Contents BI rate left unchanged at 5.

75% on inflation uncertainty Bond Market Returns 1Q 2012: Corporate bonds give higher return Observing Impact of China Slowdown to Indonesia Palm Oil Sector Pharmaceutical Industry 2012 : Growth Momentum Is Still Maintained Property Sector Heading Towards a Bubble? Mandiri Leading Economic Index (LEI) Indonesia Current Data (Table) p.02 p.05

OFFICE OF CHIEF ECONOMIST

April 2012

p.13

Indonesia Update
BI rate left unchanged at 5.75% on inflation uncertainty Bank Indonesia (BI) kept its policy rate unchanged at 5.75% in yesterday's board meeting, in line with our and consensus expectation. The central bank highlighted the potential inflation risks rising from the likely government fuel policy. Yet, it reemphasized that the impact of fuel price hike will be a one-time shock to economy and will direct its interest rate policy accordingly. Bond Market Returns 1Q 2012: Corporate bonds give higher return In the last two months, the governments rupiah bond yields rose on average by 0.78ppt according to HSBC bond index. However, overall ytd total return in the bonds still reported positive gained of 3.15% as of 16-April-2012, thanks to investment grade by Moodys rating agency in mid of Jan. This performance was lower than the stock markets return of 8.5% ytd - after in 2011 only gave 3.2% gains much below government bonds return that reached 21.5%. Observing Impact of China Slowdown to Indonesia Palm Whole world seems rely on China economy when US and Eurozone still struggling for their economy recovery and stability. Indonesia is one of the countries that count on China to maintain its export performance since China has become top three countries for Indonesia export destination. What does make China to set low target of economic growth is tend to long term quality growth reason. China government wants to balance trade sector and overseas direct investment with its domestic consumption. Pharmaceutical Industry 2012 : Growth Momentum Is Still Maintained The large number of population, the increasing pattern of life and public awareness of health, the increasing support to the government health program for public health access with some improvement in the economy and peoples purchasing power are major drivers for the development of the pharmaceutical industry in the country. The potential for the future development of pharmaceutical industry is quite large considering the relatively low of total healthcare expenditure and pharmaceutical spending in Indonesia compared to other countries in ASEAN. Property Sector Heading Towards a Bubble? Recently, the issue of bubble of Indonesian property is rising. This issue raised because property prices began to soar, giving rise to fears of a bubble in property prices. If the bubble bursts, it is afraid to make a significant impact, namely the economic crisis.
Proportion of Healthcare Expenditure to Gross Domestic Product, 2010 4.8% 4.1% 3.8% 221 3.5% 3.3% 153 2.1% 86 101 116 133 196 173 Indonesia Total Healthcare Expenditure (IDR Tn) 247

p.19 p.30 p.36 p.39

Chief Economist Destry Damayanti destry.damayanti@bankmandiri.co.id Analyst Faisal Rino Bernando Andry Asmoro M. Ajie Maulendra Nadia Kusuma Dewi Nurul Yuniataqwa Karunia Sindi Paramita Reny Eka Putri Ahmad Subhan Irani Andrian Bagus Santoso Publication Address: Bank Mandiri Head Office Office of Chief Economist th 18 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 andry.asmoro@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 andrian.bagus@bankmandiri.co.id See important disclaimer at the end of this material

Malay- Thai- Phillip- India Singa- Indonesia 2007 2008 2009 2010 2011F2012F2013F2014F2015F sia land pines pore

BI rate left unchanged at 5.75% on inflation uncertainty

Aldian Taloputra (aldian.taloputra@mandirisek.co.id) Leo Putra Rinaldy (leo.rinaldy@mandirisek.co.id)

Bank Indonesia (BI) kept its policy rate unchanged at 5.75% in yesterday's board meeting, in line with our and consensus expectation. The central bank highlighted the potential inflation risks rising from the likely government fuel policy. Yet, it reemphasized that the impact of fuel price hike will be a one-time shock to economy and will direct its interest rate policy accordingly. Meanwhile, in the short-term the central bank explicitly mentioned it will strengthen its monetary operation to manage excess liquidity, which we think may relate to strengthening open market operation, including increasing its monetary instrument rates (i.e. FASBI, term deposit, and SBI) and possible reserves requirement hike should the liquidity overhang persist. At this juncture, we maintain our view that the central bank will maintain its policy rate unchanged at 5.75% throughout the year as the mediumterm inflation remains under control and will ease back to around 5% in 2013, from 7% this year should there be fuel price hike.
(%) Actual Consensus Dec-10 6.50 6.50 Mar-11 Jun-11 Sep-11 6.75 6.75 6.75 6.65 6.75 6.75 6.75 5.54 6.75 6.75 6.75 4.61 Dec-11 6.00 6.00 6.00 3.79 Feb-12 5.75 6.00 6.00 3.56 Mar-12 5.75 5.75 5.75 3.97 Apr-12 5.75 5.75 5.75

Mandiri's forecast 6.50 CPI inflation (%,6.96 YoY)

Figure 1. BI rate summary from December 2010-April 2012. (Source: CEIC, Bloomberg, Mandiri Sekuritas)

BI kept the benchmark rate unchanged at 5.75%

Bank Indonesia (BI) kept its policy rate unchanged at 5.75% in yesterday board meeting, in line with our and consensus expectation (see figure 1). The central bank highlighted the potential inflation risk rising from the likely governments fuel price hike policy, despite the policy was delayed. We think this decision is also partly to address uncertainty coming from the setback as it could stoke short-term inflation expectation.

Office of Chief Economist

Page 2 of 40

The impact of fuel price hike will be a one-time shock to inflation

The central bank re-emphasized that the impact of fuel price hike will be a one-time shock to inflation, which we agree, particularly given the well-anchored inflation expectation in the medium term. The average inflation in the period 20122015 will be still 5.3%, according to consensus forecast (see figure 3), which suggest that at the current level, BI rate is still in line with the central bank inflation target 4.5% 1% in 2013 and still offers positive real return. Nevertheless, we believe the central bank needs to address the short-term inflation pressure prudently and work closely with the government in securing the supply side as the recent short-term inflation pressure could potentially influence the medium term inflation expectation. Therefore, the message is very clear that the central bank will only use its interest rate tools to respond medium term inflation trend, which is expected to be immune from the governments plan to hike fuel price this year. Yet it will opt to manage short-term inflation shock with mopping up excess liquidity in the system. The strong capital inflow has driven down short-term interest rate, in this case JIBOR rate close to its bottom corridor (see figure 2). Thus, any effort to bring the interbank overnight rate toward the policy rate will be seen as a tightening bias. The central bank may choose to increase FASBI rate or increase highest winning bid in term deposit and SBI auction, or even raise commercial bank reserve requirement should the excess liquidity be persistently high. We reiterate our view that BI rate will likely stay at 5.75% for the whole 2012 and will be cut to 5.5% in 2013. This is based on our inflation forecast that the impact of fuel price hike (if any) will be temporary and inflation will normalize next year. We forecast inflation to be around 7% in 2012 with fuel price hike, or 5.5% without the hike and likely to ease to 5.0% in 2013. The possible increase in interest rate will only happen should the rupiah become under pressure especially if it also triggers sharp deterioration on international reserves. The central bank still foresees strong economic performance albeit unstable global economic condition. BI projected economic growth in the first quarter to reach 6.5% YoY, before marginally declining to 6.4% YoY in the second quarter. For the whole year, they projected growth will range between 6.3% -

Interest rate policy will be the last policy option

Maintain BI rate forecast at 5.75% throughout 2012

BI maintain its positive outlook for the economy, despite global economic slowdown

Office of Chief Economist

Page 3 of 40

6.7% which is bias downward due to global economic slowdown and probability of subsidized fuel price increase. On the other hand, they projected that next year growth will hover around 6.4% - 6.8%. The main driver will still be the private consumption and investment, supported by healthy growth in bank financing. Total credit growth reached 24.2% YoY in Feb12, which is driven by strong growth in investment credit of 33.2% YoY followed by working capital and consumption credit that increased by 23.4% YoY and 19.6% YoY, respectively.

