OFFICE OF CHIEF ECONOMIST

April 2011

Indonesia Update
Contents BI kept rate unchaged at 6.75%, SBI holding period extended Heavy Equipment Industry Grows in Line with Commodity Prices Food and Beverage Industry Outlook 2011 Mandiri Current Forecast Indonesia Current Data (Table) p.02 p.05 p.13 p.26 p.27 BI kept rate unchaged at 6.75%, SBI minimum holding period extended Bank Indonesia kept its policy rate unchanged at 6.75% in governor boards meeting, in line with our and consensus expectations, as inflationary pressures moderated in March. Yet, the possibility of rate hike remains open given looming inflation risk particularly from higher global commodity prices and rising domestic demand. The central bank would allow currency to appreciate further to curb inflation as it has not adversely affected exports competitiveness. At the same time, it will also extend the minimum holding period of its SBI note to 6 months from previously only 1 month, to prevent sudden capital reversal and to prolong foreigners investment horizon. However, as the government delayed fuel rationing until indefinite period, there are possibilities rate increase could be pushed back to the 2H11. Heavy Equipment Industry Grows in Line with Commodity Prices Most of heavy equipments are used in the mining, plantation, construction and forestry sectors. Demand for heavy equipment from the forestry sector is related to the growth of timber process-based industry, such as pulp and paper as well as plywood industries. Most of heavy equipment companies in Indonesia are affiliated with foreign companies. Komatsu, the major brand of United Tractors controls the market of heavy equipment industry with 46% market share. Hexindo, which relies on Hitachi, controls 19% of the market share, Catterpillar (Trakindo) 16%, Kobelco (12%) and other brands up to 7%. There is a fierce price competition among the players in this industry. It is not only involved the existing players, but also the entry of new products from Korea and China. Food and Beverage Industry Outlook 2011 The market of processed food and beverage products in 2011 is estimated has positive growth. The sales value of food and beverage products is projected to increase within the range from 9% YoY up to 14% YoY (optimistic scenario). However, increasing price of oil and food commodities will become an obstacles in achieving the targeted sales growth.
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Analyst Faisal Rino Bernando Rini Setyowati M. Ajie Maulendra Nadia Kusuma Dewi Nurul Yuniataqwa Karunia Sindi Paramita Reny Eka Putri Ahmad Subhan Irani Publication Address: Bank Mandiri Head Office Office of Chief Economist st 21 Floor, Plaza Mandiri Jalan Jend. Gatot Subroto Kav.36-38 Jakarta 12190, Indonesia Phone: (62-21) 5245516 / 5272 Fax: (62-21) 5210430 Email: Rino.Bernando@bankmandiri.co.id Rini.Setyowati@bankmandiri.co.id Ajie.Maulendra@bankmandiri.co.id Nadia.Dewi@bankmandiri.co.id Nurul.Karunia@bankmandiri.co.id Sindi.Paramita@bankmandiri.co.id Reny.Putri@bankmandiri.co.id Ahmad.Subhan@bankmandiri.co.id See important disclaimer at the end of this material

40 Forei gn hol di ng i n SBI 35 30 % of tota l (RHS) Amount (IDR tn, LHS) 25 20 15 10 5 0 Feb-09 Jun-09 Oct-09 Feb-10 Jun-10 Oct-10 Feb-11

BI kept rate unchaged at 6.75%, SBI minimum holding period extended

Destry Damayanti (destry.damayanti@mandirisek.co.id) Aldian Taloputra (aldian.taloputra@mandirisek.co.id)

(%) Headline Inflation (% yoy) Headline Inflation (% morr) Headline Inflation (% ytd) Core Inflation (% yoy)

Dec-09 6.50 6.50 6.50 2.78

Dec-10 6.50 6.50 6.50 6.50

Mar-11 6.75 6.75 6.75 6.84

Apr-11 6.75 6.75 6.75

Figure 1. Apr11 BI Rate Summary. (Source: CEIC, Bloomberg, Mandiri Sekuritas)

Bank Indonesia kept the BI rate unchanged at 6.75% in yesterday's governor boards meeting, in line with our and consensus expectations. The central bank expects recent Rupiahs appreciation will help restrain imported inflation. Thus, with moderating headline inflation reading that mainly due to harvesting season, the central bank opts to hold the rate hike this month. Yet, despite the decision, the central bank explicitly mentioned that room for further rate hike remains open should inflationary pressure build up again. Bank Indonesia tends to allow further currency appreciation, and will only leave the rate hike only in the event of significant increase in inflationary pressures, in our opinion. The central bank sees that the appreciation has not harmed exports competitiveness as it is reflected in healthy growth in non-oil and gas exports, which we agree with. The peer currencies appreciation and Indonesia commodity based exports has helped support export competitiveness. Based on real effective exchange rate that measures competitiveness across countries by taking into account currency appreciation and inflation of country trading partners, it shows that the Rupiahs real appreciation is still within the regional average (see picture 4). We estimate that it would provide another 2%-3% appreciation from its position in Feb11 to around IDR 8,600/USD before hurting export competitiveness, assuming peer currencies and inflation
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constant. Thus, we believe any further appreciation in the Rupiah will be in line with regional currencies movement. In addition to the appreciation, the central bank also tightened the macro prudential measures, by extending the minimum holding period of central bank paper (SBI) from minimum one month to six months, effective May 13th. The policy will help prevent sudden capital outflows and reduce the flexibility of the foreign accesses to the central bank paper as the longer holding period will increase foreigners exposure to currency risk, thus increase the cost of foreign exchange hedging. For comparison, the 1-month USD/IDR nondeliverable forward (NDF) implied forward premium is 48 points (0.5%), compared with 275 points (3%) of the 6-mo contract according to Bloomberg. Yet, the impact on the overall foreign inflows, remain to be seen, as foreigners still can buy government bonds, without any restriction. Even with hedging, we estimate that the foreign investors are still able to receive reasonable positive net return more than 3% by investing in SBI, assuming they borrow at 6-mo LIBOR rate of 0.5%. Despite moderating inflationary pressures, we think inflation risk remains high. Increasing global commodity prices, triggered by political unrests in the Middle East and North Africa and weaker USD, and strong domestic demand will potentially drive inflation, which we expect to end at 6.6% in 2011. We maintain our view for another 25-bp rate hike this year by end 2Q11. However, as the government delayed fuel rationing until indefinite period, there are possibilities the rate hike could be pushed back to the 2H11.

