to encourage

healthier fiscal management, reflected by optimal revenue, quality spending, as well as efficient

and sustainable financing. Third, it is directed to stimulate the improvement of the Government

balance sheet, reflected by asset enhancement, liability management, and equity increases.

In the first year of the National Mid-term Development Plan 2020-2024, fiscal policy in 2020

has a “Budget Plan to Accelerate Competitiveness Through Innovation and Strengthening

Human Capital” theme. This theme indicates that the 2020 Budget Plan is formulated to

strengthen human resource competitiveness through improving the quality of education and

health, strengthening social assistance programs and reducing inequality, accelerating

infrastructure development to support economic transformation, strengthening the quality of

fiscal decentralization, and reforming the bureaucracy.

These programmes are implemented in Spending Better by improving the quality of national

spending. Spending Better is not only focused on improving efficiency, but also on empowering

programmes that have multiplier effects on the national economy. The Spending Better policy

will be undertaken by reallocating consumption to productive spending, sharpening goods

expenditure, encouraging productive capital expenditure, strengthening bureaucratic reform

expenditure, improving the synergy of subsidy and social assistance expenditure, and

improving the quality of fiscal decentralization.

In supporting the spending better programme, the Government will undertake innovative

actions in revenue (both tax and non-tax). This measure will be implemented while at the same

time supporting the business climate and environment sustainability. Moreover, in stimulating

the national economy and supporting the development target, the Government will execute

directed and measured expansive policy in 2020. It indicates the Budget Plan 2020 will be facing

a deficit. Thus, the Government will continue to find financing resources to offset the deficit,

both debt and non-debt. The Government will nevertheless continue to execute the budget in a

prudent, productive, efficient way while also considering the macroeconomic situation.

BUDGET PLAN 2020


Considering the increase in global uncertainty, revenue in 2020 is projected at Rp2,221.5

trillion or an increase of 9.4 percent from Budget 2019 outlook. These revenue projections

consist of tax revenue (Rp2,221.0 trillion) and non-tax revenue (Rp359.3 trillion), growth of 13.3

percent and a decline of 7.0 percent from Budget 2019 outlook respectively. The growth in tax

revenue 2020 is driven by tax revenue optimization by improving tax compliance, import,

excise, and high-risk exports controls (Penertiban Impor, Cukai, Ekspor Berisiko Tinggi)

programme, and tax potency optimization. On the other hand, the decline in non-tax revenue

in Budget Plan 2020 is affected particularly by decreasing natural resources revenue and

separated wealth income.

Furthermore, the Government’s efforts in increasing spending quality is reflected in its

allocation which is set at Rp2,528.8 trillion in 2020, consisting of central government

expenditure (Rp1,670.0 trillion) and Transfer to Region and Village Fund (Rp858.8 trillion).

The allocation of central government expenditure will be utilized, particularly for development

priorities, in education, health, social assistance, and infrastructure. In education, the

Government will focus on the initiative to expand access and improve human skills through

education assistance, such as the Indonesia Smart Card (Kartu Indonesia Pintar) and School

Operational Assistance (Bantuan Operasional Sekolah). Meanwhile, in answering the challenge

from the Industry 4.0 era and addressing low productivity, the Government is issuing the Pre-

work Card (Kartu Pra Kerja). This program is expected to improve workplace skills and

accelerate the absorption of youth workers through strengthening the skilling and reskilling of

around 2 million users. Moreover, in managing price stability and the purchasing power of poor

people, the Government continues to more effectively target energy subsidies.

In addition, in supporting and sharpening expenditure, the Transfer to Region and Village

Fund is directed to improve both quantity and quality of the public service as well as reducing

inter-region inequality. Transfers to Region and Village Fund will be focused on improving

competitiveness through accelerating the provision of public infrastructure and improvement

of human capital. The Government will also attempt to increase regional competitiveness by

increasing General Transfer Funds (Dana Transfer Umum) in financing the decentralized

authority as well as directing the management of Special Transfer Funds (Dana Transfer

Khusus) to support implementation of decentralization.

