ConfcallpresQ320069November20062ppt

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INDONESIA:

Recent Economic Developments

November

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Macroeconomic Performance

Banking Sector Performance

Government Policy for Investment

Growth

Concluding Remarks

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Government Policy for Investment Growth

Concluding Remarks

Macroeconomic Performance

Growth and components

Monetary and exchange rates

Balance of Payments

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4

Economic growth in 2006: an overview

3.8

4.4

4.9 5.1

5.6

4.7

5.2 5.5

2001 2002 2003 2004 2005 Q1'06 Q2'06 Q3'06*

Highlights

Macroeconomic Growth

* Prelimi nary ** Source: BPS, BI

% change in GDP • Indonesian economy grew by 4. 7 % and

5. 2% in the first and second quarter of 2006. During Q3 2006, economic growth reached 5. 5%.

• Growth was mainly driven by substant ial

rise in exports.

• There is a renewed optimism for

improvement in t he economic condit ions as reflect ed by st ronger purchasing

power and consumer confidence in relat ion t o income expect at ions.

• The recent posit ive achievement s are

expect ed to persist in t he last quarter of 2006. GDP growth is predict ed t o be

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5

Economic growth

…

….. demand & supply side

.. demand & supply side

.. demand & supply side …

.. demand & supply side

…

…....

GDP growth (y-o-y) - Demand Side At constant prices (year 2000)

I II III IV I* II* III* Total*

Consumption 2.00 2.60 5.50 7.30 3.75 5.57 2.83 4.4-5.4

Private 3.40 3.80 4.40 4.20 2.94 2.99 2.99 3.0-4.0

Government -9.60 -6.70 14.70 30.00 11.51 28.77 1.72 15.5-16.5

Investment/ Gross Fixed Capital

Formation 14.10 15.60 9.40 1.80 1.86 5.65 1.53 3.6-4.6

Domestic Demand 8.20 7.40 7.90 3.30 3.26 5.59 2.49

Export of good & services 11.80 11.20 4.80 7.40 11.22 11.64 12.05 9.3-10.3 Import of goods & services 18.80 17.90 10.60 3.70 3.87 8.44 9.72 8.0-9.0 Gross Domestic Product 6.30 5.60 5.60 4.90 4.81 5.08 5.52 5.0-6.0

2006 2005

Demand side:

• Q3-2006 growth supported mainly by better export performance.

• Signs are evident of renewed albeit only modest growth in private consumption.

• Export of goods and services are expected to accelerate due to improvement in

production and competitiveness especially in the non oil and gas product.

Supply side:

• Main drivers: transport and

communications, construction, trade and manufacturing

• Construction and transportation sector are expected to grow higher as reflected in the growth of property credit and number of passenger.

Highlights

GDP growth (y-o-y) - Suply Side At constant prices (year 2000)

I II III IV I* II* III* Total*

Agriculture 1.10 0.92 2.95 5.46 4.32 3.75 2.27 4.50

Mining & Quarrying 4.06 -0.53 1.01 1.92 2.16 3.69 1.03 5.20

Manufacturing 6.31 4.94 4.46 2.91 3.31 3.72 5.26 3.30

Electricity Gas and Water Suply 6.36 6.86 6.60 6.13 5.77 5.20 6.46 6.30

Construction 7.42 8.23 6.91 6.86 7.12 8.08 8.36 8.70

Trade Hotel and Restaurant 9.88 10.01 8.65 6.01 4.86 4.48 7.16 5.60 Transport and Communication 14.27 14.10 12.99 10.78 11.49 13.21 13.50 13.60 Financial, Ownership and Business 6.66 8.86 7.86 5.21 5.52 5.15 4.60 5.70

Services 4.64 4.43 5.58 5.97 5.95 6.37 6.96 5.80

Gross Domestic Product 6.25 5.63 5.63 4.90 4.80 5.08 5.52 5.50

Source : BPS (processed)

2006 2005

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6

Inflation on a declining trend

2 4 6 8 10 12 14 16 18 20

2001 2002 2003 2004 Jun-05 Jul-05 Aug-05 Sep-05 Oct-05 Nov-05 Dec-05 Jan-06 Feb-06 Mar-06 Apr-06 May-06 Jun-06 Jul-06 Aug-06 Sep-06 Oct-06 Nov-06

