The Republic of Indonesia Recent Economic Developments

Transcription

1 The Republic of Indonesia Recent Economic Developments January 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 The economy of Indonesia was forecast to expand by 5.7% in 2013, which is slower than that posted in the previous year at 6.2%. The ongoing downward economic growth trend is linked to stabilization policy issued by the Government and Bank Indonesia in order to bring economic growth towards a healthier and more balanced growth trajectory. In 2014, stronger economic growth is expected around the lower end of the % range. Domestic Direct Investment (DDI) and Foreign Direct Investment (FDI) still experienced robust growth in Q3-2013, reflecting positive perception from investors. The total investment realization as at Q increased 27.6% (yoy) to Rp trillion (USD 30.2 billion), consisted of Rp trillion (USD 21.2 billion) of Foreign Direct Investment (FDI) and Rp 94.1 trillion (USD 9.0 billion) of Domestic Direct Investment (DDI). The economic stabilization policies launched by Bank Indonesia and the Government have brought steady improvement in the current account. The current account deficit eased from the previous quarter s US$9.9 billion (4.4% of GDP) to US$8.4 billion (3.8% of GDP) in Q3/2013. Current account deficit in Q is estimated to improve supported by the trade surplus. International reserves at the end of December 2013 increased to US$99.4 billion, equivalent to 5.4 months of imports and government s external debt services, above the adequacy level of international standard. Consumer Price Index (CPI) in December 2013 reached 0.55% (mtm) or 8.38% (yoy) ), indicating the return of inflation to its normal path. The easing of inflationary pressures has led to a projected rate of inflation for 2014 to be within its target corridor of 4.5±1% and subsequently to 4.0±1% in On the fiscal front, Indonesia continues to perform prudent fiscal management in 2013 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 2.2% of GDP. Financial system stability was well maintained, buoyed by solid banking industry resilience as indicated by high capital adequacy ratio (CAR) at 18.6%, well above the minimum level of 8%, and gross non-performing loan (NPL) of 2.0%, well below the threshold of 5%. As of November 2013, credit growth slowed down to 21.9% (yoy) from 22.2% (yoy) posted in October In the Board of Governors' Meeting convened on January 9th, 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±1% in 2015, as well as supporting economic consolidation and thereby reducing the current account deficit to a more sustainable level. 4

6 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1* Q2* Q3** Executive Summary GDP Growth Inflation *: BI Projection Balance of Payments Foreign Exchange Reserves billion USD Indonesia's Balance of Payments billion USD * Curr. Account Overall Balance Cap & Fin. Account Reserve Assets (RHS) Source: Bank Indonesia

7 Executive Summary Debt to GDP Ratio (% of GDP) Debt Composition 50% 120% 40% 30% 20% 39.0% 35.2% 33.1% 28.4% 26.2% 24.4% 24.0% 25.2% 100% 80% 60% 40% 46.8% 46.9% 52.1% 47.4% 46.3% 45.1% 44.5% 46.7% 10% 20% 53.2% 53.1% 47.9% 52.6% 53.7% 54.9% 55.5% 53.3% 0% * 00% Des-13 Domestic Debt Foreign Debt Table of Debt to GDP Ratio End of Year * GDP 3,339, ,950, ,948, ,603, ,422, ,427, ,241, ,404,686.0 Debt Outstanding (billion IDR) 1,302, ,389, ,636, ,590, ,681, ,808, ,977, ,369, Domestic Debt (Loan+Securities) 693, , , , , , ,097, ,262, Foreign Debt (Loan+Securities) 609, , , , , , , ,107,540.2 Debt to GDP Ratio 39.0% 35.2% 33.1% 28.4% 26.2% 24.4% 24.0% 25.2% - Domestic Debt to GDP Ratio 20.8% 18.7% 15.8% 14.9% 14.1% 13.4% 13.3% 13.4% - Foreign Debt to GDP Ratio 18.2% 16.5% 17.2% 13.5% 12.1% 11.0% 10.7% 11.8% *: Preliminary Realization, use GDP Projection Based on Revised Budget 2013 Source: Ministry of Finance 6