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90 80 70 60 50 40 30 20 10
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40 Forei gn hol di ng i n SBI 35 30 % of tota l (RHS) Amount (IDR tn, LHS) 25 20 15 10 5 0 Feb-09 Jun-09 Oct-09 Feb-10 Jun-10 Oct-10 Feb-11

Figure 2. Foreign Holding in SBI Continue to Increase even after The Implementation of Minimum one month holding period in Jul10. (Source: CEIC)

14 12 10 8 6 4 2 0 -2 -4 11.1 9.3 9.0 8.0

Rea l Effecti ve Excha nge Ra te Feb11 (% devi a ti on from ba s e yea r end 2009=100)

7.0

6.2 5.0 4.8 4.3 3.1 2.0

-3.5

Thailand

Figure 3. Rupiah Appreciation is on The Average of Regional Currency Appreciation. (Source: BIS)

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Hong Kong SAR

Russia

Brazil

Singapore

Philippines

Malaysia

Indonesia

Korea

Japan

China

India

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Heavy Equipment Industry Grows in Line with Commodity Prices

Rini Setyowati (rini.setyowati@bankmandiri.co.id)

Heavy Equipment Demand Most of heavy equipments are used in the mining, plantation, construction and forestry sectors. In the mining sector, heavy equipments are used particularly for overburden removal process. While in plantation sector, heavy equipments are used widely from land-clearing and land-capping process to large-scale plantation maintenance process such as those in the palm plantation. Demand for heavy equipment from the forestry sector is related to the growth of timber processbased industry, such as pulp and paper as well as plywood industries. Heavy equipment sales in Indonesia have fluctuated in line with the trend of economic structure development. In the 1990s, heavy equipment sales was dominated by the construction sector during Indonesias rapid development on infrastructure or property construction. Furthermore after the 1988 crisis, the development of the property and infrastructure are being stagnant. In fact, the crisis also brought many projects to a halt. As a result, heavy equipment sales in this sector were also hampered. On the other hand, the forestry and mining sectors showed better improvement. Heavy equipment sales in this decade relied heavily on both sectors. Oil price hikes in 2005 forced the manufacturing and power plant industries to find alternative fuel to replace oil fuel. Coal was become a choice as at that time coal price was far lower than oil price, resulting in the huge coal demand both from export and domestic market. In fact, this brought Indonesia as the largest coal exporter in the world, replacing Australia dominance. This very aggressive coal production indeed had a positive impact on heavy equipment sales.

Heavy equipment sales in Indonesia fluctuate in line with the trend of economic structure development.

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In addition to coal mining sector, increasing oil price also had a positive effect on the development of the global crude palm oil (CPO) price in which CPO currently can be used as raw material for biodiesel, the substitute for oil fuel. High CPO price pushes investors to conduct expansion by opening land price pushes investors to conduct by opening land for palm plantation which requires expansion a lot of heavy equipments. for of palm plantation which requires lot of heavy As mid 2000s until now, heavyaequipment inequipments. the mining As ofplantation mid 2000s until has now,been heavy equipment thenational mining and sector the driver ofin the and plantation sector heavy equipment sales. has been the driver of the national heavy equipment sales.
12000 10000 8000

Mining
6000 4000 2000

Agriculture

Construction
0 1990 1992 1994 1996 1998

Forestry
2000 2002 2004 2006 2008 2010

Figure 4. National Heavy Equipment Sales. Heavy equipment demand comes from the construction, forestry, plantation and mining sector. The mining and plantation sectors are currently the primary driver of the national heavy equipment demand. (Source: United Tractors)

In the 4th quarter-2008, heavy equipment business which rd quarter-2004 indicated a quarter-2008, rapid demand from to the 3business heavy2004 equipment which In the 4th rd began to weaken. The fall from of coal commodity and CPO indicated a rapid demand 2004 to the 3 price quarter-2004 was the driver of declining heavy equipment. began to weaken. The falldemand of coal for commodity price and CPO was the driver of declining demand for heavy equipment. In the early 2009, increase in the price of energy as well as mining and plantation primary commodity products created a conductive climate due to the rapidly increasing export value Commodity booming up to of these products, making primary commodity export the the first semester of 2008 main driver of the domestic economic growth. Commodity created an increasing booming up to the first semester of 2008 created an demand for heavy increasing demand for heavy equipment with an indent period equipment of 3-6 months. However, a drop in the global mining and plantation commodity prices as well as strict liquidity had Office of Chief Economist 6 of 28 resulted in the decline in heavy equipment demand Page in the Page 6 of 28 Office of Chief For Economist second semester of 2008, leading to large inventory. your information, the level of inventory of heavy equipment manufacturers reached to 4-5 months of heavy equipment
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CommodityCommodity booming up booming to up to the first semester the first ofsemester 2008 of 2008 created an increasing created an increasing demand fordemand heavy for heavy equipment equipment

