Download Recent Economic Developments

REPUBLIC OF INDONESIA
Recent Economic Developments
August, 2010
Table of Contents
I. Executive Summary
II. Indonesia Story: as Acknowledged by Rating Agencies
III. Positive Macroeconomic Developments
IV. Fiscal Policy and State Budget 2010
Executive Summary
 The economy grew by 6.2% in Q2-2010. The whole year it forecasted to grow within the range of 5.5%-6.0% by the end of
2010, and estimated to reach the upper limit projection, bolstered by Indonesia's external sector performance, investment, and
consumer spending.
 The latest macro economic indicators supported us to believe that the economy, in line with the development in the global
economy, is steadily moving on an upward trend accompanied by financial system stability. It bolstered Indonesia's external sector
performance and investment, with domestic recovery gaining strength as the economy is no longer reliant solely on consumption.
The optimism also supported by latest development in the perception indicators such as an upgrade to investment grade, yield
spread, CDS, CRC-OECD, etc. An assessment of economic developments during July 2010 points to improvement in the
domestic economy amid persistent risks of global uncertainties.
 On July 13th 2010, Japan Credit Rating Agency (JCR) upgraded Indonesia's sovereign rating to Investment Grade, from BB+
to BBB-. This upgrade was the first investment grade for Indonesia in 13 years. Currently, the Republic of Indonesia’s sovereign
rating BB+ /Stable from Fitch, BB+/Stable from R&I, BB/Positive from S&P, and Ba2/positive from Moody’s.
 The latest Board Meeting convened in August 2010 resolved to hold the BI Rate at 6.5%. For the time being, the current rate
considers adequate to safeguard future inflation expectations. However, BI is taking careful note of the recent onset of higher
inflationary pressure and will pursue the necessary monetary and banking policy actions to ensure that future inflation remains on
track with the established target at 5%+1% for 2010 and 2011. BI will soon respond with measures to tighten liquidity management
without disruption to the bank intermediation function, implemented through changes in the statutory reserve requirement.
 Regarding prices, the Board of Governors is closely monitoring the onset of rising inflationary pressure. July 2010 recorded
fairly brisk CPI inflation at 1.57% (mtm) or 6.22% (yoy). Inflationary pressure was driven mainly by higher inflation in the foodstuffs
category and particularly rice, due to seasonal uncertainties. In contrast, pressure from core inflation has been kept at modest
levels as a result of adequate supply-side response to increases in demand and the appreciating trend in the exchange rate.
3
Executive Summary
 Overall, banking industry remains in a stable condition and convinced to be run prudently, which is reflected in the wellmaintained Capital Adequacy Ratio of 17.4%, and safe level of Non-Performing Loans at 3.3%, as of end of June 2010. By end of
2010, lending growth is projected to reach 22%-24%. Up to July 2010, banking industry has reached the remarkable lending
growth at 19.6%. Improved market confidence also bring more optimism to further banking intermediation function.
Going forward, BI will keep a close watch on bank lending growth to keep it within the range envisaged in the Bank Business
Plans. Special efforts will be devoted to increase credit for productive purposes. The purpose of these measures is to ensure that
demand-side increase will be adequately offset on the supply-side and thus not generate excessive inflationary pressure.
 Balance of payments has posted a significant surplus over Q2-2010 at US$5.4 billion. The surplus was contributed from
both the current account and capital and financial account. The current account posted a US$1.8 billion surplus, bolstered from
upbeat performance in non-oil/gas trade balance, the gas trade balance and the current transfers balance. The ongoing world
economic recovery has strengthened non-oil/gas exports with growth outperforming non-oil/gas imports. The capital and financial
