MicrosoftWordConferencecallAugust2006transcript.
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IRU: Conference Call, August 8, 2006.
“ Indonesia : Recent Economic & Fiscal Developments”
By Hartadi A. Sarwono
On August 8, 2006, BI’ s Board Meet ing cut BI rat e by 50 bps t o 11. 75%. As
you may well aware, l ast mont h we also cut t he policy rat e by 25 bps. Af t er
reviewing all t he dat a and inf ormat ion available f or t he f irst semest er 2006,
we concluded t hat our macroeconomic condit ions cont inue t o improve and
remain conducive f or economic act ivit ies. As you know, we had ref rained
f rom lowering t he rat e in June because of height ened market volat ilit y and
concerns about t he inf lat ionary impact of t he rupiah depreciat ion in May.
Our int ent ion is t o maint ain a gradual pace of int erest rat e reduct ions
provided inf lat ionary pressures cont inue t o be eased. We will remain t o be
caut ious so as not t o undermine f inancial market conf idence given t he
recent bout of vol at ilit y and in t he l ight of expect at ions of f urt her int erest
rat e increases abroad as well as worl d oil pri ces hike.
In t he mean t ime, based on our assessment of macroeconomic devel opment
during t he 1
stSemest er of 2006, we believe t he headl ine inf lat ion cont i nued
t o be in downward t rend wit h t he July inf lat ion rat e of 0. 45%, bringing
inf lat ion f or t he calendar year (January-Jul y) t o 3, 33%, alt hough
year-on-year rat es remain hi gh, around 15. 15%, because of base ef f ect . Core
inf lat ion is current ly about 3. 1% (January-July) wit h year-on-year rat e
around 9. 58%. The CPI inf lat ion f or 2006 is proj ect ed t o be near t he l ower
end of t he t arget ed ranges of 7-9%. Nevert heless, some ext ernal and
int ernal risks can not be ent irely ruled out t hat might l ead t o escalat ing
pressures on t he exchange rat e and CPI inf l at ion, such as high oil prices and
t he pot ent ial f or f urt her increases in global int erest rat es.
Af t er rising sharply earlier in t he year, t he exchange rat e has weakened a
bit in May and June, but get t ing st ronger recent l y. As you all aware, t his
t rend has been associat ed wit h an increase in global f inancial market
volat il it y owing t o a reassessment by f und managers of t heir risk appet it e
t oward emerging market s. We argue t hat t he lat est Rupiah depreciat ion
doesn’ t seem t o have t ranslat ed in t o a pickup in inf lat ion expect at ions.
Producers were st ill absorbing t he higher cost s rat her t han passing t hem on
t o consumers due t o weak domest ic demand. The rupiah is now st abil ized
around Rp9. 100/ $.
The posit ive devel opment has been acknowledged by t he market . On Jul y
26, 2006, St andard & Poor's Rat ings Services raised t he long-t erm f oreign
currency rat ing on t he Republ ic of Indonesia t o ‘ BB-’ f rom ‘ B+’ , and t he
long-t erm l ocal currency rat ing t o ‘ BB+’ f rom ‘ BB’ . The short -t erm rat ing of
‘ B’ was af f irmed, and t he out look on t he l ong-t erm rat ing is st able. This
upgrade ref l ect s Indonesia’ s improving macroeconomic perf ormance not abl y
t he improvement of f iscal and ext ernal perf ormance which result ing in
declining debt burdens.
(2)
IMF Art icle IV Board Meet ing at t he end of July 2006 also commended our
consi der bold achievement s t o reest ablish policy credibilit y in maint aining
sound macro economic management . The meet ing however consider t hat
t he key chall enge f acing t he count ry remains t o boost economy growt h in
order t o make t he progress, alleviat ing povert y and reducing
unempl oyment .
GDP growt h has slowed in recent quart ers. Af t er reaching 5. 6% in 2005, GDP
growt h in f irst quart er of 2006 slowed t o only 4. 6%, and est imat ed t o reach
4. 8% in t he second quart er. The sources of growt h mainly came f rom bet t er
t han expect ed net ext ernal demand, especiall y f rom mining and agricul t ure
export s. Privat e consumpt ion and invest ment have been sluggish, due t o
declining real income and higher cost of product ion. Business and
invest ment climat e appear t o have been f urt her eroded by somewhat slow
progress and impl ement at ion of key st ruct ural ref orms. Recognizing t he
need t o improve t he business and invest ment climat e t o boost economic
growt h, t he government is now f ocusing on implement at ion of various
Economic Ref orm Packages and addressing bot t lenecks on government
capit al spending.
Overall economic growt h f or 2006 is predict ed t o be around 5. 0%-5. 7%
proj ect ed range. We expect privat e demand t o recover in t he second half of
2006, as int erest rat es are pl anned t o be gradually reduced and t he impact
of t he domest ic oil price increase wears of f .
