Recent Economic Developments · Fitch Ratings (February 24, ... This follows Moody’s release last...

REPUBLIC OF INDONESIA

Recent Economic Developments

August 2011

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 8319

+6221 381 8298

Facsimile +6221 350 1950

E-mail [email protected]

mailto:[email protected]



Table of Content

Executive Summary

Improved International Perception and Rising Investment

Preserved Macroeconomic Stability to Support Further Growth

Prudent Fiscal Management

Improved Government Debt Position

Executive Summary

5

GDP Growth Inflation

Balance of Payments Foreign Exchange Reserves

Macroeconomic Overview

Billion USD

* Bank Indonesia projection

2009

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

2005 2006 2008 2008 2009 2010 Q1 2011

Q2 2011

Q3* 2011

-10.00

-5.00

0.00

5.00

10.00

15.00

20.00

Jan

Mar

May Ju

l

Sep

No

v

Jan

Mar

May Ju

li

Sep

No

v

Jan

Mar

May

July

2009 2010 2011

%

CPI (%, yoy) Core (%, yoy)

Volatile Food (%, yoy) Administered (%, yoy)

-

2.00

4.00

6.00

8.00

10.00

12.00

-20.00 40.00 60.00 80.00

100.00 120.00 140.00

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

Jul

2010 2011

foreign exchange reserves (LHS)

month of import & government debt service (RHS)

0

20

40

60

80

100

120

-10

-5

0

5

10

15

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1*

Q2*

*

2007 2008 2009 2010* 2011

Current Acc. Cap. & Fin. Acc Reserve Assets (RHS)

MBillion USD Billion USD

6

• Domestic economy expected to continue charting strong growth, mainly supported by solid export performance, strong household

consumption, and investment. Investment performance also expected to grow faster driven by higher demand and the realization of

Government’s capital expenditure. In the 2nd quarter of 2011, the economy charted 6.5% (yoy) growth, in line with the projection , and is

forecasted even stronger in Q3/2011 and trough out 2011 to reach 6.6%. The continuing strong economic activities confirm the outlook of

economic growth to potentially reach the upper bound of 6.3-6.8% in 2011 and 6.4-6.9% in 2012.

• The inflation pressure remained subdue, as reflected in July 2011 inflation which is still in line with its seasonal patterns. The CPI

inflation in July 2011 came to 0.67% (mtm) or 4.61% (yoy). Core inflation reached 0.42% (mtm) or 4.55% (yoy) driven by the increase in global

commodity prices and the increase in domestic demand. Looking forward, the increasing inflation is forecasted to grow from household

consumption during Ramadhan and Eid holidays. However, Government policies on securing supply of foods is predicted to mitigate volatility

of the prices hence inflation will be under control.

• The overall balance of payments in Q2/2011 posted a surplus of US$11.9 billion, rose significantly from US$7.7 billion surplus in the

preceding period. Spurring this increase was a sharp rise in the capital and financial account surplus that outweighed a decrease in the current

account surplus. In response, international reserves at the end of June 2011 boosted to US$119.7 billion, equivalent to 6.8 months of imports

and servicing of official external debt. Furthermore, the international reserves at the end of July 2011 reached USD 122.7 billion, or equivalent

to 7 months of imports and external debt services of the Government

• Investment realization up to the 1st half of 2011 spurred optimism that the full year target of Rp240 trillion is achievable. Total

investment realization in the 2nd quarter of 2011 is Rp. 62.0 trillion (around USD7.2 billion) with 85% of investments directed outside of the

island of Java. The realization figures until the 1st semester of 2011 came to Rp.115.6 trillion or 48.2% from the target and an increase of 24.4%

compared to the realization at the same period in 2010.

• On the fiscal front, Indonesia continue to perform a prudent fiscal management in 2011, with strong commitment to fiscal consolidation,

aiming on continue declining debt-to-GDP ratio, diversifying government debt profile, and reducing funding reliance on international capital

market.

• Financial System Stability had been maintained as indicated by the Financial Stability Index which were well below the treshold of 2 (1.61

on July 2011).

• In the Board of Governors’ Meeting held on Tuesday August, 9, 2011, Bank Indonesia decided to keep the BI rate unchanged at

6.75%. Bank Indonesia is confident that the impact of the recent turmoil in the global financial markets due to the downgrade of US credit

rating to the domestic financial market is limited, and can be contained with continuous monitoring of market development and coordination

with the Government. Bank Indonesia is strongly confident that the implementation of monetary and macroprudential policy mix can secure macroeconomic stability and keep inflation within the targets, that is, 5% +1% in 2011 and 4.5% +1% in 2012.

Executive Summary

Improved International Perception and Rising Investment

Improving International Perception: Acknowledged by Rating Agencies

Resilient economy, which impressively navigates through the global crisis and continued confidence in economic

outlook, the Republic continued to receive good reviews.

S&P (April 8, 2011): upgraded Indonesia’s long-term foreign currency rating to BB+ from BB with positive outlook. With the

rating upgrade, puts Indonesia 1 notch closer to investment grade by the three major rating agencies. The positive outlook also

indicates the possibility of Indonesia to have another upgrade in the near future. The main factor supporting this decision is continuing

improvements in the government's balance sheet and external liquidity, against a backdrop of a resilient economic performance and

cautious fiscal management.

