INDONESIA REBOUNDS

INDONESIA REBOUNDSINDONESIA REBOUNDSINDONESIA REBOUNDSINDONESIA REBOUNDS

GINANDJAR KARTASASMITAGINANDJAR KARTASASMITAGINANDJAR KARTASASMITAGINANDJAR KARTASASMITA

The Japan Institute of International AffairsT k 21 F b 2007

The Japan Institute of International AffairsT k 21 F b 2007Tokyo, 21 February 2007Tokyo, 21 February 2007

Macroeconomic UpdateMacroeconomic Update

JIIA_Tokyo_07 www.ginandjar.com 2

Macroeconomic DevelopmentOutlook 2007Outlook 2007Policy Reform Initiatives


Positive Growth TrajectoryPositive Growth TrajectoryPositive Growth TrajectoryPositive Growth Trajectory

E i t d

Sustained economic growth despite difficult environment

Economy is on a steady upward trend. Indonesia’s performance is very much

5 6 %

> 7%6 - 7 %

comparable in the region

Over the medium term, this acceleration process should 4 %

5.25 %5 - 6 %

acceleration process should continue assuming that all reform programs are i l t d

4 %

implemented.

2001-2003 2004-2005 2006 2007 - 2009 2010 -

JIIA_Tokyo_07 www.ginandjar.com 4Source: CBS .

2001-2003 2004-2005 2006 2007 - 2009 2010 beyond

Macroeconomic UpdateMacroeconomic Updatepp

Growth steadily recover2006: reached 5.5%; government

Indonesia: Economic Growth 1998-2006

006 a d 5 5%; goconsumption and expert driven; investment remains weak.Medium Term

2007 2009 : 6 7 % p a

0.9

4.9

3.84.4

4.9 5.15.6 5.6

1.2

5.1 4.9 5.25.7 6

6.5 6.5

0

5

1998 1999 2000 2001 2002 2003 2004 2005 2006

nt p

.a

– 2007-2009 : 6-7 % p.a– After 2010 : 7+% % p.a

Confidence has been restored after fuel price adjustment.13 815

-10

-5Perc

en

fuel price adjustment. Stock prices are historic highExchange rates are stableReserves stronger and still increasing

M arket confidence strengthen

11000 1800R p/U S$ 83=100

-13.8-14.1-15

GDP Non Oil and Gass

Ratings upgraded.

Macroeconomic Stability has been achieved

Y i fl ti d f 17% l t9500

10000

10500

1300

1400

1500

1600

1700stock index (R H S)

Y o y inflation down from 17% last year to 6.6% or less this yearOver Medium Term: 3-4% is the target

8000

8500

9000

800

900

1000

1100

1200

Exchange rates (LHS)


8000Jan-05 M ay-05 Sep-05 Jan-06 M ay-06 Sep-06

800

Manufacturing sector shows signs of recovery

Non Oil/Gas Industrial Growth 2005-2006

15.0%

20.0%

5 0%

10.0%

0.0%

5.0%

Q1 Q2 Q3 Q4 Q1 Q2 Q3

-5.0%2005 2006

Non Oil/Gas Industries Food Textile Fertilizer Cement


Other Macroeconomic DevelopmentOther Macroeconomic DevelopmentFiscal sustainability has been reestablished.

Budget deficits has been contained around 1% of GDP

D eclin ing B udget D efic its(% of G D P)

-1%

0%

around 1% of GDPpublic debt ratio down to about 40% at the end of 2006 and will continue falling to below 30% of GDP in 2011.

-6%

-5%

-4%

-3%

-2%

B udget

R ealization

R evised budget

On spending sidePublic spending now back to the pre

-8%

-7%

FY98 FY99 FY00(9m )

FY 01 FY02 FY03 FY04 FY05 FY06 FY07

Public spending now back to the pre crisis level around 7-8% of GDP but with different composition.Sub-national gov’t control more than 50% of total

Public Investment(% of GDP)

6%

7%

8%

DistrictCentral gov't

50% of totalEducation spending on the rise and now comparable to the peer countries around 4-5% of GDPSpending on health and infrastructure a 3%

4%

5%

6% Province

Spending on health and infrastructure a also increasing.Commitment for PPP development.

0%

1%

2%

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007


1996 1997 1998 1999 2000 2001 2002 2003 2004 2005(E)

2006(P)

2007(P)

Sustainable macroeconomic stabilitySustainable macroeconomic stability

A positive outlook on macroeconomic stability should translate

17 %

A positive outlook on macroeconomic stability should translate into a reduction of cost of finance

Stabilization of rupiah at stronger level support declining inflation thus

7 %

3-4 %6.5 %

providing room for policy rates to decline. CPI inflation : 6.6%Inflation easing toward targeted level2005 2006 2007 2007-200912000 20 Inflation easing toward targeted level

Risks for destabilizing inflation still high: rice price has been increasing since last December.4000

6000

8000

10000

81012141618

Source: Bloomberg & BI

since last December.