20
10 JIBOR 9 8 7 BI rate DF rate Repo rate

18 16 14 12 10

CPI inflation (% yoy)

6 5 4

8 6 4 2 Headline inflation Core inflation

Jan-09 Jun-09 Oct-09 Mar-10 Aug-10 Jan-11 Jun-11 Nov-11 Mar-12 Jan-04 Apr-05 Jul-06 Oct-07 Jan-09 Apr-10 Jul-11 Oct-12

Figure 2. Ample liquidity diverge JIBOR from its overnight rate benchmark (left figure). Historically, fuel price increase will only have a temporary impact towards inflation (right figure). (Source: CEIC)

2012 Bloomberg Consensus Economics Focus Economics 4.8 5.2 5.2

2013 5.3 5.3 5.6

2014 5.2 n.a. 5.5

Average 2012-2015 n.a. 5.1 n.a. 5.3 5.6 5.5

2015

Date of survey Feb-12 Mar-12 Mar-12

Figure 3. Market polling suggests medium term inflation expectation intact. (Source: Bloomberg, Concensus Economics, Focus Economics)

Office of Chief Economist

Page 4 of 40

Bond Market Returns 1Q 2012: Corporate bonds give higher return

Handy Yunianto (handy.yunianto@mandirisek.co.id)

In the last two months, the governments rupiah bond yields rose on average by 0.78ppt according to HSBC bond index. However, overall ytd total return in the bonds still reported positive gained of 3.15% as of 16-April-2012, thanks to investment grade by Moodys rating agency in mid of Jan. This performance was lower than the stock markets return of 8.5% ytd - after in 2011 only gave 3.2% gains much below government bonds return that reached 21.5%. Compared with other Asian local currency government bonds, Indonesian bonds still give the highest returns. However, in USD term, the return was lower as the rupiah depreciated against USD by almost 1.1% ytd (Figure 4). The highest returns in the USD term were Malaysia ringgit government bonds i.e. 4.6% as the ringgit appreciated by 3.1% against USD.

Singapore Korea Malaysia Thailand China Ons Philippines Indonesia -2% 0%

-1.0%

1.2% 4.8% 1.0% 2.4% 1.4% 4.6%

1.3% 0.7% 0.4% 1.0%

YTD Return (Local Currency) YTD Return (USD Currency) 4.1% 3.1% 2.0%

2%
Total Return as of April 16

4%

6%

Figure 4. Indonesia still gives the highest returns in local currency performance. (Source: HSBC and Mandiri Sekuritas)

The slowing rally in the rupiah government bonds in the last two months was because of foreign investors trimmed their holding in government bonds quite significantly following
Office of Chief Economist Page 5 of 40

increasing foreign exchange risk due to deteriorating Indonesian balance of payment data and increasing inflation expectation, as the government was proposing to increase subsidized fuel prices. According to the bond ownership data as of 13-Apr, foreigners continued to cut their ownership by more than IDR 9.5 tn to IDR 226.9 tn vs. IDR 236.42 tn of 2012s peak on 13-Feb translating into 29.5% vs. 32% of proportion to total outstanding amount. Thus, foreigners still reported net buy of IDR 4 tn ytd. Looking at the tenors, foreigners trimmed more on long-end tenors during the massive outflow to reduce the risk amid increasing inflation expectation and global economic uncertainty. The main net buyers during the period were commercial banks and Bank Indonesia of by IDR 14.1 tn and IDR 11.6 tn respectively.

IDR Trillion

20 10 -10 -20 -30 -40 Aug-11 Apr-11 Mar-11 Dec-11 May-11 Sep-11 Nov-11 Mar-12 Feb-11 Oct-11 Feb-12 Apr-12 Jun-11 Jan-11 Jul-11 Jan-12

36% 35% 34% 33% 32% 31% 30% 29% 28% Foreign share % of total outstandings

0-2

2-5

5-10

>10

Foreign share % of total outstandings (RHS)

Figure 5. Foreign outflow behind the bonds correction, but it slowed since March. (Source: DMO and Mandiri Sekuritas Estimate)

Office of Chief Economist

Page 6 of 40

Dec-10

0-2 15%

Dec-12

0-2 19%

>10 46%

2-5 18%

>10 41% 2-5 17%

5-10 21%
To t a l f o r e i g n own e r sh i p R p19 6 t n

5-10 23%
T o t al f o r eig n o wner shi p Rp228tn

Figure 6. Foreigners increased more on short-end tenors to reduce the risk. (Source: DMO and Mandiri Sekuritas Estimate)

Cumulative Net Buy/(Sell) Rptn

20,000 Cummulative IDR Gov't Bonds 15,000 Ownership Outstandings (Rp trn) 10,000

B ank F o r eig n

I nsur ance

5,000
M ut ual F und s Pensio n F und s

(5,000)

Ot her s

(10,000) 6-Jan-12 3-Feb-12 2-Mar-12 13-Jan-12 20-Jan-12 27-Jan-12 9-Mar-12 10-Feb-12 17-Feb-12 30-Dec-11 24-Feb-12 16-Mar-12 23-Mar-12 30-Mar-12 6-Apr-12

Banks (excl. Reverse Repo) Mutual Funds Insurance Others

Bank Indonesia (Incl. Reverse Repo) Pension Funds Foreigners

Figure 7. The main net buyers were commercial banks and Bank Indonesia. (Source: Bank Indonesia, DMO, and Mandiri Sekuritas Estimate)

IDR corporate bond performances better than government bonds. As we wrote in our bond market outlook 2012 we suggested investors to overweight on corporate bonds due to lower starting yields that make the government overwhelmingly
Office of Chief Economist Page 7 of 40

reliant on foreign investors and Bank Indonesia, flatter yield curves, thus we believe total return in the government bonds in 2012 might be lower than in 2011. Corporate bonds are attractive, as the risk premium is higher than the long-term average with increasing liquidity in the secondary market. We also believe Indonesian economy is still robust and will be able to endure lingering global uncertainties. There will be competition also among corporate issuers, as IDR 26 tn in corporate bonds will mature that will give incentive for investors and relatively low risk free yields. Based on IDX data, on average corporate coupon bonds issuances in 2012 is 7.8% with average tenor is 3.5 years as of April-2012. We collect top fifteen corporate bonds the most liquid in secondary market using three variables i.e. total volume transaction, total freq and continuity trading in the last three months. According to IDX bonds trading reported data, we found that on average corporate bonds return was higher than government bonds.

Office of Chief Economist

Page 8 of 40

Bonds Issue Maturity date date FR0058 FR0059 FR0061 FR0060 FR0062 ORI008 FR0053 FR0023 FR0054 FR0028 21-Jul-11 15-Sep-11 6-Oct-11 6-Oct-11 2-Feb-12 26-Oct-11 8-Jul-10 11-Sep-03 7-Jul-10 23-Feb-05 15-Jun-32 15-May-27 15-May-22 15-Apr-17 15-Apr-42 15-Oct-14 15-Jul-21 15-Dec-12 15-Jul-31 15-Jul-17 (years) T2M Coupon (%) Duration (yrs)

Avg. vol trading per month (IDR bn) 35,576 19,575 17,956 6,588 7,527 4,783 3,917 3,177 3,130 2,936 Avg. vol trading per month (IDR bn) 648.0 871.5 539.7 500.7 569.0 369.4 327.1 496.9 303.5 290.2 278.7 251.6 729.5 244.4 217.7

31-Dec-11

11-Apr-12 Total Return (%)

Price

YTM (%) 6.9 6.4 6.0 5.2 6.4 5.0 6.0 3.7 7.2 5.5

Price

YTM (%) 6.8 6.4 5.9 5.2 6.4 6.2 5.9 3.8 6.7 5.2

20.2 15.1 10.1 5.0 30.0 2.5 9.3 0.7 19.3 5.3

8.250 7.000 7.000 6.250 6.375 7.300 8.250 11.000 9.500 10.000

10.2 9.2 7.1 4.2 12.8 2.2 6.6 0.6 9.9 4.1

113.2 105.9 107.2 104.2 100.0 104.4 116.4 106.1 126.1 121.5

116.0 105.9 108.0 104.8 99.0 105.2 116.3 104.7 128.7 121.7

4.3 1.7 2.4 2.0 0.6 2.4 -1.9 1.3 0.2 -1.9 1.1

Average return Issue Bonds date Maturity date (years) T2M Rating Coupon (%) Duration (yrs) 31-Dec-11 11-Apr-12

Price

YTM (%) 11.2 8.6 8.4 8.3 8.0 7.2 9.0 6.6 9.0 8.3 8.4 8.0 9.2 10.2 9.9

Price

YTM (%) 11.07 7.14 7.39 6.98 7.90 7.20 8.23 6.19 7.76 7.17 8.38 7.36 8.88 9.49 9.23

Total Return

MEGA01 ASDF01CCN1 BNII01BCN1 BEXI01CCN1 ASDF01BCN1 SANF02A ADMF01CCN1 ASDF01ACN1 ANTM01BCN1 BNGA01B SANF02C ADMF01BCN1 BBKP01SBCN1 BNGA02SB JPFA01CN1

16-Jan-08 22-Feb-12 7-Dec-11 21-Dec-11 22-Feb-12 24-Jan-12 19-Dec-11 22-Feb-12 15-Dec-11 27-Dec-11 24-Jan-12 19-Dec-11 7-Mar-12 27-Dec-10 13-Jan-12

16-Jan-13 21-Feb-17 6-Dec-16 20-Dec-18 21-Feb-15 24-Jan-13 16-Dec-16 3-Mar-13 14-Dec-21 23-Dec-16 20-Jan-15 16-Dec-14 6-Mar-19 23-Dec-20 12-Jan-17

