Andin Hadiyanto March 8, 2010

1. Global Economic Prospects and Policy Challenges Andin Hadiyanto March 8, 2010

2. Agenda • Global Economic Prospects and Policy Challenges • Indonesia’s Economic Performance and Outlook • Fiscal Policy and State Budget for 2009 and 2010 • Conclusion 2

3. 1. Global Economic Prospects and Policy Challenges

4. A Policy-Driven Multispeed Recovery • The global recovery accelerated and broadened during the second and third quarters of 2009, with emerging economies continuing to contribute a large share to overall G-20 growth. • The strong rebound in Asia is mainly driven by China, India and other emerging Asian economies, including Indonesia Global Growth (Percent, Q to Q annualized) World Trade Indices 4

5. A Policy-Driven Multispeed Recovery • Recovery in advanced economies is being largely driven by extraordinary policy support and the turn in the inventory cycle, with strong domestic demand and higher commodity prices adding to the growth impetus in key emerging economies. Assessing Growth Momentum 5

6. A Policy-Driven Multispeed Recovery • Financial market conditions continue to improve, but bank credit is likely to remain sluggish in many advanced G-20 economies, while some sovereign debt markets are facing growing pressures. Credit Default Swap Spreads (in basis points; 5 year)

7. A Policy-Driven Multispeed Recovery • For emerging economies, surging capital inflows are complicating the policy response to rapid recoveries Emerging Market External Bond and Equity Issuance (in bio US$) Emerging Market Syndicated Loans Issuance (in bio US$) 7

8. A Policy-Driven Multispeed Recovery • The multispeed nature of the recovery, renewed risk appetite and, rebounding capital flows to emerging economies have led to important exchange rate changes • Commodity prices increased strongly at the onset of the recovery, driven largely by buoyant growth in emerging economies, particularly in Asia. Selected Commodity Price Indices (January 2002=100) Real Effective Exchange Rate Movement (% change per local currency)

9. A Policy-Driven Multispeed Recovery • Advanced economy inflation remains subdued and expectations well anchored, but upward pressures have come to the fore in some emerging economies. Headline CPI Inflation

10. A Policy-Driven Multispeed Recovery • Unemployment has stabilized in the major advanced economies and begun to decline across many emerging economies. Unemployment Rate (percent)

11. Global Economic Prospects World Economic Outlook Projection 2010 - 2011 • The speed of recovery is expected to vary considerably across G-20 countries, with weaker and more fragile growth in advanced economies contrasting with robust expansions in most emerging economies, particularly in Asia. • Inflation is expected to remain contained in most advanced economies due to increasing unemployment and large output gaps, but some emerging economies will face ongoing upward inflationary pressures.

12. Global Economic Prospects • Projections for public finances diverge significantly, with deteriorations continuing in advanced economies and more favorable prospects for emerging economies. Outlook for Public Finances (Percent to GDP)

13. Policy Challenges: Macroeconomic Policies • In the major advanced G-20 economies there will be a need for continued policy stimulus until private demand gathers sustainable momentum. • In some advanced and major emerging economies in the G-20, policy stimulus will likely need to be unwound sooner than in major advanced economies and unwinding is already underway in some. • Policymakers in all countries should remain proactive in preparing their exits from extraordinary stimulus, recognizing the challenge of mapping a course between exiting too early and too late. • Exiting from crisis-related public support policies should be viewed in the context of bridging towards strong, sustained and balanced growth with price stability. Advanced economies • In most advanced G-20 economies, ensuring fiscal sustainability is a key priority and policy challenge, notably in light of the surge in government debt levels. • While provision of fiscal support will need to be maintained until the recovery gains a solid footing, advanced G-20 governments should lay out credible medium-term plans to reduce public debt ratios. • Monetary policy can remain accommodative in the major advanced countries, but central banks need to prepare and clearly communicate credible strategies for unwinding the extraordinary monetary policy support.

14. Policy Challenges: Macroeconomic Policies Emerging Economies • In major emerging (and some advanced) economies experiencing faster recoveries, including those with sufficient fiscal space, the desirable policy mix may be different. • Some emerging market countries will also have to design policies to manage a surge of capital inflows. • Greater exchange rate flexibility would help reduce capital inflows and facilitate rebalancing in major emerging surplus economies. • Countries may choose to limit exchange rate appreciation and accumulate reserves, but this is not a long-term solution. • Monetary and fiscal policies can help to reduce inflows. • Domestic prudential regulation can help limit the risks from inflows, while capital controls can slow inflows down.

15. Policy Challenges: Financial Sector Policies • The nature of the policy challenge in advanced G-20 economies is shifting towards an unwinding of extraordinary support measures and laying the foundation for a more robust and efficient financial system. • Major work still remains to repair the damage and reduce the distortions, wrought by the crisis on the financial system. • Recent proposals of some G-20 countries may help to reduce systemic risks, provided they are part of broader, coordinated regulatory reforms. • The timing of exits from financial support policies should remain conditional on the strength and stability of the underlying activity. • Designing and implementing financial sector reform will require a high degree of domestic and cross-border coordination. • The exit from the extraordinary support measures implemented in the crisis must lead to a financial system that is safer as well as sufficiently innovative to support strong, sustained, and balanced growth. • Most emerging economies face fewer challenges in exiting from crisis interventions but they too must aim to strengthen their financial stability frameworks.