In the early In the 2009, early increase 2009, increase in the price in the of price energy of as energy well as as well as mining and mining plantation and plantation primary primary commodity commodity productsproducts created a created a conductive conductive climate due climate to the due rapidly to theincreasing rapidly increasing export value export value of theseofproducts, these products, making making primary primary commodity commodity export the export the main driver mainof driver the domestic of the domestic economic economic growth. growth. Commodity Commodity boomingbooming up to the up to first the semester first semester of 2008ofcreated 2008 created an an increasing increasing demand demand for heavy for equipment heavy equipment with an indent with an period indent period of 3-6 months. of 3-6 months. However, However, a drop in a drop the global in themining global and mining and plantation plantation commodity commodity prices as prices well as well strictas liquidity strict liquidity had had resulted resulted in the decline in the in decline heavyinequipment heavy equipment demand demand in the in the second semester second semester of 2008, of leading 2008, to leading large to inventory. large inventory. For yourFor your information, information, the level theof level inventory of inventory of heavy of equipment heavy equipment manufacturers manufacturers reached reached to 4-5 months to 4-5 months of heavy ofequipment heavy equipment requirement, requirement, while inwhile the normal in the normal circumstances, circumstances, it only it only reached reached about 1.5 about 2 months. 1.5 2 months. This triggered This triggered price war price among war among the existing the existing brands until brands Q109. until Heavy Q109. equipment Heavy equipment sales in sales in 2009 showed 2009 showed a rapid adecrease. rapid decrease. Total demand Total demand for heavy for heavy equipment equipment at the national at the national level in level 2009 in only 2009 reached only reached 6,644 6,644 units, dropping units, dropping to 31% if tocompared 31% if compared to the 2008 to the sales 2008 which sales which reached reached 9,684 units. 9,684 units.

The national The national heavy equipment heavy equipment sales in sales 2010 in reached 2010 reached 11,781 11,781 units, indicating units, indicating a rise of a 77% rise (YoY) of 77% supported (YoY) supported by the high by the high price of price coal commodity of coal commodity and CPOand as well CPO as as the well low as the interest low interest The national The heavy national heavy rate andrate base and effect base factor effect . The factor heavy . The equipment heavy equipment demand demand in in equipment equipment sales in 2010 sales in 2010 2011 is estimated 2011 is estimated to grow to by grow around by 10% around stimulated 10% stimulated by the by the reached 11,781 reached units, 11,781 units, indicating aindicating rise of 77% a rise of 77% optimism optimism of industry of industry players, players, particularly particularly for coalfor mining coal mining (YoY) supported (YoY)by supported the by the which is which supported is supported with thewith expectedly the expectedly high coal, high nickel, coal, lead nickel, lead high price of high coal price of coal and and price gold in price the short in the run. short Moreover, run. Moreover, the demand the demand for for commodity commodity and CPO asand CPO as gold well as the low wellinterest as the low interest heavy equipment heavy equipment in the construction in the construction sector is sector expected is expected to rise to rise rate as wellrate as base as well as base along with along thewith budget the increase budget increase in the infrastructure in the infrastructure sector sector effect factor effect factor which reaches which reaches 36% from 36% IDR from 35.9IDR trillion 35.9to trillion IDR 56.5 to IDR trillion. 56.5 trillion. The national The national construction construction sector issector expected is expected to grow to bygrow 7% by 7% and contributes and contributes 10.4% to10.4% the GDP to the in 2011. GDP in 2011.

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14,000 12,000 10,000 8,000 6,000 4,000 2,000 0

1,643 1,447 1,693

Heavy Equipment Sales (Units)

SBI Rate (3 Months) 13,000 11,781 9,684 7,038

18 16 14 12 10 8 6 4 2 0

6,644

4,993 3,964 2,247

4,687

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011F

Figure 5. National Heavy Equipment Sales. In addition to the high commodity price, the national heavy equipment sales are also supported by the low interest rate. As much as 90 % of the heavy equipment sales still rely on financing from multi-finance and banking sources. (Source: United Tractors, Bloomberg)

The increase in BI rate is estimated to have no effect on the purchasing power of heavy equipment consumers, particularly heavy equipments in the mining sector

The increase in BI-rate is estimated to have less effect on the purchasing power of heavy equipment consumers, particularly heavy equipments in the mining sector. A rise in BI-rate, however would affect Rupiah-based loan rate. Non-mining heavy equipment uses more Rupiah-based loan. A rate increase by 1% is still relatively acceptable to heavy equipment industry. In overall, heavy equipment sales are more influenced by the outlook of commodity price. Heavy equipment demand in 2011 would be stimulated by the mining and plantation sectors, particularly palm plantation. The expected rise in oil and gas price which is supported by the high coal import from China and India as well as disruption in supply-side are estimated to maintain coal price at a high level. The rising stripping ratio trend in coal mining would increase the need for heavy equipment in this sector.

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USD/Ton 200 180 160 140 120 100 80 60 40 20 0 1/6/2006 2/9/2007 2/22/2008 2/20/2009 2/12/2010
Coal Price (LHS) Crude Oil Price (RHS)

USD/barrel 160 140 120 100 80 60 40 20 0 2/11/2011

Figure 6. Oil and Coal Price Growth. Coal price indicates more rapid growth if compared to that of oil price because coal demand continues to mark a consistent increase, while oil price declines. Fuel substitute from oil fuel to coal in the power plant and manufacturing industries requires investment cost for special boiler. (Source: Bloomberg)

Current CPO price soars above the highest level in 2008. The following are among contributory factors in the high CPO price: Growing demand from the largest consumers, namely China and India Targeted increase in the global biodiesel production Disrupted supply in line with the change of climate leads to an increase in food commodity price, including CPO CPO price is also affected by the fluctuation in the global oil price and its substitute commodities. CPO price affects the companys financial capacity to make investment.

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leads to an increase in food commodity price, including CPO CPO price is also affected by the fluctuation in the global oil price and its substitute commodities. CPO price affects the companys financial capacity to make investment.
USD/Ton

1400 1200 1000 800 600 400 200 0

Jan-04

Jan-05

Jan-06

Jan-07

Jan-08

Jan-09

Jan-10

Jan-11

Figure 7. Crude Palm Oil Price Development. CPO price in 2011 has reached its highest level in 2008 stimulated by the high demand and disrupted supply. (Source: Bloomberg)

The forestry and construction sectors growth continue to be at a moderate level

The forestry and construction sectors continue expected to grow at a moderate level. Pulp & paper market currently shows a stagnant trend as the global economy has not made full recovery, resulting in the relatively stable pulp price. In 2011, the government sets the national infrastructure development as its priority as marked with the increase in the budget allocation if compared to last year. However, the realization of this budget would be difficult due to several issues, such as land acquisition. Positive growth in the construction sector is currently more encouraged by the development of infrastructure construction in the Eastern Indonesia in line with the era of Regional Autonomy promoting the need for infrastructure facilities, such as airport renovation, seaport, trans-Sulawesi roads and land clearing for palm plantation.
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Positive growth in the construction sector is mostly due to the Positive growth in the development of construction sector is infrastructure mostly due to the construction developmentin ofthe Eastern Indonesia infrastructure construction in the Eastern Indonesia

