Financial Note 2010 English

8/8/2019 Financial Note 2010 English

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6.4 Fiscal Risk

6.4.1 Sensitivity Analysis

6.4.1.1 Macroeconomy Assumption Sensitivity

Macroeconomic indicators adopted in APBN preparation are economic growth, inflation rate,SBI 3-month interest rate, rupiah exchange rate, Indonesia Crude Oil Price (ICP), and lifting.These indicators are basic assumptions as reference in computing the sizes of revenue,expenditure and financing in APBN. Should the realization of such variables be differentfrom their assumptions, the sizes of revenue, expenditure, and financing in APBN must bechanged accordingly. Given that, uncertainty variations of macroeconomic indicators will berisk factors influential to APBN.

Table VI.1 shows the difference of initial estimates of macroeconomic assumptions used inAPBN preparation and their realization for 2006-2009. Such difference cause variation intarget deficit from its realization. If the realized deficit is higher than target deficit in APBN,this will be a fiscal risk, for which its financing source must be sought after.

TABLE VI.1

DISPARITY BETWEEN MACROECONOMIC ASSUMPTIONS AND REALIZATION*

Remarks 2006 2007 2008 2009**

Economic growth (%) -0,32 0,00 -0,20 -0,20

Inflation (%) -1,40 0,60 4,90 -1,50

Interest rate SBI 3 months (%) -0,30 0,00 1,80 0,00

Exchange rate (Rp/USD) -237,00 90,00 591,10 -500,00

ICP (USD/barel) -0,20 9,70 1,80 16,00

Oil production/lifting (million barel per day) -0,04 -0,05 0,00 0,00

* Positive number means realization is higher than budget assumption. For exchange rate, positivenumber means depreciation.

** Constitutes disparity between APBN 2009, Stimulus Document and APBN-P 2009.

Source: Ministry of Finance

Fiscal risk from variation in macroeconomic assumptions can be illustrated in partialsensitivity analysis against baseline APBN deficit. Partial sensitivity analysis is used to assessthe impact of change in a macroeconomic assumption variable under assumption that theother macroeconomic assumption variables remain unchanged (ceteris paribus).

Economic growth will affect the sizes of APBN either in terms of revenue or expenditure.From state revenue wise, economic growth is influential to tax revenue, particularly IncomeTax (PPh) and Value added Tax (PPN). On public expenditure side, economic growth willhave influence over balance fund in Transfer to Region as the result of changing tax revenue.In 2010, if the economic growth is less than 1 percent of its assumption, additional deficit inAPBN 2010 will be predicted at Rp4.1 trillion to Rp4.5 trillion range.

Rupiah exchange rate depreciation to US dollar will exert influence to all sides of APBN,either revenue, expenditure or financing. In state revenue wise, rupiah exchange ratedepreciation will affect revenue from oil and gas in USD denomination and PPh oil and gasand PPN. As to public expenditure, this depreciation will have influence over: (1)expenditure in foreign currencies, (2) foreign loan amortization, (3) fuel and electricitysubsidy, and (4) transfer to regions consisting of revenue sharing from oil and gas. Infinancing side, the depreciated rupiah will bring about impacts to: (1) foreign loans, eitherproject loan or program loan, (2) amortization, and (3) privatization procceds and asset


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recovery in foreign currency. In 2010, if rupiah exchange rate is depreciated Rp100 perannum on the average from its assumption, additional deficit in APBN 2010 is predicted atRp0.38 trillion to Rp0.42 trillion range.

Interest rate used in APBN assumption is that of SBI 3-month rate. The changing SBI 3-month rate will exert influence on expenditure side only. In this case, the increase in SBI 3-

month interest rate will rise the payment of domestic loan interests. In 2010, if SBI 3-monthrate is 0.25 percent higher than its assumption, additional deficit in APBN 2010 is predictedat Rp0.3 trillion to Rp0.5 trillion.

Indonesia Crude Oil Price (ICP) will influence APBN on both state revenue and expenditure.In state revenue wise, higher ICP will increase revenue from Production Sharing Contracts inoil and gas sectors consisting of Non Tax (PNBP). It will also augment PPh revenue from oiland gas and other oil and gas revenue. From public expenditure side, higher ICP will raiseexpenditure of fuel subsidy and transfer to region allocation. In 2010, if ICP is to rise byUSD 1 per barrel higher than its assumption, additional deficit budget in APBN 2010 ispredicted at Rp0.0 trillion to Rp0.1 trillion range.

Lower domestic lifting will have influence over APBN in state revenue and expenditure side.

In the former, lower lifting will decrease PPh oil and gas and PNBP. As to the latter, decreasein domestic lifting will cut transfer to region allocation. In 2010, if domestic lifting is 10,000barrel per day lower than its assumption, additional deficit in APBN 2010 is predicted atRp3.0 trillion to Rp3.34 trillion range.

Another variable influential to APBN deficit is the volume of domestic fuel consumption.Increase in domestic fuel consumption by 0.5 million kiloliter will be potential to rise APBN2010 deficit at Rp1.33 trillion to Rp1.46 trillion.

Based on the above sensitivity, the fiscal risk of additional deficit arising from theassumptions of macroeconomic variables in APBN 2010 preparation can be seen in TableVI.2.

TABLE VI.2

MACROECONOMIC SENSITIVITY TO APBN 2010

No. RemarksAssumption

Change Unit

2010*

Assump-

tion

Deficit addition

possibility

(trillion Rp)

1 Economic growth (%) - 1 5,5 4,5 s.d. 4,1

2 Inflation (%) + 0,1 5,0 Indirect

3 Interest rate SBI 3 months (%) + 100 10.000 0,38 s.d. 0,42

4 Exchange rate (Rp/USD) + 0,25 6,5 0,3 s.d o,5

5 ICP (USD/barel) + 1 65 0,0 s.d. 0,1

6Oil production/lifting (millionbarel per day)

- 10 965 3,00 s.d. 3,34

7 Domestic fuel oil consumption

(million kiloliter)+ 0,5 36,5 1,33 s.d. 1,46

*Deficit on APBN 2010 is Rp98,0 trillion.

Source: Ministry of Finance.

6.4.1.2 Macroeconomic Variable Sensitivity to SOE Fiscal Risk

SOEs provide contributions to APBN, either directly or indirectly. Direct SOE contribution isstate revenue from tax, dividend payment and privatization proceeds, and public

expenditure of Public Service Obligation (PSO)/subsidy compensation. For indirectcontribution, it consists of multiplier effect to national economic development. Direct SOE


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contribution from 2004 through 2009 indicates significant amounts as presented in GraphVI.1.

Variation in oil price, exchange rate, economic growth, and interest rate can affect thefinancial performance of SOEs that ultimately can influence their contribution to APBN. Thislower contribution is part of fiscal risk from SOEs. To identify the impacts of changingmacroeconomic variables to SOE fiscal risk, the Government will conduct sensitivity test ormacro stress test to SOE fiscal risk using several fiscal risk indicators, namely: (1) net SOEcontribution to APBN, (2) net SOE loans, and (3) cross-cut risk illustration enabling to take

early and anticipative measures against such phenomenon.

Macro stress test simulation for this year will be carried out for 22 SOEs, as furtherdevelopment of last years macro stress test covering 7 SOEs with criteria (1) the largestprofit making SOEs, (2) the largest loss making SOEs, (3) the largest PSO/subsidybeneficiaries SOE, and (4) SOEs representing sectors in Indonesia economy. The selection ofthese 22 SOEs from previously 7 SOEs is expected to more reflect the increased SOEs, i.e.139 SOEs in total. The test is made in partial and aggregate manner based on the financialperformace of 22 SOEs for the last four years (2005 2008) and their financial projectionsfor the next four years (2009 to 2014).

