Recent Economic Development & Bank Indonesia's Support for Investment Development

1. RECENT ECONOMIC DEVELOPMENT & BANK INDONESIA’S SUPPORT FOR INVESTMENT DEVELOPMENT Central Java Investment Business Forum 2018 “Developing Investment & Business in Tourism and Industrial Sectors in Central Java” 26thNovember 2018 PERRY WARJIYO, Ph.D Governor

2. OUTLINE • Recent Global and Domestic Economic Development • Bank Indonesia Policy Mix Response to Strengthen External Resilience and Maintain Stability • Bank Indonesia support for Investment Development

3. Global economic growth is flat and uneven, accompanied by high uncertainty in the global financial markets Global growth is flat and uneven: Solid US growth in 2018 and consolidation in 2019, growth slowing down in Europe, Japan, and China, while growth in emerging economies increase. Trade tensions between US and several countries affect global economic growth. 1x FFR HIKE IN 2018, AND 3x IN 2019… RISK OF ESCALATING TRADE TENSIONS CAUSES LOW WORLD TRADE VOLUME… Flat Global growth causes low oil price and decreasing global commodity prices Source: Bloomberg LOWER PROBABILITY OF ECB DEPOSIT FACILITY RATE HIKE IN SEPT 2019… Source: various reports Source: Bloomberg Source: IMF WEO & Bank Indonesia

4. Indonesia economic growth is solid and inflation is low and stable… Major support for growth came from domestic demand due to high investment growth, although net export is still negative due to strong domestic demand. 2018 GDP is expected around 5.1%... Inflation stays low and stable within target. 2018 Inflation is expected around 3.2%... ALTHOUGH NET EXPORT IS STILL NEGATIVE DUE TO STRONG DOMESTIC DEMAND… DUE TO STRONG GROWTH ON INVESTMENT IN BUILDINGS AS WELL AS COMMERCIAL PROJECTS... GROWTH SUPPORTED BY DOMESTIC DEMAND… GDP 2018: around 5.1% Source: Statistics Indonesia Source: Statistics Indonesia (processed); Real – PDB: Near Term Forecast as of Nov ‘18 Source: BCI • SUPPORTED BY WELL ANCHORED INFLATION EXPECTATIONS… • AS WELL AS LIMITED EXCHANGE RATE PASSTHROUGH EFFECTS ON INFLATION… • INFLATION WITHIN TARGET… Inflation 2018: around 3.2% Source: Bank Indonesia calculation Source:Concensus Forecasts Source: Statistics Indonesia

5. Spatially, solid growth and benign inflation happened in most regions • Economic growth is supported by growth increases in Java, Sumatera, and Kalimantan. • Lowest recorded inflation happens in Sumatera (2.83%, yoy), Java (3.21%, yoy), and Kalimantan (3.28%, yoy). • Inflation in Central Java is also low at 3.15%, within national inflation target. ECONOMIC GROWTH BY REGION, 3rd QUARTER, 2018 (YoY) INFLATION BY REGION, OCTOBER 2018 (YoY) Source: Indonesia Statistics Source: Indonesia Statistics

6. Current Account Deficit (CAD) well maintained, while Rupiah follows market mechanism CAD in Q3 ‘18 increases due to strong domestic demand. However, full year 2018 estimate for CAD still lies beneath 3% GDP. Going forward, lower CAD is likely, supported by real actions to manage export and import. Rupiah moves according to market mechanism to support the adjustment process of external balance and maintain economic sustainability ALTHOUGH CURRENT ACCOUNT IN Q3 ‘18 IS STILL IN DEFICIT, 2019 ESTIMATE SHOWS BETTER CONDITION TRADE BALANCE IN OCT 2018 IS IN DEFICIT DUE TO STRONG DOMESTIC DEMAND CAD 2018: below 3% GDP Source: Indonesia Statistics RUPIAH DEPRECIATION IS RELATIVELY BETTER THAN SEVERAL PEER COUNTRIES, INCLUDING INDIA, SOUTH AFRICA, BRAZIL, TURKEY Data as of 14 November 2018 Source: Reuters, Bloomberg (processed) Source: Bank Indonesia