8 2013 Policy Summary Government coordinates policy tools to maximize growth with macroeconomic management Revenue and tax policy An Increase of non-taxable income threshold by 54%, from Rp15.8 million to Rp24.3 million. Extend and widen tax base through tax extensification. VAT tariff adjustment for a number of luxury goods. Improve monitoring and service in custom & excise. Excise tax extensification and intensification. Fiscal incentives provision for strategic economic activities i.e. Hybrid and low carbon emission motor vehicles. Monetary policy Increase the policy rate by 25bps to 7.50% in response to large current account deficit amid widespread global uncertainty. Maintain IDR exchange rate stability. Strengthen monetary policy by implementing monetary and macroprudential policy mix. Deepening of the foreign exchange market. Expenditure policy Prioritize capital expenditure allocation to support infrastructure development. Reallocate consumptive spending to more productive activities. Increase infrastructure spending to support energy and food security, domestic connectivity, and tourism. Redesign subsidy policy from price subsidy to targeted subsidy. Improve budget disbursement Financing and debt management policy Prioritize funding from domestic market and financial institutions. Focus on financial inclusiveness of government securities, access to wider retail investors Debt instruments development Active government bonds portfolio management Selective external loan only for priority projects/needs Implementation of the Crisis Management Protocol and the establishment of Financial System Stability Coordination Forum (FKSSK) 7

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 (May 2, 2013): 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 reflects the weakened policy environment and external pressures are fairly balanced against the country's strong growth prospects, conservative fiscal policy, and favorable debt trajectories. 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 Rating agencies comments Rating history Sovereign Rating History Solid economic fundamentals supported the improvement of Indonesia s sovereign credit rating since 2001 BBB- / Stable BB+ / Stable Baa3/ Stable Fitch 15 November 2013 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. S&P 2 May 2013 The rating on Indonesia fairly balances institutional and external constraints with a strong growth prospects, conservative fiscal policy, and favorable debt trajectories. The revised outlook from positive to stable signals the diminished potential for an upgrade due to the stalling of reform momentum and a weaker external profile. Moody s 18 January 2012 Indonesia s cyclical resilience to large external shocks points to sustainably high trend growth over the medium term. A more favorable assessment of Indonesia s economic strength is underpinned by gains in investment spending, improved prospects for infrastructure development following key policy reforms, and a well managed financial system. 10

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, October 2013 In response to weaker commodity prices and tighter external financing, continuous adjustment in Indonesia s economy and policy settings intensified in the third quarter plays a vital role. Should the global recovery through 2014 proves stronger than expected in the base case, Indonesia s growth prospects and its external position can improve, so long as it can capitalize on the opportunities generated by stronger global trade and investment dynamics. The level and quality of infrastructure spending remains a key determinant of long-term trade and growth performance. Low levels of spending in the period estimated to have weighed materially on growth. 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 Moderate Growth The economy of Indonesia was forecast to expand by 5.7% in 2013, which is slower than that posted in the previous year at 6.2%. The ongoing downward economic growth trend is linked to stabilization policy issued by the Government and Bank Indonesia in order to bring economic growth towards a healthier and more balanced growth trajectory In 2014, stronger economic growth is expected around the lower end of the % range, in line with the ongoing domestic economic consolidation process towards more sustainable conditions. Forecast of Economic Growth - Demand Side S e c t o r I II III IV* 2013* 2014* Private Consumption Government Consumption Gross Fixed Capital Formation Exports of Goods and Services Imports of Goods and Services GDP Forecast of Economic Growth - Supply Side S e c t o r I II III IV* 2013* 2014* Agriculture Mining and Quarrying (-0.7) (-0.2) Manufacturing Electricity, Gas, and Water Supply Construction Trade, Hotels, and Restaurant Transportation and Communication Financial, Rental, and Business Services Services GDP Source: BPS * Bank Indonesia Projection 13

15 Young and Dynamic Population Rising young and dynamic population marked by decreasing dependency ratio that will continue on until Rising income per capita and growing ranks of the middle income class. Labor force participation rate is nearly 70% and open unemployment rate only 5.9% (February 2013), -6.8% (yoy). Fourth Largest Population in the World Dependency Ratio Keeps Falling Until 2025 China 1.3 billion India 1.2 billion US 0.31 billion Indonesia 0.24 billion Increasing Middle Income Class Population Rising GDP per capita (USD) Source: BPS, Bappenas, UNPP, McKinsey Source: IMF, International Financial Statistics 14

