Financing_in_Indonesia.HSBC

Doing Business in Indonesia â&#x20AC;&#x201C; Opportunities and Outlook Nick Gandolfo

Pritya Pravina

SVP Leading International Business HSBC Indonesia â&#x20AC;&#x201C; October 2012

Relationship Manager PUBLIC Banking Commercial

Agenda  Indonesia Overview  Why Indonesia?  Economic Fundamentals & Outlook  Competitiveness and Comparisons  Singapore – Indonesia: Trade & Investment  Opportunities: Hot Sectors

 Market Entry & Considerations  Key Banking Considerations

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Indonesia Overview  Largest archipelago in the world (17k+ islands)

 4th largest population in the world (240m), 50% < 30 yrs  33 Provinces with 3 times zones  Large GDP rapidly approaching USD 1trl  Java has 55% of Economy, 60% of the population (Concentrated)  Largest economy in ASEAN (No. 19 globally), G20 Member  60% of GDP from domestic consumption  Resilient economy – grew 4.5% in 2009 (through the crisis)  3rd largest democracy in the world

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Master Economic Plan - Indonesia Overview

Source: BAPPENAS

 Huge economy and population concentration in Java

 Push to be top ten Economy Globally  USD 460bln investment needed  Blueprint for economic growth and focus  Increase value added, improve efficiency and then move to more knowledge based economy PUBLIC

Why Indonesia? – Too Big to Ignore AT Kearny – FDI Confidence Index 2012

 Overlooked potential: large progress & stability  Large Population - “Demographic Dividend”  Abundant Resources; Largest Palm Oil & Coal

 Growing Middle Class (110m – doubled last 10 yrs)  Strategic Location for Shipping/Trade  Large Domestic Market  Competitive labor costs  Resilient economy – 50% of ASEAN GDP  5th largest emerging market in the world

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Rating 窶的nvestment Grade

Source: Bank Indonesia

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Economic Fundamentals

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Indonesia GDP: Rates and Composition GDP Growth Rate

 Urbanization, rising incomes, and demographics

 4.6% growth through GFC, avg. > 5% last 10 years Economy Structure  Favorable policy settings: fiscal and monetary

 Manufacturing and trade important

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Source: Bank Indonesia

Indonesia GDP: Contribution to GDP Growth Contributions to growth Contributions to y-o-y YOY Growth

 Growth still strong in

10 8

6.4%

 Consumption & Investment key

%-pt to GDP y-o-y

Q1 & Q2, 6.3% and

6 4 2 0 -2 -4 Mar-10

Sep-10

Pte cons Net expts

Govt cons Stat disc

 Net exports relatively

Sep-11 Investm GDP y-o-y

GDP By Component

low contributor

 GDP by component stable, investments growing

Source: HSBC,CEIC

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Mar-11

Mar-12 Chg in stks

Source: HSBC, CEIC

Indonesia GDP: Industry Growth and HSBC PMI GDP breakdown by by industry GDP Breakdown Industry

 Manufacturing and

key sectors

 HSBC PMI Index (July 2012) –

%-pt contrib to GDP y-o-y

Trade & Hospitality are

7 6 5 4 3 2 1 0 Mar-10

Jun-10

Agric Trade & hospitality

Sep-10 Mining Trspt & comm

Dec-10

Mar-11 Manuf Fin & biz svcs

Jun-11

Sep-11

Utilities Other svcs

Dec-11

Mar-12

Jun-12

Constr GDP y-o-y

Source: HSBC, CEIC

Manufacturing

HSBC PMI Index

activity is expanding

 Local orders expand – export orders decline

Source: HSBC,CEIC

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GDP Per Capita & Demographics  Reached USD3.4k (f)

GDP Per Capita USD „000

in 2011 and growing fast  Resilient growth expected with demographic changes

 50% of the population

Dependency Ratio

< 30 years old – “demographic dividend”  4th largest population globally - rapidly growing Middle Class

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Inflation & Interest Rates Inflation

 YOY contained – MOM

less so = expectations elevated  Still remains a risk on the upside Source: Bank Indonesia

 Accommodative

Bank Indonesia Rate

monetary policy, growth, IDR, fuel subsidies

 Interest Rates at historic lows – normalize in 2013

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IDR: Currency Rupiah Exchange Rate

 Short –Term Outlook

for IDR is still challenging (trade deficit)

 Movements influenced by outward capital flows and volatility

Source: Bank Indonesia

Recent Weakening Rupiah  Still expected to strengthen with strong domestic conditions in the Longer Term Source: HSBC, CEIC

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Trade Performance and Flows Trade Patterns – Reflect global Weakness  Export growth slowing

 Import growth remains strong (buoyant conditions)