0

2000

2001 2002 2003 2004 2005 Q106 Q206 Q306 Oct 06246

IDR/USD Inflation rate yoy SBI 1 month - BI Rate SBI 1 month - BI Rate


External position remains promising

Current account position has

FX reserves (LHS)USDbn Months

Current account position has turned around Rise in FX reserves

USDbn

7.16 640

45

50

7 0

8.0

9.0

( )

Months of import and official debtrepayment (RHS)

30%

50%

2

3

5.04.5

5.5

6.6

5.9

25

30

35

5.0

6.0

7.0

10%

%

0

1

2832

36 36 35 43

10

15

20

25

2 0

3.0

4.0

30%

-10%2001 2002 2003 2004 2005 2006

-1

0

0

5

10

001

002

003

004

005

06* 0.0

1.0

2.0

-50%

-30%

-3

-2

Current Account (LHS) Export (RHS) Import (RHS)

Source: Bank Indonesia


20 20 20 20 20 200

Continued improvement in external debt position

External Debt Key highlights

Debt to GDP ratio decline from81% in 2001 to 47% in 2005, andexpected to reach 39% in 2006.42

.1 .6 54 256.865.7

80.7

30 035.040.045.0

60 070.080.090.0

expected to reach 39% in 2006.

There was a significant drop ofDSR in 2005 since there wasParis Club moratorium due to21

.326.631

.9

33.937

.34

19.522

.2

22.828

.4

38

41.438.6

46.054.2

25.833.1

32 215.020.025.030.0

30.040.050.060.0

Paris Club moratorium due totsunami disaster in Aceh.

214

.622.127.132.2

-5.0

10.0

2001 2002 2003 2004 2005 2006*0.010.020.0

2001 2002 2003 2004 2005 2006

Govt Ext Debt / GDP (LHS) Private Ext Debt / GDP (LHS)

Total Ext Debt / GDP (RHS) DSR (LHS)

JIIA_Tokyo_07 www.ginandjar.com 10Note : External debt consists of central government, central bank and private debtSource: Bank Indonesia

Improving Ratio of Short Term Debt t Rto Reserve

112.6%

250003000035000

100.00%

120.00%

20 74%

73.9% 62.0% 57.4% 59.3%

45.9%150002000025000

40 00%

60.00%

80.00%

11.29%20.74% 18.72%

6.42%4.70%

23.89%

05000

10000

0.00%

20.00%

40.00%

2001 2002 2003 2004 2005 Jul-06

Short term debt (OM) Short term debt (RM)Short term debt (OM) Short term debt (RM)Short term debt (OM) to Reserve Short term debt (RM) to reserve

Note : OM = Original MaturityRM = Remaining Maturity


RM = Remaining Maturity

Exchange ratemodest appreciation - low volatility

R i h t bili d d g h g

Average Exchange Rate Highlights

K R /USD V l tilit % • Rupiah stabilized and average exchange rate during Q3 2006 was Rp. 9,125. Relatively unchanged from Rp. 9,115 in the preceeding quarter10,500

11,000

6 0

7.0

8.0Kurs HarianVolatilitasR t t V l tilit

Kurs, Rp/USD Volatilitas, %

p g q

• Average exchange rate in October depreciate 0.26% to Rp. 9174 from Rp 9153

9,500

10,000

4.0

5.0

6.0Rata-rata Volatilitas

9153

• Volatility stable at 0.5%8,500

9,000

1.0

2.0

3.0

0.518,000

Jul-0

5A

ug-0

5S

ep-0

5O

ct-0

5N

ov-0

5D

ec-0

5Ja

n-06

Feb-

06M

ar-0

6A

pr-0

6M

ay-0

6Ju

n-06

Jul-0

6A

ug-0

6S

ep-0

6O

ct-0

6

-

JIIA_Tokyo_07 www.ginandjar.com 12Daily exchange rateVolatilityAverage volatility