SBI 1 month (%) BI Rate (%)

Source: Bloomberg & BI

Stabilization of rupiah at stronger level supports declining inflation thus

providing room for policy rates to decline

• CPI inflation :

Sept ember : 0. 38% (mt m) & 14. 55% (yoy), October : 0. 86 (mtm) & 6, 29% (yoy)

•

Core inflation : Sept ember : 0. 35% Oct ober : 0. 72%

•

Inflat ion easing t oward t arget ed level

Key factors : stabilized exchange rat e, lower domest ic demand, improved inflat ion

expect at ions & minimum impact from administ ered prices & volat ile foods

• BI Rat e gradually lowered to become

10. 25%. Key considerations: continued

macroeconomic stability, great er confidence for achieving 2006 and 2007 inflation targets and renewed market confidence.

0 2000 4000 6000 8000 10000 12000

2001 2002 2003 2004 2005 Q106 Q206 Q306 Oct 06 2 4 6 8 10 12 14 16 18

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7

Exchange rate

modest appreciation

modest appreciation ---- low volatility

low volatility

• Rupiah stabilized and average exchange

rate during Q3 2006 was Rp. 9, 125.

Relatively unchanged from Rp. 9, 115 in the preceeding quart er

• In October point to point, rupiah

appreciat ed 1. 28%. This is support ed by improvement in macroeconomic indicators and risk factors, and reduced monetary t ight ening pressure in US.

Average Exchange Rate

Highlights

Daily exchange rat e Volat i lit y

Average volat i li t y

0.51 8,000 8,500 9,000 9,500 10,000 10,500 11,000 Ju l-0 5 A ug-05 S ep-05 Oc t-0 5 No v -0 5 De c -0 5 J an-06 F eb-06 Ma r-0 6 Ap r-0 6 Ma y -0 6 J un-06 Ju l-0 6 A ug-06 S ep-06 Oc t-0 6 -1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 Kurs Harian Volatilitas Rata-rata Volatilitas

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8

Balance of Payments

picture is improving

• Balance of payment s recorded

surplus during Q3-2006. This was support ed by st rong current

account surplus

• The capital and financial account

also recorded a cont inued surplus in response to t he high rat e of capital inflows in rupiah

placement .

• The high capit al inflow suport ed by

posit ive market percept ions of government action in fiscal and monetary policy.

Balance of Payments

Highlights

Not e : In t housands USD * : Preliminary 20,000 25,000 30,000 35,000 40,000 45,000 2 0 0 1 2 0 0 2 2 0 0 3 2 0 0 4 Q 1 ' 0 5 Q 2 ' 0 5 Q 3 ' 0 5 Q 4 ' 0 5 Q 1 ' 0 6 Q 2 ' 0 6 Q 3 ' 0 6 * Q 4 ' 0 6 * - 9,000 - 7,000 - 5,000 - 3,000 - 1,000 1,000 3,000 5,000 7,000 9,000

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Commodity e

Commodity exports buoyant across broad

xports buoyant across broad

spectrum of products

• Increased export volume for:

– Minerals (coal, and aluminium)

– Primary based product s (CPO,

rubber product s and paper product s)

– Manufacturing (t extiles, chemical product s and elect ronics)

0 5,000 10,000 15,000 20,000 25,000 30,000

1 3 5 7 911 1 3 5 7 9 11 1 3 5 7 9 11 1 3 5 7 9 111 3 5 7 9

2002

2003

2004

2005

2006

0 200 400 600 800 1,000 1,200

Total

Mineral

Manufactured

Agriculture (RHS)

• Strong export performance driven by

high world commodity prices and continued robust growth in the world economy and international trade

Non Oil-Gas Export Volume by Product Group

(t housand t ons)

Highlight s

• Non oil-gas export growth for 2006 is

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10

Imports start to expand but at slower rate than

exports

• Slowing imports of consumpt ion

goods and capit al goods

• Slight increase in import s of raw mat erials

Lower import volume linked mainly to weakening domestic demand

0 1,000 2,000 3,000 4,000 5,000 6,000

1 3 5 7 9 11 1 3 5 7 9 11 1 3 5 7 9 11 1 3 5 7 9 11 1 3 . 5 7 9

2002 2003 2004 2005 2006

0 50 100 150 200 250 300 350 400 450

Total Imports Raw Materials

Capital Goods (RHS) Consumption Goods (RHS)

