The Republic of Indonesia Fiscal Policy Update November 2008.

The Republic of Indonesia

Fiscal Policy Update

November 2008

2

Table of Content

1. Impact of the Global Financial Crisis

2. Action Taken & Fiscal Policy Response

3. Conclusion

1. Impact of the Global Financial Crisis

Further Depreciation of Rupiah

IDR and JCI PerformancesDepreciation of Stock Indices & Exchange Rates

(Jan-Nov 2008)

-47.1

-46.2

-58.3

-54.0

-51.2

-40.0

-52.0

-54.7

-34.4

-35.6

-18.2

-21.2

-9.0

-6.4

Korea

Brazil

Indonesia

Thailand

Philippines

Malaysia

Singapore

Stock Index Exchange Rate

8,500

9,000

9,500

10,000

10,500

11,000

11,500

12,000

12,500

1-Jan 23-Feb 16-Apr 8-Jun 31-Jul 22-Sep 14-Nov

1,000

1,500

2,000

2,500

3,000IDR/USDIHSG [rhs]

Rp 12,738

1.146,3

30,000

40,000

50,000

60,000

70,000

Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08

Foreign Reserves Capital outflows from Bank Indonesia certificates, domestic government bonds and the international capital Markets to safe-haven

Decreasing of USD liquidity in the international capital markets and depreciation of rupiah

Competition to Seize Capital in the Capital Markets Leads to an Increase in Interest rates and Cost of Capital

3.00

5.00

7.00

9.00

11.00

13.00

15.00

4-Sep-08

11-Sep-08

18-Sep-08

25-Sep-08

2-Oct-08

9-Oct-08

16-Oct-08

23-Oct-08

30-Oct-08

6-Nov-08

13-Nov-08

%

INDON 17/18

UST 10 years

-1 year 20 Nov 08

5 Y 9.689 16.801

10 Y 10.251 17.076

30 Y 10.855 17.413

INDO-10 6.265 13.532

Periode

YIE

LD

SU

N

Higher Yield Curve of Government Bond (UST yields increased by 500 Bps and Indonesian government bond yields increased by 300 bps)

Refinancing of government bonds and the private sector will become more expensive and difficult

6

Exports tend to decline and imports will be slower while the real sector will be slowly impacted

40

60

80

100

120

140

160

Ja

n-0

8

Feb

-08

Ma

r-0

8

Apr-08

Ma

y-08

Ju

n-0

8

Ju

l-0

8

Aug

-08

Sep

-08

Oct-

08

No

v-08

Palm Oil Rubber

CPO & Rubber Price Sharply Decline......CPO & Rubber Price Sharply Decline......

10%

15%

20%

25%

30%

35%

40%

45%

50%

55%

60%

J an. Feb. Mar. Apr. May. J un. J ul. Aug. Sep. Oct. Nov. Dec. J an. Feb. Mar. Apr. May. J un. J ul. Aug. Sep. Oct

2007 2008

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

Total Export Total Import Export Growth Import Growth

7

5.0%5.7% 5.5%

6.3% 6.2% 6.0%5.0%

0%

8%

16%

24%

0%

2%

4%

6%

8%

2004 2005 2006 2007 2008* 2009*

Growth of GDP

GDP HH Consumption Exports Investment

Growth of GDP (Quarterly)

6.09

6.41

6.51

6.25

6.44

6.11

5.90

6.32

5.7

5.9

6.1

6.3

6.5

6.7

2007Q1 2007Q2 2007Q3 2007Q4 2008Q1 2008Q2 2008Q3 2008Q4

Forecast of 2008 Economic Growth will be Slower

2. Actions Taken and Fiscal Policy Responds

Policy Response

Place government funds at state-owned banks to increase liquidity in the banking system

Increase the amount of deposits guaranteed by the government in the banking system

Adjust the financial sector with prudential regulations (banking and the capital market) according to the needs

Recognize the importance of monetary policy support as deemed appropriate to domestic conditions

Manage SoE foreign exchange transactions to reduce speculation

Maintain the sufficiency of foreign exchange reserves through trade financing facilities, control of consumption goods imports and illegal imports

Accelerate the disbursement of program loans for government and SOE projects

Prepare Crisis Protocol (Implementation Committee of Financial Sector Stability)

Reduce government bond issuance in 2008 and 2009

Redefine emergency funding in State Budget Law 2009 based on emergency conditions for anticipating of global crisis impact