Macro stress SOE fiscal risk model presents two major results, i.e. scenario analysis andstress test output. Analysis scenario illustrates the uncertainty of fiscal risk indicator of

individual SOE or the aggragation. Meanwhile, the ouput of stress test presents relativevariation to SOE fiscal risk indicators in the event of upheaval or risk factor pressure.

Scenario analysis is prepared into three scenarios, i.e. baseline, optimistic and pessimistic.Baseline scenario illustrates macroeconomic conditions according to APBN assumptions,such as economic growth in 2010 set at 5.5 percent, ICP USD65 per barrel and rupiahexchange rate to US dollar Rp10,000/USD. In this scenario, net SOEs contribution to APBN2010 shows negative Rp34.7 trillion.

In optimistic scenario, the macroeconomic variables are assumed at optimum position thatwill be highly likely to reach, i.e. economic growth for 2010 set at 5.8 percent, relatively ICPat USD43 per barrel, and rupiah exchange rate to US dollar assumed at Rp9,000/USD.Under this conducive macroeconomic conditions, fiscal risk pressure to SOEs will lessen

marked with net contribution from SOEs APBN recording positive Rp51.9 trillion.

0

50

100

150

200

250

2004 2005 2006 2007 2008 APBN P2009

GRAPH VI.1SOEs CONTRIBUTION TO APBN

(trillion rupiah)

Tax Dividend Privatization PSO

Sumber: Ministry of SOEs, processed.


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Pessimistic scenario shows macroeconomy at the worst condition that may take place, suchas for 2010, the economic growth is set lowly 4.2 percent, high ICP USD90 per barrel andexceeding rupiah depreciation to US dollar Rp12,000 per USD. This condition will exertpressure to APBN expenditure, i.e. the increase in PSO/subsidy paid by the Government viaSOEs. In addition, SOE operational production cost will upsurge that reduce SOEcontribution to APBN in tax revenue and dividend payment. Fiscl risk will also emerge fromthe increasingly net SOE loans since the majority of operational costs and SOE loancomposition is in foreign currency.

The results of SOE fiscal risk analysis in aggregate are presented in Graph VI.2 and TableVI.3.

GRAPH VI.2

FISCAL RISK SCENARIO ANALYSIS OF AGGREGATED SOEs

(trillion rupiah)

Net Contribution to APBN Net debt value of SOEs

Gross financing need

(300)

(250)

(200)

(150)

(100)

(50)

-

50100

2009 2010 2011 2012

Baseline Optimis Pesimis

-

200

400

600

800

1.0001.200

2009 2010 2011 2012


-50

100

150

200

250

300

2009 2010 2011 2012



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TABLE VI.3

NET CONTRIBUTIONS OF SOEs TO APBN

(billion rupiah)

No. DescriptionsBaseline Scenario

2009 2010 2011 2012

1 Tax Paid 79,535 86,593 89,041 79,467

Income Tax 24,282 30,907 35,338 24,388

Value Added Tax 50,121 51,418 48,969 50,060

Royalties/duties 3,851 2,820 3,217 3,660

Other Tax 1,280 1,448 1,517 1,360

2 Subsidies Paid 97,651 148,521 170,227 223,783

3Dividend to Government

(Cash)21,711 26,481 30,776 20,343

4Nonsubsidies transfer from

Government439 465 492 521

5 Interest on Loan fromGovernment

7 1 - -

Final Position (3,281) (1,212) 64 (782)

Stress test to several main macroeconomy variables agains aggregate SOE fiscal risk is madepartially, i.e. to see the impact of variation in a macroeconomic variable to SOE fiscal riskindicator under assumption that other macroeconomic variables remain unchanged (ceterisparibus). Under this method, macroeconomic variables with the most significant impacts toSOE fiscal risk can be identified.

Rupiah exchange rate depreciation against US dollar by 20 percent will generate verysignificant impact to the sizes of PSO/subsidy, operation performance and financial balance

sheets of SOEs in aggregate. This relatively high vulnerability is because formula forPSO/subsidy calculation uses foreign currency and enormous operational cost and loancomposition in foreign currency (for example loans by PT PLN in foreign currency reachedaround 70 percent of total loans). This can be seen from the increased value of net SOE loans by Rp34.0 trillion in 2010 and will further rise in the coming years. It implies that thecapacity of SOE current assets in covering total liabilities is to decrease. This condition maycause default by SOEs or incapable to comply with their debt service.

In addition, rupiah depreciation to US dollar will increase need of SOE gross financing thatin 2010 the net financing requirements of SOEs is to rise by Rp9.3 trillion enabling themtogrow. As the result, some SOE will get difficulties in looking for financing source withoutsupports from the Government. This impact to SOEs will in turn reduce their netcontribution to APBN as shown in 2010 with the lower SOE contribution to Rp44.5 trillion.

The increase of global oil price by USD25 per barrel will significantly upsurge productioncosts especially in SOEs engaged in energy, transport, and fertilizer sectors, and increase insubsidy from the Government, so that net contribution of SOEs to APBN will be morenegative. The stress test shows that net SOE contribution to APBN in 2010 will be futhernegative Rp81.0 trillion exerting heavier pressure to fiscal. This PSO/subsidy increase ismainly attributed to higher oil and electricity subsidy extended through PT Pertamina andPT PLN.

The decrease of economic growth by 1 percent and the increase of interest rate by 3 percentwill affect fiscal despite lighter impact than rupiah depreciation to US dollar and the soaringglobal oil price. Higher interest rate will increase cost that must be borne by the SOEs withimmediate consequence of lower net SOE contribution to APBN. The increased of interestrate in 2010 will make the net SOE contribution more negative by Rp3.03 trillion and it will


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continue in the coming years if the increase endures. The output of stress test to somemacroeconomic variables can be seen in Table VI.4.

TABLE VI.4

STRESS TEST OF CHANGES OF ECONOMIC GROWTH, EXCHANGE RATE,

OIL PRICE, AND INTEREST TOWARD SOE's FISCAL RISK

Stress test of depreciation of exchange rate ammounting 20 persen

(billion rupiah)

No. Shock VariablesImpact

2009 2010 2011 2012

1 Net contribution to APBN (43,638) (47,054) (44,450) (44,711)

2 Net debt value of SOEs 28,459 34,028 44,188 52,906

3 Gross financing need 5,517 9,322 9,417 9,500

4 Subsidy 49,057 53,822 52,614 55,190

Stress test of oil price increas USD25 per barrel

(billion rupiah)


2009 2010 2011 2012


2 Net debt value of SOEs 2,558 (591) (9,077) (9,522)

3 Gross financing need 3,083 (66) (1,189) 5834 Subsidy 114,205 93,972 94,265 95,248

Stress test of interest rate increases 3 percent

(billion rupiah)


2009 2010 2011 2012


2 Net debt value of SOEs 980 (11,842) 14,194 21,2713 Gross financing need 186 (9) 5,589 162

4 Subsidy 2,042 2,645 3,623 4,654


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Stress test of economic growth decreases 1 percent

(billion rupiah)


2009 2010 2011 2012

1 Net contribution to APBN 13,137 9,429 8,530 11,457

2 Net debt value of SOEs 2,628 3,589 (896) 810

3 Gross financing need 116 418 (717) 244

4 Subsidy (14,101) (10,138) (9,129) (12,144)

In connection with the above elaboration, the financial performance of some SOEs with highfiscal risk potential from PSO in energy sector is presented in Box VI.1 andVI.1. For SOEfiscal risk in respect of PMN, i.e. an SOE engaged in People Business Credit Program (KUR)it can be seen in Box VI.9.


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BOX VI. 1

PT PERTAMINA (PERSERO)

During 2006-2008 period, Pertamina booked increase in net income and the recorded adeclinining trend of return on asset ratio. However, its debt-capital ratio was also to rise, implying

that increase in assets was more from debt than equity. Pertamina is one of the largest tax anddividend contributor SOEs.