Non Oil-Gas Import Volume by Product Group

(t housand t ons)

Highlight s

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11

Fiscal

consolidation on track

budget defi ci t % of GDP

-2.4

-1.3

-1.7

-1.3

-0.5

-1.3

-1.1

-3 -2.5 -2 -1.5 -1 -0.5 0

2001 2002 2003 2004 2005 2006* 2007*

Key highlights

Continued fiscal discipline

Improvement on revenue side (Tax and customs reforms)

Improve efficiency & effectiveness of government expenditure to stimulate growth (electricity subsidy, rehabilitation and reconstruction fund, expanding budget allocation for education, energy alternative program)

Preparations under way for medium term budget and treasury reforms, including performance and multi year budget, treasury single account, accrual basis

Disciplined approach to contingent liabilities, including phasing out of bank deposit blanket guarant ee

Consolidat ion of fiscal decent ralizat ion

• Improved f iscal bal ance

• Regional borrowing and municipal bonds, subj ect t o Minist er of Finance approval

• Regi onal f inanci al i nf ormat ion syst em t o support decent ral izat ion based on t ransparency and account abi l it y

2003 2004 2005 20061) 2007 2)

2. 1 1. 9 1. 4 1. 4 1. 3

pri mary balances, % of GDP

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12

The 2006 State Budget –Revision

•

Cont inue achieving fiscal consolidat ion and sustainability : target deficit of 1. 3% GDP

•

Increasing Tax and Non Tax Revenue

•

Increasing expenditure due to :

- changes to macro economic assumptions - carry over of government expendit ure in

2005

- additional budget for education, disaster and subsidy due t o delayed of elect ricit y t ariff

Key highlights

Original & Revised Budget

Budget % to GDP

Revised Budget 2006

% to GDP

A. Total Revenue and Grants 625,237.0 20.6 659,115.2 21.1 I. Domestic Revenue 621,605.4 20.4 654,882.3 21.0

1. Tax Revenue 416,313.2 13.7 425,053.1 13.6 2. Non-tax Revenue 205,292.3 6.8 229,829.3 7.4

II. Grants 3,631.6 0.1 4,232.9 0.1

B. Expenditures 647,667.8 21.3 699,099.1 22.4

I. Central Government Expenditures 427,598.3 14.1 478,249.3 15.3 1. Interest Payments 76,629.0 2.5 82,494.7 2.64

i. Domestic Interest 48,610.6 1.6 58,154.8 1.86

ii. External Interest 28,018.4 0.9 24,339.9 0.78

2. Oil Subsidy 54,276.1 1.8 64,212.1 2.1 II. Transfer to Region 220,069.5 7.2 220,849.8 7.1 C. Primary Balance 54,198.2 1.8 42,510.8 1.4

D. Overall Balance (A - B) (22,430.8) (0.7) (1.3)(39,983.9)

E. Financing (E.I + E.II) 22,430.8 0.7 39,983.9 1.3

I. Domestic Financing 50,913.0 1.7 55,257.7 1.8

1. Domestic Bank Financing 23,026.7 0.8 17,906.5 0.6

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Realizations of 2006 bud

Realizations of 2006 budget up to Q3

get up to Q3

2006

Budget 2006

up to September 29

2006

% to Budget

Budget 2006

up to September

29 2006

% to Budget A. Total Revenue and Grants 625,237.0 390,242.8 62.4 E. Financing (E.I + E.II) 22,430.8 22,944.4 102.3

I. Domestic Revenue 621,605.4 389,263.5 62.6 I. Domestic Financing 50,913.0 49,797.1 97.8

1. Tax Revenue 416,313.2 278,558.1 66.9 1. Domestic Bank Financing 23,026.7 6,381.3 27.7

2. Non-tax Revenue 205,292.3 110,705.4 53.9 2. Domestic Non-Bank Financing 27,886.3 43,415.8 155.7

II. Grants 3,631.6 979.2 27.0 a. Privatisation Proceeds 1,000.0 -

-B. Expenditures 647,667.8 403,478.3 62.3 b. Assets Recovery PT. PPA 2,350.0 269.3 11.5

