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Country Presentation 2008

Country Presentation 2008. The Republic of Indonesia. May 4, 2008. 1. Macroeconomic Performance. Macroeconomic Stability. Economic Growth and Outlook. Indonesia is maintaining macroeconomic stability substantiated by a stable exchange rate, increasing foreign reserves and stable inflation.

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Country Presentation 2008

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  1. Country Presentation 2008 The Republic of Indonesia May 4, 2008

  2. 1. Macroeconomic Performance

  3. Macroeconomic Stability Economic Growth and Outlook Indonesia is maintaining macroeconomic stability substantiated by a stable exchange rate, increasing foreign reserves and stable inflation

  4. What’s in store for 2008

  5. 2. Prudent Fiscal Policy

  6. Budget Assumption

  7. Deficit and Debt Ratio (% to GDP) Debt to GDP Ratio

  8. Revised 2008 State Budget (Rp Trillion)

  9. Tax Revenue2008 • Tax revenue increase because of ICP assumption and improved administration • Tax incentives: • Food prices (rice, cooking oil, soy bean, flour) • Reduce income tax rate to public listed companies • Priority sectors, oil and geothermal • Actual non oil tax revenue collection as of March increased by 48.1% and 105% from target.

  10. Non Tax Revenue Non tax revenue increase, because of : • Increase in oil price • Increase in natural resources and mining revenue • Pertamina / SOE profit

  11. Government Expenditure • 10% cut in ministries spending • Capital spending on infrastructure and poverty program remain priority • Provide fiscal risk : • US$100 ICP • Additional 2 millions KL oil consumption • Policy measure for macro assumption • Contingent liabilities related to PPP

  12. Subsidy • Fuel subsidy Rp126.8 trillion (US$13.9 billion) and electricity Rp60.3 trillion (US$6.6 billion) • Policy on subsidy: • Energy conversion from Kerosene to LPG • Smart card‏ • Incentive & disincentive for electricity • Energy saving lamp • Fuel subsidy capped 3% % GDP, representing additional Rp8.3 trillion (US$0.9 billion) though ICP average above US$100/barrel • Extend food subsidy for price stabilization : • Rice for Poor HH • Cooking Oil for poor HH • Soybean and flour for SMEs

  13. Transfer to Region • No significant increase in local government revenue • Local government share windfall oil revenue to central government

  14. Net Impact on the Change of oil Consumption (vol.) and ICP • Positive net impact of increase in oil price to the budget, however in the declining trend

  15. 3. Debt Management Strategy

  16. Effective Debt Management Strategy Fiscal Policy and Outlook Disciplined approach to sovereign debt management Objective To minimize cost of debt with manageable risk Prudent Rules Domestic Bond Market Development External Loan Financing Portfolio Management • Prioritise debt securities issuance in domestic market for deficit financing & debt refinancing • Diversify debt instruments to widen investors base • Develop market infrastructure to support efficient price discovery mechanism • Meet Millennium Development Goals (MDGs), (E.g. poverty reduction) • Finance cost recovery projects • Enhance project readiness criteria • Issue benchmark bonds on regular basis (E.g. 5, 7, 10, 15 and 20 years) • Aggressively conduct debt switching to extend duration • Buyback bonds to reduce outstanding debt and stabilize market Effective Coordination amongst Fiscal, Monetary and Capital Market Authorities 16

  17. Financing Trends for Budget 2008 IDR trillion % 120 2.5 100 2.0 80 60 1.5 40 1.0 20 - 0.5 (20) 2005 2006 2007 Preliminary 2008 Budget 2008 Revised Budget (40) 0.0 Realization Govt Securities - Domestic Issuance, Net Govt Securities - Int'l Issuance, Net External Loan, Net Non-Debt, Net Deficit Deficit - % of GDP (RHS) • Financing for budget 2008 rely on market sources

  18. 2008 Financing • Debts will become the main sources for deficit financing and debt refinancing; • Government Securities issuance and Program Loan will play significant role to cover the deficit financing; • Program loan will mainly be coming from World Bank, ADB, and JBIC.

  19. Government Securities Issuance Program • Issuance will be tapped by maximizing from domestic sources; • New debt instrument will be launched  Sukuk; • Assets already identified worth of Rp15.0 Trillion; • Will issue short term instruments i.e. T-Bills and Variable Rate Bonds; • Will cautiously looking in the international market.

