The Republic of Indonesia Recent Economic Developments

Transcription

1 The Republic of Indonesia Recent Economic Developments May 2014

2 About Investor Relations Unit (IRU) ABOUT THE REPUBLIC OF INDONESIA INVESTOR RELATIONS UNIT The Republic of Indonesia Investor Relations Unit (IRU) has been established as the join effort between the Coordinating Ministry of Economic Affairs, Ministry of Finance and Bank Indonesia in The main objective of IRU is to actively communicating Indonesian economic policy and address concerns of investors, especially financial market investors. IRU is expected to serve as a single point of contact for the financial market participants. As an important part of it communication measures IRU maintains a website under Bank Indonesia website which is being administrated by the International Department of Bank Indonesia. However, investor relations activities involve a coordinated efforts which are supported by all relevant government agencies, namely Bank Indonesia, the Ministry of Finance, the Coordinating Ministry for Economic Affairs, Investment Coordinating Board, Ministry of Trade, Ministry of Industry, State Ministry of State Owned Enterprises, State Asset Management Company and the Central Bureau of Statistics. IRU also hold an investor conference call on a quarterly basis, answers questions through , telephone and may arrange direct visit of banks/financial institutions to Bank Indonesia and other relevant government offices. Published by Investor Relations Unit Republic of Indonesia Contact: Bimo Epyanto (International Department - Bank Indonesia, Phone: ) Abdurohman (Fiscal Policy Office Ministry of Finance, Phone: ) Subhan Noor (Debt Management Office - Ministry of Finance, Phone: ) contactiru-dl@bi.go.id 1

3 Table of Content Executive Summary Improved International Perception and Rising Investment Preserved Macroeconomic Stability Prudent Fiscal Management Improved Government Debt Position 2

4 Executive Summary 3

5 Executive Summary As a result of stabilization policies by the Government and the Central Bank, economic adjustment continues with growth moderating to 5.21% (yoy) in the 1st quarter of Apart from the slowdown in export performance of non oil and gas, domestic demand are also moderated with limited investment growth although household consumptions still growing relatively strong. In line with moderating domestic demand, current account deficit improved slightly. while foreign capital inflow increase as a result of positive sentiment on Indonesia s economic fundamentals. Indonesia s overall balance of payments (BOP) in Q1/2014 recorded a surplus of US$2.1 billion. In line with the positive perception from investors, investment realization (Domestic Direct Investment (DDI) and Foreign Direct Investment (FDI)) in Q of Rp trillion reached the highest record. The rate of inflation continued to follow a downward trend, thus supporting the successful achievement of the inflation target in 2014, more specifically 4.5±1%, and reinforcing controlled economic rebalancing. The ongoing economic rebalancing process are not compromising financial system stability. Banking system remained resilient with sufficient capital and well-mitigated risks. Financial market performed well in Q as evidenced by gains in the IDX composite index and lower yield on tradeable government securities (SBN). On 8 May 2014, BI decided to hold the BI Rate at 7.50%, as well as the interest rates on the lending facility and the deposit facility at 7.50% and 5.75%, respectively. On the fiscal front, Indonesia continues to perform prudent fiscal management in 2014 with strong commitment to fiscal consolidation, aiming on continue declining in debt-to-gdp ratio, diversifying government debt profile, and reducing funding reliance on international capital market budget deficit realization is maintained at a safe level of 2.3% of GDP. 4

6 Executive Summary GDP Growth Inflation Balance of Payment Foreign Exchange Reserves 5

7 Executive Summary Central Government Debt to GDP Ratio (% of GDP) Debt Composition 50% 120% 40% 30% 39.0% 35.1% 33.0% 28.3% 26.2% 24.4% 24.0% 26.1% 100% 80% 60% 46,8% 46,9% 52,1% 47,4% 46,3% 45,1% 44,5% 44,2% 20% 10% 40% 20% 53,2% 53,1% 47,9% 52,6% 53,7% 54,9% 55,5% 55,8% 0% * 0% Apr-14 Domestic Debt Foreign Debt *: Preliminary Realization Table of Debt to GDP Ratio End of Year * GDP 3,339, ,957, ,954, ,613, ,422, ,427, ,241, ,084,000.0 Debt Outstanding (billion IDR) 1,302, ,389, ,636, ,590, ,681, ,808, ,977, ,371, Domestic Debt (Loan+Securiti 693, , , , , , ,097, ,263, Foreign Debt (Loan+Securities 609, , , , , , , ,107,540.2 Debt to GDP Ratio 39.0% 35.1% 33.0% 28.3% 26.2% 24.4% 24.0% 26.1% - Domestic Debt to GDP Ratio 20.8% 18.6% 15.8% 14.9% 14.1% 13.4% 13.3% 13.9% - Foreign Debt to GDP Ratio 18.2% 16.5% 17.2% 13.4% 12.1% 11.0% 10.7% 12.2% Source: Ministry of Finance 6

8 2014 Policy Summary Government coordinates policy tools to stabilize growth with macroeconomic management Revenue and tax policy Enlarging taxbase by focusing on mining, plantation, property and trade sector Improving tax administration system to increase tax compliance. Improving tax regulation in order to give certainty, fairness and reasonable treatment. Extensification of high-income and middle individual taxpayers; Optimization of data from the national tax census; Strengthening law enforcement for tax evasion. Monetary policy Preemptive and Bold increase of BI Policy Rate by 175 bps to 7,50% since June 2013 Exchange rate flexibility to facilitate external adjustments Financial market deepening and capital flows management Macroprudential and supervisory actions, eg LTV to property and automotive sectors Policy coordination with the government and financial stability forum Central bank cooperations, including second line of defences. 7 Expenditure policy Stimulating the economy through an increase in capital expenditure for infrastructure to improve competitiveness & production capacity. Improve government spending quality through efficiency measures as well as the strengthening of expenditure allocation of productive expenditure. Support the implementation of effective and efficient government, the 2014 election and the National Social Security System. Support the implementation of development programs to achieve the goals of economic growth, poverty reduction and the reduction of unemployment and increase the capacity of mitigation and adaptation to climate change and disaster. Financial management strengthening within the framework of fiscal decentralization to strengthen the financial capacity and reduce fiscal disparities among regions/ local governments. Financing and debt management policy Daily monitoring of market and yield movements Improving coordination amongst policy makers to stabilize the broader financial system Prioritize funding from domestic market and financial institutions Focus on financial inclusiveness of government securities access to wider retail investors Active government bonds portfolio management Deepening cross currency swap arrangements with regional Central Banks to implement foreign exchange market intervention

