General Review ProdukHukum BankIndonesia

Monetary Policy Report - Quarter I-2010 2 robust external side performance, more vigorous growth is forecasted for some sectors, most importantly manufacturing and trade. Manufacturing growth has picked up in response to stronger performance in export-oriented manufacturing and the automotive industry. At the same time, more vigorous trade sector growth is consistent with mounting activity in exports and imports and stronger manufacturing performance. Nevertheless, various issues remain that pose challenges to higher growth, particularly in regard to measures to accelerate infrastructure programmes and make optimum use of opportunities from the launching of the ASEAN-China Free Trade Agreement AC-FTA. The strengthening of the economy is also visible in the steady improvement in economic performance at the regional level. Economic performance in the regions was led by Sumatra, Kalimantan, Sulawesi, Maluku and Papua Kali-Sulampua and Jakarta. Other regions Java, Bali and Nusa Tenggara or Jabalnustra, however, reported slowing economic activity. Buoyant economic performance in the regions is driven by higher exports, investments and consumption. Export performance in individual regions has risen on higher exports of mainstay commodities, such as mining products and CPI in Sumatra and Kali-Sulampua and chemicals in the Jabalnustra region. In analysis by major export destinations, exports from individual regions have shifted from Japan, America and Europe as in the past to ASEAN and China, due to the more advanced recovery in these economies. Sumatra and Kali-Sulampua have even increased their share of exports to India, particularly for CPO and coal. Indications point to strengthening investment in line with the mounting pace of economic activity. Reflecting this is the positive growth in the indicators for cement consumption growth and capital goods imports. In the area of Regional Government investment, increases have been made in capital expenditures. The higher investment has been channelled mainly into infrastructure projects, such as construction of roads, dams, bridges and airports. In analysis by business category, the industry sector has picked up in response to improving domestic and external demand. More robust industry performance is reflected in production capacity expansion and higher raw materials imports in all regions. In the mining sector, performance has climbed largely from increased production of non-oil and gas mining products led by coal and copper. In contrast, oil and natural gas production continues on a slowing trend. Concerning prices, inflation remained at modest levels in Q12010. Low inflationary pressure in Q12010 was indicated by March 2010 deflation at 0.14 mtm, bringing annual CPI inflation to 3.43 yoy. The success in curbing inflation at this low level is partly attributable to the appreciation in the rupiah and adequate levels of supply in responding to increased demand. Besides this, the low inflation in March 2010 also resulted from a moderation of inflationary pressures from volatile foods mainly rice, due to the onset of the harvest season in some regions, and minimum inflationary pressure from administered prices. The balance of payments maintained an estimated solid position in Q12010, supported by recovery in the world economy. Projections point to a current account surplus, consistent with the steady improvement in exports, particularly of resource-based commodities including coal and copper. Conversely, imports have also climbed in response to more robust domestic and export demand. The capital and financial account similarly recorded General Review 3 an estimated Q12010 surplus on the strength of capital inflows and issuance of government foreign currency bonds. Risk indicators for Indonesia have improved, as reflected in the all- time low in the credit default swap CDS indicator for Indonesia, narrowing yield spread for Indonesia Government Bonds over US Treasury Notes and the upgrading of Indonesia’s rating. Taken together, international reserves at end-March 2010 stood at 71.8 billion US dollars, equivalent to 5.8 months of imports and servicing of official external debt. The solid performance in the balance of payments underpinned an appreciating trend in the rupiah. Measured as an average for Q12010, the rupiah appreciated by an overall 2.2 to Rp 9,254USD. At end Q12010, the rupiah stood at Rp 9,090USD, having gained 3.7 point to point. The strengthening of the rupiah was supported by conducive conditions in macroeconomic fundamentals, reflected in healthy performance in the balance of payments and improving risk perceptions. Other support for rupiah appreciation came from the continued attractiveness of returns on rupiah placements, reflected in uncovered parity UIP, covered interest parity CIP and the relatively high yield spread on Indonesia Government Bonds surpassing yields in other countries in the region. The appreciation in the rupiah was also accompanied by stable level of