Risks Related to Our Fixed and Cellular Telecommunication Business

270 PT Telkom Indonesia Persero Tbk However, we cannot assure you that we will be successful in mitigating the adverse impact of the substitution of mobile voice services and other alternative means of communication for wireline voice services or in reducing the rate of decline in our revenues generated from wireline voice services. Migration from wireline voice services to mobile services and other alternative means of communication may further intensify in the future, which may afect the inancial performance of our wireline voice services and thus materially and adversely afect our results of operations, inancial condition and prospects as a whole. Our data and internet services are facing increasing competition, and we may experience declining margins andor market share from such services as such competition intensiies Our data and internet services are facing increase competition from other data and internet operators including as mobile operators. The number of mobile broadband subscribers have increased with the increasing popularity of smart phones in Indonesia, which adversely afects our market share and revenues from our ixed line data and internet services. In addition, with the increasing popularity of smart phones in Indonesia, we expect that 4G long term evolution “LTE” services will increasingly become an intense area of competition for data and internet services, as well as cellular services. In 2014, the Government issued licenses for LTE 4G 900 MHz frequency band for cellular operators and in 2015 issued a policy to refarm the1800 MHz frequency for LTE use. Since our launch of 4G LTE services in December 2014, as of December 31, 2015, our LTE services covered 14 cities. However, as of such date, a couple of our cellular competitors have 4G LTE coverage in more cities than us. Further, in 2013, the regulator permitted the Wi-Max operators to deploy the LTE technology which will further intensify competition in the broadband internet space. Currently, First Media, which is part of the Lippo Group, is operating LTEWi-Max services in the Greater Jakarta area. We have been taking various measures in order to mitigate the impact of intense competition in our data and internet businesses. However, we cannot assure you that we will be successful in mitigating such adverse impact. Competition may further intensify in the future, which may afect the inancial performance of our data and internet services and thus materially and adversely afect our results of operations, inancial condition and prospects as a whole. Competition from existing cellular service providers and new market entrants may adversely afect our cellular services business The Indonesian cellular services business is highly competitive. Competition among cellular services providers in Indonesia is based on various factors, including pricing, network quality and coverage, the range of services, features ofered and customer service. With the increasing popularity of smart phones in Indonesia, we believe that data network quality and coverage, including 4G LTE coverage, will increasingly become an intense area of competition. Our cellular services business, operated through our majority-owned subsidiary, Telkomsel, competes primarily against Indosat and XL Axiata. Several other smaller GSM and CDMA operators also provide cellular services in Indonesia, including PT Hutchison CP Telecommunications “Hutchison”, and PT Smartfren Telecom Tbk “Smartfren Telecom”. In addition to current cellular service providers, the MoCI may license additional cellular service providers in the future, and such new entrants may compete with us. A number of consolidation among operators in Indonesia have occurred in recent years. In March 2010, PT Smart Telecom and Mobile-8 announced that they signed an agreement to use the same logo and brand under the name “smartfren”. On January 18, 2011, Mobile-8 acquired PT Smart Telecom, and on April 12, 2011, PT Mobile-8 Telecom Tbk changed its name to Smartfren Telecom. 271 PT Telkom Indonesia Persero Tbk XL Axiata completed the acquisition of a majority interest in PT Axis Telekom and merged in 2014, which resulted in XL Axiata becoming one of the three largest operators and also acquiring additional frequency allocations to implement 4GLTE technology. Further consolidation among operators may occur for operators to remain competitive, reduce operating costs and “rebalance” the broadband mobile frequency that require wider frequency bandwidth. The MoCI also supports operator consolidation, through not issuing additional or new licenses for cellular players. While operator consolidation may lead to improved conditions in the cellular telecommunication industry, it also present challenges for Telkomsel in maintaining its market position.