(trillion rupiah)

Descriptions 2006 2007 2008

Total Assets 206.1 254.2 294.4

Total Liabilities 81.8 133.7 144.2

Minority Liability 1.5 1.7 1.1

Total Equity 122.8 118.8 149.1

Net Income 19.02 19.51 30.20

Return on investment 9.23% 7.67% 10.26%

Debt to equity ratio 66.60% 112.60% 96.73%

Source: Ministry of SOEs, processed.

In the same period 2006-2008, there is no additional PMN for Pertamina. In 2009 there isadditional PMN, i.e. the swap of government receivables in amount of Rp9.1 trillion to governmentcapital.

Under PSO framework, Pertamina shall assume tasks from the Government to supply fuel forpeople. For such PSO, Pertamina receives subsidy from the Government in lieu of the differencefrom the selling price of PSO fuel.

(trillion rupiah) Year Subsidy Description

2006 64.2 LKPP 2006 (audited)

2007 83.8 LKPP 2007 (audited)

2008 139.1 Realization

2009 52.4 APBN-P

2010 68.7 APBN

Source: Ministry of Finance, processed.

Macro stress test to some macroeconomic variables to fuel subsidy in Pertamina indicates impacts

as follows.

(billion rupiah)Shock Variables 2009 2010 2011 2012

Exchange rate depreciation 20 % 32,465 33,350 32,850 32,323

Oil price increases USD25 per barrel 75,982 66,345 65,756 65,120

Interest rate increases 3 % - - - -

Economic growth 1 % - (502) (413) (410)



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BOX VI.2

PT PLN (PERSERO)

During 2006-2008 PLN booked the increasingly looses. The main contributing factor was the netloss in foreign currency exchange rate for its debt service. During such period, PLN loans were to

rise significantly.

(trillion rupiah)


Total Assets 247.9 273.48 290.72

Total Liabilities 108.1 137.07 163.73

Minority Liability - - -

Total Equity 139.8 136.41 126.99

Net Income (1.9) (5.65) (12.30)

Return on investment -0.78% -2.06% -4.23%

Debt to equity ratio 77.29% 100.48% 128.94%Source: Ministry of SOEs, processed.

The relatively high debt to equity ratio (128,94%) made the burdens to be shouldered by PLNheavier. PLN must take any initiative to reduce this loan burdens. In this respect, the largest risk isin relation with the financing for the development of 10,000 MW Power Plant Project, whicharound 80% will use foreign loans. Financing barrier will be more obvious if this project is notsupported with well-advanced loan disbursement.

(trillion rupiah)

Year Subsidy Remarks

2006 30,4 LKPP 2007 (audited)

2007 33,1 LKPP 2007 (audited)

2008 83,9 Realization

2009 47,5 APBN-P

2010 37,8 APBN


From 2006 2008, there is no PMN for PLN. This is also true in 2009, during which no additionalPMN is proposed by PLN. In PSO framework, PLN is tasked by the Government to supply electricalenergy with affordable rate. For such PSO, PLN receives subsidy from the Government in lieu of thedifference from selling price of PSO electricity.

Macro stress test to some macroeconomic variables of fuel subsidy in PLN shows the followingimpacts.

(billion rupiah)

Shock Variables 2009 2010 2011 2012

Exchange rate depreciation 20 % 15.955 16.731 18.831 21.984

Oil price increases USD25 per barrel 33.899 23.568 24.248 26.357

Interest rate increases 3 % 1.869 2.489 3.483 4.528

Economic growth 1 % (14.377) (10.862) (9.281) (12.436)



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BOKS VI.3

PT ASKRINDO DAN PERUM JAMKRINDO IN SMALL-HOLDERS BUSINESS

CREDITS (KUR) INSURANCE PROGRAM

Small-Holders Business Credits/Kredit Usaha Rakyat (KUR) Insurance Program is to follow upInpres No. 6 year 2007 concerning Real Sector Development Acceleration and UMKMK (MicroSmall Medium Cooperative Enterprises) Empowerment Policies. KUR credit is extended byexecuting banks secured by PT Askrindo and Perum Jamkrindo.

The realization of KUR insurance per 31 December 2008 is as follows.

Description PT AskrindoPerum

JamkrindoTotal

Principal (miliar Rp) 8,528.00 2,454.13 10,982.13

Gearing ratio 10.03 times 4.05 times 7.6 times

TotalUMKMK (unit) 1,140,404 168,017 1,308,421

Total labour 3,233,071 255,962 1,489,033

Total claim (billion rupiah) 2.21 1.92 4.13

Non performing guarantee 0.03 % 0.08 % 0.04 %

Fiscal stimulus Program 2009 provided additional Government Capital (PMN) to these two SOEs worth of Rp500 billion. The largest risk of KUR program is the potential increase in NonPerforming Guarantee (NPG) due to global financial crisis that will affect the performance ofinsurance company and reduce PMN placed in such two enterprises.

In general the financial performance of PT Askrindo is as follows.

(billion rupiah)


Total assets 907.2 1,793.3 1,962.3

Total liabilities 55.2 65.5 207.1

Total equity 852.0 1,727.9 1,755.3

Net Income 87.3 48.7 36.7

Return on equity 10.25% 2.82% 2.09%

Debt to equity ratio 6.48% 3.79% 11.80%

Source: PT Askrindo, processed.

As to financial performance of Perum Jamkrindo it is as follows:

(billion rupiah)


Total assets 442,0 1.126,0 1.267,2

Total liabilities 147,0 180,4 209,0

Total equity 295,0 945,6 1.058,2

Net Income 33,6 58,6 133,8

Return on equity 11,38% 6,20% 12,65%

Debt to equity ratio 49,83% 19,07% 19,75%

Source: Perum Jamkrindo, processed.


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6.4.2 Public Debt Risk of Central Government

One important fiscal risk and therefore must be soundly managed by the Government isPublic Debt Risk. The management of this risk will significantly affect fiscal sustainability inthe current year and in the future. The management of public debt will indicate the size ofdebt burdens to be shouldered by the Government in the future. With appropriate debt risk

management, the Government will not only concentrate to look for financing sources withlow fees for the current APBN but also take into account risk trend that will have influenceover APBN in the coming years.

Risks that must be dealt with in public debt risk management may come from external orinternal factors of debt management unit. The said risks include: (1) financial risk, i.e.interest rate risk, exchange rate risk and refinancing risk, and (2) operational risk. These varying risks have direct impacts to the overall efficiency and effectiveness of debtmanagement.

Financial risk conditions in public debt portfolio during 2009 are exposed to severechallenges from the faltering global financial market due to crisis. The outbreak of globalfinancial crisis as the continuation of subprime mortgage scandal in USA has spurred world-

wide economic disaster. The immediate consequence is the drying out liquidity of globalfinancial market. The crisis indeed compromised domestic financial market includingGovernment Securities (SBN) market indicated with the falling SBN price in secondarymarket and less demands in SBN Auction.

The issuance of SBN in early 2009 (quarter I) was hampered by crisis impacts. Investortolerance to risk was to decrease. It was nearly no demand on SBN with medium to long termtenors. They only preferred to SBN with very short tenor. To cope with problems in coveringfinancing needs through SBN issuance in domestic market, the Government issuedinternational SBN in global market amids very unfavorable market conditions, and succeedto issue global bonds in relatively enormous amount (USD3 billion or equivalent to Rp36trillion). Success in this global bond issuance lessened financing risks to the Government.

The conditions of domestic and global markets were a bit better entering quarter II 2009,marked with the lower SBN yield in domestic and global markets. In Quarter II, theGovernment issued Sukuk with foreign currency denomination and started to offer SBN withlonger tenors. The bolstering market conditions in quarter II 2009 had reduced risks to debtportfolio during Semester I 2009.

The improvement of debt risk conditions in 2009 was a little bit impeded by global financialcrisis especially in respect of refinancing risk, which was lightly to rise as the result ofshortening ternor for the issued SBN. Meanwhile, interest rate risk was still on upward trendand exchange rate risk was stable with upward trend compared with previous years. Withoptimum measures in semester II 2009 it is expected that the said risks can be furtherabated.