account recorded a US$3.3 billion surplus distributed fairly among all major components. renewed growth in capital inflows in
response to the upward revision of the credit rating outlook and more upbeat international perceptions.
 International reserves position at 30 July 2010 reached USD78.8 billion, equivalent to 6.03 months of imports and servicing
of official external debt. This helped the rupiah to maintain stable movement throughout July 2010 with an appreciating trend.
 In May 2010, the parliament approved 2010 revised budget proposed by the government . The revision is perceived as a
necessary measure to adjust the current economic conditions especially changes in the macroeconomic assumptions. The
proposed budget adjustment would increased deficit from 1.6 to 2.1%, in order to contain increasing subsidies figures due to
rising commodity prices mainly from oil.
4
Indonesia Story: as Acknowledged by Rating Agencies
Impressively navigates through the global crisis and as growing confidence in economic outlook, the Republic
continued to receive good reviews, especially from Rating agencies
 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.
 Moody’s Investors Service (June 21, 2010): revised the outlook of Indonesia’s foreign and local-currency Ba2
sovereign debt ratings to positive from stable. The positive outlook broadly reflects the country's capacity for sustained
strong growth, the overall stability and effectiveness of its fiscal and monetary policies, and expectations of further
improvements in the government's financial and debt position.
 OECD (April 2, 2010): upgraded Indonesia’s Credit Risk Classification (CRC) from category 5 to 4. This upgrade was a
timely acknowledgement by the developed economies of the consistent economic improvement. This upgrade 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.
 S & P (March 12, 2010): upgraded Indonesia’s long-term foreign currency rating to BB from BB- with positive outlook
which indicates that Indonesia has big possibility to be upgraded within a year, even maybe faster. The main factor supporting
this decision is steadily improving debt metrics and growing foreign currency reserves which reduced vulnerability to shock
with continued cautious fiscal management.
 Fitch Ratings (January 25, 2010): upgraded the Republic of Indonesia’s sovereign rating to ‘BB+’ from ‘BB’ with
stable outlook The rating action reflects Indonesia’s relative resilience to the severe global financial stress test of 2008-2009
which has been underpinned by continued improvements in the country’s public finances.
5
Positive Macroeconomic Developments
Real Sector: Indonesia Development Policy
Indonesia Development Policy is based on a ‘Triple Track Strategy’
1st
2nd
Pro-Growth:
Increase Growth by prioritizing export and investment
Pro-Job :
Boost up the real sector in order to create jobs
Pro-Poor:
3rd
7
Revitalize agriculture, forestry, maritime, and rural economy
to reduce poverty
Source: Coordinating Ministry for Economic Affairs
Economic Growth Sustained
Indonesia’s economic growth is steadily moving on an upward trend.
 Economic data up to end of Q1-2010 supported us to believe that the economy, in line with the development in the global
economy, is moving toward better development than we previously expected on the beginning of this year. The optimism also
supported by latest development in the perception indicators such as yield spread, sovereign rating, CDS, CRC-OECD, etc. On
the backdrops, in the end of Q1-10, BI revised economic growth outlook for 2010 and 2011 to be consecutively within the
range of 5.5-6.0% and 6.0-6.5%.
 In the 2nd quarter of 2010, the Indonesian economy grew 6.2% (yoy), higher than forecasted at 6.0% and higher than
previous quarter (5.7%). The growth driven mainly from investment and consumer spending. The economy is projected to grow
within the range of 5.5-6.0 % for 2010, and is forecasted to reach the upper limit projection, bolstered by Indonesia's rising
export performance, investment, and continued strength of consumption.
Sustainable Economic Growth
(*): Preliminary
Source: Ministry of Finance, BPS.
8
Source: Bank Indonesia.
Inflation
Inflation
9
Inflation Expectation – Consensus Forecast