7. External Shocks’ Mitigation: Multi Layered Safety Net • 1st Line of Defense: National FX Reserves Accumulation, Prudential Management, and Strong Institutional Capacity • US$22.76 billion swap line with Japan currently in place • The size of the swap line was increased from US$12 billion in Dec 2013 Japan RESERVES BUFFER IS ADEQUATE… REGULATION ON PRUDENTIAL PRINCIPLES IN MANAGING EXTERNAL DEBT • Renewed a 3 year KRW/IDR swap arr. up to KRW 10.7 tn / IDR115 tn in Mar 2017 South Korea Bilateral • Established a 3 year A$/IDR swap arr. up to A$ 10 bn / IDR100 tn in Dec 2015 Australia • Repo and Local Currency Swap Arr. equivalent to USD10 bn in Oct 2018 Singapore • Amendment of Bilateral Currency Swap Arr. equivalent to USD30 bn in Nov 2018 China Chiang Mai Initiative Multilateralization (CMIM) • Entitled to a maximum swap amount of US$ 22.76 bn under the ASEAN+3 • (Japan, China, and Korea) FX reserves pool created under the agreement • Came into effect in 2010 with a pool of US$120 bn • Doubled to US$240 bn effective July 2014 Regional • Indonesia is entitled to access IMF facilities for crisis prevention to address • potential (actual) BoP problem • Such facilities include Flexible Credit Line (FCL) and Precautionary and • Liquidity Line (PLL) IMF Global Financial Safety Net (GFSN) Global Source: Bank Indonesia Source: Bank Indonesia 2nd Line of Defense: Swap Bilateral, Regional, Global ENCOURAGING CORPORATE COMPLIANCE ON HEDGING RATIO AND LIQUIDITY RATIO… *Data as of Q2 2018, total corporation: 2727 Source: Bank Indonesia Source: Bank Indonesia

8. Financial system stability well maintained amidst increasing intermediation Credit 2018: around 12% BANK CAPITAL REMAINS HIGH WITH AMPLE LIQUIDITY… CREDIT GROWTH IS PICKING UP… Source: Bank Indonesia Source: Bank Indonesia CREDIT RISK WELL MANAGED… NON BANK FINANCING CONTINUES GROWING… September2018 2,7% • Gross NPL Net NPL 1,2% Source: Bank Indonesia Source: KSEI as of Oct ‘18, SPM OJK as of 2nd week of Oct ‘18

9. Spatially, intermediation is picking up and credit risk is well managed in most regions • Highest credit growth recorded in Java and several provinces outside Java. • Non-performing loans (NPL) ratio in most regions are well maintained in a healthy level below 5%, except for East Kalimantan, due to the limited performance of mining sector in this region. NPL BY REGION,SEPTEMBER 2018 (%) CREDIT GROWTH BY REGION,SEPTEMBER 2018 (%, YOY) Source: Bank Indonesia Source: Bank Indonesia

10. Bank Indonesia Policy Mix 1. Board Meeting Nov’18 increased BI7DRR 25bps to 6% (BI7DRR increased by a total of 175 bps in 2018) • Ongoing effort to lower current account deficit within a manageable threshold, in coordination with the government. • Strengthening the attractiveness of domestic financial market by anticipating global policy rate hike in the next few months. 2. Board Meeting Nov’ 18 implemented policies to maintain flexibility and distribution of liquidity in the banking industry. • Raising the ‘Averaging’ portion of Reserve Requirement in Rupiah (conventional and syaria) from 2% to 3% of third-party fund. • Increasing the ratio of Macroprudential Liquidity Buffer (conventional and syaria) that can be used for repo transaction with Bank Indonesia, from 2% to 4% of third-party fund. 3. Other policies for stabilization as well as maintaining growth momentum • Accomodative macroprudential policies, ranging from Loan to Value Ratio,Macroprudential Intermediation Ratio which is being preserved at 80-92% and Countercyclical Buffer which is set at 0% in Board Meeting Nov ‘18. • Accelerating financial market deepening by issuing regulation on interest rate derivatives in Rupiah, i.e Interest Rate Swap (IRS) dan Overnight Index Swap (OIS) as an alternative for hedging. This regulation, along with IndONIA and strengthened JIBOR will support a more transparent yield curve formation in both money market and bonds market, which in turn will help strengthen monetary policy transmission as well as further developing the markets. • Payment system development, including National Payment Gateway, electronification program for social transfer and government financial transactions. • Islamic economic and financial development, through halal value chain, including halal lifestyle, development of Islamic commercial and social finance, as well as education and communication.