The lowering of BI rat e in lat May and Jul y 2006 has had posit ive impact
event l imit ed ef f ect on bank deposit and lendi ng rat e. As a result , loan
disbursement in June 2006 amount ed subst ant ially by almost Rp. 10 t rill ion
t o reach RP. 757 t ril l ion. Despi t e, t his devel opment compared t o posit ion at
t he end of December 2005 which bank loan was up by onl y Rp. 27 t rill ion
represent ing 3. 72% expansi on. In view of f urt her improvement s in economic
act ivit ies, credit expansion is predict ed t oget her pass bef ore t he end of t he
year 2006. This opt imism not only explai ned by f alling int erest rat e but also
lower credit risks ref l ect ed in reduct i on of NPL f rom 8. 8% t o 8. 7%. Al t hough
bank f inancing perf ormed below earlier est imat ed, non bank sources of
f inancing like equit ies and bonds as shown encouraging growt h. Tot al value
of new shares of f ering in f irst half of 2006 reached Rp. 7. 4 t ril lion wit h
bonds issuing adding a f urt her around Rp. 4. 9 t ril lion. During June 2006,
ext ernal f inancing f or t he privat e sect or simil arly ext ended by USD 700
mil lion.
Balance of payment s overall surpl us in Q2/ 2006 reached an est imat ed $3. 3
bill ion, surpassing t he earl ier f orecast of $2. 7 bil lion. This improvement of
surplus t ook pl ace in t he current account ($1. 1 billion) as a result of more
robust export growt h (14. 8%) perf ormance t hat cont rast ed wit h import
growt h (4. 3%). The capit al and f inancial account recorded anot her surplus
at $2. 2 bil lion despit e some capi t al reversal in t he middl e of May 2006.
Following t he $3. 8 billion accelerat ed repayment of part of t he debt owing
t o t he IMF on June 30
t h, 2006 int ernat ional reserves were down slight ly t o
reach US$40 billion. Quit e recent l y, t he reserves improve t o more t han $41
bill ion, equival ent t o t he healt hy benchmark of 4. 6 mont hs of import s and
servicing of of f icial debt .
(3)
The recent high in t he global oil prices seem t o have posit ive impact on t he
budget due t o lower oil import and l esser subsidies. These, of course
dif f erence wit h our experienced in 2005 where higher oil price caused
signif icant pressure on budget .
On t he f iscal f ront , t he Government remains commit t ed t o prudent f iscal
policy. The budget is expect ed t o be suit abl y bal anced bet ween cont inued
reduct ion of t he public debt burden over t he medium t erm and providing
support t o aggregat e demand. Anot her good news is t hat t he ef f ect of
int ernat ional oil price hike t o f iscal condit ion is st ill posit ive.
Not wit hst anding t he cont inued sound macroeconomic policy management ,
growt h remains below pot ent ial. The improvement s of macroeconomic
f undament al s were not being t ranslat ed int o higher l iving st andards. To
bring Indonesia’ s growt h perf ormance up t o it s pot ent ial, implement at ion of
government ‘ s st ruct ural agenda wil l be needed t o increase domest ic and
f oreign invest ment . Recent ly, Government , t oget her wit h Bank Indonesia,
has issued Financial Sect or Policy Package t o cont inue ref orm st eps t o
st rengt hen t he banking indust ry, non-bank f inancial inst it ut ions and t he
capit al market . The package complement s t wo previously issued policy
packages early t his year – i. e. t he Policy Package f or Improving t he
Invest ment Climat e and t he Pol icy Package f or t he Accel erat ion of
Inf rast ruct ure Development . Mr. Mahendra will t alk about t his l at er on.
Having said al l t hat , we are conf ident t hat our j ourney t oward a sust ainable
recovery is in t he right t rack. Economic act ivit ies should regain moment um
in t he second semest er t his year despit e some downside risks. A recovery in
economic act ivit ies depends on global growt h not being af f ect ed
subst ant ial ly by recent gl obal oil price and int erest rat e increases. The
proj ect ed recovery also assumes t hat t he government succeeds in
accelerat ing capit al spending and t hat implement at ion of st ruct ural ref orms
begins t o rest ore invest or conf idence.
By Muhammad Ikhsan
The t hree policy packages have been issued in order t o accel erat e
invest ment and economic growt h. The Policy Package f or Improving t he
Invest ment Climat e is int ended t o improve Indonesia’ s economic
compet it iveness in an increasingly compet it ive global environment . The
Policy Package f or t he Accelerat ion of Inf rast ruct ure Development has been
an ef f ort t o upgrade Indonesia’ s inf rast ruct ure condit ion and improving it s
capacit y. Meanwhile, t he Fi nancial Sect or Policy Package is aimed at
improving f inancial market and inst it ut ional inf rast ruct ure, enhancing
businesses’ access t o capit al and est ablishing a st ronger, more bal anced and
st able st ruct ure of t he f inancial market . This way, t he count ry’ s improving
macroeconomic st abil it y in recent mont hs is expect ed t o be maint ained and
becoming a solid basis f or t he real sect or recovery t hrough adequat e
f inancing support f rom f inancial inst it ut i ons and t he capit al market .