9 Improved International Perception and Rising Investment 8

10 Improving International Perception: Acknowledged by Rating Agencies Resilient economy, which impressively navigates through the global crisis and continued confidence in economic outlook, the Republic continued to receive good reviews. Fitch Ratings (November 15, 2013): affirmed Indonesia's sovereign credit rating at BBB- level with stable outlook. The key factors supporting the decision of affirming Indonesia s sovereign credit rating are strong and sustainable economic growth, adequate policies for managing the Indonesian economy amid the global economic downturn, prudent fiscal management with public sector debt at safe levels and a banking sector underpinned by strong capital resources. Rating and Investment Information, Inc (October 11, 2013): affirmedsovereign Credit Rating of the Republic of Indonesia at BBB-/stable outlook. R&I stated that the key factors behind their decision are as follows: (1) Indonesia s capacity to achieve sustainable economic growth in the long term; (2) conservative fiscal management; (3) a sound banking sector; and (4) a low level of government debt. Japan Credit Rating Agency, Ltd (July 22, 2013): affirmed Indonesia s foreign currency long-term senior debt at BBB- and local currency long term senior debt BBB with stable outlook. JCR stated that key factors supporting the decision of affirming the sovereign credit rating of Indonesia (1) the country s sustainable economic growth outlook underpinned by solid domestic demand, (2) low level of public debt burden brought by prudent fiscal management, (3) resilience to external shocks. S&P (April 28, 2014): affirmed Indonesia s sovereign credit rating, at BB+ level for long-term and B level for short-term and revised its outlook to stable from positive. S&P stated that stable outlook on Indonesia is reflecting the moderately weak institution, low GDP per capita, and external vulnerability balanced against favorable fiscal and debt metrics and the country's moderately strong growth prospects. Moody s Investors Service (January 18, 2012): upgraded Republic of Indonesia s foreign and local-currency bond ratings to Baa3 with stable outlook. Moody's stated the key factors supporting this action were (1) Moody s anticipation that government financial metrics will remain in line with Baa peers (2) The demonstrated resilience of Indonesia s economic growth to large external shocks (3) The presence of policy buffers and tools that address financial vulnerabilities and (4) A healthier banking system capable of withstanding stress. 9

11 Mar-99 Dec-99 Sep-00 Jun-01 Mar-02 Dec-02 Aug-03 May-04 Feb-05 Nov-05 Aug-06 May-07 Jan-08 Oct-08 Jul-09 Apr-10 Jan-11 Oct-11 Jul-12 Mar-13 Dec-13 Fitch Mar-99 Dec-99 Sep-00 Jun-01 Mar-02 Dec-02 Aug-03 May-04 Feb-05 Nov-05 Aug-06 May-07 Jan-08 Oct-08 Jul-09 Apr-10 Jan-11 Oct-11 Jul-12 Mar-13 Dec-13 S&P Mar-99 Dec-99 Sep-00 Jun-01 Mar-02 Dec-02 Aug-03 May-04 Feb-05 Nov-05 Aug-06 May-07 Jan-08 Oct-08 Jul-09 Apr-10 Jan-11 Oct-11 Jul-12 Mar-13 Dec-13 Moody s Sovereign Rating History Baa3 Ba1 Ba2 Ba3 B1 B2 B3 CCC+ CCC Moody's Investment grade Jan 2012 (affirmed Dec 2013) Baa3 / Stable Indonesia's rating is based on the country's resilient growth, low debt burden, favorable maturity profile, and high debt affordability. Indonesia has a demonstrated resilience to large external shocks [with] sustainably high trend growth over the medium term. Prudent fiscal management has contained budget deficits and steadily reduced the government's debt burden over the past decade. BBB- BB+ BB BB- S&P Investment grade 28 April 2014 BB+ / Stable B+ B B- CCC+ CCC The sovereign credit ratings reflect the economy's low per capita income, a relatively weak policy environment, and rising external leverage from a moderate level. These rating constraints are weighed against the country's well-entrenched cautious fiscal management and resultant modest general government debt and interest burden, which make for a favorable debt profile. BBB- BB+ Fitch Investment grade BBB- / Stable BB BB- B+ B B- Caa1 Caa2 Positive Watch Positive Outlook Negative Outlook Stable Outlook Dec 2011 (affirmed Dec 2013) This reflects policy adaptability to market pressures that have prevailed since May, as well as relatively strong public finances. [ ] Indonesia's sovereign credit profits from stronger and less volatile growth than its BBB peers. Real GDP growth remains substantially higher than the BBB median (3.3% for 2013), even with lower growth of 5.0%-5.5% in the context of stabilisation of external finances. Source: Moody s, S&P, Fitch 1