0.8 4.9 4.7 6.7 2.9 0.8 4.7 0.9 9.7 4.7 2.8 2.7 6.9 8.7 4.8

A(idn) idAA+ idAA+/AAA(idn) idAAA idAA+ AA(idn); idAAidAA+ idAA+ idAA idAAA AA(idn); idAAidAA+ idA AA(idn) idA/A+(idn)

11.5 8.6 8.75 8.5 8 7.2 9 6.6 9.05 8.3 8.4 8 9.25 10.85 9.9

0.7 3.9 3.7 5.0 2.5 0.7 3.7 0.9 6.4 3.8 2.4 2.3 5.0 5.5 3.7

101.5 100.0 101.3 100.3 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 103.5 100.0

101.8 105.0 105.4 107.4 101.2 100.0 103.0 100.4 108.7 104.5 100.1 101.6 101.9 108.0 102.6

0.3 6.0 4.0 7.1 2.1 1.3 2.9 0.9 8.7 4.5 1.7 1.5 2.5 4.3 4.7 3.5

Average return

Figure 8. Corporate bonds gave average higher returns. (Source: IDX and Mandiri Sekuritas Estimate)

Bond yield outlook 2H2012: Delay of increasing fuel price might give negative sentiments to bonds market. The House of Representatives late last month rejected the governments plan to raise the prices of subsidized fuels from IDR 4,500 to IDR 6,000 per liter, but instead approved a conditional increase. The revised state budget law passed
Office of Chief Economist Page 9 of 40

states that the government can increase the fuel price if the average of the ICP in the previous six months is 15% above USD 105 per barrel an assumption of the ICP set in the budget. It means that the government has the authority to go ahead with the 33% fuel price hike if the six-month ICP average goes beyond USD 120.75. Given the 15% increase threshold or at, the government may need to wait until Jun12 before it can increase subsidized fuel prices in early July, assuming the ICP price to stay flat at Feb12 price of USD 122.2/barrel. However, July and August this year will have seasonal high inflation high due to the Lebaran celebration. This condition might cause the government to delay fuel price hike further. Delay in fuel price increase might be positive to lowering short-term inflation pressure. However, the critical point will be on budget deficit calculation and current account balance data. The fuel price hike delay will increase burden on the government budget. The government estimated that without fuel price hike, the consumption could reach 48 mn kl, against the budgeted 40 mn kl in the revised budget. Under this scenario, we estimate that budget deficit can reach 2.7% of GDP, which will require government to cut other spending or to issue more debt. Due to net oil importer, the delay of fuel price hike also gives pressure in the current account data. The latest news government is mulling to revive the plan to restrict subsidized fuel consumption by private cars starting in Java and Bali based on the engine size. Currently, private cars consumed more subsidized premium gasoline reaching 53% of the total consumption. Consumption of subsidized fuel in March was 3.78 mn kiloliters, up 11% from 3.41 million kiloliters in February. The government could issue the regulation in late April or May, though this could be delayed too. Currently, the different between Pertamax nonsubsidized fuel and premium price is 126% (IDR 10,200 vs. IDR 4,500), thus if the policy is implemented, it will give additional CPI inflation by 1.4% or slightly lower compared with 2% if government increases fuel prices by y 33%. Simulation bond market performance in 2012. The government bond yields now are slightly close to our fair yield models. We still maintain our fair yield forecast for the 10 years and 2 years at 6.75% (range: 6.3-7.2%) and 5.05%
Office of Chief Economist Page 10 of 40

(range: 4.9-5.2%). Currently the 10years and 2years are trading at 6.1% and 4.72% respectively. We made a portfolio simulation to compare their performance due to some yield curve scenario in 2012. There are three scenarios (1) Yield curve stable at current level. As yield curve currently has normal shape, thus investors can sell the bonds at lower yields by YE12 we called it riding the yield curve. (2) Using implied forward yield curve (3) Using fair yield regression model assuming that BI rate is stable at 5.75%, inflation rises to 5.5% (assuming theres limited consumption rather than increasing fuel price), the rupiah weakens to 9,100 and the Fed Fund Rate being stable at 0.25%. Thus, the two-and tenyear bond yields are predicted to be 4.9% and 6.3% making yield curve steepening in 2012. From all scenarios, total return in the government bonds is projected to be only 2-5%, thus we project the return will be below 8% this year. Thus, we still maintain our view chasing corporate bond issuances to enhance the bond return this year as the risk premium is higher than long-term average with increasing liquidity in the secondary market. We also believe Indonesian economy is still robust and will be able to endure lingering global uncertainties. There will be competition also among corporate issuers, as IDR 26 tn in corporate bonds will mature that will give incentive for investors.
YTM (%) 7.5

7.0

6.5

6.0

5.5

5.0

Scenario 1: Yield curve stable Scenario 2: Implied Forward Scenario 3: Fair yield model

4.5

4.0 0 5 10 Time to maturity (yrs) 15 20

Figure 9. Yield curve simulation and their total return projection. (Source: Bloomberg and Mandiri Sekuritas)

Office of Chief Economist

Page 11 of 40

Expected Total Return 2012 (%) 6 Scenario1: Yield curve stable Scenario 2: Implied forwardl 5 Scenario 3: Fair yield model 4.8

3.7 3.1 3.2 2.7 2.3 2.1 2.1 3.2

3.6

2.0

2.1

FR0060 FR0061 FR0059 FR0058

Figure 10. Projected total return 2012. (Source: Bloomberg and Mandiri Sekuritas)

Office of Chief Economist

Page 12 of 40

Observing Impact of China Slowdown to Indonesia Palm Oil Sector

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

Decelerating China Growth

China has become top three countries for Indonesia export destination

Surprising news made by Chinas government after announcement of lowering economic growth target to 7.5% this year, furthermore the number figure is the lowest since 2004. China has been known for its high economic growth performance in this particular past three years amid global uncertain condition. Whole world seems rely on China economy when US and Eurozone still struggling for their economy recovery and stability. Indonesia is one of the countries that count on China to maintain its export performance since China has become top three countries for Indonesia export destination. What does make China to set low target of economic growth is tend to long term quality growth reason. China government wants to balance trade sector and overseas direct investment with its domestic consumption.
Indonesia Export Figure By Products 2011
Mi neral fuel s , oi l s , di s ti l l a ti on products , etc Ani mal ,vegeta bl e fa ts a nd oi l s , clea va ge products , etc Ores , s l a g and as h

Indonesia Palm Oil Export Figure 2011

4.5% 4.8%

Indi a Chi na
1.9% 2.0% 3.5% 6.5%

12.7%

4.9% 30.3% 5.3%

Ma l a ys i a Netherl a nds Ba ngl a des h

38.9%

Rubber a nd a rticl es thereof Orga ni c chemi cal s

9.3%

Egypt Si nga pore

8.7%

12.3%

12.4%

13.5%

Pul p of wood, fibrous cel l ulos i c ma teri a l , wa s te etc El ectri ca l , el ectroni c equi pment Mi s cel l aneous chemi ca l products Others

Figure 11. China is very important market. In 2011, total Indonesia export value reached USD 203,4 million, which China as one of big four market together with Japan, Singapore and US. Take a closer look at Palm Oil sector, Indonesia supplied 2 million tons Palm Oil to China, second highest after India which took 5 million tons. (Source: International Trade Center)

Office of Chief Economist

Page 13 of 40

Indonesias Palm Oil and China

China is the second biggest market of Indonesias PALM OIL export after India

What we see from slowing down China growth might have some effects to Indonesia economy through export performance. Since that subject has been taken as macroeconomic issue that is needed further accurate calculation, this article will emphasize to Indonesia Palm Oil sector. The chosen subject become interesting since China is the second biggest market of Indonesias palm oil export after India. Connection between Indonesias palm oil and China describe how important China market and what is happening in China economy or China trade policy will eventually affect Indonesia palm oil export.