(4)
Besides t hose t hree policy packages, Government also issued t wo ot hers
new packages, f irst one is concerning new energy policy and t he second one
is SME development . It was assembling as part of invest ment climat e and
f inancial sect or package.
Regarding t he progress of invest ment climat e and inf rast ruct ure
development , we can roughly say t hat we can achieve al most ent ire t arget
alt hough t here are some missing if we l ook on mont hl y basis. However,
t here are pick up in t he achievement f rom mont h t o mont h. Theref ore,
t here are some progresses in general.
All t he aspect s in t he policy ref orm t hat has not been able t o init iat e is t he
labor law. In line wit h t his, we have asked an independence academician t o
look at indust rializat ion in Indonesia. They have already f inished t heir st udy
and have submi t t ed t he preliminary result and hopef ull y by t he end of t his
mont h, t he f inal result will be present ed by t hird part y t o t he board of
labor union and business associat i on. We hope t hat we st ill open t he
possibil it y t o improve l abor condit ion in labor market . We do not close yet
t he possibilit y t o do ref orm. If we can not amend t he l abor law, we wil l go
t hrough t o t he implement at ion regulat ion in order t o meet t he obj ect ive.
On t he inf rast ruct ure init iat ive, t here are quit e a l ot of t arget s t hat has not
been achieved. The reason is because coverage of t he package is quit e
ambit ious at t hat t ime. However, we hope t hat at t he end of 2006 all t he
init iat ives can be achieved. But t he import ant part of t hat is t he risk
management unit has been est abl ished. We also all ocat ed about Rp. 2
t rillion in 2006 revised budget . We al so hope t o put anot her Rp. 2 t rill ion in
2007 f or t he l and acquisit ion f und, inf rast ruct ure f und and guarant ee f und.
So f ar t here is no progress report ed f or t he f inancial sect or package t hat
launched in June 2006 except f or t he impl ement at ion regulat ion f or
problem loan resolut ions at t he st at e banks. Minist ry of Finance has
present ed t he revised implement at ion regul at ion t o t he cabinet meet ing
and t he President asked Minist ry of Finance t o consult t o Supreme Court
about possi bilit y of conf lict bet ween one law t o anot her law. So f ar,
response f rom Supreme Court is quit e posit ive and hopef ully by t he end of
August 2006, t he regulat ion can be implement ed.
The issuance of f inancial sect or policy package al so ref l ect s t he st rengt hen
policy coordinat ion bet ween f iscal and monet ary aut horit ies. This is t he
f irst policy package t hat has been done by Bank Indonesia and The
Government . We hope we will cont inue t o improve t he achievement of t his
pol icy when we issue t he SME pol icy package because one of t he area of
SME pol icy package is improving f inancing access of SMEs. The main
obj ect ive of f inancial pol icy package is t o devel op non banking f inancial
inst it ut ion. If you look back at t he f inancial sect or bef ore crisis, we onl y
f ocus on banking sect or, and no sign t o move t he non banking f inancial
inst it ut ion. The f inancial sect or policy package also ment ions t hat we cl arif y
t he government privat izat ion policy direct ion. We will est ablish The
Privat izat ion Commit t ee. Such Commit t ee wil l decide t he road map of
privat izat ion over 2009.
(5)
In t he new energy policy, we will t ouch bot h t he demand side and suppl y
side. As you now, in our 2006 budget , our f uel subsidies is st ill very high, it
is about USD 6 bil lion f or oil subsidies and t he ot her USD 3. 5 bil lion f or
elect ricit y subsidies. Theref ore more t han USD 9 bill ion is cont ribut ed f or
subsidy due t o our dependence on pet roleum. We want t o reduce our
consumpt ion on pet rol eum by t arget ing main consumers.
1.
The f irst main consumer is The St at e Elect ricit y Company. Wit h regard
t o t his, we have l aunched a program t o reduce f uel consumpt ion f or
elect ricit y power generat ion. Last year St at e Elect ricit y Company
consumed about 10. 6 million kilo lit er (MKL) on diesel oil. This year t he
company has reduced it s consumpt ion t o 9. 5 (MKL). We hope next year
we could reduce it t o 8. 9 MKL and in 2008 t o 6. 6 MKL. It is reall y a
signif icant reduct ion but we hope wit h t he new program we could
reduce more t han 2 MKL (or may be less).
2.
The second one is househol d cust omer. Since we are not able pol it icall y
t o adj ust kerosene prices in t he next t wo years so we want t o give more
alt ernat ive t hat have l ower subsidy per unit . The available choice is by
int roducing LPG t o household cust omer. We hope by limit ing suppl y of
kerosene and diversif ying of LPG, we could reduce t he amount of
subsidies f urt her.
3.
We also launch cit y gas program in several area and we have already had
t he roadmap and it will be announced soon.
4.
The last t arget is t ransport at ion sect or and we st art t o require public
t ransport at ion in Jakart a t o use gas inst ead of gasoline.