Design standby financing for counter-cyclical or stimulus in 20009 Budget

10

2008 Budget Outlook

Maintain fiscal stability in the face of external economic shocks

Key Assumptions

Source: Ministry of Finance

Official State Budget

2008 budget outlook deficit is 1.1%, down from original target of 2.1% of GDP

Oil price decline helps to reduce energy subsidies and budget deficit

No bond issuance since October 2008 due to volatile market conditions

Revised 2008 Budget 2008 Outlook

GDP Growth (%) 6.4 6.3

Inflation (%) 6.5 12.5

Exchange Rate (US$/IDR) 9,100 9,606

3 Month SBI Rate (%) 7.5 9.1

Crude Oil Price (US$/Bbl) 95 100.5

Crude Oil Production (000 Bbl/day) 927 933

Fuel Consumption (mm KL) 38.0 39.3

In IDR trillionRevised 2008

Budget2008

Outlook

A. Total Revenues & Grants 895.0 950.1

I. Domestic Revenue 892.0 948.0

(i) Tax Revenue 609.2 642.8

(ii) Non-tax Revenue 282.8 305.2

B. Total Expenditures 989.5 1,001.5

I. Central Government 697.1 706.9

(i) Ministry / Agency 290.0 261.0

(ii) Non-Ministry / Agency 407.0 446.9

Interest Payments 94.8 93.1

Subsidies 234.4 268.2

– Energy 187.1 213.2

– Non-Energy 47.3 55.0

II. Regional Transfers 292.4 294.6

C. Surplus / (Deficit) (A-B) (94.5) (51.4)

% of GDP (2.1%) (1.1%)

D. Financing (I+II) 94.5 61.6

I. Domestic Financing 107.6 73.4

o/w Government Bonds, Net 117.8 86.4

II. Foreign Financing (13.1) (11.8)

o/w Program Loan 26.4 31.3

11

2009 Budget

The 2009 budget gives the government enough room to adjust to the impact of the global financial turmoil

Key Assumptions

2009 Budget

GDP Growth (%) 6.0

Inflation (%) 6.2

Exchange Rate (US$/IDR) 9,400

3 Month SBI Rate (%) 7.5

Crude Oil Price (US$/Bbl) 80

Crude Oil Production (000 Bbl/day) 960

Fuel Consumption (mm KL) 36.8

In IDR trillion2009

Budget % of GDP

A. Total Revenues & Grants 985.7 18.5

I. Domestic Revenue 984.8 18.5

(i) Tax Revenue 725.8 13.6

(ii) Non-tax Revenue 258.9 4.9

B. Total Expenditures 1,037.1 19.5

I. Central Government 716.5 13.4

(i) Ministry / Agency 322.3 6.1

(ii) Non-Ministry / Agency 394.2 7.4

Interest Payments 101.7 1.9

Subsidies 166.7 3.1

– Energy 103.6 1.9

– Non-Energy 63.1 1.2

II. Regional Transfers 320.5 6.0

C. Surplus / (Deficit) (A-B) (51.3) (1.0)

% of GDP (1.0%)

D. Financing (I+II) 51.3 1.0

I. Domestic Financing 60.8 1.1

o/w Government Bonds, Net 54.7 1.0

II. Foreign Financing (9.4) (0.2)

o/w Program Loan 26.4 0.5

Official State Budget

2009 budget deficit is expected to be 1.0% of GDP as compared to 2.1% of GDP of the revised budget 2008 and 1.1% of GDP of 2008 outlook

Safety nets and crisis prevention mechanisms are built into the 2009 state budget

Source: Ministry of Finance

12

Macroeconomic assumptions used are still optimistic despite of inclusion for downside risks

Moderate tax revenue growth of 20% for 2009 Implementation of the new Income Tax Law that provide lower rate, increase treshhold,

incentives for certain sectors and regions.

Currently implementing the Income Tax Law, which lowers tariffs and increases minimum thresholds, and provides tax incentives to certain sectors (food, energy, textile and footwear and export-oriented small and medium enterprises) and regions, in order to reduce costs for businesses

Improve transparency for the calculation of cost recovery and revenue from the oil and gas sector

Use all fiscal, trade and industry instruments to support the real sector, boost investment climate and increase competitiveness of Indonesia’s economy

Summary of 2009 Budget

13

Increase fiscal reserve to fund budget deficit

Priority is given to poverty alleviation and education (BLT, PKH, PMPH and BOS), health care and infrastructure (road, bridge, airport and electricity) programs

Shift financing sources from marketable securities to standby financing facilities from bilateral and multilateral institutions

Design standby financing for countercyclical/stimulus in Budget 2009

Preparing Crisis Protocol (Implementation Committee of Financial Sector Stability)

Summary of 2009 Budget

14

Measures are Taken to Maintain State Budget 2009 Sustainability

Offensive (Counter-Cyclical)Defensive

High awareness and proactive management of the impact of the global financial crisis on Indonesia

Reduce income tax rate for both individuals and corporates by 2% and a further 5% for listed companies

Provide tax incentives for certain sectors and regions and relax tax tariffs for several sectors such as crude palm oil

Allocate non-energy tax subsidies of IDR 10 trillion as a counter-cyclical fiscal measure

Increase or focus expenditure on large industrial sectors which have greater impact on employment creation and poverty reduction

Upsize financing from bilateral and multilateral organizations

Obtain additional funding from foreign loans through private placement with sovereign wealth funds, international financial institutions and ASEAN+3

