INDONESIAINDONESIA REBOUNDSREBOUNDSGINANDJAR
GINANDJAR KARTASASMITAKARTASASMITA
TheThe Japan
Japan Institute
Institute ofof International
International Affairs
Affairs
Tokyo,Tokyo, 21
21 February
February 2007
2007

Macroeconomic Update

JIIA_Tokyo_07

www.ginandjar.com

2 Macroeconomic Development
 Outlook 2007
 Policy Reform Initiatives

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3Positive Growth Trajectory
Sustained economic growth despite difficult environment
 Economy is on a steadyupward trend. Indonesia’s
performance is very muchcomparable in the region

> 7%
6-7%
5-6%
5.25 % Over the medium term, thisacceleration process shouldcontinue assuming that allreform programs areimplemented.

4%

2001-2003 2004-2005
Source: CBSJIIA_Tokyo_07

20062007 - 2009 2010 beyond.
www.ginandjar.com

4Macroeconomic UpdateIndonesia: Economic Growth 1998-2006

Growth steadily recover

4.9 5.1

5

4.9
3.8

5.2
4.4

5.7

6.5

6

4.9

5.1

2003

2004

6.5

5.6

5.6

2005

2006

Percent p.a

0.9 1.2

01998

1999

2000

2001

2002

-5



-10

-15

- 13.8- 14.1

GDP

M a rk e t c o n fid e n c e s tre n g th e n

R p /U S $11000

83=1001800

s to c k in d e x (R H S )

1700

10500

1600
1500

10000

1400
9500

1300
1200

9000



1000
E x c h a n g e ra te s (L H S )Stock prices are historic highExchange rates are stable
Reserves stronger and still increasing
Ratings upgraded.

Macroeconomic Stability has beenachieved


1100

8500

8000
J a n -0 5Confidence has been restored after fuelprice adjustment.


Non Oil and Gass2006: reached 5.5%; government
consumption and expert driven;
investment remains weak.
Medium Term
– 2007-2009 : 6-7 % p.a– After 2010 : 7+% % p.a

Y o y inflation down from 17% last year
to 6.6% or less this year
Over Medium Term: 3-4% is the target

900
800

M a y-0 5

JIIA_Tokyo_07

S e p -0 5

J a n -0 6

M a y-0 6

S e p -0 6

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5Manufacturing sector shows signsof recovery
Non Oil/Gas Industrial Growth 2005-2006
20.0%

15.0%

10.0%

5.0%

0.0%
Q1

Q2

Q3

Q4

Q1

2005

Q2

Q3

2006

-5.0%

Non Oil/Gas Industries

JIIA_Tokyo_07

FoodTextile

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Fertilizer

Cement6Other Macroeconomic Development
Fiscal sustainability has been reestablished.
Budget deficits has been contained around
1% of GDPpublic debt ratio down to about 40% at theend of 2006 and will continue falling tobelow 30% of GDP in 2011.

D e c lin in g B u d g e t D e fic its(% o f G D P )

0%
-1 %
-2 %
-3 %
R e vis e d b u d g e t-4 %R e a liz a tio n-5 %B udget
-6 %
-7 %
-8 %
FY98



FY99

On spending sidePublic spending now back to the pre crisis
level around 7-8% of GDP but with different
composition.
Sub-national gov’t control more than 50% of
total
Education spending on the rise and now
comparable to the peer countries around 45% of GDP
Spending on health and infrastructure aalso increasing.
Commitment for PPP development.

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FY 01

FY02

FY03

FY04

FY05

FY06

FY07

Public Investment(% of GDP)

8%
7%

DistrictCentral gov't

6%

Province

5%
4%
3%
2%
1%
0%
1996

JIIA_Tokyo_07

FY00(9 m )

1997

1998

1999

2000

2001

2002

2003

2004

2005
(E)

2006
(P)

72007
(P)

Sustainable macroeconomic stability
A positive outlook on macroeconomic stability should translate
into a reduction of cost of finance
17 %7%

