ProdukHukum BankIndonesia

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REPUBLIC OF INDONESIA

Recent Economic Developments

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Published by Investors Relations Unit –Republic of Indonesia Address Bank Indonesia

International Directorate Investor Relations Unit

Sjafruddin Prawiranegara Building, 5th_floor

Jalan M.H. Thamrin 2 Jakarta, 10110 Indonesia

Tel +6221 381 8316

+6221 381 8298 Facsimile +6221 350 1950 E-mail [email protected]

[email protected]

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Executive Summary

 Indonesia’s economy has posted robust growth in 2008 and one of the rare countries which successfully posted a

positive growth rate in 2009, navigating through the global financial turmoil and economic slowdown. For the whole 2009, the economy charted fairly vigorous growth at 4.5%(yoy) and it is projected at 5.5 % in 2010

 Banking industry is in stable condition with high level of CAR (17.4%) and comfortably safe level of NPL (gross) at a 3.8% (as of December 2009 data).

 By end of the Q4-2009, Indonesia's overall balance of payments recorded a surplus of US$4.0 billion larger than a surplus of US$3.5 billion in the preceding quarter, resulted from surpluses in both the current account as well as the capital and financial account.

 International reserves reached to USD 69.5 billion as of end of January 2010, equivalent to about 6.8 months of imports and official external debt payment.

 In 2009, Rupiah has been showing an appreciation trend, mainly supported by continuing of global economic recovery and positive economic performance which outperformed regional economies. Rupiah strengthened from IDR 10,950 against USD as on December 31, 2008 to IDR 9,400 against USD as on December 31, 2009, representing 16.5% appreciation .

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Executive Summary

 Monetary relaxation during 2009 has provided ample support for the economic recovery and bank intermediation processes. At the latest Board of Governors Meeting convened in January 2010, The BI rate decided to be kept at 6.50% after concluding the present level of the BI Rate is consistent with achievement of the 2010 inflation target, set at 5%±1%. In the balance of risk, the probability of renewed inflationary pressure is low, at least during the first half of 2010. The BI Rate is also seen as favorable to boost economic recovery, maintain financial system stability and

promote the banking intermediation function.

 The Indonesian economy in 2009 has charted remarkably low inflation. In 2009, the Consumer Price Index (CPI) recorded annual inflation at 2.8% (yoy). Inflationary pressure has eased in response to the government decision to lower fuel prices at the beginning of the year, external factors of lower trading partner inflation, appreciation of the exchange rate, and better public expectations on inflation. In January 2010, monthly inflation arrived at 0,84% (mtm) or 3,58% (yoy), slightly higher than the previous month. Inflation in January 2010 was driven mainly by volatile food, especially rice. However, we are confident Inflation in 2010 will stay within the target range of 5%±1%.

 With the fiscal deficit target of 1.6% of GDP in 2010, Government continues to maintain the balancing act to support the recovery and to anticipate the global growth momentum going forward by improving public infrastructure and energy. In the medium term, fiscal policy is directed toward maintaining fiscal consolidation while at the same time sustaining fiscal stimulus. We expect to see fiscal deficit move on a downward trend. On the revenue side, tax ratio is expected to pick up.

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Indonesia Story: as Acknowledged by Rating Agencies

Despite of the global crisis, the Republic continued to receive good review from Rating agencies:

 Moody’sInvestors Service (16 September 2009): upgradedIndonesia’sforeign and local-currency sovereign debt ratingsto Ba2 with stable outlook. The upgrade was prompted by the Indonesian economy’s relatively strong resilience to the global recession as well as its healthy medium-term growth prospects.

 S&P (23 October 2009): revised the outlook on Indonesia’s BB- rating to positive from stable. The outlook change takes into account their expectation that debt reduction and underlying cautious fiscal management will remain key elements of macroeconomic policy. It also incorporates S&P view that a reform-minded leadership with a fresh and increased mandate will continue to pursue microeconomic reforms to increase Indonesia's growth potential, and further strengthen policy coordination and implementation thorough administrative reforms.

 Fitch Ratings upgraded the Republic ofIndonesia’s sovereign rating in January 25, 2010 (IDRs) 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 thecountry’spublic finances.

CCC-CCC+ B BB-BB+ BBB SD/DDD R/C CC CCC B-B+ BB BBB-Ca Caa2 B3 B1 Ba2 Baa3 Baa1 BBB+ C Caa3 Caa1 B2 Ba3 Ba1 Baa2 Economic Crisis in 1998 Banks Recapitalization

Continuous fiscal adjustment, improving liquidity and structural

improvements in real economy

Sound record of fiscal management on the success of Government efforts to improve

the investment climate

Current Ratings:

Moody’s: Ba3

S&P: BB-Fitch BB

Diminished likelihood that the Government will seek additional

debt rescheduling

Gradually improving external liquidity, macroeconomic stability and improved political

conditions Jan 10: Fitch upgrades to BB+ (stable outlook)

Sep 09: Moody’s

upgrade to Ba2 (stable outlook)

Oct 09: S&P revised outlook

to positive

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Indonesia Development Policy is based on a

‘Triple

Track

Strategy’

1st

Pro-Growth:

Increase Growth by prioritizing export and investment

2nd

Pro-Job :

Boost up the real sector in order to create jobs

3rd

Pro-Poor:

