REPUBLIC OF INDONESIA Summary of Recent Updates

1. REPUBLIC OF INDONESIASummary of Recent Updates October 2009

2. Macroeconomic Development Monetary Policy Market Update Fiscal Update OUTLINE

3. 1 Macroeconomic Development

4. Latest Macroeconomic Indicators Source: Bank Indonesia

5. Macroeconomic Highlights Indonesia was selected as the region most active business reformer in East Asia and the Pacific according to Doing Business Index 2010 as surveyed by International Financial Corporation (IFC). Indonesia’s rank moved up from 129 to 122 in the index. Indonesia considered as one of few countries in the front row of economic recovery,with the resilient growth over the last 2 years. One of the rare countries which successfully post a positive growth rate in 2009, third fastest growing economy in the G20. Even during the peak of global economic slowdown, the economy was still able to generate a positive growth of 4.4% in Q1-2009 and 4.0% in Q2-2009. Banking industry has stayed resilient with high level of CAR (17.0%) and NPL (gross) at a subdued level of 4.7% (latest data as of July 2009) Indonesia's current account posted a US$3.1 billion surplus in Q2/2009, up from the US$2.9 billion surplus in the previous quarter, brought the overall balance of payments to record a surplus to US$1.1 billion, to further increased the level of International reserves to US$57.6 billion, equivalent to about 5.5 months of imports and official debt service payments. The rupiah exchange rates have been showing an appreciation trend, mainly supported by continuing of global economic recovery and domestic economic performance. During August 2009, the rupiah appreciated 1.3% on average from Rp10,098 against USD to Rp9,966 against USD. To Rupiah appreciated to Rp. 9,720 against USD by September 28, 2009. CPI inflation up to August 2009 (y-t-d) is recorded only by 1.22% (2.75%, y-o-y). The decline in inflationary pressures was mainly driven by the low administered price and volatile food inflation in line with government policy to adjust the price subsidized fuel at the beginning of the year and the adequacy of supply and smooth distribution.

6. Macroeconomic Highlights Fiscal policy is adopting the need to stimulate the economy and will continue in a slower pace in 2010. Tax policy reform continue with lower tariff and higher compliance. 2010 budget provides fiscal space for next government to implement their priority programs. The latest monthly Board of Governors’ Meeting convened in September 2009 decided to leave the BI Rate unchanged at the low level of 6,50%, which considered adequate to the economic recovery process. At 6.50%, the BI Rate level is also deemed consistent with achievement of the 2010 inflation target, set at 5%±1%. Moody’s Investors Service just upgraded Indonesia’s foreign and local-currency sovereign debt ratings to Ba2 with stable outlook. The upgrade was prompted by the Indonesian economy’s relatively strong resilience to the global recession as well as its healthy medium-term growth prospects.

7. Economic Growth Sustained The economic growth is relatively strong compared to regional economies. • During 2007 - 2008, the economy performed steadily at 6,2% in average which was the highest GDP growth after Asian crisis. However, in Q4-2008, Indonesia’s economic performance began to moderate as an impact of the global economic downturn. • Furthermore, GDP growth in Q1-2009 and Q2-2009 were 4,4% and 4,0% (yoy), lower than the preceding year. The softening GDP growth was largely the result of sharply falling in export, commensurate with the deterioration in global economic condition and its impact on purchasing power. Despite this, economic activity fuelled by the national election activities is expected to keep the domestic economy from further decline. Strong Growth in the Last Two Years Source: Bank Indonesia, BPS.

8. Growth Projection 2010 Growth provide a higher target of 5.5% with strong improvement in investment and export performance Source: *BPS **MoF Projection. • Politics: Continue and Stronger Government and Parliament Support (>60% seats) • Policy Support 2010: • Stimulus budget continue, stable currency and better crisis prevention measures • Economic Policy supports: tax rate reduction, trade financing, cost of fund, one stop service, civil service reform, sets of new laws pro investment (local taxes, energy, power, infrastructure, etc).

9. Dramatic slow in world economy pose significant challenges to the economy in 2009 Main Factors Behind The Forecast 2009 Forecast • Economic growth for 2009 is estimated to moderate as external demand falls, but resilience in domestic demand could moderate the adverse effect of external demand. • Going forward, a better exports performance is expected to be seen as global economic slowdown abate after reaching its peak in Q1-2009 • Household consumption remains strong, primarily supported by the domestic economic performance as well as confidence on the government and monetary policy. GDP Growth is forecasted at about 4%-4.5% Export is expected to chart higher growth • Monthly export growth has been in upward trend since March 2009 in line with global economic recovery. • Indonesian exports characteristics which is based on primary commodities has also supported export growth acceleration. The primary commodities basis exports has recuperated as demand of trading partner countries recovered. Private Consumption will remain strong • Election spending related to campaigning for national and local legislatures and the presidential election involve considerable funding, which in turn may counter the drop in household consumption. • The Government countercyclical policy also has contribution in maintaining people purchasing power. Inflation is estimated to be on target at range of 4.5%±1% • Inflation expectation is in downward trend. • Adequate food production and smooth distribution have made volatile foods continued to contribute to waning inflationary pressure. • Government price policy was also favorable for inflation, while pressure from core inflation remains contained. Source: Bank Indonesia.

