OJK-ADB, Nusa Dua, Bali

July 13, 2017

The Importance of Managing External Perception in

Minimizing Systemic RiskRizal B. Prasetijo

We know that…

2

ExternalFinancialMarket

InterestRate Shock

FX RateShock

Corporates BanksSystemic

Risk

We also know that managing…

3

• Macro fundamental• External balance• Fiscal balance• Sustainable debts

• Banking CAR• Corporate gearing• FX loans hedging

• Micro fundamental

ARE IMPORTANT

But…

4

• Realizing peers’/relative fundamental strength• Managing perception among foreign companies,

creditors, and portfolio investors

ARE EQUALLY IMPORTANT

Beware, calm water could drown you

5

Global volatility has droppedPt Pt

Source: J.P. Morgan.

US FOMC est. are challenged% %

Source: J.P. Morgan.

IDR volatility has also decreased…

6

Source: Bloomberg.

USD/IDR 3-mth realized and implied volatilitiesPt

0

5

10

15

20

25

30

1/10 1/11 1/12 1/13 1/14 1/15 1/16 1/17

3M Realized 3M Implied

…and is now of the lowest in EM

7

Source: Bloomberg.

USD/EM FX 3-mth realized volatilityPt

0.0

5.0

10.0

15.0

20.0

25.0

IDR

THB

MYR

SGD

PH

P

TWD

INR

KR

W

PK

R

PEN CLP

CO

P

MX

N

BR

L

ILS

HU

F

PLN TR

Y

RU

B

ZAR

NG

N

Our capital flow is dominated by portfolio flow…

8

Source: CEIC.

Average CA, 2014-2016% of GDP

Average FDI and portfolio flows, 2014-2016% of GDP

-6

-3

0

3

6

-8

-4

0

4

8

ID PK IN PH VN MY CO PE BR MX AR CL VE ZA EG TY PL NG SA RU HU IL

FDIPortfolio

Why do we have to watchour external balance?

… and because foreign ownership in ourtradable public debts is relatively high

9

Source: Deutsche Bank.

Foreign ownership in tradable public debts% of total tradable public debts

0

10

20

30

40

50

IN KR

TH

Asi

a ex ID MY

BR

Lata

m CO

MX PE IL

RO TR

EMEA HU

RU PL

ZA CZ

Our FX reserves-to-import coverageis relatively strong

10

Source: CEIC.

FX reserves-to-import coverage ratioMonth

0

5

10

15

20

25

30

35

MY KR ID PH IN TH TW MX CL AR CO PE BR HU TR ZA PL NG IL RU

FX reserves is one ofdefence tools

But our FX reserves-to-short term external liabilities is slightly below our peers…

11

Source: CEIC.

FX reserves-to-short term external liabilities ratio%

0

300

600

900

1,200

1,500

1,800

2,100

MY ID IN TW PH KR TH AR CL MX CO BR PE TR ZA HU PL IL NG RU

…as well as our FX reserves againstIMF risk-weighted metrics

12

Source: CEIC, IMF* Reza Mogadham, Jonathan D. Ostry, Robert Sheehy, Assessing Reserve Adequacy, (IMF, 2011).

FX reserves against IMF risk-weighted metrics*Pt

0

100

200

300

400

500

600

700

800

900

MY ID IN TW PH KR TH AR MX CL CO BR PE TR ZA HU PL IL NG RU

Our large corporate gearing ratio is relatively low

13

Source: J.P. Morgan.

Debt-to-equityX

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

TW KR ID MY PH IN TH PE CL CO MX BR EG HU UA PL ZA CZ TR QA RU

But our corporates relatively relyon foreign creditors

14

How did EMs raise their debts?Offshore loans to total loans (onshore + offshore loans) ratio

Source: CEIC.

0

25

50

75

100

-10.0 -5.0 0.0 5.0 10.0 15.0 20.0

CA to GDP, %

Offshore/(On-shore+Offshoreloans), %

CO

ZA

ID

MX

AR

BR

PE PL

CL

EG

VE

PK

INNG

VN

RU

KR

MY

THPH

SA

HU

TW

QA

IL

HK

TR

Good news is higher DSR can be usedto reduce reliance on external financing

15

Domestic saving ratioSum of 4Q, % of GDP

Source: CEIC.

20.0

25.0

30.0

35.0

3/94 3/96 3/98 3/00 3/02 3/04 3/06 3/08 3/10 3/12 3/14 3/16

How do we avoid systemic riskfrom external financial market?

16

ExternalFinancialMarket

InterestRate Shock

FX RateShock

Corporates BanksSystemic

Risk

1

1

2

3

4

41 Fundamental

Communication

2 Hedging3 Tax: Cap on deductible

interest charges4 Management

CAR

Rizal Bambang Prasetijo

17

Rizal Bambang Prasetijo is the chairman of Trimegah Securities, the parent company of Trimegah Assets Management, one of the largest local fund management houses. He is also one of Bank Indonesia Institute faculty members. Before joining Trimegah Securities in February 2015, he was one of the member of the Indonesian Deposits Insurance Corporation (IDIC) Board Commissioner as well as the chairman of the IDIC Information Committee and the Risk Management Committee, where he was responsible for building and overseeing the implementation of the IDIC’s banking industry Early Warning Signals (EWS), macroeconomic research, and IDIC’s Enterprise Risk Management (ERM). His term ended in November 2014.

Prior to his appointment by the President of Republic of Indonesia at IDIC in late 2012, Mr. Prasetijo spent 23 years in the investment banking industry. He has been working at Jardine Fleming, Chase Fleming, and J.P. Morgan Chase (JPM). Mr. Prasetijo was one of JPM Asia Pacific’s Managing Directors (MD), responsible for managing the JPM Indonesia equity business (2010-2012) and was JPM Indonesia’s Country Manager (2008-2010).

Prior becoming a MD at JPM, Mr. Prasetijo spent 18 years (1989-2008) of his professional career as an equity strategist and banking analyst, covering the Indonesian, Thai, and Philippines markets. He was consistently named as one of top five best Indonesian equity analysts as well as voted as the number one Indonesian equity analyst several times by the Institutional Investor survey for 15 consecutive years during the 1993 to 2008 period.

Before turning himself as a sell side analyst, Mr. Prasetijo taught business mathematic and statistic at his almamater, the Faculty of Economy of University of Indonesia, where he obtained his undergraduate degree.

Mr. Prasetijo is also one of the founders of Karya Salemba Empat (www.karyasalemba4.org), a non-profit organization providing scholarship to the needy in a number of leading state universities. Since its humble inception in 1995, the foundation has provided scholarship to almost 13,000 university students, mainly from poor families. In his leisure time, Mr. Prasetijo is an audiophilist, cyclist, golfer, swimmer, and long distance runner. He has completed four out of six World Major Marathons and an Olympic distance triathlon race.