On t he supply side, we also encourage new development in oil and gas
companies by improving invest ment cl imat e in gas and oil. Wit h t hat regard,
The Coordinat ing Minist ry of Economic Af f airs have inst ruct ed us t o
est ablish a t eam t o synchronize t he regulat ion in oil and gas sect or
part icul arl y in relat ion t o t axat i on. The President has also announced what
we cal led t he green energy program by providing f iscal incent ive f or green
energy by allocat ing enough budget in 2007 f or t ax f iscal incent ive.
The new energy elect ricit y and mining law is current l y under preparat ion
and we hope t hat at t he end of t he year 2006 coul d be f inished. If we can
conclude t hat t ask, it wil l reduce subsidies subst ant ial ly and al so reduce
cost of product ion in Indonesia because we want t o get our elect ricit y price
close t o int ernat ional price. And t hen it i s al so creat e empl oyment and
diversif y energy sources.
The main obj ect ive of SME’ s policy package is t o upgrade SME’ s
prof it abilit y, encourage ent repreneurship and f acil it at ed SME and l arge f irm
part nership. The policy direct ion basicall y is how t o get done
t he regulat ion
of cent ral and local government . Our t arget wit h t he SMEs policy are 1) To
improve SMEs f inancing access t o banking sect or and non bank f inancial
inst it ut ion, 2) To revit alize t he vocat ional t raining and 3) To increase
budget f or inf rast ruct ure.
(6)
Q&A Sessions
________________________________________________________
1.
Q: Citigroup, Hong Kong
There is a trend t o continue t he gradually reduce int erest rate. What are
the fact ors that support this policy and what the risks of this scenario for
2006.
A: Hartadi A. Sarwono
Bank Indonesia will reduce t he int erest rat e gradually as l ong as t he pressure
on t he i nf lat ion can be reduced.
Some f act ors t hat support t he pol icy t o reduce t he int erest rat e are:
a.
Development of inf lat ion i n semest er I 2006, showed t hat t he pressure of
inf lat ion is limit ed. Bank Indonesia’ s proj ect ion on inf lat ion by t he end of
t he year 2006 will be slight ly below t he l ower t arget of 7%. Alt hough t here
are some risk f act ors especially on t he global t ight ening monet ary policy,
we hopef ul ly t hat t he risks will be reduced a lit t le bit af t er t he FOMC
meet ing on August 8, 2006.
b.
We believe t he dif f erence bet ween domest ic and int ernat ional int erest rat e
st ill provide some incent ives f or invest ors t o place t heir f und in Indonesia.
We bel ieve t hese act ions wil l not bring signif icant capit al reversal f rom
Indonesia.
c.
We also see t hat as l ong as t he oil price is below USD 70, - per barrel, it is
st ill have a posit ive impact on f iscal and also on balance of payment . Based
on our calculat ion, USD 1, - increase in oil price will give posit ive surpl us of
oil and gas around USD 300 mil lion. We also see a posit ive impact on t he
budget t hat USD 1, - increase in oil price will give surpl us budget about Rp.
0. 4 t rillion. Basically, t he pressure f rom t he global t ight ening and high oil
price has been limit ed and t here is no pressure on inf lat ion. Based on t hat
consi derat ion, Board has decided t o l ower t he int erest rat e 50 bps. We
believe t hat conf idence is increased and economic act ivit y will move
f orward which will enable us t o achieve more GDP growt h t his year.
2.
Q: Morgan Stanley
Would you please explain what you have done to reduce the possibility of
investor take their money out and to increase investment activit y in
Indonesia?
A: Muhamad Ikhsan
So f ar, what we have done is t o ensure all t he packages will be implement ed on
t ime so as t o improve our credibilit y.
(7)
We realized t hat several programs have not been achieved on t ime as
scheduled. Nonet heless, we also have done some short cut , f or example we
cooperat ed wit h Government of Singapore t o t ry t o develop special economic
zone in Bat am and Karimun. We chose t hat Area because t here are no problems
on inf rast ruct ure t here. Just by simplif ying t he administ rat ion problems, we
hope it coul d produce quick result s in t he invest ment .
In relat ion t o t hat , Minist ry of Finance has also launched int ernal ref orm in t he
Direct orat e General (DG) of Taxat ion and DG of Cust oms. So f ar, t he progress
based on our discussion wit h business sect or is quit e sat isf act ory, but we hope
t hat in t he second semest er of 2006 we will have more progress in t he
implement at ion of our package.
3.
Q: Bearn & St erns, Singapore
a.
In the proposed revised budget 2006, the debt amortization for official
debt due does not include the amortization due of regular foreign bonds.
In t he original budget for 2006, amortization due was Rp. 63 trillion and
in 2006 revised to be Rp. 54 trillion. What is the explanation for t he
difference.
b.
In 2006 government budget, net issuance of government bonds
(domestic and global) is Rp. 24. 9 trillion. What is the amount of net
issuance of government bonds in 2005.
c.
From your GDP table, there is a significant increase in public
consumption in the second quarter 2006. Would you please explain what
derives that?
A: Muhammad Ikhsan
a.
The dif f erence is because t he appreciat ion of exchange rat e. In our original
2006 budget , t he assumpt ion exchange rat e was Rp. 9. 900, - while in revised
budget is Rp. 9. 300, -.
b.