Revitalize agriculture, forestry, maritime, and rural economy

to reduce poverty

Real Sector: Indonesia Development Policy

Source: Coordinating Ministry for Economic Affairs

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Fiscal Policy Overview 2009 and 2010

Fiscal Policy framework for 2009 and 2010

Fiscal Stimulus Policies:



Continue an effective fiscal stimulus



Actual fiscal deficit 1.6% of GDP, lower than the 2.4% of GDP target deficit projected in 2009 Revised Budget



Target fiscal deficit 1.6% of GDP in 2010 Budget



Reduce Public debt to GDP ratio: 29.6% as of September 2009

Maintain Social Welfare



Continue welfare programs and provide budget for education sector Tax and Administrative Reforms:



Continue tax policy and administration reform



Simplify tax regulations and broaden tax base for taxpayers

Fiscal Policy for 2010 to Promote Economic Recovery

 Energy incentive

Fiscal Policy for 2010 to Enhance Indonesia’s Competitiveness

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Economic Growth Sustained

(*): Preliminary

Source: Ministry of Finance, BPS.

Sustainable Economic Growth

 During 2007 - 2008, the economy performed steadily at 6,2% on average, which was the highest GDP growth after Asian crisis. However, in Q4-2008, Indonesia’s economic performance began to moderate as an impact of the global economic downturn.

 Furthermore, GDP growth in Q1-2009 and Q2-2009 slid to 4,5% and 4,1% (yoy). The softening GDP growth was largely the result of plunging export, commensurate with the deterioration in global economic condition. Despite this, economic activity fuelled by the national election activities has been able to keep domestic economy from further decline.

 Entering the Q3-2009, global economic development showed a sign of improvement, faster than expected. Household consumption remains strong, primarily supported by maintained household confidence to domestic economic performance. As a result, the Indonesian economy in Q3-2009 charted a 4,2% growth (yoy) and will continue to trend upward.

 GDP in Q4-2009 showed a significant improvement charted a 5.4% growth (yoy). and as result Indonesia’s economic growth for the whole 2009 reached 4,5% (yoy), better than expected. The major improvement was a result from increased exports, investment, and government consumption.

 Going forward in 2010, the Indonesian economy is forecasted to grow in the range of 5.0%-5.5%, with growth in 2011 climbing to 6.0%-6.5%. This improving growth trend is predicted alongside recovery in the world economy, strong domestic demand, and improvement in financial and banking sector.

The growth is quite strong compared globally.

9 _{Source: Bank Indonesia.}

0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0

2006 2007 2008* 2009*

5.5

6.3

6.0

4.5 % yoy

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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

The industry’s resilience and maintained positive performance is owed to prudent measures and policies:



Banks kept away from trouble and remained free from toxic assets



Banks were not dependent on international funding



Enhanced supervision & risk management, including licensing for Structured Products



Swap has been extended from 7 days to 1 month



Bank Indonesia renewed provision of short-term liquidity facility to provide access for all banks in the event of severe liquidity constraints. Collateral requirements are also extended. The new policies allow banks to also include performing loans as collaterals from previously only high quality

Sufficient CAR (%) Declining NPLs (%)

21.3%

19.3%

16.8% 17.4%

2006 2007 2008 Dec-09

Average CAR (%)

3.60%

1.90%

1.50%

0.90%

2006 2007 2008 Dec-09

Net NPL(%)

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Balance of Payments Q4-2009

Balance of Payments

Indonesia's balance of payments in Q4/2009 posted a surplus of US$4.0 billion, up from a surplus of US$3.5 billion in Q3/2009. This surplus is encouraged by the performance of both the current account and the capital and financial account. In response, international reserves at end-Q4/2009 mounted to US$66.1 billion, equivalent to 6.5 months of imports and official external debt service payments.

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Flexible monetary policy to support growth objectives

Source: Bank Indonesia, BPS.



The monetary relaxation during 2009 with BI Rate lowered 300 bps to 6.50% has provided ample support for the economic recovery and bank intermediation processes.



In regard to prices, the Indonesian economy in 2009 has charted remarkably low inflation. In 2009, the Consumer Price Index (CPI) recorded annual inflation at 2.78% (yoy)., the lowest inflation in ten years



Inflationary pressure has eased in response to the government decision to lower fuel prices at the beginning of the year, external factors of lower trading partner inflation, appreciation in the exchange rate and softening public expectations of inflation.



The monetary policy stance is directed towards maintaining consistently low inflation while making adequate provision for measures to strengthen economic recovery.

The monetary relaxation has offered ample support for the economic recovery and bank intermediation process

0

5

10

15

20 2006

2007

2008

2009

BI Rate (%)

Inflation (%y-o-y)

-5

0

5

10

15

20

Food Processed Food

Housing Clothing Health Education Transp. & Comm.

%

2006

2007

2008

2009

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 Inflation in 2009 came to 2.78% (yoy), fell below the inflation target and the lowest inflation in 10 years. The low inflation was closely linked to external demand and a series of policy actions instituted by the government. The steep global economic contraction sent world commodity prices tumbling in 2009, a development that also slowed activity in the domestic economy

 As global economic growth is expected to pick up, international commodity prices will follow suits accordingly, raising imported inflation. From domestic side, in addition to administered price, inflationary pressure will also come from higher demand along with higher economic growth. Those conditions will increase people expectation on inflation. With that, inflation is estimated to return to its normal path of 5 1% in 2010.