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Most of heavy equipment companies in Indonesia are affiliated with foreign companies

Heavy Equipment Supply Most of heavy equipment companies in Indonesia are affiliated with foreign companies. United Tractors is affiliated with Komatsu, Hexindo with Hitachi, Trakindo Utama with Caterpillar, PT Intraco Penta with Volvo, Kobelco, Ingersol Rand, Bobcat, as well as PT Tatindo Hexaprima with Sumitomo. Several players dominate the heavy equipment industry. Komatsu, the major brand of United Tractors controls the market of heavy equipment industry with 46% market share. Hexindo, which relies on Hitachi, controls 19% of the market share, Catterpillar (Trakindo) 16%, Kobelco (12%) and other brands up to 7%. There is a fierce price competition among the players in this industry. It is not only involved the existing players, but also the entry of new products from Korea and China.

United Tractors controls the market of heavy equipment industry with 46% market share

Others 7% Kobelco 12% Hitachi, 19% Caterpillar 16% Komatsu, 46%

2010
Mining Mining Komatsu Komatsu Caterpillar Hitachi Hitachi Kobelco Others Others 53% 53% 19% 11% 11% 5% 12% 12%

Market Share Market Share By By Sector Sector

Agro
49% 49% 11% 27% 27% 13% 0% 0%

Construction Construction 37% 37% 16% 16% 16% 27% 4% 4%

Forestry Forestry 26% 26% 10% 40% 40% 24% 0% 0%

Figure 8. Heavy Equipment National Market Share. Komatsu still dominates the national heavy equipment market share of 46%. Komatsu sales are particularly in the mining and plantation sectors. Hitachi controls the heavy equipment market in the forestry and plantation sectors. (Source: United Tractors)

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The majority of the heavy equipment sales are funded by financing industry

The majority (90%) of the heavy equipment sales are funded by financing industry. However in the multi-finance industry itself, heavy equipment financing only contributes 12% to their total financing. Multi-finance business is still focused on automotive financing, reaching 80% of the total revenues of multi-finance companies. If compared to 2009, the financing factoring indicated a decrease by 5.9%, despite of the improved NPL from 5.9% to 3.4%. Although multi-finance industry becomes the main source of heavy equipment financing, the banking sector also begins to target this market. Domestic heavy equipment supply is affected by the earthquake and tsunami in Japan as it still relies heavily on the imported heavy equipment machine components. 80% of raw materials still depend on imported steel as the industry still uses steel with specific quality. Conclusions - Heavy equipment demand is estimated to continue growing driven by the optimism of industry players, particularly for coal mining and plantation segment which is supported by the expectedly high coal, nickel, lead and gold as well as CPO price in the short run. - Although in overall, this industry offers relatively good prospect, but need to pay attention to several factors, including among other the risk of decrease in commodity price in the global market, increasingly unpredictable weather factor, increase in the inflation and interest rate as well as regulations related to mining and plantation industries.

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Food and Beverage Industry Outlook 2011

M. Ajie Maulendra (ajie.maulendra@bankmandiri.co.id)

Domestic demand, which is estimated to grow by 7.3% (YoY), remains the driving factor for economic growth

The solid macroeconomic condition is estimated to persist in 2011. This year, Indonesias economy is estimated to grow by 6.3% (YoY), domestic demand will remain functioning as the driving factor, which is estimated to grow by 7.3% (YoY). Such growth of domestic demand will certainly have positive impacts on the food and beverage industry. However, the relatively high volatility of the prices of food commodities and energy in 2011 should also be taken into account in relation to this industry. This is necessary because some of food commodities like wheat and sugar are used as raw materials for the food and beverage industry. Optimism on consumption side To see the actual condition of food and beverage product consumption, we can observe several indicators, namely the real retail sales index of food and tobacco, consumers expectations and the sales of food and beverage products. During the last year, the real retail sales index of food and tobacco released by Bank Indonesia indicated an increasing and relatively stable trend. In more details, the movement of the real retail sales index of food and tobacco in January up to February 2011 was still increasing, while on the contrary, the total real retail sales index (covering all types of commodities, including food and tobacco) was decreasing. Such condition may be caused by the pressure posed by the relatively high level of inflation during the period of January - February 2011, so that it is expected to affect the peoples purchasing power and to lead to a decline in the consumption of goods in general. Even though the consumption of goods in general is decreasing, the consumption of food and beverage products is estimated to remain stable as indicated by the movement of the real retail sales index of food and tobacco.

Even though the consumption of goods in general is decreasing, the consumption of food and beverage products is estimated to remain stable as indicated by the movement of the retail real sales index of food and tobacco

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257.9 204.9 221.5 206.9 213.6 213.5 207.3 217.9 227.7 231 240.8

263.2

242.8

245.8

269.7

256.3

% yoy 245.1

253.7

253

268.8

265.1

259.2 273.8 291.8 331.2 316.6 318.3 332.8 292.8 269.2 293 325 327.9 326.5 % yoy

Jun-10

Oct-10

Mar-10

May-10

Apr-10

Aug-10

Feb-10

Sep-10

Jan-10

Oct-09

Nov-09

food and tobacco real retail sales index

Dec-09

total real retail sales index

Figure 9. Increasing Trend of real retail sales index. The movement of index above indicates an increasing trend of food consumption despite the pressure posed by inflation. (Source: Bank Indonesia)

..consumers being surveyed were relatively optimistic that their income for the next six months will increase

Another indicator to observe the trend of food and beverage consumption is the consumer expectation index. According to the consumer expectation index released by Bank Indonesia as of February 2011, the consumers being surveyed were relatively optimistic that their income for the next six months will increase. This is reflected on the increase of the index as from January up to February 2011 by 2.8 points. In line with the expectation of better income, the respondents in the aforementioned survey conducted by BI estimated that their consumption will increase in the future especially for foodstuff and processed food. In 2011, GAPMMI (Indonesia Association of Food and Beverage Industry) estimated that the sales of food and beverage products will reach IDR 660 trillion, or grow by approximately 9% compared to the previous year. Under the most optimistic scenario, GAPMMI estimated that such sales figure may grow by 14% (YoY) or to reach IDR 690 trillion. However, there are several obstacles hampering such growth of 14%, including consumption expenditure pattern which will continue prioritizing basic food stuff, such as rice, vegetables, chillies, etc., over processed food and beverage products in the event of an increase of the prices of those foodstuff. The prices of basic foodstuff may potentially increase in 2011 mainly due to climate change.
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The prices of basic foodstuff may potentially increase in 2011 mainly due to climate change.