exchange rate volatility at 0.57 compared to the Q42009 level of 0.56. Financial sector performance has picked up in line with the recovery in the global and domestic economy. The JSX Composite Index mounted significantly in Q12010 with gains at 10.2. This index performance was the highest for any country in the region. Factors driving the JSX Composite gains include the brightening outlook for the Indonesian economy, and with it, reduced perceptions of risk, improvement in the credit rating and high returns on rupiah placements. Also reflecting this was movement in other financial indicators, such as declining yield on government securities. Considerable excess liquidity remains on the interbank money market, which has pushed the overnight interbank rate closer to the lower BI Rate corridor. The Bank Indonesia decision to lengthen the maturities of SBIs for reasons including financial deepening proved successful, as indicated by the narrowing of the high-low interest rate spread on the overnight interbank market. Added to this, the proportion of SBIs in the 3-month tenor soared to 67.0 from 24.64 at the end of the preceding quarter. Consistent with the diminishing perceptions of bank risks, deposit and lending rates saw further decline although less than expected. Looking forward, monetary policy transmission is predicted to improve in line with strengthening optimism of the banking system in the condition of the economy. At the micro level, conditions in the national banking system remain stable. Reflecting this is the still comfortable level of the capital adequacy ratio CAR at 19.3 in February. Similarly, the gross non-performing loans NPLs ratio remains below 4 with the net ratio at 1. Besides this, banking liquidity improved further, including liquidity on the interbank money market. Bank depositor funds similarly recorded growth. The improvements in the global and domestic economy during Q12010 are forecasted to carry forward into the future. This reinforces the confidence of Bank Indonesia in a more robust outlook for the Indonesian economy compared to earlier Monetary Policy Report - Quarter I-2010 4 forecasts. Economic growth in 2010 is predicted in the 5.0-6.0 range, up from the originally projected 5.0-5.5. The economy improved not only from the continued strength of consumption, but also higher exports in line with the global economic recovery. Rising demand accompanied by improvement in the investment climate is expected to drive significant growth in investment. The improvement in the economy is forecasted to carry forward into 2011 with growth possibly reaching 6.0-6.5. Rising demand matched by capacity for supply-side response is expected to keep future inflationary pressures at a modest level. A complete elaboration of the medium-term outlook for the economy is presented the Indonesian Economic Review 2009, accessible on the Bank Indonesia website. On 6 April 2010, the Bank Indonesia Board of Governors decided to maintain the BI Rate at 6.5 with an interest rate corridor at +- 50 bps around the BI Rate. Key to this decision was the assessment that the 6.5 level in the BI Rate remains consistent with achievement of the 5+1 inflation target for 2010. The present monetary policy stance is also regarded conducive to the economic recovery process and operation of the bank intermediation function. Latest Macroe conomic Indicators 5

2. Latest Macroeconomic Indicators

The continuing process of global economic recovery has also provided a boost to domestic economic performance. During Q12010, the increasingly broad-based global economic recovery was supported by solid economic performance in Asia with positive impact on the domestic economy. The better than forecasted growth in Q12010 came in response to strengthening of exports and also received support from indications of rising investment. More robust demand in trading partner nations coupled with high commodity prices boosted export performance. In a similar vein, business optimism for improvement economic conditions, improvements in the domestic investment climate and plans for government- sponsored infrastructure projects strengthened investment performance. Household consumption maintained an upward trend, bolstered by strong public purchasing power and buoyant consumer optimism. On the supply side, rising exports and imports are expected to strengthen performance in the manufacturing and trade, hotels and restaurants sectors. Growing export demand will generate a positive contribution for manufacturing, while higher exports will bring greater activity to the trade, hotels and restaurants sector. On the other hand, agriculture is expected to show reduced growth in Q12010, mainly due to the shift in the harvest season to early Q22010. Other sectors expected to see brisk growth are the electricity, gas and water utilities sector, primarily from the continuation of the kerosene conversion programme in some regions and commissioning of several powerplants in the Phase I 10,000MW project, and the transport