Specifically, the interest rate risk of debt porfolio indicates downward trend as seen in TableVI. 5.

The same table shows that indicators of interest rate in 2009, i.e. variable rate and refixingrate ratio to total debt were lower than previous years with downward trend thanks tofinancing strategy policy focusing on SBN issuance and the procurement of foreign loans with fixed rate. Time taken to reset interest rate is slighly to reduce consistent with theshorter Average Time of Maturity (ATM).

This lower ATM ratio is still in tolerable limit since it was not attributed to variable rate ratio, which is more sensitive to interest fluctuation. The exchange rate risk is further lessenedalong with the declining debt ratio in foreign currency denomination (FX debts) if comparedwith the size of Gross Domestic Product (GDP). This ratio is important since its lowering will

indicate less exchange rate risk relative to economy. FX debt ratio to total debts alsoindicates a lightly downturn tren. If no global financial crisis took place in 2008 and 2009


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causing the slumping rupiah exchange rate to a number of foreign currencies, the FX debtratio to total debts would be at better level (at 45 percent range).

Refinancing risk was to rise in 2009 as the consequence of global financial crisis thatshortened tenors of the issued SBN. This higher refinancing risk can be seen in Table VI.5.ATM to total debt in 2009 recorded relatively significant decrease to 8.32 years from 9.18

years in 2008. This decrease indicates that in general tenor for public debt tends to shorten.For further observation, refinancing risk can be also detected from the portion of debts thatwill be on due in the next year, which in fact its percentage was to rise from 6.97 percent in2008 to 7.40 percent in 2009. The similar trend was also found in the portion of debts thatwould be on due in the next 2 and 5 years.

TABLE VI.5

LOAN PORTFOLIO RISK INDICATORS OF 2006-2010

Notes:*) 2009 rate projection for the last 2009 based on realization of semester I of 2009**) 2010 rate is projection based on trends during 2006 through 2009Source: Ministry of Finance

Based on the projection of debts to be matured in 2010 it will exceed Rp130.0 trillion inconsideration of Government Treasury Bill (SPN) with maturity less than 1 year in SemesterII 2009. As to outstanding debts it is expected to reach Rp1,675.04 trillion consisting of SUNRp1,065 trillion and PLN Rp610 trillion. It is projected that the debt risk condition in 2010 will continue the trend of the last few years, i.e. interest rate risk will bolster with thedeclining projection of debt variable rate and refixing rate ratio. Improved risk rate will alsobe found in exchange rate risk consistent with lower foreign currency debt to GDP ratio andforeign currency debt to total debt ratio. As to refinancing risk it will aggravate due to higher

portion of matured short term debts. However, if the market conditions start to recover, it is


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expected that refinancing risk will not increase significantly and become stable (same asconditions in 2009).

Efforts to improve debt risk rate must be pursued with the following strategies:

1. Prioritize the issuance/loan withdraw with fixed rate to lessen interest rate risk, on topof converting debts with variable rate to fixed rate.

2. Prioritize the issuance of rupiah debt instruments in domestic market in view of marketabsorption capacity in semester II 2009 and 2010 that is expected to bolster in line withthe recovering global economy from crisis.

3. Currency selection in loan withdraw/SBN issuance in view to its volatility to rupiah.4. Prioritize the withdraw of new loans with more favorable terms and condition, including

to reduce/omit commitment fee for the undisbursed committed loans.5. Continue buyback and switching for the management of Government Securities (SBN)

portfolio and risk with a view to lessen refinancing risk in semester II 2009 and 2010.6. Effective monitoring to loan withdraw so that inefficient loan commitment can be

immediately closed.7. In addition to the above strategies, active debt management is now reviewed using

financial derivative instrument in the context of hedging. Review on the adoption ofderivative instrument in 2009 will be intensified with the preparation of FinanceMinister Decree on debt portfolio hedging application.

In the operation, debt management also include Operational Risk control. Efforts taken bythe Government to control operational risk in debt management are inclusive of: (a) developand apply standard debt management procedure, for either internal units responsible fordebt management or those responsible for relation mechanism between debt managementunits and stakeholders; (2) enforce ethical code of personnel within debt management units;(3) enhance the competence of personnel of debt management units; (4) develop technologysystem to support effective, efficient, safe, transparent and accountable debt management;and (5) prepare and revise laws and regulations concerning debt management as legal basisto perform debt management in transparent, safe, accountable and responsible manner.

6.4.3 Contingent Liabilities of Central Government

6.4.3.1 Infrastructure Development Project

Fiscal risk related to infrastructure development project arises from support/guaranteeprovided by the Government to some projects, i.e. 10,000 MW Power Generation PlantDevelopment Acceleration Project, Trans Java Toll Road Development Project, JakartaOuter Ring Road II (JORR II) Development Project, Jakarta Monorail Development Project, Water Supply Acceleration Project, and Government Support for IPP PLTU Central JavaModel.

a.10,000 MW Power Plant ProjectPursuant to Presidential Regulation No. 71 of 2006 and Presidential Regulation No. 86 of2006 as amended with President Regulation No. 91 of 2007, the Government shall providesupports of full guarantee for debt service of PT PLN (Persero) to creditors extendingfunds/credits for electrical power generation development projects (10,000 MW) asprovided for in such Presidential Regulation No. 71. This guarantee aims to improve thecreditworthiness of PLN to get credits and reduce project capital fees.

It is expected that the completion of the said 10,000 MW power plant development projectbe accelerated and power shortages be resolved. To assure the sufficiency of power supply infuture, at present the Government is developing 10,000 MW power generation plant phase II

covering coaldriven power plant, water-driven power plant, and geothermal-driven powerplant (renewable resources).


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Total investment value of this 10,000 MW power project is expected to amount Rp99.4trillion (exchange rate USD1 = Rp9,200) with the following breakdowns: Rp73.5 trillion forgenerators and Rp25.9 trillion for transmission. Around 85 percent of fund requirements forsuch power generation and transmission project will be covered from bank credits, eitherdomestic or foreign. Through May 2009 the committed financing sources (signed and thebid winner had been determined) can be seen in Table VI.6.

TABLE VI.6

FINANCING RESULT OF 10,000 MW POWER PLANT PROJECT

(through November 2009)

No. PLTUCapacity

(MW)

Loan Ammount

Rupiah Portion

(in billion)

USD Portion

(in million)

1 Suralaya 1 x 625 735.4 284.29

2 Paiton 1 x 660 600.6 330.83

3 Rembang 2 x 315 1,911.5 261.80

4 Labuan 2 x 315 1,188.6 288.56

5 Indramayu 3 x 330 1,272.9 592.22

6 Pacitan 2 x 315 1,045.9 293.23

7 Teluk Naga 3 x 315 1,606.6 454.97

8 Pelabuhan Ratu 3 x 350 1,874.3 481.94

9 Lampung 2 x 100 459.9 119.21

10 Sumatera Utara 2 x 200 780.8 209.26

11 NTB 2 x 25 273.8 23.79

12 Gorontalo 2 x 25 264.8 25.84

13 Sulawesi Utara 2 x 25 304.5 27.31

14 Kepulauan Riau 2 x 7 71.2 -15 NTT 2 x 7 73.2 7.89

16 Sulawesi Tenggara 2 x 10 97.1 10.28

17 Kalimantan Tengah 2 x 60 413.9 62.06

18 Tanjung Awar-Awar 2 x 350 1,155.4 -

19 Sulawesi Selatan 2 x 50 379.9 52.35

20 3 Bangka Belitung 2 x 30 316.9 22.95

21 2 Papua 2 x 10 140.8 13.66

22 Kalimantan Selatan 2 x 65 313.4 83.94

23 Aceh 2 x 110 614.3 124.26

24 2 NTT 2 x 16.5 134.5 23.42

25 1 NTB 2 x 10 120.5 23.79

26 Sumatera Barat 2 x 112 521.4 138.34

27 2 Kalimantan Barat 2 x 27.5 172.0 30.77

28 4 Bangka Belitung 2 x 16.5 142.2 23.90

29 Maluku Utara 2 x 7 100,4 9.87

30 Adipala 1 x 660 50,0 575.26

Total 9,145 17,136.7 4,595.99



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Fiscal risk from the above full guarentee is when PLN fails to comply with its debt service tocreditors timely, for which the Government shall be required to meet such debt service. Thisdebt service compliance by the Government will be carried out through APBN mechanism.Some risk factors that can reduce PLN capacity in complying with its debt service tocreditors on timely basis include high power energy sales growth, tariff policy, exchange ratefluctuation, fuel price hike and coal supply shortages.