China Vegetable Oil Consumption

Total Vegetable Oil Consumption 26.3 MMT

Soybean Oil 11.4 MMT (43.3%)

Palm Oil 5.6 MMT (21.3%)

Rapeseed Oil 5.3 MMT (20.2%)

Other Oils 4 MMT (15.2%)

Import Soybean Crushing 9.6 MMT (84.2%)

Domestic Soybean Crushing 0.5 MMT (4.4%)

Import Soybean Oil 1.3 MMT (11.4%)

Import 5.7 MMT

Import Rapeseed Crushing 0.4 MMT (7.5%)

Domestic Rapeseed Crushing 4.3 MMT (81%)

Import 0.6 MMT (11.4%)

Domestic Production 3.9 MMT (97.5%)

Import 0.1 MMT (2.5%)

Figure 12. Vegetable Oil Consumption in China. Malaysia and Indonesia are two main countries which constantly supplying palm oil for China. In 2011, China imported palm oil USD 4.23 billion (65% of total palm oil import) from Malaysia, and Indonesia supplied the rest for about USD 2.3 billion (35% of total palm oil import). (Source : International Trade Center, Dongling & Custom)

Palm oil is the rivalry of soybean oil which is the most vegetable oil that is produced and consumed in China

First thing need to observe is the usage of palm oil in China. Among other vegetable oils that used in China, palm oil is the rivalry of soybean oil which is the most vegetable oil that is produced and consumed in China. The usage of both of them is quite the same that is mostly for cooking oil and food. To put in another way, consuming vegetable oil including Palm Oil has become their main necessity.
Page 14 of 40

Office of Chief Economist

China Palm Oil consumption in 2009 rose by 22% from 2008, it is quite high regarding to the crisis condition

China must fulfill the domestic needs for cooking oil for about 26 million metric tonnes per year and it is obvious cannot get only from soybean oil. For that reason, China must import other vegetable oils including palm oil from Indonesia, the average China import of palm oil from Indonesia is about 6 milion metric tons per year. Did Chinas Slowdown Affect Indonesias Palm Oil Export ? Next question regarding Indonesia palm oil is what had happened to Indonesias palm oil export when there was decelerating economy growth in China ? Lets take a look at historical data in 2008 2009 when that is the closest periode that might best describe the answer.
Global crisis period

Millions tons

2.5

60.0%

40.0% 2

20.0% 1.5 0.0% 1 -20.0%

0.5 -40.0%

0 Q105 Q205 Q305 Q405 Q106 Q206 Q306 Q406 Q107 Q207 Q307 Q407 Q108 Q208 Q308 Q408 Q109 Q209 Q309 Q409 Q110 Q210 Q310 Q410 Q111 Q211 Q311 Q411

-60.0%

China Import of Palm Oil

Growth yoy (%)

Figure 13. China consumption of Palm Oil (represented by China import of Palm Oil). Consumption of Palm Oil which mainly as food keep stable during the crisis period (2008 2009). From the figure above we see China consumption of Palm Oil was increasing and grew positively from Q4 2008 to Q1 2009 which is the beginning of global crisis period. China Palm Oil consumption in 2009 rose by 22% from 2008, it is quite high regarding to the crisis condition. (Source : Bloomberg)

Since global crisis which is trigerred by financial disaster in US hit all economies, it also had hampered China as the numerous economy in the world. The export of China was eventually going down similar to other countries which its export destination is headed to advance countries such as US , Japan and Europe. It made China economy growth shrunk to
Office of Chief Economist Page 15 of 40

9.2 % in 2009 from 9.6 % in year before, even though it was much better than other countries figure at that time.

Contrary to that broad picture of the economy, the palm oil consumption of China people seems not too be affected by slowing down China

Contrary to that broad picture of the economy, the palm oil consumption of China people seems not too be affected by slowing down China. That can be explained by China imports on palm oil on 2008 2009. The data showed us that Chinas palm oil imports keep growing relatively stable when global crisis happened at that time. Somehow, the data also tell us that palm oil consumption of China people was quite strong in that crisis period. How about Indonesias palm oil export to China? Facing the stable China consumption of palm oil, Indonesias palm oil export should be going fine in the period of global crisis. Unless if we find some hints about India consumption on palm oil at the same time showed significant decrease, it might potentially harm Indonesias palm oil export.
Global crisis period

Million tons

7,000

200%

6,000

150%

5,000 100% 4,000 50% 3,000 0% 2,000

1,000

-50%

Q106 Q206 Q306 Q406 Q107 Q207 Q307 Q407 Q108 Q208 Q308 Q408 Q109 Q209 Q309 Q409 Q110 Q210 Q310 Q410 Q111 Q211 Q311 Q411

-100%

Total Indonesia CPO Export

Growth yoy (%)

Figure 14. Indonesias palm oil export. Indonesia Palm Oil export in term of quantity still increased by 18% (YoY) in 2009, although the growth little bit lower than previous year, 20%, but it can be considered as stable growth. In contrast, Indonesias Palm Oil export in term of dollar value in 2009 decreased by -16%, contributed by sharp decline of Palm Oil price at that time. In fact, global economic turmoil has played role in giving negative sentiment to commodity price including Palm Oil. (Source : BPS)

According to graph above finally we know that Indonesia palm oil export to China in global crisis period, or in period when
Office of Chief Economist Page 16 of 40

Expected lower China import of soybean from Latin America has also played role as well as robust Palm Oil consumption.

China economy decelerated, was still increase in term of the volume growth. The condition is similar as what we have seen in china palm oil consumption in same period. Keep increasing amid slow down in China Taking historical studies about Indonesias palm oil export performance in global crisis period, we can predict how the export will perform amid the current China slowing down today. The fact is palm oil is one of primary needs in China as food and cooking oil and its consumed relatively stable unless the economy has become tremendous severe of recession in a long period of time. Therefore, Indonesia palm oil export in 2012 is still expected to increase following to robust consumption of Palm Oil in China. Besides, expected lower China import of soybean from Latin America has also played role as well as robust Palm Oil consumption.

20.3 17.8 14.2 9.6 9.2 10.4 9.2

8.2 6.5 0.9 2011 2012F

(1.9) 2007 2008 2009 China GDP Growth 2010

(3.2)

Total Indonesia's CPO Export Growth

Figure 15. Indonesias palm oil export. Although China is predicted slowing down in 2012 , Indonesia Palm Oil export is still expected to grow. Robust vegetable oil consumption of China and expected lower China import of soybean from Latin America become several main factors. In addition, Indonesia palm oil export to Pakistan is also expected to increase due to equal import tariff rate with Malaysia Palm Oil. (Source : IMF, International Trade Center, GAPKI)

Office of Chief Economist

Page 17 of 40

As noted from GAPKI (Indonesia Palm Oil Association) palm oil export could be reached 17,5 milion tons this year, indicating stable demand for palm oil.

In fact, regarding to deceleration of China economy, the Chinas government wants to empasize domestic economy. In other words, this time China will boost domestic consumption as economy engine of growth. For this reason, economy sector that related to consumer goods such as food and beverage for instance, will be benefited. Consequently, palm oil as one of the most popular vegetable oils beside soybean oil might be consumed more. Those are good news for Indonesia palm oil sector and then the palm oil export to China is predicted remain grow positively this year. As noted from GAPKI (Indonesia Palm Oil Association) palm oil export could be reached 17.5 milion tons this year, indicating stable demand for palm oil.

Office of Chief Economist

Page 18 of 40

Pharmaceutical Industry 2012 : Growth Momentum Is Still Maintained

Nadia Kusuma Dewi (nadia.dewi@bankamandiri.co.id)

Growth Driver of Indonesias Pharmaceutical Industry

The potential for the future development of the pharmaceutical industry is quite large

The large number of population, the increasing pattern of life and public awareness of health, the increasing support to the government health program for public health access with some improvement in the economy and peoples purchasing power are major drivers for the development of the pharmaceutical industry in the country. The potential for the future development of pharmaceutical industry is quite large considering the relatively low of total healthcare expenditure and pharmaceutical spending in Indonesia compared to other countries in ASEAN.

Proportion of Healthcare Expenditure to Gross Domestic Product, 2010 4.8% 4.1% 3.8%

Indonesia Total Healthcare Expenditure (IDR Tn) 247 221

3.5%

3.3% 153 2.1% 86 101 116 133

196 173

Malay- Thai- Phillip- India Singa- Indonesia 2007 2008 2009 2010 2011F2012F2013F2014F2015F sia land pines pore

Figure 16. Proportion of Healthcare Expenditure to Gross Domestic Product 2010 (%) and Indonesia Total Healthcare Expenditure (IDR Tn). Proportion of healthcare expenditure to Indonesian GDP in 2010 is 2.1% only. The Indonesia total healthcare expenditure is expected to grow at an average of 14.1% per year in 2007 from IDR 86 Tn. to IDR 247 Tn. in 2015. (Source: Kalbe Farma, Business Monitor International)

Based on data from the Business Monitor International, the proportion of healthcare expenditure to GDP in 2010 is
Office of Chief Economist Page 19 of 40

Indonesia 2.1%, lower than Malaysia, Thailand, Philippines, and Singapore. Indonesia total healthcare expenditure in 2010 reached IDR 133 tn and is expected to rise to IDR 247 tn in 2015. Meanwhile, Indonesia pharmaceutical spending per capita in 2010, amounted to USD 17.4, is much lower than Singapore, amounting to USD 119.6. Indonesia Pharmaceutical spending in 2010 amounted to IDR 38 tn and is expected to rise to IDR 63 tn in 2015.