Fitch Ratings (February 24, 2011): affirmed Indonesia’s long-term foreign and local currency issuer default ratings (IDRs) at

‘BB+’ and revised the outlooks on both to Positive from Stable. Fitch stated key factors supporting this action were strong

economic growth, well above of the ‘BB’ and ‘BBB’ range medians. Encouragingly, Indonesia’s growth has not been accompanied by

the emergence of potentially-risky external imbalances – rising savings rates have largely matched the growing investment, and

especially the performance of Indonesia's balance of payments. Modest current account surplus is always maintained since 1998. The

strengthening of foreign exchange reserves reached USD96.2 billion, equivalent to 7 months of imports and debt payments become

critical factors that support the credit profile of Indonesia.

Moody’s Investors Service (January 17, 2011): upgraded Republic of Indonesia’s foreign and local-currency bond ratings to

Ba1 with stable outlook. This follows Moody’s release last December which placed the ratings on a review for possible upgrade. The

key factors supporting this action were (1) economic resilience which accompanied by sustained macroeconomic balance; (2)

Improved government’s debt position and central bank’s foreign currency reserve adequacy; and (3) Improved prospects for foreign

direct investment inflows which expected to fortify Indonesia’s external position and economic outlook.

Japan Credit Rating Agency, Ltd (July 13, 2010): upgraded Indonesia's sovereign rating to Investment Grade from BB+ to

BBB- with stable outlook. The first upgrade to reach investment grade in the last 13 years reflects enhanced political and social

stability, sustainable economic growth , alleviated public debt burden as a result of prudent fiscal management, reinforced resilience to

external shocks stemming from the foreign reserves accumulation and an improved capacity for external debt management and efforts

made by the current administration to outline the framework to deal with structural issues such as infrastructure development.

8

Sovereign Rating History

9

Solid economic fundamentals supported the improvement of Indonesia’s sovereign credit rating since 2001

Improving International Perception: Significant Raise in Perception Indices

World Economic Forum – The Global Competitiveness Report 2010 – 2011 (September 15, 2010) reported that Indonesia posts

an impressive gain of 10 places, mainly driven by a healthier macroeconomic environment and improved education indictors.

Indonesia considered to successfully maintain a relatively healthy macroeconomic environment throughout the crisis. While most other

countries saw their budget deficits surge, Indonesia kept its deficit under control”

The IMD Competitive Center (May 19, 2010) reports a major improvement in Indonesia's global competitiveness, with

Indonesia moving up from 42nd to 35nd place among a total of 57 major nations surveyed worldwide. For Indonesia, the

improvement in 2010 has been achieved through significant gains in economic performance, followed by government efficiency and

infrastructure improvement.

OECD (March 31, 2011): Indonesia’s Credit Risk Classification (CRC) still category 4. Indonesia is in one peer with Colombia,

Egypt, Philippina, Turkey and Uruguay. The last year upgrade was a timely acknowledgement by the developed economies of the

consistent economic improvement. And an upgrade in this category 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.

10

Conducive business climate improvement to support optimism in FDI inflows

Strong investment underpinned by competitiveness and stability

Realized foreign direct investment (USD billion) Realized domestic direct investment (IDR trillion)

Source: BKPMSource: BKPM

* US$ / Rp. exchange rate of 8,709, the BI middle exchange rate as of March 31, 2011.

Total investment realization in the second quarter of 2011 was Rp. 62.0 trillion (around USD7.2 billion) with 85% of investments are located

outside the island of Java.

Until the 1st semester of 2011 it reached Rp.115.6 trillion or 48.2% from the target and an increase of 24.4% compared to that during the same

period in 2010.

Those figures raised the expectation that domestic and foreign direct investment realization target of Rp240 trillion in 2011 can be

accomplished. Continuous improvements of investment policies and services, acceleration of infrastructure development and the provision of

fiscal incentives on capital investment will contribute to the realization of this target.

11

6.0

10.3

14.9

10.8

16.2

9.4

2006 2007 2008 2009 2010 Semester 1 2011

20.8

34.9

20.4

37.8

60.6

33.0

2006 2007 2008 2009 2010 Semester 1 2011

Strong investment underpinned by competitiveness and stability

Source: BKPM

12

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

2006 2007 2008 2009 2010 Semester 1 2011

2,229 2,526

813746

704

1,026

747673

1,612

6281,183

798 903

955

714

1,293 655

806

756860

1,064789

1,428650

706

785

647

3,305

8,530

4,171

5,046

1,051

653

1,138

882

1,295

2,556

Mining

Other primary sector

Food industry

Paper and printing industry

Chemical and pharmaceutical industry

Metal machinery and electronic industry

Motor vehicle and other transport equipment industries

Other secondary sector

Electricity, gas and water supply

Trade and repair

Transportation, storage and communications

Other tertiary sector

FDI – By Sector (USD million)

Preserved Macroeconomic Stability

Robust and Stable Economy Continues to Chart Strong Growth

Source: Bank Indonesia.

14

On the growth side, supported with a more balanced growth structure, investment forging ahead and continued solid performancein exports, BI forecast

the economy to grow around 6.3%-6.8% in 2011 and further 6.4%-6.9% in 2012.