 Stabilization of rupiah at stronger

6.5 %
3-4 %

12000

2006

2005

2007

2007-2009 201816
141210864210000
8000
6000
4000
2000
0
2001
IDR/USD

2002

2003

2004

2005

Q106Inflation rate yoy SBI 1 month - BI Rate

JIIA_Tokyo_07

Q206

Q306

Oct 06level support declining inflation thus
providing room for policy rates todecline.
 CPI inflation : 6.6%
 Inflation easing toward targeted level Risks for destabilizing inflation stillhigh: rice price has been increasing
since last December.
Source: Bloomberg & BI

SBI 1 month - BI Rate

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8External position remains
promising
Current account position has
turned around

Rise in FX reserves
USDbn

USDbn

350
45

2003

2004

2005

2006

-2
Current Account (LHS)-50%

Source: Bank Indonesia

JIIA_Tokyo_07

Export (RHS)

4.5

Import (RHS)
-3

6.0
5.0

25
4.0

20

-1
-30%

5.9

5.0

1528

32

36

36

35

43

3.0

10

2.0

5

1.0

00.0

www.ginandjar.com

2006*

2002

5.52001

2001

7.0

2005

0

6.6

353010%

-10%

40

2004

18.0

7.1

2003

230%

9.0

Months of import and official debt
repayment (RHS)

2002

50%

MonthsFX reserves (LHS)

9

Continued improvement
in external debt position
External Debt

2001

2002

2003

27.1

2004

46.0
2 6 .6
1 9 .532.2

54.2
3 1 .92 2 .241.4 33.1

3 3 .92 2 .83 7 .3
2 8 .4

56.8

22.1

2005

2 1 .3

65.7

90.0
80.0
70.0
60.0
50.0
38.6
40.0
25.8 30.0
20.0
10.0
0.0
1 4 .680.7
4 2 .1
3 8 .6

45.0
40.0
35.0
30.0
25.020.0
15.0
10.0
5.0
-Key highlights

 Debt to GDP ratio decline from
81% in 2001 to 47% in 2005, andexpected to reach 39% in 2006.
 There was a significant drop ofDSR in 2005 since there was
Paris Club moratorium due totsunami disaster in Aceh.

2006*

Govt Ext Debt / GDP (LHS)

Private Ext Debt / GDP (LHS)

Total Ext Debt / GDP (RHS)

DSR (LHS)

Note : External debt consists of central government, central bank and private debt
Source: Bank Indonesia

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10Improving Ratio of Short Term Debtto Reserve
35000
30000
25000
20000
15000
10000
5000
0120.00%

112.6%

100.00%
73.9%

62.0%

57.4%

80.00%

59.3%
45.9%

20.74%

23.89%
4.70%

6.42%

18.72%

11.29%

60.00%
40.00%
20.00%
0.00%

2001

2002

2003

2004

2005

Jul-06

Short term debt (OM)

Short term debt (RM)

Short term debt (OM) to Reserve

Short term debt (RM) to reserve

Note : OM = Original Maturity
RM = Remaining Maturity

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11Exchange ratemodest appreciation - low volatility
Average Exchange Rate

Highlights

Kurs, Rp/USD

Volatilitas, %11,0008.0

10,500Kurs Harian
Volatilitas

7.0

Rata-rata Volatilitas

6.0

10,000

5.0

9,500

4.0
3.0

9,000

2.0
8,500

• Rupiah stabilized and average exchange
rate during Q3 2006 was Rp. 9,125.
Relatively unchanged from Rp. 9,115 in
the preceeding quarter• Average exchange rate in Octoberdepreciate 0.26% to Rp. 9174 from Rp9153• Volatility stable at 0.5%

1.00.51-J u l-0 5
A u g -0 5
S e p -0 5
O c t- 0 5
N o v -0 5
D e c -0 5
J a n -0 6F e b -0 6
M a r-0 6
A p r-0 6
M a y -0 6
J u n -0 6
J u l-0 6
A u g -0 6
S e p -0 6
O c t- 0 6

8,000

Daily exchange
rate
JIIA_Tokyo_07
Volatility
Average volatility

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12

Fiscal Consolidation Outcomes
Sovereign Debt to GDP Ratio
100%
Compare to Other Emerging Countries