In 2010 the liabilities of PLN to creditors will be limited to the payment of loan interest. If allfinancing requirements can be fulfilled in 2009, the Government will allocate budget in itsAPBN 2010 to anticipate fiscal risks arising from PLN obligations, i.e. interest payment, inamount of Rp1 trillion. Increase in risk budget allocation is made on two mainconsiderations.

First, higher interest payment in 2009 was because credit dibursement in 2009 was expectedto rise up to 100 percent of total loans committed. Second, it is expected that theconstruction of most generators be accomplished. These two factors can bring about impactsto financial performance/cash flow of PLN.

b.Toll Road Development ProjectFiscal risk in toll road development project comes from Government support in shoulderingpart of land acquisition cost excess (land capping) because of price escalation during landacquisition. Twenty eight (28) toll road development projects receiving such supportsinclude Trans-Java Toll Road Projects and Jakarta Outer Ring Road II (JORR II).Government supports to cost escalation in land acquisition in 28 links of toll road isintended to accelerate the sluggish toll road development, which is due to increase in price ofland liberation that will be in toll road development. Such supports are also to maintainfinancial feasibility of toll road projects so that investors will immediately finish theirdevelopment.

The supports are expressed in the allocation of Rp4.89 trillion since 2008. Out of such sum,Rp1.2 trillion will be allocated in APBN 2010. The expenditure of budget procceeds from theend of 2009 to early 2010 will be used to evaluate this Government support policy and asbasis to decide the continuation of land capping policy in 2011 and so forth.

c. Jakarta Monorail Development Project Another infrastructure project receiving Government support is that of Jakarta MonorailDevelopment Project (green line and blue line). The support is given in the form of guaranteeto cover shortfall of ridership for 160,000 passengers per day. The maximum amount of thisguarantee will be USD 11.25 million per annum for five years since the commercial operationof project in question with transport capacity of 270,000 passengers per day. The guarantee

will be effective since 15 March 2007 for 36 months period. If this provision is not compliedwith, according to Decree of Finance Ministry (PMK) No. 30/PMK.02/2007 such guaranteeshall declare void and null.

Until the first quarter 2009, the investors of Jakarta Monorail Development Project has yetto get financial facility (financial close) as set out in Agreement signed with DKI Jakartagovernment (Pemprov DKI). For this respect, Pemprov DKI will conduct due diligence thatits result will be used as reference in deciding this continuation of project.

Given that, in 2010 it is expected that no fiscal risk may arise from this monorail projectsince the project will not operated in 2010.


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d.Water Supply Development Acceleration ProjectTo accelerate water supply for people and to reach millennium development goals (MDG),the Government will promote investments in PDAM. This is made by broadening investmentcredits from national banks under guarantee and interest subsidy by central government.

This policy is set out in Presidential Regulation No. 29 of 2009 concerning Guarantee andInterest Subsidy Provision by Central Government for Water Supply Development Acceleration. Guarantee from the Central Government reaches 70 (seventy) percent ofPDAM debt services of total matured investment credits. The remaining 30 (thirty) percentwill be the risk of banks extending the investment credits. With regard to interest rate for theinvestment credits extended by the banks to PDAM it is set at equal to BI rate plus maximum5 (five) percent on the condition that interest rate at BI rate shall be charged to PDAM andthe difference of interest rate higher than BI rate for a maximum of 5 percent shall becomesubsidy shouldered by the Central Government. Guarantee for PDAM debt service andsubsidy will be paid by the Government under APBN scheme. Such guarantee will becomeliabilities of PDAM and Regional Government to Central Government.

Fiscal risk that may arise from this guarantee is the incapacity of PDAM to comply with its

debt service for the credits on due to banks. Owing to that, the Government will cover 70(seventy) percent of such PDAM debt service. Factors that can incite such default includeexceeding non water revenue (NWR), unreliable interal PDAM management, and water tariff(set by Regional Government/PDAM) lower than its economic price.

PDAM debt service to banks in APBN 2010 is limited to the payment of credit interest. In APBN 2010, the Government will allocate budget Rp50 billion to anticipate fiscal risk ofPDAM debt service with regard to interest payment.

e.Establishment of Guarantee Fund for Infrastructure As mandated in Presidential Instruction No. 5 of 2008 concerning Economic Focus for

2008-2009, the establishment and operation of guarantee fund institution is required toencourage the participation of private sector in infrastructure development. The main goal toset up this guarantee fund is to provide facilitation for infrastructure projects in obtainingthe best financial close and cost of capital by raising creditworthiness of infrastructureprojects concerned. Guarantee fund is expected to enhance the quality in guaranteemanagement against the risks secured by the Government for infrastructure projects asspelled out in Presidential Regulation No. 67 of 2005 and Decree of Finance Minister No.38/PMK.01/2006.

Guarantee fund will improve the management into more transparent and accountablefashion against the contingent liabilities arising from the guarantee to infrastructure projects.Nevertheless, its does not necessarily mean that guarantee fund will get rid of fiscal risk

exposure of such infrastructure projects since guarantee fund can propose recourse to theGovernment for the paid claims.

The participation of Government funding in such institution is expressed with the placementof Government Fund (PMN) as initial capital for its formation. Indeed, guarantee fund willbe set up as a State Owned Enterprise (SOE). In 2009, the Government has allocated budgetof Rp1.o trillion. With this Government Capital (PMN), the ownership of Government to thesaid institution will reach 100 percent. In 2010 the Government has yet to allocate co-participation capacital to guarantee fund.

f. Government Support for Independent Power Producer (IPP) Model in PLTUCentral Java

In Semester I 2009, the Government received proposal for support request from PT PLN(Persero) for IPP Model in PLTU Central Java. The project is 1 (one) of 10 (ten) projects


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promoted by the Government during Indonesia Infrastructure Conference and Exhibition(IICE) 2006 as project models that will be executed in accordance with PresidentialRegulation No. 67 of 2005 and Decree of Finance Minister No. 38 of 2006. In 2010, it isexpected that no fiscal risk from the aforesaid project will arise since the contruction will justbe commenced in 2011 and operated in 2014.

6.4.3.2 Pension and Old Age Insurance Program (THT) for Public Servants(PNS)

Starting from 2009, the Government decides that pension funding for PNS (GovernmentCivil Servants) will be totally charged to APBN. Formerly, pension funding was undersharing arrangement between APBN and PT Taspen (Persero) with the portion percentageset by the Minister of Finance. In 2007 and 2008, the percentage of this funding sharing wasrespectively 85.5 : 14.5 and 91 : 9.

The overall benefits for PNS pension fund in 2007 and 2008 was respectively Rp27.6 trillionand Rp33.3 trillion and expected to rise to Rp39.8 trillion and Rp48.9 trillion in 2009 and2010 respectively in view of basic salary increase of PNS and more beneficiaries includingthe payment of honor fund as stipulated in Government Regulation No. 24 of 2008. APBNburdens in pension payment for 2009 and 2010 can be seen in Table VI.7.