12 Positive Perceptions from International Institutions JBIC 2013 Survey Report on Overseas Business Operations of Japanese Manufacturing Companies, November 2013 Put Indonesia at the 1 st rank for the most promising investment destination for the next three years. In 2013, Japan already dominates foreign direct investment in Indonesia. Japanese companies investing enthusiasm in Indonesia is mainly due to Indonesia's rapidly expanding middle class combined with large population (over 240 million people), thus forming a huge consumption class. High consumption rate is believed to be a catalyst to spur further economic development in Southeast Asia's largest economy. World Economic Forum: Global Competitiveness Report Indonesia is considered as one of the most dynamic and rapidly improving economies in terms of competitiveness Since edition of GCI, Indonesia has been progressed 19 places, positioned at 38th on edition - the biggest progression among G20. Infrastructure pillar is the most improved since infrastructure improvement spending have started to bear fruit. The positive development will contribute to sustaining Indonesia s impressive growth momentum - GDP grew by 5.2 percent annually over the past decade. World Bank Indonesia Economic Quarterly, March 2014 Indonesia is blessed with abundant labor. Between 2013 and 2020, the population of working age will increase by 14.8 million, reaching 189 million from the current 174 million. Today, 50 percent of the population is under the age of 30. This increasingly educated and IT-savvy youth is an asset that can be used to boost overall productivity and economic growth. Urbanization is increasing at an annual pace of about 4 percent, making Indonesia one of the most rapidly urbanizing countries in the world. China s rapidly rising wages present Indonesia with a potential second chance in regaining a comparative advantage in labor-intensive export sectors. McKinsey Report (The Archipelago Economy: Unleashing Indonesia s Potential), September 2012 Indonesia will be the 7th largest economy in the world in 2030, and additional 90 million Indonesians could join the global consuming class (individuals with net income of more than US$ 3,600 per annum in PPP). Over the past decade, compared with any advanced countries in OECD and BRIC plus South Africa, Indonesia has had the lowest volatility in economic growth, fallen debt to GDP ratio (5th lowest), and third strongest economic growth after China and India. To achieve growth target, Indonesia needs to push labor productivity, address social gap issue and manage increasing demand. 11

13 Preserved Macroeconomic Stability 12

14 Robust and Stable Economy Continues to Chart Balanced Growth Economic growth realization in Q is lower than previous quarter and BI s projection, mainly due to the less favorable performance of the external sector where exports experienced a significant contraction. Economic slowdown occurred in almost all sectors, with mining sector experienced a contraction. Negative growth in mining sector was caused by declining production in both oil and non-oil subsector. Slowdown in mining sector gave impact to other related sectors, especially the transportation equipment, machinery and equipment subsector. Economic Growth - Demand Side S e c t o r I II III IV I Private Consumption Government Consumption Gross Fixed Capital Formation Exports of Goods and Services (-0.8) Imports of Goods and Services (-0.6) 1.2 (-0.7) GDP Economic Growth - By Sector S e c t o r I II III IV I Agriculture Mining and Quarrying (-0.6) (-0.4) Manufacturing Electricity, Gas, and Water Supply Construction Trade, Hotels, and Restaurant Transportation and Communication Financial, Real Estate, and Business Services GDP

15 Conducive Environment Underpinning Growth Fundamentals Equipped with abundant natural resources and a young and technically trained workforce, Indonesia s vast economic potential is primed for takeoff The largest economy in South- East Asia According to McKinsey, Indonesia is projected to be the 7 th largest economy in the world by % average real GDP growth over the period Exports are 23.7% of GDP for the year of 2013, one of the lowest in Asia, creating low volatility in GDP Foreign direct investment grew at an average rate of 21.1% from (US$tn) Nominal GDP Strong Growth to Continue E A large, culturally diverse, young and vibrant workforce 4 th most populous country in the world 66.6% of the population is of working age (1) and 68.5% were 39 years and younger as of 2012 Working population projected to grow at a 0.7% compared to 0.5% CAGR for total population from A high literacy rate of more than 90% Male Female Large consumer base with fast growing spending power ~7mm people a year are expected to join the middle class Consumer expenditure has grown at a 13.8% CAGR from and is expected to continue at a 11.5% rate from Disposable incomes are projected to grow at 12.1% from According to McKinsey, mm people will join the consuming class (2) by 2030 ( 000) Middle Class Households 60,740 39,340 21, E Source: KPMG, Ernst and Young, Jefferies Economist Intelligence Unit, Ministry of Finance, BPS and CIA World Factbook (1) Working age defined as being between years old (2) Consuming class is individuals with annual net income of more than $3,500 in PPP at 2005 exchange rate 1

16 Globally Competitive and a Top Investment Destination Indonesia s stage of development is categorized as efficiency-driven with a strong and well balanced performance across all 12 pillars of competitiveness Indonesia is in the Top 40 of the Global Competitiveness Index ( GCI ) Rank (1) Country 2008 (2) 2013 (2) Institutions Infrastructure Macro-economic Environtment Health and primary education Higher education and training Goods market efficiency Labor market efficiency Financial market development Technological readiness Market size Business sophistication Score Score Score Score Score Score Score Score Score Score Score Score Innovation 1 Spain Thailand Indonesia Turkey Italy South Africa Mexico Brazil Philippines Source: Global Competitiveness Index , WEF (1) Countries with sovereign ratings in the Eaa1-Baa1 category and population larger than 40 million (2) Rank among 148 countries JBIC: Indonesia is the #1 Promising Country/Region for Business Development Over the Medium Term (Next 3 Years) Rank Country / Region No. of Companies (1) (%) Percentage Share 3 1 Indonesia India Thailand China Vietnam Brazil Mexico Myanmar Russia USA Source: Japan Bank for International Cooperation ( JBIC ) FY2013 Survey Report on Overseas Business Operations of Japanese Manufacturing Companies (1) Total number of companies that responded was 488 The Economist: Indonesia is the #3 Investment Destination in Asia in 2013 China India Indonesia Malaysia Thailand Vietnam Increase their level of investment Reduce their investment Source: The Economist Asia Economic Outlook Survey Still in the market, but will not invest more Have no plans to invest 15