90%
80%

Domestic

70.0
63.1

70%
60%

50.0
% dari PDB

50%

59.0

60.0

External

40%

54.4
46.5

40.0

2006

20%

10.0

10%0.02007

Indonesia

JIIA_Tokyo_07

2005

37.5

30.0
20.0

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

45.1
42.4

40.9

30%0%

47.3

46.5 45.3 45.4

Malaysia

Philippines

ThailandSource: IMF, World Economic Outlook, Sept 2006

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13

Banking indicators: Banks maintaining
reasonable performance
Main Banking Indicators
Average CAR

23%
22.5

Gross NPL%
12.0
21.7

21.5
8.1

8.7

8.2

19.9

19.5
19.4 19.4
4.8

195.1

5.6

3.0

JIIA_Tokyo_07

Source: Bank Indonesia'Sep 06

Q2'06

Qi'06

2005

 Banks well capitalized with CAR at around

21% as of August 2006, far above therequired level of 8%
around 64-65 %. In September 2006 LDR
recorded at 65%.

6.0

 Net interest income (NII)2 in September

4.0

2006 was Rp 6.2 trillion, similar toDecember 2005 figure, despite slowing
credit expansion

4.92.02004

2006

8.0

1.72003

2002

2001

2.1

 NPL ratios decline during the course of LDR1 relatively stable during 2006 at

3.6

1817.5

8.5

20.5

10.0

5.8

19.5

18.5

21.0

9.4

8.3

20.5
20

Net NPL 14.0

22.4

22 12.1

21Highlights

0.0 RoA stable at around 2.6% with significant

rise in total assets.
1 Loan calculations include channeling loans
2 Calculated as NII for the particular month divided by earning

assets for the corresponding periodwww.ginandjar.com

14

No More IMF and CGI
 In 2006 Indonesia settled the remaining

debt to IMF amounting $ 7 billion, 4 yearsahead.
 In January 2007, GOI announced thedissolution of CGI.

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15

THE PROBLEMS
Macroeconomic development has not been
followed by improvements in the microeconomic(real) sectors; major constraint for economic
development.
 Lagging investment.
 Social Impact : increase of poverty from 16 % to17.75 % (equivalent to 19.1 million poor
households in 2006) and 10.85 million
unemployed.
 Tax Policy.
JIIA_Tokyo_07

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16

THE PROBLEMS
Manpower: labor law, low income, euphoria of
freedom of expression (demonstrations andstrikes).
 Infrastructure: inadequate infrastructure
constitute a major constraint to economy as well
as social life.
 Unstable and high oil prices in international
markets had given impact to socioeconomic lifeof the people.
 Political and security instability impact on
economic development, particularly toinvestment.


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17Outlook 2007
Tabel
Projected Economic Growth
World Output
Developed Countries
USJepang
Euro Area
Asia
ChinaIndia
Asean-4
World Trade Volume
Impor
Developed Countries
Expor
Developed Countries
Inflation
Developed Countries
Emerging and Developing Countries
LIBOR
on USDon Yenon Euro Deposit
Source: IMF

JIIA_Tokyo_07

2004
5.3
3.2
3.9
2.3
2.1
8.8
8
5.8
5.5

2005
4.9
2.6
3.2
2.6
1.3
9
8.5
5.1
5.7

2006
5.1
3.1
3.4
2.7
2.4
8.7
8.3
5
5.8

2007
4.9
2.7
2.9
2.1
2
10
7.35.6
5.4

10.6

7.4

8.9

7.6

9.1

6

7.5

6

8.8

5.5

862
5.6

2.3
5.3

2.6
5.2

2.3
5

1.8
0.1
2.1

3.9
0.1
2.2

5.4
0.5
3.1

5.5
1.1
3.7

• Global economy
slowing down
• Domestic demandshould be the driverfor economic growth

www.ginandjar.com– Public investment andprivate investment– Private consumption

18

Outlook 2007
 Economic Growth: 6 – 6,5% (Budget:6.3%; Consensus around 6 %)
 Inflation: 6-7%
 Policy Rate: 8-9,5% (Budget: 8,5% incurrent pace; policy rate to go down tobecomes 7,5% at the end of 2007); astimulus for reducing bank’s lending rate.