Stable rupiah is expected to damp pressure from higher commodity prices and pave the way for better inflation expectation. From domestic side, in
addition to administered price, subtle inflationary pressure would also be the result from higher demand along with higher economic growth as production
capacity remain adequate to respond to higher demand. Those conditions is projected to be reflected in inflation rate at 5+1% in 2010.

BI is closely monitoring the onset of rising inflationary pressure. July 2010 recorded fairly brisk CPI inflation at 1.57% (mtm) or 6.22% (yoy). Inflationary
pressure was driven mainly by higher inflation in the foodstuffs category and particularly rice, due to seasonal uncertainties. In contrast, pressure from core
inflation has been kept at modest levels as a result of adequate supply-side response to increases in demand and the appreciating trend in the exchange
rate. Accordingly, the most important factors in mounting inflation are seasonal, requiring action to safeguard against increased expectations of future
inflation.

Future inflationary pressure until end of 2010 is predicted mainly from higher electricity tariff, upcoming Ramadhan festivities and higher food prices
associated with seasonal uncertainties.

Going forward in 2011, inflationary pressures could be spurred by an increasingly limited supply-side response to the expected sustained growth in demand.
BI will keep a close watch on the rising inflationary pressure and make the necessary adjustments to monetary policy responses to ensure that inflation
remains on track with the established targeting range at 5%+1% in 2010 and 2011.
Source: Bank Indonesia
Monetary Policy Stance

Since December 2008, BI has slashed BI Rate by 300 bps. The monetary relaxation has offered ample support for the economic
recovery process and bank intermediation.

In the latest Board Meeting convened in August 2010, BI Rate is kept at 6.50%. For the time being, BI considers the 6.5% BI
Rate adequate to safeguard future inflation expectations while closely monitoring the recent rise in inflation. However, we are
taking careful note of the recent onset of higher inflationary pressure and will pursue the necessary monetary and banking policy
actions to ensure that future inflation remains on track with the established target at 5%+1% for 2010 and 2011.
BI Rate
10
Source: Bank Indonesia.
Balance of Payments: Q2-2010
• Indonesia's Q2-2010 balance of payments posted a significant surplus at US$5.4 billion (Q1-2010: US$6,6 billion surplus).
Key to this surplus were positive contributions from the current account and the capital and financial account.
• The current account in Q2-2010 posted a surplus of about US$1.8 billion (Q1-2010: US$2,1 billion surplus). Bolstering this surplus
was upbeat performance in the non-oil/gas trade balance, the gas trade balance and the current transfers.
• The capital and financial account in Q2-2010 recorded a surplus at US$3.3 billion (Q1-2010: US$4,3 billion surplus). All major
components of the capital and financial account, encompassing direct investment, portfolio investment and other investment,
recorded surplus.
• Accordingly, international reserves at end Q2-2010 mounted to US$76.3 billion, equivalent to 5.8 months of imports and servicing of
official external debt.
Balance of Payments
11
Source: Bank Indonesia.
Sound Banking Sector
Protected by prudential guidelines and conservative practices, the Banking Sector has weathered the global
financial turmoil and posted good performance : strong solvency, contained risk exposure and profitability
Sufficient CAR (%)
Sound level of NPLs (%)
 financial system stability up to July 2010 is well maintained, confirmed by Financial Stability Index (FSI) which was recorded at
1.84 (slightly lower than June 2010 at 1.87). The decrease indicates lower pressure to the financial system which mainly came
from lower credit risk and lower volatility in the financial market.
 Banking industry remains in a stable condition and convinced to be run prudently, which is reflected in the well-maintained Capital
Adequacy Ratio (17.4%, as of end of June 2010) and safe level of Non-Performing Loans at 3.0%, as of end of June 2010.
 Intermediary function is steadily improving reflected from 19.6% (yoy) lending growth recorded in end of June 2010.
12
Source: Bank Indonesia.
In 2010, the Indonesian economy is positioned to grow higher
2010 Forecast
Main Factors Behind The Forecast
GDP Growth

With more upbeat confidence to the economy, exports and investment are expected to keep climbing, providing
additional boost to mounting consumption in support of higher levels of economic growth.

Global economic recovery will produce renewed acceleration in exports. The global economy is predicted to enter
an expansionary phase in 2010. Renewed momentum is predicted in the economies of Indonesia’s major trading
partners, such as China. This strengthened performance will position exports as one of the main engines of
economic growth in 2010.

