Indonesia's Economy Steadily Rebounds

INDONESIA REBOUNDS

GINANDJAR KARTASASMITA

The Japan Institute of International Affairs
Tokyo, 21 F b
Tk February 2007

Macroeconomic Update

JIIA_Tokyo_07 www.ginandjar.com 2

Macroeconomic Development
Outlook 2007
Policy Reform Initiatives


Positive Growth Trajectory

Sustained economic growth despite difficult environment

Economy is on a steady
E i td
upward trend. Indonesia’s
> 7%
6-7%
performance is very much
5-6%
comparable in the region
5.25 %
Over the medium term, this
acceleration process should
4%
continue assuming that all
reform programs are
implemented.
il td

2007 - 2009 2010 -
2006
2001-2003 2004-2005
beyond
Source: CBS .

Macroeconomic Update
p
Growth steadily recover
Indonesia: Economic Growth 1998-2006

2006: reached 5.5%; government
006 a d 5 5%; go
consumption and expert driven;
6.5 6.5
6
5.7 5.6 5.6
5.2
4.9 5.1 5.1
4.9 4.9
4.4

investment remains weak.
5 3.8

0.9 1.2

Medium Term
0
Percen p.a

1998 1999 2000 2001 2002 2003 2004 2005 2006

– 2007 2009 : 6-7 % p.a
2007-2009 6 7 pa
nt

-5

– After 2010 : 7+% % p.a
Confidence has been restored after
-10

fuel price adjustment.
- 13 8 14.1
13.8
-15
15 -

Stock prices are historic high
GDP Non Oil and Gass

Exchange rates are stable
M a rk e t c o n fid e n c e s tre n g th e n
Reserves stronger and still increasing
83=100
R p /U S $
11000 1800

Ratings upgraded.
s to c k in d e x (R H S ) 1700
10500
1600

Macroeconomic Stability has been
1500
10000

achieved
1400

9500 1300
Y o y i fl ti
inflation d
down f
from 17% l t
last
1200

year to 6.6% or less this year
9000
1100

Over Medium Term: 3-4% is the
1000
8500
E x c h a n g e ra te s (L H S )
target
900

8000 800
J a n -0 5 M a y-0 5 S e p -0 5 J a n -0 6 M a y-0 6 S e p -0 6


Manufacturing sector shows signs
of recovery
Non Oil/Gas Industrial Growth 2005-2006

20.0%

15.0%

10.0%

5.0%
5 0%

0.0%
Q1 Q2 Q3 Q4 Q1 Q2 Q3

2005 2006
-5.0%

Non Oil/Gas Industries Food Textile Fertilizer Cement


Other Macroeconomic Development
Fiscal sustainability has been reestablished. D e c lin in g B u d g e t D e fic its
(% o f G D P )

Budget deficits has been contained 0%

around 1% of GDP
-1 %

-2 %

public debt ratio down to about 40% at -3 %

the end of 2006 and will continue falling R e vis e d b u d g e t
-4 %

to below 30% of GDP in 2011.
R e a liz a tio n
-5 %
B udget
-6 %

-7 %

-8 %
FY98 FY99 FY00 FY 01 FY02 FY03 FY04 FY05 FY06 FY07

On spending side (9 m )

Public spending now back to the pre
crisis level around 7-8% of GDP but with Public Investment
different composition. (% of GDP)
8%

Sub-national gov’t control more than District
Central gov't
7%

50% of total 6%
Province
Education spending on the rise and now 5%
comparable to the peer countries around
4-5% of GDP
4%

Spending on health and infrastructure a
3%

also increasing. 2%

Commitment for PPP development. 1%

0%
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
(E) (P) (P)


Sustainable macroeconomic stability

A positive outlook on macroeconomic stability should translate
into a reduction of cost of finance
17 %

7%
Stabilization of rupiah at stronger
6.5 %
level support declining inflation thus
3-4 %
providing room for policy rates to
decline.
CPI inflation : 6.6%
2006 2007 2007-2009 Inflation easing toward targeted level
2005
12000 20
18
10000
16
Risks for destabilizing inflation still
8000 14

high: rice price has been increasing
12
6000
10

since last December.
4000 8
6
2000
4
0 2
2001 2002 2003 2004 2005 Q106 Q206 Q306 Oct 06
Source: Bloomberg & BI
IDR/USD Inflation rate yoy SBI 1 month - BI Rate SBI 1 month - BI Rate