10. 2 Monetary Policy

11. Indonesian banking sector continues maintaining stability and performance (as of July 2009): Banking Stability Strong solvency, with CAR of 17.0% Controllable credit risk exposure, with NPL of 4.6% (gross) and 1.7% (net) Stay profitable, with ROA of 2.7% Source: Bank Indonesia

12. Balance of Payments: Q2 - 2009 During Q2-2009, Indonesia’s current account posted a US$3.1 billion surplus, up from the US$2.9 billion surplus in Q1-2009. This surplus more than compensated for the deficit in the capital and financial account, bringing the overall balance of payments surplus to US$1.1 billion. In response, international reserves climbed further to US$57.6 billion at end Q2-2009, equivalent to about 5.5 months of imports and official debt service payments. Balance of Payments Source: Bank Indonesia.

13. Balance of Payments: Preliminary Estimates for Q3-2009 Indonesia's balance of payments in Q3-2009 is estimated to post a surplus of around US$2.2 billion (Q2-2009: US$1.1 billion), mostly due to an expected improvement in the capital and financial account, while the current account surplus is expected to decline. In accordance, international reserves is projected to increase to US$60.6 billion at end-September 2009, equivalent to 6.0 months of imports and official external debt service payments. These are very preliminary estimates based on actual data up until August 2009. Balance of Payments Source: Bank Indonesia.

14. Inflation has Been Trending Downward • The downward trend in inflation is set to continue. Monthly inflation maintained a downward trend primarily from the first round and second round effect of the cut in fdomesticuel prices. In monthly CPI movement, August 2009 recorded 0.56% inflation (mtm). Measured annually, August CPI inflation reached 2.75% (yoy). • Inflation expectation is in a downward trend. It is mainly related with the strong consumer and business confidence on the government and monetary policy as well as exchange rate stability, the absence of administered price policy, and better food supply management. Headline Inflation Trending Down from Peak Source: Bank Indonesia.

15. Inflation has Been Trending Downward • In line with slowing demand, globally and domestically, we estimate subdued inflationary pressure in 2009. Against this backdrop, CPI inflation in 2009 is predicted to be in the target range 4.5%+1%. • Looking forward, inflation in 2010 is forecasted to return to normal alongside renewed strength in domestic economic activity and commodity prices. Thus, Bank Indonesia will continue monitoring global economic developments and taking the necessary measures to safeguard macroeconomic stability while maintaining a conducive climate for the economy. • To enhance the effectiveness of monetary policy transmission, BI will encourage systemically important banks (SIBs) to play significant role as market leaders in setting the deposit and credit rates. BI will also encourage banks to continue extending credit to the real sector, without abandoning prudential banking policy. Inflation Expectation – Consensus Forecast CPI Inflation Forecasts Source: Bank Indonesia

16. Exchange rate: Strengthened and more stable through 2009 Rupiah appreciated substantially spurred with increasing risk appetite by investor due to improvement in global economic recovery outlook. Investors’ preferenceto hold rupiah assets were also supported by better economic growth in 2009 along with favorable political condition. Foreign investors purchased the rupiah assets such as SBI, government bonds (SUN), and stocks. Rupiah strengthened from Rp10,950 per USD at the beginning of this year to Rp9,720 per USD on September 28, 2009, the strongest appreciation among other Asian currencies. Exchange Rate Volatilities Rupiah Exchange Rate Source: Bank Indonesia.

17. 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 September 2009, the Board of Governors Meeting decided to keep BI Rate at 6,50%. At this level, BI Rate is also deemed consistent with achievement of the 2010 inflation target, set at 5%±1%. BI Rate Source: Bank Indonesia.