Indonesian exports characteristics which is based on primary commodities has also supported export growth
acceleration.
Private
Consumption

Household consumption is forecasted to remain strong. The strengthening global economic outlook for 2010 will
given added momentum to Indonesia’s exports, which in turn will produce an overall increase in private incomes.
will remain strong

Higher investment will also contribute to rising incomes, thus paving the way for stronger public purchasing power.

Signs of future inflationary pressures until end of 2010 are noted, which mainly predicted from administered prices
and volatile food seasonal uncertainties. However, BI is positive to contain the inflation level within the target
range, and will keep a close watch on the rising inflationary pressure and make the necessary adjustments to
monetary policy responses to ensure that inflation remains on track with the established targeting range at 5%±1%
in 2010 and 2011.
is forecasted to be at
the upper limit of 5.5%6.0% projection
Export
is expected to chart
higher growth
Inflation
is estimated to be on
target at range of
5.0%±1%
13
Source: Bank Indonesia.
Main Banking Indicators
Banking system stability held firm amid the onset of renewed credit expansion (data as of May 2010)
* Preliminary figures, operational risk is calculated in June 2010 figures
14
Source: Bank Indonesia
Fiscal Policy and State Budget 2010
Overview of Fiscal Policy
 Continue an effective fiscal stimulus 2009 (1.4% GDP), 2010 (1.6% GDP)
Fiscal
Stimulus
Policies
 Reduce debt to GDP ratio: 2009 (28%), 2010 (27%).
 Actual fiscal deficit 1.6% of GDP, lower than 2.4% of GDP target deficit projected in 2009 Revised Budget
 Target fiscal deficit 1.6% of GDP in 2010 Budget (budget adjustments is in ongoing discussion with the
parliament) .
 Continue tax policy and administration reform, reduce rate for companies, certainty of tax policy for oil
Tax and
Administrative
Reforms
companies
 Implement the 1st batch of Performance Based Budget (PBB), Civil Service Reform and Remuneration
(11 ministries) and multi-years projects
 Provide fiscal space for the new government to implement additional priority programs (0.4% of GDP or
equal to USD 2.5 billion)
New Feature of
Fiscal Policy
 Sufficient fiscal risk for oil and commodity prices, El-Nino, provide guarantee on land acquisition for
infrastructure projects, secure financing for power (PLN) and restructuring water services (PDAM),
domestic oil price adjustment if necessary
 Export promotion (additional capital for Indonesian Exim Bank) and incentives for real sector, climate
change projects (geothermal, bio-premium, green funds)
Maintain
Social Welfare
16
 Continue welfare programs (PNPM, BOS, Jamkesmas, Raskin) and provide budget for education
sector
Source: Ministry of Finance
Fiscal Policy to Promote Economic Recovery
The fiscal policy aims to promote economic recovery by providing tax incentives to various sectors and
businesses which further promotes private consumption and investment spending
 Reduce income tax rate for corporations from 28% to 25%
 Reduce income tax rate by 5% for listed companies with 40% public ownership
Incentives on
General
Taxation
 Provide income tax facilities for businesses in specific industries or areas
 Free VAT for primary agriculture products
 Eliminate many luxury tax items
 Provide tax and custom Incentive for special areas in accordance with law on tax and custom
 Eliminate non tax revenue for export and import documentation
 Provide incentive for geothermal energy through income tax and VAT
Energy
Incentives
 Provide tax incentive on imports (both income tax and VAT on imports) for the oil and gas exploration
sector
 Provide incentive for green energy through for VAT and subsidy
Incentives for
Industry
17
 Provide custom incentives for select industries
 Provide custom incentives for imported capital goods and capex
Source: Ministry of Finance
Fiscal Policy to Enhance Competitiveness
The Indonesian government continues to support the development of infrastructure and enhance the social
welfare through the effective fiscal policy and incentives for specific sectors
Infrastructure
Development
and Social
Welfare
Assistance to
Support
Specific
Sectors
18

Guarantee for 10,000 MW electricity program and IPP

Additional funds for land clearing for toll road building

Guarantee obligation for State Water Company and subsidy on interest for clean water, and interest
credit for State Water Company, business in Aceh / Nias, and KKPE