Source: HSBC, CEIC

Imports - by Country  Trade flows are Asia Pacific heavy

 US & Europe relatively low trade flows

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Exports – by Country

Trade Forecast  Indonesian total trade to rise 171% by 2026  Trade activity forecast to increase by 6.9% annually over this period Source: HSBC Global Connection

 Japan, China, the US

and Singapore are the key trading partners  Machinery and

2012-16

2012-21

2012-26

2017-21

2022-26

CAGR World

3.7%

4.8%

4.7%

5.9%

4.3%

CAGR Indonesia

8.5%

8.1%

6.9%

7.7%

4.5%

Source: HSBC Global Connection

commodities lead

exports

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Balance of Payments Widening Current Account Deficit

Widening current account deficit

 CAD expects to persist

10,000 8,000

in short term with

6,000

reducing trade balance

USD mn

4,000 2,000 0 -2,000

 Large services payments balanced by FDI and portfolio flows

-4,000 -6,000 -8,000 Mar-08

Dec-08

Trade acct

Sep-09

Income acct

Jun-10

Dec-11

Current acct

Source: CEIC, HSBC

Balance of Payments  Still low % of GDP,

however, creates pressure on IDR

 Net exports are a low

% contribution to GDP Source: Bank Indonesia

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Mar-11

Transfers

Potential Impacts: USA & Europe

Low Exports to GDP and Low Net Exports

Low Debt to GDP and Fiscal Flexibility

Domestic Focused Economy

Consumption Powered Economy and Growing Middle Class (Demographics) Diversified Export Markets*

Indonesia

FDI Momentum & Confidence

Solid Banking Sector

Low Household and Corp Leverage

Nature of Exports**

* < 15% of exports go to the US + Europe ** > 50% of exports are commodities PUBLIC

Potential Impact: Trade World Bank – Growth Scenarios Source: World Bank

 Low % Exports to GDP versus peers

 Low % of exports to GDP

 Diversified trade Exports/GDP – Exposure to European Banks

partners

150%

70%

 Relatively low exposure

to European banks

10 5 CH

Source: CEIC, BIS, HSBC

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ID Exports (% GDP)

European Bank Foreign Claims (% GDP)

Outlook: Key Forecasts Macro Economic Key Indicators and Forecasts

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Competitiveness and Comparisons

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Indonesia vs BRIC Comparison Factor

Indonesia

Brazil

Russia

India

China

Population (m)

240

196

142

1,102

1,300

GDP (USD)

846bln

2.45trl

1.47trl

1.8trl

7.23trl

Per Capital GDP

3.4k

12.7k

13.4k

1.46k

5.4k

GDP Growth 2012 (forecast)

6.1%

2.5%

3.0%

6.2%

8.4%

World Competitive 2012 (WEF)

Doing Business Rank 2011 (IFC)

129

126

120

132

Source: HSBC, World Bank, IMB, CIa Factbook

 Large population, rapid growing GDP per capita, solid competitiveness rankings  Indonesia included in N11, Global Growth Generator, and CIVITS classifications  Indonesia sits relatively well with the BRICs

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World Economic Forum Competitiveness Score World Competitiveness Ranking Scores

Source: World Economic Forum

 Indonesia compares well also to many other emerging markets  Compares well to some regional peers  Key positive area; size of economy, business sophistication and macro environment

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Singapore â&#x20AC;&#x201C; Indonesia: Trade & Investment Opportunities

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Singapore & Indonesia Trade Flow DESCRIPTION Total trade

