1. Half-yearly Indonesia Economic Update and Outlook William E. Wallace Lead Economist, World Bank Indonesia 10 December 2008

3. Overview Commodity prices boom … and bust Int’l financial market turmoil Global economic downturn Impacts domestic economy IDN financial markets 2007 Q3 2008 Q1 2008 Q3 2008 Q4 2009 H1 -> Stage 1 ↔ Stage 2 ↔ Stage 3

4. Approaching the crisis: Economy coming in strong Volatile & weaker Indo. financial mkts Commodity prices boom International financial market turmoil Global economic downturn Impacts domestic real economy 2007 Q3 2008 Q1 2008 Q3 2008 Q4 2009 H1  Commodity prices burst Higher export prices, stronger terms of trade Higher inflation Lower poverty Share market  Supports currency Real wages  Invest’t  Employ’t  Incomes  Higher poverty Slower decline in poverty Export prices  , terms of trade weaken

9. Approaching the crisis: The rise in commodity prices fed inflation Volatile & weaker Indo. financial mkts Commodity prices boom International financial market turmoil Global economic downturn Impacts domestic real economy 2007 Q3 2008 Q1 2008 Q3 2008 Q4 2009 H1  Commodity prices burst Higher export prices, stronger terms of trade Higher inflation Lower poverty Share market  Supports currency Real wages  Invest’t  Employ’t  Incomes  Higher poverty Slower decline in poverty Export prices  , terms of trade weaken

12. Approaching the crisis: With a strong economy, poverty has fallen Volatile & weaker Indo. financial mkts Commodity prices boom International financial market turmoil Global economic downturn Impacts domestic real economy 2007 Q3 2008 Q1 2008 Q3 2008 Q4 2009 H1  Commodity prices burst Higher export prices, stronger terms of trade Higher inflation Lower poverty Share market  Supports currency Real wages  Invest’t  Employ’t  Incomes  Higher poverty Slower decline in poverty Export prices  , terms of trade weaken

14. The global financial market turmoil Impacting Indonesian financial markets… Commodity prices boom International financial market turmoil Global economic downturn 2007 Q3 2008 Q1 2008 Q3 2008 Q4 2009 H1  Commodity prices burst Higher export prices, stronger terms of trade Higher inflation Export prices  , terms of trade weaken Lower poverty Supports Indonesia’s real economy IDR weaker Stocks fall Slower fall in poverty Invest’t  Income  Credit tighter Higher inflation Yields on gov’t debt ↑ Supports Indon. financial markets Employ-ment 

17. The global economic downturn Slower global growth will impact Indonesia Higher inflation Commodity prices boom International financial market turmoil Global economic downturn 2007 Q3 2008 Q1 2008 Q3 2008 Q4 2009 H1  Commodity prices burst Higher export prices, stronger terms of trade Higher inflation Slower fall in poverty Income  IDR weaker Stocks fall Invest’t  Higher inflation Weaker export demand, especially manufactures Lower poverty Supports Indon. financial markets Supports Indonesia’s real economy Employ-ment 

26. Half-yearly Indonesia Economic Update and Outlook William E. Wallace Lead Economist, World Bank Indonesia 10 December 2008

27. The global financial & economic turmoil Impacting Indonesian financial markets… Commodity prices boom International financial market turmoil Global economic downturn 2007 Q3 2008 Q1 2008 Q3 2008 Q4 2009 H1  Commodity prices burst Higher export prices, stronger terms of trade Higher inflation Export prices  , terms of trade weaken Lower poverty Supports Indonesia’s real economy IDR weaker Stocks fall Slower fall in poverty Invest’t  Income  Employ-ment  Credit tighter Higher inflation Yields on gov’t debt ↑ Supports Indon. financial markets

28. Overview Volatile & weaker Indo. financial mkts Commodity prices boom International financial market turmoil Global economic downturn Impacts domestic real economy 2007 Q3 2008 Q1 2008 Q3 2008 Q4 2009 H1  Commodity prices burst Higher export prices, stronger terms of trade Higher inflation Slower decline in poverty Export prices  , terms of trade weaken Lower poverty Supports Indon. financial markets Supports Indonesia’s real economy