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Indonesia Islamic Finance Development

Indonesia Islamic Finance Development. by Luky Alfirman. IFN ASIA FORUM Kuala Lumpur, 18 October 2011. Fiscal Policy Office, Ministry of Finance of the Republic of Indonesia. Outline . Recent Economic Development. A Story of Growth and Stability….

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Indonesia Islamic Finance Development

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  1. Indonesia Islamic Finance Development by Luky Alfirman IFN ASIA FORUM Kuala Lumpur, 18 October 2011 Fiscal Policy Office, Ministry of Finance of the Republic of Indonesia

  2. Outline

  3. Recent Economic Development

  4. A Story of Growth and Stability… Strong and Consistent Real GDP Growth (% yoy) Demonstrated resilience throughout the global financial crisis 2006 – 2010 Avg. = 5.7% Source: Ministry of Finance, BPS and Bank Indonesia *Medians derived from S&P – no data available between 2000 to 2003 Source: Ministry of Finance and Moody’s Statistical Handbook Ranked according to 2009 GDP growth rate Above Average GDP Growth Lower Growth Volatility Volatility of GDP (%) 5-year Real GDP Growth Average (%) 5-year Standard Deviation Source: Ministry of Finance, BPS, Bank Indonesia and Moody’s; Moody’s Medians Source: Fitch Ratings, as of 2010 (latest available)

  5. Supported by Domestic Demand and Economic Diversification Private Consumption Driving Growth(Rp tn) Investment, Financed by Large Domestic Savings, Supportive of Strong Growth Impetus (% of GDP) A Diverse Economy Supports Stability USD840.6bn 2011 Nominal GDP = Rp 7,226.9tn/ USD840.6bn Source: Ministry of FinanceNote: Excludes changes in stock residual and statistical discrepancies; USD / Rp. exchange rate of 8,597, the BI middle exchange rate as of June 30, 2011. US dollar values are for convenience only Source: Bank Indonesia Source: Ministry of Finance, as of 30 June 2011Note: USD / Rp. exchange rate of 8,597, the BI middle exchange rate as of June 30, 2011. US dollar values are for convenience only 5

  6. Strong Investment Underpinned by Competitiveness and Stability Realized Foreign Direct Investment (USD bn) Realized Domestic Direct Investment (Rp tn) USD6.7bn Source: BKPM Source: BKPMNote: USD / Rp. exchange rate of 8,597, the BI middle exchange rate as of June 31, 2011. US dollar values are for convenience only FDI – By Sector (USD mm) Significant Improvement in the Global Competitive Scorecard GC Index Rankings Source:World Economic Forum Source: Bank Indonesia 6

  7. Indonesia is now only one-notch below the Investment Grade… Moody’s (Ba1 Stable Outlook) S&P(BB+ Positive Outlook) Fitch(BB+ Positive Outlook) 2011 2010 Ba2 BB BB+ 2009 2008 Ba3  Ba2 BB-  BB BB  BB+ 2007 BB- BB-  BB Ba3 2006 BB- B1  Ba3 2005 BB- BB- B2  B1 2004 BB- B+  BB- B2 2003 B+ B+  BB- B2 B  B+ B+ B3  B2 B-  B B  B+ “… momentum in the economy is expected to be sustained by steady domestic demand, a reasonable pace and sequencing of policy and structural reforms, and rising foreign direct investment. Furthermore, the country's debt position and reserve adequacy remain on an improving trajectory relative to most of its ratings peers,"  “.. The rating upgrade reflects continuing improvements in the government's balance sheet and external liquidity, against a backdrop of a resilient economic performance and cautious fiscal management.” “…the Positive Outlook reflects Fitch's view that Indonesia's favourable macroeconomic prospects are likely to see the credit profile strengthen further over the next twelve to eighteen months…. “ Source: Moody’s, S&P, Fitch

  8. However, global economic growth is revised lower due to the risk pressure from US and Europe crises... Economic Growth Forecast (%, yoy) Global Economic Growth (%, yoy) ↓ ↓ ↓ ↓ ↓ ↓ ↓ ↓ Emerging Countries Developed Countries World • The growth slowdown especially in developed countries which is estimated to achieve 1,6% (yoy) in 2011 and 1,9% (yoy) in 2012. While Emerging Countries and ASEAN 5 are projected to grow over 5% (yoy). • The world trade volume is predicted to grow slower by 7,5% (yoy) in 2011and 5,8% (yoy) by 2012. World Trade Volume (%, yoy) Trade Total Export Import Source: World Economic Outlook, Sep 2011

  9. Indonesia’s growth remains strong in Q2 2011… GDP Growth (%) • Some countries experiencedsome GDP slowdown vs Q2-2010. • Indonesia GDP growth in Q2-2011 was 6.5% or higher than Q2 2010 of 6.1%. 9 Source: Statistic Bureau (BPS) & Bloomberg