Considering revenue and expenditure, the Budget Plan 2020’s deficit will be set at Rp307.2

trillion or 1.76 percent of GDP. The fiscal deficit will be directed to encourage strong and

sustainable economic growth and supporting productive activities in improving productivity

and competitiveness. The source of financing will be obtained both from debt and government

securities issued. Debt financing will be directed to manage the debt ratio in the safe level of

securities issuance. Meanwhile, domestic and foreign loans will be focused on empowering

domestic industry and develop infrastructure. The government debt ratio will be maintained

at a safe level, below 30 percent, far less than the debt in many other countries.

Table 13. Budget Plan 2020 (trillion Rupiah)



2020

Budget Outlook Budget Plan

A. REVENUE 2,165.1 2,030.8 2,221.5

I DOMESTIC REVENUE 2,164.7 2,029.4 22,210.0

1 Tax Revenue 1,786.4 2,029.4 1,861.8

2 Non-tax Revenue 378.3 386.3 359.3

II GRANT 0.4 1.3 0.5

B. EXPENDITURE 2,461.1 2,341.6 2,528.8

I CENTRAL GOVERNMENT 1,634.3 1,527.2 1,670.0

1 Line Ministries 855.4 854.9 884.6

2 Non-line Ministries 778.9 672.2 785.4

II TRANSFER TO REGION AND VILLAGE FUND 826.8 814.4 858.8

1 Transfer to Region 756.8 744.6 786.8

2 Village Fund 70.0 69.8 72.0

C PRIMARY BALANCE (20.1) (34.7) (12.0)

D DEFICIT (296.0) (310.8) (307.2)

% Surplus/Deficit to GDP (1.8) (1.9) (1.8)

E FINANCING 296.0 310.8 307.2

I DEBT FINANCING 359.3 373.9 351.9

II INVESTMENT FINANCING (75.9) (75.8) (74.2)

III LENDING (2.4) (2.3) 5.2

IV GUARANTEED DEBTS 0.0 0.0 (0.6)

V OTHERS 15.0 15.0 25.0

DESCRIPTION2019


Box 2. The Role of Vigorous Purchasing Power and Social Assistance Distribution in

Reducing Poverty and Gini Ratio

Indonesia’s government has set the poverty target in the range 8.5-9.5 percent for 2019

and it has made positive progress. In March 2019, the percentage of the poor population

has decreased to 9.41 percent (0.25 pp lower than September 2018 and 0.41 pp lower than

March 2018). Meanwhile, the number of the poor population recorded 25.14 million in

March 2019 (0.53 million lower than September 2018 and 0.81 million lower than March

2018), with the percentage of poor people in urban areas decreasing to 6.69 percent, while

those in rural areas recorded 12.85 percent.

The Gini ratio in 2019 is targeted in the range of 0.380-0.385. In March 2019, the Gini ratio

recorded 0.382 (0.002 points lower than September 2018 and 0.007 lower than March

2018). The Gini ratio in urban areas increased to 0.392, while in rural areas it decreased to

0.317.

According to inequality measures from the World Bank, Indonesia’s expenditure

distribution for the lowest 40-percent income group is 17.71 percent. By region, the urban

area recorded 16.93 percent (classified in moderate inequality category), whilst the rural

area recorded 20.59 percent (classified in low inequality category).

The improvement in these two welfare indicators has been supported by the increase in

expenditure per capita of low and middle income population, both in urban and rural

areas. Social assistance in early 2019 has also contributed in reducing poverty and

inequality, as well as solid economic growth and benign inflation. The Budget allocation

for social assistance has increased in 2019 and is aimed to accelerate the reduction of

poverty and inequality in Indonesia.