11. Strengthening Policy Coordination among Authorities • Strengthening coordination with the Government and related authorities to maintain economic stability and external resilience during global uncertainty Coordination in Maintaining Macroeconomic Stability • Maintaining the attractiveness of the domestic financial market, particularly Government bonds. • Coordination with the Government in controlling inflation. Coordination in Reducing Current Account Deficit Implementation of the B20 program starting September 1, 2018 to reduce oil imports and bolster CPO exports. Synergy in accelerating FX proceeds frompriority destinations of tourism. To increase exports and reduce imports through fiscal policy, trade, industry and the implementation of domestic components policy. Coordination in Accelerating Financial Market Deepening for Economic Financing, including Infrastructure Infrastructure financing through securities issuance such as Earning Backed Securities (EBA), Fixed Income Funds, project bonds, blended finance, etc. Corporate financing through capital market such as Medium Term Notes (MTN), Promissory Notes (PN), and Commercial Papers (CPs). Going forward, Bank Indonesia will remain vigilant againstglobal and domestic economic developmentand outlookin order to strengthen the policy mix response to maintain macroeconomic and financial system stability.

12. Trade and Investment in Central Java continue to grow Investment in Central Java increases. FDI in 2018 is dominated by electricity, gas, and water sector, as well as other sectors. DDI in 2018 is dominated by construction, electricity, gas, and water, and other sectors. Trade balance in Central Java recorded deficits since 2013. Biggest export shares came from Textile and Product of Textile (TPT), and Wood and Product of Wood (WPW). Meanwhile, biggest import shares came from oil and gas and machinery. INVESTMENT REALIZATION CONTINUE TO GROW INVESTMENT IN THE FORM OF FOREIGN DIRECT INVESTMENT (FDI) AND DOMESTIC (DDI) TRADE BALANCE RECORDED DEFICIT, INLINE WITH THE OIL AND GAS DEFICIT AND INCREASING IMPORTS ON MACHINERY AND TPT 71% Oil&Gas Deficit 29% Non Oil&Gas Deficit

13. Tourism sector development in Central Java Foreign tourists’ visits to Joglosemar, including 3 candi, increased in the last 4 years. To harvest more FX incomes, tourists’ visits should grow at least 8% yearly, supported by investment development and tourists’ satisfaction. Attraction, Amenity, and Access need to be developed along with branding and institutional development. Bank Indonesia supports these efforts by providing data, analysis, research, social program, promotion, and regional investor relation unit. SHORT & MEDIUM TERM STRATEGY FOR TOURISM DEVELOPMENT TOURISTS’ VISITS TO JOGLOSEMAR, INCLUDING 3 CANDI JOGLOSEMAR 3 CANDI (49% OF FOREIGN TOURISTS) ATTRACTION AMENITY ACCESS • Connection NYIA • Add flight schedule to KarimunJawa • Add more MICE events • Tourism Villages • Adventure packages CAGR Wisman : 6,26% CAGR Wisman : 7,76% • Crowd Management • Homestay Standardization foreign BRANDING, SELLING, ADVERTISING • Promotion from embassy & diaspora • Packaging folklore & art performances in villages • Wonderful Indonesia & Socmed • Branding Heritage & Adventure domestic INSTITUTION • Agreement to develop Borobudur • Increasing environmental awareness • Synergy between authority and civilians to develop tourism villages • Optimizing tourism awareness groups Millions of tourists Millions of tourists TARGETS FOR 2023 BANK INDONESIA’S SUPPORTS IN TOURISM DEVELOPMENT • Optimizing the usage of Tourist Information Center. • Developing historical tourism of DIENG - BOROBUDUR • Providing shuttle Bus / bicycle in Borobudur. • Adding attraction and amenity with digital tourism incl. payment in Joglosemar. • Strengthening SMEs through tourism villages and creative industries • Analysis and research on potential foreign tourists. • Promoting tourism and investment through RIRU (KERIS JATENG)

14. Support from Bank Indonesia and coordination with Central and Regional Government for investment development BANK INDONESIA POLICIES COORDINATION WITH REGIONAL GOVERNMENT THROUGH keris jateng • Maintaining macroeconomic stability as the foundation to increase economic competitiveness and investment. • Promoting intermediation through accommodative macroprudential policies. • Accelerating financial market deepening through diversification of money market instrument to provide efficient hedging as well as to finance the economy, in particular infrastructure projects. • Coordination with the Government to promote the development of: • Certain industrial sectors, incl. automotive, and • Tourism as a source of growth and for lowering current account deficit. • Investment promotion: • Through investor relation unit (central - IRU, regional - RIRU, and global - GIRU) • Coordination with Central Java Regional Government (KERIS JATENG) KerisJateng: coordination forum to boost Trade, Tourism, and Investment in Central Java to increase global competitiveness. • INVESTMENT • Mapping investment potentials/projects. • Promoting the clean and clear investment potentials/projects through business meeting and website. • Facilitating dispute settlement relating to licence and investment. • Giving ease of doing businessinformation in Central Java. • Giving professional and proactive investment services. • TOURISM • Mapping investment potentials and tourist destinations. • Promoting investment potentials and tourist destinations. . • TRADE • Mapping SMEs in Central Java with export potentials. • Promoting export-ready SMEs through website. • Matching SMEs with potential buyers and investors. CENTRAL JAVA POTENTIAL INVESTMENT CHALLENGE 2018 Due to low amount of clean & clear investment projects. Aims to find and promote clean & clear investment projects.

