Economic Outlook and Improving Investment Climate

1. The Republic of Indonesia Economic Outlook and Improving Investment Climate May 8, 2007 Strictly Private and Confidential STRICTLY CONFIDENTIAL

2. GDP growth of 6.3% in 2007 Stable macro-economic and socio conditions Indonesia – On The Right Track for Continued Growth Improving investment climate Progressing infrastructure development Prudent fiscal & monetary policy Implemented financial sector reforms Solid debt management

3. 1. Economic Performance

4. GDP Growth – Pre Crisis, Crisis period and After Crisis GDP growth post crisis has not reached the GDP growth pre crisis, except for government spending. Investment growth pre crisis was double digit in average. Pre Crisis (1991 – 1996) After Crisis (2000 - 2006) Crisis Period (1997 – 1999)

5. 2007 Target: Achieving 6.3% GDP Growth Strong growth driven by investment, domestic consumption, improving export performance and rising consumer purchasing power Sources of GDP growth Sustainable economic growth Note: 1. Based on 2007 state budget Source: Ministry of Finance Note: 1. Based on 2007 state budget Source: Ministry of Finance

6. 2007 Target: Achieving 6.3% GDP Growth Strong growth driven by investment, domestic consumption, improving export performance and rising consumer purchasing power Sustainable economic growth Note: ** Based on 2007 state budget ^^ 1Q 2007 realization Sources of GDP growth Source: Ministry of Finance

7. Investment to Grow Significantly in 2007 From the Surge of Approvals Investment realization Investment approval Further investment triggered by accelerated imports of capital goods Source: Ministry of Finance

8. Equal legal status Equal legal status and treatment to domestic and foreign investors Investors’ protection Protection against nationalization and any expropriation, as must be based on law and compensated at market prices; Guaranteeing the right to repatriate earnings in foreign currency; Omission of the forced divestiture and limited duration of foreign investment under 1967 Foreign Investment Law Dispute resolution Binding international arbitration in the event of dispute between the government and foreign investors Immigration procedures Allowing expatriate to be granted two year residence permits with multiple entry visas; The residence permits to be turned into a permanent residence permit for living in Indonesia continuously for more than two years All business activities open to investment unless explicitly closed/restricted; A transparent investment negative list based on standard industrial classifications to be issued as a single Presidential Regulation Stronger property rights (e.g. land use rights for investors of up to 95 years) Negative list Property rights Tax incentives Special tax incentives for certain types of investment under certain conditions. For e.g. : tax holidays for pioneer industries, income tax reductions, exemption or reduction of import duty and VAT for capital goods and raw materials, accelerated depreciation and reduced property tax Recently Approved Investment Law – Supportive Climate for Investment Source: Ministry of Finance

9. Household Consumption Remains Strong Domestic expenditures increased by growing consumer spending Domestic consumption Household consumption – Real Source: Ministry of Finance

10. Aluminium Brent Oil Copper Gold Strong Performance of Non-Oil Export Export value and volume in the increasing trend. 2006 export growth remains strong despite the Rupiah appreciation. Export value and volume: 2000 – 2006 Export value and growth: 2000 – 2006 USD / IDR exchange rate Oil / Metals commodity index Source: Ministry of Finance

11. Improve Efficiency & Effectiveness of Government Expenditure Strong growth in goods and capital spending Infrastructure-related activities dominated government expenditure Source: Ministry of Finance

12. 2. Prudent fiscal policy

13. Fiscal Consolidation on Track Continued fiscal discipline Debt to GDP Note: ** Based on 2007 state budget Key highlights • Stimulate and consolidation fiscal policy • Support on infrastructure financing and establishment Risk Management Unit • Improvement in efficiency and effectiveness of government expenditure to stimulate growth (infrastructure, social expenditure through education and health subsidies) • Preparations under way for medium term budget and treasury reforms, including performance and multi year budget, treasury single account, accrual basis • Possibility of widening budget deficit in 2007 to anticipate some additional urgent spending (i.e. natural disaster, government target on agriculture and energy alternative program) • Consolidation of fiscal decentralization • Improving fiscal balance • Regional borrowing and municipal bonds, subject to Minister of Finance approval • Regional financial information system to support decentralization based on transparency and accountability Source: Ministry of Finance, Bank of Indonesia

14. 2006 State Budget 2006 State budget1 • Fiscal consolidation and sustainability • Outperformed deficit at 1.0% of GDP, below target of 1.3% • Total debt/GDP ratio at 39% less than estimated 43.1% • Capital spending exceeded initial budget • Budget financing to rely more on domestic sources, primarily government debt • Increase expenditures for the regions Note: 1. Realizations. 8 Source: Ministry of Finance