Figure 31. Poverty Rate and Gini Ratio in Indonesia

Source: Ministry of Finance, processed

0,3820,413 0,38411,66

9,669,41

0

5

10

15

0,000

0,200

0,400

0,600

2012 2013 2014 2015 2016 2017 2018 Jan-19 Feb-19 Mar-19 Apr-19 May-19 Jun-19 Jul-19

(%)

Assistance for Social Security and Poverty Alleviation (Rp100 trillion) Gini Ratio


PART III SPECIAL ANALYSIS: PENSION FUNDS AS AN ALTERNATIVE FOR LONG TERM FINANCING SOURCE


A. BACKGROUND

Decent infrastructure is one of the prerequisites for Indonesia to support mobility as well as

to encourage development making infrastructure as one of the important points in the 2020-

2024 RPJMN. Based on the 2020-2024 RPJMN, there are 19 major projects related to National

Priority Number 5: Strengthening Infrastructure to Support Economic Development and Basic

Services, which requires an allocation of funds of around 2,085 Trillion Rupiah. The source of

funding that is expected to be used to finance the project comes from the State Revenue and

Expenditure Budget and other schemes such as assignment schemes to State-Owned

Enterprises, Non-Budget Infrastructure Development and Public Private Partnerships.

In order to explore other sources that can be used to finance infrastructure projects,

innovation is a must. Infrastructure projects are long-term projects that require large amounts

of funds. The characteristics of the funding sources should be adjusted to the characteristics of

the long-term project. One source of financing that matches these characteristics is life

insurance and pension management funds.

B. PENSION FUND INDUSTRY IN INDONESIA

The pension system in Indonesia consists of mandatory pension funds and voluntary pension

funds. The mandatory pension program includes a pension program for Civil Servants (PNS)

managed by PT Taspen (Persero), for members of the armed forces/police (TNI/POLRI) managed

by PT Asabri (Persero), and a national pension program for private formal workers managed by

BPJS Ketenagakerjaan. In addition to the mandatory pension program, there is a voluntary

pension program organized by employers (Dana Pensiun Pemberi Kerja/DPPK) and financial

institutions (Dana Pensiun Lembaga Keuangan/DPLK).

The total assets under management of the current pension program are relatively high, as of

December 2018 recorded at 850.78 trillion rupiah. The total managed fund is dominated by the

mandatory pension program managed by BPJS Ketenagakerjaan, which is 319.33 trillion rupiah

and is expected to continue to increase over the coming years. Although the assets of the

national pension program are experiencing rapid growth, the role of pension funds in the

development of the financial sector in Indonesia is still very small. As of December 2018, the

total pension fund managed by the pension industry was only about 5.63 percent of gross

domestic product (GDP), this value is relatively small when compared to other countries. This

indicates that the assets of pension funds in Indonesia are currently not optimally managed and

have significant growth potential.

C. CURRENT PROBLEMS

In general, the lack of long-term financing sources, especially those originated from the

pension fund, is due to these two main reasons: the assets of pension funds are not optimally

managed, and the nation wide pension system is not harmonized.

1. Pension Fund Assets are not Optimally Managed


The pension fund assets in Indonesia are mostly invested in short-term investment

instruments, this is not in accordance with the characteristics of pension programs that

have long-term liabilities (thus there is a asset-liability mismatch). Because of that, pension

fund assets that are currently managed cannot be developed optimally. Some things that

cause asset-liability mismatch are as follows.

Table 14. Asset Liability Mismatch

Pension Plan (Jaminan Hari Tua) Pension Guarantee (Jaminan Pensiun)

TENOR Asset/Liability Asset Asset/Liability Asset

<1 113% 35.1 T 3946% 6.8 T

1-5 37% 34.4 T 159% 2.2 T

5-10 47% 33.1 T 234% 4.1 T

10-20 215% 157.1 T 552% 24.9 T

>20 90% 19.1 T 6% 2.9 T

TASPEN ASABRI DPPK dan DPLK

TENOR Asset/Liability Asset Asset/Liability Asset Asset/Liability Asset

<1 688% 71.7 T 244% 11.5 T 238% 120.7 T

1-5 238% 56.6 T 155% 3.5 T 140% 52.7 T

5-10 74% 19.9 T 139% 3.3 T 68% 28.7 T

>10 282% 82.8 T 85% 4.3 T 68% 68.6 T

Source: BPJS Ketenagakerjaan

a) The performance measurement of the management of fund managers, both

mandatory and voluntary programs, is based on the performance of the past year

alone.