Fiscal Consolidation Outcomes

100%

Sovereign Debt to GDP Ratio

70%

80%

90%

Domestic

Compare to Other Emerging Countries

63.1

59.060 0

70.0

40%

50%

60%

70%

External

46.5 46.5 47.3

40.9

45.3 45.1

37.5

45.4

54.4

42.4

30 0

40.0

50.0

60.0

dari

PDB 2005

2006

2007

10%

20%

30%

40%

10.0

20.0

30.0

% d 2007

0%

10%

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

0.0

Indonesia Malaysia Philippines Thailand

Source: IMF, World Economic Outlook, Sept 2006


Banking indicators: Banks maintaining reasonable performance

Main Banking Indicators Highlights

% %

NPL ratios decline during the course of 2006

B k ll it li d ith CAR t d

Main Banking Indicators Highlights

22.422.5

23 14.0Average CAR Gross NPL Net NPL

Banks well capitalized with CAR at around 21% as of August 2006, far above the required level of 8%

LDR1 relatively stable during 2006 at 21.0

21.7

8 79.48.3

12.1

21

21.5

22

10.0

12.0

LDR relatively stable during 2006 at around 64-65 %. In September 2006 LDR recorded at 65%.

Net interest income (NII)2 in September

20.5

19.519.419.4

19.9

8.5

5 1

8.7

5.8

8.28.1

19 5

20

20.5

21

6.0

8.0

2006 was Rp 6.2 trillion, similar to December 2005 figure, despite slowing credit expansion

RoA stable at around 2 6% with significant

9 5.1 4.95.64.8

3.03.618.5

19

19.5

2.0

4.0

RoA stable at around 2.6% with significant rise in total assets.

1 Loan calculations include channeling loans2 Calculated as NII for the particular month divided by earning

1.72.1

17.5

18

2001

2002

2003

2004

2005

Qi'0

6

Q2'

06

Sep

06

0.0

JIIA_Tokyo_07 www.ginandjar.com 14Source: Bank Indonesia

p y gassets for the corresponding period

Q

'S

No More IMF and CGINo More IMF and CGI

In 2006 Indonesia settled the remaining debt to IMF amounting $ 7 billion, 4 years g $ , yahead.In January 2007 GOI announced theIn January 2007, GOI announced the dissolution of CGI.


THE PROBLEMSTHE PROBLEMSM i d l t h t bMacroeconomic development has not been followed by improvements in the microeconomic (real) sectors; major constraint for economic(real) sectors; major constraint for economic development. Lagging investmentLagging investment.Social Impact : increase of poverty from 16 % to 17 75 % (equivalent to 19 1 million poor17.75 % (equivalent to 19.1 million poor households in 2006) and 10.85 million unemployedunemployed.Tax Policy.


THE PROBLEMSTHE PROBLEMSM l b l l i h i fManpower: labor law, low income, euphoria of freedom of expression (demonstrations and strikes).strikes).Infrastructure: inadequate infrastructure constitute a major constraint to economy as well j yas social life.Unstable and high oil prices in international markets had given impact to socioeconomic lifemarkets had given impact to socioeconomic life of the people.Political and security instability impact onPolitical and security instability impact on economic development, particularly to investment.


Outlook 2007Outlook 2007Tabel

• Global economy slowing down

TabelProjected Economic Growth

2004 2005 2006 2007World Output 5.3 4.9 5.1 4.9Developed Countries 3.2 2.6 3.1 2.7 US 3.9 3.2 3.4 2.9

• Domestic demand should be the driver

Jepang 2.3 2.6 2.7 2.1 Euro Area 2.1 1.3 2.4 2Asia 8.8 9 8.7 10 China 8 8.5 8.3 7.3 India 5.8 5.1 5 5.6 Asean-4 5.5 5.7 5.8 5.4

for economic growth– Public investment and

World Trade Volume 10.6 7.4 8.9 7.6Impor Developed Countries 9.1 6 7.5 6Expor

Developed Countries 8 8 5 5 8 6

private investment– Private consumption

Developed Countries 8.8 5.5 8 6

InflationDeveloped Countries 2 2.3 2.6 2.3Emerging and Developing Countries 5.6 5.3 5.2 5

LIBORon USD 1.8 3.9 5.4 5.5on Yen 0.1 0.1 0.5 1.1on Euro Deposit 2.1 2.2 3.1 3.7Source: IMF


Outlook 2007Outlook 2007

Economic Growth: 6 – 6,5% (Budget: 6.3%; Consensus around 6 %); )Inflation: 6-7%P li R t 8 9 5% (B d t 8 5% iPolicy Rate: 8-9,5% (Budget: 8,5% in current pace; policy rate to go down to becomes 7,5% at the end of 2007); a stimulus for reducing bank’s lending rate.stimulus for reducing bank s lending rate.