I. Central Government Expenditures 427,598.3 224,834.5 52.6 c. Government Bonds (net) 24,886.3 43,496.5 174.8

Subsidies 79,510.4 41,203.0 51.8 d. Government Capital Participation (350.0) (350.0) 100.0

i. Oil Subsidy 54,276.1 26,931.7 49.6 II. Foreign Financing (28,482.2) (26,852.7) 94.3

ii. Non-oil Subsidy 25,234.3 14,271.3 56.6 1. Gross Drawing 35,112.4 8,576.6 24.4

II. Transfer to Region 220,069.5 158,643.8 72.1 2. Amortizations (63,594.6) (35,429.3) 55.7 C. Primary Balance 54,198.2 41,864.6 77.2

D. Overall Balance (A - B) (22,430.8) (13,235.6) 59.0 Surplus/(Deficit) Financing - 9,708.8

-Source: Minist ry of Finance

The realization is compare to the original 2006 state budget

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2007 Budget

In IDR t n % of GDP Financing In IDR t n % of GDP

Tot al revenues & grant s 723. 1 20. 5 Government bank account 13. 0 0. 4

Tax revenues 509. 5 14. 4 Privat izat ion proceeds 2. 0 0. 1

Non-t ax revenues 210. 9 6. 0 Asset disposal 1. 5 0. 0

Grant 2. 7 0. 1 Government bonds, net 40. 6 1. 1

Expendit ures 763. 6 21. 6 Of f icial ext ernal debt , net (14. 6) (0. 4)

Cent ral Government 504. 8 14. 3 Gross drawing 40. 3 1. 1

- Fuel subsidy 61. 8 1. 8 Amort izat ions (54. 8) (1. 6)

Transf er t o region 258. 8 7. 3

Primary bal ance 44. 6 1. 3 Tot al f inancing 40. 5 1. 1

Overal l bal ance (def icit ) (40. 5) (1. 1)

St at e budget 2007

1

GDP gr owt h (%) 6. 3

Inf l at ion (%) 6. 5

Exchange rat e (USD/ IDR) 9, 300

SBI 3 mont hs (%) 8. 5

Cr ude oi l pr ice (USD/ bbl ) 63. 0

Cr ude oi l pr oduct ion (mm bbl / day) 1. 000

Key assumpt ions

_{Fiscal consol idat ion and sust ainabil it y}

Target def icit at 1. 1% of GDP

Lower t ot al debt / GDP rat io at 37%

Budget f inancing t o rel y more on domest ic revenues, principal ly t axat ion

Increase expendit ures f or t he regions

12

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15

Government bonds : recent financing

developments

Domest ic Market

• Period January to Oct ober 2006 : Tot al amount of domest ic issued was

IDR 42. 58 t rillion

- Tenth (10) auctions of domestic Government bonds, mostly in dual tranches issue - launched first retail bonds issuance.

- Nine new series with tenors ranging from 2-20 years was offered

• On August 9, 2006 government launched government retail bonds, so called ORI001, in

domestic market with total nominal IDR 3, 28 trillion. The bonds is designed for individual investors. In primary market only Indonesian individual investor may buy ret ail bond. However all part ies may t rade ret ail bonds in secondary market

• Up t o Oct ober 2006, Government has swit ched IDR 24, 01 t rillion bonds mat uring

bet ween 2007-2009 int o long dated bonds maturing in 2011 and 2025.

Int ernational Market

• In March 2006, The Government issued global bonds amount ing t o USD2 billion in dual

t rances, which consist of new issue of 10 - yr global bond t hat will mat ure on March 9 2017 (INDO’ 17) and reopening global bond INDO’ 35 (mat ured on 12 Oct ober 2035) wit h the value of each issuance is US$1 billion.