Subsidy and VAT for people’s housing (low income housing)

Credit for green fuel development

Credit for farming and cow growers

Subsidy for fertilizers, seeds and inventory

Direct assistance for seeds at competitive pricing in order to revitalize plantation, cocoa and sugar
industry

Additional capital for LPEI (Indonesian Exim Bank) to finance export related activities, including for
SMEs

Provide incentives for high performance regions (e.g. performance on financial, economics and social
welfare)

Resolution for troubled asset at SOEs and SMEs loan
Source: Ministry of Finance
Budget Deficit / GDP
Public Finances is a fundamental strength of the Indonesian economy; most of Indonesian ratios are strong or stronger
than its peers; Fiscal Budget deficit has traditionally been limited and remained contained in 2009. Fiscal Stimulus did not
impact much on fiscal deficit in 2009
Budget Deficit / GDP (%)
2006
2007
2008
Budget Deficit / GDP 2009* vs. Emerging Markets Countries
2009
2010
-1.6
-1.6
Revised
Budget
2010
0
-0.1
-0.5
-1
-1.5
-0.9
-1.3
-2
-2.1
-2.5
19
Source: Ministry of Finance
State Budget 2010 and Revised Budget 2010
Budget 2010
949,6
742,7
Revised Budget 2010
992,4
743,3
205,4
247,2
1.047,7
1.126,1
725,2
781,5
-Departm ental / Line Minis tries
340,1
366,2
-Non-Departm ental / non Line Minis tries
385,1
415,3
-Energy Subs idies
i. Fuel
106,5
68,7
143,9
88,9
37,8
55,1
322,4
344,6
C. Surplus/(Deficit) Budget (A -B)
% GDP
-98,0
(1.6)
-133,7
(2.1)
D. Financing
I. Dom es tic
II. International (net)
98,0
107,9
-9,8
133,7
133,9
-0,1
ITEMS
A. Revenue and Grant
1. Tax
2. Non tax revenue
B. Expenditure
I. Central Government
ii. Electricity
II. Transfer to Region
MACRO AS S UMP TIONS 2010
NO
20
Budget
1
Growth
2
Infl ati on
3
E xc hange rates (/US D)
4
SBI
5
Oi l P ri c e (US D/B arrel )
6
Oi l Li fti ng (mi l .B arrel /Day
Rev ised Budget
5,5%
5%
10.000
5,8%
5,3%
9.200
6,50%
6,5%
65
80
0,965
0,965
Source: Ministry of Finance
State Budget 2010 and Revised Budget 2010 - Revenue
2010
2010
Budget
Rev. Budget
Items
I.
Domestic Revenue
1. Tax Revenue
a. Domestic Taxes
i. Income Taxes
1. Oil and Gas
2. Non Oil and Gas
ii. Value Added Tax
iii. Land and Building Tax
iv. Duties on Land and Building Transfer
v. Excises
vi. Other Taxes
b. International Trade Taxes
i. Import Duties
ii. Export Duties
948,1
742,7
715,5
351,0
47,0
303,9
269,5
26,5
7,4
57,3
3,9
27,2
19,6
7,6
990,5
743,3
720,8
362,2
55,4
306,8
263,0
25,3
7,2
59,3
3,8
22,6
17,1
5,5
2. Non Tax Revenue
a. Natural Resources
i. Oil and Gas
ii. Non Oil and Gas
b. Profit Transfer from SOE's
c. Other Non Tax Revenue
d. BLU Income
205,4
132,0
120,5
11,5
24,0
39,9
9,5
247,2
164,7
151,7
13,0
29,5
43,5
9,5
1,5
1,9
949,7
992,4
II. Grants
State Revenue and Grants
DEPARTEMEN KEUANGAN RI
21
Source: Ministry of Finance
State Budget 2010 and Proposed Revised Budget 2010 - Expenditures
Items
I.
725,2
340,1