16 Estimate Investment is Becoming the New Engine of Growth Investment both by domestic and foreign direct investors continues on the expanding trend, supporting economic growth at a time of slowing down exports Investment of GDP (%) Direct Investment (Billion USD) Investment Destination in Asia Indonesia Brazil China India Russia South Korea Increase their level of investment Still in the market, but will not invest more Reduce their investment Have no plans to invest China India Indonesia Malaysia Thailand Vietnam Singapore South Korea Philippines Australia Japan Hong Kong Taiwan Source: IMF, World Economic Outlook Database April 2013 Source: BKPM *: Cumulative up to Q Source: The Economist 15

17 Strong Investment Underpinned by Competitiveness and Stability The total investment realization as at Q is Rp trillion (USD 30.2 billion) consisted of Rp trillion (USD 21.2 billion) of Foreign Direct Investment (FDI) and Rp 94.1 trillion (USD 9.0 billion) of Domestic Direct Investment (DDI). It increases 27.6% (yoy) compared to the same period in 2012 Rp trillion (USD 25.6 billion). The distribution of project location from January to September 2013 outside of Java is Rp trillion (USD 12.9 billion) or 42.5% from total investment realization. Realized Foreign Direct Investment (Billion USD) Realized Domestic Direct Investment (Billion USD) *: cumulative Source: BKPM *: cumulative Source: BKPM 16

18 Strong Investment Underpinned by Competitiveness and Stability FDI Realization by Location Q (Million USD) DDI Realization by Location Q (Million USD) FDI by Countries Q (Million USD) Source: BKPM 17

19 Strong Investment Underpinned by Competitiveness and Stability FDI By Sector (Million USD) 25,000 2,055 20,000 1,274 2,808 1,515 1,535 3,866 1,618 1,858 15, ,556 1, ,791 1,865 2,453 2,633 5,046 1,414 1,295 2,770 1,138 8, ,000 2, ,774 1,307 3,305 4,171 1,428 1,466 1,783 1, , ,708 5, ,064 1, , , , ,608 4,225 4, ,183 2, Q3 2013* Mining Other primary sector Food industry Paper & printing industry Chemical & pharmaceutical industry Metal machinery & electronic industry Motor vehicle & other transport equip. industries Other secondary sector Electricity, gas & water supply Trade & repair Transportation, storage & communications Other tertiary sector *: cumulative Source: BKPM 18

20 The Inflationary Pressures Is Easing Headline inflation in December was 0.55% (mtm) or 8.38% (yoy), indicating the return of inflation to its normal path. Inflationary pressures have gradually been brought under control and are currently much less intense than when fuel prices were raised at the end of June The easing of inflationary pressures has led to a projected rate of inflation for 2014 to be within its target corridor of 4.5±1% and subsequently to 4.0±1% in Bank Indonesia will continue to strengthen policy coordination with the central and local governments through inflation control teams in order to help achieve the inflation target. Disaggregation of Inflation Inflation Expectation Consensus Forecast %,yoy Ekspektasi Inflasi 2013 Inflation Expectation 2013 Ekspektasi Inflasi 2014 Inflation Expectation Source: BPS, Bank Indonesia Source: Consensus Forecast