16. Summary • The global recovery is off to a stronger start than anticipated earlier, but it is proceeding at different speeds in the various regions. • The speed of recovery is expected to vary considerably across G-20 countries, with weaker and more fragile growth in advanced economies contrasting with robust expansions in emerging economies, particularly in Asia. • Risks to the outlook are on balance moderately to the downside. • A multispeed recovery means that policy challenges vary across countries. • Policymakers need to formulate and begin to implement strategies for exiting from crisis-related intervention policies. • Some emerging market countries will have to design policies to manage a surge of capital inflows.

17. 2. Indonesia’s Economic Performance And Outlook 17

18. Positive Macroeconomic Environments... IDR and IHSG Net Foreign Buying 2009 Stock Indices & Exchange Rates (%change Jan-Dec09) Foreign Reserves Indonesia’s macroeconomic environment remains positive and favorable, supported by Rupiah appreciation, strengthening of the stock index, the record high in FX reserves and positive investor perception 18

19. Indonesia’s Sustained GDP Growth Economic growth in Q4 2009 is estimated to be 4,9% yoy , leading to a projected FY2009 growth rate of 4.4%. GDP Growth and Sources • Due to a large, diverse domestic economy, growth in household and government consumption have driven GDP growth despite a decline in international trade. • The pick-up in investment has already strated with growth estimated to be 5,5% in 2010. Source: MOF GDP Growth and Sources 19

20. Indonesia’s Economic Growth Outlook for 2010 GDP growth for 2010 is projected to be driven by the recovery in investment and exports growth, in addition to the continued household and government consumption growth GDP Growth Projections Positive Outlook for 2010 • Indonesia’s economic outlook remains robust. • Growth momentum is expected to be strong, not only because of healthy consumer confidence but also due to improving businesses sentiment. • Government policies in 2010 will remain supportive for the economic growth target of 5.5% . 20

21. 3. Fiscal Policy and State Budget for 2009 and 2010 21

22. Budget Realization 2009 22

23. Implementation Progress of Fiscal Stimulus Program The Indonesian government is committed to the implementation of the fiscal stimulus program and established the legal basis to ensure the program is properly implemented in a timely manner Fiscal Law 2010 article 14 was passed to ensure the implementation of the fiscal stimulus program according to plan 23

24. State Budget for 2010 State Budget 2010 and Outlook for Revised Budget The budget deficit 2010 are under control. Macro Assumption for the Outlook revised Budget are: Growth 5,5%, Inflation 5,7%, Exchange rates Rp.9500 perUSD, SBI 7%, Oil Prices 77 USDperbarrel Oil Lifting 0.965 million barrel perday. 24

25. Overview of Fiscal Policy for 2009 and 2010 Fiscal Policy for 2009 and 2010 Fiscal Stimulus Policies • Continue an effective fiscal stimulus 2009 (1.4% GDP), 2010 (0.6% GDP) • Reduce debt to GDP ratio: 2009 (29%) • Continue tax policy and administration reform, reduce rate for companies, certainty of tax policy for oil companies • Implement first batch of Performance Based Budget (PBB), Civil Service Reform and Remuneration (11 ministries) and multi-year projects Tax and Administrative Reforms • Provide fiscal space for the new government to implement additional priority programs (0.4% of GDP or equal to USD 2.5 billion) • 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 Exim Bank) and incentives for real sector, climate change projects (geothermal, bio-premium, green funds) New Feature of Fiscal Policy Maintain Social Welfare • Continue welfare programs (PNPM, BOS, Jamkesmas, Raskin) and provide budget for education sector 25

26. 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 Fiscal Policy for 2010 to Promote Economic Recovery • Reduce income tax rate for corporations from 28% to 25% • Reduce income tax rate by 5% for listed companies with 40% public ownership • 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 Incentives on General Taxation • Provide incentive for geothermal energy through income tax and VAT • 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 EnergyIncentives Incentives for Industry • Provide custom incentives for select industries • Provide custom incentives for imported capital goods and capex 26

27. Fiscal Policy to Enhance Indonesia’s 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 • 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 Export 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 Fiscal Policy for 2010 to Enhance Indonesia’s Competitiveness Infrastructure Development and Social Welfare Assistance to Support Specific Sectors 27

28. 4. Conclusion 28

29. Conclusion • Sustained economy resilience with strong growth prospects amid the global economic crisis • 4.4% growth projected for 2009 and manageable budget deficit of 1.6% of GDP • Substantial improvements are evident in economic fundamentals • Prudent fiscal management with strong commitment to fiscal consolidation • Declining debt-to-GDP ratio • Diversifying government debt profile • Reducing funding reliance on international capital market • With strong foundation economic fundamental and budgetary achievement in 2009, we are confident toward the economic and fiscal targets for 2010 29

30. Thank You