There are rules relating to achieving an investment target for pension fund

management institutions in accordance with Peraturan Menteri Badan Usaha Milik

Negara (BUMN) and the annual investment plan (rencana investasi tahunan/RIT)

target of PT Taspen (Persero) and PT Asabri (Persero) according to Peraturan Menteri

Keuangan (PMK) that encourages management to place assets under management on

short-term investment instruments, because they have a low level of volatility even

though the yields obtained are relatively small. This condition is different from the

practice in several other countries (such as Malaysia, Australia and Canada) where

annual performance measurements for management are based on the last 3-5 rolling

years average performance.

b) Early withdrawal, especially in the Jaminan Hari Tua (JHT) program at BPJS

Ketenagakerjaan based on Regulation of the Minister of Manpower No. 19 2015

concerning the Procedures and Requirements for Payments of Old Age Benefits.

The JHT program, that has the largest assets under management (as of December 2018

amounting to Rp278.9 trillion), did not grow optimally because many participants

made withdrawals long before their retirement age. The withdrawal from a JHT fund

can be done at any time, including shortly after stopping work. This is very likely to

occur because several existing regulations allow it.


According to Law Number 40 of 2004 concerning the National Social Security System

(SJSN Law), part of JHT funds are permitted to be withdrawn if the participant has had

a minimum of 10 years contribution. Thus, the early withdrawal of JHT funds that

occurs currently often contradicts the provisions of the SJSN Law. Not only that, in

many countries, pension funds can only be accessed/withdrawn when participants

reach a set retirement age.

c) Financial Services Authority Regulation (Peraturan Otoritas Jasa Keuangan/POJK)

that requires Non-Bank Financial Institutions (IKNB) to allocate investment to

Government Bonds (SBN) within certain limits without considering the character

and duration of the program liabilities.

According to the POJK, at least 50 percent of the investment assets of the Employment

Social Security Fund (Dana Jaminan Sosial/DJS) must be placed on the SBN. This

provision results in the allocation of funds in SBN that are large enough that makes

less room for corporate securities and other investment instruments to develop.

Considering that the performance measure is based on annual performance, pension

fund managers tend to allocate funds to SBN that have a short or medium tenure.

d) Investment literacy (including about asset liability management) of the people,

including participants, management bodies, and regulators is still relatively low.

Referring to best practice, the main principles to determining investment strategies

for pension plan assets are determined by the liability profile of the program. If the

liability profile of a program is dominated by short-term liabilities, the investment

strategy that should be undertaken is a conservative strategy. Conversely, if the

liability profile of a program is dominated by long-term liabilities, the investment

strategy that should be undertaken is a more aggressive strategy. This principle is not

yet understood correctly. In addition, people are only familiar with conventional

instruments such as savings, deposits, and SBN but do not understand other

instruments such as stocks and mutual funds.

2. The Whole Pension System is not Harmonized

In the history of its development, Indonesia has had a pension program (since the 1960s).

The mandatory pension program implemented in Indonesia currently covers all formal

workers but does not include informal workers, which currently account for 57 percent of

the total workforce in Indonesia. Broadly speaking the mandatory pension program in

Indonesia can be explained as follows.

a) Indonesia has had a pension program since 1966 which is a mandatory pension

program for the military, and a mandatory pension program for civil servants.

Furthermore, in 1992 the government began implementing the JHT program through

the Labor Social Security (Jaminan Sosial tenaga Kerja/Jamsostek) program for private

employees, as well as the voluntary pension program through the DPPK and DPLK.

b) In 2003, through Law Number 13 of 2003 concerning Labor (Labor Law) the

government began requiring employers to provide compensation for workers who

were laid off (PHK) in the form of severance pay, years of service awards, and

compensation money rights.


c) Furthermore, in 2004 the government introduced the National Social Security System

(SJSN) through the SJSN Law, government introduced social security protection that

was designed to provide all citizens, including a pension program in the form of a

Pension Guarantee (Jaminan Pensiun/ JP) and JHT, and established BPJS

Ketenagakerjaan.