TABLE VI.7

PENSION PAYMENT

Year Total Pension

Beneficiary (people)

Pension Payment

(Rp trillion)

2009 2,344,645 39.8

2010 2,505,788 48.9

With the increasingly APBN burdens for pension payment and in view of provision set out inthe applicable laws and regulations, i.e. Law No. 11 of 1969, Government Regulation No. 25of 1981 and Law No. 40 of 2004, the Government needs to establish Pension Fund and applyfully funded system. Consequently, the Government will be charged with past service liabilityfor active PNS. One alternative to lessen fiscal risk is to set graph cut of date, in which the oldPNS (prior to cut of date) shall be treated under pay as you go system as currently applied.But, for the new PNS (after cut of date) they shall be treated under fully funded system. Thus,the Government will be no longer charged with past service liability, however, still requiredto allocate fund to pay pension for the old PNS.

For Pension and Old Age Insurance (THT ) program, its funding is thus far from PNS salarycut [contribution], i.e. 3.25 percent. The benefits to be paid are subject to factors, which oneof them is PNS salary. The Government policy to rise PNS salary brings consequence of fiscal

risk consisting of unfunded liability (UFL). Based on calculation made by PT Taspen, theoutstanding UFL until 2008 reached Rp4.09 trillion. In 2009 following PNS salary increasein accordance with Government Regulation No. 8 of 2009 dated 16 January 2009concerning the Eleventh Amendment to Government Regulation No. 7 of 1977 concerningPNS Salary Regulations, the UFL is to upsurge by Rp2.98 trillion. If there is no any change inbenefit formula and the Government plans to raise the basic salary of PNS by 15 percent, thepotential UFL is expected to amount Rp3.65 trillion.

Since UFL accumulation correlates with the currently applied system, significant change toTHP Program system for PNS will be therefore paramount. One alternative to settle thisproblem is that of amended provision concerning the benefits of THT PNS that shall be setup no longer based on service term and salary, instead the accumulated contributions and

their investment. In order to make this new formula reflect more fairness and PNS willaccept this change, the Government as employer will also provide contributions.


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6.4.3.3 Financial Sectora.Bank IndonesiaAccording to Law No. 23 of 1999 concerning Bank Indonesia as amended with Law No. 3year 2004, about the capacityof central bank, Bank Indonesia has a single goal, i.e. to pursueand maintain the stability of rupiah. Stable rupiah connotes two aspects, i.e. stable to goodsand services, and stable to the currencies of other countries. The first aspect is reflected frominflation rate trend and the second aspect is from rupiah exchange rate trend to other foreigncurrencies. To realize such goal, Bank Indonesia is assigned with three tasks: (1) decide andexercise monetary policies, (2) regulate and maintain payment system, and (3) regulate andsupervise banks.

As provided for in article 6 paragraph (1) Law on BI to perform the above tasks, capital forBank Indonesia is established minimum of Rp2 trillion. In case of risks arising from theimplementation of tasks and duties of Bank Indonesia resulting such capital to decrease lessthan Rp2 trillion (Article 62), the Government shall be required to replenish the shortagesubject to endorsement of House of Representatives (DPR).

Apart from the foregoing laws, the capital of Bank Indonesia is also regulated in article 3paragraph 2 point (f) Memorandum of Understanding between the Government and BankIndonesia concerning Bank Indonesia Liquidity Assistance Settlement (BLBI) and FinancialRelation of the Government and Bank Indonesia signed on 1 August 2003 stating that ifcapital to monetary liabilities ratio of Bank Indonesia is less than 3 percent, it is agreed thatthe Government will pay charge to Bank Indonesia in amount equal to the shorfalls required.

However, in contrast, if the capital to monetary liabilities ratio of Bank Indonesia reachesmore than 10 percent, Bank Indonesia shall share some part of such surplus as established inlaws on BI. Historical data on Bank Indonesia capital from 2006-2008 and its projection for2009 and 2010 can be seen in Graph VI.3.

The above graph shows that in 2009 and 2010 BI capital ratio is expected to decrease by 9.85

percent and 6.68 percent respectively. This lower capital ratio is attributed to deficit comingfrom exceeding monetary fees (marked with SBI volume projected to hit Rp230 trillion)

12,36

8,04

10,389,85

6,68

0,00

2,00

4,00

6,00

8,00

10,00

12,00

14,00

2006 2007 2008 2009(Est.) 2010(Est.)

Percent

Year

GRAPH VI.3

CAPITAL TO MONETARY OBLIGATIONS RATIOOF BANK INDONESIA

Note:Minimum limit of capital to monetary obligations ratio (3%).

Source: Bank Indonesia.


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borne to Bank Indonesia, which is also tasked to maintain macroeconomic stability.Nevertheless, the internal financial condition within Bank Indonesia in 2009 and 2010 ispredicted in sustain condition. In view of the above financial performance of BI, theGovernment is not necessary to allocate charge fund for Bank Indonesia in APBN 2010.

b.Indonesia Deposit Insurance Corporation (LPS) According to Law No. 24 of 2004 concerning Indonesia Deposit Insurance Corporation(LPS), a function that shall be played by LPS is to insure c ustomers deposits in banks.Another function is to actively participate in maintaining banking system stability based onthe given authorities, in this case bank restructuring. The insured deposits since 13 October2008 is a maximum of Rp2 billion per customer per bank. This amount is to rise fromprevious ceiling, i.e. Rp100 million per customer per bank. To play its functions, LPSreceives initial capital from the Government i.e. Rp4 trillion. Until the end of 2008, capital(equity) of LPS develops to Rp8.68 trillion.

Based on Law No. 24 of 2004 concerning LPS, if LPS capital is decreasing until less than itsinitial capital, the Government with endorsement of House of Representatives shallreplenish the shortfalls. Similarly, when LPS sustains liquidity problems, it will receive loans

from the Government, Graph VI. 4 illustrates total deposits insured and capital position in2009 and 2010 projection.

Source : LPS.Notes:* Based on Financial Statement of LPS for 2008.** Based on Work Plan and Annual Budget of LPS for 2009.*** Capital Positions of 2010 can not be estimated yet.

Total claims for payable deposits and/or restructuring costs for default banks that must bepaid by LPS in 2009 and 2010 cant be estimated since the business permits of default bankswill be revoked by Bank Indonesia and default banks for recapitulation in 2009 and 2010cant be estimated [at present]. Thus, it is uncertain whether the Government has to allocate

charge fund for LPS or not.

819,1512,2 624,3

1.093,5 1.208,2

5,6 6,98,6 10,5

1

10

100

1.000

2006 2007* 2008* 2009** 2010***

Trillion

Rp

Year

GRAPH VI.4TOTAL INSURED DEPOSIT AND LPS' CAPITAL

POSITION

Insured Deposit Capital


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c. Indonesia Export Financing Institution /LPEI (Indonesia Eximbank)Indonesia Export Financing Institution/LPEI formerly Indonesia Export Bank (BEI) is anon-banking financial institution with function to support national export program withexport financing. Such export financing is provided in financing, guarantee and/or insurance.

According to Law No. 2 of 2009 concerning LPEI, the initial capital for LPEI is set at aminimum of Rp. 4 trillion. Should such initial capital decrease until less than Rp4 trillion,the Government replenishes the shortfalls from its APBN based on the applicablemechanism. Graph VI.5 illustrates the position of LPEI capital in 2009 and 2010. In 2010,LPEI capital is expected to amount Rp4.8 trillion. This sum is only sufficient to supportexport financing, i.e. Rp14.4 trillion for financing, Rp545.0 billion for guarantee and Rp72.0billion for insurance. To develop national export especially for products potential for export,the Government plans to develop the export financing capacity of LPEI by allocatingadditional capital consisting of Government Capital (PMN) in sum of Rp2.0 trillion.