For the 2nd quarter of 2011, the economy, as projected, charted 6.5% (yoy) growth. While in the 3rd quarter of 2011 and trough out 2011 the economy is

forecasted even stronger to reach 6.6% on the back of solid investment, export, and consumption. Investment is gaining momentum to grow stronger

since to government starts to spend its capital expenditure. From the production side, the growth driver are the manufacturing sector, trade, hotel, and

restaurants sector, and transportation and communication sector. % yoy

Economic Growth ForecastTable 3.1

Forecast of Economic Growth - Demand Side

Sector 2009 20102011

2011* 2012*I II III*

Private Consumption 4,9 4,6 4,5 4,6 4,7 4,4 - 4,9 4,8 - 5,3

Government Consumption 15,7 0,3 3,0 4,5 18,4 8,8 - 9,3 3,9 - 4,4

Gross Fixed Capital Formation 3,3 8,5 7,3 9,2 10,5 9,3 - 9,8 12,3 - 12,8

Exports of Goods and Services -9,7 14,9 12,3 17,4 7,9 9,4 - 9,9 9,7 - 10,2

Imports of Goods and Services -15,0 17,3 15,6 16,0 10,3 11,1 - 11,6 11,3 - 11,8

GDP 4,6 6,1 6,5 6,5 6,6 6,3 - 6,8 6,4 - 6,9

* Bank Indonesia Projection

Economic Growth ForecastTable 3.2

Forecast of Economic Growth - Supply Side

S e c t o r 2009 20102011

2011* 2012*I II III*

Agriculture 4,0 2,9 3,4 3,5 3,5 3,1 - 3,6 3,5 - 4,0

Mining and Quarrying 4,4 3,5 4,6 4,1 4,1 3,7 - 4,2 3,7 - 4,2

Manufacturing 2,2 4,5 5,0 5,1 5,1 4,8 - 5,3 5,0 - 5,5

Electricity, Gas, and Water Supply 14,3 5,3 4,2 5,3 5,9 5,1 - 5,6 6,4 - 6,9

Construction 7,1 7,0 5,3 6,8 7,2 6,4 - 6,9 7,6 - 8,1

Trade, Hotels, and Restaurants 1,3 8,7 7,9 8,4 8,9 8,5 - 9,0 8,6 - 9,1

Transportation and Communication 15,5 13,5 13,8 13,1 13,2 12,7 - 13,2 11,6 - 12,1

Financial, Rental, and Business Services 5,1 5,7 7,3 6,9 7,0 6,7 - 7,2 6,8 - 7,3

Services 6,4 6,0 7,0 6,7 6,6 6,3 - 6,8 6,1 - 6,6

GDP 4,6 6,1 6,5 6,5 6,6 6,3 - 6,8 6,4 - 6,9

* Bank Indonesia Projection

1515Source: Bank Indonesia

Balance of Payments Q2/2011

Balance of Payments

• In line with strong capital inflow (including FDI) and surplus in the current account, Indonesia balance of payment is expected to post

another considerable surplus in 2011. The overall balance of payments in Q2/2011 posted a surplus of US$11.9 billion. At the end of

July 2011, the international reserves reached USD 122.7 billion, or equivalent to 7 months of imports and external debt services of the

Government

0

20

40

60

80

100

120

-10

-5

0

5

10

15Q

1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

*

Q2

**

2007 2008 2009 2010* 2011

Current Acc. Cap. & Fin. Acc Reserve Assets (RHS)

MBillion USD Billion USD

16

Balance of Payments Q2/2011

The current account posted a surplus of US$0.2 billion in Q2/2011, buoyed mainly by strong growth in non-oil & gas exports and natural gas

exports. This surplus, however, was declined considerably from the US$2.1 billion recorded in the preceding quarter, a result of larger deficits in

the oil trade balance, services and income accounts.

Declining performance in the current account was offset by a significant rise in the capital and financial account surplus to US$12.5 billion

almost doubled from those in the previous quarter. A more conducive investment climate, continuing attractive returns on investments in

Indonesia, and the need of foreign denominated liquidity in domestic market, while there be sustained excess liquidity in the global financial

markets, were among the key factors that supported the robust capital & financial account performance.

Source: Bank Indonesia

TOTAL Q1 Q2 Q3 Q4 TOTAL Q1* Q2**

I. Current Account 10,628 1,936 1,409 1,205 1,093 5,643 2,089 232

A. Goods 1 30,932 6,954 6,848 7,593 9,232 30,628 8,686 9,728

- Exports 119,646 35,088 37,444 39,712 45,830 158,074 45,818 51,460

- Imports -88,714 -28,134 -30,596 -32,119 -36,597 -127,447 -37,133 -41,732

1. Non Oil & Gas 25,560 5,812 5,881 6,605 9,097 27,395 8,628 10,638

2. Oil -4,016 -1,663 -2,140 -1,991 -2,859 -8,653 -3,438 -4,998

3. Gas 9,388 2,805 3,107 2,980 2,994 11,886 3,495 4,088

B. Services -9,741 -2,106 -2,275 -2,155 -2,788 -9,324 -2,305 -3,598

C. Income -15,140 -3,993 -4,262 -5,385 -6,653 -20,291 -5,318 -6,871

D. Current transfers 4,578 1,080 1,098 1,151 1,301 4,630 1,027 974

II. Capital & Financial Account 4,852 5,590 3,697 7,365 9,550 26,201 6,436 12,518

A. Capital Account 96 18 2 4 26 50 1 0

B. Financial Account 2

4,756 5,572 3,695 7,361 9,524 26,151 6,435 12,518

1. Direct Investment 2,628 2,484 2,298 1,684 4,241 10,706 3,041 2,699

2. Portfolio Investment 10,336 6,159 1,089 4,517 1,437 13,202 3,798 5,742

3. Other Investment -8,208 -3,072 308 1,160 3,846 2,243 -404 4,076

III. Total (I + II) 15,481 7,526 5,106 8,570 10,642 31,844 8,525 12,750

IV. Net Errors & Omissions -2,975 -905 315 -1,616 646 -1,559 -859 -873

V. Overall Balance (III + IV) 12,506 6,621 5,421 6,955 11,289 30,285 7,666 11,876

Memorandum:

Reserve Asset Position 66,105 71,823 76,321 86,551 96,207 96,207 105,709 119,655

In Months of Imports & Official Debt Repayment 6.5 5.2 5.6 6.3 7.0 7.0 6.0 6.8

Current Account (% GDP) 1.95 1.18 0.80 0.65 0.58 0.79 1.06 0.11

Debt Service Ratio (%) 23.2 21.2 23.2 20.3 23.7 22.2 18.0 21.6

o/w. Government & Monetary Authority DSR (%) 7.5 5.0 7.2 4.8 6.2 5.8 4.5 5.4

1) In terms of free on board (fob)

2) Excluding reserves and related items

3) Negative represents surplus and positive represents deficit.

* Provisional figures

** Very provisional figures

- Not available

2009 2010*I T E M S

2011

17

Trade Balance: Non-Oil & Gas

A strong performance of non-oil & gas exports that charted 38.6% growth (yoy) supported the non-oil & gas trade balance surplus of US$10.6

billion. Primary products (resources-based commodities) were the main contributors to exports performance, benefited from buoyant demand

and high commodity prices in international market.

Meanwhile, solid economic growth during the reporting period triggered the non-oil & gas imports to grow at 28.4% (yoy). Imports of raw

materials and capital goods, comprised of 70% and 20% of total imports consecutively, and grew by 31% and 26% respectively.


Balance of Payments Q2/2011: Current Account

-40

-20

0

20

40

60

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

*

Q2

**

2007 2008 2009 2010* 2011

Trade Balance of Non-Oil & Gas

Exports Imports Non Oil & Gas Trade Balance

Billion USD

Trade balance of Non-Oil & Gas

18

Trade Balance: Oil & Gas

The oil & gas trade balance turned into deficit as oil imports drove up in response to rising consumption of oil-based fuels and falling

national oil production amid a hike in international oil price. Meanwhile, further increase in the gas trade balance surplus was constrained by a

shifting of gas supply particularly for fulfiling domestic needs.



-6

-4

-2

0

2

4

6

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1*

Q2*

*

2007 2008 2009 2010* 2011

Trade Balance of Oil & Gas

Oil Trade Balance Gas Trade Balance Oil & Gas Trade Balance

Billion USD

Trade balance of Oil & Gas

19

• The services account deficit was higher than the deficit in Q1/2010 mainly due to mounting numbers of outbound travellers during the

vacation period (seasonal factors) and increased payments for freight services in line with upbeat import activity.

• The income account deficit in Q2/2011 was broaden to US$6.9 billion (Q1/2011: US$5.3 billion deficit), primarily explained by a rise in

payments of debt interest.

• Meanwhile, current transfers surplus were relatively stable as compared to the previous period.

Services, Income, and Current Transfers



-8-7-6-5-4-3-2-1012

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

*

Q2

**

2007 2008 2009 2010* 2011

Services, Net

Current Transfer, Net

Income, Net

Services, Incomes & Current TransfersBillion USD

Services, Income, and Current transfers

20

The financial account surplus mounted to US$12.5 billion, almost doubled from a surplus in the previous period. The higher surplus was

primarily due to substantial inflows of foreign capital in terms of domestic debt instruments and growing domestic financing needs that prompted

the private sector to draw on foreign lines of credits and offshore deposits.

Financial Account: Total


Balance of Payments Q2/2011: Capital & Financial Account

-10

-5

0

5

10

15Q

1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1*

Q2

**

2007 2008 2009 2010* 2011

Other Investment Portfolio Investment

Direct Investment Financial Account

Financial Account (Total)Billion USD

Financial Account: Total

21

The residents’ investment abroad (the financial account - assets) posted a lower net outflows in Q2/2010 (US$1.0 billion), compared to a

substantial net outflows of US$3.3 billion in Q1/2010. This was primarily explained by higher withdrawal of resident deposits in overseas banks in

order to fulfill the foreign currency liquidity needs in domestic market.

Financial Account: Assets



-8

-6

-4

-2

0

2

4Q

1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1*

Q2**

2007 2008 2009 2010* 2011

Other Investment Portfolio Investment

Direct Investment (abroad) Financial Account

Financial Account (Assets)Billion USD

Financial Account: Assets

22

Financial Account Liabilities: Foreign Direct Investment (FDI)

Inflows of foreign direct investment (FDI) expanded further to prop up a US$5.2 billion net flows of FDI in Q2/2011. A relatively strong

investment growth was supported by a more conducive investment climate and favorable macroeconomic conditions contributes significantly

to this robust performance.