2007

2008

2009

2010

2011

Trend%) 2007-2011

Jan-Jul 2011

2012

Changes%) 2012/2011

20.341.412,1 34.651.531,5 25.813.063,4 33.964.096,3 44.408.559,4

16,67

25.407.081,9 25.297.120,2

-0,43

7.442.699,2

14.357.256,3 22.746.763,9

25,85

12.669.256,0 13.047.647,7

2,99

12.898.712,9 21.200.153,3 17.184.158,3 19.606.840,0 21.661.795,5

10,06

12.737.825,8 12.249.472,6

-3,83

10.501.617,3 12.862.045,2 10.262.665,1 13.723.265,6 18.443.891,1

12,65

10.334.228,5 9.732.266,8

-5,82

Oil & gas

1.511.244,1

2.757.476,6

2.315.102,5

4.169.693,5

7.330.455,9

42,93

3.722.961,1

3.857.539,2

3,61

Non oil & gas

8.990.373,2

10.104.568,6

7.947.562,6

9.553.572,1

11.113.435,2

3,75

6.611.267,4

5.874.727,6

-11,14

9.839.794,8

21.789.486,3 15.550.398,3 20.240.830,7 25.964.668,3

20,53

15.072.853,4 15.564.853,4

3,26

Oil & gas

5.931.455,1

10.693.901,6

6.313.802,6

10.187.562,8 15.416.308,0

20,46

8.946.294,9

9.190.108,4

2,73

Non oil & gas

3.908.339,7

11.095.584,7

9.236.595,7

10.053.267,9 10.548.360,4

20,77

6.126.558,4

6.374.744,9

4,05

Balance of trade

661.822,4

-8.927.441,2

-5.287.733,2

-6.517.565,1

-7.520.777,2

0,00

-4.738.624,9 -5.832.586,5

23,09

-4.420.211,0

-7.936.425,0

-3.998.700,1

-6.017.869,3

-8.085.852,0

0,00

-5.223.333,8 -5.332.569,2

2,09

5.082.033,4

-991.016,2

-1.289.033,0

-499.695,8

565.074,8

0,00

Oil & gas Non oil & gas Export

Import

Oil & gas Non oil & gas

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13.451.378,2

8.628.905,0

484.709,0

-500.017,3

-203,16

Singapore & Indonesia Trade Flow by Product Product

Indonesiaâ&#x20AC;&#x;s imports from Singapore Value in 2009

Value in 2010

Value in 2011

All products

15,550,398

20,240,831

25,964,666

Mineral fuels, oils, distillation products, etc

6,328,152

10,205,403

15,442,276

Electrical, electronic equipment

1,949,418

2,465,100

2,512,726

Machinery, nuclear reactors, boilers, etc

1,967,508

1,830,172

1,771,384

Plastics and articles thereof

593,360

865,551

1,095,115

Organic chemicals

627,024

998,338

1,076,374 Source: International Trade Centre

Product

Indonesiaâ&#x20AC;&#x;s exports to Singapore Value in 2009

Value in 2010

Value in 2011

All products

10,262,665

13,723,266

18,443,890

Mineral fuels, oils, distillation products, etc

2,365,556

4,194,732

7,335,579

Electrical, electronic equipment

1,473,992

2,219,593

2,545,163

Tin and articles thereof

1,004,837

1,122,809

1,535,622

Machinery, nuclear reactors, boilers, etc

1,356,074

1,300,673

1,394,160

462,017

347,971

824,396

Pearls, precious stones, metals, coins, etc

Source: International Trade Centre

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FDI Trends (2011) FDI by Country

FDI by Sector

FDI by Location

Source: BKPM

 Singapore continues to dominate  More than 50% of FDI is now outside Java  Similar sectors remain consistently hot  Automotive, plantation, food & beverage as key emerging sectors PUBLIC

Singapore FDI to Indonesia Realized FDI (USD Billions)

Singapore FDI to Indonesia USD'Bln 6.0 5.0 4.0 3.0 2.0 1.0 0.0

A ust r a l i a FD I t o I ndone si a U SD 'm 250

200

150

100

0 2006

2007

2008

2009

2010

2006

2007

Source: Bank Indonesia

2008

2009

2010

2011

Source: BKPM

►

FDI in Indonesia increased by 18.4% to USD 19.28 bln in 2011

►

FDI figure is expected to rise even further following Indonesia’s upgrade to investment grade

►

Singapore is the biggest source of FDI, investing USD 5.1 bln (26.3%), followed by Japanese investors (USD 1.5 bln)

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Q1 2012

Sectors: Key Opportunities

Commodities

Plastics

Engineering

Machinery

Chemicals

Infrastructure

Electronics

Pharmaceutical

Logistics

Retail

Medical

Transport

Education  Chemicals, machinery and logistics/transportation  Trading, Manufacturing & Services  Developing opportunities in many sectors  Not just Jakarta or Java focused PUBLIC

Singapore BATAM Connection

Market Entry & Considerations

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Market Entry Options Foreign Investor

Source: PWC

Subsidiary (“PMA Company”)

Branch Office

Representative Office

Considerations  Operations/activities/business

COMMERCIAL ACTIVITIES (Direct trading/servicing to customer)

Indirect Presence (Agency/ Distributor)

   

Production Sharing Contract (“PSC”)

PMA Company Branch Office Agency (Sole/Non-Exclusive) Cooperation/Production Sharing

 Duration of presence  Time frame  Minimum Capitalization

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NON-COMMERCIAL ACTIVITIES (Market research, promotion, marketing, liaison, coordination, searching for business opportunities)

 Representative Office excluding Public Works Representative Office)

Market Entry Options Closed for investment Identify if NLI provides certain restrictions

Reserved only for domestic investor or small/medium company

Foreign investor cannot engage in the business

Stop

Yes Identify business classification code under KBLI

Identify whether the business classification code is mentioned in the Negative List

Require joint venture with local partner

Other Considerations

Theoretically, foreign investor can own 100% shareholding (seek confirmation from BKPM)