The number of net government issuance in 2005 was Rp. 59 t rill ion.
c.
As you may be aware, government spending in t he f irst quart er is very low.
There are 2 f act ors t hat derives t he increase of government consumpt ion :
1) The current expendit ure in Q1 2006 is only ¼ of t he t ot al. It is mean t hat
we st ill have ¾ of t he t ot al government spending t hat shoul d be be real ized
2) Most of t he spending in government budget is in t he f orm of social
t ransf ers l ike uncondit ional cash t ransf er, f unding f or educat ion, grant f or
school and public healt h. Al l of t hese is direct ly t o t he obj ect and not
t hrough t he bureaucracy. Theref ore t here is no bureaucrat ic problem f or
t he disbursement .
On t he invest ment , t here are some measurement s t hat t he government is
going t o expedit e t he realizat ion of capit al expendit ure. We are quit e
opt imism t hat during second semest er capit al expendit ure will be expended
so t here will put t ing a boost public invest ment .
(8)
4.
Q: Wellington USA
a.
I was wandering if you could to update any plans to amend the labor law?
b.
Can you update any concrete progress that were made in infrastructure
program? What the proj ect that can we expect?
A: Muhammad Ikhsan
a.
On t he labor l aw, we have st ruggled t o amend t he law because t here were
demonst rat ion and rej ect ion f rom l abor union. Now we are t rying t o set t le
down t he problem bet ween labor union and business associat ion. The
Government t ries t o act as moderat or by asking academician t o f ind out
what are t he hinder f act ors t hat make indust rial relat ion in Indonesia
doesn’ t f unct ion well and what we shoul d do t o have more f l exible labor
market . The academic t eam has already f inished t heir st udy and t he
prel iminary resul t has been submit t ed t o The Coordinat ing Minist ry f or
Economic and current l y is being review by independent reviewer. Hopef ull y
by t he end of t his mont h, t he f inal result (f indings) will be present ed by t he
independent reviewer t o bot h t he labor union employer and business
associat ion. We hope by present ing t his independence reviewer’ s f inding, it
will have some rooms f or negot iat ion t o improve l abor relat ion. Basically, if
we can not amend t he l aw, but we st ill can achieve t he obj ect ive of
improving i ndust rial rel at i on t hrough revised t he implement at ion
regul at ions.
b.
In t he inf rast ruct ure program, we now f ocus in t wo ki nds of proj ect s,
namely t oll road and elect ricit y proj ect s. Al l t he schedule of t hose t wo
proj ect s has been f ulf il led. For example in elect ricit y, 3 proj ect s has been
awarded and one st ill under preparat ion f or t ender. Some of t he proj ect s
have been complet ed f or example on Tanj ung Jat i B Proj ect f inance by JBIC
wit h capacit y of 1300 megawat t which has been operat ed. Anot her JBIC
f inancing proj ect s t hat has been compl et ed and operat ed are Gas Turbin
Proj ect in Cil egon wit h capacit y 700 mega wat t and Cilacap proj ect of 600
megawat t . While in t oll road, some invest ors have submit t ed some proposal
t o t he Minist ry of Fi nance t o have risk management valuat ion. We hope we
could get t he result soon.
5.
Q: Convivo Capital, UK
Would you please explain about the overall picture of budget funding in
2006. How much you have been issued and how much do you plan to issue .
A: Ayu Sukorini
For t his year, according t o revised budget we have t o issue government bonds
t o f inance budget def icit in net t erm about IDR 35. 8 t rillion. So f ar we have
already achieved t he net t erm about IDR 31. 5 t rillion. We also have t o pay
debt mat ure on Oct ober 2006 about IDR 7 t rillion. The amount t hat st il l l ef t is
about IDR 11. 9 t rill ion and some of t he IDR 11. 9 t rillion has already sat isf ied
(9)
t hrough t he issuance of government ret ail bonds in domest ic market . Theref ore,
t he amount t hat st ill lef t around IDR 8 t ril lion (gross f unding).
Based on t he current sit uat i on, we believe t hat we can issue al l t he f inancing
needs t hrough domest ic market . We don’ t see any need t o issue bonds in
int ernat ional market since based on our f iscal policy we can not do any kind of
ref unding or somet hing like t hat
Q : The net funding t hat you have done t his year is 71. 5, is that right ?
A: Ayu Sukorini
The net f unding t hat we have done t his year is IDR 34. 8 t rill ion, t heref ore
overal l we st il l have t he gross f unding about IDR 40 t ril lion.
6.
Q: Merrill Lynch, UK
I want t o know about f oreign part icipant in t he local bond market . In your earl y
det ail ed not iced t hat f oreign part icipat ion has increased signif icant ly reaching
around 12% of t he t ot al government securit ies. I was wondering, whet her t here
has been any changes in view of t he t urbulence experienced globally especiall y
in period May – June 2006. What would t he updat e of f oreign part icipat ion
overal l, is t here st ill wit hdrawal or is st il l going up.