Pharmaceutical Spending Per Capita, 2010 (USD)

119.6

Indonesia Pharmaceutical Spending (IDR Tn) 63 57 52 38 42 46

58.6 50.3 29.9 17.4 11.4

30 24

34

Singa- Thaipore land

Malay- Philip- Indosia pines nesia

India

2007 2008 2009 2010 2011F2012F2013F2014F2015F

Figure 17. Pharmaceutical Spending Per Capita 2010 (USD) and Indonesia Pharmaceutical Spending (IDR Tn). Indonesia pharmaceutical spending per capita in 2010 amounted to USD 11.4, much lower than other ASEAN countries. Indonesia pharmaceutical spending is estimated to grow at an average of 12.8% per year in 2007 from IDR 24 Tn. to IDR 63 Tn. in 2015. (Source: Kalbe Farma, Business Monitor International)

Indonesia Pharmaceutical Market Development

Indonesian pharmaceutical market during 20072011 grew at an average of 13% per year and is expected to reach IDR 43.1 Tn. in 2012

Indonesian pharmaceutical market during 2007-2011 grew at an average of 13% per year. In 2011, the Indonesia pharmaceutical market and is expected to reach IDR 43.1 tn or increases by 12% to IDR 48.3 tn this year. Based on the type of drug, ethical drug is still the largest contributor to Indonesia pharmaceutical market (58.1%) with a value of IDR 25 tn in 2011 and an average growth of 13.9% per year during 20072011. Meanwhile, for the same period, Over the Counter (OTC) drug grew at an average of 11.8% per year with a value reaching IDR 18 tn and a market share of 41.9% in 2011.
Page 20 of 40

Office of Chief Economist

Indonesia Pharmaceutical Market (IDR Tn) 43.1 38.5 35.4 31.0 26.5

48.3

Composition of Indonesian Pharmaceutical Market (IDR Tn) CAGR Share '07-'11 2011 Ethical OTC 20.8 11,8% 41,9% 18.0 15.7 15.2 13.8 11.6 17.2 20.2 22.8 25.0 27.5 13,9% 58,1%

14.9

2007 2008 2009 2010 2011 2012F

2007

2008

2009

2010

2011 2012F

Figure 18. Indonesia Pharmaceutical Market (IDR Tn). Indonesian pharmaceutical market grew at an average of 13% per year during 2007-2011 and is estimated at IDR 48.3 Tn. in 2012. Indonesian pharmaceutical market is dominated by ethical drugs which control 58.1% of total market share of drugs with an average growth of 13.9% per year, slightly higher than OTC drugs that grew by 11.8% per year. Ethical drug market growth is mainly driven by improved purchasing power. (Source: Kalbe Farma)

Ethical drugs dominate Indonesian pharmaceutical market with an average growth of 13.9% per year, slightly higher than OTC drugs that grew by 11.8% per year. Ethical drug market growth is mainly driven by improved purchasing power

Ethical drug market is divided into three, namely patent drugs, branded generics and real generics (OGB) that is generally better known by the generic term itself. Branded generics segment controls 67% share of the national pharmaceutical market, patent drugs of multinational industrial production (originator) by 25%, and the remaining by 8% is real generics. The domestic market real generics are still relatively low, which is estimated to be about 10% of the total national pharmaceutical market. Governments support through the issuance of the Regulation of the Minister of Health Number HK.02.02/Menkes/068/I/2010 regarding An Obligation to Use Generic Drugs in Government Health Care Facilities is expected to drive the real generic growth in the future. Real generic production is controlled by pharmaceutical StateOwned Enterprises (SOEs) such as Indofarma and Kimia Farma. The production share of the two pharmaceutical State-Owned Enterprises in the generics market is about 21%. Furthermore, the regrouping plan of Kimia Farma and Indofarma targeted for completion in the third quarter of 2012 is expected to

Office of Chief Economist

Page 21 of 40

increase the market share of generic drugs of the two companies up to 30%. The regrouping plan of the pharmaceutical State-Owned Enterprises can strengthen their position as a major player in Indonesia generics. With the support of government, which prioritizes the production of generic drugs made by the pharmaceutical State-Owned Enterprises, the regrouping company is expected to further perform a specific marketing strategy that the companys generic drugs become the main preference of people. Kimia Farma targets the sales value of IDR 3.9 tn in 2012. From the value, the company sales of generic drugs are expected to contribute by 50%, while in volume, the sales of generic drugs contribute by 70%. As for Indofarma, from the projected sale value of IDR 1.5 tn in 2012, generic drugs is estimated to contribute by 86%. Industry Structure and Business Competition National pharmaceutical industry is highly fragmented with over 250 players, where the five largest players control 32% market share. Based on the deployment of their territories, most of the pharmaceutical industry is located in West Java and East Java.
Indonesia Pharmaceutical Manufacturer (Unit) 225 233 231 232 238 251 Geographical Distribution of Pharmaceutical Manufacturer (Unit) 23 30 45 46 95 9 3 251

2005 2006 2007 2008 2009 2010 West DKI East BantenCentral North Others Total Java Jakarta Java Java Sumatera

Figure 19. Number of Pharmaceutical Manufacturers and the Spread throughout Indonesia. The number of pharmaceutical manufacturers in Indonesia in 2010 was 251 companies. Of these manufacturers, 38% or 95 companies were located in West Java (at the highest), followed by Jakarta of 46 companies and East Java of 45 companies. (Source: Directorate General of Pharmaceutical and Medical Device Development, Ministry of Health, 2011)

Office of Chief Economist

Page 22 of 40

Indonesians pharmaceutical industry is highly fragmented with over 250 players. The five largest players control 32% market share

Overall, Kalbe Group has the largest pharmaceutical market in Indonesia (13%), followed by Dexa Medica Group (5%), Sanbe (5%), Soho Group (5%), Pharos Group (4%), Tempo Group (3 %), and GlaxosmithKL Group (3%). When viewed in more detail based on the type of drug, the major players in the ethical drug segment are Kalbe Group (13%), Dexa Medica Group (7%), Sanbe (6%), Sanofi Aventis Group (4%), Novartis Group (4%) , Fahrenheit (4%), and Interbat (3%). Meanwhile, the major players in the OTC segment include Kalbe Group (14%), Soho Group (8%), Pharos Group (7%), Tempo Group (7%), Abbott Group (5%), Konimex (5%), and GlaxosmithKL Group (4%).
Market Share of Main Player in OTC (%) Kalbe Group 14 8 Others 50 7 5 5 4 GSK Group Tempo Group Abbott Group Konimex 7 Pharos Group

Market Share of Main Player in Ethical (%) Kalbe Group 13 Others 59 4 4 3 Interbat 7 Sanbe 6 4 Sanofi Others Aventis Group Novartis Group Fahrenheit Dexa Medica Group

Soho Group

Figure 20. Market Share of Major Players in Ethical and OTC Drug Market, 3M11 (%). Kalbe Group controls the largest market share, for both ethical and OTC drugs. There are several big names of foreign players such as Sanofi Aventis Group of France and Novartis Group from Switzerland in the ethical drug market. As for the OTC drug market, it is controlled more by local players. (Source: Kalbe Farma)

Business competition in the pharmaceutical industry is getting tougher. More and more product diversiticaton is made by large pharmaceutical companies

Business competition is getting tougher in the pharmaceutical industry, where more and more diversification of products is made by large pharmaceutical companies. Competition in the consumer health segment (OTC, energy drinks, nutrients) is expected to be heavier. On the other hand, government regulation which prohibits foreign pharmaceutical companies to sell their products in Indonesia without having production
Page 23 of 40

Office of Chief Economist

facilities in Indonesia, the strict government regulations regarding quality standards and product safety, and regulation of drug prices pose barriers to entry into the pharmaceutical industry. Drug Distribution Lines
The number of distribution facilities, such as Pharmaceutical Wholesalers as wholesalers and pharmacies as retailers, strongly supports the growth of the pharmaceutical industry

The existence of Pharmaceutical Wholesalers (PBF) in the pharmaceutical industry is important, considering every drug company in distributing drug products should use the Pharmaceutical Wholesaler lines. From the Pharmaceutical Wholesalers, the drug products is further marketed through sub-distributors or directly to retailers such as pharmacies, hospitals, drug stores, physicians, and other general stores using the medical representative services. In 2010, there were approximately 2,855 Pharmaceutical Wholesalers with 16,603 pharmacies and 8,447 drug stores. In the retail lines, approximately 43% of drugs were sold through pharmacies, 18% through general stores, 14% through drug stores, 13% through physicians, and 12% through hospitals. Some things that affect the sales turnover of pharmacies are the location, the presence of physicians who open personal practice within the pharmacy location and public perception about the completeness of drugs provided by the pharmacy. On the sale of drugs in general, margins earned by pharmacies are at an average of 10% for OTC drugs and 20% to 30% for ethical drugs.