Outlook 2007Outlook 2007

Th bl f h i bThe problem of purchasing power can be compensated in 2007 by: increase of civil servant’s salary, minimum wage, consumption credits, good control of inflation and lending rate by Bank Indonesia.The goal of economic development for 2007: reducing unemployment to 9.9 %2007: reducing unemployment to 9.9 % and number of poor people to 16,4 %.


Three Policy PackagesThree Policy PackagesThree Policy PackagesThree Policy Packages1 Investment Law & Procedure

InvestmentClimate

1 Investment Law & Procedure

2 Tax & Custom Reform

3 L b & I i tiImprovement 3 Labor & Immigration

4 Trade Licenses

Infrastructure

5 Cross Sector Strategic Policy Reform

6 Sector Restructuring, Corporatisation and Policy ReformInfrastructure

7 Regulation on monopoly & investment protection

8 Clear separation on the role of policy maker, regulator, contracting agency and operator

Financial

9 Coordination Monetary & Fiscal Authority

10 Financial Institution (Banking & Non Banking)

contracting agency, and operator


Financial 10 Financial Institution (Banking & Non Banking)

11 Capital Market and SOE Privatization

New Reform Packages and Special ProgramsNew Reform Packages and Special Programs

SME Policy Reform PackageFocus on particularly four areas: − Access to FinanceAccess to Finance− Access to Market− Human Resource Development and

Entrepreneurship− Regulatory Reform and Deregulation

Poverty Reduction ProgramPoverty Reduction ProgramFocus 1: Mainstreaming Budget for PovertyFocus 2: Integration and expansion of KDP (Kecamatan Development Program) and P2KP (Urban Poor) into PNPM (National Program on Community Empowerment)Focus 3: Shifting Cash Transfer to Conditional CashFocus 3: Shifting Cash Transfer to Conditional Cash TransferFocus 4: Others like Biofuel, Housing and Rural Infrastructures

Crash Program for Electricity ExpansionCrash Program for Energy ConversionCrash Program for Energy Conversion

LPG for KeroseneGas for GasolineCoal and Gas for Power GenerationBioenergy

Note : KDP = Kecamatan Development ProgramP2KP = Program Penanganan Kemiskinan PerkotaanPNPM= Program Nasional Pemberdayaan masyarakat.


g y y

Investment PoliciesInvestment PoliciesInvestment PoliciesInvestment PoliciesNew Investment Law is being finalized in the Parliament.Streamlining investment procedures.Equal treatment of foreign and domesticEqual treatment of foreign and domestic investment.Less negative listLess negative list.More incentive to invest.


SOCIO POLITICAL DEVELOPMENTSOCIO-POLITICAL DEVELOPMENT

Indonesia is emerging from long period of authoritarian rule to consolidate its status as one of the world’s largest democratic country.


Regime Change in IndonesiaRegime Change in Indonesia

• August 1945 - March

SukarnoSukarno

• March 1968 - May 1998

SuhartoSuharto

August 1945 March 1968

• Elected by the PPKI• Impeached by MPRS

March 1968 May 1998• Elected by MPRS• Resigned under

pressure

October 1999 JulyB.J. HabibieB.J. HabibieAbdurrahman WahidAbdurrahman Wahid

• May 1998-October 1999• Accountability Speech

Rejected• Declined to run for

October 1999 – July 2001Elected by MPRImpeached by MPR

President

Susilo Bambang Susilo Bambang YudhoyonoYudhoyono

MegawatiMegawati

• October 2004 – 2009• Directly elected

YudhoyonoYudhoyono• July 2001 – October 2004

• Elected by MPR • Lost election to SBY


SOCIO POLITICAL DEVELOPMENTSOCIO-POLITICAL DEVELOPMENT

I d i ’ liti l d i d l tIndonesia’s political and economic development after the REFORMASI (1998) seems to be on the right trackthe right track.Socio-political development: amendment of 1945 Constitution improvement of checks and1945 Constitution, improvement of checks and balances system, direct presidential and regional executives elections legal reform andregional executives elections, legal reform and decentralization, human rights, freedom of the press, bigger role of civil society. p , gg yPeace in Aceh.


MAJOR PROBLEMSMAJOR PROBLEMS

1. Institutions: ambiguity between presidential and parliamentary systems; weak bicameral parliamentary system, establishment of quasi-government institutions, and confusion of role and function in the judicial branch of government.

2. Political ethics and behavior:institutionalization of political acts versus personification of political figures; money politics, manipulation of masses.



3. Major problems in governance includes Reform of the bureaucracy quality of civil servantscorruptioninefficiencylow salaryImpact of problems in bureaucracy on socio-economic domains.



4. Ethno-nationalism: as negative impact of decentralization and political freedomdecentralization and political freedom (euphoria: from autonomy to special autonomy to independence?)autonomy to independence?)