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Government

Government debt securities

debt securities

debt securities pro

debt securities

pro

profile

file

as of

as of October 31

October 31

October 31 2006

2006

Source: Minist ry of Finance Notes:

1) Tradable

2) _{Non-Tradable, Indexat ion value}

*) include ORI

Assumptions:

Exchange Rate = IDR 9, 110/ USD 1 GDP 2006 = IDR 3, 119 t rillion

GOVERNMENT DEBT SECURITIES NOMINAL % of GDP % of Total

I. Government Domestic Bonds

1. Fixed Rate 1) * IDR 233,471,501,000,000 7.49% 30.98%

2. Variable Rate 1) IDR 191,255,108,000,000 6.13% 25.38%

Sub Total IDR 424,726,609,000,000 13.62% 56.36%

3. Bonds to Bank Indonesia 2) IDR 278,078,732,114,287 8.92% 36.90%

Sub Total IDR 278,078,732,114,287 8.92% 36.90%

Total Government Domestic Bonds IDR 702,805,341,114,287 22.53% 93.26%

II Government International Bonds

Total Government International Bonds USD 5,500,000,000 6.74%

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2006 Debt financing program

Debt financing program

• By the end of October, actual net debt financing already achieved IDR 37. 36 trillion, meanwhile

bonds mature for the rest of 2006 will be IDR 1. 52 trillion.

• GOI already achieve target of net issuance IDR 35. 77 trillion.

Not e:

- Figures ar e in t rillion I DR,

- Non Debt inclu de: Priv at izat ion , Asset Sale an d Gov ’t Capit al Part icipat ion Tot al Revenue (t rillion) 6 25 , 2 2 0 , 6 % 6 59 , 1 2 1 , 1 %

Expendit ur e 6 47 , 7 2 1 , 3 % 6 99 , 1 2 2 , 4 %

of whi ch Int er est payment 76, 6 2, 5% 82, 5 2, 6% Domest i c 48, 6 1, 6% 58, 2 1, 9% For ei gn 28, 0 0, 9% 24, 3 0, 8%

Capi t al 63, 0 2, 1% 69, 8 2, 2%

Primary Balance 54, 2 1 , 8 % 42 , 5 1 , 4 %

Overall Balance (22 , 4) -0 , 7 % (40 , 0) -1 , 3 %

Financing 22, 4 0 , 7 % 40 , 0 1 , 3 %

Non Debt 26 , 0 0 , 9 % 19 , 5 0 , 6 % Debt (3 , 6) -0 , 1 % 20 , 5 0 , 7 % Govt Securit ies (Net ) 24, 9 0 , 8 % 35 , 8 1 , 1 % Official Borrowing (28 , 5) -0 , 9 % (15 , 3) -0 , 5 %

Di sbur sement 35, 1 1, 2% 37, 6 1, 2%

Repayment (63, 6) -2, 1% (52, 8) -1, 7%

Assumpt i ons:

GDP (t r i l l i on) 3. 040, 8 3. 119, 1 Gr owt h (%) 6, 2 5, 8 Inf l at i on (%) 8, 0 8, 0 3-mo SBI (% avg) 9, 5 12, 0 Rp / USD (avg) 9. 900, 0 9. 300, 0 Oi l Pr i ce (USD/ bar r el ) 57, 0 64, 0 Oi l Li f t i ng (MBCD) 1. 050, 0 1. 000, 0

2 0 06 Budget 2 0 0 6 -Revised

*) Non-t r adabl e bond t o Bank Indonesi a, mat ur ed i n Dec'06

Init ial Target (Net ) 24, 886

Realizat ion, up t o Oct , 31

Issuance 60, 979

Domest i c Currency 42, 579 Convent i onal 39, 295 Ret ai l 3, 284 Forei gn Exchange 18, 400

Redempt ion (23, 620) Buy Back

-Tot al Act ual Financing (Net ) 37, 359

New Target (Net ) 35, 772

Net Financing left over (1, 587)

Source of Financing (rest of FY)

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2007 Debt Financing Program

• In 2007 budget, the Government is

t arget ed t o finance budget deficit at the net amount of IDR40, 6 trillion;

• To meet such t arget , t he Government plans to conduct regular monthly

issuance in domestic market and will ent er int ernational market with very measurable obj ectives.

• To ensure market absorpt ion and

liquidit y, Government priorit ised t he market infrast ruct ure development by est ablishing primary dealers syst em, diversifying product, and st rengt hen market regulat ion.