18. 3 Market Update

19. Financial Market Performed Well Positive net foreign buying of Indonesian securities has driven the outperformance of the stock market and the stability of the exchange rate. Recent financial indicators also showed robust improvements The stock index rose significantly from 1355 at the end of 2008 to 2,420 at September 15, 2009, one of the best performing equity index in the region this year. Indonesia Stock Index and Exchange Rate Indonesia CDS Rate 17 Sept 2009 2,456 Aug 10 5Y: 197 10Y: 198 Sep 2 5Y: 233 10Y: 235 Sep 16 5Y: 174.5 10Y: 181 17 Sept 2009 9,705 Stock Net Foreign Buying Bond Net Foreign Buying Source: MoF, Bloomberrg

20. Indonesia Government Bond’s Yield • RoI Global Bond yield is lowered at the same level as its peers • yield curve domestic Bonds has dropped significantly since October last year Global Bond Yield 10 Y: Indonesia and Peers Yield Curve Domestic Bond Source: MoF, Bloomberrg

21. Deeper Bond Market Average Daily Trading Diversified Bondholders Source: MoF,

22. 4 Fiscal Update

23. Budget Outcome for Fiscal Year 2009 2009 National Budget – Original vs. Revised Source: Ministry of Finance.

24. 2009 Funding Plan The 2009 budget is designed to give the Government enough room to adjust to any potential impact of the global credit crisis Budget Deficit Financing (in IDR) The Government’s funding plans are well on-track with realized government securities issuance at 90.05% of gross issuance required in the 2009 Budget Revised. Redemption and buyback amount subject to change GDS stands for Government Debt Securities

25. State Budget 2009 - 2010 In US$ Billion Assumptions: • Growth: 2009: 4,3% and 2010; 5.5% • inflation 4.5% (2009) and 5% (2010) • Oil price: $61/b (2009) and $65/b (2010) • Budget deficit (2009) 2,4% GDP and (2010) 1.6% GDP • Tax to GDP increase from 12.1% (2009) to 12.4% (2010) • Ministries Spending and Regional Transfer, each accounted for app 31% to Total Expenditure • Energy Subsidies and interest payment app 20%to Total Expenditure Source: Ministry of Finance.

26. Budget Financing 2009 – 2010 In US$ Billion Budget Financing 2009 - 2010 Assumptions: • Funding Needs: 2009: US$ 24.4 billion (almost secured) and 2010; US$ 22.9 billion. If 2010 market conditions improved there is room to provide additional financing. • Budget financing rely on government securities (bonds) mainly rupiah and the rest from global bond conventional and SUKUK. • Non-Debt Financing 2009 mainly coming from accumulated cash/budget surplus in 2008. Source: Ministry of Finance.

27. 2010 Budget Deficit is proposed at 1.6%;taking into account the confidencein sustainability of government’s financing resources ability Triillion Rp % 7000 100 89 90 85 6000 80 77 5000 70 67 61 60 57 4000 47 50 3000 39 40 35 33 32 30 30 2000 20 1000 10 0 0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009* 2010* GDP Outstanding Debt Debt ratio to GDP Budget Deficit 2010 GDP – Outstanding Debt – Debt Ratio to GDP Main financing resources for 2010 financing deficit Rp98 T (US$9.8 bio) • Government bond issuances,net Rp104,4 T (US$ 10.4 bio) • Various tenors(long and short term) • Diversified Instruments (Sukuk, conventional, GMTN, direct buying, retail, non-tradable bonds) • External debt, gross Rp57,6 T (US$ 5.7 bio) • Program loans (fromWorld Bank, ADB, IDB, Japan & France) • Project loans, particularly for multi-year activity • Contingencies' Loan from World Bank, ADB, Japan Samurai and Australia provide a market confident 27 Source: Ministry of Finance.

28. Debt Management policy • Prioritizing issuance of Rupiah bonds in domestic market, • Consistently reduce the forex loan exposure, • Further diversifying debt financing instruments (sukuk, samurai bond, retail securities), • Further developing secondary market infrastructures, • Supporting central bank in using Government Debt Securities as monetary instruments

29. Credit Rating History Economic Crisis in 1998 Banks Recapitalization 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 BBB+ Baa1 BBB Baa2 BBB- Baa3 Ba1 BB+ Sep 09: Moody’s upgrade to Ba2 (stable outlook) Ba2 BB Ba3 BB- Jan 09: Fitch affirms ratings B1 B+ B2 B Gradually improving external liquidity, macroeconomic stability and improved political conditions B3 B- Diminished likelihood that the Government will seek additional debt rescheduling Current Ratings: Moody’s: Ba3 S&P: BB- Fitch BB Caa1 CCC+ Caa2 CCC Caa3 CCC- Ca CC C R/C SD/DDD Solid economic fundamentals helped the improvement of Indonesia’s sovereign credit rating since 2001 Moody’s Investors Service just upgraded Indonesia’s foreign and local-currency sovereign debt ratings to Ba2 with stable outlook. The upgrade was prompted by the Indonesian economy’s relatively strong resilience to the global recession, healthy medium-term growth prospects as well as its prudent debt management . Nov 08: S&P affirms ratings 29

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