6.4.3.4 Legal Claims to the Government

Generally, claims lodged to the Government c.q. the Ministry of Finance mostly concernabout civil matters in respect of tender, assets owned by foreign country/China, import dutycharge, land and/building assets, judicial review of regulations lower than law concerningstate revenue and other cases relevant to former Indonesia Banking Restructuring Agency(BPPN). These cases will affect to the Government fiscal, i.e. to reduce state revenue, toincrease public expenditure as the result of obligations to pay compensation and the loss ofstate owned assets.

With regard to cases relating to the performance of tasks and functions of the Ministry ofFinance, compensation claims filed to the Government reach Rp909.5 billion consisting ofmaterial compensation Rp212.9 billion and immaterial compensation Rp696.5 billion. Forlegal cases involving former BPPN, they can be differentiated into two types, i.e. civil caseand advocacy for former BPPN officials and employees whose testmony is required. In

2008 (Real.) 2009 (est.) 2010(est.)

Financing 9,577 12,693 14,437

Underwriting 0,268 0,408 0,545

Insurance - - 0,072

Capital 3,000 4,473 4,754

0

2

4

6

8

10

12

14

16

TrillionRp

GRAPH VI.5EXPORT FINANCING ACTIVITIES AND FINANCING POSITION OF

THE INDONESIA EXIMBANK2008 - 2010

Financing Underwriting Insurance Capital



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respect of civil cases, there is case relating to Governement Guarantee Program and thesettlement of shareholders obligations/PKPS. As to the former, there are some casesrequiring the Government to make payments, including:

a. Five (5) cases requiring the Government to pay in amount of Rp516.4 billion andUSD104.7 million.

b. Twenty one (21) cases potential to cause losses for the state with values of Rp629.5billion and USD38.2 million.Meanwhile, cases in Shareholders Obligation Settlement (PKPS), BPPN (and BankIndonesia) will require the Government, among other things, to pay Rp23.5 billion. However,the plaintiffs still have obligations to the State, i.e. shareholder obligation (JKPS) worth ofRp88.2 billion (before deducted with payment made by the plaintiffs and the sales of grouploan).

Moreover, the Government c.q. the Ministry of Energy and Mineral Resources has to dealwith lawsuits in connection with the development of some power generation plants that arepotential to arise liabilities to the Government, including Water-Driven Power Plant (PLTA)Koto Panjang and PLTA Riam Kana in amount of respectively Rp63 billion (plus forced

money Rp500,000 per day since the date of court judgment until its enforcement) andRp1.15 trillion.

6.4.3.5 Membership in International Financial Organizations and Agencies

The membership of Indonesia in international financial organizations and agencies cancause fiscal risk from the Government committment to provide contribution and co-financing to such international financial organizations and agencies.

In 2010, it is expected that budget allocated by the Government to pay contribution andcofinancing in international financial organizations and agencies reach Rp1,094.7 billion.Contribution to international organizations is extended under DIPA for the Ministry of

Foreign Affairs as provided for in Keppres No. 64 of 1999 in amount of approx. Rp300 billion. Meanwhile contribution, co-financing and trust fund in international financialorganizations and agencies will be allocated in DIPA the Ministry of Foreign Affairs worth ofRp794.7 billion. The breakdowns of contribution, co-financing and trust fund of theGovernment to the above international financial organizations and agancies can be seen inTable VI.8.


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TABLE VI.8

GOVERNMENT FUND CONTRIBUTION AND CAPITAL PARTICIPATION ON INTERNATIONAL FINANCIAL

AGENCIES AND INSTITUTIONS OF 2010

No.International Financial

Agencies and Institutions

Jumlah

RemarkForeign Currency

Equivalent to

Rp

(billion Rp)

Capital Participation

1 Islamic Development Bank (IDB)ID8,562,400*

145.56 8th and 9th installment

of IDBs 2nd GCI

2 International Bank for Reconstruction

and Development (IBRD)

171.52 Outstanding promissory

drawdown accumulation

in

rupiah

3 Asian Delopment Bank (ADB) 3.98 Non yet disbursed

promissory note

remnant

446.4 1st installment GCI 5th

ADB

4 International Fund for Agricultural

Development (IFAD)

USD1,500,000 16.5 1st installment

replenishment

8th IFAD

Contribution

5 ASEAN+3 Finance Cooperation Fund

(AFCF)

USD 2,000 0.022

6 Group of Experts (GoE) USD12,500 0.138

7 ASEAN Finance Minister Investor

Seminar (AFMIS)

0.150

8 OECD Development Centre EUR31,500 0.425

Trust Fund

9 USAID Trust Fund 10.0 Contribution payment to

USAID

trust fund in rupiah

(total similar to 3 years

latest payment)

Total 794.7


6.4.3.6 Natural Disaster

Indonesia is a country vulnerable to natural disasters. One of contributing factors for this vulnerability is its geographical conditions. Out of various catastrophes, floods andearthquakes are the most frequent disasters aggravating this country. Natural disaster eventsin 2004 to 2008 are listed in Table VI.9.

TABLE VI.9

DISASTER EVENTS IN INDONESIA 2004-2008

Natural DisasterTotal Events

Total2004 2005 2006 2007 2008

Earthquake 11 9 20 12 8 60

Earthquake and Tsunami 1 1 2

Volcano Eruption 5 2 5 4 117

Landslide 54 50 73 56 39 272

Flood and Landslide 9 13 31 45 22 120

Flood 285 248 328 152 197 1,210

Storm 65 47 84 75 56 327

Tidal Wave/Abration 8 6 14 29 8 65

Technology Fault 8 7 18 6 3 42

Total 446 382 574 379 334 2,115

Source: National Board for Disaster Management.


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The most dominant catastrophes, i.e. floods and earthquakes, generate huge impacts.However, more alertness should be given to earthquake than flood because of its suddentand unpredicted occurence. Unfortunately, this lethal catastrophe cant be predictedaccurately. As to flood, it is much more predictable, i.e. when rainy season reaching its peak.This will enable the Government and communities to take anticipative measures, such assave the assets and move to safer place. Death toll of earthquake are normally much higherthan fatalities claimed by flood. Total casualties from 2004-2008 can be seen in TableVI.10.

TABLE VI.10CASUALTIES FROM DISASTER IN INDONESIA 2004 2008

Bencana AlamCasualties

Total2004 2005 2006 2007 2008

Earthquake 150 953 5,784 102 12 7,001

Earthquake and Tsunami 165.945 - 683 - - 166,628

Volcano Eruption 2 - 2 - - 4

Landslide 135 212 214 73 73 707

Flood and Landslide 45 77 228 346 54 750

Flood 100 68 379 122 68 737

Storm 11 4 11 24 3 53

Tidal Wave/Abration - - - 3 - 3

Technology Fault 78 277 562 248 30 1,195

Total 166,466 1,591 7,863 918 240 177,078

Source: National Board for Disaster Management.

The table indicates that the dead toll for the last five years are relatively enormous, i.e.177,078 persons. Out of them, 94 percent was casualities of earthquake and tsunamidevastating Aceh in 2004. With regard to earthquake, further observation against data from1963 through 2000 indicated that total cumulative earthquake incidences record liniear

increase. However, from 2000 to 2007, the cumulative earthquake events did not follow theprevious pattern, instead show sharp increase toward asymptotic pattern. The changingpattern in cumulative earthquake incidences from 2000 can be seen in Graph VI.6.

GRAPH VI.6

CHANGES OF EARTHQUAKE PATTERNS THROUGHOUT SURFACELONGITUDE OF SUMATERA 1965 - 2007

Source: National Board for Disaster Management, processed.

The estimated financial losses from earthquake can be seen in Table VI.11.


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TABLE VI.11ESTIMATION OF FINANCIAL LOSSES CAUSED BY EARTHQUAKE

Earthquake LocationMagnitude

(Reichter Scale)

Estimation of Financial

Losses

(billion rupiah)

High Economic Activities5 1,559.896 12,946.95

7 52,127.33

Medium Economic Activities

7 5.70

8 113.96

9 693.65

Low Economic Activities

7 2.16

8 27.12

9 12.48

Source: Estimation based on Catastrophe Model

Notes:Earthquake simulation is made in 3 different regions, based on the relevant region economic capacity(high, medium and lower). Simulation of earthquake spot (epicenter) ranges from magnitude 7, 8, and9. Model simulation results will be different for the different epicenter and magnitude. Other factorsinclude longitude, latitude, and depth.