Tot a l Reve nue ( t rillion) 7 2 3 .0 5 7 2 0 .5 %

Ex pe ndit ure 7 6 3 .5 7 0 2 1 .6 %

of which interest paym ent 85.086 2.4% Dom estic 58.421 1.7% Foreign 26.665 0.8%

Prim ary Bala nce 4 4 .5 7 3 1 .3 %

Ove ra ll Balance ( 4 0 .5 1 3 ) - 1 .1 %

Fina ncing 4 0 .5 1 3 1 .1 %

N on- D ebt 1 4 .4 6 2 0 .4 %

D ebt 2 6 .0 5 1 0 .7 %

Gov't Securit ies ( net ) 4 0 .6 0 6 1 .1 %

Officia l Bor row ing ( 1 4 .5 5 5 ) - 0 .4 %

Disbursem ent 40.274 1.1% Repaym ent ( 54.830) - 1.6%

Assu m pt ions:

GDP ( trillion) 3,531.1 Growth ( % ) 6.3 I nflation ( % ) 6.5 3- m o SBI (% avg) 8.5 Rp/ USD ( avg) 9,300.0 Oil Price (USD/ barrel) 63.0 Oil Lifting ( MBCD) 1,000.0 Note:

Non- Debt include: Privatization, Asset Sale and Gov't Capital Participation

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Macroeconomic Stability

Concluding Remarks

Banking indicators

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20

Ban

Banking indicators

king indicators

Banks maintaining reasonable performance

Source: Bank Indonesia

% % _{NPL ratios decline during the course of}

2006

Banks well capitalized with CAR at around

21% as of August 2006, far above the required level of 8%

LDR1 _{relatively stable during 2006 at}

around 64-65 %. In Sept ember 2006 LDR recorded at 65%.

Net int erest income (NII)2 _{in Sept ember}

2006 was Rp 6. 2 trillion, similar to December 2005 figure, despit e slowing credit expansion

RoA stable at around 2. 6% with significant rise in t ot al asset s.

1_{Loan calculat ions include channeli ng loans}

2_{Cal culat ed as NII f or t he part i cular mont h divi ded by earni ng asset s}

f or t he correspondi ng peri od 27

Main Banking Indicators

Highlights

21.0 20.5 21.7 19.5 19.4 19.4 22.4 19.9 8.5 5.1 _4.9 8.7 9.4 8.3 5.8 8.2 8.1 12.1 5.6 4.8 1.7 3.0 2.1 3.6 17.5 18 18.5 19 19.5 20 20.5 21 21.5 22 22.5 23

2001 2002 2003 2004 2005 Qi

'0 6 Q2 '0 6 'S ep 06 0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0

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Prudential Regulations st rengt hened

(October 2006 Banking Policy Package )

• Two Bank Indonesia Regulations concerning Commercial Banks:

1. Updat ed provisions concerning t he Legal Lending Limit (LLL)

2. Special t reat ment in banking services f or cust omers in disast er-hit areas • Four Bank Indonesia Regulations concerning Rural Banks:

1. Amendment of t he capit al requirement

2. Changes in earning asset qualit y and allowance f or earning asset losses 3. Changes t o t he Annual Financial St at ement and Published Financial

St at ement t o accommodat e t he operat ion of t he linkage programme; and 4. New provisions concerning est ablishment and of f ice net works of Rural Banks • Five Bank Indonesia Regulations concerning Islamic Banking:

1. Changes in asset qualit y rat ing f or sharia commercial banks; and

2. Changes in t he calculat ion of t he Financing Deposit Rat io (FDR) wit hin t he St at ut ory Reserve Requirement .

3. New minimum capit al requirement f or Sharia Rural Banks; 4. Changes in asset qualit y f or Sharia Rural Banks; and

5. Relaxed requirement s f or business development and of f ice net work expansion f or Sharia Rural Banks.

• Regulation measures for consolidation of the Indonesian banking industry.

1. St ipulat es t he Single Presence Policy (SPP) f or t he Indonesian Banking Syst em; 2. Incent ives f or bank mergers.