17 Trillion Rp Strong Investment Underpinned by Competitiveness and Stability The value of investment in Q is direct investment realization done during three months reporting period (January March 2014) which is based on investment realization report by the DDI and FDI companies (Oil and Gas, Banking, Non- Bank Financial Institution, Insurance, Leasing and SMEs are excluded) The investment value is in Rp Trillion (T) with the exchange rate of US$1 = Rp10,500,-based on State Budget 2014 Investment Realization in Q1-2014: Rp106.6T, an increase around 14.6% from Q (Rp93.0T) Investment Realization Progress Q QI-2013 QIV-2013 QI Target* Achievement** DDI % FDI Source: BKPM % TOTAL 93.0 Source: BKPM % *)Revised Investment Target 2014 Strategic Planning BKPM **) Against target 2014

18 Majority of FDI in Industrial Sectors Foreign Direct Investment realization based on sector (five leading sectors) were: Mining (US$ 1.7 billion); Food Industry (US$ 0.8 billion); Transport Equipment and Other Transport Industry (US$ 0.6 billion); Food Crops & Plantation (US$ 0.6 billion); and Paper and Printing Industry (US$ 0.5 billion). All industrial sectors be combined, contribute US$3.5 billion or 50,9% of total foreign direct investment realization. FDI By Sector (Million USD)

19 Java is Still the Main Destination of Investment Based on Economic Corridor in Q1-2014, the highest realization of DDI and FDI is located in Java Corridor. The next highest realization of DDI is in Sumatera, Kalimantan, Sulawesi, Maluku and Papua, also Bali and Nusa Tenggara Corridor. While the next highest realization of FDI is Kalimantan, Sumatera, Maluku and Papua, Bali and Nusa Tenggara, Sulawesi Corridor. DDI and FDI by Economic Corridor Q % % (Million USD) % % 3,500 3,000 2,500 2,000 1,500 1, ,000 Realized Foreign Direct Investment (Million USD) 3, , , Sumatera Java Kalimantan Sulawesi Bali & Nusa Maluku and Tenggara Papua Source: BKPM Realized Domestic Direct Investment (Million USD) % % 2,500 2,000 1, ,000 Sumatera Bali & Nusa Tenggara Sulawesi Java Kalimantan Maluku and Papua Source: BKPM Sumatera Java Kalimantan Sulawesi Bali & Nusa Tenggara Maluku and Papua Source: BKPM

20 Downward Trend on Inflation Continued Inflationary pressures continued to dissipate in April 2014, with a deflation of 0.02% (mtm) or 7.25% (yoy), a decline from previous month which was at 0.08% (mtm) or 7.32% (yoy). The persistent downward trend was a result of sharp correction in food prices, especially rice and miscellaneous horticultural commodities in line with abundant domestic supply linked to the harvest season. Core inflation remained under control in line with moderating domestic demand, falling external price and well anchored inflation expectations Retailer s Inflation Expectation Disaggregation of Inflation CPI Inflation (rhs) Retailer s Expectation 3 months ahead Retailer s Expectation 6 months ahead Source: BPS, Bank Indonesia Source: Consensus Forecast

21 Balance of Payments Recorded a Surplus in Q Trend of improvement in the current account to a more healthy level continued in Q1/2014. The current account deficit fell from US$4.3 billion (2.12% of GDP) in the Q4/2013 to US$4.2 billion (2.06% of GDP) in Q1/ This improvement came from decrease in imports of goods and narrowing deficits in services and income accounts. The improvement in Indonesia s economic fundamentals bolstered foreign investors interest to invest in Indonesia so that the capital and financial account charted US$7.8 billion surplus. Total foreign inflows increased from US$10.5 billion in Q4/2013 to US$12.3 billion in Q1/2014, primarily in portfolio instruments. Improvement in the current account and the capital and financial account surplus led the Indonesia s overall balance of payments (BOP) in Q1/2014 recorded a surplus of US$2.1 billion. Surplus in Q1/2014 BOP, in turn pushing up international reserves from US$99.4 billion in Q4/2013 to US$102.6 billion in Q1/2014, or equivalent to 5.7 months of imports and government foreign debt payments. Source: Bank Indonesia 20

22 Current Account Lower Trade Balance Surplus in Q Trade Balance: Non-Oil & Gas Non-oil & gas imports still contracted (-5.5% yoy) following the moderation in domestic demand, as reflected in the decrease in imports of raw materials and capital goods. Although non-oil & gas imports has decreased, the nonoil & gas trade surplus in Q1/2014 (US$6,2 billion) was lower than Q4/2013 (US$6,9 billion) as non-oil & gas export growth in nominal term slipped back into negative territory (-0.2% yoy) due to weakening global demand, especially China, decline in global commodity prices, and temporary impact of ban on the exports of raw mineral. Trade Balance: Non-Oil & Gas The oil and gas trade deficit widened in Q1/2014 to US$2.6 billion from US$2.1 billion as oil and gas exports charted negative growth in line with decline in oil production even though oil imports also contracted following the pattern of lower fuel consumption at the beginning of the year. 21

23 Current Account - Modest Deficit in Services and Income Account The more modest deficit in services account at US$2,2 billion was explained by reduced payments on transportation services, in keeping with the drop in imports of goods, and reduced payments on travel services, along with the lower number of the Indonesian traveling abroad in the aftermath of the hajj season and year-end holiday period. In the same period, the income account deficit also narrowed to US$6.5 billion, mainly due to reduced foreign debt interest payments as scheduled. Meanwhile, surplus in current transfers was relatively unchange mainly supported by incoming remittances of Indonesian workers overseas. 22 Source: Bank Indonesia