Office of Chief Economist

Page 24 of 40

PBF

Pharmacy

Drugstore 13,671

16,603

10,931 7,940 6,816 5,915 2,743 2,821 2,855 7,953 8,447

2,789

2007

2008

2009

2010

Figure 21. Number of Distribution Facilities of Pharmaceutical Sector in Indonesia (Unit). Growth of the pharmaceutical industry is also supported by the development of distribution of pharmaceutical facilities, such as Pharmaceutical Wholesalers as wholesalers and pharmacies and drug stores as retailers. During 2007-2010, the number of pharmacies grew at an average of 35% per year, the highest increase among other distribution lines. In 2010, the number of pharmacies in Indonesia reached 16,603. (Source: Directorate General of Pharmaceutical and Medical Device Development, Ministry of Health, 2011)

The Pharmaceutical Industry cost structure and Efforts to Reduce Depending of Raw Materials Imports
Import duty exemption of some pharmaceutical raw materials this year provides a conducive climate to the pharmaceutical manufacturing industry given 70% to 80% of production cost structure is dominated by the cost of raw materials, which approximately 90% is imported

Raw material component dominates around 70% to 80% of total drug production cost structure. Meanwhile, most (90%) of raw materials of the pharmaceutical industry is still imported, mainly from China (75%), India (20%), and the rest is from Europe and the U.S. In the middle of November 2011, the Ministry of Finance issued a Regulation on the Rate Imposition of the Minister of Finance No. 174/PMK.011/2011 regarding Rate Imposition of Imported Goods Import Duty, governing the import duty exemption for some pharmaceutical raw materials. With this regulation, the rate of import duties for some pharmaceutical raw materials fell to 0% from the previous rate of 5%. The regulation applies since 17 November 2011 and is expected to show its positive impact on 1Q12. According to the association of suppliers of pharmaceutical raw materials, namely Pharma Materials Management Club

Office of Chief Economist

Page 25 of 40

The high import of pharmaceutical raw materials challenges the national pharmaceutical industry. Import of pharmaceutical raw materials in 2012 is estimated at IDR 11.9 to 12.3 tn.

(PMMC), the import of pharmaceutical raw materials of Indonesia in 2011 reached IDR 10.6 to IDR 10.7 trillion and is projected to increase to IDR 11.9 to IDR 12.3 trillion by 2012 in line with the development of national pharmaceutical market. The high import of pharmaceutical raw materials from year to year encourages various efforts of thought of related parties to begin to reduce import dependence. Government through the Ministry of Health requests the pharmaceutical Stateowned Enterprises to become manufacturers of drug raw materials. Raw materials that take precedence in this case are those widely used in the pharmaceutical industry in Indonesia, such as Amoxicillin and Paracetamol. In this case, the Ministry of Health plans to provide incentives for investment in pharmaceutical raw materials, among others, including income tax relief, tax returns, and other forms. However, it still requires further in-depth study and discussion of crossgovernment agencies, among others, regarding the investment needs and financial resources to be manufacturers of drug raw materials for pharmaceutical State-owned Enterprises. International Pharmaceutical Manufacturers Group (IPMG) states there are currently three multinational pharmaceutical principals (two companies from India and one from China) that are interested in investing in the manufacture of pharmaceutical raw materials and production of drugs in Indonesia. However, according to the IPMG, currently foreign pharmaceutical principals find it difficult to realize the investment plan of pharmaceutical raw materials in Indonesia because the investment of pharmaceutical raw materials is included in the rules of negative investment list (DNI), which regulates that foreign principals should work with local companies when investing in Indonesia. Currently, the government limits the ownership of foreign principals in the pharmaceutical industry at a maximum of 75%. In this case, foreign pharmaceutical principals are not easy to find local partners, in addition, local companies may also object to the portion of their shares that is smaller than the portion of foreign partners. Associated with pharmaceutical raw materials, fluctuation in the Rupiah exchange rate is a critical factor given the large import content in the pharmaceutical industry. Rupiah

Office of Chief Economist

Page 26 of 40

Fluctuation in the Rupiah exchange rate is a critical factor given the large import content in the pharmaceutical industry

exchange rate (at an average) in 2010 was at IDR 9,084/USD and rose to the level of IDR 8,780/USD in 2011. For 2012, the Rupiah exchange rate (at an average) is predicted to be relatively stable at around IDR 8,900/USD to IDR 9,100/USD.

13,000 12,000 11,000

Rupiah Exchange Rate (IDR/USD)

Kalbe Farma Total Manufacturing Cost (%) 27.0% 4.3% 100%

68.7% 10,000 9,000 8,000 7,000 4/19/2006

4/19/2008

4/19/2010

4/19/2012

Raw and Direct packaging labor materials

ManufacTotal turing Manufacturing overhead Cost

Figure 22. Rupiah Exchange Rate and Production Cost Structure of the Pharmaceutical Industry. The relatively stable Rupiah exchange rate is fairly conducive for the pharmaceutical industry, given about 90% of pharmaceutical raw materials are still imported. Raw materials contribute by 70% to 80% of drug production cost structure. (Source: Bloomberg, PT Kalbe Farma Tbk)

Government Regulations in the Pharmaceutical Industry

Pharmacy is a fairly regulated industry, in the rules of pricing, quality and safety as well as business competition

Pharmacy is a fairly regulated industry considering the role that can not be separated from health care function. Here are some government regulations in the pharmaceutical industry related to: 1. Product Quality and Safety Law No. 23/1992 All pharmaceutical manufacturers, importers and distributors in Indonesia must be licensed Government Regulation No. 949/Menkes/PER VI/2002 All finished products of the pharmaceutical industry must have a registration from the Ministry of Health to provide protection for consumers

Office of Chief Economist

Page 27 of 40

Application of c-GMP The free trade era forces the Indonesia pharmaceutical industry to be able to apply the standards of current Good Manufacturing Practice (c-GMP)

2. Price Rules Decree of the Minister of Health of the Republic of Indonesia Number 092/MENKES/SK/II/2012 regarding the Highest Retail Prices of Generic Drugs In 2012 Decree of the Minister of Health No. 069/Menkes/SK/II/2006 about Inclusion of the Highest Retail Prices on Drug Labels 3. Role of Foreign Companies Regulation of the Minister of Health No. 1010/Menkes/Per/XI/2008 on Drug Registration. The regulation sets out only domestic pharmaceutical companies having production facilities (factories) are allowed to register and distribute drugs in Indonesia. Presidential Regulation No. 36/2010 regarding the lists of closed business sectors and opened business sectors with requirements in the investment sector or often referred to as Negative Investment List. In this case, the pharmaceutical industry businesses that include drug industrial raw materials and drug industry, foreign ownership are limited to a maximum of 75%. Closing Remarks The large number of population, the increasing pattern of life and public awareness of health, the increasing support to the government health program for public health access with some improvement in the economy and peoples purchasing power become a strong basis for the development of the pharmaceutical industry in the country. The potential for the future development of the pharmaceutical industry is quite large considering the relatively low of total healthcare expenditure and pharmaceutical spending in Indonesia. The growing number of distribution facilities in the pharmaceutical sector also supports the development of the pharmaceutical industry. Meanwhile, on the competition side, the increasingly tougher business competition in the
Office of Chief Economist Page 28 of 40

pharmaceutical industry requires the building of brand awareness and company product diversification to keep abreast of consumer needs. Import duty exemption of some pharmaceutical raw materials this year provides a conducive climate to the pharmaceutical manufacturing industry given 70% to 80% of production cost structure is dominated by the cost of raw materials, which approximately 90% is imported. However, the high import of pharmaceutical raw materials remains a challenge for the national pharmaceutical industry. Efforts to reduce dependence on import of raw materials begin to be a more serious concern in the long run.

Office of Chief Economist

Page 29 of 40

Property Sector Heading Towards a Bubble?

Sindi Paramita (sindi.paramita@bankmandiri.co.id)

A Recent Issue Recently, the issue of bubble of Indonesian property is rising. This issue raised because property prices began to soar, giving rise to fears of a bubble in property prices. If the bubble bursts, it is afraid to make a significant impact, namely the economic crisis. Based on survey results of the property consultant, Cushman & Wakefield, it shows that there are some property subsectors that are currently growing high, i.e. housing, industrial land, office and apartments, particularly strata title apartment or condominium.
Property bubble is a situation where there is an unfair increase in property prices

What is the property bubble? Property bubble is a situation where there is an unfair increase in property prices. The fairness of increases in prices applies gradually along with the rise of inflation or income level. If the rapid price movements are left unchecked, the outbreak of the property bubble condition that makes property prices fall followed by the collapse of the economy as a whole that will cause national problems, i.e. economic recession, will occur. There are several indicators of the bubble of rising property prices, including: 1. Increase in property prices significantly, and 2. Increasing number of commercial and residential property projects that are empty or uninhabited, and 3. Property projects continues to grow rapidly despite the price rises and the increasing vacancy rate, and 4. The high price-to-income or price-to- rent ratio, and 5. Increase in the property investment in GDP significantly. One of the property bubble triggers is the high foreign capital inflows. The entry of foreign capital in the same time would make Indonesia have the abundance fund. This abundance of capital becomes an opportunity for investors. And one investment form with the fastest absorption rate is the property industry, both residential and commercial.

Office of Chief Economist

Page 30 of 40

Contributing factors to the occurrence of such property bubble is the supply of land that is still widely available at a relatively affordable price, the increasingly rising incomes from rents, especially from the commercial property market and relatively small risk become attractive opportunities to invest in the property industry. This will encourage the growth of many new developers. The possibility of a property bubble in Indonesia needs to be a concern for all parties, whether the business actors, banking and government itself. Property bubble needs to be aware in order to avoid over-supply and large number of lending to the property industry that could result in a crisis as occurred in 1997. How is actually the probability for the occurrence of bubble?
some indicators related to the property sector in Indonesia still show a moderate growth.