Figure 32. Total Distribution of Pension Plan Claim in 2017

Source: BPJS Ketenagakerjaan

Since the implementation of the Labor Law and the SJSN Law, there have been several

social security programs that must be provided by employers (including JP, JHT, and

severance pay). However, the regulations governing the pension program are currently

not well integrated with one another. This has resulted in the adoption of pension

programs that are less harmonious and even offer different redundancy benefits in

different programs. The current lack of a harmonized pension system is reflected in the

following impacts.

a) Based on the EPLex Indicators International Labor Organization (International Labor

Organization, 2015), regulations on the protection of workers in Indonesia are very

rigid and most rigid when compared to other countries in Asia. In addition,

enforcement and compliance rates for these regulations are very low (World Bank,

2019).

b) From the employer side, the burden of contributions borne for mandatory pension

plans and similar mandatory programs is relatively high, one of the highest in Asia

(Social Security Administration - International Social Security Association, 2016), with

the following details.

i. For severance programs, based on actuarial calculations, the average contribution

burden is borne by employers for 8 percent of workers' wages, while for workers

with relatively short work periods, the required contributions can reach 12 – 15

percent.

0%

50%

100%

0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30

Membership period (years)

Entering retired ages

Passed away

Permanent disability Leaving

Indonesia Work

termination

Resign

Partial claim (30%)

Partial claim (10%)


ii. The mandatory pension plan for private employees (in SJSN), which has been in

effect since 2015, with a contribution rate of 3 percent of workers' wages (with a

division between employers of 2 percent and workers by 1 percent), provides an

additional burden for employers so that the total burden of employers to meet

obligations to workers range from 18.24 - 23.74 percent of worker's wages.

c) The membership number of pension programs (and other similar employment

programs) which is currently relatively very low, is broadly summarized as follows:

i. Most workers who have been protected by the pension program are formal sector

workers, but not all formal workers are protected by the pension program (only

about 43 percent of formal workers or 16 percent of the total workforce).

ii. Based on data from the Central Statistics Agency (Badan Pusat Statistik/BPS),

more than half of the workforce in Indonesia are workers in the informal sector.

However, almost all workers in the informal sector are not protected by the

pension program.

Figure 33. (a) Formal Workers (b) Social Security

(a) (b)

Source: BPJS Ketenagakerjaan d) On the other hand, the voluntary pension program, which is organized by DPPK and

DPLK, has not been well developed due to the following matters.

i. Public perception, both workers and employers, appear to think that pension

funds from the mandatory program are sufficient to meet their needs.

ii. The absence of incentives to the public (especially people in high wage brackets) to

save in pension funds.

In many countries, tax incentives are the key to generate the amount of funds managed

under the voluntary pension program. Pension plan tax incentives (i.e. contributions can

be tax deductible) can only be obtained if paid through an employer. It is not currently

possible if contributions are paid directly to the DPLK by individuals. The current

retirement system provides for a lose-lose situation for stakeholders (the Government,

Workers and Employers), which is reflected in the following matters.

0,4

0,45

0,5

0,55

0,6

40

60

80

100

120

140

2015 2016 2017 2018

Juta

Workers*)[124 MILLION]

FormalWorkers

[53.5 MILLION; 43%]

Labor Social Security

Participants[20.2 MILLION;

16%]Total Formal workers Formal workers Percentage


a) The accumulation of long-term funds in Indonesia, especially from the accumulation

of pension funds, is very low. Total managed funds for all pension programs are

currently 5.6 percent of GDP. This amount is very low relative to other countries such

as Australia (+ 130 percent), Canada (+ 154 percent), and Malaysia (+ 60 percent) (OECD

and World Bank, 2018).

b) Investment climate that is not conducive.

c) Very low employment protection.

D. POLICY RECOMMENDATIONS

To be able to maximize pension funds under management as a source of long-term financing,

improvement options can be divided into optimizing the management of pension fund assets

and harmonizing the pension system.