24 Capital & Financial Account Financial Account: Assets On the assets side, Indonesia s financial account charted net outflow of US$4.4 billion in Q1/2014, higher than US$1.7 billion net outflow in the previous quarter. This development was driven mainly by the placements of private savings abroad in keeping with strong inflows in portfolio investment. Financial Account Liabilities: Foreign Direct Investment (FDI) Foreign direct investment (FDI) inflows in Q1/2014 were still robust in line with increased in domestic investment. FDI was recorded at US$4.5 billion, relatively at the same level with the previous quarter, but higher than Q1/2013. Manufacturing, agriculture, and trading sectors were the main contributing factors in FDI surplus for Q1/2014. Meanwhile, ASEAN, Japan, and South Korea were the main home countries for the FDI inflows. 23

25 Capital & Financial Account Foreign portfolio investment in Q1/2014 charted a US$8.5 billion surplus, significantly higher than US$1.6 billion surplus in the preceding quarter. The increased inflows of foreign portfolio investments, in addition to the impact of increase in net foreign buying in rupiah denominated portfolio instruments, was also supported by the Government step in issuing foreign currency bonds as a source of fiscal financing. Financial Account Liabilities: Foreign Portfolio Investment Financial Account Liabilities: Foreign Other Investment Foreign other investment in reporting periode slipped into US$0,8 billion deficit, after registering a US$4,4 billion surplus in the previous period. The deficit was mainly explained by net outflows of public and private sector foreign loans. 24

26 Exchange Rate In Line With Fundamentals After a period of appreciation in Q due to improvement in economic fundamental and BOP performance, rupiah experienced slight depreciation in April Rupiah Exchange Rate In April 2014, Rupiah was slightly corrected by 1.74% to Rp11,562 per USD from Rp11,360 per USD in March Rupiah s depreciation was influenced by concerns from Federal Reserve s hawkish stance, slowdown in China, and increasing geopolitical tension between Ukraine-Russia. However, rupiah movements was still in line with currency movements in other countries, such as China and India. Stable exchange rate, accompanied by strong inflows, reflected in the increasing trend of FX reserves. (US$105.6 Billion or equal to 5.9 of imports and official debt repayment). Apr./Depr. of Regional Currency International Reserves

27 Monetary Policy Stance In the Board of Governors' Meeting convened on May 8th, 2014, Bank Indonesia decided to maintain BI rate at 7.50%, and holding the Lending Facility rate and Deposit Facility rate at 7.50% and 5.75%, respectively. The decision is consistent with ongoing efforts to steer the inflation rate towards its target corridor of 4.5±1% in 2014 and 4.0±1% in 2015, as well as reducing the current account deficit to a more sustainable level. Recent developments indicate that the rate of inflation is under control and the balance of trade has returned to record a surplus. Looking ahead, Bank Indonesia will remain vigilant on a variety of risks, and implement anticipatory measures to ensure the preservation of economic stability and stimulate the economy in a more balanced direction, thereby buoying current account performance. Bank Indonesia will strengthen the monetary and macroprudential policy mix as well as coordination with the Government to control the rate of inflation and reduce the current account deficit, including policy to bolster the structure of the economy and external debt management. BI Rate (%) Source: Bank Indonesia 26

28 Financial System Stability Well-Maintained Banking industry resilience remains solid with credit risk, liquidity risk and market risk well anticipated, underpinned by support from solid capital structure, CAR above the minimum level of 8% (19.8% as of February 2014) and gross NPLs managed at comfortably safe level below 5% (2.0% as of February 2014). Credit growth eased from 21.4% (yoy) in Q to 19.1% in Q in line with moderating domestic demand. Meanwhile, capital market performed well in April 2014, as corroborated by gains on the IDX Composite Index (JCI: 4,840) and lower yields of tradable government securities (SBN), in line with investor optimism on domestic economy. Steady Loan Growth CAR Comfortably High, Low NPL and Favorable LDR Stock Price Index Rebound Declining Government Bonds Yield 27

29 Prudent Fiscal Management 28

30 Fiscal Policy Measures Additional budget for social protection and infrastructure: Conditional Cash Transfer ( PKH ): IDR0.7tn Unconditional Cash Transfer ( BLSM ): IDR9.3tn Poor Students Aid ( BSM ): IDR7.5tn Additional allocation of rice for the poor ( Raskin ): IDR4.3tn Basic infrastructure development: IDR7.2tn Implementing higher deficit for expansionary reason. Deficit is revised from 1.7% to 2.4% Support of Small and Medium Enterprise: Simplification of Business License application process Easier access to electricity Improved access to loans Support for the simplification of regulations regarding Bankruptcy Settlement, Recording of Land & Building Rights and Recording of Land & Building Ownership 1. Additional income tax for selected goods. The criteria includes: Goods not used for domestic industries Household consumption goods Non-inflationary goods. 2. Additional relaxation of goods imported for export activity The package is to be fully implemented by January Revised Budget October Policy Package December Policy Package June July August September October November December Subsidized Fuel Price Adjustment August Policy Package 2014 Budget Subsidized fuel prices increased by 44.4% per liter for gasoline and 22.2% per liter for diesel A. Policy to improve current account and exchange rate performance: Increase mandatory level of biodiesel in diesel oil to reduce oil imports Additional luxury tax on luxury cars and branded products Increase mineral exports by relaxing procedures related to quotas and Clean & Clear B. Provision of incentives to maintain economic growth and people s purchasing power Deduction / deferring of income tax for specific industries Improve tax holidays & tax allowance provisions C. Policy to curb inflation Improve the meat and horticulture trade system to satisfy demand D. Policy to promote investment Streamline permit process and improve the National Single Window for Investment ( NSWi ) service Accelerate the revision of the Presidential Decree pertaining to the Negative Investment List ( DNI ) De-bottleneck problems in strategic investment projects Macroeconomic Assumption 2013 Revised Budget 2014 Budget Growth (%) Inflation (%) Exchange Rate (IDR / US$) 9,600 10,500 Interest Rate (SPN 3 months) (%) ICP (US$ / barrel) Oil and gas Lifting a. Oil Lifting (MBCD) b. Gas Lifting (MBOEPD) 1,240 1, Key Government Policies Government capital expenditure to support economic growth Support of infrastructure development guarantees Government incentives with respect to investments Price stabilization policies to maintain purchasing power Improvements to the Negative Investment List (DNI) Increase productivity through incentives for R&D activity and training as well as Social Security and Labor Policy

