ProdukHukum BankIndonesia
REPUBLIC OF INDONESIA
Recent Economic Developments
July, 2010
Published by Investors Relations Unit – Republic of Indonesia
Address
Tel
Facsimile
E-mail
Website
Bank Indonesia
International Directorate
Investor Relations Unit
Sjafruddin Prawiranegara Building, 5th floor
Jalan M.H. Thamrin 2
Jakarta, 10110 Indonesia
+6221 381 8316
+6221 381 8319
+6221 381 8298
+6221 350 1950
Elsya Chani: elsya_chani@bi.go.id
Firman Darwis: firman_darwis@bi.go.id
Dyah Miranti Wulandari: dyah_mw@bi.go.id
www.bi.go.id/iru
Table of Contents
I. Executive Summary
II. Indonesia Story: as Acknowledged by Rating Agencies
III. Positive Macroeconomic Developments
Executive Summary
The economy grew by 5.7% in Q1-2010 and forecasted to grow within the range of 5.5%-6.0% by the end of 2010. Bolstered by
Indonesia's external sector performance and investment, BI estimates for Q2/2010, economic growth will reach around 6%.
Economic data up to Q2-2010 supported us to believe that the economy, in line with the development in the global economy, is
moving toward better development than we previously expected on the beginning of this year. It bolstered Indonesia's external
sector performance and investment, with domestic recovery gaining strength as the economy is no longer reliant solely on
consumption. Bank Indonesia estimates Indonesia's Q2/2010 economic growth at about 6%. The optimism also supported by
latest development in the perception indicators such as yield spread, sovereign rating, CDS, CRC-OECD, etc. On the
backdrops, Bank Indonesia revised economic growth outlook for 2010 and 2011 to be consecutively within the range of 5.5-6.0%
and 6.0-6.5%.
The latest Board of Governors' Meeting convened in July 2010, resolved to hold the BI Rate at 6.50%. This decision was taken
after a comprehensive evaluation of economic performance and the future outlook of the economy, which is showing steady
overall improvement. The Board of Governors believes that the BI Rate at this level is consistent with achievement of the 5%+1%
inflation target in 2010 and remains conducive to recovery in the domestic economy amid escalating risks of uncertainty from the
debt crisis now besetting Greece and a number of other European nations.
Concerning prices, the Board of Governors takes note of indications of renewed inflationary pressure. CPI Inflation in June 2010
reached 0.97% (mtm), representing an annual rate of increase at 5.05% (yoy). Inflationary pressure was stoked mainly by soaring
inflation in the volatile foods category and specifically seasonings, recorded at 11.51% (yoy) due to seasonal uncertainties.
However, inflationary pressure from fundamentals, reflected in core inflation, has held at a modest 3.97% (yoy) with support from
adequate supply-side response to rising demand and the appreciating exchange rate trend. Similarly, little visible impact has
resulted from increases in electricity tariff with inflation in administered prices still at a modest 2.60%. BI will keep a close watch
on the rising inflationary pressure and make the necessary adjustments to monetary policy responses to ensure that inflation
remains on track with the established targeting range at 5%±1% in 2010.
4
Executive Summary
By end of 2010, lending growth is projected to reach 22%-24%. Up to the first half of 2010, banking industry has reached the
remarkable lending growth at 18.6%. Improved market confidence to the economic outlook also bring us more optimism in further
banking intermediation function optimization. Overall, banking industry remains in a stable condition and convinced to be
run prudently, which is reflected in the well-maintained Capital Adequacy Ratio (17.8%, as of end of May 2010) and safe level of
Non-Performing Loans at 3.6%, as of end of May 2010.
Balance of payments charted another surplus at a robust US$6.6 billion in Q1-2010, marking significant improvement over
the Q4-2009 surplus (US$4.0 billion). Going forward in Q2/2010, improvement in the global economy bolstered Indonesia's
external sector performance and investment which reflected on the current account surplus, estimated at USD1.75 billion in
Q2/2010 or ahead of the originally forecasted USD1.23 billion. Similarly, the capital and financial account posted a higher
estimated surplus at USD3.09 billion compared to the earlier USD1.16 billion forecast. The robust current account surplus and
capital and financial account surplus are consistent with the improvement in the global economy along with rising commodity
prices and renewed growth in capital inflows in response to the upward revision of the credit rating outlook and more upbeat
international perceptions.
The policy package launched by Bank Indonesia on 15 June 2010 also met with positive response from domestic and
international market actors and is envisaged to provide added reinforcement in monetary management and financial market
deepening. In response to these developments, the rupiah exchange rate maintained an overall appreciating trend in Q2/2010
accompanied by reduced volatility. International reserves at end-Q2/2010 reached USD76.3 billion, equivalent to 5.9
months of imports and servicing of official debt.
5
Indonesia Story: as Acknowledged by Rating Agencies
Impressively navigates through the global crisis and as growing confidence in economic outlook, the Republic
continued to receive good reviews, especially from Rating agencies
Moody’s Investors Service (June 21, 2010): revised the outlook of Indonesia’s foreign and local-currency Ba2
sovereign debt ratings to positive from stable. The positive outlook broadly reflects the country's capacity for
sustained strong growth, the overall stability and effectiveness of its fiscal and monetary policies, and expectations of
further improvements in the government's financial and debt position.