External position remains
promising
Current account position has
Rise in FX reserves
turned around
Months
USDbn USDbn
FX reserves (LHS)
( )
50 9.0
3
50% Months of import and official debt
repayment (RHS)
45 8.0
7.1
2
40
30%
% 6.6
66 7.0
70
35 5.5 6.0
1
5.0
5.9
30
10% 4.5
5.0
0 25
4.0
2001 2002 2003 2004 2005 2006
-10% 20
36 36 35 43
-1 3.0
32
15 28
2.0
20
-30%
30% 10
-2
1.0
5
Current Account (LHS) Export (RHS) Import (RHS)
-3
-50% 0 0.0
Source: Bank Indonesia

06*
001

002

003

004

005

200
20

20

20

20

20

Continued improvement
in external debt position
External Debt Key highlights

45.0 90.0
Debt to GDP ratio decline from
80.7
40.0 80.0
81% in 2001 to 47% in 2005, and
65.7
35.0 70.0
4 2 .1

expected to reach 39% in 2006.
3 8 .6

56.8 54.2
54 2
30 0
30.0 60.0
60 0
3 7 .3

46.0
There was a significant drop of
25.0 50.0
3 3 .9

3 1 .9

38.6
2 8 .4

2 2 .8

41.4 33.1
2 2 .2

20.0 40.0 DSR in 2005 since there was
2 6 .6
1 9 .5

2 1 .3
15.0 25.8 30.0 Paris Club moratorium due to
32.2
32 2
10.0 20.0
tsunami disaster in Aceh.
27.1
1 4 .6
22.1
5.0 10.0
- 0.0
2001 2002 2003 2004 2005 2006
2006*

Govt Ext Debt / GDP (LHS) Private Ext Debt / GDP (LHS)
Total Ext Debt / GDP (RHS) DSR (LHS)
Note : External debt consists of central government, central bank and private debt

Improving Ratio of Short Term Debt
to Reserve
tR
35000 120.00%
112.6%
30000 100.00%
25000 80.00%
73.9%
62.0% 57.4%
20000 59.3%
60.00%
15000 45.9%
40.00%
40 00%
20.74%
20 74%
23.89%
10000 18.72%
6.42% 11.29% 20.00%
5000 4.70%
0 0.00%
2001 2002 2003 2004 2005 Jul-06

Short term debt (OM) Short term debt (RM)
Short term debt (OM) to Reserve Short term debt (RM) to reserve
Note : OM = Original Maturity
RM = Remaining Maturity


Exchange rate
modest appreciation - low volatility

Average Exchange Rate Highlights

• R i h stabilized and average exchange
Rupiah t bili d d g hg
K Rp/USD
Kurs, R /USD V l tilit %
Volatilitas,
rate during Q3 2006 was Rp. 9,125.
11,000 8.0
Relatively unchanged from Rp. 9,115 in
Kurs Harian
7.0
Volatilitas
10,500
the preceeding quarter
p gq
Rata-rata V l tilit
R t t Volatilitas 6.0
60
10,000
• Average exchange rate in October
5.0
depreciate 0.26% to Rp. 9174 from Rp
9,500 4.0
9153
3.0
9,000
• Volatility stable at 0.5%
2.0
8,500
1.0
0.51
8,000 -
M a y -0 6
A u g -0 5

N o v -0 5

M a r-0 6
A p r-0 6

A u g -0 6
J u l-0 5

S e p -0 5
O c t- 0 5

D e c -0 5
J a n -0 6
F e b -0 6

J u n -0 6
J u l-0 6

S e p -0 6
O c t- 0 6

Daily exchange
rate
Volatility
Average volatility

Fiscal Consolidation Outcomes
Sovereign Debt to GDP Ratio

100%

Compare to Other Emerging Countries
90%
Domestic
80% 70.0
63.1

70% 59.0
60 0
60.0
54.4

60% 50.0 47.3
46.5 46.5
45.3 45.4 45.1
42.4
40.9

% dari PDB
50% 2005
External 40.0 37.5

2006
40%

d
30.0
30 0 2007

30% 20.0

20% 10.0

10% 0.0
Indonesia Malaysia Philippines Thailand
0%
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Source: IMF, World Economic Outlook, Sept 2006