15. 2007 State Budget – 1Q Realization Key assumptions • Aggressive target of GDP growth of 6.3% • Based on conservative oil price assumption • Target deficit at 1.1% of GDP and 37% debt/GDP • Budget financing to rely more on domestic government debt • Increase expenditures for the regions • Provide risk sharing scheme for PPP project 2007 State budget – 1Q realization 8 Source: Ministry of Finance

16. 2007 Budget Outlook and 2008 Budget Projection - Preliminary State budget 2007 – 1Q realization Draft of 2008 State budget 1 Note: 1. Very Preliminary Niumber • Outlook Deficit of 2007 State Budget – Revision (APBN – P 2007): +/- 1.9% • Crude oil price (USD/bbl): 60.0 Source: Ministry of Finance

17. Fiscal Policy to Support Investment Tax policy Tax ratio on upward trend • Establishment of clear and transparent criteria • Service desk at major tax office • Planned revision of VAT to promote export activities • Tax procedure and tax assessment • New tax incentives for investment in certain sectors & regions i.e. loss carry forward, accelerated depreciation, investment tax credit • Elimination of VAT on certain primary agricultural commodities to improve competitiveness Customs & Excise • Zero per cent import duty for raw materiel used in automotive component production • Electronic data interchange system to reduce customs clearances Note: ** Based on 2007 state budget 8 Source: Ministry of Finance

18. Government support on PPP infrastructure projects Framework • Promoting private sector participation in the provision of public goods through infrastructure development • Government will guarantee the economic of infrastructure project based on fairness of IRR through risk sharing scheme • Establishment of Risk Management Unit • Support model project (Infrastructure Summit II) Government support in process: Power (Electricity) Toll roads/Transportation 10 model Project PPP • Trans Java Toll Highway Project • JORR II • Jakarta Monorail • Electrical Power Infrastructures Crash Program 10.000 MW - PSO (Public Service Obligation) Policy • Covering sectors: transportation, toll road, water supply, power and telecommunication 8 Source: Ministry of Finance

19. 3. Debt management strategy

20. Effective Coordination Fiscal, Monetary and Capital Market Authority Debt Management Strategy Objective To minimize cost of debts at manageable risk Prudent rules Domestic bond market development External loan financing Portfolio Management • To target maximum net additional total debts (loan & debt securities) <1% of GDP • To prioritize debt securities issuance in domestic market for deficit financing & debt refinancing • To diversify debt instruments as to widen investors base • To develop market infrastructure as to support efficient price discovery mechanism • To meet Millenium Development Goals (MDGs), (E.g. poverty reduction) • To finance cost recovery projects • To enhance project readiness criteria • To issue benchmark bonds on regular basis (E.g. 5, 7, 10, 15 and 20 years) • To aggressively conduct debt switching to extend duration • To buybacks bonds to reduce outstanding debt and stabilize market

21. Government Bonds Recent Developments • 3 (three) auctions of government bonds • 2nd government retail bond (“ORI”) • Rp 24.3 trillion amount issued in domestic market. Two new series with tenor ranging from 15-20 years Domestic Issuance (Jan – Mar 2007) • INDO-37: USD 1.5 billion global bond offering, a 30-yr issue due Feb 2037, coupon at 6.625%. Total book order of USD 5.25 billion. International Issuance (Feb 2007) • Successful debt switching of Rp 11.2 trillion, comprising of: • Rp 0.03 trillion maturing in 2007; • Rp 0.41 trillion maturing in 2008; • Rp1.78 trillion matured in 2009; • Rp2.19 trillion matured in 2010; • Rp4.76 trillion matured in 2011; and • Rp2.05 Trillion matured in 2012 Debt Switching

22. Budget Financing Trend • More reliance on debt securities (positive net additional debt securities) • Reduction in external financial (negative net additional loans) • Net additional total debt less than 1% of GDP Source: Ministry of Finance

23. Improving Maturity Profile of Domestic Debt Securities Significant reduction of debt refinancing risk and enhanced government bond market liquidity Source: Ministry of Finance

24. Performance of Domestic Government Bond Market Investor base is getting more diversified with the increased ownership by foreign investors. This depicts investor confidence on Indonesia. Diversified bondholders Ever-increasing daily transaction Note: 1. Offshore include banks, financial institutions, etc. 2. Others include individuals, corporate, foundations, etc. Source: Ministry of Finance

25. Active Debt Management and Proactive Market Development Policy The beginning of active debt debt management Source: Ministry of Finance Source: Ministry of Finance

26. Reduced Cost of International Borrowing US$ 1,500 million bond offering, a 30-yr issue due 2037, 6.625% coupon, yield at 6.75%; “.. at record low pricing and record- high size ..” (Finance Asia, Feb’07)

27. 4. Effective monetary policy

28. Prudent Monetary Measures Declining inflation supported by gradual easing of monetary policy BI Rate, IDR exchange rate • Within ITF, BI continues to maintain inflation towards a moderate medium term range, while continuing to accelerate economic growth • BI supports incentives for long term capital flows Source: BPS, Bank Indonesia.