Inflation

CPI Inflation

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IDR is expected to be stable



In January 2010, the Rupiah appreciated on the increasing of investor’s risk appetite due to the improvement of global economic

recovery. The Rupiah’s gain was being driven by the positive regional sentiment as Asia leading growth in global recovery.



Investors’ preference to hold Rupiah assets was also supported by better economic growth in 2009 higher than other regional economy.



Foreign investors purchased Rupiah assets such as SBI, government bonds (SUN) and stocks. The increase of Rupiah assets holdings was driven by an attractive yieldof Indonesia’s assets as the highest yield in South East Asia region.



Rupiah strengthened 0.55% from IDR 9,404 per USD as on December 31,2009 to IDR 9,353 per USD in January 2010. Rupiah expected to be stable along with favorable economic condition.

Rupiah Exchange Rate –Against USD Exchange Rate Movement –Indonesia Compared to Regional

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In 2010, the Indonesian economy is positioned to grow higher

GDP Growth

is forecasted at about 5.0%-5.5%

 Better exports performance along with global economic recovery and rising commodity prices

 Strong household consumption growth on the back of strong consumer confidence and increasing income from exports revenue

 Responding to strong demand from domestic and external, investment is also expected to pick up

2010 Forecast Main Factors Behind The Forecast

15 Source: Bank Indonesia.

Inflation

is estimated to be on target at range of

5.0% 1%

 As global economic growth is expected to pick up, international commodity prices will follow suits accordingly, raising imported inflation.

 From domestic side, in addition to administered price, inflationary pressure will also come from higher demand along with higher economic growth. Those conditions will increase people expectation on inflation.

 Volatile food inflation is estimated to remain low as production and distribution of food will remain favorable.

Export

is expected to chart higher 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.

Private

Consumption

will remain strong

 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.

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Monetary Policy Stance

BI Rate

 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 last Board of Governors' Meeting in January 2010, Bank Indonesia has decided to keep the BI Rate unchanged at 6.5%. Following an evaluation of the economy in 2009 and deliberation of the future economic outlook, The Board of Governors believes that the monetary relaxation brought about by the 300 bps decline in the BI Rate offers ample support for the economic recovery process and bank intermediation. At 6.50%, the BI Rate is also deemed consistent with achievement of the inflation target for 2010, set at 5% 1%.

Source: Bank Indonesia.

12.75

9.75

8.00

9.50

6.50

6 7 8 9 10 11 12 13 14

2006 2007 2008 2009 2010

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 Inflation in 2010 is forecasted to return to its normal path alongside renewed strength in domestic economic activity and commodity prices. Bank Indonesia continues in monitoring global economic developments and taking the necessary measures to safeguard macroeconomic stability while maintaining a conducive climate for the economy.

 To enhance the effectiveness of monetary policy transmission, BI will encourage systemically important banks (SIBs) to play significant role as market leaders in setting the deposit and credit rates. BI will also encourage banks to continue extending credit to the real sector, without abandoning prudential banking policy.

Inflation Expectation

CPI Inflation Forecasts Inflation Expectation –Consensus Forecast

18 Source: Bank Indonesia

4 .9 5 .5 0.0 2.0 4.0 6.0 8.0 10.0 12.0 Ja n -08 Fe b -08 M a r-08 A p r-08 M a y -08 Ju n -08 Ju l-08 A u g -08 Se p -08 O c t-08 N o v -08 De c -08 Ja n -09 Fe b -09 M a r-09 A p r-09 M a y -09 Ju n -09 Ju l-09 A u g -09

%, yoy

_{Ekspektasi Inflasi - Consensus Forecast}

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2010 Growth provides a higher forecast of 5.0-5.5% with strong improvement expected in investment and exports performance, while private consumption remain strong.

Growth Projection

Source: Bank Indonesia, BPS.

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Latest Macroeconomic Indicators

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The Indonesian banking sector continues to maintain financial stability and show positive performance

(as of December 2009):

Banking Stability

22 Source: Bank Indonesia

Dec-06 Dec-07 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09

Total Assets (T Rp) 1,693.5 1,986.5 2,310.6 2,352.1 2,354.3 2,388.6 2,534.1

Deposits (T Rp) 1,287.0 1,510.7 1,753.3 1,786.2 1,824.3 1857.3 1973.0

- Demand Deposits 338.0 405.5 430.0 437.0 447.1 460.4 465.9

- Savings 333.9 438.5 498.6 492.5 515.0 536.2 605.4

- Time Deposits 615.1 666.7 824.7 856.7 862.1 860.7 901.7

Earning Assets (T Rp) 1,556.2 2,794.0 3,478.6 3,520.4 3,567.0 3607.3 3823.0

- Loans (incl. channeling) 832.9 1,045.7 1,353.6 1,342.1 1,368.9 1399.9 1470.8

- Loans (excl. channeling) (T Rp) 792.2 1,002.0 1,307.7 1,305.4 1,335.4 1366.1 1437.9