6. Risks Related to Development of New Businesses

We believe that eforts to develop new businesses other than the telecommunication business such as digital consumer and enterprise businesses, as well as international expansion are necessary to ensure continuing business growth. Risks related to new business development include competition from established players, suitability of business model, competition from disruptive new technologies or business models, the need to acquire new expertise in the new areas of operation, and risks related to online media which include intellectual property, consumer protection and conidentiality of customer data. Focusing on international expansion is one of our strategic business intiatives. In particular, we have started expansion into a number of jurisdictions in telecommunications or data related areas, namely Singapore, Hong Kong, Macau, Timor Leste, Australia, Myanmar, Malaysia, Taiwan, United States of America, Saudi Arabia. We have also entered into a conditional sale and purchase agreement in May 2015 to acquire Guam AP Teleguam Holdings, Inc, the parent company of GTA Teleguam, which has voice, mobile, ixed broadband and IPTV operations. The acquisition is subject to regulatory approvals. Expanding our operations internationally exposes us to a number of risks associated with operating in new jurisdictions for example, our international operations could be adversely afected by political or social instability and unrest, by regulatory changes, such as an increase in taxes applicable to our operations, macroeconomic instability, limitations on or controls on the foreign exchange trade, competition from local operators, diference in consumer preferences and a lack of expertise in the local markets in which we will be in operation. Any of these factors could cause our expected returns from our expansion to be limited and could have a material and adverse efect on our business, results of operations and inancial condition.

C. Quantitative And Qualitative Disclosure About Market Risk

We are exposed to market risks that arise from changes in foreign exchange rates and interest rates risk, each of which will have an impact on us. We do not generally hedge our long-term liabilities in foreign currencies but hedge our obligations for the current year. As of December 31, 2015. assets in foreign currencies reached 8.64 against our liabilities denominated in foreign currencies. Our exposure to interest rate risk is managed through a mix of ixed and variable rate liabilities and assets, including short-term ixed rate assets. Our exposure to such market risks luctuated during 2013, 2014, and 2015 as the Indonesian economy was afected by changes in the US Dollar- Rupiah exchange rate and interest rates themselves. We are not able to predict whether such conditions will continue during 2016 or thereafter. 272 PT Telkom Indonesia Persero Tbk Exchange Rate Information The following table shows the exchange rate of Indonesia Rupiah to US Dollar based the middle exchange rate which is calculated based on the Bank Indonesia buying and selling rates for the periodes indicated. Calender Year at Period End 1 Average 2 Low 2 High 2 Rp Per US1 2011 9,068 8,779 9,185 8,460 2012 9,670 9,380 9,707 8,892 2013 12,189 10,451 12,270 9,634 2014 12,440 11,878 12,900 11,271 2015 13,795 13,392 14,728 12,444 September 14,657 14,396 14,728 14,081 October 13,639 13,796 14,709 13,288 November 13,840 13,673 13,840 13,461 December 13,795 13,855 14,076 13,615 2016 through March 28 13,323 13,537 13,946 13,020 January 13,846 13,889 13,946 13,835 February 13,395 13,516 13,757 13,333 March through March 28 13,323 13,170 13,367 13,020 Source : Bank Indonesia 1 Determined based upon the middle exchange rate announced by Bank Indonesia applicable on the last day for the period. 2 Determined based upon the daily middle exchange rate announced by Bank Indonesia during the applicable period. Under the current exchange rate system, the exchange rate of the Indonesian rupiah is determined by the market, relecting the interaction of supply and demand in the market However, Bank Indonesia may take measures to maintain a stable exchange rate. For the year 2015, the average rate of rupiah to the US Dollar was Rp13,392 with the lowest and highest rates being Rp14,728 dan Rp12,444. The exchange rates used for conversation of monetary assets and liabilities denominated in foreign currencies are the buy and sell rates published by Reuters in 2013, 2014 and 2015. The Reuters buy and sell rates, applied respectively to monetary assets and liabilities, were, Rp12,160 and Rp12,180 to US1.00 as of December 31, 2013, Rp12,160 and Rp12,180 to US1.00 as of December 31, 2014 and Rp13,780 and Rp13,790 to US1.00 as of December 31, 2015. The Consolidated Financial Statements are stated in Rupiah. The convesion of Rupiah amounts into US Dollar are included solely for the convenience of readers and have been made using the average of the market buy and sell rates of Rp13,785 to US1.00 published by Reuters on December 31, 2015. On March 28, 2015 the Reuters bid and ask rates were Rp13,365 and Rp13,370 to US1.00. Foreign Exchange Controls Indonesia operates a liberal foreign exchange system that permits the free low of foreign exchange. Capital transactions, including remittances of capital, proits, dividends and interest, are free of exchange controls. A number of regulations, however, have an impact on the exchange system. For example, only banks are authorized to deal in foreign exchange and execute exchange transactions related to the import and export of goods. In addition, Indonesian banks including branches of foreign banks in Indonesia are required to report to Bank Indonesia any fund transfers exceeding US10,000. As a State-Owned Company, and based on the decree of the Head of PKLN, we are required to obtain an approval from PKLN prior to acquiring foreign commercial loans and must submit periodical reports to PKLN during the term of the loans.