15. Economic Package XVI: investment development and maintaining national economic resilience • Purpose: Increase investment and strengthen industrial sector from upstream to downstream through the expansion of business sector and the Standard Classification of Indonesian Business Fields (KBLI) for pioneer industries being granted tax holidays. • Main policies included: • Expansion of KBLI being granted tax holidays into 169; • Tax holiday facility through OSS, giving certainty and simplicity EXPANDING THE PROVISION OF TAX HOLIDAYS I RELAXATION OF NEGATIVE INVESTMENT LIST II • Purpose: Increasing competitiveness and attractiveness of investment in Indonesia, as well as boosting new product developments with international market network to increase export. • Main policies included: • Negative Investment List should decrease from time to time • Expansion on export oriented business fields. INCREASING PLACEMENT OF NATURAL RESOURCES EXPORT PROCEED IN DOMESTIC FINANCIAL SYSTEM III • Purpose: Increasing and maintaining national economic resilience as well as increasing the positive perception on domestic economy. • Main policies included: • Natural resources export proceed from mining, plantation, and fishery must enter the domestic financial system • Such proceed is not under obligation to be converted to Rupiah • Incentive of final earnings tax • Such proceed can still be used for certain purposes

16. Bank Indonesia Programs to support economic development in Central Java: business clusters for inflation control as well as for developing SMEs Dairy Cows CLUSTERS FOR DEVELOPING SME IN CENTRAL JAVA CLUSTERS FOR INFLATION CONTROL IN CENTRAL JAVA Beef Cattles Phasing out Existing Phasing out Existing Organic Paddy Rice Inspirational Villages in Pati Regency Convection PadurenanKudus Period 2009 - 2011 Herbal Medicine Integrated Dairy Cows - Horticulture Fresh Water Fish SME in Islamic Schools Rembang Regency Integrated Chilli – Beef Cattles in Blora Regency Creative Industry for Tourism in Borobudur Magelang Regency Period 2016 - 2019 Rattan Furniture TrangsanSukoharjo Period 2007 - 2009 Garlic Inspirational Villages for Integrated Farming Tourism in Dieng,. Wonosobo Regency PeriodeTh 2017 - 2020 Integrated Corn-Cattles

17. RECENT ECONOMIC DEVELOPMENT & BANK INDONESIA’S SUPPORT FOR INVESTMENT DEVELOPMENT Central Java Investment Business Forum 2018 “Developing Investment & Business in Tourism and Industrial Sectors in Central Java” 26thNovember 2018 PERRY WARJIYO, Ph.D Governor

18. Bank Indonesia’s policies to maintain flexibility and distribution of banking liquidity Raising the ‘Averaging’ portion of Reserve Requirement (RR) in Rupiah (conventional & syaria) from 2% to 3% of third-party fund. Increasing the ratio of Macroprudential Liquidity Buffer (MLB) (conventional & syaria) that can be used for repo transaction with Bank Indonesia, from 2% to 4% of third-party fund. Raising AVERAGING PORTION OF RR To 3% 100% of MLB can be used for repo transaction with BI * Maximum amount of securities which can be used for repo transaction with BI in an open market operation under certain conditions.

19. Bank Indonesia Offers FX Swap with Low and Competitive Pricing Bank INDONESIA’s LOW FX SWAP RATE INCREASES MARKET APPETITE… • Two kinds of FX Swap in BI’s monetary operations: • FX Swap to manage banking liquidity • Executed through auction system • Tenor: 1, 3, 6, and 12 months • Auction period: 10.00 - 11.30 • Auction result announced before 14.00 • Auction result reported in bank’s daily report and BI website • FX Swap Hedging • Tenor: 3,6, and 12 months • Executed through “window” open daily at 14.00 -16.00 • Pricing: referring to price formation from FX Swap auction. • Mechanism: exporter, foreign loan debtor, foreign investor buying Govt. bills, and any business entity in the real sector can swap their FX money (USD, Euro, JPY, & CNH) to the commercial bank. Then, bank may re-swap to BI. Data as of 13 November 2018 MARKET SWAP RATE ALSO DECREASES AFTER BANK INDONESIA STRENGTHENS MONETARY OPERATIONS… Data as of 13 November 2018