Banking indicators: Banks maintaining
reasonable performance
Main Banking Indicators Highlights
NPL ratios decline during the course of
Average CAR Gross NPL Net NPL 14.0
23
2006
% %
22.4
22.5
Banks
B k well capitalized with CAR at around
ll it li d ith t d
12.0
21% as of August 2006, far above the
22 12.1 21.7
required level of 8%
21.5 10.0
21.0
9.4
8.3
LDR1 relatively stable during 2006 at
8.7
87
21
8.1 8.2 8.5
around 64-65 %. In September 2006 LDR
8.0
20.5
20.5
recorded at 65%.
19.9 5.8
20 19.5 6.0
Net interest income (NII)2 in September
19.4 19.4
9
19 5
19.5 51
5.1
2006 was Rp 6.2 trillion, similar to
4.9
5.6
4.8
December 2005 figure, despite slowing
4.0
19
credit expansion
3.6
18.5
3.0 2.0
RoA stable at around 2.6% with significant
2 6%
18 2.1
1.7
rise in total assets.
17.5 0.0
2001

2002

2003

2004

2005

'S 06
Qi'06

Q2'06

Loan calculations include channeling loans
1
Sep

Calculated as NII for the particular month divided by earning
p y g
2
Q

assets for the corresponding period


No More IMF and CGI
In 2006 Indonesia settled the remaining
debt to IMF amounting $ 7 billion, 4 y
g , years
ahead.
In January 2007, GOI announced the
2007
dissolution of CGI.


THE PROBLEMS
Macroeconomic d
M i development h not b
l t has t been
followed by improvements in the microeconomic
(real) sectors; major constraint for economic
development.
Lagging investment
investment.
Social Impact : increase of poverty from 16 % to
17.75
17 75 % (equivalent to 19 1 million poor
19.1
households in 2006) and 10.85 million
unemployed.
unemployed
Tax Policy.


THE PROBLEMS
Manpower: labor l
M l b law, llow i
income, euphoria of
hi f
freedom of expression (demonstrations and
strikes).
Infrastructure: inadequate infrastructure
constitute a major constraint to economy as well
j y
as social life.
Unstable and high oil prices in international
markets had given impact to socioeconomic life
of the people.
Political and security instability impact on
economic development, particularly to
investment.

Outlook 2007
Tabel

• Global economy
Projected Economic Growth
2004 2005 2006 2007
World Output 5.3 4.9 5.1 4.9
slowing down
Developed Countries 3.2 2.6 3.1 2.7
US 3.9 3.2 3.4 2.9
Jepang 2.3 2.6 2.7 2.1

• Domestic demand
Euro Area 2.1 1.3 2.4 2
Asia 8.8 9 8.7 10
China 8 8.5 8.3 7.3

should be the driver
India 5.8 5.1 5 5.6
Asean-4 5.5 5.7 5.8 5.4

for economic growth
World Trade Volume 10.6 7.4 8.9 7.6
Impor
Developed Countries 9.1 6 7.5 6
– Public investment and
Expor
Developed Countries 88
8.8 55
5.5 8 6

private investment
Inflation
Developed Countries 2 2.3 2.6 2.3

– Private consumption
Emerging and Developing Countries 5.6 5.3 5.2 5

LIBOR
on USD 1.8 3.9 5.4 5.5
on Yen 0.1 0.1 0.5 1.1
on Euro Deposit 2.1 2.2 3.1 3.7
Source: IMF


Outlook 2007
Economic Growth: 6 – 6,5% (Budget:
6.3%; Consensus around 6 %)
; )
Inflation: 6-7%
P li R t 8 9 5% (B d t 8 5% i
Policy Rate: 8-9,5% (Budget: 8,5% in
current pace; policy rate to go down to
becomes 7,5% at the end of 2007); a
stimulus for reducing bank’s lending rate.
bank s


Outlook 2007
The
Th problem of purchasing power can b
bl f hi be
compensated in 2007 by: increase of civil
servant’s salary, minimum wage,
consumption credits, good control of
inflation and lending rate by Bank
Indonesia.
The goal of economic development for
2007: reducing unemployment to 9.9 %
and number of poor people to 16,4 %.