21 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1* Q2* Q3** Balance of Payments Q The current account in Q improved as shown by shrinking the deficit to US$8.4 billion (3.8% of GDP) from US$9.9 billion (4.4% of GDP) in the previous quarter. This lower deficit was in line with the improvement in the global economy and also slowdown in domestic economy. Meanwhile, capital and financial account remained in surplus of US$4.9 billion, mainly contributed by inflow of foreign direct investment (FDI) which is the largest source of private capital flows. Current account deficit in Q is estimated to improve supported by the trade surplus. Current account deficit was not fully covered by capital and financial account surplus yet. As the result, international reserves at the end of September 2013 charted to US$95.7 billion or lower than at the end of the previous quarter. At those levels, foreign exchange reserves sufficient to finance 5.4 months of import payment for imports, equivalent to 5.2 months of imports and government foreign debt payments. billion USD Source: Bank Indonesia * Provisional figures Balance of Payments Indonesia's Balance of Payments * 2013 Curr. Account Overall Balance Cap & Fin. Account Reserve Assets (RHS) billion USD ITEMS 2012 TOTAL* I. CURRENT ACCOUNT -24,418-5,873-9,954-8,449 (CA/GDP)% A. Goods, net 8,618 1, Non Oil & Gas, net 13,857 4,483 1,587 2, Oil, net -20,436-6,356-5,294-5, Gas, net 15,197 3,501 2,998 3,038 B. Services, net -10,331-2,477-3,127-2,616 C. Income, net -26,800-6,126-7,129-6,706 D. Current transfers, net 4,094 1,102 1, II. CAPITAL & FINANCIAL ACCOUNT 25, ,428 4,933 A. CAPITAL ACCOUNT B. FINANCIAL ACCOUNT 25, ,364 4, Direct investment 13,982 3,876 3,771 5, Abroad -5, In Indonesia 4) 19,404 4,083 4,673 5, Portfolio investment 9,206 2,760 3,389 1, Other Investment 1,922-6,945 1,203-2,131 III. TOTAL (I+II) 743-6,170-1,526-3,516 IV. NET ERRORS & OMISSIONS V. OVERALL BALANCE (III+IV) 215-6,615-2,477-2,645 Memorandum: 8) 2013 (Million USD) Q1* Q2* Q3** Reserve Assets Position 112, ,800 98,095 95,675 (In Months of Imports & Official Debt Repayment)

22 Capital Flows Improved Both capital inflows from foreign direct investment (FDI) and portfolio investment (PI) in Q is estimated to record a surplus which are sufficient to finance the current account deficit. Capital Flows in Financial Market Govt Sec 21

23 Exchange Rate In Line With Fundamentals The rupiah exchange rate in 2013 weakened by by 20.8%(yoy) to Rp12,170 per USD. Pressures on rupiah was most notable on the period of May to August 2013, in line with high intensity of capital outflow due to surge of domestic inflation, investors concern on the prospect of current account, and the global negative sentiment on quantitative easing tapering off plan. The weaker rupiah is in line with a number of countries in the Asian region beset with currency depreciation. Looking ahead, Bank Indonesia will continue to maintain rupiah exchange rate stability in line with fundamentals. Rupiah Exchange Rate Appreciation/Depreciation of Regional Currency & Euro Source: Bank Indonesia 22

24 Monetary Policy Stance In the Board of Governors' Meeting convened on January 9th, 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±1% in 2015, as well as supporting economic consolidation and thereby reducing the current account deficit to a more sustainable level. Looking ahead, BI policy in 2014 will continue to focus on maintaining economic and financial system stability through a sound monetary, macroprudential and payment system policy mix. BI will also reinforce its policy coordination with the Government and relevant authorities. BI Rate (%) Source: Bank Indonesia 23

25 Sound Financial Sector Banking industry resiliencies remained solid, as indicated by secure level of CAR above the minimum level of 8% (18.6% as of November 2013) and gross NPLs managed at comfortably safe level below 5% (2.0% as of November 2013). Credit growth eased towards the end of the year, achieving 21.9% (yoy) in November 2013 compared to 23.1% (yoy) at the end of the previous year, in line with the general economic downturn and higher domestic interest rates environment. Bank Indonesia will continue to remain vigilant of financial system stability in order to support sustainable and sound economic consolidation. Steady Loan Growth Capital Adequacy Ratio (CAR) Comfortably High NPL (gross) Historically Low Steady Loan-to-Deposit Ratio Source: Bank Indonesia 24

26 Bank Indonesia s Policy Responses 11 Jun 13 DF Rate 25bps to 4,25% 18 Jul 13 FX Swap Initial offering 23 Aug 13 Extension of FX TD maturity Relaxation of FX purchasing by exporter selling export proceed. Revision of regulation regarding FX Swap transaction between commercial banks and BI. Relaxation of regulation regarding external debt Issuance of Bank Indonesia Deposit Certificate (SDBI). 29 Aug 13 BI Rate by 50bps to 7.00%, DF Rate by 50bps to 5.25%, LF Rate by 25bps to 7.00% Shorten MHP of SBI from 6 months to 1 month. Calculating SDBI as part of Sharia Reserve Requirement (GWMS). Extending BSA between BI and BoJ 8 Oct 13 Maintain BI rate at 7.25%. establish a bilateral KRW/IDR swap arrangement June July August September October November 13 Jun Jul Agustus Sep Nov 13 BI Rate by 25bps to 6.00%, maintaining DF rate at 4.25% and LF rate at 6.75% BI Rate by 50bps to 6.5%, DF Rate by 50bps to 4.75% and maintain LF Rate at 6,75% Revising regulation regarding LTV for property sector Maintain BI rate at 6.5%. Issuance of SDBI. Rising Reserve Requirement (RR) and LDR to 78% - 92% (starting on 1 Dec-13). Rising GWMS by 1,5% (gradual increase by 0.5% each month until 1 Dec-13) BI Rate by 25bps to 7.25%, DF Rate by 25bps to 5.5% and maintain LF Rate at 7.25% BI Rate by 25bps to 7.50%, DF Rate by 25bps to 5.75% and LF Rate to 7.5% Supervisory action to banks with credit growth >20%. Extending BSA with Japan.