20. Bank Indonesia Offers Domestic Non-Deliverable Forward (DNDF) Transaction Definition Settlement DNDF transaction is a plain vanilla derivative FX against IDR transaction in the form of forward transaction with fixing mechanism, in the domestic market Settlements are done with fixing mechanism in Rupiah. Fixing mechanism is a settlement without full movement of the funds by counting the difference (netting) between forward transaction rate and the reference rate at a certain date which has been set in the contract (fixing date) The reference rates are JISDOR for USD/IDR and Bank Indonesia FX Transaction Midrate for non-USD/IDR Purposes • Strengthen efforts to stabilize the Rupiah exchange rate. • Accelerate domestic FX market deepening. • Provide an alternative hedging instrument for market players. Characteristics DNDF transaction can be done by banks with customer/foreign parties to hedge foreign exchange risks. DNDF transactions between bank and customer/foreign party must be supported by underlying transaction. The amount and period of a DND transaction must not exceed the amount and period of its underlying transaction. DNDF Underlying Transactions Trade in goods and services. Investment, loan, capital, and other investments, both onshore and offshore. Bank loan in foreign currency for trade and investment purposes.

21. Bank Indonesia issued regulation on interest rate derivatives in Rupiah: Interest Rate Swap (IRS) and Overnight Index Swap (OIS) IRS and OIS Transactions Definition Conducted between Bank and Customer and/or Foreign Party for the purpose of hedging on Rupiah interest rate. Bank conducting IRS and OIS transaction with its Customer and/or Foreign Party on behalf of its Customer and/or Foreign Party must analyse the need for such transaction. Bank must follow market convention. Settlement can be done in ‘netting’ and must use Rupiah. Interest Rate Swap (IRS): contract/agreement between 2 parties to exchange interest stream in Rupiah periodically, during contract period or at the end of contract, based on a certain notional amount. IRS could use JIBOR for price formation. Overnight Index Swap (OIS):a part of IRS transaction which calculates its interest daily (could use IndONIA for price formation). Purposes and Benefits • Creating an efficient price formation in Rupiah money market. • Strenghtening monetary policy transmission • Providing alternatives for hedging instruments. • Supporting the development of bonds market in Indonesia.

22. Special Deposit Account (SDA) Scheme for Exporters of Natural Resources Exporters of natural resources are given option either to convert their FX export proceed to Rupiah or to save their FX export proceed in domestic banks. Special Deposit Account (SDA) SDA in Domestic Banks exporter convert their FX export proceed FX Rupiah Domestic Banks Availibility of Hedging Instruments Bank Indonesia Domestic Bank SDA in Rupiah FX Term Deposit / FX SBBI SDA in FX Swap Hedging Swap Hedging

23. SDA in Rupiah Scheme Exporters of natural resources can convert their FX export proceed into Rupiah, and then deposit the fund in the bank with a reduction of deposit interest rate tax as well as corporate earnings tax. DOMESTIC BANK SDA in Rupiah in the Bank FX export proceed Exporters convert their FX proceed INCENTIVE: Reduction of deposit interest rate tax

24. SDA in Rupiah and the FX Flows FX possessed by the bank after the conversion can be used as an addition for FX supply in domestic FX market, or it can be transacted with Bank Indonesia to strengthen official FX reserves. Natural Resources Export Proceed Forex Market Effective Supply $ RpStable/ Appreciate Sell $ Convert to Rp SDA in Rp Bank Sell Forward $ to Ekportir Bank covering its position: Cad Dev Exporter Buy Forward $ from Bank 1 Swap with BI Sell Spot $ Buy Forward $ OR FX market Buy Spot $ Exporter Bank sell DNDF to Ekportir Bank buy DNDF from FX Market Exporter Buy DNDF from Bank 2 BI sell DNDF to FX Market

25. SDA in FX Scheme Exporters can deposit their FX proceed in the bank with an incentive of a reduction in deposit interest rate tax, or engage in swap hedging with Bank Indonesia through the bank. DOMESTIC BANK BANK INDONESIA 1 FX Term Deposit SDA in FX in the Bank 1 Incentive: reduction in deposit interest rate tax SDA in FX 2 FX SBBI Swap Hedging 2 Incentive :low and competitive swap premium