Awareness toward the Property Bubble is necessary, but some indicators related to the property sector in Indonesia still show a solid fundamental: 1. Indonesias economic fundamentals are strong and demand for property is very real and still dominated by the end users. Based on a survey conducted by the property consultant, Cushman & Wakefield, approximately 77% of buyers of residential property is the end users.
Types of Housing Buyers in Jabodetabek (%)

25%

21%

25%

22%

23%

75%

79%

75%

78%

77%

Jakarta

Tangerang

Bekasi
End-Users

Bogor-Depok
Investors

Jabodetabek

Figure 23. Percentage of Housing Buyers in Jabodetabek. Residential property buyers in Jabodetabek are mostly dominated by end users or amounting to 77% of total housing buyers. (Source: Cushman & Wakefield) Office of Chief Economist Page 31 of 40

2. Indonesia is still in insufficient supply of housing and infrastructure so that the property market is still very large. According to the BPS (Badan Pusat Statistik), needs of housing nowadays is approximately 13.6 million units or there is still a backlog or lack of availability of at least 7.1 million houses. 3. Residential property prices such as housing and apartments experience fair increases considering house is a basic need for the people. The increase that occurred all this times is partly because of market demand and rising prices of building materials. Meanwhile, the increase in industrial land and office space prices is, among others, also fueled by high demand and limited land. Prices of these property units both residential and commercial, which have now reached billions of Rupiah in urban areas, are also absorbed by the people, both to be occupied or to be used as an investment. This indicates the market is able to absorb them at that price.

Residential Property Price Index

Apartments Selling Price & Renting Developments (USD/sqm)

155 150 145 140 135 130 125 120 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12*

Smal l

Medi um

La rge

TOTAL

Figure 24. House and apartment price developments. House and apartment price developments start to rise. This is due to higher building material prices and increasing demand. (Source: BI, Cushman & Wakefield)

4. Indonesian property sectors contribution to Gross Domestic Product (GDP) is still relatively small. Thus, the sector still has a chance to develop. When compared to
Office of Chief Economist Page 32 of 40

Asia Pacific countries, the ratio of property loans to Indonesian GDP are among the lowest or only about 4.13% in 2011 compared to Australia, Malaysia, Thailand and Philippines, respectively which reached 80.17%, 31.61% ; 17.40% and 4.81%.

Property Credit to GDP Ratio (%)

Figure 25. The property sectors contribution to the economy is still relatively small. When compared to Asia Pacific countries, the ratio of property loans to Indonesian GDP are among the lowest or only about 4,13% in 2011. (Source: BI)

5. Property lending by banks are also relatively small at about 14% of total bank loans. This condition is different from the condition before the economic crisis of 1997/1998, whose share of property loans reached 20%. National banks today are quite selective in providing property loans in anticipation of non-performing loans as it did in 1997/1998 and 2008.

Office of Chief Economist

Page 33 of 40

Property Loan and Total Loan (IDR trillion)

2,500 14% 2,000 1,500 1,000 12% 11%

15%

15%

15% 14% 14%

148 1,002

194 1,308

214 1,438

242 1,766

0
2004 2005 2006 2007 2008 2009 2010 2011

Property Loan

Total Loan

Share

Figure 26. Developments of Property Loans and Total Loans. The number of property loans in 2011 reached IDR 301 trillion, equivalent to 14% of total loans in 2011 that reached IDR 2,200 trillion. (Source: BI)

6. Instrument of housing financing in Indonesia still relies on the primary market (Public Housing Loan), while the secondary mortgage such as Public Housing Loan securitization is still underdeveloped in Indonesia. The secondary sources of financing instruments and the derivatives (subprime mortgage) become the trigger of crisis bubble of 2008 in the United States. 7. The study results of DPNP (Directorate of Banking Research and Regulation) of Bank Indonesia in the First Quarter of 2011 using various methods (data aggregate method, affordability method and investment method) is commonly used in measuring the bubble state that in general we cannot conclude the occurrence of bubble in property prices in Indonesia.
The property market is assessed to be able to serve as a warning of the emergence of a crisis

The property market is assessed to be able to serve as a warning of the emergence of a crisis; thus, Bank Indonesia believes that it is necessary to maintain awareness in the sector, despite the relatively safe current growth. BI believes the condition of the property industry in the country is still in a safe position. Despite showing a moderate growth, awareness of the occurrence of the property bubble still needs to be done. Therefore, BI has taken preventive
Page 34 of 40

Office of Chief Economist

301 2,200

62 556

86 696

113 792

500

16.0% 15.0% 14.0% 13.0% 12.0% 11.0% 10.0% 9.0% 8.0% 7.0% 6.0% 5.0%

measures, one of which is the Circular of Bank Indonesia No.14/10/DPNP dated March 15, 2012 on the Application of Risk Management on Banks Conducting Public Housing Loans (KPR) and Motor Vehicle Loans (KKB), which regulates the ratio of credit to the value of financed item or Loan to Value (LTV) for housing loans of up to 70%. This regulation applies to property with building area of more than 70 m2, including vertical and landed residential. Its implementation began on March 15, 2012 with a socialization period for three months to June 15, 2012. The impact of this regulation will affect the upper to middle classes in the short term. Sales for these classes will likely be delayed because the purchaser must accumulate a larger down payment. However, in the long run this regulation can make a good fundamental factor for the property sector because it provides a good buffer for banks because they are protected by a higher value of collateral. Closing Remarks Given the recent development in property sector, it could not be concluded that the bubble occurs in the property sector in Indonesia. Some sub-sectors such as housing, industrial land, office spaces and strata title apartments show a robust growth. However, the growth is still considered reasonable because it is supported by strong demand. Nevertheless, awareness of the occurrence of the property bubble in the longer run should be taken into account. Therefore, BI has taken preventive measures, one of which is by passing a regulation on LTV of consumption loans (including housing loans), which intended to prevent a potential bubble in consumption loans by encouraging prudent banking practices.

Office of Chief Economist

Page 35 of 40

mandiri leading economic index (LEI)

April 2012
Mandiri LEI fluctuated in the range of 99.2 to 100.5 during the period of February 2011 to January 2012. Although the trend shows there will be a contraction of the economy until the second quarter of 2012 but the volatile MoM changes of the index depicts the monthly fluctuation of the economic activity. The preliminary change in January 2012 of 0.1% of the index is mainly driven by the robust growth of Indonesian stock market, while the other indicators are still in their sluggish path. The global economy keeps the pace with recovery even though many factors are still under their optimal level of development, for instance the concern of the sovereign debt crisis in Spain. Recently The IMF has increased the outlook of the 2012 global economic growth to 3.5% from the previous of 3.3% and the outlook of US economic growth to 2.1% from the previous of 1.8%. Meanwhile, the Indonesias economy has been estimated to grow 6.4% in 2012. The Indonesian stocks index has emerged above its psychological level of 4,000 in the first quarter of 2012 shows that the investors confidence is increasing. This confidence can be impetus for the Government of Indonesia to attract more investment into the country, not only portfolio investment but also capital investment. It is estimated in the first quarter of 2012 the Gross Capital Formation will increase 10%. Except for the stable BI-rate and low inflation rate in the first quarter, other economic indicators are not so happy to see. In February 2012 the trade surplus has declined USD 220 million because of the higher growth of import compared to export. In the fourth quarter of 2011, Indonesia has current account deficit of USD 0.94 billion, and capital & financial account deficit of USD 1.37 billion.

Office of Chief Economist

Page 36 of 40

2011 Apr M-LEI

Change (%MoM)

2012 Sep 100.1

0.2

May 100.2
(0.2)

Jun 100.3
0.0

Jul 100.2
(0.1)

Aug 99.9
(0.3)

Oct 99.5
(0.6)

Nov 99.8
0.3

Dec 99.2
(0.6)

Jan* 99.3
0.1

100.5
0.3

M-CEI
Change (%MoM)

100.2
(0.3)

100.3
0.1

99.9
(0.3)

100.2
0.2

98.2
(2.0)

100.5
2.4

101.2
0.6

101.0
(0.2)

100.9
(0.1)

101.8
0.9

note : *) preliminary Index > 100 indicates optimal economic growth Index < 100 indicates less optimal economic growth Changes in parentheses indicate negative numbers

LEI and CEI are composite indices for predicting the movement of GDP (Gross Domestic Product) so they can be useful as an early warning on the movement of Indonesian economy. LEI is used to predict the movement of GDP in the next 6 months, while CEI is used to predict the movement of GDP in the same month. LEI and CEI composite indices are formed from several indicators deemed important in studying the movement of Indonesian economy.