-8

-5

-3

0

3

5

8

10

13Q

1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

*

Q2

**

2007 2008 2009 2010* 2011

Foreign Direct Investment (FDI)

Inflow (Equity & Loan Disb)

Outflow (Equity & Debt Repayment)

Total

Billion USD

Foreign Direct Investment (FDI)

23

Financial Account Liabilities: Foreign Portfolio Investment

Foreign portfolio investment recorded a US$6.3 billion surplus in Q2/2011, higher than US$4.1 billion surplus in the preceding period. The

massive inflows were mainly charted in domestic stocks and government bonds, driven by sustained excess liquidity on global financial markets

and continuing attractive returns on investments in Indonesia.



-6

-4

-2

0

2

4

6

8Q

1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

*

Q2

**

2007 2008 2009 2010* 2011

Foreign Portfolio Investment

Public Sector Private Sector Liabilities, Total

Billion USD

Financial Account Liabilities: Foreign Portfolio Investment

24

Financial Account: Foreign Other Investment

Foreign other investment booked a US$2.0 billion surplus, rose from a US$0.8 billion surplus in Q1/2010. This upturn was mainly caused

by larger withdrawal of corporates’ foreign debts to support their business activities and mounting foreign deposits in domestic banks.

Meanwhile, the government debts showed a net outflows due to the seasonal factors of debt repayments.



-3-2-1123456

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

*

Q2

**

2007 2008 2009 2010* 2011

Foreign Other Investment

Public Sector Private Sector Total

Billion USD

Foreign Other Investment

The CPI inflation in July 2011 recorded at 0.67% (mtm) or 4.61% (yoy), which is relatively in line with its seasonal pattern. Core inflation

reached 0.42% (mtm) or 4.55% (yoy) driven by the increase in global commodity prices and the increase in domestic demand. Looking

forward, the increasing inflation is forecasted to grow from household consumption during Ramadhan and Eid holidays. However,

Government policies on securing supply of foods is predicted to mitigate volatility of the prices hence inflation will be under control.

Risk of further pressure is emanating from seasonal factor

Inflation – by component

25 Source: Bank Indonesia

-10.00

-5.00

0.00

5.00

10.00

15.00

20.00

Jan

Feb

Mar

Ap

r

May Jun

Jul

Au

g

Sep

Oct

No

v

De

c

Jan

Feb

Mar

Ap

r

May Jun

Juli

Au

g

Sep

Oct

No

v

De

c

Jan

Feb

Mar

Ap

r

May Jun

July

2009 2010 2011

%

CPI (%, yoy) Core (%, yoy) Volatile Food (%, yoy) Administered (%, yoy)

Monetary Policy Stance

BI Rate

In the latest Board of Governors’ Meeting convened on August 9, 2011, BI rate decided to be held at 6.75%.

Bank Indonesia is confident that the impact of the recent turmoil in the global financial markets due to the downgrade of US

credit rating to the domestic financial market is limited, and can be contained with continuous monitoring of market development

and coordination with the Government. Bank Indonesia is strongly confident that the implementation of monetary and macroprudential policy mix can secure macroeconomic stability and keep inflation within the targets, that is, 5% +1% in 2011

and 4.5% +1% in 2012.

Source: Bank Indonesia.26

8.25%

6.75%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

Sep-08 Apr-09 Nov-09 Jun-10 Jan-11 Aug-11

Sound Financial Sector

Stability in the banking system remains firm alongside steady improvement in credit growth

• On the financial sector, Financial System Stability had been maintained as indicated by the Financial Stability Index which were

well below the threshold of 2 (1.61 on July 2011).

• Within the system, banking industry remains strong and prudently managed with improved intermediary function. This was reflected

in the relatively high level of Capital Adequacy Ratio (CAR) of 17% and subdued Non-Performing Loans (NPL) at below 5% (2.7%)

as of June 2011.

27

Sufficient CAR (%) Sound level of NPLs (%)


19.3 19.1 19.2

17.8

17.4

16.5 16.2

16.4 16.4 16.3

17 17

18

17.617.8

17.4

17

14.5

15.0

15.5

16.0

16.5

17.0

17.5

18.0

18.5

19.0

19.5

20.0

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

Feb-10 Apr-10 Jun-10 Agust-10 Okt-10 Des-10 Feb-11 Apr-11 Jun-11

gross NPL

net NPL

• Further improvement in banking intermediation is also reflected in progressively improving credit growth, recorded in

June 2011 at 23.6% (yoy) on the strength of expansion in all lending categories including credit to SMEs.

• Bank Indonesia will keep monitoring banking sector condition and improve sector efficiency so that the

intermediation function can be optimized.

Banking Intermediation

Steady loan growth


28

674 665 677 676 677 683 703 632 633 684 694 726 759 758 813 818 819 853 880 855 857 870 882 906 940

269 274 280 278 281 286 297289 301

296 307 305336 339

325 327 332 330 348 342 357 357 365 376388391 398 408 411 418 427 436

483 493 475 484 499489 500

501 513 523 523537 548 558 568 577

588603

Working Capital loans Investment Loans Consumption Loans

Banking System Stability remains sound with stable CAR, continuous credit expansion and low NPL

(data as of June 2011)

Main Banking Indicators


29

Indicators Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11

Total Asset (T Rp) 2.563,7 2576,3 2.604,4 2.678,3 2.683,5 2.700,2 2.758,1 2.796,4 2.856,3 3.008,9 2.990,7 2.993,1 3.065,8 3.069,1 3.136,4 3.195,1

Deposits (T Rp) 1.982,2 1.980,5 2.013,2 2.096,0 2.082,6 2.092,8 2.144,1 2.173,9 2.212,2 2.338,8 2.302,1 2.287,8 2.351,4 2.340,2 2.397,2 2.438,0