A: Hary Tangguh
Unt il now, f oreign part icipat ion in domest ic market is st ill going up. I guess it is
because bullish sit uat ion of domest ic market and due t o t he cent ral bank
lowering t he int erest rat e. The f oreign ownership of domest ic government
bonds is about 11. 9% of t he t ot al t radable government securit ies. The number
is about IDR 54 t rillion.
7.
Q: Invesco, USA
a.
You have mentioned that current increasing in int ernational oil price still
have positive impact t o the budget and balance of payment. Can you
explain more detail on this?
b.
Is it possible the smuggling will become a problem again and the positive
impact change to be negative impact?
A: Muhammad Ikhsan
a.
Let me explain why 2006 is dif f erent f rom 2005 sit uat ion. In 2005, we
est ablished 2 (t wo) t ier pricing syst ems consist ing non subsidy f uel and
subsidy f uel. On t he non subsidy f uel, basical ly f ollow t he market , so I t hink
demand is really relat ed t o t he price. The demand is quit e high f or t he non
subsidy f uel. For t he subsidy syst em, af t er we increase more t han 100% in
(10)
Oct ober 2005, t he prime consumpt ion in 2006 is supposed t o be about 41
MKL. But our conservat ive proj ect ion, coming about 37 MKL. So t he
domest ic oil consumpt ion act ually declining.
b.
The impact of USD 1, - increase in oil price t o BOP will increase t rade
balance of oil and gas about USD 200 million, This is due t he export will up
in USD 300 mill ion while import also up about USD 100 million. Theref ore,
t he t ot al reserve will be up around USD 170 – 180 million.
c.
Of course possibl e. As long as ot her count ries not moving t o adj ust t heir
price, I t hink we are quit e accept abl e. For exampl e, demand f or smuggl ing
most likely happen in diesel oil not in t he kerosene, because demand f or
kerosene does not available in world market except in India. So t he
possibil it y is only f or t he diesel oil. If you compare bet ween Mal aysian price
wit h Indonesian price, now Indonesian price higher t han Malaysia. But if you
compare t o Thailand, Indonesian price st il l below but not as high as what
dif f erences bet ween China price and Indonesian price.
(1)
In t he new energy policy, we will t ouch bot h t he demand side and suppl y
side. As you now, in our 2006 budget , our f uel subsidies is st ill very high, it
is about USD 6 bil lion f or oil subsidies and t he ot her USD 3. 5 bil lion f or
elect ricit y subsidies. Theref ore more t han USD 9 bill ion is cont ribut ed f or
subsidy due t o our dependence on pet roleum. We want t o reduce our
consumpt ion on pet rol eum by t arget ing main consumers.
1.
The f irst main consumer is The St at e Elect ricit y Company. Wit h regard
t o t his, we have l aunched a program t o reduce f uel consumpt ion f or
elect ricit y power generat ion. Last year St at e Elect ricit y Company
consumed about 10. 6 million kilo lit er (MKL) on diesel oil. This year t he
company has reduced it s consumpt ion t o 9. 5 (MKL). We hope next year
we could reduce it t o 8. 9 MKL and in 2008 t o 6. 6 MKL. It is reall y a
signif icant reduct ion but we hope wit h t he new program we could
reduce more t han 2 MKL (or may be less).
2.
The second one is househol d cust omer. Since we are not able pol it icall y
t o adj ust kerosene prices in t he next t wo years so we want t o give more
alt ernat ive t hat have l ower subsidy per unit . The available choice is by
int roducing LPG t o household cust omer. We hope by limit ing suppl y of
kerosene and diversif ying of LPG, we could reduce t he amount of
subsidies f urt her.
3.
We also launch cit y gas program in several area and we have already had
t he roadmap and it will be announced soon.
4.
The last t arget is t ransport at ion sect or and we st art t o require public
t ransport at ion in Jakart a t o use gas inst ead of gasoline.
On t he supply side, we also encourage new development in oil and gas
companies by improving invest ment cl imat e in gas and oil. Wit h t hat regard,
The Coordinat ing Minist ry of Economic Af f airs have inst ruct ed us t o
est ablish a t eam t o synchronize t he regulat ion in oil and gas sect or
part icul arl y in relat ion t o t axat i on. The President has also announced what
we cal led t he green energy program by providing f iscal incent ive f or green
energy by allocat ing enough budget in 2007 f or t ax f iscal incent ive.
The new energy elect ricit y and mining law is current l y under preparat ion
and we hope t hat at t he end of t he year 2006 coul d be f inished. If we can
conclude t hat t ask, it wil l reduce subsidies subst ant ial ly and al so reduce
cost of product ion in Indonesia because we want t o get our elect ricit y price
close t o int ernat ional price. And t hen it i s al so creat e empl oyment and
diversif y energy sources.
The main obj ect ive of SME’ s policy package is t o upgrade SME’ s
prof it abilit y, encourage ent repreneurship and f acil it at ed SME and l arge f irm
part nership. The policy direct ion basicall y is how t o get done
t he regulat ion
of cent ral and local government . Our t arget wit h t he SMEs policy are 1) To
improve SMEs f inancing access t o banking sect or and non bank f inancial
inst it ut ion, 2) To revit alize t he vocat ional t raining and 3) To increase
budget f or inf rast ruct ure.
