Indonesia – The Trillion Dollar Economy James Castle Kuta , Bali 1 February 2013

1. Indonesia – The Trillion Dollar Economy James Castle Kuta, Bali 1 February 2013

2. Today’s Talk • Background - The Long View • A Snapshot of Today • The Impact of the Global Crisis • The Economy • Social Conditions • Politics • Some Questions from You • Conclusions

3. Some Solid Fundamentals • Indonesia’s macro-economic management over the past decade has been very good. • Conservative fiscal management, lower tax rates and better tax collection have generally kept the country’s annual budget deficits below 2% of GDP and reduced government debt to around 25% of GDP from over 100% in the aftermath of the Asian financial crisis just over a decade ago. • This has helped keep the currency stable and interest rates relatively low on an historic basis. This, in turn, has enabled Indonesian business to maximize the benefits that strong global commodity markets have offered and brought annual investment levels back from well under 20% of GDP to over 30%.

4. … and let us not forget • Some Accomplishments - - • Enhancing social cohesion and • political stability with… • The establishment of a viable democracy that has conducted three successful national elections and literally thousands of local elections that were free and fair • The peaceful and voluntary removal of the military from a direct role in political life • A vibrant free press

5. Plus Some Core Strengths • Indonesia’s current impressive economic progress is a commodity export – domestic consumption story • It is the world’s largest exporter of palm oil and the second largest exporter of thermal coal, tin and cocoa. • It has 3.5 billion barrels of proven oil reserves and over 110 trillion cubic feet of natural gas reserves • Young population – over 50% of Indonesia’s 240 million people are under the age of 29 • and • Indonesia should become a • trillion dollar economy by 2014

6. Indonesia Today - McKinsey • 16th largest economy in the world • 45 million members of the Consuming Class • 53% of population in cities, producing 74% of GDP • 55 million skilled works • $0.5 trillion market opportunity in consumer services, agriculture and fisheries, resources, and education McKinsey Global Institute: The Archipelago Economy: Unleashing Indonesia’s Potential; Sept 2012

7. Indonesia in 2030 - McKinsey • 7th largest economy in the world • 135 million members of the consuming class • 71% of population in cities producing 86% of GDP • 113 million skilled workers needed • $1.8 trillion market opportunity in consumer services, agriculture and fisheries, resources, and education McKinsey Global Institute: The Archipelago Economy: Unleashing Indonesia’s Potential; Sept 2012

8. Back to the Present: 2012 - A Tough Year. 2013 More of the Same • Persistent global uncertainty • Falling commodity prices • Ballooning fuel subsidy • Growing current account deficit • Merchandise trade deficit • Weaker Rupiah • Slower growth

9. Why S&P said “No” • Positives • Low central govt deficit • Declining public debt burden • Strengthening external liquidity • Resilient economic performance in global downturn • Constraints • Policy slippage: failure to reduce fuel, electricity subsidies; questionable industrial and trade policies • Structural & Institutional impediments to higher growth • Shallow domestic capital markets • Under-spending capital budget; • Implementation risk on infrastructure and energy development

10. Social Indicators • Inflation down • Per capita income up • Numbers of unemployed & those living below the poverty line down • Consumer credit availability at highest levels ever • Income redistribution via regional autonomy Still Very Positive

11. Governance/ Business Environment / Competitiveness Some slippage over the past year • Indonesia ranked 50th this year compared to 46th in 2011-112 survey • Other ASEAN rankings: Singapore 2nd; Malaysia 25th; Thailand 38th; Philippines 65th; Vietnam 75th • BRICs: China 29th; India 59th; Brazil 48th; Russia 67th • MISTs: Mexico 53rd; South Korea 19th; Turkey 43rd • MIST countries are linked by rising consumer spending WEF: Global Competitiveness Index (2012-13)

12. Infrastructure Challenges - National • Rail 54% – Accounts for less than 10% of passenger and less than 1% of freight transport. Jakarta is the largest city in the world without intra-city rail • Roads 61% - 35% of district roads and 10% of national roads are classified as “Heavily Damaged” Ports 77% • Indonesia has only 2 international hub ports Merak Crossing -12 days Source: McKinsey

13. Infrastructure Challenges - Jakarta • Population of Greater Jakarta (Jabodetabek) will grow from 24 million today to over 32 million in 2020 • 8.2 million more people will require over 2 million additional housing units with 47% more commuting trips • Worsening public health due to increasing levels of air and water pollution – 377m m3 more sewage and 17m m3 of waste generated Source: McKinsey

14. Rp 35,500,000 Per Capita GDP 2012 Ave Growth Rate 6.00% 8.00% Population Growth 1.04% 1.04% Per Capita GDP 2020 52,000,000 60,500,000 -14% Per Capita GDP 2030 84,000,000 118,000,000 -29% What does slower growth mean to young Indonesians? • If you are 20 years old today, when you are 38, instead of earning Rp 118 million, you will be earning only Rp 84 million. Consequences of Sub-Optimal Growth

15. Questions from the participants (1) • What might foreign investors expect in the years ahead? • How will Indonesia fare within the region and the world? • Forecasts on the Indonesian economy, strengths and possible weaknesses • What might foreign investors expect in the years ahead? • Since hotels depend on the health of the economies of source markets – how goes Indonesia, Australia, Singapore, Malaysia, Japan, Europe and America? • Fuel and Power prices? Will Indonesia abolish subsidies?

16. Questions from the participants (2) • How will that impact buying power of the Indonesian market (now 55% of Bali arrivals) and the cost of doing business (e.g. PLN)? • The Indonesian national debt and the need for revenue.  What will happen on taxes, subsidies, etc? • Will Indonesia meet the tremendous demands for infrastructure development to stay competitive in the region? • Indonesian tourism promotional budgets among the lowest in ASEAN? Is this likely to change?

17. Questions from the participants (3) • How realistic are expectations in some quarters for changes in property ownership rules for foreigners and foreign corporations? • How goes to government’s efforts to eradicate corruption? • How will AFTA potentially effect the way hotels in Indonesia do business? More foreign staff? • Exodus of talent? • If Minister Pangestu is chosen to head the WTO, what might that mean to Indonesia? • Coming elections: Smooth or rough sailing?

18. Conclusions • Advantages • Stable Politics • Strong Macroeconomic Fundamentals • Established track record of prudent fiscal mgmt • Favorable Demographics: 30% population is 15< years old • Valuable commodities • Strong investor interest • Disadvantages/Challenges • Weak rule of law/governance • Infrastructure bottlenecks • Inefficient govt bureaucracy • Persistent inflation • Human capital/skills shortages • Lack of political will to confront subsidies and creeping economic nationalism Source: Adapted and modified from IMF Article IV summary

19. Prospects for Prosperity • Over the past five years, Indonesia has shown that it has the domestic strength to continue to prosper despite the worst peacetime global financial climate in nearly a century. • Indonesia’s momentum should carry it forward for the next several years. But, if not addressed, policy failures in vital sectors will keep growth at sub-optimal levels.

20. The risks today – weak global economy, major leadership changes in 2014 – are the greatest since 2001 when Indonesia’s first democratically elected president was impeached less than two years into his term • Electioneering, over-confidence and protectionist trade and investment policies are making the country much more vulnerable to the inevitable commodity downturn than it needs to be. Prospects for Prosperity

21. Nevertheless, if the 2014 election goes smoothly (as we think it will) and infrastructure investment continues to increase (very likely as the election draws closer) . . . • . . . Indonesia should be able to maintain its position as one of fastest-growing G-20 economies for some time – and become a trillion dollar economy by 2014. Prospects for Prosperity

22. THANK YOU