3. St rengt hening of good corporat e governance (GCG).

Current banking initiatives & policies:

More efforts to consolidate the Indonesian banking

industry

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Prudential Regulations st rengt hened

(January 2006 Banking Policy Package )

Adj ust ment t o rul es on qual it y of commercial bank earning

asset s

Expansion of publ ic access t o shar ia banking ser vices t hr ough

of f ice channel l ing

Ext ension of banking net wor k t o micr o, smal l and medium sized

ent erprises

Adj ust ment of risk weight ed asset s f or mort gages and l oans f or

civil servant s, mil it ary personnel and ret irees

Cust omer pr ot ect ion scheme t hr ough l aunching of banking

mediat ion pr ogram

Impl ement at ion of Good Corporat e Governance f or commercial

banks

Financial sect or reform package (banking sect or)

Impr ovement s t o t he banking indust ry in l ine wit h t he bl ue pr int

f or Indonesia’ s Banking Archit ect ure

Measures t o improve perf ormance at st at e banks, incl uding

resol ut ion of NPLs t hrough amendment s t o rel at ed regul at ions

Current banking initiatives & policies:

More efforts to consolidate the Indonesian banking

industry (cont

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Macroeconomic Stability

Concluding Remarks

Improvements to investment climate

Accelerated provision of infrastructure

Strengthening of financial sector

New energy policy

Poverty alleviation

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24

Investment Climate Package

( Policy and progress )

General

Improvement and simplification of trade

licensing regulations has been completed

Delegation of authority for legal validation

of limited companies to regional offices to reduce processing time.

National Single Window Team has been

established. NSW pilot proj ect launched in Batam

Establishment of j oint team for supervising

work on draft Regional Government

regulations & evaluation of existing regional government regulations

By Sept ember 2006, the Ministry of Finance

had issued recommendations for revocation

of a total of 911 Regional Government

Regulat ions (PERDAs). The Minist ry of Home

Affairs has revoked 763 PERDAs

• St rengt hen invest ment service inst it ut ions

• Transparency

• Equal t reat ment of domest ic and f oreign invest ors

• Disput e set t lement mechanisms

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25

Establishment of clear and transparent criteria Service desks at Maj or Tax Offices

Planned revision of VAT to promote

export activities

Tax

Streamlined processing time Implementation of EDI system to

improve efficiency

Customs

Establishment of Government Revenue

Module which improve efficiency & transparency in government revenue system. The Module is operated based on online syst em among Cust oms Office, Tax Office & DG of Treasury

Draft Tax Law submit ted to Parliament.

Simplifications of customs inspection

procedure by issuing a number of

regulations including Ministry of Finance Regulation

Development of EDI syst em in August

2006 to reduce the time release target.

Investment Climate Package

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26

Review of Labor Law No. 13/ 2003, specifically

addressing issues of retrenchment, severance and other matters affecting labor rights, also minimum wages and outsourcing

Development of Employment Dispute Information

System

Development of online j ob search syst em t o

enhance effectiveness of workforce allocation

Labor

Independent academic st udy t eam

commissioned had already undertook comprehensive study.

Team has submitted preliminary

findings at the end of September 2006.

Submission t o Parliament of a draft

amendment of Law No. 13/ 2003

Investment Climate Package

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27

•

Regulatory Reform, including Revisions

to Laws and Regulation

•

Improved policy coordinat ion for t he acceleration of infrastructure

provision.

•

Provision of Public Privat e Part nership (PPP) Program

•

Improving land acquisit ion procedures

•

Est ablishment of PPP Cent re and nodes

•

Strategic Policy on Infrastructure

Financing:

•

Strategic review of Public Service

Obligation (PSO) policy.

Accelerated Provision of Infrastructure

( Policy and Progress)

•

The establishment of new sets institution building i. e. Consitutional Court and Judicial Commision

•

Revitalization of The National Committee for the Acceleration of Infrastructure Provision (KKPPI).

•

The framework and guidelines of PPP has been stated in the Presidential Regulation No 67/ 2005

•

Development of Risk Allocation Framework – MoF Decree No. 38/ 2006 and Establishment of Risk Management Unit on Infrastructure Provision, MoF

•

Policy Paper on Infrastructure Financing for non-bank institutions (Infrastructure fund)

(28)

28

•

Improved coordination between fiscal

and monetary authorities

•

Policy on strengthening banking

institutions and building performance

of SOE Banks

•

Strengthening of non bank financial

institutions: insurance, pension

funds, finance companies & venture

capital firms

•

Enhancement of capital market:

liquidity, efficiency and integrity

•

Clarification of Government policy

direction for privatization

Strengthening of Financial Sector

(Policy and Progress)

•

Deposit Insurance Agency Regulation

regarding t he role and guidelines of the institution to handle unhealthy banks that could t rigger systemic problems.