(2)
Q&A Sessions
________________________________________________________
1.
Q: Citigroup, Hong Kong
There is a trend t o continue t he gradually reduce int erest rate. What are
the fact ors that support this policy and what the risks of this scenario for
2006.
A: Hartadi A. Sarwono
Bank Indonesia will reduce t he int erest rat e gradually as l ong as t he pressure
on t he i nf lat ion can be reduced.
Some f act ors t hat support t he pol icy t o reduce t he int erest rat e are:
a.
Development of inf lat ion i n semest er I 2006, showed t hat t he pressure of
inf lat ion is limit ed. Bank Indonesia’ s proj ect ion on inf lat ion by t he end of
t he year 2006 will be slight ly below t he l ower t arget of 7%. Alt hough t here
are some risk f act ors especially on t he global t ight ening monet ary policy,
we hopef ul ly t hat t he risks will be reduced a lit t le bit af t er t he FOMC
meet ing on August 8, 2006.
b.
We believe t he dif f erence bet ween domest ic and int ernat ional int erest rat e
st ill provide some incent ives f or invest ors t o place t heir f und in Indonesia.
We bel ieve t hese act ions wil l not bring signif icant capit al reversal f rom
Indonesia.
c.
We also see t hat as l ong as t he oil price is below USD 70, - per barrel, it is
st ill have a posit ive impact on f iscal and also on balance of payment . Based
on our calculat ion, USD 1, - increase in oil price will give posit ive surpl us of
oil and gas around USD 300 mil lion. We also see a posit ive impact on t he
budget t hat USD 1, - increase in oil price will give surpl us budget about Rp.
0. 4 t rillion. Basically, t he pressure f rom t he global t ight ening and high oil
price has been limit ed and t here is no pressure on inf lat ion. Based on t hat
consi derat ion, Board has decided t o l ower t he int erest rat e 50 bps. We
believe t hat conf idence is increased and economic act ivit y will move
f orward which will enable us t o achieve more GDP growt h t his year.
2.
Q: Morgan Stanley
Would you please explain what you have done to reduce the possibility of
investor take their money out and to increase investment activit y in
Indonesia?
A: Muhamad Ikhsan
So f ar, what we have done is t o ensure all t he packages will be implement ed on
t ime so as t o improve our credibilit y.
(3)
We realized t hat several programs have not been achieved on t ime as
scheduled. Nonet heless, we also have done some short cut , f or example we
cooperat ed wit h Government of Singapore t o t ry t o develop special economic
zone in Bat am and Karimun. We chose t hat Area because t here are no problems
on inf rast ruct ure t here. Just by simplif ying t he administ rat ion problems, we
hope it coul d produce quick result s in t he invest ment .
In relat ion t o t hat , Minist ry of Finance has also launched int ernal ref orm in t he
Direct orat e General (DG) of Taxat ion and DG of Cust oms. So f ar, t he progress
based on our discussion wit h business sect or is quit e sat isf act ory, but we hope
t hat in t he second semest er of 2006 we will have more progress in t he
implement at ion of our package.
3.
Q: Bearn & St erns, Singapore
a.
In the proposed revised budget 2006, the debt amortization for official
debt due does not include the amortization due of regular foreign bonds.
In t he original budget for 2006, amortization due was Rp. 63 trillion and
in 2006 revised to be Rp. 54 trillion. What is the explanation for t he
difference.
b.
In 2006 government budget, net issuance of government bonds
(domestic and global) is Rp. 24. 9 trillion. What is the amount of net
issuance of government bonds in 2005.
c.
From your GDP table, there is a significant increase in public
consumption in the second quarter 2006. Would you please explain what
derives that?
A: Muhammad Ikhsan
a.
The dif f erence is because t he appreciat ion of exchange rat e. In our original
2006 budget , t he assumpt ion exchange rat e was Rp. 9. 900, - while in revised
budget is Rp. 9. 300, -.
b.
The number of net government issuance in 2005 was Rp. 59 t rill ion.
c.
As you may be aware, government spending in t he f irst quart er is very low.
There are 2 f act ors t hat derives t he increase of government consumpt ion :
1) The current expendit ure in Q1 2006 is only ¼ of t he t ot al. It is mean t hat
we st ill have ¾ of t he t ot al government spending t hat shoul d be be real ized
2) Most of t he spending in government budget is in t he f orm of social
t ransf ers l ike uncondit ional cash t ransf er, f unding f or educat ion, grant f or
school and public healt h. Al l of t hese is direct ly t o t he obj ect and not
t hrough t he bureaucracy. Theref ore t here is no bureaucrat ic problem f or
t he disbursement .
On t he invest ment , t here are some measurement s t hat t he government is
going t o expedit e t he realizat ion of capit al expendit ure. We are quit e
opt imism t hat during second semest er capit al expendit ure will be expended
so t here will put t ing a boost public invest ment .
(4)
4.
Q: Wellington USA
a.