- Demand Deposits 471,1 462,1 473,7 522,2 506,9 496,4 504,2 497,8 511,9 535,9 530,6 529,8 540,8 528,3 561,2 577,0

- Savings Accounts 576,2 580,5 588,8 610,8 619,5 633,2 653,6 659,7 674,3 733,2 715,8 713,2 722,7 734,5 740,8 753,7

- Time Deposit 934,9 937,8 950,7 963,1 956,2 963,2 986,2 1.016,4 1.026,0 1.069,8 1.055,6 1.044,9 1.087,8 1.077,4 1.095,2 1.107,3

Earning Assets (T Rp) 2.416,4 2419,4 2.452,4 2.528,5 2.531,6 2.547,1 2.591,3 2.647,9 2.643,1 2.778,9 2.746,8 2.749,8 2.813,3 2.799,6 2.859,7 2.912,9

- Loans (T Rp) 1.485,9 1.516,0 1.561,2 1.615,8 1.627,4 1.670,6 1.689,1 1.705,8 1.736,1 1.796,0 1.776,1 1.803,9 1.844,2 1.872,6 1.918,6 1.979,6

- Bank Indonesia Certificates (T Rp) 221,5 255,4 253,6 224,3 190,5 208,7 176,3 147,3 142,6 139,3 143,5 121,3 139,8 133,6 111,4 115,3

- Overnight Placements at BI (T Rp) 82,5 43,2 47,0 97,0 119,2 66,0 132,2 218,1 178,4 277,8 269,9 257,4 262,5 245,5 284,1 282,6

- Securities 350,6 331,7 333,3 327,1 325,7 325,1 326,4 320,7 342,9 324,9 323,1 326,5 337,9 331,8 339,5 334,5

- Inter-bank Placements 264,9 262,7 246,6 252,9 258,3 265,8 256,2 244,7 231,8 228,5 221,6 227,9 216,0 203,9 193,7 188,3

- Equity Investments 11,0 10,4 10,6 11,4 10,5 10,9 11,1 11,3 11,3 12,4 12,6 12,8 12,9 12,2 12,4 12,6

Net Interest Income (Cummulated) 36,1 48,2 60,3 73,1 85,4 98,1 110,6 123,5 136,6 1.765,8 1.746,0 1.773,9 1.814,8 1.843,5 1.889,5 1.950,7

Capital Adequacy Ratio (%) 19,1 19,2 17.8* 17,4 16,5 16,2 16,4 16,4 16,3 17,0 17,0 18,0 17,6 17,8 17,4 17,0

Loans/Earning Assets (%) 61,5 62,7 63,7 63,9 64,3 65,6 65,2 64,4 65,7 64,6 64,7 65,6 65,6 66,9 67,1 68,0

Gross Non Performing Loans (%) 3,8 3,5 3,6 3,3 3,4 3,4 3,0 3,6 3,4 2,9 3,1 3,1 3,2 3,2 3,2 3,0

Net Non Performing Loans (%) 1,0 0,9 1,0 0,8 0,9 0,7 0,7 0,9 1,0 0,7 0,9 0,9 0,9 0,9 1,1 0,9

Return on Assets (%) 3,0 2,9 2,9 2,9 2,9 2,8 2,8 2,9 2,8 2,7 3,0 2,8 3,1 3,0 3,0 3,1

Net Interest Margin (%) 5,0 5,0 5,0 5,0 0,5 0,5 0,5 0,5 0,5 0,5 0,5 0,5 0,6 0,5 0,5 0,5

Ops. Expense/Ops. Income (%) 83,6 84,8 84,3 84,8 78,7 78,7 78,9 79,8 79,4 80,0 83,5 80,5 77,8 78,5 78,2 80,0

Loan to Deposit Ratio (%) 75,0 76,5 77,5 77,1 78,1 79,8 78,8 78,5 78,5 76,8 77,2 78,8 78,4 80,0 80,0 81,2

No. of Banks 121 121 121 121 122 122 122 122 122 122 121 121 121 121 121 121

No. of Bank Office Network 13.067 13.078 13.092 13.106 13.381 13.453 13.514 13.591 13.767 13.971 14.103 14.126 14.202 14.273 14.392 14.454

Prudent Fiscal Management

Fiscal policy overview

Continue tax administration reform agenda

Explore tax potential through intensification (widening tax base) and intensification

Increase the quality of tax inspection and investigation

Strengthen custom and excise supervision

Provide tax incentive and custom facilities

Taxation

Government

Expenditure

Subsidy

Budget

Financing

2011 State budget

Provide non-energy subsidies (food, fertilizer, seeds, credit interest program)

Rely on domestic bond market to finance deficit

Widening domestic and international investors base through financing instrument diversification

Gradually eliminate external debt

Utilize domestic financing sources (Investment Fund Account and assets management)

Provide infrastructure financing, e.g. government investment, guarantee, and liquidity facilities

Boost infrastructure development (roads, bridges, ports, electricity, disaster rehabilitation)

Social security programs, such as health program (Jamkesmas), education (BOS), and society empowerment

program (PNPM) to protect the poor household

Remuneration in order to continue bureaucracy reform agenda

Continued LPG conversion program

Better targeted electricity subsidy

Utilizing alternative energy

Control subsidized fuel usage through close distribution system

Provide subsidy for bio fuel

Source: Ministry of Finance31

Summary of 2011 Revised Budget(IDR Trillion)


Deficit in Revised Budget 2011 is estimated to increase to 2,1% from 1,8% in Original Budget 2011, whereas increase in government spending is higher than additional revenue and grant. To cover the gap, the Government will use cash surplus balance...