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Nov-10

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Dec-10

Jul-10

Feb-11

Jan-11

6 6.3

6.1

5.5 4.6

5.3

6.1

6.3

Furthermore, the achievement of targets for the sales of food and beverage products this year may potentially be hampered by the increase of prices of food and beverage products. Such increase is caused by the increase of the prices of commodities used as raw materials, such as wheat and sugar. 2007 2008 2009 2010 2011F

Domestic Demand
Food and Beverage Sales (IDR trillion)
690 660

Rea l GDP Growth

GDP Growth and Consumption Spending (%)
7.4 7.8 6.1 6.1 6.3

505 383

555

605

6 6.3

5.5 4.6

5.3

2007

2008

2009

2010

2011F

IDR 660 Trillion = Moderate Scenario IDR 690 Trillion = Optimism Scenario

2007

2008

2009

2010

2011F

Domestic Demand

Rea l GDP Growth

Figure 10. Stable sales growth. The domestic sales of food and beverage products grows in a relatively stable manner. When there is an increase of the prices of the products, demands would usually decrease for two or three months and afterwards the demands would gradually increase.(Source: GAPMMI, Mandiri Group Estimates)

Several players in the food and beverage industry also have positive view regarding business propects for this year, so that they are generally targetting increase of sales. Those players are, among others: In 2011, GAPMMI estimated the sales of food and beverage products will reach IDR 660 trillion, or will grow by approximately 9% compared to the previous year

PT. Garudafood Putra Putri Jaya, which is targetting sales increase of 100% (YoY) in 2011 or to become IDR10 trillion. PT Tiga Pilar Sejahtera Food Tbk, which is targeting sales increase of 49% (YoY) in 2011 for the food sector to become IDR 1 trillion. PT. Siantar Top, which is targetting sales increase of 20% (YoY) in 2011 to become IDR900 billion. PT. Mayora Indah, which is targetting sales increase of 25%(YoY) in 2011 to become IDR8.75 trillion.

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The Association of Indonesian Soft Drink Manufacturers (Asrim) also estimated a relatively high growth in the beverage market. The sales of energy drinks is estimated to grow by 10% in 2011, to become IDR3.8 trillion from IDR3.5 trillion in the previous year. Meanwhile, the sales of isotonic drinks in 2011 is estimated to grow by 15% - 20% (YoY), or to reach IDR1.72 IDR1.8 trillion. Asrim also estimated that the market for ready-to-drink tea will increase by 7.5% (YoY) this year.

GAPMMI projected that investments in the food and beverage industry in 2011 would reach IDR39 trillion, or to grow by 56% compared to the last years figure of IDR 25 trillion.

Competition in increasing production The optimism about the increase in public consumption has made food and beverage manufacturers enthusiastic to increase their production in 2011. With such increase of production, the players in this industry are expected to be able to meet their sales targets which have been set to reach significant increase this year. GAPMMI projected that investments in the food and beverage industry in 2011 would reach IDR39 trillion, or to grow by 56% compared to the last years figure of IDR25 trillion. With such increase of investments, the capacity of the food and beverage industry is targeted to increase by 15-20%.

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GDP Share of Non Oil and Gas Manufacturing Industry

Food, Bevera ges a nd Toba cco Indus tri es Texti l e, Lea ther Products a nd Footwea r Wood Products a nd Other Wood Products Pa per a nd Pri nti ng Ferti l i zers , Chemi ca l a nd Rubber Products

0.7%

32.9%

29.8%

1.5% 3.0%

9.8% 13.3% 3.8% 5.2%

Cement a nd Nonmeta l i c Qua rryi ng Products Ba s i c Meta l , Iron a nd Steel Tra ns port Equi pment, Ma chi nery a nd Appa ra tus Other Ma nufa cturi ng Products

Figure 11. Main Contributor. Food and beverage industry is one of main contributors for non oil and gas manufacturing sector in Indonesia. The government has set the target that the production of the food, beverage and tobacco industry would grow by 7.9% (YoY) in 2011, indicating an increase from the target for 2010 of 6.64% (YoY). (Sources: Central Statistics Agency, news in the media)

Several large scale food and beverage producers will invest in the forms of the construction of new plants or improvement of production capacity this year

In line with the aforementioned projection, GAPMMI noted that several large scale food and beverage producers will invest in the forms of the construction of new plants or improvement of production capacity this year. Those producers are PT. Mayora Indah Tbk, which will construct two candy and biscuit factories in Tangerang with investments of IDR 700 billion, PT. Tiga Pilar Sejahtera Food, which will increase the capacity of its factories and conduct machine restructuring with investments of IDR200-300 billion, PT. Indofood Tbk, which will increase its production capacity with investments of IDR3 trillion, as well as Nippon Sari, which will construct three factories in North Sumatra, South Sulawesi and Jakarta with investments of IDR160 240 billion.