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19Outlook 2007
 The problem of purchasing power can becompensated in 2007 by: increase of civil
servant’s salary, minimum wage,
consumption credits, good control ofinflation and lending rate by BankIndonesia.
 The goal of economic development for
2007: reducing unemployment to 9.9 %and number of poor people to 16,4 %.
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20

Three Policy Packages
InvestmentClimate
Improvement

Infrastructure

Financial
JIIA_Tokyo_07

1

Investment Law & Procedure2

Tax & Custom Reform

3

Labor & Immigration

4

Trade Licenses

5

Cross Sector Strategic Policy Reform

6

Sector Restructuring, Corporatisation and Policy Reform

7

Regulation on monopoly & investment protection

8

Clear separation on the role of policy maker, regulator,
contracting agency, and operator

9

Coordination Monetary & Fiscal Authority

10

Financial Institution (Banking & Non Banking)11

Capitalwww.ginandjar.com
Market and SOE Privatization

21

New Reform Packages and Special ProgramsSME Policy Reform Package
 Focus on particularly four areas:− Access to Finance− Access to Market− Human Resource Development and Entrepreneurship− Regulatory Reform and Deregulation
Poverty Reduction Program Focus 1: Mainstreaming Budget for Poverty
 Focus 2: Integration and expansion of KDP (KecamatanDevelopment Program) and P2KP (Urban Poor) into PNPM
(National Program on Community Empowerment)
 Focus 3: Shifting Cash Transfer to Conditional CashTransfer
 Focus 4: Others like Biofuel, Housing and Rural
Infrastructures
Crash Program for Electricity Expansion
Crash Program for Energy Conversion
 LPG for Kerosene
 Gas for Gasoline
 Coal and Gas for Power Generation
 Bioenergy

Note : KDP = Kecamatan Development Program
P2KP = Program Penanganan Kemiskinan Perkotaan
PNPM= Program Nasional Pemberdayaan masyarakat.

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22

Investment Policies
New Investment Law is being finalized in theParliament.
 Streamlining investment procedures.
 Equal treatment of foreign and domestic
investment.
 Less negative list.
 More incentive to invest.
JIIA_Tokyo_07

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23

SOCIO-POLITICAL DEVELOPMENT

Indonesia is emerging from long period of
authoritarian rule to consolidate its status asone of the world’s largest democratic country.

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24Regime Change in Indonesia

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SukarnoSukarnoSuhartoSuharto• • AugustAugust1945
1945- -March
March
1968
1968
• • ElectedElectedby
bythethePPKI
PPKI• • ImpeachedbyMPRS
Impeached by MPRS

• • March
March1968
1968- -May
May1998
1998• • ElectedbyMPRS
Elected by MPRS
• • Resigned
Resignedunder
underpressurepressure

Abdurrahman
AbdurrahmanWahidWahid October
October1999
1999––July
July20012001
 ElectedElectedby
byMPR
MPR
 ImpeachedImpeachedby
byMPR
MPR

B.J.
B.J.Habibie
Habibie• • May
May1998-October
1998-October1999
1999• • Accountability
SpeechAccountability Speech
Rejected
Rejected• • Declined
Declinedtotorun
runforfor
President
President

Megawati
Megawati• • July
July2001
2001––October
October
2004
2004• • ElectedElectedby
byMPR
MPR• • Lostelection
Lost electiontotoSBY
SBY

SusiloSusiloBambang
Bambang
Yudhoyono
Yudhoyono• • October
October2004
2004––20092009• • Directlyelected
Directly elected

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25

SOCIO-POLITICAL DEVELOPMENT
Indonesia’s political and economic development
after the REFORMASI (1998) seems to be on
the right track.
 Socio-political development: amendment of1945 Constitution, improvement of checks andbalances system, direct presidential andregional executives elections, legal reform anddecentralization, human rights, freedom of thepress, bigger role of civil society.
 Peace in Aceh.
JIIA_Tokyo_07

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26

MAJOR PROBLEMS
1. Institutions: ambiguity between presidentialand parliamentary systems; weak bicameralparliamentary system, establishment of quasigovernment institutions, and confusion of roleand function in the judicial branch of government.
2. Political ethics and behavior:institutionalization of political acts versus
personification of political figures; money politics,manipulation of masses.
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27

MAJOR PROBLEMS
3. Major problems in governance includes






Reform of the bureaucracy
quality of civil servants
corruption
inefficiency
low salary
Impact of problems in bureaucracy on socioeconomic domains.