Law No. 24 of 2007 concerning Natural Disaster Management puts this responsibility toCentral Government and Regional Government. As for Central Government, theresponsibilities in natural disaster management shall include:

a. mitigate disaster risk and integrate disaster risk with development program;b. protect the affected communities from the impacts of disasters;c. assure the right fulfilment of the affected communities and refugees in fair mannerd. according to minimum service standard;e. condition recovery;f. allocate adequate natural disaster management budget in APBN;g. allocate natural disaster management budget consisting of standby fund; andh. maintain authentic and credible files/documents from the threats and impacts of

disaster.

Budget for natural disaster management in APBN is allocated for activities performed duringpre-disaster stage, emergency response stage, and post-disaster stage. This natural disastermanagement budget in APBN is taken among other from disaster contingency fund. Fundallocated and the realization can be seen in Graph VI.7. Besides allocating part of disastercontingency fund in APBN, another way that can be used to lessen fiscal risk from naturaldisaster is to encourage the participation of people under Public Private Partnership (PPP)

scheme with regard to Natural Disaster Awarenes Campaign and risk transfer to insurancecompanies.


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6.4.4 Fiscal Decentralization: Region Subdivision

Fiscal decentralization policy is to accelerate the realization of prosperous people withimproved service, empowerment and community participation as well as improved regionalcompetitiveness inspired by democracy, equality, privilege and uniqueness of a region withinthe unitary state of the republic of Indonesia. In the field, this policy on top of positiveimpacts is potential to bring fiscal risk.

The another side of fiscal decentralization is regional subdivision phenomenon. Since theintroduction of decentralization, the number of new autonomous regions is steadilyincreasing. It is followed with more APBN budget for transfer to regions. In 2008, theproceeds of transfer to regions amounted Rp666.41 trillion (67 percent of APBN) and in2009 it reaches Rp587.62 trillion (56.7 percent).

6.4.4.1 Regional Subdivision

Regional subdivision is basically a tool to speed up the realization of goals from theintroduction of decentralization. The more streamlined control span is expected to makepublic service be delivered in more effective and efficient way. In the field this lofty thoughtis hampered by many constraints, and if not appropriately manage it will be potential to addfiscal burdens.

Since the introduction of decentralization policy through 2009, the number of autonomousregions is 524 regions consisting of 33 provinces, 398 districts and 93 cities. This trend wasaddressed by the Government with the issuance of Government Regulation (PP) No. 78 of2007 concerning Procedures for the Establishment, Dissolution, and Amalgamation ofRegions. Such PP contains tighter requirements that must be complied with for theformation of new regions. It is expected that this PP be the main screen so as to achieveeffective regional subdivision.

0

500

1.000

1.500

2.000

2.500

3.000

3.500

2004 2005 2006 2007 2008 2009 2010

BillionRp

GRAPH VI.7NATURAL DISASTER CONTINGENCY FUND

Ceilings on State Budget Realization


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Based on the above Graph VI.8, while the said PP contains tighter requirements for newregion formation, the number of new autonomous regions is constantly to increase.

6.4.4.2 Impacts to Fiscal

From fiscal wise, new autonomous regions will have influence over APBN in respect of: (1)General Allocation Fund (DAU); (2) Special Allocation Fund (DAK); and (3) VerticalInstitution NeedsAny additional autonomous region will reduce the real DAU allocation toother autonomous regions. If hold harmless (e.g. DAU allocation of a region may not lessthan its last years DAU) policy is introduced again in 2010, either in whole or in part, thelower DAU allocation will bring consequence to APBN, i.e. need of allocating adjustmentfund.

Governance services and infrastructure in regions are verily needed by new autonomousregion, Starting from 2003, the Government allocates DAK fund for governance instructureto support the operation of regional governance in the newly established regions. Thebeneficiary of this fund include those sustaining the impacts of regional subdivision (new

autonomous region and parent region). From 2003 to 2009, DAK allocated for the provisionof this governance infrastructure ranges from Rp3.27 billion to Rp5.46 billion per beneficiary.For any new autonomous region, the Government will need the same amount. DAKallocation for governance infrastructure from 2003 through 2009 can be seen in GraphVI.9.

2831 32 33 33

69

81

85 8791 93

267

347 368

398

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008Year

GRAPH VI.8TOTAL AUTONOMOUS REGIONS

Province City Regency


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27

Another consequence of regional subdivision to public finance is additional offices for vertical institutions to perform governance activities under the responsibilities of CentralGovernment, including: defense, security, religion, justice, and finance. With the opening ofsuch offices, the Central Government must allocate fund for the associated facilities andinfrastructure. Indeed, the Central Government has to allocate fund for the procurement ofoffice facilities and infrastructure, personnel and other operational expenditures. Based on

Work and Budget Plan of Ministries/Agencies (RKA-KL) 2005-2009 total APBN fundallocated to new autonomous region ranged from Rp6.30 trillion to Rp14.27 trillion. Budgetallocation for vertical institutions in new autonomous region from 2005 to 2009 can be seenin Graph VI.10.

88

228

148

448,6

539

362

562

2257

34

135159

106 103

0

100

200

300

400

500

600

2003 2004 2005 2006 2007 2008 2009

BillionRp

GRAPH VI.9ALLOCATION OF DAK OF GOVERNMENTAL

INFRASTRUCTURES, 2003 - 2009

Allocation Of DAK of Governmental InfrastructuresTotal Beneficiary Regions (District/City)Source: Ministry of Finance


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Source: Ministry of finance

6.4.4.3 Other Problems

Apart from fiscal, the bifurcation of region is potential to bring about other negative impacts.Many studies on regional subdivision by various institutions of government ornongovernment arrived at conclusions that there were still a lot of things to be dealt with inrespect of this region bifurcation. Formula used to compute revenue sharing (DBH) fromnatural resources contains weakness that can be availed by the producing region to bifurcateits region solely on the grounds of higher portion to be received. Another problem is theswitching of producing region from the parent region to the new region. This may spur newconflict. They (parent and new regions) will tussle the recognition as producing region. Inconnection with revenue allocation, new region claiming as producing region but notestablished as producing region in Decree of Minister of Energy and Mineral Resources may

get suspension for its transfer to region allocation since the relevant budget documents mustbe revised accordingly.

There will be additional sectors in DAK, i.e. traditional market sector and underdevelopedregion development sector consisting of rural infrastructure development. Consequently, theGovernment has to allocate additional budget. Changing oil and gas price will affect APBN interms of state revenue and public expenditure. Any additional state revenue from oil and gasprice increase will be transfered to regions either under DBH oil and gas mechanism or DAUin the formulated sums. However, additional public expenditure from the same ground mustbe shouldered by Central Government, for example, increase in fuel subsidy following thesoaring oil price. In other words, any additional state revenue will be distributed to regions, but any additional public expenditure will be charged to Central Government. Unless thecurrent allocation method is changed, the Government will be potential to shouldersignificant financial burdens when the oil and gas price is skyrocketing as experienced in2007 and 2008.

8.714

6.304

8.090

14.015 14.272

0

2.000

4.000

6.000

8.000

10.000

12.000

14.000

16.000

2005 2006 2007 2008 2009

BillionRp

GRAPH VI.10ALLOCATION OF VERTICAL INSTITUTIONS BUDGET IN

NEW AUTONOMOUS REGIONS, 2005 - 2009

Personnel Expenditure Material Expenditure Capital Expenditure

Social Assistance Total

Financial Note 2010 English

Documents

Transcript of Financial Note 2010 English