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In the food sector, the market of instant noodle products is currently dominated by Indofood (ICBP) with a market share of 66%

Food and beverage industry has always been influenced by product innovation each year. This results in relatively tight competition in this industry even though the products of large-scale players are still dominating the market. In the food sector, the market of instant noodle products is currently dominated by Indofood (ICBP) with a market share of 66%. Its closest competitor is Wings Food, with a market share of 26%. Even though Indofood is currently controlling the market, its share has decreased compared to its share in 2002. During that period, Indofood controlled the market of instant noodle with a market share of 90%. In addition, other instant noodle products, such as Nissin Mas, PT. ABC and TPS Food, have been increasingly gaining market shares and contributing to the increasingly intensive competition in the instant noodle market.

The market share of packaged tea drinks is still dominated by Sinar Sosro (65%)

While in the beverage sector, the markets of ready-to-drink tea and energy drinks are still expected to grow positively in 2011. As mentioned earlier, the sales of ready-to-drink tea is expected to grow by 7.5%(YoY) this year, while the sales of energy drink is expected to grow by 10% (YoY). The market share of packaged tea drinks is still dominated by Sinar Sosro (65%) followed by its closest competitor Orang Tua Group (20%). Both of them targeting an increase of sales in 2011. Sinar Sosro sets a target for sales increase of 10 12%, while a higher target is set by Orang Tua Group, namely 45% this year.

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Instant Noodle Market Share in Indonesia

Others 8.2% Wings Food 25.5% Indofood 66.3%

Packaging /BottleTea Market Share in Indonesia

Orng Tua Group 20%

Coca Cola Indonesi a, Pepsi,Ot hers 15% Sinar Sosro 65%

Figure 12. Competition in Domestic Markets. Markets for processed food and beverage products are still promising for the manufacturers. For example, the current consumption of soft drinks in Indonesia, which is still relatively low namely 43 liters/capita, is targeted to increase to 100 liters/capita in 2015. (Source: Indonesian Soft Drink Industry Association)

.. the producers also face competition from imported products

In addition to competition among domestic players in the industry, the producers also face competition from imported products. Seen from the nominal value, imports of processed food and beverage products during the last two years have indicated a relatively significant increase. In 2010, imports of those products reached USD2,439.6 million or increased as high as 78.4% compared to the same in 2009 namely USD 1,367.3 million. By comparing the value of imported processed food and beverage products to the value of other imported goods, it can be concluded that processed food and beverage products are among the category of most imported consumer goods.

Office of Chief Economist

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Office of Chief Economist

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Imports of Consumer Goods

Pri ma ry food a nd bevera ge

2.6% 15.4% 11.7%

Proces s ed food a nd bevera ge Proces s ed Fuel a nd Lubri ca nts Pa s s enger vehi cl es

13.7%

24.4%

Tra ns port equi pment not for i ndus try Dura bl e cons umpti on goods

10.8% 2.5% 9.2%

9.7%

Semi dura bl e cons umpti on goods Non dura bl e cons umpti on goods Others (not cl a s s i fi ed)

Figure 13. Competition with imported goods. The value of imports of food and beverage products in Q1 2011 rose by 6% (YoY) to USD 44.88 million from USD 42.34 million in Q1 2010. The largest imports of food and beverage products are from Malaysia, in Q1 2011 imports of food and beverage products from Malaysia reached USD 6.72 million or 15% of the total imports of food and beverage products. (Source: Ministry of Trade)

The industry is also concerned about the increasingly rampant inflow of illegal imported products during the last few years

Such condition is certainly an indication that there have been increasingly large amount of imported food and beverage products, resulting in fiercer competition for the players in the food and beverage sector. In addition to the increase in the imports of food and beverage products, entrepreneurs engaging in the food and beverage sector are also concerned about the increasingly rampant inflow of illegal imported products during the last few years. According to GAPMMI, illegal imports in 2010 was estimated to reach 10 15% of the total amount of products circulated in the market. If no action is taken on this matter, the portion of illegally imported goods is feared to increase continuously and take up the market share of the domestic industry. Based on a survey conducted by GAPMMI, most of those illegally imported products are sold in a number of traditional markets, such as in Semarang, Solo and Yogyakarta. Those products are generally in the forms of biscuits and peanut products. In addition the concern about business competition, such
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Most of those illegally imported products are sold in a number of traditional markets

Office of Chief Economist

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Food and beverage industry is one of the sectors affected by the high prices of food commodities

illegally imported products are feared to have poor standards (accordance with halal and hygiene standards). The increasing price of raw materials In 2011, the global and domestic economy are still facing the high prices of crude oil and food commodities. Food and beverage industry is one of the sectors affected by the high prices of food commodities. The main raw materials are wheat, which is used in the making of processed food (flour, noodle and bread), sugar, which is used in the production of processed food and beverages (candies, chocolate, packaged drinks). Such condition occurs because food and beverage industries use food commodities in a large amount as raw materials for their processing.

Wheat Price Forecast (US cents/bushel)

782.0 657.0 800.0 800.0 729.0 624.0

Raw Sugar Price Forecast (cents/lb)

30 20

27.8 22.3 21

16.5

2009

2010

Q111

Q211

Q311

Q411

avg09

avg10

Q111

Q211

Q311

Q411

Figure 14. Increase of commodity prices. The average price of wheat is estimated to increase by 22% (YoY) in 2011. Meanwhile, the average price of raw sugar this year is estimated to increase by 24% (YoY). The two commodities are commonly used as raw materials in the food and beverage industry. (Sumber : Bloomberg)

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Office of Chief Economist

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In addition to those commodities, CPO is also used as raw material for the production of processed food, such as margarine and cooking oil.

several commodities used as raw materials, such as wheat and sugar, must be imported

Other than CPO, several commodities used as raw materials, such as wheat and sugar, mostly is imported. To meet the demands for wheat, wheat flour producers in Indonesia import the commodity from several countries, such as the USA, Canada, Argentina and Australia. Whereas raw sugar, the raw material for processing refined sugar required by food and beverage industry, must also be imported from several countries, such as Australia, Brazil and Thailand.

The fluctuation of exchange rate also affects the production costs of the industry in relation to the purchase of raw materials. However, the appreciation of Rupiah may become a deducting factor for the production costs of the food and beverage industry amidst the increasing prices of commodities used as raw materials.