OECD (April 2, 2010): upgraded Indonesia’s Credit Risk Classification (CRC) from category 5 to 4. This upgrade
was a timely acknowledgement by the developed economies of the consistent economic improvement. This upgrade
would significantly improve Indonesia’s credit standing in front of the creditor countries especially the credit exports
creditor countries which eventually would decrease the debt burden.
S & P (March 12, 2010): upgraded Indonesia’s long-term foreign currency rating to BB from BB- with positive
outlook which indicates that Indonesia has big possibility to be upgraded within a year, even maybe faster. The main
factor supporting this decision is steadily improving debt metrics and growing foreign currency reserves which reduced
vulnerability to shock with continued cautious fiscal management.
Fitch Ratings (January 25, 2010): upgraded the Republic of Indonesia’s sovereign rating to ‘BB+’ from ‘BB’ with
stable outlook The rating action reflects Indonesia’s relative resilience to the severe global financial stress test of
2008-2009 which has been underpinned by continued improvements in the country’s public finances.
6
Positive Macroeconomic Developments
Real Sector: Indonesia Development Policy
Indonesia Development Policy is based on a ‘Triple Track Strategy’
1st
2nd
Pro-Growth:
Increase Growth by prioritizing export and investment
Pro-Job :
Boost up the real sector in order to create jobs
Pro-Poor:
3rd
8
Revitalize agriculture, forestry, maritime, and rural economy
to reduce poverty
Source: Coordinating Ministry for Economic Affairs
Economic Growth Sustained
Optimistic on growth prospects, it is quite strong compared globally
Indonesia’s economic growth for the whole 2009 reached 4,5% (yoy), better than expected. The major improvement was a result from increase in
exports, investment, and government consumption. Going forward in 2010, the Indonesian economy grew by 5.7% in Q1-2010
Economic data up to end of Q1-2010 supported us to believe that the economy, in line with the development in the global economy, is moving toward
better development than we previously expected on the beginning of this year. The optimism also supported by latest development in the perception
indicators such as yield spread, sovereign rating, CDS, CRC-OECD, etc. On the backdrops, Bank Indonesia revised economic growth outlook for
2010 and 2011 to be consecutively within the range of 5.5-6.0% and 6.0-6.5%.
The domestic economy has sustained only limited impact from the Euro-Crisis due to the robust condition of Indonesia's economic fundamentals. The
upbeat conditions and improving outlook for the global economy have benefited Indonesia's exports, which maintained brisk growth during the first four
months of 2010 with export performance approaching pre-2008 crisis levels.
Improvement in the domestic economy is visible across a range of indicators. While private consumption maintains brisk growth, exports have mounted
steadily on the performance of manufactured exports in response to improvement in global economic conditions, led by advanced economies. Strengthen
domestic and external demand is stimulating renewed growth in investment, reflected in rapidly growing imports of raw materials and capital goods. With
support from investment as well as consumption and exports, the domestic economy is now in an expansionary stage of the cycle.
Sustainable Economic Growth
% yoy
6.3
7.0
6.0
5.7
5.5
6.0
4.5
5.0
4.0
3.0
2.0
1.0
0.0
2006
(*): Preliminary
Source: Ministry of Finance, BPS.
9
2007
2008
2009
Q1-2010
Source: Bank Indonesia.
Inflation
The monetary policy stance is directed towards maintaining consistently low inflation while making adequate provision
for measures to strengthen economic recovery.
Inflation Expectation – Consensus Forecast
Inflation
20
Monthly (m-t-m)
Annually (y-o-y)
15
10
9.17
6.71
5.27
5.05
5
0.97
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Jan
Feb
Mar
Apr
May
June
July
Aug
Sep
Okt
Nov
Des
Jan
Feb
Mar
Apr
May
Jun
0
-5
10
2006
2007
2008
2009
2010
Stable rupiah is expected to damp pressure from higher commodity prices and pave the way for better inflation expectation. From domestic side, in
addition to administered price, subtle inflationary pressure would also be the result from higher demand along with higher economic growth as production
capacity remain adequate to respond to higher demand. Those conditions is projected to be reflected in inflation rate at 5 1% in 2010.
Renewed inflationary pressure are already noted, which in June resulted in 0.97% (mtm) CPI inflation, representing an annual rate of increase in the CPI at
5.05% (yoy). However, inflationary pressure from fundamentals, reflected in core inflation, has held at a modest 3.97% (yoy) with support from adequate
supply-side response to rising demand and the appreciating exchange rate trend. Similarly, little visible impact has resulted from increases in electricity tariff
with inflation in administered prices still at a modest 2.60%.
Future inflationary pressure until end of 2010 is predicted mainly from higher electricity tariff, upcoming Ramadhan festivities and higher food prices
associated with seasonal uncertainties.
Going forward in 2011, inflationary pressures could be spurred by an increasingly limited supply-side response to the expected sustained growth in demand.