  10. GDP Q2-2011 grew 6.5% supported by investment, exportand government consumption… • Source of GDP growth Q2-2011 were private consumption 4.6%, government consumption 4.5%, Investment 9.2%, export 17.4%, and import 16.0%. • Investment in Q2-2011 was supported by building type investment and foreign equipment & machinery investment, in line with the increase in the construction sector and non oil & gas export for manufacturing. • Increase in export was supported by high growth in both oil & gas and non-oil & gas sectors. Oil & gas exports grew by 73.9% and non-oil & gas exports grew by 37.5%. Source: BPS 10

  11. Global inflation tends to increase along with the higher food and energy price…. Inflation in Developed Countries Inflation in ASEAN • Higher food and energy prices have driven higher inflation in China and USA • Inflation in ASEAN also tends to increase in which Vietnam shows the highest inflation 23.02%. 11 Source: CEIC

  12. Trading Partnership • Indonesia’s export shares to Japan and US has been declining, however export to ASEAN countries and China increase. In addition, export share to PIIGS relatively small (3.17%). • It shows that the exposure from US and PIIGS debt crisis will be limited for Indonesia. 12

  13. State Budget 2011 vs 2012 2011 (revised) and 2012 (proposed) State Budget 2012 Macroeconomic Assumptions * Note: SPN for 3 month 2012 GDP Growth Forecast by Expenditure Public consumption: 5.4%Government consumption: 6.8% Source: Ministry of Finance Sectoral Growth Targets 2012Manufacturing: 6.0%Agriculture, livestock, forestry and fisheries: 3.7%Trade, hotels and restaurants: 8.8%Mining and quarrying: 2.4% Source: Ministry of Finance Development Targets for 2012Open unemployment rate: 6,4 – 6,6%People living below poverty line: 10.5%–115% Source: Ministry of FinanceNote: USD / Rp. exchange rate (BI middle exchange rate 8,995 as of September 26, 2011. and 8,800 as of macro economic assumption for 2012 exchange rate 13

  14. Renewed Focus on Capital Expenditures… Targeted Infrastructure Spending through Capital Expenditure Helps Lower the Unemployment Rate Rp tn USD15.7bn Source: Ministry of FinanceNote: USD / Rp. exchange rate of 8,995, the BI middle exchange rate as of September 26, 2011. US dollar values are for convenience only Increased Allocation for Capital Expenditures in the Annual Budget as Subsidies Decrease 2005 Budget 2011 Budget Source: Ministry of Finance 14

  15. Debt Management Strategy 2010 - 2014 • Fulfilling financing needs through the issuance of government securities (including SUKUK) and government loans/project financing; • Optimizing debt portfolio structures to support fiscal sustainability; • Developing debt instruments to obtain flexibility in choosing more cost-efficient and minimal risk instruments; • Obtaining foreign loans to finance priority projects with favorable terms and conditions; • Optimizing foreign loans to finance project priorities and high quality projects; • Improving coordination with monetary and capital market authorities to encourage financial deepening; • Improving coordination and communication to enhance the efficiency of loans management and sovereign credit rating improvement. 15 Source: Ministry of Finance

  16. Sustainable Fiscal Management Fiscal Deficit (% of GDP) 8-year fiscal deficit average= -1.1% Debt to GDP Ratio Has Been Sharply Declining Since Crisis Period 16 Source: FPO

  17. Shariah Business Practices

  18. Tax Treatment on Shariah Transactions (1) Before 2009/2010 • NO equal tax treatment between Shariahand conventional business practices • Income Tax (before 2009) • Income from Shariah business was not clearly considered as taxable object • No tax regulations for Shariah transactions creates uncertainty and difficulty in applying Shariah principles • Value Added Tax (before 2010) • Conventional financial services were treated as VAT non-taxable, but the Shariah ones were VAT taxable After 2009/2010 • Equal tax treatment between Shariahand conventional business practices • Amendment of Income Tax Laws – effective 2009 • Amendment of Value Added Tax Laws – effective 2010 Transition Tax Borne by Government Mechanism

  19. Tax Treatment on Shariah Transactions (2) Amendment of Income Tax Laws • Article 31D • Defining Income Tax treatment for business activities based on Shariah principles, which further detailed in Government Regulation (PP) No: 25/2009 • Income derived from Shariah business activities are now taxable, that includes commonly defined income, costs, and withheld income • Mutatis Mutandis principle • It provides Equal Treatment and Legal Certainty

  20. Tax Treatment on Shariah Transactions (3) Amendment of Value Added Tax Laws • Article 1A paragraph (1) letter h • Goods transaction delivered by taxpayers through Shariah financing scheme is considered as (VAT) taxable transactions • Explanation of Article 4A (3) letter d • Financing services, including under Shariah schemes, as follows: financial leasing (with options rights), factoring, credit card, consumer financing services ,are NOT VAT taxable, • It provides Equal Treatment and Legal Certainty