29. 5. BoP development

30. Strong External Position BoP supported by strong current account surplus Healthy rise in foreign exchange reserves • Increasing trend in the foreign exchange reserves mainly from oil and gas export, government bond sales and capital market. • In the 3rd week of April 2007, the reserves increased to level of USD 49 billion Source: Bank Indonesia.

31. 6. Commitment to the financial sector

32. Increasing Investor Confidence JSX – No 3 Top Performing Exchange in the world (2006). JSX well-performed and sustained growth trend over the past five years reflect increasing investors’ confidence on Indonesia. Source: Bloomberg.

33. 3,500 3,296 3,000 2,500 2,298 2,000 1,500 1,000 552 445 500 - Total Jan 07 Feb 07 Mar 07 1Q 2007 Stocks Transaction Value by Foreign Investors Increasing trend of foreign participation in the stock market shown with positive net buying position • Rp 17.3 trillion and Rp 3.3 trillion net buying value in 2006 and 1Q 2007, respectively

34. Improvement of National Banking Industry Underpinned by growth in earning assets, high level of capital adequacy ratio and improved NPL Improving CAR and NPL Commendable performance of commercial bank earnings assets Source: Bank Indonesia.

35. Financial Sector Policy Direction To continue strengthening banking institutions and to widen and deepen financial instrument, supported by secure and liquid financial market Key plans in 2007 Achievements in 2006 • Improved intermediary function • Enhanced bankers’ competence through certification of risk management • Improved customer protection in banking sector • Enhance Credit Information Center (Credit Bureau) • Implement Risk Management Certification Program for bank’s commissioners • Speeding up banking consolidation to strengthen structure of national banking system

36. Banking Policy in 2007 Incentives provided by the Central Bank (Bank of Indonesia) to boost intermediation within prudential banking corridor Direction of banking policy in 2007 To be more active in functioning as a catalyst in the process of increasing bank intermediation function towards the real sector To reorganise the national banking through the revitalisation of existing banks and their role, especially state-owned banks To facilitate the merger process between banks that are deemed in need of assistance To facilitate a smooth banking intermediary function, which has become the main problem faced by Indonesia’s banking industry recently To provide guidance to foreign banks to contribute more optimally to the development of the Indonesian economy To more proactively develop the financial market as well as financial instruments To accelerate the expansion of Indonesian Sharia banking To redirect the role, function and operational design of rural banks to serve the common people, particularly those in informal sectors

37. 7. Conclusion

38. Investment climate improvement 1 Investment Law & Procedure 2 Tax & Custom Reform 3 Labor & Immigration 4 Trade Licenses 5 Cross Sector Strategic Policy Reform Infrastructure 6 Sector Restructuring, Corporatisation and Policy Reform 7 Regulation on natural monopoly & investment protection 8 Clear separation on the role of policy maker, regulator, contracting agency, and operator 9 Coordination Monetary & Fiscal Authority Financial 10 Financial Institution (Banking & Non Banking) 11 Capital Market and SOE Privatization Summary Initiatives for 2007 – 2008 Revision and upgrade of the policy packages Mainstreaming Government budget Poverty Program Expansion • Reallocate the budget for infrastructure, human development and poverty • Increase effectiveness of spending both at central government and sub national level • Expand community development program • Increase allocation for sub district • Introduce new conditional cash transfer program in education and health Introduction new credit policies by Bank of Indonesia Privatization program with a new orientation • New policies within prudential banking principles • Plan by Privatization Committee is at Parliament for approval

39. The Republic of Indonesia Moving Forward… • Strong economic growth driven by surging of investment, consumer spending, government capital spending and strong performance of non-oil exports • Declining inflation supported by gradual easing of monetary policy • Strong BoP supported by a solid current account surplus and healthy foreign exchange reserves • Prudent debt management strategy by minimizing the cost of debt with a manageable risk • Maintain fiscal sustainability and rely more on domestic financing sources • Improvement of investment climate and implementation of infrastructure PPP project • Improvement of intermediary function of banking industry