BI will keep a close watch on the rising inflationary pressure and make the necessary adjustments to monetary policy responses to ensure that inflation
remains on track with the established targeting range at 5% 1% in 2010 and 2011.
Source: Bank Indonesia
Monetary Policy Stance
Since December 2008, BI has slashed BI Rate by 300 bps. The monetary relaxation has offered ample support for the economic
recovery process and bank intermediation.
In the latest Board of Governors' Meeting convened in July 2010, BI Rate is kept at 6.50%. This decision was taken after a
comprehensive evaluation of economic performance and the future outlook of the economy, which is showing steady overall
improvement.
The Board of Governors believes that the current level of BI Rate is consistent with achievement of the 5%+1% inflation target for 2010
and 2011 and remains conducive to recovery in the domestic economy amid the persistently high level of global risks from the debt
crisis in some European nations.
BI Rate
11
10
9
9.90
8
7
6.5
6
6.27
5
Total Overnight Inter-Bank Rate
BI rate
4
Jan-08
11
Mar-08
May-08
Jul-08
Aug-08
Oct-08
Dec-08
Jan-09
Mar-09
May-09
Jul-09
Aug-09
Oct-09
Dec-09
Jan-10
Mar-10
May-10
Jul-10
Source: Bank Indonesia.
Balance of Payments: Preliminary Estimates for Q2-2010
Improvement in external sector performance is reflected on the current account surplus, estimated at USD1.74 billion in Q2/2010 or
ahead of the originally forecasted USD1.23 billion. Similarly, the capital and financial account posted a higher estimated surplus at
USD3.09 billion compared to the earlier USD1.16 billion forecast. The surplus are consistent with the improvement in the global economy
along with rising world commodity prices and renewed growth in capital inflows in response to the upward revision of the credit rating
outlook and more upbeat international perceptions of Indonesia. With positive prospects on those two accounts, overall balance of
payments in Q2-2010 is estimated to post a surplus of around US$4.3 billion.
Accordingly, international reserves at end-June 2010 mounted to US$76.3 billion, equivalent to 5.9 months of imports and official
external debt service payments.
Official BOP statistics for Q2-2010 will be released in mid-August 2010.
Balance of Payments
12
Source: Bank Indonesia.
Sound Banking Sector
Protected by prudential guidelines and conservative practices, the Banking Sector has weathered the global
financial turmoil and posted good performance : strong solvency, contained risk exposure and profitability
Sound level of NPLs (%)
Sufficient CAR (%)
25.0
4
20.5
19.3
19.3
20.0
19.1
3.5
19.2
17.8
17.4
3.6
16.2
3
2.5
15.0
1.9
2
1.5
10.0
1.5
1
5.0
0.9
1.0
1
0.9
1
Dec-09
Feb-10
Mar-10
Apr-10
May-10
0.5
-
0
Dec-06
Dec-07
Dec-08
Dec-09
Feb-10
Mar-10
Apr-10
May-10
Dec-06
Dec-07
Dec-08
financial system stability up to Q2-2010 is well maintained, confirmed by Financial Stability Index (FSI) in June 2010 which was
recorded at 1.87 (slightly lower than May 2010 at 1.88). In addition to that, stress test results also indicates that the banking
industry is resistant to various risks, particularly credit risk, market risk and liquidity risk.
Banking system stability remains in sound and stable condition, reflected in high CAR level at 17.8% and sound level of NPL ratio
at 3.6% (as of May 2010).
Intermediary function is steadily improving reflected from 18.6% (yoy) credit expansion recorded in end of June 2010.
13
Source: Bank Indonesia.
In 2010, the Indonesian economy is positioned to grow higher
2010 Forecast
GDP Growth
is forecasted to be at
the upper limit of 5.5%6.0% projection
Main Factors Behind The Forecast
Export
is expected to chart
higher growth
Private
Consumption
will remain strong
Inflation
is estimated to be on
target at range of
5.0% 1%
14
With more upbeat confidence to the economy, exports and investment are expected to keep climbing, providing
additional boost to mounting consumption in support of higher levels of economic growth.
Global economic recovery will produce renewed acceleration in exports. The global economy is predicted to enter
an expansionary phase in 2010. Renewed momentum is predicted in the economies of Indonesia’s major trading
partners, such as China. This strengthened performance will position exports as one of the main engines of
economic growth in 2010.
Indonesian exports characteristics which is based on primary commodities has also supported export growth
acceleration.
Household consumption is forecasted to remain strong. The strengthening global economic outlook for 2010 will
given added momentum to Indonesia’s exports, which in turn will produce an overall increase in private incomes.
Higher investment will also contribute to rising incomes, thus paving the way for stronger public purchasing power.
Signs of future inflationary pressures until end of 2010 are noted, which mainly predicted from administered prices
and volatile food seasonal uncertainties. However, BI is positive to contain the inflation level within the target
range, and will keep a close watch on the rising inflationary pressure and make the necessary adjustments to
monetary policy responses to ensure that inflation remains on track with the established targeting range at 5% 1%
in 2010 and 2011.
Source: Bank Indonesia.