1. Optimizing the Management of Pension Fund Assets

In the short term, additional long-term funds can be obtained by optimizing the

management of existing pension plan assets. Some things that can be done to optimize the

management of pension fund assets are:

a) Management's annual performance measured against the average performance for a

longer (rolling) period (for example the last 3-5 years). This current measure is based

only on the past 1 year performance alone.

b) Minimizing the early withdrawal of pension funds. Regarding withdrawal of JHT

funds, the following matters need to be considered:

i. re-adjust the existing rules to be accordance with the SJSN Law (it is permissible

to take some if the participant has a minimum of 10 years' contribution); or

ii. separating JHT assets into two parts with a certain composition (percentage), i.e.

a small portion of funds can be accessed (withdrawn) at any time by participants

for certain purposes while other parts of program funds can only be accessed

(withdrawn) by participants when they reach retirement age (for example:

management of pension programs in Malaysia).

c) Adjusting to the POJK related to the minimum Government Bonds ownership, by

taking into account the suitability of the character of the program and the duration of

program liabilities. This adjustment can be utilized by the government by issuing more

long-term Government Bonds.

d) Improve financial literacy.

e) Creating space to increase the supply of long-term instruments to absorb needs.

By improving the optimization of pension fund management in the form of changes in

management performance measurements and minimizing early withdrawal, the simulation

shows that there is a potential long-term fund of 226 Trillion Rupiah.

2. Harmonizing the pension system

Over a relatively long term, the addition of long-term funds can be achieved by improving the

pension system. Comprehensive improvements will produce programs that are well integrated,

provide comprehensive, effective and efficient protection, and create a large and sustainable

accumulation of long-term funds. Some improvements that can be done are as follows.


a) The harmonization of existing programs need to pay attention to the amount of

contributions based on the ability and affordability of workers and/or employers, which

involves the following matters:

i. change or adjust the severance payment scheme;

ii. reallocate contributions from some of the existing programs. The complete

reallocation proposal; and / or

iii. improve enforcement and compliance with regulations.

b) Establish an Unemployment Insurance program, as one of the mandatory programs as a

consequence of adjusting the severance scheme.

c) Provide tax incentives (tax deduction) on individual contributions used to top-up or invest

in pension funds. If this is approved, it will be necessary to improve the individual tax

return form to include the individual pension fund contribution field as a deduction for

taxable income.

d) Increasing the protection and participation of informal workers in pension programs, by

establishing mandatory pension plans for informal workers and/or working towards the

transition of informal workers into formal ones. One simple effort that can be done is that

every community (worker) who has a taxpayer identification number (NPWP) can be

recorded as a formal worker.


RECENT

MACROECONOMIC

INDICATOR

DEVELOPMENT

APPENDIX


Macroecon

omic In

dicator D

ata

AugustSeptember

OctoberNovember

DecemberJanuary

FebruaryMarch

AprilMay

JuneJuly

August

5.175.18

5.075.05

2,684.192,638.89

2,625.042,735.19

3,841.763,798.68

3,782.363,963.46

3.202.88

3.163.23

3.132.82

2.572.48

2.833.32

3.28

134.07133.83

134.20134.56

135.39135.83

135.72135.87

136.47137.40

138.16138.59

138.75

2.902.82

2.943.03

3.073.06

3,063.03

3.053.12

3.253.18

3.30

2.552.40

2.743.07

3.363.39

3.383.25

3.173.38

1.892.22

1.87

4.973.75

4.484.32

3.391.76

0.330.16

2.054.08

4.914.90

5.96

14,56014,869

15,17914,697

14,49714,163

14,03514,211

14,14314,393

14,22714,044

14,242

14,71114,929

15,22714,339

14,48114,072

14,06214,244

14,21514,385

14,14114,026

14,308

5.505.75

5.756.00

6.006.00

6.006.00

6.006.00

6.005.75

5.50

11.9611.9

11.8311.8

11.7311.72

11.6811.64

11.6211.57

11.57

10.4810.59

10.4710.48

10.3410.52

10.5510.51

10.510.43

10.42

10.3710.54

10.3810.51

10.3810.38

10.3610.34

10.3110.26

10.24

69.468.3

69.268.6

54.856.6

61.363.6

68.368.1

61.061.3

69.873.3

65.350.9

49.051.6

55.058.2

63.960.9

54.755.0

77.283.0

73.958.4

57.760.2

64.066.1

71.371.1

64.164.0

BondsYield (5YR)

7.988.05

8.357.82

7.917.85

7.517.15

7.317.54

6.786.84

6.79

BondsYield (10YR)