385,1
781,5
366,2
415,3
1.
2.
3.
4.
160,4
107,1
82,2
115,6
77,4
38,2
157,8
106,5
68,7
37,8
51,3
7,2
64,3
30,7
162,0
112,1
101,9
105,7
71,9
33,8
201,3
144,0
88,9
55,1
57,3
0,2
65,5
32,9
322,4
306,0
81,4
203,5
21,1
16,4
9,1
7,3
-
344,6
314,4
89,6
203,6
21,1
30,2
9,1
21,2
-
1.047,7
1.126,1
6.
7.
8.
Personnel Expenditure
Material Expenditure
Capital Expenditure
Interest Payments
a. Domestic Interest
b. External Interest
Subsidies
a. Energy
i. Oil Subsidy
ii. Electricity Subsidy
b. Non Energy
Grants
Social Expenditure
Other Expenditure
T ransfer to Region
1. Balanced Fund
a. Revenue Sharing
b. General Allocation Fund
c. Special Allocation Fund
2. Special Autonomy & Adjustment Fund
a. Special Autonomy Fund
b. Adjustment Fund
3. Grants to Region
State Expenditure
22
Rev. Budget
Central Government Expenditure
- Line Ministries Expenditure
- Non-Line Ministries Expenditure
5.
II.
Budget
Source: Ministry of Finance
State Budget 2010 and Revised Budget 2010 - Overall Balance
2010
2010
Budget
Rev. Budget
Items
Overall Balance (A - B)
% Deficit to GDP
Financing
I.
Domestic Financing
1. Bank
Investment Fund Account
Government Account
2. Non Bank
Privatization
Assets Management
Government Bonds (net)
Domestic Loan
Infrastructure Fund
II. Foreign Financing
1. Gross Drawing
a. Program Loan
b. Project Loan
2. Subsidiary Loan Agreement
3. Amortizations
23
Gross Domestic Product (trillion Rp)
Economic growth rate (%)
Inflation rate (%)
Interest rate of SBI 3 Month (%)
Exchange rate (Rp/US$1)
Oil price (US$/barrel)
Oil production (MBCD)
(98,0)
(1,6)
(133,7)
(2,1)
98,0
133,7
107,9
7,1
5,5
1,0
100,8
1,2
104,4
1,0
(3,9)
133,9
45,5
5,5
39,3
88,4
1,2
1,2
107,5
1,0
(12,9)
(9,9)
57,6
24,4
33,2
(8,6)
(58,8)
(0,2)
70,8
29,4
41,4
(16,8)
(54,1)
5.981,4
5,5
5,0
6,5
10.000,0
65,0
0,965
6.253,8
5,8
5,3
6,5
9.200,0
80,0
0,965
Source: Ministry of Finance
Financing Trend 2005-2010
Budget Deficit Financing
24
Source: Ministry of Finance
Debt Ratio
Debt to GDP Ratio (% of GDP)
Debt Service to GDP Ratio (%)
Table of Debt to GDP Ratio
End of Year
2004
2005
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
6.253.789,50
Debt Outstanding (billion IDR)
- Domestic Debt (Securities)
- Foreign Debt (Loan+Securities)
1.299.504,02
653.032,15
646.471,87
1.313.294,73
658.670,86
654.623,87
1.302.158,97
693.117,95
609.041,02
1.389.415,00
737.125,54
652.289,46
1.636.740,72
783.855,10
852.885,62
1.589.780,96
836.308,91
753.472,05
1.609.314,83
868.514,53
740.800,30
Debt to GDP Ratio
- Domestic Debt to GDP Ratio
- Foreign Debt to GDP Ratio
56,60%
28,44%
28,16%
47,34%
23,74%
23,60%
2006
38,99%
20,76%
18,24%
2007
35,18%
18,66%
16,52%
2008*
33,04%
15,82%
17,22%
2009**
28,32%
14,90%
13,42%
May 10***
25,73%
13,89%
11,85%
Notes:
* = Preliminary
** = Very Preliminary
*** = Very Very Preliminary, GDP number based on Budget 2010 Assumption
25
[Outstanding as of May, 2010]
Source: Ministry of Finance