Main Banking Indicators
Banking system stability held firm amid the onset of renewed credit expansion (data as of May 2010)
* Preliminary figures, operational risk is calculated in May 2010 figures
15
Source: Bank Indonesia
Overview of Fiscal Policy for 2009 and 2010
Continue an effective fiscal stimulus 2009 (1.4% GDP), 2010 (1.6% GDP)
Fiscal
Stimulus
Policies
Reduce debt to GDP ratio: 2009 (28%), 2010 (27%).
Actual fiscal deficit 1.6% of GDP, lower than 2.4% of GDP target deficit projected in 2009 Revised Budget
Target fiscal deficit 1.6% of GDP in 2010 Budget (budget adjustments is in ongoing discussion with the
parliament) .
Tax and
Administrative
Reforms
Continue tax policy and administration reform, reduce rate for companies, certainty of tax policy for oil
companies
Implement the 1st batch of Performance Based Budget (PBB), Civil Service Reform and Remuneration
(11 ministries) and multi-years projects
Provide fiscal space for the new government to implement additional priority programs (0.4% of GDP or
equal to USD 2.5 billion)
New Feature of
Fiscal Policy
Sufficient fiscal risk for oil and commodity prices, El-Nino, provide guarantee on land acquisition for
infrastructure projects, secure financing for power (PLN) and restructuring water services (PDAM),
domestic oil price adjustment if necessary
Export promotion (additional capital for Indonesian Exim Bank) and incentives for real sector, climate
change projects (geothermal, bio-premium, green funds)
Maintain
Social Welfare
16
Continue welfare programs (PNPM, BOS, Jamkesmas, Raskin) and provide budget for education
sector
Source: Ministry of Finance
Fiscal Policy to Promote Economic Recovery
The fiscal policy aims to promote economic recovery by providing tax incentives to various sectors and
businesses which further promotes private consumption and investment spending
Reduce income tax rate for corporations from 28% to 25%
Reduce income tax rate by 5% for listed companies with 40% public ownership
Incentives on
General
Taxation
Provide income tax facilities for businesses in specific industries or areas
Free VAT for primary agriculture products
Eliminate many luxury tax items
Provide tax and custom Incentive for special areas in accordance with law on tax and custom
Eliminate non tax revenue for export and import documentation
Provide incentive for geothermal energy through income tax and VAT
Energy
Incentives
Incentives for
Industry
17
Provide tax incentive on imports (both income tax and VAT on imports) for the oil and gas exploration
sector
Provide incentive for green energy through for VAT and subsidy
Provide custom incentives for select industries
Provide custom incentives for imported capital goods and capex
Source: Ministry of Finance
Fiscal Policy to Enhance Competitiveness
The Indonesian government continues to support the development of infrastructure and enhance the social
welfare through the effective fiscal policy and incentives for specific sectors
Infrastructure
Development
and Social
Welfare
Guarantee obligation for State Water Company and subsidy on interest for clean water, and interest
credit for State Water Company, business in Aceh / Nias, and KKPE
Subsidy and VAT for people’s housing (low income housing)
Credit for green fuel development
18
Additional funds for land clearing for toll road building
Assistance to
Support
Specific
Sectors
Guarantee for 10,000 MW electricity program and IPP
Credit for farming and cow growers
Subsidy for fertilizers, seeds and inventory
Direct assistance for seeds at competitive pricing in order to revitalize plantation, cocoa and sugar
industry
Additional capital for LPEI (Indonesian Exim Bank) to finance export related activities, including for
SMEs
Provide incentives for high performance regions (e.g. performance on financial, economics and social
welfare)
Resolution for troubled asset at SOEs and SMEs loan
Source: Ministry of Finance
Financing Trend 2005-2010
Budget Deficit Financing
19
Source: Ministry of Finance
Debt Ratio
Debt to GDP Ratio (% of GDP)
Debt Service to GDP Ratio (%)
Table of Debt to GDP Ratio
End of Year
2004
2005
GDP
2.295.826,20
2.774.281,00
3.339.480,00
3.949.321,40
4.954.028,90
5.613.441,74
6.253.789,50
Debt Outstanding (billion IDR)
- Domestic Debt (Securities)
- Foreign Debt (Loan+Securities)
1.299.504,02
653.032,15
646.471,87
1.313.294,73
658.670,86
654.623,87
1.302.158,97
693.117,95
609.041,02
1.389.415,00
737.125,54
652.289,46
1.636.740,72
783.855,10
852.885,62
1.589.780,96
836.308,91
753.472,05
1.609.314,83
868.514,53
740.800,30
Debt to GDP Ratio
- Domestic Debt to GDP Ratio
- Foreign Debt to GDP Ratio
56,60%
28,44%
28,16%
47,34%
23,74%
23,60%
2006
38,99%
20,76%
18,24%
2007
35,18%
18,66%
16,52%
2008*
33,04%
15,82%
17,22%
2009**
28,32%
14,90%
13,42%
May 10***
25,73%
13,89%
11,85%
Notes:
* = Preliminary
** = Very Preliminary
*** = Very Very Preliminary, GDP number based on Budget 2010 Assumption
20
[Outstanding as of May, 2010]
Source: Ministry of Finance
Recent Economic Developments
July, 2010
Published by Investors Relations Unit – Republic of Indonesia
Address
Tel
Facsimile
Website
Bank Indonesia
International Directorate
Investor Relations Unit
Sjafruddin Prawiranegara Building, 5th floor
Jalan M.H. Thamrin 2
Jakarta, 10110 Indonesia
+6221 381 8316
+6221 381 8319
+6221 381 8298
+6221 350 1950
Elsya Chani: elsya_chani@bi.go.id
Firman Darwis: firman_darwis@bi.go.id
Dyah Miranti Wulandari: dyah_mw@bi.go.id
www.bi.go.id/iru
Table of Contents
I. Executive Summary
II. Indonesia Story: as Acknowledged by Rating Agencies
III. Positive Macroeconomic Developments
Executive Summary
The economy grew by 5.7% in Q1-2010 and forecasted to grow within the range of 5.5%-6.0% by the end of 2010. Bolstered by
Indonesia's external sector performance and investment, BI estimates for Q2/2010, economic growth will reach around 6%.