27 Prudent Fiscal Management 26

28 2013 Revised Budget (APBN-P) Items Budget Comparison 2012 Audited Budget 2013 Original Budget 2013 Revised Budget % of % of % of IDR tn US$ bn GDP IDR tn US$ bn GDP IDR tn US$ bn GDP A. State revenue and grants 1, % 1, % 1, % I. Domestic revenue 1, % 1, % 1, % 1. Tax revenue % 1, % 1, % 2. Non tax revenue % % % II. Grants % % % B. State expenditure 1, % 1, % 1, % I. Central gov. expenditure 1, % 1, % 1, % 1. Personnel and material % % % 2. Capital % % % 3. Interest payments % % % 4. Subsidies % % % 5. Grants % % % 6. Social expenditure % % % 7. Other expenditure % % % II. Transfer to region % % % C. Primary balance (52.8) (5.6) (0.6%) (40.1) (4.3) (0.4%) (111.7) (11.6) (1.2%) D. Overall balance (A - B) (153.3) (16.3) (1.9%) (153.3) (16.3) (1.7%) (224.2) (23.4) (2.4%) E. Financing % % % I. Domestic financing % % % II. Foreign financing (23.5) (2.5) (0.3%) (19.5) (2.1) (0.2%) (16.9) (1.8) (0.2%) Surplus/(deficit) financing % % % 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 2013 Revised Macroeconomic Assumptions 2013 Revised Gross Domestic Product (Rp trn) 10,366 Economic growth rate (%) 6.4 Inflation rate (%) 4,5 Interest rate of SPN 3 Month (%) 5.5 Exchange rate (Rp/US$) 9,750 Oil price (US$/ barrel) 106 Oil production (MBCD) 0.87 Gas Production (MBOEPD) 1.24 Various macroeconomic assumptions revisions Fiscal policy revisions: Revenue target (especially tax revenue) decline Energy subsidy change (due to fuel price increase and parameter change) Additional budget for social protection and infrastructure: Conditional Cash Transfer (PKH) Rp0.7Tn Poor Students Aids (BSM) Rp7.5 Tn Additional allocation for Rice for the poor (Raskin) Rp4.3 Tn Unconditional Cash Transfer (BLSM) Rp9.3 Tn Basic infrastructure development Rp7.2 Tn Efficiencies in Line Ministries spending Deficit widen Key Revisions Accumulated cash surplus utilization (SAL) to cover widening deficit 27

29 Summary of Budget Realization Items Revised Budget (APBN-P) Realizati on % of APBN-P Revised Budget (APBN-P) Realizati on* % of APBN-P A STATE REVENUE 1, , , , I DOMESTIC REVENUE 1, , , , Tax Revenue 1, , , Non Tax Revenue II GRANT B STATE EXPENDITURE 1, , , , I CENTRAL GOVERNMENT EXPENDITURE 1, , , , a.o.** - Line Minis tries Interes t Paym ent Subs idy a.o a Energy Fuel, Biofuel & Gas Electricity b Non Energy II TRANSFER TO REGIONS Regional Fis cal Balance Funding Special Autonom y Funding III PRIMARY BALANCE (72.3) (52.8) 73.0 (111.7) (96.8) 86.7 IV BUDGET SURPLUS/ (DEFICIT) (A-B) (190.1) (153.3) 80.6 (224.2) (209.5) 93.4 Deficit (% of GDP) (2.23) (1.86) (2.38) (2.24) V FINANCING (I+II) I DOMESTIC FINANCING II EXTERNAL FINANCING (4.4) (23.5) (16.9) (13.3) 78.7 FINANCING SURPLUS/(DEFICIT) Source: Ministry of Finance *: Preliminary as of December 31, 2013 **: Among others. 28