- BI Certificates 179.0 203.9 166.5 208.1 204.2 182.4 212.1

- Overnight Placements at BI 38.6 46.8 71.9 46.8 58.6 44.8 84.4

- Securities 342.9 350.2 358.5 374.0 363.3 351.7 346.2

- Interbank Placements 156.8 139.8 213.8 236.9 229.5 252.9 261.5

- Equity Placements 5.9 5.6 6.6 7.0 7.0 9.6 10.0

Net Interest Income--Cummulated (T Rp) 83.1 96.4 113.1 31.4 63.5 94.6 129.3

Capital Adequacy Ratio (%) 20.5 19.3 16.2 17.4 17.0 17.7 17.4

Loans/Earning Assets (%) 53.5 37.4 38.9 38.1 38.4 38.8 38.5

Gross NPL (incl. channeling) (%) 7.0 4.6 3.8 4.5 4.5 4.3 3.8

Gross NPL (excl. channeling) (%) 6.1 4.1 3.2 3.9 3.9 3.8 3.3

Net NPL (incl. channeling) (%) 3.6 1.9 1.5 1.9 1.7 1.3 0.9

Net NPL (excl. channeling) (%) 2.5 1.2 0.8 1.2 1.0 0.7 0.3

Return on Assets (%) 2.6 2.8 2.3 2.8 2.7 2.6 2.6

Net Interest Margin (%) 0.5 0.3 0.3 0.4 0.3 0.3 0.3

Ops Expense to Ops Income (%) 86.4 78.8 84.1 82.3 82.2 82.0 81.6

Loan to Deposit Ratio (%) 64.7 69.2 77.2 75.1 75.0 75.4 74.5

No. of banks 130 130 124 123 122 121 121

No. of bank office network 9,110 9,680 10,936 12,039 12,556 12,652 12,971

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 With prudential and governance principles in place, the Indonesian banking system has fairly insulated itself from the adverse impacts of global financial meltdown and has been able to weather the global crisis

 Prudential and governance principles have prevented banks from:

 having exposures in equity markets

 investing in real estate and property markets

 engaging in other speculative transactions, including sub-prime lending and investing in US sub-prime mortgage securities

 Banks have exercised prudence and stronger governance. As a result, banks in general maintain:

 High CAR

 Low NPL

 There is still much room for increased credit growth

The Indonesian Banking sector: Weathering the Global Crisis

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Prudential Measures To Mitigate Instability

24 Source: Bank Indonesia

Statutory reserve has been adjusted to mitigate systemic liquidity risk. Banks are required to maintain statutory and secondary reserves. Statutory reserves have been lowered to 5.0% for domestic currency (Indonesian Rupiah) plus 2.5% secondary reserves must be pledged in the form of SBI (BI Certificate) and Government Bonds;

Statutory reserves for foreign currency are lowered to 1% (previously 3%). Banks have to meet statutory reserve requirements by October 24, 2009 to allow sufficient time for portfolio adjustments;

Swap has been extended from 7 days to 1 month;

Banks may request foreign exchange to meet their customers’ need against underlying transactions. This allows smooth demand for foreign currencies in the domestic market;

Bank Indonesia renewed provision of short-term liquidity facility to provide access for all bank in severe liquidity constraints. Collateral requirements are also extended. The new policies allow banks to also include performing loans as collaterals from previously only high quality securities;

Bank Indonesia may provide emergency liquidity financing to prevent systemic crisis; Structured products are subject to license from Bank Indonesia;

Regulation to enhance quality of risk management has been launched in July 2009. Banks are required to have enhanced risk management processes in 8 risk areas.

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• In the international level, Indonesia is a member of G-20;

• G-20 has 50 action plans as prompt corrective measures to restore global financial system stability;

• Indonesia has been a member of Financial Stability Board (FSB) and Basel Committee on Banking

Supervision (BCBS) since April 2009:

• In the FSB, Indonesia is member of Standing Committee of Supervisory and Regulatory Cooperation (SC

SRC);

• Indonesia is also a member of Working Group on Cross Border Crisis Management (WG CBCM);

• The FSB has important initiatives for international co-operation in financial stability, cross-border crisis

management, supervisory college, and early warning exercise;

• FSB will have greater role and an agency drafting the global standards for financial system stability

maintenance

• BCBS has initiatives to enhance banking regulatory framework including Basel II and international

accounting standards

Enhanced International Collaboration

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Balance of Payments Q4

–

2009

Indonesia’s Balance of Payments (BOP) in Q4-2009 registered a surplus of US$4.0 billion, larger than a surplus of US$3.5 billion in the preceding quarter. Both current account and capital and financial account positively contributed to this surplus. In line with this surplus, the official reserves increase from US$62.3 billion at end of September 2009 to US$66.1 billion (equivalent to 6.5 months of imports and official external debt service payments) at end of December 2009.

The current account in Q4-2009 recorded a more robust US$3.4 billion surplus compared to US$2.2 billion in Q3-2009. This improvement was explained mainly by buoyant exports driven by the ongoing recovery in the global economy and rising prices of some main export commodities.

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Balance of Payments Q4

–

2009

Trade Balance:

Non-Oil & Gas

Surplus on non-oil and gas trade balance increased in Q4-2009 to US$8.4 billion (Q3-2009: US$6.6 billion surplus). The resurgent export performance was still dominated by resource-based commodities requiring comparatively little imported raw materials, a trend that has kept imports from rising as quickly as exports.