31 Indonesia s Fiscal Policy in Mitigating Global Crisis Pre-emptive measures Implementing Crisis Management Protocol Implementing Bond Stabilization Framework Enhancing coordination between government institutions and continuous dialogue with market participants Specific policies in place to address crisis enacted in the 2013 budget law Swap facility arrangements based on international cooperation Chiang Mai Initiative Multilateralization Extremely prudent with fiscal deficits and debt ratios among lowest in the world Addresses growth and social needs through capital spending and subsidies while lowering debt to GDP Aims for quality spending with capital expenditures increasing Crisis mitigation measures in place 1 Fiscal Buffers to prevent and mitigate crisis Deferred Drawdown Option facility 2 Specific articles in the 2013 State Budget Law that provide flexibility for Government to take quick mitigation action if necessary, with Parliament approval that has to be given within 24 hours 30

32 2014 Budget (APBN) Items Budget Comparison IDR tn 2013 Realization 2014 Budget US$bn % of GDP IDR tn US$bn % of GDP A. State revenue and grants 1, % 1, % I. Domestic revenue 1, % 1, % 1.Tax revenue 1, % 1, % 2.Non tax revenue % % II. Grants % % B. State expenditure 1, % 1, % I. Central gov. expenditure 1, % 1, % 1. Personnel and Goods & Services % % 2. Capital % % 3. Interest payments % % 4. Subsidies % % 5. Grants % % 6. Social expenditure % % 7. Other expenditure % % II. Transfer to region % % Primary balance (96.8) (9.3) (1.1%) (54.1) (5.2) (0.5%) Overall balance (A - B) (209.5) (20.0) (2.3%) (175.4) (16.7) (1.7%) Financing % % I. Domestic financing % % II. Foreign financing (13.3) (1.3) (0.1%) (20.9) (2.0) (0.2%) 2014 Macroeconomic Assumptions State revenue and grants forecast at 16.1% of GDP State expenditure forecast at 17.8% of GDP Effort to allocate more funds away from subsidies, with state expenditure on subsidies at 3.2% of GDP below previous budgets Savings from subsidies generated by the recent fuel price hike initiative Indicators Key Points 2013 Revised Realization as Budget of Dec 31, (APBN-P) State Budget (APBN) Economic growth (%) Exchange rate (IDR/USD) 9,600 10,452 10,500 Inflation (%) SBI/SPN 3 months (%) ICP (USD/barrel) Oil lifting (thousands barrel/day) Gas lifting (thousands barrel oil equivalent/day) 1,240 1,213 1,240 Will decrease both state expenditure on subsidies and the percentage allocation of central government expenditure to subsidies Source: Ministry of Finance Note: IDR/US exchange rate of 9,600 which is the rate used under the 2013 Revised Budget. USD values are for convenience only 31

33 (1) 46.3% 46.5% 39.0% 35.9% 35.1% 32.2% 33.0% 30.1% 28.3% 31.8% 26.1% 28.3% 24.3% 26.4% 24.0% 28.7% 26.1% 30.2% 60.5% 55.8% 54.9% 67.8% 80.2% 95.1% Budget Favorable Current Macro Conditions is Supported by Prudent Fiscal Management Consistent fiscal conservatism is a hallmark of Indonesia s macroeconomic management A combination of moderate leverage and consistent debt reduction provides more fiscal headroom to respond to economic shocks Indonesia has Maintained a Sustainable Fiscal Deficit... (% GDP) Avg: (1.3%) (1.3%) (0.1%) (1.6%) (0.7%) (1.1%) (1.9%) (2.3%) (1.7%) And a Consistent Path of Govt. Debt Reduction 100% 90% 80% 70% As a result, Indonesia has been able to maintain a lower fiscal deficit versus similar and higher rated peers Source: Ministry of Finance 2012 Fiscal Balance (% of GDP) 60% 50% 40% Between , Indonesia budget deficit averaged at 1.3%. 30% 20% 10% 0% Govt Debt to GDP External Debt to GDP Source: Ministry of Finance and S&P Sovereign Risk Indicators as of July 2013 Source: Ministry of Finance 3

34 Improved Government Debt Position 33

35 Secondary Market Performance of Central Government Bonds Yield of Benchmark Series [In Percentage] 22,00 20,00 18,00 16,00 Global Financial Crisis 5Y 15Y 10Y 20Y As of May 14, ,00 12,00 10,00 8,00 6,00 4,00 Eurozone sovereign debt crisis 2,00 Des'08 Okt'08 Agust'08 Jun'08 Apr'08 Des'09 Okt'09 Agust'09 Jun'09 Apr'09 Feb'09 Des'10 Okt'10 Agust'10 Jun'10 Apr'10 Feb'10 Des'12 Okt'12 Agust'12 Jun'12 Apr'12 Feb'12 Des'11 Okt'11 Agust'11 Jun'11 Apr'11 Feb'11 Des'13 Okt'13 Agust'13 Jun'13 Apr'13 Feb'13 Apr'14 Feb'14

36 Government Securities Realization (Million IDR) Budget 2014 % Realization Realization (ao May 14, 2014) to Budget 2014 Government Securities Net ,81% Government Securities Maturing in ,79% -Buyback ,37% Issuance Need 2014* ,45% Government Debt Securities (GDS) Domestic GDS Coupon GDS (Auction, Private Placement) Conventional T-Bills (Auction, Private Placement) SPNNT Retail Bonds - International Bonds Government Islamic Debt Securities Domestic Government Islamic Debt Securities Global Sukuk - *Adjusted by changes in Cash Management & Debt Switch