A. PENDAPATAN NEGARA DAN HIBAH 949,7 992,4 995,3 1.104,9 1.169,9 65,0 5,9

I. PENERIMAAN DALAM NEGERI 948,1 990,5 992,2 1.101,2 1.165,3 64,1 5,8

1. PENERIMAAN PERPAJAKAN 742,7 743,3 723,3 850,3 878,7 28,4 3,3

2. PENERIMAAN NEGARA BUKAN PAJAK 205,4 247,2 268,9 250,9 286,6 35,7 14,2

II. PENERIMAAN HIBAH 1,5 1,9 3,0 3,7 4,7 0,9 24,7

B. BELANJA NEGARA 1.047,7 1.126,1 1.042,1 1.229,6 1.320,8 91,2 7,4

I BELANJA PEMERINTAH PUSAT 725,2 781,5 697,4 836,6 908,2 71,7 8,6

A. Belanja K/L 340,1 366,1 332,9 432,8 461,5 28,8 6,6

B. Belanja Non K/L 385,1 415,4 364,5 403,8 446,7 42,9 10,6

II. TRANSFER KE DAERAH 322,4 344,6 344,7 393,0 412,5 19,5 5,0

C. KESEIMBANGAN PRIMER 17,6 (28,1) 41,5 (9,4) (44,3) (34,8) 368,4

D. SURPLUS/ (DEFISIT) ANGGARAN (A - B) (98,0) (133,7) (46,8) (124,7) (150,8) (26,2) 21,0

% Defisit Terhadap PDB (1,6) (2,1) (0,7) (1,8) (2,1) (0,3) 17,5

E. PEMBIAYAAN (I + II) 98,0 133,7 91,6 124,7 150,8 26,2 21,0

I. PEMBIAYAAN DALAM NEGERI 107,9 133,9 96,1 125,3 153,6 28,3 22,6

II. PEMBIAYAAN LUAR NEGERI (neto) (9,9) (0,2) (4,6) (0,6) (2,8) (2,2) 355,6

APBN

2010

ITEMAPBN-P Realisasi APBN

2011

Nominal persen

Selisih thd APBN

APBN-P

A. STATE REVENUES & GRANTS

B. STATE EXPENDITURES

C. PRIMARY BALANCE

E. FINANCING (I+II)

D. SURPLUS/ (DEFICIT) (A-B)

I. DOMESTIC REVENUES

II. GRANTS

II. TRANSFER to REGIONS

I. CENTRAL GOVERNMENT EXPENDITURES

I. DOMESTIC FINANCING

II. FOREIGN FINANCING

B. Non Line Ministries/Agencies

A. Line Ministries/ Agencies

1. TAX REVENUES

2. NON TAX REVENUES

% deficit of GDP

Original Budget

Original Budget

Revised Budget

Revised Budget

Realisation

diferrence

Percent

Deficit in the Revised Budget 2011 is estimated to increase to 2.1% from 1.8% in the Original Budget. An increase

of government spending is higher than additional revenue and grant on the revised budget. To cover the gap, the

Government will use cash surplus balance.

2011 Revised Budget Macroeconomic Assumption

The changes for macroeconomic assumption in the revised budget 2011 is in the following table.

Macroeconomic

Assumption

2010 2011

Revised

BudgetRealization State Budget Revised Budget

Growth (%) 5.8 6.1 6.4 6.5

Inflation (%) 5.3 6.95 5.3 5.65

SBI 3 month or SPN 3 month for 2011

revised budget (%) 6.5 6.57 6.5 5.6

Exchange Rate (RP/US$) 9,200 9,087 9,250 8,700

ICP (US$/bbl) 80 79.4 80 95

Lifting (MCBD) 0.965 0.954 0.970 0.945

Source: Ministry of Finance

Macro Assumption 2010-2011

33

Improved Government Debt Position

Debt Securities Strategy 2011

Prioritizing issuance of government securities in domestic market

Supporting money market and capital market development to strengthen financial system

Promoting the creation of investment-oriented society

Supporting efficient monetary management

Foreign currency government securities issuance is complementary to domestic currency government securities

issuance

Diversification of financing instruments to widen the market

Maintaining the presence of government financial instruments in global market

Avoiding crowding out in domestic market

Government securities issuance is taking into account the support to the implementation of Asset Liability Management with

Bank of Indonesia

Continuing development of government securities program to enhance the depth and liquidity in secondary market


Debt To GDP


Notes:* = Preliminary, GDP number based on Revised Budget 2011 Assumption

[Outstanding as of June, 2011]

Debt to GDP Ratio Debt Composition

Table of Debt to GDP Ratio

Notes:

Based on debt outstanding as of June 2011

* = Preliminary , GDP Number Based on Revised Budget 2011 Assumption

57%

47%

39%

35%33%

28%26% 25%

2004 2005 2006 2007 2008 2009 2010 2011++

50% 50% 53% 53%48%

53% 54% 56%

50% 50% 47% 47%52%

47% 46% 44%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2004 2005 2006 2007 2008 2009 2010 2011++