•

The est ablishment of Mediat ion Agency for Indonesia Insurance in Sept ember 2006.

•

The est ablishment of road map pension

fund program in Sept ember 2006.

•

The issuance Bank Indonesia regulation

regarding incent ive for banks merger and consolidation.

•

The est ablishment of Commit t ee for

Privat isat ion of St at e Ent erprise. The t ask of t he commit t ee is t o formulat e general policy for privat isation.

•

A clear legal ruling on separat e

(29)

29

New Energy Policy

DEMAND SIDE:

• Target Main Consumers:

– St at e Elect ricit y Company (PLN)

» Diversification toward non-pet roleum based generat ion

– Households

» Kerosene reduction program through city gas and LPG

– Transport at ion

» CNG-based public transportation in Jakart a and Surabaya

SUPPLY SIDE

• Promot e new development in oil and gas sector

– Improvements to investment climate in oil and gas sector

• Green Energy Program

– Fiscal incent ives for green energy (bio-fuel)

• New Energy, Elect ricit y and Mining Laws under preparat ion

• Reduces Subsidies

• Reduces Cost s

• Creat es Empl oyment

• Diver sif ies Energy Sources

• New St eam Power Pl ant , Cap : 2X660MW

• New Hydr o Power Pl ant , Cap : 3X 70MW

• Power Pl ant Crash Program : 10. 000 MW

(30)

30

Poverty Alleviation

–Uncondit ional Cash T ransf ers

» Covers about 19 million HH living in

povert y or near-povert y

» Program is biggest of it s kind in world

» Preliminary evaluation shows coverage on

par with world best practices.

» In 2007 and beyond, t o be t ransformed int o

conditional cash transfers linked to educat ion, health and nut rit ion.

–Rice f or Poor Households

» Effective social safety net – rice accounts

for 30% of spending by households.

» Int roduced during t he1998 El Nino and

Financial Crisis

» Covers about 10 million households. » Will be cont inued in 2007

–Communit y Based Part icipat ion Program:

Kecamat an Development Program (KDP)

• Int roduced in 1999

• Covers Kecamat an (Sub-districts) in

Indonesia.

• For development of infrast ructure and basic services

• Open menu and competition based

• Typical cash for work program.

• Phased expansion to cover all Kecamat an in

Indonesia in 2009 (rural and urban areas)

• Independent evaluation shows program not only improves rural infrast ruct ure but also increases social capital stocks. Compared to typical government proj ects, costs savings more t han 30 percent

(31)

31

SME Policy Packages (in progress

)

Main Obj ect ives

Upgrade SME Productivity

Encourage Ent repreneurship

Facilitat e SME Partnerships with

Large Firms

Policy D ir e ct ion

Deregulation at Central and Local Government levels

Improved SME Access to Bank Lending

Revitalization of Vocational Training

(32)

Macroeconomic Stability

(33)

33

Improved Investors’ Confidence in the

Indonesian Economy

Source : Bloomberg 100 150 200 250 300 350 400 J un-05 Ju l-0 5 A ug-05 S ep-05 Oc t-0 5 No v -0 5 De c -0 5 J an-06 F eb-06 Ma r-0 6 A p r-0 6 Ma y -0 6 J un-06 Ju l-0 6 A ug-06 S ep-06 Oc t-0 6

INDO'14 INDO'15 INDO'35

Spread on Sovereign Bonds

Improved invest or’ s confidence of the Indonesian economy can be shown in the increasing foreign ownership of Indonesian government bonds and t ight ening credit spread.

7.78 %

12.89 %

2.69 %

1.55 % 0.48 %

Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Oct-06

Foreign ownership in government bonds

As % of t ot al out st anding t radabl e IDR Government bonds, excl udi ng non t radabl e bonds issued t o Bank Indonesia