and communications sector due to market penetration of the telecommunications business. DEVELOPMENTS IN THE WORLD ECONOMY Estimates point to added momentum in global economic recovery in Q12010. Emerging markets, led by Asia, again provided the driving force accelerating the improvement in the world economy. Developed economies are also predicted to chart positive growth despite the twin challenges of high unemployment levels and tight lending. However, recovery in the European Union lags somewhat due to the fiscal crisis in countries such as Greece and weakness of consumption indicators. Production in advanced economies is on a solid growth track due to the success of the fiscal stimulus in boosting industry activity, a development supported by low inventory levels. In developing nations, solid domestic demand in China is driving the strong demand for imports from Asia with a spillover effect on growth in other economies in the Asian region. In Q42009, the US economy reported solid growth on the back of strengthening activity in industry. The fiscal stimulus launched by the US government succeeded in boosting production, which also benefited from decline in inventory levels. The US economy reported Q42009 growth at 5.6 qtq, annualised, with positive year-on-year growth at -0.1. As a result, the US economy is expected to chart positive growth for Q12010. The latest information suggests a renewed surge in consumption in the US as worker lay-offs are brought under control. Stronger household consumption is reflected in steady growth in retail sales Monetary Policy Report - Quarter I-2010 6 for 4 months in a row. An added factor in the rising consumption is the slowing rate of worker lay-offs and a levelling off in the unemployment rate, now at 9.7. The conducive condition of the labour market is reflected in the decline in average initial jobless claims in Q12010 to 467 thousand from 500 thousand one quarter earlier. In further developments, negative growth in payroll figures is progressively easing. The production side in the US is gathering force with indications of entering an expansionary phase. The US government fiscal stimulus through infrastructure projects has given added impetus to US production. On the other hand, mounting retail sales have resulted in drawing down of inventories, with business responding by increasing production as reflected in the rising purchasing manager index PMI and industrial production index. Global financial market performance resumed an upward trend after a downturn halfway through the quarter, triggered by uncertainties over resolution of the fiscal crisis in Europe. Reflecting the growing investor optimism in the global financial market were the gains on stock markets in advanced economies during Q12010. Despite this, stock markets tumbled briefly on reports of burgeoning fiscal deficits in the GIPSY nations Greece, Ireland, Portugal, Spain and Italy and lack of clear resolution to this problem. Near the end of Q12010, investor risk appetite rebounded after announcement of a solution to fund the Greek fiscal deficit involving the European Union and IMF. Global markets also picked up after the release of data pointing to steady improvement in global economic fundamental and corporate financial statements consistent with forecasts. In Asia, economic recovery progressed rapidly during Q42009, with growth back in positive territory. In most Asian economies, growth has rebounded following the steep decline in the first half of 2009. Externally oriented countries in Asia saw significant improvement in line with robust demand for exports to China and India. Added to this was the escalating trend in domestic demand buoyed by positive wealth assets in line with rising housing and stock market prices in Asia and prolonged low interest rates. At the same time, other Asian economies more reliant on domestic demand have maintained positive trends. Looking forward, the economies of China and India remain in the forefront as the economic powerhouses of Asia. Estimated growth in China and India during Q12010 is 11.1 yoy and 7.9 yoy. World inflationary pressures during Q12010 were comparatively mild. According to composite data on inflation outcomes, world inflationary pressure held at a relatively stable level compared to the preceding quarter. World inflation in March 2010 was recorded at 3.1 yoy, unchanged from one quarter earlier. Indications suggest that the mounting level of international commodity prices has not escalated inflationary pressure, given the lack of full recovery in world economic activity. Monetary policy remained accommodative despite initial signs of tightening on some emerging markets. In Q12010, most major central banks, such as the Fed, BoJ and ECB, kept a lid on interest rates in order to promote domestic economic recovery. The Fed decided to hold its rate in the 0-0.25 range due to high unemployment and still modest forecast for inflation. Similarly, the ECB held its rate at 1.0 to create a conducive climate for resolution