After recording negative growth since Q1-2009 (yoy), the non-oil and gas exports in Q4-2009 charted a positive growth of 17.6% (Q32009: -11.1%). Meanwhile, the non-oil and gas import posted a smaller negative growth in Q4-2009 (-8.4%) as compared to Q3-2009 (-24.3%).

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Balance of Payments Q4

–

2009

Trade Balance:

Oil & Gas

The oil & gas trade balance posted a larger surplus as oil trade balance deficit decreased and gas trade balance raised.

The oil trade balance deficit decreased in line with imports drop following a seasonal decrease in fuel consumption after Idul Fitri festivities and exports increase on the back of further production of Cepu field and higher oil price.

In the meantime, the gas trade balance surplus was larger than Q3-2009 surplus. Gas exports were bolstered by increased volume of LNG exports with Trains 1 and 2 of Tangguh LNG plant entering operation.

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Balance of Payments Q4

–

2009

• The services account deficit

was larger than the deficit in

Q3-2009 primarily due to increase in net outflows of transportation and other business services.

• The deficit on income

account was larger due to

increased profit transfer by direct investment enterprises and increase payments of other investment interest.

• The surplus on current

transfers was slightly

increase mainly accounted for

by increase in general government receipt of current transfers.

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Balance of Payments Q4

–

2009

The financial account posted a US$1.4 billion surplus primarily resulted from surplus on direct investment and portfolio investment. Although pressures on international financial markets prompted a drop in foreign investor risk appetite and hence triggered outflow of capital in certain instrument in December 2009, the overall portfolio investment surplus still improved in Q4/2009 compared to one quarter earlier.

The positive condition of the financial account was attributable to stable domestic macroeconomic conditions and improving global liquidity.

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Balance of Payments Q4

–

2009

Financial Account:

Foreign Direct Investment

Foreign Direct Investment

(FDI) in Q4-2009 posted a net inflows of US$962 million, slightly lower than US$987 billion net inflows in Q3-2009. This condition was more accounted for by an increased outflow in oil & gas sector related to cost recovery to foreign contractors. Meanwhile, in line with positive growth of investment (gross fixed capital formation) in GDP, FDI inflows in non-oil and gas sector increased. FDI inflows in this sector were still concentrate in manufacturing sector.

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Balance of Payments Q4

–

2009

Financial Account:

Foreign Portfolio Investment

Although pressures on international financial markets prompted a drop in foreign investor risk appetite and hence triggered outflow of capital from selling of Bank Indonesia Certificate (SBI) in December 2009,

the overall portfolio

investment surplus still

improved in Q4-2009

compared to one quarter earlier. Also contributed to this improvement was the direct issuance of corporate bond in global market such as one conducted by PT Adaro Indonesia.

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Balance of Payments for Q4

–

2009

Financial Account:

Foreign Other Investment

Foreign other investment reached a US$0.8 billion surplus of in Q4-2009 compared to a surplus of US$5.4 billion in Q3-2009. During this period, foreign loan disbursement of domestic banks decreased while repayments of other private enterprises increased as scheduled.

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Fiscal Policy to Support Economic Recovery

Fiscal policy will be aimed at stimulating economic recovery by providing tax incentives to various sectors and businesses, at promoting private consumption and investment spending, at supporting infrastructure development and enhancing social welfare through specific incentives



Provide tax incentive on imports (both income tax and VAT on imports) for the oil and gas exploration sector

Energy Incentives



Reduce income tax rate for corporate from 28% to 25% and personal income tax rate by 5%



Reduce income tax rate for listed companies with 40% public ownership



Provide income tax facilities for businesses in specific industries or areas



Free VAT for primary agriculture products



Eliminate many luxury tax items

Incentives on General Taxation

Fiscal Policy for 2010 to Promote Economic Recovery



Guarantee for 10,000 MW electricity program and IPP



Creation of a Land Working Group



IDR 4.9 trillion have been allocated for land capping for 28 toll roads in addition to Rp600 billion Land Acquisition Revolving Fund and Fund covering 23 projects, lending to investors procuring land



Adoption of a Land Freezing policy

Infrastructure Development and Social Welfare

Fiscal Policy for 2010 to Enhance Indonesia’s Competitiveness

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Budget Deficit / GDP

* Realized budget

Public Finances is a fundamental strength of the Indonesian economy; most of Indonesian ratios are strong or stronger than its peers; Fiscal Budget deficit has traditionally been limited and remained contained in 2009. Fiscal Stimulus did not impact much on fiscal deficit in 2009

Budget Deficit / GDP (%) Budget Deficit / GDP 2009* vs. Emerging Markets Countries

(0,1%) (1,6%) (1,3%) (0.9%) (1,8%) (1,6%) (1,4%) (1,2%) (1,0%) (0,8%) (0,6%) (0,4%) (0,2%) 0,0%

2006 2007 2008 2009*

(3 ,2 % ) (3 ,7 % ) (3 ,8 % ) (5 ,7 % ) (6 ,3 % ) (7 ,7 % ) (8 ,0 % ) (9 ,1 % ) (3 ,0 % ) (1 ,6 % ) (12,0%) (10,0%) (8,0%) (6,0%) (4,0%) (2,0%) 0,0% In do ne si a C ol om bi a B ra zi l P hi lip pi ne s C hi na Th ai la nd Tu rk ey R us si a In di a V ie tn am

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State Budget 2009 - 2010

Assumptions:

 Growth: 2009: 4,3% and 2010; 5.5%

 inflation 5% (2009) and 5% (2010)

 Oil price: $61/b (2009) and $65/b (2010)

 Budget deficit (2009) 2,5% GDP and (2010) 1.6% GDP

 Tax to GDP increase from 12.1% (2009) to 12.5% (2010)

 Ministries Spending and Regional Transfer, each accounted for app 35%

 Energy Subsidies and interest payment app 20%

38 Source: Ministry of Finance.

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2009 State Budget

39 Source: Ministry of Finance.

Rev Budget Realization *)

% to Rev

budget % to GDP

A. Revenues and Grants 871.0 866.8 99.5 16.2

I. Domestic Revenue 870.0 865.7 99.5 16.2

1. Tax revenue 652.0 641.2 98.3 12.0

- Stimulus 56.3 45.8 81.3 0.9

2. Non Tax revenue 218.0 224.5 103.0 4.2

II. Grants 1.0 1.1 110.5 0.0

B. Expenditure 1,000.8 954.0 95.3 17.9

I. State Expenditure 691.5 645.4 93.3 12.1

A. Expenditure Ministries/Agencies 314.7 301.6 95.8 5.7

- Stimulus 12.2 10.2 83.2 0.2

B. Expenditure Non Ministries/Agencie 376.8 343.9 91.3 6.4

eg: Subsidi 158.1 159.5 100.9 3.0

- Stimulus (Fuel and Electric) 4.2 4.2 100.0 0.1

II. Transfer to region 309.3 308.6 99.8 5.8

0.0 D. Overall Balances (129.8) (87.2) 67.2 -1.6

% deficit to GDP (2.4) (1.6)

E. Financing 129.8 125.2 96.4 2.3

I. Domestic Financing 142.6 142.6 100.0 2.7

II. Foreign Financing (12.7) (17.4) 136.7 -0.3

ITEMS

(40)

State Budget (Revised 2009 and 2010) - Revenue

(41)

State Budget 2009 - Expenditures

(42)

State Budget 2009 - Overall Balance

(43)

2010 Budget Deficit is proposed at 1.6%; taking into account the confidence in sustainability of government’s financing resources ability

32 33 35 39 47 57 61 67 77 89 85 30 0 1000 2000 3000 4000 5000 6000 7000

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009* 2010*

Triillion Rp 0 10 20 30 40 50 60 70 80 90 100 %

GDP Outstanding Debt Debt ratio to GDP

Main financing resources for 2010 financing deficit Rp98 T (US$9.8 bio)

 Government bond issuances, net Rp104,4 T (US$ 10.4 bio)  Various tenors (long and short term)

 Diversified Instruments (Sukuk, conventional, GMTN, direct buying, retail, non-tradable bonds)

 External debt, gross Rp57,6 T (US$ 5.7 bio)

 Program loans (from World Bank, ADB, IDB, Japan & France)

 Project loans, particularly for multi-year activity

 Contingencies' Loan from World Bank, ADB, Japan Samurai and Australia provide a market confident

Budget Deficit 2010

43 Source: Ministry of Finance.

(44)

State Budget 2009 and 2010 Overview

Budget 2009 and 2010 (In Trillion of IDR)

The realized target budget deficit in 2009 was is manageable at Rp.87.2 billion or 1.6% of GDP, substantially

below the revised target 2009 budget deficit of 2.4% of GDP. Budget deficit in 2010 is projected at Rp.98 billion

or 1.6% of GDP

Realized 2009 (Preliminary) Budget 2010

A. Revenue and Grant 866.8 949.7

1. Tax 641.2 742.7

-Income Tax 317.6 351.0

-VAT 214.3 269.5

-Excises 56.7 57.3

-Import duties 18.1 19.6

2. Non tax revenue 224.5 205.4

B. Expenditure 954.0 1,047.7

I. Central Government 645.4 725.2

-Energy Subsidies 94.5 106.5

II. Transfer to Region 308.6 322.4

C. Surplus/(Deficit) Budget (A -B) (87.2) (98.0)

% GDP (1.6) (1.6)

D. Financing 125.2 98.0

(45)

(46)

Financing Strategy for the 2010 Budget Deficit

Financing Strategy



Main financing sources for 2010 financing deficit of IDR98 T (US$9.8bn)



Government bond issuances, net IDR104.4 T



Various tenors (long and short term)



Diversified Instruments (Sukuk, conventional, GMTN, direct buying, retail, non-tradable bonds)



External loans, gross IDR57.6 T (US$5.7bn)



Program loans, among others from World Bank, ADB, IDB, Japan & France



Project loans, particularly for multi-year activity



US$5.1bn remaining of the Contingency Facility from World Bank, ADB, Japan, Australia to provide market confidence

Financing Needs

Item

2010 Budget (IDR T)

Deficit (98.0)

Financing:

ATotal domestic financing 107.9

Government Securities 104.4

BTotal Foreign financing (9.9)

 Program Loan 24.4

 Project Loan 33.2

 Total gross drawing 57.6  On-lending to SOEs and local

governments

(8.6)

Amortizations (58.8)

Total financing 98.0

(47)