30 2014 Budget Items Macroeconomic Assumptions A STATE REVENUE 1,667.2 I DOMESTIC REVENUE 1, Tax Revenue 1, Non Tax Revenue II GRANT 1.4 B STATE EXPENDITURE 1,842.5 I CENTRAL GOVERNMENT EXPENDITURE 1,249.9 a.o.**- Line Minis tries Interes t Paym ent Subs idy a.o a Energy Fuel, Biofuel & Gas Electricity 71.4 b Non Energy 51.6 Indicators Revised Budget (APBN-P) 2013 Realization as of Dec 31, 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 II TRANSFER TO REGIONS Regional Fis cal Balance Funding Special Autonom y Funding III PRIMARY BALANCE IV BUDGET SURPLUS/ (DEFICIT) (A-B) (175.4) Deficit (% of GDP) - V FINANCING (I+II) I DOMESTIC FINANCING II EXTERNAL FINANCING (20.9) **: Among others. FINANCING SURPLUS/(DEFICIT)

31 Favorable Current Macro Conditions is Supported by Prudent Fiscal Management Indonesia's low budget deficit compared to developing Asia and developed economies are beneficial as buffers against potential vulnerabilities. Between , Indonesia budget deficit averaged at 1.3% Fiscal Balance (% of GDP) Indonesia Fiscal Deficit Source: Ministry of Finance and S&P Sovereign Risk Indicators as of July 2013 Source: Ministry of Finance 30

32 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 31

33 4 Packages of Government Economic Policy The Government is prepared to respond to global financial market developments in a coordinated manner, and launch 4 Packages of Government Economic Policy on 23 August Policy to promote investment Streamline permit process and improve single window service for investment. Currently Government has been formulating permit simplification for oil and gas upstream investment from 69 permits to only 8 permits. Accelerate the revision of Presidential Decree of negative investment list. Debottlenecking problems in the strategic investment projects such as power plant, oil, gas, mineral mining, and infrastructure projects. Policy to improve current account and exchange rate performance Increasing biodiesel portion to reduce diesel consumption Additional luxury tax rate for luxury car and branded products by 25% - 50%. Promote mineral export by easing procedure in regard with quota and CnC. Incentive provision to maintain economic growth and people purchasing power. Government will seek to ensure that the 2013 state budget deficit keeps sound at 2.38%. Short term Deduction / Deferring of Income tax for specific industries (labor intensive & export oriented industries). Relaxation for facility restriction policy in bonded zone. VAT relief for books. VAT relief for luxury goods for basic products. Mid term Additional deduction for R&D. Improve tax holiday & Tax allowance provisions. Policy to curb inflation The Government will continue to coordinate closely with Bank Indonesia. The Government is responding to volatile food inflation by improving the meat and horticulture trade system to satisfy demand. Additional Policies in December 2013 (1) additional income tax for selected goods, and (2) additional relaxation for imports goods for export activity. Both policies were aimed to ease pressure on trade balance, specifically by reducing the demand for some specific goods (luxury and consumptive goods), to induce exports and also to encourage domestic production on import-substitution intermediate goods The increase in income tax rate (PPh 22) is for selected products. Special criteria of goods that are targeted are the ones: Not considered as goods that are used 32 for domestic industries, Household Consumption goods, Non-inflationary goods. The package is to be fully implemented in January 2014.