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Food Industrys Cost of Production Structure

Labour Overhead 3% 10%

Beverage Industrys Cost of Production Structure

Labour Overhead 3% 12%

Raw Materials 33%

Packaging 27%

Raw Materials 60%

Packaging 52%

Figure 15. Production costs are estimated to increase. Raw materials (sugar and wheat) as well as plastic packaging have the largest contributions to the structure of production costs. Increase of the prices of food commodities, such as wheat and sugar, as well as increase of the prices of plastic will lead to increase of the production costs for the food and beverage industry. (Source: GAPMMI )

The increase of the production costs occurring in the food and beverage industry will be charged to the prices of the final products to be bought by consumers

The increase of the world oil prices also contributes to the increase of the prices of plastic raw materials, leading to the increase of prices of plastic packaging used by the food and beverage industry. GAPPMI has estimated the increase of plastic packaging price would be around 5-15% this year. This industry is the largest consumer of plastic packaging (60%).

The increase in the production costs occurring in the food and beverage industry will be charged to the prices of the final products to be bought by consumers. At the beginning of 2011, GAPMMI estimated that increase of the prices of processed food and beverage products during 2011 may reach approximately 10-15%. Such estimate was based on the increase of the prices of commodities, such as wheat and sugar, as well as the increase of the costs of energy.

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Financial performance of the players In line with the optimism of the players in the food and Financial performance of food and beverage beverage industry in setting their sales targets, the financial companies indicate a performance in this industry this year is estimated has positive trend of positive outlook. growth

Company Sales Indofood Mayora Siantar Top Ultra Jaya Aqua 27,858.3 2,828.4 600.3 1,126.8 1,952.2

2007 Net Income 980.4 141.6 15.6 30.3 65.9

Net Profit Margin 3.5% 5.0% 2.6% 2.7% 3.4%

Sales 38,799.3 3,907.7 624.4 1,362.6 2,331.5

2008 Net Income 1,034.4 196.2 4.8 303.7 82.3

Net Profit Margin 2.7% 5.0% 0.8% 22.3% 3.5%

Sales 37,397.3 4,777.2 627.1 1,613.9 2,733.7

2009 Net Income 2,075.9 372.2 41.1 61.2 95.9

Net Profit Margin 5.6% 7.8% 6.5% 3.8% 3.5%

Sales 38,403.4 6,652.1

2010 Net Income 2,952.9 448.5

Net Profit Margin 7.7% 6.7%

1,880.4

107.1

5.7%

Figure 16. Financial performance indicates a trend of positive growth. The profitability of companies is estimated to increase further in 2011. Such condition is in line with the relatively optimistic sales targets set by the players in the food and beverage industry. (Source: the companies financial statements)

Conclusions The market of processed food and beverage products in 2011 is estimated has positive growth. The sales value of food and beverage products is projected to increase within the range from 9% YoY up to 14% YoY (optimistic scenario). One of the obstacles in achieving the targeted growth of sales is the increase of the prices of food and beverage products due to the increase of the prices of raw materials.

In addition to the optimism with regard to demands, it is also necessary to take into account the high costs of raw materials due to potential inflation from food commodities

The production of the domestic food and beverage industry is estimated to grow by 7.9% (YoY) in 2011. Producers are competing in their business expansion, in the form of the increase of production capacity in order to reach their sales targets in 2011. Therefore, competition in the food and beverage industry will remain tight this year.

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During This year we still see the increasing price of global commodity prices, including the prices of wheat, sugar and CPO, which are mostly consumed as raw materials by the food and beverage industry. In addition, the prices of plastic packaging are estimated to increase this year. Such increase in the prices of raw materials and plastic packaging will lead to higher price of the final food and beverage products because most of the components of the production costs are contributed by raw materials and packaging. The financial performance of the players in the food and beverage industry during the period of 2009 2010 showed good performance. Such condition is estimated to continue this year in line with the positive growth of the economy and domestic demand.

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MACRO ECONOMIC INDICATORS AND FORECAST 2005 National Account Real GDP (% yoy) Domestic Demand (% yoy) Real Consumption: Private (% yoy) Real Gross Fixed Capital Formation (% yoy) GDP (USD bn) - nominal GDP per capita (USD) - nominal External Sector Exports (%yoy,USD) - Merchandise Imports (%yoy,USD) - Merchandise Trade Balance (USD bn) Current Account (% of GDP) Current Account (USD bn) External Debt (% of GDP) International Reserves (US$ bn) Import cover (months) IDR/USD (period average) IDR/USD (year end) Other BI rate (% period average) BI rate (% year end) Headline Inflation (% yoy, year end) Headline Inflation (% yoy, period average) Fiscal Balance (% of GDP) S&P's Rating - FCY S&P's Rating - LCY 5.7 5.0 4.0 10.8 286 1,298 2006 5.5 4.5 3.2 2.9 364 1,641 2007 6.3 6.0 5.0 9.2 432 1,922 2008 6.1 7.4 5.3 11.7 512 2,242 2009 4.6 5.5 4.9 3.3 540 2,339 2010 6.1 5.2 4.6 8.5 717 3,024 2011(f) 6.3 7.3 5.0 13.1 856 3,561 2012(f) 6.6 8.1 5.2 14.4 1,007 4,126

