Discussion Material for Russian Economic Challenge Moscow, 22 nd March 2017 Budi Hikmat Chief Economist & Diretor for Investor Relation PT Bahana TCW Investment Management Withstanding The Resource Curse The Case of Indonesia: A Fund Manager’s view
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Discussion Material for
Russian Economic Challenge
Moscow, 22nd March 2017
Budi Hikmat Chief Economist & Diretor for Investor Relation
PT Bahana TCW Investment Management
Withstanding The Resource Curse The Case of Indonesia: A Fund Manager’s view
Fund Manager’s Macro Map
2
Trump POTUS45 Fed hawkish Stimulus ECB, BoJ & BoE China economic stabilization
Aging society, global warming, de-leveraging, wealth inequality, multi-polar cold war
Rate still lower, disruptive innovation, currency wars, end of commodity super-cycle
External Global & Regional Dynamics
Domestic Economic
Challenges & Policy
Responses
Populist Politics & Resource Curse: The Risk of Middle-Income Trap 2030
Fiscal reforms: Subsidy system & Supply-side Revolution Prudence monetary policies
Tax amnesty: Revenue Reforms
Macro-prudential
Financial deepening
Impact, Outlook & Strategic Guideline
Current account deficit
Oil
Trade balance
Tourism, Re-industrialization
Brexit
Abated IDR exchange rate pressure encourages capital inflows
Liquidity-riven rally (LSIEV)
Equity
Bond
From stability to growth
Legal & Admin
Withstanding Resource Curse…
3
Indonesia Experience With Commodity Boom Oil Bonanza 1974-1979 Asia Financial Crisis, 1998 Comdty Boom 2000-2012
Strong centralized leadership
Political Change, Reformasi
Poor macroeconomic management • Fixed exchange rate system • Weak monitoring and supervision
on banking system • Under-developed financial market • Weak tax collection & poor debt
management system --
Initial social cost to recapitalize banking system Rp400tn, weaken fiscal stimulus to achieve inclusive growth
Direct election, fragmanted coalition, desentralization, populist
Productive & inclusive spending: Basic education, family planning, rural infrastructure, iriigation, fertilizer plant, electricity generation, transmigration, satellite communication
Consumptive & exclusive spending: Fuel subsidy, car, petro-chemical, gadget, travelling abroad. Widening inequality among regions
• Faster growth with less inequality • Current account surplus
• Slow growth with worsening inequality
• Current account deficit
4
Gini ratio
GDP growth
Overwhelming Challenge Ahead
• In the last 10 years, Indonesian economy becoming less: productive, competitive, efficient and equally distributed
• The risk of growing old before growing rich in 2030 • Solution:
– Faster & sustainable growth with better equality – Transforming from saving to investing society
5
Rich country: GDP/capita > $12K
Indonesia 2045
More Productive & Inclusive Spending
6
Education
Infrastructure
Health
Energy Subsidy
Commitment for Reforms IDR, tn
2017: Deficit 2,41% GDP
The Dark Side of Populist Politics
7
Indonesia no longer OPEC member since 2004
Tax Amnesty Program
8
Tax ratio, % GDP
Target tax collection 2017 Rp1.496tn (tax ratio 11%)
Source: IMF 2015
Entering Era of Strong Dollar
9
Index $ Global
Index Commodity
Krismon Asia
Krisis utang AS
Krisis utang Eropa
Krisis utang Negara
Berkembang
Strong DXY, Despite Excessively Created…
10
V = GDP nominal / M2
DXY
Asian Crisis
Mothers of All Disruptive Innovation
11
BoJ too aggressive
ECB Fed
BoJ
Invasion of fiat money makes rate lower for longer
Fed’s excess reserve $2tn
Central Bank Commercial Banks Investment Banks/Shadow Banking
Central Bank Commercial Banks Invest Banks
Pre
Post
Strong DXY
Lower Oil Price on Bigger Supply
12
IDR: Friendly Internal Drivers
13
Bahana Fear Index
OilDef
USD
IDR
Inspiration From the Past…
14
Opportunity to Promote Lifecycle Investment
Genesis 41 and QS 12:47 Economist (Typical IMF-World Bank policy recommendation)
Fund Manager
You will cultivate consequtively for seven years Structural policy Productivity (Y) Growth Equity
Leave in the ears all you have harvested Buffer stock & Preservation Protection Gov bond
Expect the little out of which you may eat Demand management (A) Distribution Structured product
15
Invest Harvest
Aggresive Moderate Conservative
Pension Pass away Start
Labor income Non Labor income
Supply (Y+M) = Demand (C+I+G+X) Y = C + I + G + (X-M) (X-M) = (Y-A) Current account deficit = excess domestic demand 1. Demand management (A) 2. Structural policy (Y) 3. Exchange rate policy (Ex Japan) 4. External financing
Revising Overlapping Generation Model (Paul Samuelson, 1958)
Lesson To Learn
• Strong leadership to achieve national’s vision inclusively
• Fiscal policy as the anchor of policy credibility to avoid crisis – Reforms: Expenditure, revenue, future liability
– Tax reforms: Simple, equitable, regionally competitive
• Financial reforms to withstanding external transmission, including invasion of fiat money – Macro prudential, financial deepening
– Foreign debt: Monitoring and its productivity
• The role of capital market to secure good policy
• Support globalization, widening market space
• Promoting investment society to anticipate middle-income trap
16
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