State Budget Financing 2010

in trillion IDR

2010- Budget % of GDP

Total Revenue & Grants 949.7 15.7%

of which Tax Revenue 742.7 12.3% Non Tax Revenue 207.0 3.4%

Expenditure 1,047.7 17.3%

of which Interest payment 115.6 1.9%

Domestic 77.4 1.3%

Foreign 38.2 0.6%_0.0%

Subsidy 154.9 2.6%_0.0%

Primary Balance 17.6 0.0

Overall Balance (deficit) (98.0) -1.6%

Financing 98.0 1.6%

Non Debt 2.4 0.0%

Debt 95.6 1.6%_0.0%

Govt Securities (Net) 104.4 1.7%_0.0%

Domestic Official Borrowing 1.00 0.0%

External Official Borrowing (Net) (9.8) -0.2% Disbursement 57.6 1.0% Program Loan 24.4 0.4% Project Loan 33.2 0.5% On lending (8.6) -0.1% Repayment (58.8) -1.0%

Assumptions:

GDP (trillion) 6,050.1

Growth (%) 5.5

Inflation (%) 5.0

3-mo SBI (% avg) 6.5

Rp / USD (avg) 10,000.0

Oil Price (USD/barrel) 65.0

Oil Lifting (MBCD) 0.965

(48)

Notes:

Central Government Expenditure = Total Expenditure minus Transfer to Regions Debt Service = Principal and Interest Payment

GDP 2008 projected based on numbers from BPS

* = Preliminary + = GDP Based on numbers from BPS ** = Very Preliminary ++ = GDP Based on Assumption on 2009

Revised Budget *** = Very Very Preliminary

Debt to GDP Ratio Debt Composition

Debt Figure, 2004

–

2009

Per Law Number 17/2003 concerning State Budget, stipulated that the growth of debt should not exceed Indonesia economic growth with the following key measures:

– Overall Balance (deficit) should be less than 3% of GDP, and – Total Debt to GDP ratio should be less than 60%

48 Source: Ministry of Finance.

Notes:

^ : Preliminary ^^ : Very Preliminary ^^^ : Very Very Preliminary

50% 50% 53% 53% _48% 53%

50% 50% 47% 47% _52% 47%

0% 20% 40% 60% 80% 100%

2004 2005 2006 2007^ 2008^^ 2009^^^ Domestic Debt External Debt

57% 47% 39% 35% 33% 29% 0% 10% 20% 30% 40% 50% 60%

(49)

Debt To GDP

2004 2005* 2006** 2007*** 2008+ 2009++

GDP 2,295,826.20 2,774,281.00 3,339,480.00 3,949,321.40 4,954,028.90 5,401,640.30 Debt Outstanding (billion IDR) 1,299,504.02 1,313,294.73 1,302,158.97 1,389,415.00 1,636,740.72 1,589,780.96 - Domestic Debt (Securities) 653,032.15 658,670.86 693,117.95 737,125.54 783,855.10 836,308.91 - Foreign Debt (Loan+Securities) 646,471.87 654,623.87 609,041.02 652,289.46 852,885.62 753,472.05

Debt to GDP Ratio 56.60% 47.34% 38.99% 35.18% 33.04% 29.43%

- Domestic Debt to GDP Ratio 28.44% 23.74% 20.76% 18.66% 15.82% 15.48%

- Foreign Debt to GDP Ratio 28.16% 23.60% 18.24% 16.52% 17.22% 13.95%

End of Year

Outstanding as of December 31, 2009

Notes:

* = Preliminary ** = Very Preliminary *** = Very Very Preliminary

+ = GDP Based on numbers from BPS

++ = GDP Based on Assumption on 2009 Revised Budget

(50)

-10 20 30 40 50 60 70 80 90 100 110 120 130 140

External Debt 52.21 46.65 46.10 47.92 46.92 47.06 42.19 36.71 35.59 34.40 32.52 26.83 21.34 17.06 13.34 10.91 9.61 8.44 6.95 5.06 4.28 3.90 3.78 3.30 1.80 1.24 1.05 0.85 0.68 0.59 1.05 Domestic Debt 61.41 39.20 62.32 42.39 57.74 43.38 38.34 36.32 48.10 55.93 38.49 16.76 25.44 21.03 18.05 17.22 2.45 14.43 17.59 - 8.05 - - 126.7 - 15.04 - 20.50 24.71 - -

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 2040 Promissory Notes

to BI

Total Debt Maturity Profile

Notes:

• Preliminary, as of December 31, 2009

• Excluding amortization of Non Tradable Securities (SUN-002, SU-004, and SU-007)

(51)

62 61 59 64 69 69 63 62 62 67 65

71 ₆₈

73 77 71 ₇₁ 82 85 83

104

-20 40 60 80 100 120 140 160 180

1999 2000 2001 2002 2003 2004 2005 2006 2007+ 2008++ Dec'09+++

Loan Government Securities

[Billion USD ]

Outstanding of Total Central Government Debt

+ Preliminary numbers ++ Very preliminary numbers

+++ Very very preliminary numbers, as of December, 2009

Year 1999 2000 2001 2002 2003 2004 2005 2006 2007+ 2008++ Dec'09+++

Loan 47% 47% 48% 47% 47% 49% 47% 43% 42% 45% 38%

Government Securities 53% 53% 52% 53% 53% 51% 53% 57% 58% 55% 62% Total Central Government Debt 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%

(52)

Holders of Tradable Domestic Government Securities Developments in the Domestic Market

Source: Ministry of Finance

 Yearly issuance schedule publicly available

 Established primary dealership infrastructure

 Established benchmark series

 Active communication with market participants

 Variety of domestic securities available

– T-Bills, fixed rate, floating rate, variable rate, zero coupon, retail bonds and Sukuk (1)

Holders of Tradable Government Securities

There is an increasing proportion of foreign and non-bank holders of Indonesian Government securities.