Foreign investor to establish an Indonesian Limited Liability Company and obtain the necessary licenses

 Must have min 2 directors Source: PWC

 Practicality of Local Partners  Commissioners (Independent directors)  Company set up 2-3 months  Rep office approx 2-3 weeks PUBLIC

Culture & Communication (Indonesia)

Cultural Values

Business Values

Strategies for Success

Hierarchical

Business is Personal

Focus on Accomplishment not Negative

Formal Style

Non-Confront

Group Oriented Relationship Focused

Indirect Fluid View of Time

Retain Face

Donâ&#x20AC;&#x;t Show Impatience or Lose Temper

Head of Co. Father

Build Consensus

Emotional Control

Focus on LT Relationship

Win-Win Collective

Source: HSBC, Culture Wizard LLC

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Build Trust before Negotiating

Challenges in Doing Business Factors for Doing Business

Stage of Development

Source: World Bank

 Dynamic Regulatory Environment (Overlapping regulations)  Skilled Labour – HR (Labour Laws)

 Infrastructure & Logistics Cost: Huge Country  Local Partners – Negative Investment List PUBLIC

Source: World Bank

Key Banking Considerations

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Key Banking Considerations



IDR not permitted offshore



Capital flows largely unregulated



Reporting requirements and documentation needed to support transactions



USD sales permitted onshore (developing IDR rules for onshore sales)



Export Sales proceeds must be remitted back to Indonesia (new rules)



Rupiah Volatility



Non resident accounts can be opened



Competitive banking market

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Key Banking Considerations: Lending & Funding



Minimum Capitalization (min now USD1.2m: 1 part equity 3 parts loans etc)



No formalized thin capitalization rules (shareholder loans common)



USD and IDR available (mach to business needs) – IDR only onshore



Cannot lend to a non-resident company



Most of the bank debt market is short term working capital



Onshore vs Offshore (cost/security/structure) considerations for funding



Bond market is growing but relatively small (15% of GDP)



Equity market – foreign companies can list (overall market cap small 50% of GDP)

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Disclaimer

 This document is issued by The Hongkong and Shanghai Banking Corporation Limited (HSBC). The information contained herein is derived from sources we believe to be reliable, but which we have not independently verified. HSBC makes no representation or warranty (express or implied) of any nature nor is any responsibility of any kind accepted with respect to the completeness or accuracy of any information, projection, representation or warranty (expressed or implied) in, or omission from, this document. No liability is accepted whatsoever for any direct, indirect or consequential loss arising from the use of or reliance on this document or any information contained herein by the recipient or any third party.  Any examples given are for the purposes of illustration only. The opinions in this document constitute our present judgement, which is subject to change without notice. This document does not constitute an offer or solicitation for, or advice that you should enter into, the purchase or sale of any security, commodity or other investment product or investment agreement, or any other contract, agreement or structure whatsoever and is intended for institutional, professional or sophisticated customers and is not intended for the use of private individual or retail customers. No consideration has been given to the particular investment objectives, financial situation or particular needs of any recipient. Recipients should not rely on this document in making any investment decision and should make their own independent appraisal of and investigations into the information and any investment, product or transaction described in this document. Unless governing law permits otherwise, you must contact a HSBC Group member in your home jurisdiction if you wish to use HSBC Group services in effecting a transaction in any investment mentioned in this document. This document, which is confidential and not for public circulation, must not be copied, transferred or the content disclosed, in whole or in part, to any third party. The document should be read in its entirety.  Copyright. The Hongkong and Shanghai Banking Corporation Limited 2010. ALL RIGHTS RESERVED. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, on any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the Hongkong and Shanghai Banking Corporation Limited.  References to HSBC Research are to opinions held by HSBC Global Research in previously published research reports and do not represent an endorsement by HSBC Global Research or any product or strategy referred to herein. HSBC Global Research is not under any duty to update any such opinions.  All the information set out in this presentation is provided on the best of the Bank's current knowledge and understanding of the relevant law, rules, regulations, directions and guidelines governing or otherwise applicable to RMB trade services but the Bank makes no guarantee, representation or warranty and accepts no liability as to its accuracy or completeness. Please refer to any updates that shall be published or issued by our Bank from time to time including notices that we place at our HSBC branches.  There may be exchange rate risks if you choose to convert RMB payments made on the securities to your home currency.  RMB is currently not freely convertible and is subject to certain conversion restrictions. Conversion of RMB is subject to a daily limit of RMB20,000 and time should be allowed if the conversion amount exceeds daily limit.  RMB products may suffer significant losses in liquidating the underlying investments if such investments do not have an active secondary market and their prices have large bid / offer spreads.  In general, RMB equity products are exposed to the usual kind of default risks that might be associated with equity products denominated in other currencies.

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