Economic data up to Q2-2010 supported us to believe that the economy, in line with the development in the global economy, is
moving toward better development than we previously expected on the beginning of this year. It bolstered Indonesia's external
sector performance and investment, with domestic recovery gaining strength as the economy is no longer reliant solely on
consumption. Bank Indonesia estimates Indonesia's Q2/2010 economic growth at about 6%. The optimism also supported by
latest development in the perception indicators such as yield spread, sovereign rating, CDS, CRC-OECD, etc. On the
backdrops, Bank Indonesia revised economic growth outlook for 2010 and 2011 to be consecutively within the range of 5.5-6.0%
and 6.0-6.5%.
The latest Board of Governors' Meeting convened in July 2010, resolved to hold the BI Rate at 6.50%. This decision was taken
after a comprehensive evaluation of economic performance and the future outlook of the economy, which is showing steady
overall improvement. The Board of Governors believes that the BI Rate at this level is consistent with achievement of the 5%+1%
inflation target in 2010 and remains conducive to recovery in the domestic economy amid escalating risks of uncertainty from the
debt crisis now besetting Greece and a number of other European nations.
Concerning prices, the Board of Governors takes note of indications of renewed inflationary pressure. CPI Inflation in June 2010
reached 0.97% (mtm), representing an annual rate of increase at 5.05% (yoy). Inflationary pressure was stoked mainly by soaring
inflation in the volatile foods category and specifically seasonings, recorded at 11.51% (yoy) due to seasonal uncertainties.
However, inflationary pressure from fundamentals, reflected in core inflation, has held at a modest 3.97% (yoy) with support from
adequate supply-side response to rising demand and the appreciating exchange rate trend. Similarly, little visible impact has
resulted from increases in electricity tariff with inflation in administered prices still at a modest 2.60%. BI will keep a close watch
on the rising inflationary pressure and make the necessary adjustments to monetary policy responses to ensure that inflation
remains on track with the established targeting range at 5%±1% in 2010.
4
Executive Summary
By end of 2010, lending growth is projected to reach 22%-24%. Up to the first half of 2010, banking industry has reached the
remarkable lending growth at 18.6%. Improved market confidence to the economic outlook also bring us more optimism in further
banking intermediation function optimization. Overall, banking industry remains in a stable condition and convinced to be
run prudently, which is reflected in the well-maintained Capital Adequacy Ratio (17.8%, as of end of May 2010) and safe level of
Non-Performing Loans at 3.6%, as of end of May 2010.
Balance of payments charted another surplus at a robust US$6.6 billion in Q1-2010, marking significant improvement over
the Q4-2009 surplus (US$4.0 billion). Going forward in Q2/2010, improvement in the global economy bolstered Indonesia's
external sector performance and investment which reflected on the current account surplus, estimated at USD1.75 billion in
Q2/2010 or ahead of the originally forecasted USD1.23 billion. Similarly, the capital and financial account posted a higher
estimated surplus at USD3.09 billion compared to the earlier USD1.16 billion forecast. The robust current account surplus and
capital and financial account surplus are consistent with the improvement in the global economy along with rising commodity
prices and renewed growth in capital inflows in response to the upward revision of the credit rating outlook and more upbeat
international perceptions.
The policy package launched by Bank Indonesia on 15 June 2010 also met with positive response from domestic and
international market actors and is envisaged to provide added reinforcement in monetary management and financial market
deepening. In response to these developments, the rupiah exchange rate maintained an overall appreciating trend in Q2/2010
accompanied by reduced volatility. International reserves at end-Q2/2010 reached USD76.3 billion, equivalent to 5.9
months of imports and servicing of official debt.
5
Indonesia Story: as Acknowledged by Rating Agencies
Impressively navigates through the global crisis and as growing confidence in economic outlook, the Republic
continued to receive good reviews, especially from Rating agencies
Moody’s Investors Service (June 21, 2010): revised the outlook of Indonesia’s foreign and local-currency Ba2
sovereign debt ratings to positive from stable. The positive outlook broadly reflects the country's capacity for
sustained strong growth, the overall stability and effectiveness of its fiscal and monetary policies, and expectations of
further improvements in the government's financial and debt position.