37 Outstanding of Total Central Government Debt [USD billion] Loan Government Securities ,64 71,29 70,51 82,34 85,26 82,78 104,20 118,39 130,97 140,75 136,27 153, ,91 68,59 63,09 62,02 62,25 66,69 65,02 68,65 68,51 63,76 58,28 58, March 2014 [in percentage] Year March 2014 Loan 47% 49% 47% 43% 42% 45% 38% 37% 37% 31% 30% 28% Government Securities 53% 51% 53% 57% 58% 55% 62% 63% 63% 69% 70% 72% Source: Ministry of Finance

38 Total Debt Maturity Profile as of April 30, 2014 Maturity Profile of Central Government by Instruments (in trillion IDR) Gov't Securities Loan Maturity Profile of Central Government by Currencies (in trillion IDR) Foreign Domestic 56% 44% Foreign Domestik

39 Central Government Debt Securities Issuance Plan 2014 in billion Rp Budget % to GDP A. Total Revenue ,8 16,07% - 0,00% B. Total Expenditure ,3 17,76% C. Primary Balance (54.069,0) -0,52% D. Deficit ( ,5) -1,69% E. Financing ,5 1,69% I. Non Debt Financing (9.773,7) -0,09% II. Debt Financing ,2 1,78% 1. Government Securities (Net) ,8 1,98% 2. Foreign Loan (Net) (20.903,6) -0,20% + Disbursement ,7 0,38% - Program Loan 3.900,0 0,04% - Project Loan ,7 0,34% + Subsidiary Loan Agreement (SLA) (1.226,3) -0,01% + Repayment (58.810,0) -0,57% 3. Domestic Loan (Net) 963,0 0,01% Assumptions : a. GDP (trillion IDR) (Y.o.Y) ,3 b. Growth (%) 6,0 c. Inflation (%) y-o-y 5,5 d. 3-month-SPN (%) 5,5 e. IDR/USD (average) Gov t Debt Operation Policy Combination Domestic market issuance will be prioritized Issuance in benchmark tenor, Benchmark Series for 2014: FR 69 5 Y FR Y FR Y FR Y Issuance in global market Maximum non-idr govt securities issuance approximately 18%-20% from total gov t debt securities issuance 1. Citibank N.A 2. Deutsche Bank AG 3. HSBC Primary Dealers 4. PT. Bank Central Asia, Tbk 5. PT. Bank Danamon Indonesia, Tbk. 6. PT. Bank Internasional Indonesia, Tbk 7. PT. Bank Mandiri (Persero), Tbk 8. PT. Bank Negara Indonesia (Persero), Tbk 9. PT. Bank OCBC NISP, Tbk 10. PT. Bank Panin, Tbk 11. PT. Bank Rakyat Indonesia, Tbk 12. PT. Bank Permata, Tbk 13. PT. Bank CIMB Niaga, Tbk 14. Standard Chartered Bank 15. JPMorgan Chase Bank NA. 16. PT. Bahana Securities 17. PT. Danareksa Sekuritas 18. PT. Mandiri Sekuritas 19. PT. Trimegah Securities, Tbk Source: Ministry of Finance

40 Holders of Tradable Central Government Securities Continued Increasing proportion of foreign ownership of Indonesian Government securities. Holders of Tradable Domestic Government Securities Foreign Ownership of Gov t Domestic Debt Securities 30,53% 30,80% 32,98% 32,54% 34,84% 100% 80% 46% 38% 45% 44% 41% 40% 40% 32,98% 33,64% 32,54% 30,53% 30,80% 34,59% 34,84% 40,00% 35,59% 32,58% 30,49% 33,76% 34,66% 33,88% 36,63% 36,53% 33,70% 30,50% Dec-10 Dec-11 Dec-12 Dec May-14 Foreign Holders Domestic Non-Banks Domestic Banks 60% 40% 20% 0% 25% 21% 28% 32% 38% 34% 34% 17% 18% 8% 16% 13% 11% 15% 16% 5% 10% 12% 3% 5% 5% 4% 4% 8% 5% 6% 7% 7% Dec-10 Dec-11 Dec-12 Dec-13 Mar-14 Apr May-14 >10 >5-10 >2-5 > % Foreign Ownership to Total (RHS) 20,00% 0,00% Source: Ministry of Finance

41 Profile of Central Government Debt Securities GOVERNMENT DEBT SECURITIES (GDS) Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Apr May Domestic Tradable GDS IDR IDR IDR IDR IDR IDR IDR a. Zero Coupon IDR IDR IDR IDR IDR IDR IDR Government Treasury Bills IDR IDR IDR IDR IDR IDR IDR Zero Coupon Bond IDR IDR IDR IDR IDR - IDR - IDR - b. Government Domestic Bonds IDR IDR IDR IDR IDR IDR IDR Fixed Rate *) +) IDR IDR IDR IDR IDR IDR IDR Variable Rate *) IDR IDR IDR IDR IDR IDR IDR Promissory Notes to Bank Indonesia **) ***) IDR IDR IDR IDR IDR IDR IDR SPNNT IDR - IDR - 4. Total GDS (1+2+3) IDR IDR IDR IDR IDR IDR IDR Total Government International Bonds *) USD USD USD USD USD USD USD TOTAL GOV'T DEBT SECURITIES (3+(4*Exchange Rate Assumption)) IDR IDR IDR IDR IDR IDR IDR GOVERNMENT ISLAMIC DEBT SECURITIES (GIDS) a. Domestic Tradable GIDS IDR IDR IDR IDR IDR IDR IDR a. Fixed Rate *)++) IDR IDR IDR IDR IDR IDR IDR b. Zero Coupon IDR IDR 195 IDR IDR IDR b. Domestic Non Tradable GIDS IDR IDR IDR IDR IDR IDR IDR c. Government International Islamic Bonds 1. Fixed Rate *) USD 650 USD 650 USD USD USD USD USD TOTAL GOV'T DEBT SECURITIES (6+(8*Exchange Rate Assumption)) IDR IDR IDR IDR IDR IDR IDR TOTAL GOVERNMENT SECURITIES IDR IDR IDR IDR IDR IDR IDR Notes: - Nominal in billion rupiah (domestic bonds), million USD & million JPY (international bonds) - *) Tradable - **) Non-Tradable - +) Including ORI (IDR Billion)) IDR IDR IDR IDR IDR IDR IDR ) Including Sukuk Ritel/SR (IDR Billion) IDR IDR IDR IDR IDR IDR IDR Exchange Rate Assumption (IDR/USD1) IDR IDR IDR IDR IDR IDR IDR Exchange Rate Assumption (IDR/JPY1) IDR 101,70 IDR 110,29 IDR 116,80 IDR 111,97 IDR 116,17 IDR 112,61 IDR 156,60 - Since October 2006, Government and Central Bank committed to replace interest payment of Promissory Notes to Bank Indonesia (SU-002 & SU-004) with new bond (SU-007) and omitted indexation of SU-002 & SU-004 Source: Ministry of Finance 40