  21. Tax Treatment on Shariah Transactions (4) Transition • Problem • Before 2010, shariah transactions, such as murabahah, were treated differently from conventional transactions where the former had to pay VAT • Due to non existence of tax regulations on shariah transactions, tax audit on shariah companies conducted before 2010 resulted in tax (VAT) assessment had to be paid by those companies • It created unfair competition and unclear legal position of shariah business • Solution • Government provides fiscal facilities, that all tax (VAT) assessments on murabahah transactions issued by tax auditors before (1 April) 2010 will be borne by government (note: tax assessments are not waived rather they are paid by government)

  22. Islamic Financial MarketDevelopment in Indonesia 1980 1994 2000 2002 2004 2007 ▪ Islamic Banking Act (2009) ▪ 1st Islamic Bank Bank Muamalat Ind ▪ 1st Islamic Branch Bank IFI Syh ▪ 2nd Islamic Bank Bank Syh Mandiri ▪ Office Channeling Islamic banking ▪ 1st Takaful Company Asuransi Takaful Keluarga ▪ 1st Takaful Branch Assi Great Eastern ▪ 1st Islamic Re-insReINDO Takaful ▪ Islamic Money Market (IMA Certificate) ▪ Jakarta Islamic Index • 1st ShariahFund • PT. Danareksa Financial Markets ▪ Islamic Capital Market ▪ ICM Master Plan (2005) ▪ 1st Corporate Sukuk Indosat (Mudharabah) - 2003 Sukuk ▪ Sukuk Guidelines (2006) SukukAct (2008) Issue State SUKUK 1992 1997 1999 2001 2003 2006 2008

  23. Regulatory Framework to Support Shariah Capital Market and Non Bank Financial Industry Capital Market Sector • Issuance of Sharia securities and the criteria of Shariah Securities, has provided the basis for developing capital market activities based on Shariah principles. (Guidance of National Sharia Board Ref.#: 80/DSN-MUI/III/2011) • Issuance of regulations for implementing and managing of Shariah business, particularly to comply with Shariah principles Insurance Sector • Issuance of the Application of Basic Principles of Insurance Business Operation and Reinsurance Business with Sharia principles. (MOF Regulation No. 11/PMK.010/2011) • More detailed and technical regulations will be issued soon to make it applicable in the operational level Financing Sector • Issuance of regulatory frameworks associated with financing products based on Sharia principles have provided the basis for further development of Shariah financing activities

  24. Shariah-based Capital Market and Non Bank Financial institution Products Have Been Growing significantly… Progress for Total Value of Sukuk Emission and Total Number of Sukuk Issuance 2005-2011 Progress for Total Net Asset Value (NAV), and Total Number of Shariah Mutual Funds 2005-2011 Progress for Key Indicators of Insurance and Reinsurance Company Based on Shariah Principles 2005-2009 Source: Ministry of Finance

  25. Composition of Government Securities Source: Ministry of Finance

  26. Strategic Plan • Promoting Equality of ShariahFinancial Products with Conventional Products. • Product creation process • Product issuance procedures • Publishing products liability • Taxation treatment Developing regulatory framework to support market development of Shariah capital market and non-bank financial industry. Capital market Insurance Financing, insurance, and mortgage Pension fund Developing capital market products and non-bank financial services, based on Shariahprinciples. Increase the quantity of products New product innovation based as needed Improving product competitiveness Strategic Plan: Islamic Capital Market and Islamic Non Bank Financial Institutions 2010 - 2014 Enhancing Human Resource Development in the Shariah Capital Market and non-bank financial industry. Improving quantity and quality Education and intensive socialization Preparation of educational infrastructure Source: Ministry of Finance

  27. Conclusions

  28. Conclusions • Sustainable economic growth driven by robust domestic consumption and diversified domestic economy accompanied by relatively low inflation rate • Positive fiscal story with strong track-record of prudent revenue and expenditure management and sound debt management strategy • Improved investment and business climates • Supportive fiscal policies and tax regimes on Shariah financial industry • Equal treatment and legal certainty for Shariah business 28 Source: Ministry of Finance

  29. Shariah Business Opportunities • Strong economic performances • Conducive investment climates • Competitive tax treatment on Shariah transactions/ businesses • Very large market of Indonesian population - 240 million - with majority of moslems • A great number of potential development projects in line with expected economic growth of 6,7% in 2012 • A growing financing market with great demand of financial services, especially Shariah business → still in early stage 29 Source: Ministry of Finance

  30. TerimaKasih Thank You Ministry of Finance Republic of Indonesia Fiscal Policy Office

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