OECD (April 2, 2010): upgraded Indonesia’s Credit Risk Classification (CRC) from category 5 to 4. This upgrade
was a timely acknowledgement by the developed economies of the consistent economic improvement. This upgrade
would significantly improve Indonesia’s credit standing in front of the creditor countries especially the credit exports
creditor countries which eventually would decrease the debt burden.
S & P (March 12, 2010): upgraded Indonesia’s long-term foreign currency rating to BB from BB- with positive
outlook which indicates that Indonesia has big possibility to be upgraded within a year, even maybe faster. The main
factor supporting this decision is steadily improving debt metrics and growing foreign currency reserves which reduced
vulnerability to shock with continued cautious fiscal management.
Fitch Ratings (January 25, 2010): upgraded the Republic of Indonesia’s sovereign rating to ‘BB+’ from ‘BB’ with
stable outlook The rating action reflects Indonesia’s relative resilience to the severe global financial stress test of
2008-2009 which has been underpinned by continued improvements in the country’s public finances.
6
Positive Macroeconomic Developments
Real Sector: Indonesia Development Policy
Indonesia Development Policy is based on a ‘Triple Track Strategy’
1st
2nd
Pro-Growth:
Increase Growth by prioritizing export and investment
Pro-Job :
Boost up the real sector in order to create jobs
Pro-Poor:
3rd
8
Revitalize agriculture, forestry, maritime, and rural economy
to reduce poverty
Source: Coordinating Ministry for Economic Affairs
Economic Growth Sustained
Optimistic on growth prospects, it is quite strong compared globally
Indonesia’s economic growth for the whole 2009 reached 4,5% (yoy), better than expected. The major improvement was a result from increase in
exports, investment, and government consumption. Going forward in 2010, the Indonesian economy grew by 5.7% in Q1-2010
Economic data up to end of Q1-2010 supported us to believe that the economy, in line with the development in the global economy, is moving toward
better development than we previously expected on the beginning of this year. The optimism also supported by latest development in the perception
indicators such as yield spread, sovereign rating, CDS, CRC-OECD, etc. On the backdrops, Bank Indonesia revised economic growth outlook for
2010 and 2011 to be consecutively within the range of 5.5-6.0% and 6.0-6.5%.
The domestic economy has sustained only limited impact from the Euro-Crisis due to the robust condition of Indonesia's economic fundamentals. The
upbeat conditions and improving outlook for the global economy have benefited Indonesia's exports, which maintained brisk growth during the first four
months of 2010 with export performance approaching pre-2008 crisis levels.
Improvement in the domestic economy is visible across a range of indicators. While private consumption maintains brisk growth, exports have mounted
steadily on the performance of manufactured exports in response to improvement in global economic conditions, led by advanced economies. Strengthen
domestic and external demand is stimulating renewed growth in investment, reflected in rapidly growing imports of raw materials and capital goods. With
support from investment as well as consumption and exports, the domestic economy is now in an expansionary stage of the cycle.
Sustainable Economic Growth
% yoy
6.3
7.0
6.0
5.7
5.5
6.0
4.5
5.0
4.0
3.0
2.0
1.0
0.0
2006
(*): Preliminary
Source: Ministry of Finance, BPS.
9
2007
2008
2009
Q1-2010
Source: Bank Indonesia.
Inflation
The monetary policy stance is directed towards maintaining consistently low inflation while making adequate provision
for measures to strengthen economic recovery.
Inflation Expectation – Consensus Forecast
Inflation
20
Monthly (m-t-m)
Annually (y-o-y)
15
10
9.17
6.71
5.27
5.05
5
0.97
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Jan
Feb
Mar
Apr
May
June
July
Aug
Sep
Okt
Nov
Des
Jan
Feb
Mar
Apr
May
Jun
0
-5
10
2006
2007
2008
2009
2010
Stable rupiah is expected to damp pressure from higher commodity prices and pave the way for better inflation expectation. From domestic side, in
addition to administered price, subtle inflationary pressure would also be the result from higher demand along with higher economic growth as production
capacity remain adequate to respond to higher demand. Those conditions is projected to be reflected in inflation rate at 5 1% in 2010.
Renewed inflationary pressure are already noted, which in June resulted in 0.97% (mtm) CPI inflation, representing an annual rate of increase in the CPI at
5.05% (yoy). However, inflationary pressure from fundamentals, reflected in core inflation, has held at a modest 3.97% (yoy) with support from adequate
supply-side response to rising demand and the appreciating exchange rate trend. Similarly, little visible impact has resulted from increases in electricity tariff
with inflation in administered prices still at a modest 2.60%.
Future inflationary pressure until end of 2010 is predicted mainly from higher electricity tariff, upcoming Ramadhan festivities and higher food prices
associated with seasonal uncertainties.
Going forward in 2011, inflationary pressures could be spurred by an increasingly limited supply-side response to the expected sustained growth in demand.