8.208.12

8.547.87

8.038.01

7.827.63

7.837.96

7.377.38

7.33

StocksIHSG

6,0185,977

5,8326,056

6,1946,533

6,4436,469

6,4556,209

6,3596,391

6,328

NFBSUN, Saham, SBI

14,975-5,919

10,05546,065

-12,39530,502

30,84224,141

46,030-16,807

50,38224,265

22.8322.91

22.9723.32

23.323.22

23.4523.42

23.2122.43

22.63

93.7994.09

93.7193.19

94.7893.97

94.1294

94.2596.19

9.98

2.72.66

2.672.7

2.592.56

2.62.5

2.572.61

2.511.91

12.4313.09

12.0511.7

11.912.7

11.5511.06

11.069.34

Source: BI, Central Bureau of Statistics, Bloomberg, dan DG Budget

Government Securities and Stocks

Perbankan (%)

CAR

LDR

NPL

Credit Growth

Working Capital Credit (eop)

Investment Credit (eop)

Oil Price (USD/barel)

Average (ICP)

WTI

Brent

Exchange Rate (Rp/USD)

Average

End Of Period

Interest Rate (%)

BI-7days Repo Rate

Consumption Credit (eop)

Nominal Current Price (trillion rupiah)

Inflation (%)

IHK

Core

Administrative Price

Volatile Food

20182019

GDP

Economic Growth (%)Nominal Constant Price (trillion rupiah)

Indicators


BudgetReal to 31 Jul

% to

BudgetBudget

Real to 31 Jul%

to Budget

1,894,720.4

994,357.50

52.5%2,165,111.8

1,052,826.8

48.60%

1,893,523.5

991,087.40

52.3%2,164,676.5

1,052,021.4

48.60%

1,618,095.5

780,052.20

48.2%1,786,378.7

810,748.5

45.40%

a. Domestic Tax

1,579,395.5

754,722.40

47.8%1,577,600.0

788,213.5

44.70%

b. International Trade Tax38,700.0

25,329.80

65.5%

43,321.8

22,535.0

52.00%275,428.0

211,035.20

76.6%

378,297.9

241,272.9

63.80%1,196.9

3,270.10

273.2%

435.3

805.4

185.00%2,220,657.0

1,145,656.10

51.6%

2,461,112.1

1,236,500.0

50.20%1,454,494.4

697,020.50

47.9%

1,634,339.5

761,467.2

46.60%847,435.2

375,930.50

44.4%

855,445.8

419,900.0

49.10%607,059.2

321,090.00

52.9%

778,893.7

341,600.0

43.90%766,162.6

448,635.60

58.6%

826,772.5

475,069.9

57.50%706,162.6

412,774.90

58.5%

756,772.5

433,190.1

57.20%60,000.0

35,860.70

59.8%

70,000.0

41,879.7

59.80%(87,329.5)

(4,853.80)

-11.5%

(20,115.0)

(25,080.4)

124.70%(325,936.6)

(151,299.20)

(296,000.2)

(183,700.0)

62.10%

(2.2)

(1.02)

(1.8)

(1.1)

325,936.6

206,598.30

63.4%296,000.2

229,731.8

77.60%

399,219.4

205,567.70

51.5%359,250.6

234,131.4

65.20%

(65,654.3)

(1,550.00)

2.4%(75,900.3)

(5,133.9)

6.80%

(6,690.1)

2,474.00

-37.0%(2,350.0)

715.8

-30.50%

(1,121.3)

-

0.0%-

-

0.00%

183.0

106.60

58.3%15,000.0

18.6

0.10%

55,299.10

46,021.6

SURPLUS / (DEFICIT) BUDGET FINANCING

E. FinancingI. Debt FinancingII. Investm

ent FinancingIII. LendingIV. Guaranteed DebtsV. Others

II. Transfer to Region and Village Fund1. Transfer to Region2. Village Fund

C. Primary Balance

D. Deficit%

Surplus / (Deficit) to GDP

2. Non-tax RevenueII. Grant

B. ExpenditureI. Central Governm

ent Expenditure1. Line M

inistries2. Non-line M

inistries

2019

A. RevenueI. Dom

estic Revenue1. Tax Revenue

Descriptions

2018

Bu

dget R

ealization Ju

ly 20

18 an

d Ju

ly 20

19

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