19.7 24.0 17.5 0.3 0.3 47.1 34.7 5.3 9,751 9,830

17.3 6.7 29.7 2.6 10.9 36.4 42.6 5.6 9,167 9,020

13.1 21.8 32.8 0.4 10.5 32.7 56.0 7.1 9,139 9,400

22.0 40.7 22.9 (0.1) 0.1 30.3 51.6 4.9 9,694 11,120

(15.0) (25.0) 35.2 1.9 10.7 32.0 66.1 8.5 10,399 9,400

32.2 42.0 31.1 0.9 6.3 27.1 96.2 9.0 9,086 8,963

17.5 24.0 28.3 0.6 4.7 25.0 118.1 9.1 8,819 8,762

19.1 22.7 28.1 0.1 0.6 23.3 135.4 8.5 8,698 8,663

9.2 12.8 17.1 10.4 (0.9) B+ BB

11.9 9.8 6.6 13.3 (1.1) BBBB+

8.6 8.0 6.6 6.0 (1.3) BBBB+

8.7 9.3 11.1 9.8 (0.1) BBBB+

7.1 6.5 2.8 4.9 (1.6) BBBB+

6.5 6.5 7.0 5.3 (0.6) BB BB+

6.9 7.0 6.8 7.0 (1.5) BB+ BBB-

7.0 7.0 6.5 6.3 (1.5) BBBBBB

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INDONESIA CURRENT DATA

Indicators Exchange Rate End of Period Average Monetary Sector Base money M0, eop Narrow money M1 Broad Money M2 Outstanding Loan Outstanding Deposit Lending rate (working capital) 3-month deposit rate, eop Overnight rate, eop Prices Headline CPI (2007=100) Year on year inflation rate Month on month inflation rate Year to date inflation rate Wholesale Price Index (2000=100) Trade Export Oil Non oil Import Oil Non oil Trade Balance Output GDP (current price) GDP (constant price at 2000) Real Growth Capital Market JCI Index, eop Volume, avg Value, avg Consumer Confidence Index Unit 2007 2008 2009 Jun 9061 9147 401.43 545.41 2,230.24 1,589.66 2,006.83 13.17 6.95 6.25 119.86 5.05 0.97 2.42 173 Jul 8950 9043 408.97 539.75 2,216.60 1,605.81 1,987.51 13.21 6.95 6.25 121.74 6.22 1.57 4.02 174 Aug 9016 8973 426.87 555.50 2,235.50 1,647.42 1,993.98 13.19 6.96 6.46 122.67 6.44 0.76 4.82 175 2010 Sep 8913 8969 423.81 549.53 2,271.52 1,669.64 2,041.15 13.00 6.95 6.21 123.21 5.8 0.44 5.28 176 Oct 8936 8929 418.88 555.53 2,308.16 1,686.46 1,951.12 13.01 6.99 5.63 123.29 5.67 0.06 5.35 176 Nov 9053 8947 483.92 571.35 2,346.80 1,717.88 2,107.82 12.96 7.03 5.60 124.03 6.33 0.60 5.98 177 Des 8978 9021 518.45 605.38 2,469.40 1,783.60 2,208.72 12.83 7.06 5.72 125.17 6.96 0.92 6.96 178 2011 Jan 9056 9041 512.19 604.17 2,436.68 1,763.33 2,188.75 12.75 6.88 6.03 126.29 7.02 0.89 0.89 180 Feb 8818 8916 Mar 8705 8760

IDR/USD IDR/USD IDRtn IDRtn IDRtn IDRtn IDRtn % p.a % p.a % p.a Index % % % Index

9393 9354 379.58 450.06 1,649.66 995.11 1,459.44 13.00 7.42 4.50 155.5 6.59 1.1 N/A 217

10900 1167 344.69 456.79 1,883.85 1,313.87 1,673.82 15.22 11.97 9.40 113.86 11.06 -0.04 11.06 238.0

9390 9462 402.12 515.82 2,141.38 1,446.81 1,914.11 13.69 6.85 6.24 117.03 2.78 0.33 2.78 167

502.19 506.79 585.92 2,419.78 1,793.99 2,173.95 12.72 6.82 6.02 6.14

126.46 126.05 6.84 6.65 0.13 -0.32 1.03 0.70 180 180

USDbn USDbn USDbn USDbn USDbn USDbn USDbn IDRtn IDRtn % YoY Index shares mn IDRbn

10.86 2.51 8.36 6.81 2.39 4.42 4.06 1034.86 493.37 5.88 2745.83 3155.65 4340.55 99.10

8.69 1.24 7.45 6.29 0.98 5.31 2.40 1274.29 518.94 5.20 1355.41 1743.25 1454.61 90.60

13.35 2.50 10.85 10.33 2.10 8.22 3.02 1450.82 547.54 5.43 2534.36 3422.10 2332.42 108.70

12.33 1.90 10.43 11.76 2.39 9.37 0.57 1574.83 573.82 6.19 2913.68 4542.75 2847.71 111.40

12.49 1.88 10.61 12.62 2.11 10.51 -0.13

13.73 1.99 11.73 12.17 2.21 9.96 1.55

12.18 2.08 10.10 9.65 2.00 7.65 2.53 1668.35 593.70 5.80

14.40 2.84 11.56 12.15 2.38 9.76 2.25

15.63 2.82 12.82 13.01 2.95 10.06 2.62

16.78 3.26 13.57 13.15 2.64 10.50 3.63 1670.52 585.10 6.89

14.45 2.62 11.99 12.56 2.97 9.59 1.89

14.40 2.56 11.84 12.00 2.56 9.44 2.40

3069.28 4104.74 2910.90 105.70

3081.88 4190.05 3308.05 104.00

3501.30 6533.21 4922.46 107.60

3635.32 6240.28 4830.13 112.00

3531.21 6748.29 5302.33 108.10

3703.51 3965.38 3959.30 109.30

3409.17 3445.26 4950.21 113.90

3470.35 3707.49 2559.76 2887.41 3431.62 3833.09 106.40 107.10

Disclaimer: This material is for information only, and we are not soliciting any action based upon it. This report is not to be construed as an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. The information herein has been obtained from sources believed to be reliable, but we do not warrant that it is accurate or complete, and it should not be relied upon as such. Opinion expressed is our current opinion as of the date appearing on this material only, and subject to change without notice. It is intended for the use by recipient only and may not be reproduced or copied/photocopied or duplicated or made available in any form, by any means, or redistributed to others without written permission of PT Bank Mandiri Tbk. Additional information is available upon request. For further information please contact: Office of Chief Economist, Ph. (021) 524 5516/5272 or Facs. (021) 521 0430.

Office of Chief Economist

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Head Office
Plaza Mandiri Jl. Gatot Subroto Kav. 36-38 Jakarta 12190, Indonesia Tel: (62-21) 526 5045 526 5095 Fax: (62-21) 526 8372 526 5008 Website: www.bankmandiri.co.id

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