42 Debt Switch & Cash Buyback Program Debt Switch Program [in billion IDR] Auction Date Auction Frequency Source Bonds Tenor Series Offer Received Offer Awarded series up to 21 series up to 21 series up to 31 series up to 28 series up to 28 series up to 27 series up to 20 series up to 13 series series Total Year Auctions Buyback Program Frequencies Direct Transactions Volume (IDR billion) GRAND TOTAL

43 Maturity Profile of Tradable Central Government Securities as of May 14, 2014 [IDR Trillion] 120,00 100,00 80,00 60,00 40,00 20, TOTAL 64,2 93,1 87,4 75,2 87,7 104, 74,1 64,0 97,5 83,2 98,4 27,5 19,6 45,0 50,2 43,7 25,6 27,1 42,8 47,8 36,6 18,3 4,11 33,7 38, ,5 37,8 24,8 30,9 SUKUK USD ,4 17, , SUKUK IDR 5,17 18,9 14,9 20,4 8,71-1,17-1, ,55-3, , ,11 10, ,58 - SUN JPY ,93 6,74-6, SUN USD - 11,4 10,3 17,6 21,8 22,9 22,9 28,7 22,9 28,7 22, ,3-17,2 22, ,8 17,2 22,9 SUN IDR 59,1 62,7 62,1 37,0 45,7 60,5 43,2 35,3 55,1 54,5 75,4 26,0 19,6 41,4 50,2 43,7 23,5 27,1 42,8 47,8 36, ,40 15, ,5 12,0-8,00 Source: Ministry of Finance

44 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar Apr May-14 Daily Transaction & Offshore Ownership Average Daily transaction Govt Bonds Net Buyer (Seller) Non Resident [Trillion IDR] Volume (billion rupiah) - LHS Frequency - RHS Source: Ministry of Finance April 14 March 14 Feb 14 Jan ,00 20,00 10,00 1,69 0,00 (1,49) (4,99) (10,00) (20,00) (30,00) (40,00) (29,29) Capital Inflows 8,06 13,11 (8,99) (2,27) 4,15 10,13 (0,08) (4,37) (1,41) Capital inflows over total foreign holders 7,83 9,35 19,52 2,68 0,68 8,44 (0,88) 17,97 4,22 2,81 (19,98) (1,76) 10,13 23,98 6,08 (0,37) 4,82 16,49 15,77 16,10 4,61 0,10 0,05 0,00 (0,05) (0,10) (0,15)

45 Ownership of IDR Tradable Central Government Securities (IDR Trillion) ` Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Apr May-14 Banks 254,36 43,72% 217,27 33,88% 265,03 36,63% 299,66 36,73% 335,43 33,70% 343,08 31,48% 334,08 30,50% Govt Institutions 22,50 3,87% 17,42 2,72% 7,84 1,08% 3,07 0,37% 44,44 4,47% 53,42 4,90% 61,56 5,62% Non-Banks 304,89 52,41% 406,53 63,40% 450,75 62,29% 517,53 63,09% 615,38 61,83% 693,28 63,62% 699,72 63,88% Mutual Funds 45,22 7,77% 51,16 7,98% 47,22 6,53% 43,19 5,27% 42,50 4,27% 44,82 4,11% 45,40 4,15% Insurance Company 72,58 12,48% 79,30 12,37% 93,09 12,86% 83,42 10,17% 129,55 13,02% 145,71 13,37% 148,24 13,53% Foreign Holders 108,00 18,56% 195,76 30,53% 222,86 30,80% 270,52 32,98% 323,83 32,54% 377,00 34,59% 381,61 34,84% Pension Fund 37,50 6,45% 36,75 5,73% 34,39 4,75% 56,46 6,88% 39,47 3,97% 39,07 3,59% 39,10 3,57% Securities Company 0,46 0,08% 0,13 0,02% 0,14 0,02% 0,30 0,04% 0,88 0,09% 0,91 0,08% 0,89 0,08% Individual 32,48 3,26% 33,93 3,11% 33,24 3,03% Others 41,12 7,07% 43,43 6,77% 53,05 7,33% 63,64 7,76% 46,68 4,69% 51,84 4,76% 51,23 4,68% Total 581,75 100% 641,21 100% 723,61 100% 820,27 100% 995,25 100% 1.089,78 100% 1.095,37 100% Notes: - Foreign Holders (offshore) are non-resident Private Banking, Fund/Asset Mgmt, Securities Co, Insurance, Pension Fund, etc - Others are Corporate, Foundations, etc. - Private Banks Recap and Non Recap Banks include foreign banks branches and subsidiaries Source: Ministry of Finance