Domestic Debt External Debt

2004 2005 2006 2007 2008 2009 2010 2011++

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 6.422.918,20 6.888.149,80

Debt Outstanding (billion IDR) 1.299.504,02 1.313.294,73 1.302.158,97 1.389.415,00 1.636.740,72 1.590.656,07 1.676.851,19 1.723.896,74

- Domestic Debt (Securities) 653.032,15 658.670,86 693.117,95 737.125,54 783.855,10 836.308,91 902.429,79 958.396,82

- Foreign Debt (Loan+Securities) 646.471,87 654.623,87 609.041,02 652.289,46 852.885,62 754.347,16 774.421,40 765.499,92

Debt to GDP Ratio 56,60% 47,34% 39% 35% 33% 28% 26% 25%

- Domestic Debt to GDP Ratio 28,44% 23,74% 21% 19% 16% 15% 14% 14%

- Foreign Debt to GDP Ratio 28,16% 23,60% 18% 17% 17% 13% 12% 11%

End of Year

61 59 64 69 69 63 62 62 67 65 68 69

6864

7377 71

7182 85 83

104118

132

-

50

100

150

200

250

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011++

Loan Government Securities

Outstanding of Total Central Government Debt


+ Preliminary numbers, as of June, 2011

[in percentage]

Year 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011++

Loan 47% 48% 47% 47% 49% 47% 43% 42% 45% 38% 37% 34%

Government Securities 53% 52% 53% 53% 51% 53% 57% 58% 55% 62% 63% 66%

Total Central Government Debt 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%

11.4

7.9

1.4 1.7 2.3

6.6 7.7

12.2

15.7

(2)

3

8

13

18

Peru BBB- Indonesia BB Uruguay BB Colombia BB+ Vietnam BB- Philippines BB Romania BB+ Turkey BB India BBB-

Domestic (% GDP) Foreign (% GDP)

Balanced and contained borrowing needs

Debt maturity profile

2011 Gross borrowing requirements (% GDP)1

Source: Individual Fitch Reports; Ministry of Finance; *Indonesia IMF GDP1 Calculations include debt servicing

Debt profile shows smooth external repayment profile and a balance between domestic and external debt

Source: Ministry of Finance and Bank Indonesia38

-

20

40

60

80

100

120

140

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 2040-2055

External Loan Securities

[Trillion IDR]

Notes:

• Preliminary, as of June, 2011

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

Promissoryto BI

Robust domestic bond market

More diversified government bond holders (IDR trillion) Foreign ownership on longer term securities is dominant

39

The domestic bond market plays an increasing role in financing the budget

287,56 300,17276,65 283,50 281,76

254,36217,27 220,72

101,00 68,58 87,18

116,09 156,33 219,39

228,19 230,59

10,74

31,09 54,92

78,16

87,61

108,00 195,76

248,87

-

100,00

200,00

300,00

400,00

500,00

600,00

700,00

800,00

Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 29-Jul-11

Foreign Holders Domestic Non-Banks Domestic Banks

Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 29-Jul-11

Total 194.971 200.405 211.574 221.424 225.319 234.992 248.869

>5 132.550 135.846 140.767 145.158 143.260 148.742 159.348

>2-5 33.855 34.633 33.823 35.065 42.134 40.422 42.309

>1-2 7.736 8.858 12.039 12.454 13.227 17.510 16.747

0-1 20.829 21.069 24.945 28.746 26.698 28.318 30.465

0

50.000

100.000

150.000

200.000

250.000

300.000

[Rp miliar]

IDR Billion


Declining local borrowing rates

IDR Government Bonds : Yield Curve (IDMA)

40

3.00

5.00

7.00

9.00

11.00

13.00

15.00

17.00

19.00

21.00

1Y 2Y 3Y 4Y 5Y 6Y 7Y 8Y 9Y 10Y 15Y 20Y 30Y

10 Aug '11 3 Aug '11

7 May '10 27 Oct '08

13 Sep '05

[in percentage]

Tenor 10-Aug-11 3-Aug-11 7-May-10 27-Oct-08 13-Sep-05

1Y 4.49 4.25 6.64 19.37

2Y 4.87 5.25 7.10 17.35 14.59

3Y 5.72 5.57 7.45 19.93

4Y 6.16 6.10 8.03 17.17 14.14

5Y 6.24 6.24 8.77 17.46 14.96

6Y 6.54 6.45 8.93 17.05 15.24

7Y 6.80 6.70 9.03 17.06 16.17

10Y 6.89 6.88 9.29 20.91 15.75

15Y 7.82 7.61 9.89 16.65 14.12

20Y 8.16 8.00 10.46 20.27

30Y 8.58 8.41 10.55 20.37

Sources: IDMA, Bloomberg

Bond stabilization framework

Accumulated cash surplus

Funds managed by

Government Investment Unit

Second line of defense

As set in the memorandum of understanding between MoF and Ministry

of SoE, under coordinative framework, SoEs will use their balances to

buy Government bonds

Parliamentary approval is needed prior to the usage of the funds

Government Investment Unit will use its fund to buy Government bonds

in the secondary market for its portfolio

Participating SOEs, ie banks,

insurance company & other

financial institution

Government

cash balance

Balance sheet

SOE

Idle cash Government has the capacity to support the secondary market whenever

needed

First line of defense

The DMO stands ready to support the domestic bond market as required in the event of substantial capital

outflows

41

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