72.02% 75.07%

66.07%

59.34%

53.60%

43.72% 42.62% 42.48% 25.29% _17.15%

20.82%

24.30%

29.74%

37.71% _37.89% _37.92%

2.69%

7.78%

13.12%

16.36% 16.66% _18.56% _19.49%

19.61% 0% 20% 40% 60% 80% 100%

Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Jan-10 February 2, 2010

(1)

State Budget Financing 2010

in trillion IDR

2010- Budget

% of

GDP

Total Revenue & Grants

949.7 15.7%

of which

Tax Revenue

742.7 12.3%

Non Tax Revenue

207.0 3.4%

Expenditure

1,047.7

17.3%

of which

Interest payment

115.6 1.9%

Domestic

77.4 1.3%

Foreign

38.2 0.6%

_0.0%

Subsidy

154.9 2.6%

_0.0%

Primary Balance

17.6

0.0 Overall Balance (deficit)

(98.0)

-1.6%

Financing

98.0 1.6%

Non Debt

2.4 0.0%

Debt

95.6 1.6%

_0.0%

Govt Securities (Net)

104.4 1.7%

_0.0%

Domestic Official Borrowing

1.00 0.0%

External Official Borrowing (Net)

(9.8)

-0.2%

Disbursement

57.6 1.0%

Program Loan

24.4 0.4%

Project Loan

33.2 0.5%

On lending

(8.6)

-0.1%

Repayment

(58.8)

-1.0%

Assumptions:

GDP (trillion)

6,050.1

Growth (%)

5.5 Inflation (%)

5.0 3-mo SBI (% avg)

6.5 Rp / USD (avg)

10,000.0

Oil Price (USD/barrel)

65.0 Oil Lifting (MBCD)

0.965

(2)

Notes:

Central Government Expenditure = Total Expenditure minus Transfer to Regions

Debt Service = Principal and Interest Payment

GDP 2008 projected based on numbers from BPS

* = Preliminary

+ = GDP Based on numbers from BPS

** = Very Preliminary

++ = GDP Based on Assumption on 2009

Debt to GDP Ratio

Debt Composition

Debt Figure, 2004

–

2009

Per Law Number 17/2003 concerning State Budget, stipulated that the growth of debt should not exceed Indonesia economic

growth with the following key measures:

–

Overall Balance (deficit) should be less than 3% of GDP, and

–

Total Debt to GDP ratio should be less than 60%

Notes:

^ : Preliminary

^^ : Very Preliminary

^^^ : Very Very Preliminary

50% 50% 53% 53% _48% 53%

50% 50% 47% 47% _52% 47%

0% 20% 40% 60% 80% 100%

2004 2005 2006 2007^ 2008^^ 2009^^^

Domestic Debt External Debt

57%

47%

39%

35%

33%

29%

0%

10%

20%

30%

40%

50%

60%

(3)

Debt To GDP

2004

2005*

2006**

2007***

2008+

2009++

GDP

2,295,826.20

2,774,281.00

3,339,480.00

3,949,321.40

4,954,028.90

5,401,640.30

Debt Outstanding (billion IDR)

1,299,504.02

1,313,294.73

1,302,158.97

1,389,415.00

1,636,740.72

1,589,780.96

- Domestic Debt (Securities)

653,032.15

658,670.86

693,117.95

737,125.54

783,855.10

836,308.91

- Foreign Debt (Loan+Securities)

646,471.87

654,623.87

609,041.02

652,289.46

852,885.62

753,472.05

Debt to GDP Ratio

56.60%

47.34%

38.99%

35.18%

33.04%

29.43%

- Domestic Debt to GDP Ratio

28.44%

23.74%

20.76%

18.66%

15.82%

15.48%

- Foreign Debt to GDP Ratio

28.16%

23.60%

18.24%

16.52%

17.22%

13.95%

End of Year

Outstanding as of December 31, 2009

Notes:

*

=

Preliminary

**

=

Very Preliminary

***

=

Very Very Preliminary

+

=

GDP Based on numbers from BPS

(4)

-10

20

30

40

50

60

70

80

90

100

110

120

130

140

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 2040

Promissory Notes

to BI

Total Debt Maturity Profile

Notes:

(5)

62

61

59

64

69

63

62

67

65

71 ₆₈

64

73

77

71 ₇₁

82

85

83

104 -20

40

60

80

100

120

140

160

180 1999

2000

2001

2002

2003

2004

2005

2006

2007+

2008++

Dec'09+++

Loan

Government Securities

[Billion USD ]

Outstanding of Total Central Government Debt

+ Preliminary numbers

++ Very preliminary numbers

+++ Very very preliminary numbers, as of December, 2009

Year

1999

2000

2001

2002

2003

2004

2005

2006

2007+

2008++ Dec'09+++

Loan

47%

48%

47%

49%

47%

43%

42%

45%

38%

Government Securities

53%

52%

53%

51%

53%

57%

58%

55%

62%

Total Central Government Debt

100%

(6)