Three Policy Packages
1 Investment Law & Procedure
Investment 2 Tax & Custom Reform
Climate
3 Labor I
L b & Immigration
i ti
Improvement
4 Trade Licenses

5 Cross Sector Strategic Policy Reform

6 Sector Restructuring, Corporatisation and Policy Reform
Infrastructure
7 Regulation on monopoly & investment protection
Clear separation on the role of policy maker, regulator,
8
contracting agency and operator
agency,
9 Coordination Monetary & Fiscal Authority

Financial 10 Financial Institution (Banking & Non Banking)

11
Capital Market and SOE Privatization

New Reform Packages and Special Programs
SME Policy Reform Package
Focus on particularly four areas:
− Access to Finance
− Access to Market
− Human Resource Development and
Entrepreneurship
− Regulatory Reform and Deregulation
Poverty Reduction Program
Focus 1: Mainstreaming Budget for Poverty
Focus 2: Integration and expansion of KDP (Kecamatan
Development Program) and P2KP (Urban Poor) into
PNPM (National Program on Community Empowerment)
Focus 3: Shifting Cash Transfer to Conditional Cash
Transfer
Focus 4: Others like Biofuel, Housing and Rural
Infrastructures
Crash Program for Electricity Expansion
Crash Program for Energy Conversion
LPG for Kerosene
Gas for Gasoline
Coal and Gas for Power Generation
Bioenergy

Note : KDP = Kecamatan Development Program
P2KP = Program Penanganan Kemiskinan Perkotaan
PNPM= Program Nasional Pemberdayaan masyarakat.
g y y


Investment Policies
New Investment Law is being finalized in the
Parliament.
Streamlining investment procedures.
Equal treatment of foreign and domestic
investment.
Less negative list
list.
More incentive to invest.


SOCIO POLITICAL DEVELOPMENT
SOCIO-POLITICAL

Indonesia is emerging from long period of
authoritarian rule to consolidate its status as
one of the world’s largest democratic country.


Regime Change in Indonesia
Sukarno Suharto

• August 1945 - March • March 1968 - May 1998
1968 • Elected by MPRS
• Elected by the PPKI • Resigned under
• Impeached by MPRS pressure

Abdurrahman Wahid B.J. Habibie
October 1999 – July • May 1998-October 1999
2001 • Accountability Speech
Elected by MPR Rejected
• Declined to run for
Impeached by MPR
President

Megawati Susilo Bambang
Yudhoyono
• July 2001 – October
2004 • October 2004 – 2009
• Elected by MPR • Directly elected
• Lost election to SBY


SOCIO POLITICAL DEVELOPMENT
SOCIO-POLITICAL

Indonesia’s political and economic d
Id i’ liti l d i development
l t
after the REFORMASI (1998) seems to be on
the right track.
track
Socio-political development: amendment of
1945 Constitution improvement of checks and
Constitution,
balances system, direct presidential and
regional executives elections legal reform and
elections,
decentralization, human rights, freedom of the
p
press, bigger role of civil society.
, gg y
Peace in Aceh.


MAJOR PROBLEMS
1. Institutions: ambiguity between presidential
and parliamentary systems; weak bicameral
parliamentary system, establishment of quasi-
government institutions, and confusion of role
and function in the judicial branch of government.
2. Political ethics and behavior:
institutionalization of political acts versus
personification of political figures; money politics,
manipulation of masses.


MAJOR PROBLEMS
3. Major problems in governance includes
Reform of the bureaucracy
quality of civil servants
corruption
inefficiency
low salary
Impact of problems in bureaucracy on socio-
economic domains.