34 Improved Government Debt Position 33

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

36 Government Securities Realization Budget 2014 Realization (ao January 13, 2014) (Million IDR) % Realization to Budget 2014 Government Securities Maturing in ,84% Government Securities Net ,56% Buyback ,00% Issuance Need 2013* ,07% Government Debt Securities (GDS) Domestic GDS Coupon GDS (Auction, Private Placement) Conventional T-Bills (Auction, Private Placement) SPNNT Retail Bonds - International Bonds USD Global Bonds USD Domestic Bonds Government Islamic Debt Securities Domestic Government Islamic Debt Securities Global Sukuk - Remaining issuance in 2013 will be around IDR22,971 trillion: For Conventional GS : - Regular IDR Bond Auction : 2 times - USD onshore: (November 2013) Islamic IDR Bond: Regular IDR Bond Auction: 2 times *Adjusted by changes in Cash Management & Debt Switch

37 Outstanding of Total Central Government Debt [USD billion] Loan Government Securities ,35 63,52 73,30 76,64 71,29 70,51 82,34 85,26 82,78 104,20 118,39 130,97 140,75 138, ,10 58,90 63,74 68,91 68,59 63,09 62,02 62,25 66,69 65,02 68,65 68,51 63,76 57, Nov 2013 [in percentage] Year Nov 2013 Loan 47% 48% 47% 47% 49% 47% 43% 42% 45% 38% 37% 37% 31% 29% Government Securities 53% 52% 53% 53% 51% 53% 57% 58% 55% 62% 63% 63% 69% 71% Source: Ministry of Finance 36

38 Total Debt Maturity Profile as of December 31, 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 53% 47% Foreign Domestik 37

39 Government Debt Securities Issuance Plan 2014 in billion Rp Source: Ministry of Finance 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 4. PT. Bank Central Asia, Tbk 5. PT. Bank Danamon Indonesia, Tbk. 6. PT. Bank Internasional Indonesia, Tbk 7. PT. Bank Mandiri (Persero), Tbk Primary Dealers 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 38

40 Holders of Tradable 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% 32,45% 100% 80% 49% 46% 38% 45% 44% 44% 45% 32,98% 32,31% 32,54% 32,45% 30,53% 30,80% 40% 35,59% 32,58% 30,49% 33,76% 32,56% 33,88% 36,63% 36,53% 33,70% 34,99% Dec-10 Dec-11 Dec-12 Dec Dec-13 Foreign Holders Domestic Non-Banks Domestic Banks 60% 40% 20% 0% 22% 20% 5% 4% 19% 25% 21% 28% 32% 32% 32% 17% 18% 8% 16% 13% 13% 13% 5% 10% 12% 3% 5% 5% 5% 8% 6% 5% 5% Dec-09 Dec-10 Dec-11 Dec-12 Nov-13 Dec Jan-14 >10 >5-10 >2-5 > % Foreign Ownership to Total (RHS) 20% 0% Source: Ministry of Finance 39

41 Profile of Government Debt Securities GOVERNMENT DEBT SECURITIES (GDS) Dec-09 Dec-10 Dec-11 Dec-12 Oct-13 Nov-13 Dec Jan Domestic Tradable GDS IDR IDR IDR IDR IDR IDR IDR IDR a. Zero Coupon IDR IDR IDR IDR IDR IDR IDR IDR Government Treasury Bills IDR IDR IDR IDR IDR IDR IDR IDR Zero Coupon Bond IDR IDR IDR IDR IDR - IDR - IDR - IDR - b. Government Domestic Bonds IDR IDR IDR IDR IDR IDR IDR IDR Fixed Rate *) +) IDR IDR IDR IDR IDR IDR IDR IDR Variable Rate *) IDR IDR IDR IDR IDR IDR IDR IDR Promissory Notes to Bank Indonesia **) ***) IDR IDR IDR IDR IDR IDR IDR IDR SPNNT IDR Total GDS (1+2+3) IDR IDR IDR IDR IDR IDR IDR IDR Total Government International Bonds *) USD USD USD USD USD USD USD USD TOTAL GOV'T DEBT SECURITIES (3+(4*Exchange Rate Assumption)) IDR IDR IDR IDR IDR IDR IDR IDR GOVERNMENT ISLAMIC DEBT SECURITIES (GIDS) a. Domestic Tradable GIDS IDR IDR IDR IDR IDR IDR IDR IDR a. Fixed Rate *)++) IDR IDR IDR IDR IDR IDR IDR IDR b. Zero Coupon IDR IDR 195 IDR IDR IDR IDR b. Domestic Non Tradable GIDS IDR IDR IDR IDR IDR IDR IDR IDR c. Government International Islamic Bonds 1. Fixed Rate *) USD 650 USD 650 USD USD USD USD USD USD TOTAL GOV'T DEBT SECURITIES (6+(8*Exchange Rate Assumption)) IDR IDR IDR IDR IDR IDR IDR IDR TOTAL GOVERNMENT SECURITIES IDR 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 IDR ) Including Sukuk Ritel/SR (IDR Billion) IDR IDR IDR IDR IDR IDR IDR IDR Exchange Rate Assumption (IDR/USD1) IDR 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 114,15 IDR 116,80 IDR 116,17 IDR 116,31 - 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 Total Buyback Program Year Auctions Frequencies Direct Transactions Volume (IDR billion) GRAND TOTAL