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28

MAJOR PROBLEMS
4. Ethno-nationalism: as negative impact ofdecentralization and political freedom(euphoria: from autonomy to special
autonomy to independence?)

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29

MAJOR PROBLEMS Political trust and social trust: problem inlaw enforcement (frequently constrained byissues of human rights and freedom ofexpression).
 Pluralism: negative impact of pluralism in theform of horizontal conflicts along religious,
ethnics, socio-economic divide.
 Terrorism.

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30

MAJOR PROBLEMS
5. Major ecological problems: Tsunami,
earthquakes, volcanic eruptions, mud eruptions,deforestation, illegal logging, forest fires, floods
and landslides
6. Major health problems: avian flu and dengue
fever

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31

Japan-Indonesia Relationship Japan is a traditional and natural economic partner andpolitical ally of Indonesia. Good relation and mutualinterest between the two countries have to bemaintained.
 Generally Japanese people and the Japanese BusinessCommunity are “losing interests” in Indonesia, giving
more attention to China and India.

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32The Current Stateof Economic Cooperation
 TradeYearIndonesia’s
Export to Japan

Indonesia’s Importfrom Japan2005

US$ 20.8 billion

US$ 9.2 billion

US$ 11.6 billion

2006(Jan-Dec)

US$ 23.9 billion

US$ 7.3 billion

US$ 16.6 billion

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Surplus33

The Current Stateof Economic Cooperation . . .
 ODA Almost 40% of Indonesia’s ODA comes fromJapan:
 Economic
 SocialSectors

 Institutional Capacity Building Technology

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34

The Current Stateof Economic Cooperation . . .
 Investment
 Japan is still the biggest investor in Indonesia

among 103 countries with US$ 39 billion in1.715 projects (13% of the total FDI) up toJune 2006.

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35

Changes for Promising
Countries/Regions over the Medium-term

Note: “Medium-term” means the next 3 years or so.
Source: JBEC Institute, Dec 2006
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36

Milestones for Enhanced Cooperation
Indonesia-Japan Strategic Investment Action Plan (SIAP)
At the meeting between Prime Minister Junichiro Koizumi andPresident Susilo Bambang Yudhoyono on 2 June 2005, the twoleaders announced the Japan-Indonesia Strategic Investment Action
Plan (SIAP).
 This was an initiative to promote foreign investment in Indonesia
based on the shared recognition that a substantial increase inforeign investment is essential for poverty reduction and employment
generation, and that increased investment from Japan to Indonesia
is an important challenge also for revitalization of the Japanese
economy.
 SIAP is composed of 118 action items in 5 sectors, namely, tax,
customs, labor, infrastructures, industrial competitiveness/small andmedium enterprises.
JIIA_Tokyo_07

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37

Milestones for Enhanced Cooperation . . .
 The significance of the November 2006 visit ofPresident Susilo Bambang Yudhoyono to
Japan:

Signing of the Strategic Partnership for Peacefuland Prosperous Future.
 Signing of the Principles of Economic Partnership
Agreement (EPA).
JIIA_Tokyo_07

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38

Indonesia-Japan Economic Partnership
Agreement (IJ-EPA)
a. Trade in Goods (Tariff and Non-Tariff Measures,
Rules of Origin, Trade Remedies).
b. Trade in Services.
c. Customs Procedures.
d. Investment.
e. Movement of Natural Persons.
f. Energy and Mineral Resources.
g. IPR.
h. Government Procurement.
i. Competition Policy.
j. Improvement of Business Environment andPromotion of Business Confidence.
k. Cooperation
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39

Political Cooperation
Bilateral.
 Regional.
 Multilateral.
JIIA_Tokyo_07

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40

Momentum of the 50th Anniversary ofIndonesia-Japan Diplomatic Relations
2008
Broadening and deepening exchanges andcross generational mutual understanding.
 Milestone for a more advanced and maturebilateral relations.
 Contribution to peace, stability and economic
growth on the East Asia region.
JIIA_Tokyo_07

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41

JIIA_Tokyo_07

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JIIA_Tokyo_07

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