  20. Jakarta Composite Index and Yield of Gov’t Bond

  21. Effective Debt Management Strategy Fiscal Policy and Outlook Continued reduction in external volatility while maintaining debt service capability

  22. Indonesia’s Credit Rating History BBB+ Baa1 BBB Baa2 BBB- Baa3 Ba1 BB+ Ba2 BB Ba3 BB- B1 B+ B2 B B3 B- Caa1 CCC+ Caa2 CCC Caa3 CCC- Ca CC C R/C SD/DDD Prudent government debt securities management helped the improvement of Indonesia’s sovereign credit rating Credit Rating History Economic Crisis in 1998 Banks Recapitalizations Continuous fiscal adjustment, improving liquidity and structural improvements in real economy Sound record of fiscal management on the success of Government efforts to improve the investment climate Gradually improving external liquidity, macroeconomic stability and improved political conditions Diminished likelihood that the Government will seek additional debt rescheduling Oct’07 upgrade to Ba3 (stable) by Moody’s Source: Ministry of Finance 21

  23. 4. Effective Monetary Policy

  24. Interest Rates DURING 2007, BANK INDONESIA CAUTIOUSLY LOWERED POLICY INTEREST RATE Real Policy Rates Regional Interest Rates • In Q1 2008, Bank Indonesia decided to maintain the BI Rate at 8.00%. • Rupiah investment return, in the form of interest rate (represented by the difference between the domestic and global interest rates) remained the highest in the region, despite downward trend of BI Rate since mid 2006.

  25. Exchange Rate THE RUPIAH EXCHANGE RATE REMAINS STABLE, PROVIDING A BULWARK AGAINST INCREASED INFLATIONARY PRESSURE FROM RISING INTERNATIONAL COMMODITY PRICES Rupiah Exchange Rate Real Effective Exchange Rate • Compared to regional exchange rates, Rupiah is still more competitive, as reflected in Real Effective Exchange Rate. • In 2008, the Rupiah exchange rate continues to be stable and moves in line with fundamentals. • The average Rupiah exchange rate in Q1 2008 was Rp 9,258 to the US dollar.

  26. Inflation HEIGHTENED INFLATIONARY PRESSURE DUE TO HIGH INTERNATIONAL COMMODITY PRICES CPI Inflation Inflation per Component • High global oil and food prices cause inflationary pressure to domestic prices in 2008.

  27. 5. BoP Development

  28. Balance of Payments IN 2007, INDONESIA’S BOP RECORDED A SURPLUS OF US$ 12.5 BILLION THAT REINFORCED EXTERNAL BALANCES AND STABILITY IN THE RUPIAH • The BoP in 2008 is expected to post a significant surplus (US$11.3 billion), albeit lower from 2007 (US$12.5 billion). • As a reflection of the expected BoP surplus, by the end of 2008 international reserves are predicted to reach about US$68.2 billion. • In Q1 2008, Indonesia's current account again recorded a surplus in keeping with high international commodity prices

  29. Banking Performance BANK PERFORMANCE STAYED THE COURSE WITH STEADY IMPROVEMENT IN THE INTERMEDIARY FUNCTION AND RESILIENCY BI Rate and Credit Growth Banking Indicators • Bank performance stayed the course with steady improvement in the intermediary function. In February 2008, bank credit expanded by Rp 14.8 trillion (1.4%) to Rp 1,045.9 trillion. • As such, LDR for the banking system widened to 70.9% in February 2008 (from 70.1% in January 2008). • Despite the rise in LDR, NPLs remained below 5% at 4.78% gross and 2.0% net.

  30. 6. Conclusion : Challenges Ahead

  31. Key Reform & Mitigating Strategy : Key Reforms • Reform in the Fiscal Sector which covers, Tax, Custom and Budget Reform • Reform in Investment, which includes the streamlining of business licensing process, establishing framework for Public-Private Partnership system. • Legal Reform including harmonization and simplification of laws and regulations governing Businesses and Business Infrastructure • Political Reform by establishing a direct general election system Crisis Mitigating Strategies • Strengthening Budget by optimizing existing revenue sources. • Identifying new low cost revenue sources. • Adopting prudent budget spending approach • Decreasing subsidy for oil and gas • Improving the facilitation of import and export as well as streamlining ofbusiness licensing process.

  32. Challenges for 2008 : Conclusion • Revised down GDP growth target 6.8%  6.4% due to lower US and global economic growth • Persistent high commodity prices (oil and food) could cause inflationary pressures • Budget deficit expanded to 2.1% from 1.8% GDP due to additional energy and food subsidy • Fiscal stimulus to support household consumption and investment • Fuel subsidy capped to maximum 3% GDP (Rp135.1 trillion or US$14.8 billion) • Maintain sound banking sector and effective bank intermediary • Monetary policy will be consistently aimed at addressing external inflationary pressures through preserving exchange rate stability and optimizing open market operation of the central bank.

  33. Thank You

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