BI will keep a close watch on the rising inflationary pressure and make the necessary adjustments to monetary policy responses to ensure that inflation
remains on track with the established targeting range at 5% 1% in 2010 and 2011.
Source: Bank Indonesia
Monetary Policy Stance
Since December 2008, BI has slashed BI Rate by 300 bps. The monetary relaxation has offered ample support for the economic
recovery process and bank intermediation.
In the latest Board of Governors' Meeting convened in July 2010, BI Rate is kept at 6.50%. This decision was taken after a
comprehensive evaluation of economic performance and the future outlook of the economy, which is showing steady overall
improvement.
The Board of Governors believes that the current level of BI Rate is consistent with achievement of the 5%+1% inflation target for 2010
and 2011 and remains conducive to recovery in the domestic economy amid the persistently high level of global risks from the debt
crisis in some European nations.
BI Rate
11
10
9
9.90
8
7
6.5
6
6.27
5
Total Overnight Inter-Bank Rate
BI rate
4
Jan-08
11
Mar-08
May-08
Jul-08
Aug-08
Oct-08
Dec-08
Jan-09
Mar-09
May-09
Jul-09
Aug-09
Oct-09
Dec-09
Jan-10
Mar-10
May-10
Jul-10
Source: Bank Indonesia.
Balance of Payments: Preliminary Estimates for Q2-2010
Improvement in external sector performance is reflected on the current account surplus, estimated at USD1.74 billion in Q2/2010 or
ahead of the originally forecasted USD1.23 billion. Similarly, the capital and financial account posted a higher estimated surplus at
USD3.09 billion compared to the earlier USD1.16 billion forecast. The surplus are consistent with the improvement in the global economy
along with rising world commodity prices and renewed growth in capital inflows in response to the upward revision of the credit rating
outlook and more upbeat international perceptions of Indonesia. With positive prospects on those two accounts, overall balance of
payments in Q2-2010 is estimated to post a surplus of around US$4.3 billion.
Accordingly, international reserves at end-June 2010 mounted to US$76.3 billion, equivalent to 5.9 months of imports and official
external debt service payments.
Official BOP statistics for Q2-2010 will be released in mid-August 2010.
Balance of Payments
12
Source: Bank Indonesia.
Sound Banking Sector
Protected by prudential guidelines and conservative practices, the Banking Sector has weathered the global
financial turmoil and posted good performance : strong solvency, contained risk exposure and profitability
Sound level of NPLs (%)
Sufficient CAR (%)
25.0
4
20.5
19.3
19.3
20.0
19.1
3.5
19.2
17.8
17.4
3.6
16.2
3
2.5
15.0
1.9
2
1.5
10.0
1.5
1
5.0
0.9
1.0
1
0.9
1
Dec-09
Feb-10
Mar-10
Apr-10
May-10
0.5
-
0
Dec-06
Dec-07
Dec-08
Dec-09
Feb-10
Mar-10
Apr-10
May-10
Dec-06
Dec-07
Dec-08
financial system stability up to Q2-2010 is well maintained, confirmed by Financial Stability Index (FSI) in June 2010 which was
recorded at 1.87 (slightly lower than May 2010 at 1.88). In addition to that, stress test results also indicates that the banking
industry is resistant to various risks, particularly credit risk, market risk and liquidity risk.
Banking system stability remains in sound and stable condition, reflected in high CAR level at 17.8% and sound level of NPL ratio
at 3.6% (as of May 2010).
Intermediary function is steadily improving reflected from 18.6% (yoy) credit expansion recorded in end of June 2010.
13
Source: Bank Indonesia.
In 2010, the Indonesian economy is positioned to grow higher
2010 Forecast
GDP Growth
is forecasted to be at
the upper limit of 5.5%6.0% projection
Main Factors Behind The Forecast
Export
is expected to chart
higher growth
Private
Consumption
will remain strong
Inflation
is estimated to be on
target at range of
5.0% 1%
14
With more upbeat confidence to the economy, exports and investment are expected to keep climbing, providing
additional boost to mounting consumption in support of higher levels of economic growth.
Global economic recovery will produce renewed acceleration in exports. The global economy is predicted to enter
an expansionary phase in 2010. Renewed momentum is predicted in the economies of Indonesia’s major trading
partners, such as China. This strengthened performance will position exports as one of the main engines of
economic growth in 2010.
Indonesian exports characteristics which is based on primary commodities has also supported export growth
acceleration.
Household consumption is forecasted to remain strong. The strengthening global economic outlook for 2010 will
given added momentum to Indonesia’s exports, which in turn will produce an overall increase in private incomes.
Higher investment will also contribute to rising incomes, thus paving the way for stronger public purchasing power.
Signs of future inflationary pressures until end of 2010 are noted, which mainly predicted from administered prices
and volatile food seasonal uncertainties. However, BI is positive to contain the inflation level within the target
range, and will keep a close watch on the rising inflationary pressure and make the necessary adjustments to
monetary policy responses to ensure that inflation remains on track with the established targeting range at 5% 1%
in 2010 and 2011.
Source: Bank Indonesia.