Office of Chief Economist

Page 37 of 40

MACRO ECONOMIC INDICATORS AND FORECAST 2009 2010 2011F National Account Real GDP (% yoy) Domestic Demand (% yoy) Real Consumption: Private (% yoy) Real Gross Fixed Capital Formation (% yoy) GDP (US$ bn) - nominal GDP per capita (US$) - nominal External Sector Exports (%yoy,US$) - Merchandise Imports (%yoy,US$) - Merchandise Trade Balance (US$ bn) Current Account (% of GDP) Current Account (US$ bn) External Debt (% of GDP) International Reserves (US$ bn) Import cover (months) Rp/US$ (period average) Rp/US$ (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 4.6 5.5 4.9 3.3 539 2,337 6.1 5.2 4.6 8.5 707 2,975 6.5 5.4 4.6 8.0 835 3,464

2012F 6.2 6.1 4.6 9.0 933 3,809

2013F 6.5 7.0 4.7 11.9 1,092 4,393

(15.0) (25.0) 35.2 1.9 10.7 32.1 66.1 8.1 10,409 9,470

32.2 42.0 31.1 0.9 6.3 27.5 96.2 8.5 9,086 8,963

29.2 31.2 37.7 0.3 2.9 25.6 110.1 7.6 8,841 9,091

9.9 12.1 37.7 (0.1) (0.7) 25.2 130.0 8.0 9,108 9,124

15.6 17.5 38.9 (0.4) (4.2) 23.7 150.2 8.0 8,949 8,931

6.9 6.5 2.8 4.3 (1.6) BBBB+

6.5 6.5 7.0 5.3 (0.6) BB BB+

6.6 6.0 3.8 5.1 (1.5) BB+ BBB-

6.0 6.0 5.5 4.7 (1.1) BBBBBB

5.5 5.5 5.0 5.1 (1.1) BBBBBB

Office of Chief Economist

Page 38 of 40

INDONESIA CURRENT DATA

Indicators Unit 2007 2008 2009 2010 Jul 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) Aug Sep 2011 Oct Nov Dec Jan 2012 Feb Mar

IDR/USD IDR/USD

9393 9354

10900 1167

9390 9462

8978 9021

8507 8533

8534 8541

8813 8791

8855 8886

9200 9040

9069 9059

8990 9071

9023 9020

9146 9157

IDRtn IDRtn IDRtn IDRtn IDRtn % p.a % p.a % p.a

379.58 450.06 1,649.66 995.11 1,459.44 13.00 7.42 4.50

344.69 456.79 1,883.85 1,313.87 1,673.82 15.22 11.97 9.40

402.12 515.82 2,141.38 1,446.81 1,914.11 13.69 6.85 6.24

518.45 605.38 2,469.40 1,783.60 2,208.72 12.83 7.06 5.72

555.01 639.69 2,564.56 1,995.84 2,288.67 12.55 6.88 5.82

625.44 662.81 2,621.35 2,054.08 2,296.18 12.50 6.90 5.88

565.15 656.10 2,643.33 2,100.81 2,363.63 12.39 7.05 5.31

566.28 665.00 2,677.79 2,128.72 2,396.28 12.36 7.11 5.05

568.78 667.61 2,728.74 2,169.61 2,450.33 12.31 6.99 4.55

613.49 733.99 2,877.22 2,223.69 2,596.33 12.16 6.81 4.55

594.08 696.32 285.49 218.34 2,540.24 12.09 6.68 4.02

578.96 683.25 284.97 222.77 2,567,362 12.02 6.52 3.75

586.03

3.75

Index % % % Index

155.5 6.59 1.1 N/A 217

113.86 11.06 -0.04 11.06 238.0

117.03 2.78 0.33 2.78 167.35

125.17 6.96 0.92 6.96 177.87

127.35 4.61 0.67 1.74 182.30

128.54 4.79 0.93 2.69 183.45

128.89 4.61 0.27 2.97 184.27

128.74 4.42 -0.12 2.85 184.64

129.18 4.15 0.34 3.20 184.94

129.91 3.79 0.57 3.79 185.76

130.9 3.65 0.76 0.76 187.11

130.96 3.56 0.05 0.81 187.77

131.05 3.97 0.07 0.11 188.54

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

USDbn USDbn USDbn USDbn USDbn USDbn USDbn

10.86 2.51 8.36 6.81 2.39 4.42 4.06

8.69 1.24 7.45 6.29 0.98 5.31 2.40

13.35 2.50 10.85 10.33 2.10 8.22 3.02

16.83 3.26 13.57 13.15 2.64 10.50 3.68

17.43 3.80 13.62 16.21 3.80 12.41 1.22

18.65 4.09 14.56 15.08 3.81 11.27 3.57

17.54 3.93 13.61 15.17 3.42 11.69 2.37

16.96 3.06 13.90 15.53 3.28 12.25 1.42

17.24 3.52 13.71 15.39 3.45 11.94 1.84

17.20 3.60 13.60 16.34 3.63 12.71 0.86

15.49 2.97 12.51 14.57 2.98 11.58 0.92

15.64 3.30 12.34 14.95 3.49 11.46 0.69

IDRtn IDRtn % YoY

1034.86 493.37 5.88

1274.29 518.94 5.20

1450.82 547.54 5.43

1670.52 585.10 6.89

1923.57 632.43 6.46

1921.56 623.96 6.49

Index shares mn IDRbn

2745.83 3155.65 4340.55 99.10

1355.41 1743.25 1454.61 90.60

2534.36 3422.10 2332.42 108.70

3703.51 3965.38 3959.30 109.30

4130.80 5336.18 4225.88 111.80

3841.73 6121.77 5623.02 110.60

3549.03 3886.25 4280.52 115.00

3790.85 4905.28 3885.67 116.20

3715.08 3098.96 2870.38 114.30

3821.99 3496.38 2684.29 116.60

3941.69 4045.49 3269.50 119.20

3985.21 3482.60 4161.39 111.70

4156.09 4315.66 3772.20 107.30

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

Page 39 of 40

Head Office
Plaza Mandiri Jl. Jend. 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

Overseas Offices
Hongkong Branch 7th Floor, Far East Finance Centre 16 Harcourt Road, Hongkong Tel: 852-2527-6611 Fax: 852-2529-8131

Zulkifli Zaini President Director & CEO Tel: (62-21) 3002 3067, Fax: (62-21) 526 3459 Riswinandi Deputy President Director Tel: (62-21) 3002 3028, Fax: (62-21) 526 3408 Abdul Rachman Director Institutional Banking Tel: (62-21) 3002 3839, Fax: (62-21) 526 3671 Sentot A. Sentausa Director Risk Management Tel: (62-21) 3002 3454, Fax: (62-21) 526 8213 Budi Gunadi Sadikin Director Micro & Retail Banking Tel: (62-21) 3002 3079, Fax: (62-21) 252 1585 Ogi Prastomiyono Director Compliance & Human Capital Tel: (62-21) 3002 3666, Fax: (62-21) 252 1585 Pahala N. Mansury Director Finance & Strategy Tel: (62-21) 3002 3089, Fax: (62-21) 526 8213 Fransisca N. Mok Director Corporate Banking Tel: (62-21) 3002 3847, Fax: (62-21) 252 1585 Sunarso Director Commercial & Business Banking Tel: (62-21) 3002 3087, Fax: (62-21) 252 1585 Kresno Sediarsi Director Technology & Operation Tel: (62-21) 524 3092, Fax: (62-21) 526 3617 Royke Tumilaar Director Treasury, FI & Special Asset Management Tel: (62-21) 3002 3057, Fax: (62-21) 5296 4053 Mansyur S. Nasution EVP Coordinator Consumer Finance Tel: (62-21) 3002 3075, Fax: (62-21) 5296 4116 Riyani T. Bondan EVP Coordinator Internal Audit Tel: (62-21) 3002 3722, Fax: (62-21) 5296 4116 Ventje Raharjo EVP Coordinator Change Management Office Tel: (62-21) 3002 3076, Fax: (62-21) 526 8213

Singapore Branch 3 Anson Road #12-01/02, Springleaf Tower Singapore 079909 Tel: 65-6213-5688 Fax: 65-6438-3363

Cayman Islands Branch rd Cardinal Plaza 3 Floor 30 Cardinal Avenue, PO Box 10198, Grand Cayman, KY1-1002, Cayman Islands Tel: 1-345-945-8891 Fax: 1-345-945-8892

Bank Mandiri (Europe) Limited, London nd Cardinal Court (2 Floor), 23 Thomas More Street London EIW IYY, United Kingdom Tel: 44-207-553-8688 Fax: 44-207-553-8699

Shanghai Representative Office 3401, Bank of China Tower 200 Yin Cheng (M) Road, Pudong New Area, Shanghai, 200120 Peoples Republic of China Tel: 86-21-5037-2509 Fax: 86-21-5037-2507

Dilli Branch Timor Leste Avenida Presidente Nicolao Lobato No.12, Colmera Dilli Timor Leste Tel: +670-331-7777 Fax: +670-331-7190/74444

Mandiri International Remittance Sdn.Bhd. Wisma Mepro, 29 & 31 Jalan Ipoh 51200 Kuala Lumpur, Malaysia Telp : +60-3-4045-988

Office of Chief Economist

Page 40 of 40