43 Maturity Profile of Tradable Government securities as of January 10, 2014 [IDR Trillion] 120,00 100,00 80,00 60,00 40,00 20, TOTAL 121, 81,5 88,4 54,0 90,1 91,4 75,1 65,8 99,9 85,0 48,2 27,5 19,6 44,3 50,7 19,9 25,6 27,1 42,8 47,8 18,4 19,5 4,11 34,8 40, ,5 39,4 22,9 3,75 SUKUK USD 7, ,2 18, , SUKUK IDR 15,5 18,9 14,9 1,17 8,71-0,58-1, ,55-2, , ,11 10, ,68 - SUN JPY ,07 6,98-6, SUN USD 28,0 12,2 10,9 14,5 23,1 24,3 24,3 30,4 24,3 30, ,5-18,3 24, ,4 18,3 - SUN IDR 69,7 50,4 62,5 38,3 46,1 44,6 43,2 35,3 55,1 54,5 48,2 26,0 19,6 41,4 50,7 19,9 23,5 27,1 42,8 47,8 18, ,40 15, ,5 12,0-3,75 Source: Ministry of Finance 42

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 Dec Jan-14 Daily Transaction & Offshore Ownership Average Daily transaction Govt Bonds Net Buyer (Seller) Non Resident Volume (billion rupiah) - LHS Frequency - RHS Jan '13 Feb '13 Mar '13 Apr '13 May '13 Juni ' July Aug Sep Okt 13 Nov Dec Jan ,00 20,00 10,00 0,00 (10,00) (20,00) (30,00) (40,00) [Trillion IDR] (1,49) (29,29) 1,69 (4,99) Capital Inflows 8,06 13,11 (8,99) (2,27) 4,15 (0,08) (4,37) Capital inflows over total foreign holders 10,13 (1,41) 7,83 9,35 19,52 0,68 2,68 8,44 (0,88) 17,97 4,22 (19,98) 2,81 (1,76) 10,13 23,98 6,08 (0,37) 1,90 0,10 0,05 0,00 (0,05) (0,10) (0,15) Source: Ministry of Finance 43

45 Ownership of IDR Tradable Government Securities (IDR Trillion) Dec-09 Dec-10 Dec-11 Dec-12 Dec Jan-14 Banks 254,36 43,72% 217,27 33,88% 265,03 36,63% 299,66 36,73% 335,43 33,70% 351,23 34,99% Govt Institutions 22,50 3,87% 17,42 2,72% 7,84 1,08% 3,07 0,37% 44,44 4,47% 32,43 3,23% Non-Banks 304,89 52,41% 406,53 63,40% 450,75 62,29% 517,53 63,09% 615,38 61,83% 620,20 61,78% Mutual Funds 45,22 7,77% 51,16 7,98% 47,22 6,53% 43,19 5,27% 42,50 4,27% 42,99 4,28% Insurance Company 72,58 12,48% 79,30 12,37% 93,09 12,86% 83,42 10,17% 129,55 13,02% 131,52 13,10% Foreign Holders 108,00 18,56% 195,76 30,53% 222,86 30,80% 270,52 32,98% 323,83 32,54% 325,73 32,45% Pension Fund 37,50 6,45% 36,75 5,73% 34,39 4,75% 56,46 6,88% 39,47 3,97% 39,59 3,94% Securities Company 0,46 0,08% 0,13 0,02% 0,14 0,02% 0,30 0,04% 0,88 0,09% 0,87 0,09% Individual 32,48 3,26% 32,42 3,23% Others 41,12 7,07% 43,43 6,77% 53,05 7,33% 63,64 7,76% 46,68 4,69% 47,07 4,69% Total 581,75 100% 641,21 100% 723,61 100% 820,27 100% 995,25 100% 1.003,86 100% Source: Ministry of Finance 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 44