MAJOR PROBLEMS

4. Ethno-nationalism: as negative impact of
decentralization and political freedom
(euphoria: from autonomy to special
autonomy to independence?)


MAJOR PROBLEMS
Political trust and social trust: problem in
law enforcement (frequently constrained by
issues of human rights and freedom of
expression).
Pluralism: negative impact of pluralism in the
form of horizontal conflicts along religious,
ethnics, socio-economic divide.
Terrorism.


MAJOR PROBLEMS
5. Major ecological problems: Tsunami,
earthquakes, volcanic eruptions, mud eruptions,
deforestation, illegal logging, forest fires, floods
and landslides
6. Major health problems: avian flu and dengue
fever


Japan-Indonesia Relationship
Japan-
Japan is a traditional and natural economic partner and
political ally of Indonesia Good relation and mutual
Indonesia.
interest between the two countries have to be
maintained.
Generally Japanese people and the Japanese Business
Community are “losing interests” in Indonesia, g g
y g giving
more attention to China and India.


The Current State
of Economic Cooperation

Trade
Year Indonesia’s Indonesia’s Import Surplus
Export to Japan from Japan
2005 US$ 20.8 billion US$ 9.2 billion US$ 11.6 billion
2006 US$ 23.9 billion US$ 7.3 billion US$ 16.6 billion
(Jan-Dec)


The Current State
of Economic Cooperation . . .

ODA
Almost 40% of I d
Al t f Indonesia’s ODA comes f
i’ from
Japan:
Economic Sectors
Social
Institutional Capacity Building
Technology


The Current State
of Economic Cooperation . . .

Investment
Japan is still th bi
J i till the biggest i
t investor i I d
t in Indonesia
i
among 103 countries with US$ 39 billion in
1.715
1 715 projects (13% of th t t l FDI) up t
jt f the total to
June 2006.


Changes for Promising
Countries/Regions over the Medium-term
Medium-

Note: “Medium-term” means the next 3 years or so.
Source: JBEC Institute, Dec 2006


Milestones for Enhanced Cooperation
p
Indonesia-
Indonesia-Japan Strategic Investment Action Plan (SIAP)
At the meeting between Prime Minister Junichiro Koizumi and
President Susilo Bambang Yudhoyono on 2 June 2005, the two
leaders announced th J
ld d the Japan-Indonesia St t i Investment Action
Id i Strategic I t t A ti
Plan (SIAP).
This was an initiative to promote foreign investment in Indonesia
p g
based on the shared recognition that a substantial increase in
foreign investment is essential for poverty reduction and employment
generation,
generation and that increased investment from Japan to Indonesia
is an important challenge also for revitalization of the Japanese
economy.
SIAP is composed of 118 action it
i df ti items i 5 sectors, namely, t
in t l tax,
customs, labor, infrastructures, industrial competitiveness/small and
medium enterprises.


Milestones for Enhanced Cooperation . . .
p

The significance of the November 2006 visit of
President Susilo Bambang Yudhoyono to
Japan:
Signing of the Strategic Partnership for Peaceful
and Prosperous Future
Future.
Signing of the Principles of Economic Partnership
Agreement (EPA).


Indonesia-Japan Economic Partnership
Indonesia-
Agreement (IJ-EPA)
A t (IJ-
a.
a Trade in Goods (Tariff and Non-Tariff Measures
Non Tariff Measures,
Rules of Origin, Trade Remedies).
b. Trade in Services.
c. C t
Customs Procedures.
P d
d. Investment.
e.
e Movement of Natural Persons
Persons.
f. Energy and Mineral Resources.
g
g. IPR.
h. Government Procurement.
i. Competition Policy.
j. Improvement of Business Environment and
jI t fB i Ei td
Promotion of Business Confidence.
k. Cooperation
p

Political Cooperation

Bilateral.
Regional.
Multilateral.


Momentum of the 50th Anniversary of
Indonesia-
Indonesia-Japan Diplomatic Relations
2008

Broadening and deepening exchanges and
cross generational mutual understanding.
ti l t l d t di
Milestone for a more advanced and mature
bilateral l ti
bil t l relations.
Contribution to peace, stability and economic
growth on th E t Asia region.
th the East A i i


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