I was wandering if you could to update any plans to amend the labor law?
b.
Can you update any concrete progress that were made in infrastructure
program? What the proj ect that can we expect?
A: Muhammad Ikhsan
a.
On t he labor l aw, we have st ruggled t o amend t he law because t here were
demonst rat ion and rej ect ion f rom l abor union. Now we are t rying t o set t le
down t he problem bet ween labor union and business associat ion. The
Government t ries t o act as moderat or by asking academician t o f ind out
what are t he hinder f act ors t hat make indust rial relat ion in Indonesia
doesn’ t f unct ion well and what we shoul d do t o have more f l exible labor
market . The academic t eam has already f inished t heir st udy and t he
prel iminary resul t has been submit t ed t o The Coordinat ing Minist ry f or
Economic and current l y is being review by independent reviewer. Hopef ull y
by t he end of t his mont h, t he f inal result (f indings) will be present ed by t he
independent reviewer t o bot h t he labor union employer and business
associat ion. We hope by present ing t his independence reviewer’ s f inding, it
will have some rooms f or negot iat ion t o improve l abor relat ion. Basically, if
we can not amend t he l aw, but we st ill can achieve t he obj ect ive of
improving i ndust rial rel at i on t hrough revised t he implement at ion
regul at ions.
b.
In t he inf rast ruct ure program, we now f ocus in t wo ki nds of proj ect s,
namely t oll road and elect ricit y proj ect s. Al l t he schedule of t hose t wo
proj ect s has been f ulf il led. For example in elect ricit y, 3 proj ect s has been
awarded and one st ill under preparat ion f or t ender. Some of t he proj ect s
have been complet ed f or example on Tanj ung Jat i B Proj ect f inance by JBIC
wit h capacit y of 1300 megawat t which has been operat ed. Anot her JBIC
f inancing proj ect s t hat has been compl et ed and operat ed are Gas Turbin
Proj ect in Cil egon wit h capacit y 700 mega wat t and Cilacap proj ect of 600
megawat t . While in t oll road, some invest ors have submit t ed some proposal
t o t he Minist ry of Fi nance t o have risk management valuat ion. We hope we
could get t he result soon.
5.
Q: Convivo Capital, UK
Would you please explain about the overall picture of budget funding in
2006. How much you have been issued and how much do you plan to issue .
A: Ayu Sukorini
For t his year, according t o revised budget we have t o issue government bonds
t o f inance budget def icit in net t erm about IDR 35. 8 t rillion. So f ar we have
already achieved t he net t erm about IDR 31. 5 t rillion. We also have t o pay
debt mat ure on Oct ober 2006 about IDR 7 t rillion. The amount t hat st il l l ef t is
about IDR 11. 9 t rill ion and some of t he IDR 11. 9 t rillion has already sat isf ied
(5)
t hrough t he issuance of government ret ail bonds in domest ic market . Theref ore,
t he amount t hat st ill lef t around IDR 8 t ril lion (gross f unding).
Based on t he current sit uat i on, we believe t hat we can issue al l t he f inancing
needs t hrough domest ic market . We don’ t see any need t o issue bonds in
int ernat ional market since based on our f iscal policy we can not do any kind of
ref unding or somet hing like t hat
Q : The net funding t hat you have done t his year is 71. 5, is that right ?
A: Ayu Sukorini
The net f unding t hat we have done t his year is IDR 34. 8 t rill ion, t heref ore
overal l we st il l have t he gross f unding about IDR 40 t ril lion.
6.
Q: Merrill Lynch, UK
I want t o know about f oreign part icipant in t he local bond market . In your earl y
det ail ed not iced t hat f oreign part icipat ion has increased signif icant ly reaching
around 12% of t he t ot al government securit ies. I was wondering, whet her t here
has been any changes in view of t he t urbulence experienced globally especiall y
in period May – June 2006. What would t he updat e of f oreign part icipat ion
overal l, is t here st ill wit hdrawal or is st il l going up.
A: Hary Tangguh
Unt il now, f oreign part icipat ion in domest ic market is st ill going up. I guess it is
because bullish sit uat ion of domest ic market and due t o t he cent ral bank
lowering t he int erest rat e. The f oreign ownership of domest ic government
bonds is about 11. 9% of t he t ot al t radable government securit ies. The number
is about IDR 54 t rillion.
7.
Q: Invesco, USA
a.
You have mentioned that current increasing in int ernational oil price still
have positive impact t o the budget and balance of payment. Can you
explain more detail on this?
b.
Is it possible the smuggling will become a problem again and the positive
impact change to be negative impact?
A: Muhammad Ikhsan
a.
Let me explain why 2006 is dif f erent f rom 2005 sit uat ion. In 2005, we
est ablished 2 (t wo) t ier pricing syst ems consist ing non subsidy f uel and
subsidy f uel. On t he non subsidy f uel, basical ly f ollow t he market , so I t hink
demand is really relat ed t o t he price. The demand is quit e high f or t he non
subsidy f uel. For t he subsidy syst em, af t er we increase more t han 100% in
(6)