Political trust and social trust: problem in law enforcement (frequently constrained by issues of human rights and freedom of expression).Pluralism: negative impact of pluralism in the form of horizontal conflicts along religious, ethnics, socio-economic divide.Terrorism.Terrorism.



5. Major ecological problems: Tsunami, earthquakes, volcanic eruptions, mud eruptions, deforestation, illegal logging, forest fires, floods and landslides

6. Major health problems: avian flu and dengue fever


JapanJapan--Indonesia RelationshipIndonesia Relationship

Japan is a traditional and natural economic partner and political ally of Indonesia Good relation and mutualpolitical ally of Indonesia. Good relation and mutual interest between the two countries have to be maintained.maintained. Generally Japanese people and the Japanese Business Community are “losing interests” in Indonesia, giving y g g gmore attention to China and India.


The Current State The Current State of Economic Cooperationof Economic Cooperation

TradeTrade

Year Indonesia’s Export to Japan

Indonesia’s Import from Japan

Surplus

2005 US$ 20.8 billion US$ 9.2 billion US$ 11.6 billion2006 US$ 23.9 billion US$ 7.3 billion US$ 16.6 billion

(Jan-Dec)


The Current State The Current State of Economic Cooperation . . .of Economic Cooperation . . .

ODAODAAl t 40% f I d i ’ ODA fAlmost 40% of Indonesia’s ODA comes from Japan:

EconomicSocial

Sectors

Institutional Capacity BuildingTechnology


The Current State The Current State of Economic Cooperation . . .of Economic Cooperation . . .

InvestmentInvestmentJ i till th bi t i t i I d iJapan is still the biggest investor in Indonesia among 103 countries with US$ 39 billion in 1 715 j t (13% f th t t l FDI) t1.715 projects (13% of the total FDI) up to June 2006.


Changes for Promising Changes for Promising Countries/Regions over the MediumCountries/Regions over the Medium--termterm

Note: “Medium-term” means the next 3 years or so.Source: JBEC Institute, Dec 2006


Milestones for Enhanced CooperationMilestones for Enhanced Cooperationpp

IndonesiaIndonesia--Japan Strategic Investment Action Plan (SIAP)Japan Strategic Investment Action Plan (SIAP)At the meeting between Prime Minister Junichiro Koizumi and President Susilo Bambang Yudhoyono on 2 June 2005, the two l d d th J I d i St t i I t t A tileaders announced the Japan-Indonesia Strategic Investment Action Plan (SIAP).This was an initiative to promote foreign investment in Indonesia p gbased on the shared recognition that a substantial increase in foreign investment is essential for poverty reduction and employment generation and that increased investment from Japan to Indonesiageneration, and that increased investment from Japan to Indonesia is an important challenge also for revitalization of the Japanese economy.SIAP i d f 118 ti it i 5 t l tSIAP is composed of 118 action items in 5 sectors, namely, tax, customs, labor, infrastructures, industrial competitiveness/small and medium enterprises.


Milestones for Enhanced Cooperation . . .Milestones for Enhanced Cooperation . . .pp

The significance of the November 2006 visit of President Susilo Bambang Yudhoyono to Japan:Japan:

Signing of the Strategic Partnership for Peaceful and Prosperous Futureand Prosperous Future.Signing of the Principles of Economic Partnership Agreement (EPA).


IndonesiaIndonesia--Japan Economic Partnership Japan Economic Partnership A t (IJA t (IJ EPA)EPA)Agreement (IJAgreement (IJ--EPA)EPA)

a Trade in Goods (Tariff and Non-Tariff Measuresa. Trade in Goods (Tariff and Non Tariff Measures, Rules of Origin, Trade Remedies).

b. Trade in Services.C t P dc. Customs Procedures.

d. Investment.e Movement of Natural Personse. Movement of Natural Persons.f. Energy and Mineral Resources.g. IPR.gh. Government Procurement.i. Competition Policy.j I t f B i E i t dj. Improvement of Business Environment and

Promotion of Business Confidence.k. Cooperation


p

Political CooperationPolitical CooperationPolitical CooperationPolitical Cooperation

Bilateral.Regional.Regional.Multilateral.


Momentum of the 50Momentum of the 50thth Anniversary of Anniversary of IndonesiaIndonesia--Japan Diplomatic RelationsJapan Diplomatic Relations

20082008

Broadening and deepening exchanges and ti l t l d t dicross generational mutual understanding.

Milestone for a more advanced and mature bil t l l tibilateral relations.Contribution to peace, stability and economic

th th E t A i igrowth on the East Asia region.


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