Main Banking Indicators
Banking system stability held firm amid the onset of renewed credit expansion (data as of May 2010)
* Preliminary figures, operational risk is calculated in May 2010 figures
15
Source: Bank Indonesia
Overview of Fiscal Policy for 2009 and 2010
Continue an effective fiscal stimulus 2009 (1.4% GDP), 2010 (1.6% GDP)
Fiscal
Stimulus
Policies
Reduce debt to GDP ratio: 2009 (28%), 2010 (27%).
Actual fiscal deficit 1.6% of GDP, lower than 2.4% of GDP target deficit projected in 2009 Revised Budget
Target fiscal deficit 1.6% of GDP in 2010 Budget (budget adjustments is in ongoing discussion with the
parliament) .
Tax and
Administrative
Reforms
Continue tax policy and administration reform, reduce rate for companies, certainty of tax policy for oil
companies
Implement the 1st batch of Performance Based Budget (PBB), Civil Service Reform and Remuneration
(11 ministries) and multi-years projects
Provide fiscal space for the new government to implement additional priority programs (0.4% of GDP or
equal to USD 2.5 billion)
New Feature of
Fiscal Policy
Sufficient fiscal risk for oil and commodity prices, El-Nino, provide guarantee on land acquisition for
infrastructure projects, secure financing for power (PLN) and restructuring water services (PDAM),
domestic oil price adjustment if necessary
Export promotion (additional capital for Indonesian Exim Bank) and incentives for real sector, climate
change projects (geothermal, bio-premium, green funds)
Maintain
Social Welfare
16
Continue welfare programs (PNPM, BOS, Jamkesmas, Raskin) and provide budget for education
sector
Source: Ministry of Finance
Fiscal Policy to Promote Economic Recovery
The fiscal policy aims to promote economic recovery by providing tax incentives to various sectors and
businesses which further promotes private consumption and investment spending
Reduce income tax rate for corporations from 28% to 25%
Reduce income tax rate by 5% for listed companies with 40% public ownership
Incentives on
General
Taxation
Provide income tax facilities for businesses in specific industries or areas
Free VAT for primary agriculture products
Eliminate many luxury tax items
Provide tax and custom Incentive for special areas in accordance with law on tax and custom
Eliminate non tax revenue for export and import documentation
Provide incentive for geothermal energy through income tax and VAT
Energy
Incentives
Incentives for
Industry
17
Provide tax incentive on imports (both income tax and VAT on imports) for the oil and gas exploration
sector
Provide incentive for green energy through for VAT and subsidy
Provide custom incentives for select industries
Provide custom incentives for imported capital goods and capex
Source: Ministry of Finance
Fiscal Policy to Enhance Competitiveness
The Indonesian government continues to support the development of infrastructure and enhance the social
welfare through the effective fiscal policy and incentives for specific sectors
Infrastructure
Development
and Social
Welfare
Guarantee obligation for State Water Company and subsidy on interest for clean water, and interest
credit for State Water Company, business in Aceh / Nias, and KKPE
Subsidy and VAT for people’s housing (low income housing)
Credit for green fuel development
18
Additional funds for land clearing for toll road building
Assistance to
Support
Specific
Sectors
Guarantee for 10,000 MW electricity program and IPP
Credit for farming and cow growers
Subsidy for fertilizers, seeds and inventory
Direct assistance for seeds at competitive pricing in order to revitalize plantation, cocoa and sugar
industry
Additional capital for LPEI (Indonesian Exim Bank) to finance export related activities, including for
SMEs
Provide incentives for high performance regions (e.g. performance on financial, economics and social
welfare)
Resolution for troubled asset at SOEs and SMEs loan
Source: Ministry of Finance
Financing Trend 2005-2010
Budget Deficit Financing
19
Source: Ministry of Finance
Debt Ratio
Debt to GDP Ratio (% of GDP)
Debt Service to GDP Ratio (%)
Table of Debt to GDP Ratio
End of Year
2004
2005
GDP
2.295.826,20
2.774.281,00
3.339.480,00
3.949.321,40
4.954.028,90
5.613.441,74
6.253.789,50
Debt Outstanding (billion IDR)
- Domestic Debt (Securities)
- Foreign Debt (Loan+Securities)
1.299.504,02
653.032,15
646.471,87
1.313.294,73
658.670,86
654.623,87
1.302.158,97
693.117,95
609.041,02
1.389.415,00
737.125,54
652.289,46
1.636.740,72
783.855,10
852.885,62
1.589.780,96
836.308,91
753.472,05
1.609.314,83
868.514,53
740.800,30
Debt to GDP Ratio
- Domestic Debt to GDP Ratio
- Foreign Debt to GDP Ratio
56,60%
28,44%
28,16%
47,34%
23,74%
23,60%
2006
38,99%
20,76%
18,24%
2007
35,18%
18,66%
16,52%
2008*
33,04%
15,82%
17,22%
2009**
28,32%
14,90%
13,42%
May 10***
25,73%
13,89%
11,85%
Notes:
* = Preliminary
** = Very Preliminary
*** = Very Very Preliminary, GDP number based on Budget 2010 Assumption
20
[Outstanding as of May, 2010]
Source: Ministry of Finance