Reduce expenditure for lower priority projects and imports

Reallocate central and provincial government expenditure if needed

Redefine emergency funding in State Budget (APBN) Law 2009 based on emergency conditions (GDP and other macroeconomic assumptions), SBN funding costs and banking systemic risk

Increase fiscal reserve to mitigate against any increase in fiscal risk due to deviation from current macroeconomic assumptions

Lower revenue growth target for tax collection

Reduce deficit target to 1% of GDP with less reliance on financing from the capital markets

15

Debt Financing Strategy 2009

Demand for government bonds will be impacted

A decline in investor interest from the U.S. and Europe, which are the largest buyers (65%) of Indonesian global bonds

Foreign investors will also reduce the purchase of rupiah bonds

Banks, the primary buyer of government bonds, need to maintain sufficient liquidity

Obtain alternative financing from bilateral and multilateral organizations and institutional investors

The availability of loan programs to finance the deficit

The demand for the issuance of Sukuk remains strong

Private placement with bilateral agencies, international Financial Institutions and sovereign wealth funds

Standby financing facilities amounting to USD5.5 billion are arranged with bilateral and multilateral organizations

          Year2007 2008 2009

(USD billion) Audited 39,742.00 39,742.00A   Overall budget deficit 5.30 6.40 5.61

Primary budget deficit -3.19 -3.76 -5.20Interest Payments 8.49 10.15 10.81

Commercial debt 5.75 6.90 7.38Official loans 2.74 3.25 3.44

B Amortization 12.51 10.76 11.33Commercial debt 6.35 4.17 4.77Official loans 6.16 6.59 6.55

C Other 0.21 0.30 1.42A + B + C Gross financing need 18.03 17.46 18.36               D + E Gross financing plan 18.03 17.46 18.36D   Domestic and commercial 14.41 12.45 12.81

Banking and other sources 1.98 0.10 2.21Debt 12.43 12.35 10.60

IDR Bonds 10.99 8.10 8.10USD Bonds 1.44 4.25 2.50

Official foreign financing 3.62 5.01 5.55Program loans 2.09 2.70 2.81Project loans 1.54 2.31 2.74

               Memorandum Items        

Exchange rate: IDR per USD 9,140.00 9,257.00 9,400.00Nominal GDP (IDR trillion) 3,957.40 4,732.60 5,327.50

Indonesian Government Financing Table

17

  Domestic   External   Total

(IDR tn) (USD bn) (USD bn) (IDR tn) (IDR tn) (USD bn)

  (1) (2) (3) (4) (1 + 4) (2 + 3)

January 0,00 0,00 0,38 3,62 3,62 0,38

February 0,00 0,00 0,32 3,04 3,04 0,32

March 0,00 0,00 0,3 2,81 2,81 0,30

April 5,25 0,55 0,5 4,8 10,05 1,05

May 0,00 0,00 0,32 3,06 3,06 0,32

June 14,84 1,57 1,39 13,14 27,98 2,96

July 13,32 1,41 0,33 3,12 16,44 1,74

August 2,93 0,31 0,31 2,94 5,87 0,62

September 2,71 0,29 0,29 2,76 5,47 0,58

October 0,00 0,00 0,5 4,73 4,73 0,50

November 0,00 0,00 0,32 3,01 3,01 0,32

December 0,00 0,00   1,44 13,68   13,68 1,44

Total 39,05 4,12   6,41 60,72   99,77 10,53

Indonesia 2009 Monthly Sovereign Debt Amortization Schedule

In the Article 23 of Law in the Government Budget 2009 and the explanation were given a protection law to anticipate the state of emergency as the impact of the global economic crisis following :

In an emergency, if the following matters:

The decrease of economic growth under the assumption that the deviation and other macro-economic assumptions that lead to the decrease in income countries, and / or increasing state spending significantly;

Increase the cost of debt, particularly yield securities countries, significantly, and / or

Systemic crisis in the banking and financial system, the national need additional funds and the banks underwriting Non-Bank Financial Institutions (LKBB),

Emergency Condition (Article 23 UU APBN 2009 and Explanation)

Government with the approval of the Board of Representatives can make steps:

expenditures that are not yet available budgets and / or expenditures exceed Limit defined in the Revised Fiscal Year 2009;

shift spending between programs, between activities, and / or the type of shopping in one of the state ministries / agencies and / or inter-state ministries / agencies;

expenditure savings in order to increase the country's efficiency, while maintaining the target programs and activities that priority should be achieved;

withdrawal of standby loans from bilateral and multilateral creditors;

publication of the State Securities exceeds the Limit, which is set in the Budget that year.

Government steps to convey the policies referred to in paragraph (1) report in the Budget Implementation Semester I and / or the Financial Report of the Central Government.

Emergency Condition (Article 23 UU APBN 2009 and Explanation) (cont’d)

G20 Declaration

In case where severe market disruptions have limited access to the necessary financing for counter-cyclical fiscal policies, multilateral development banks must ensure management are in place to support, as needed, those countries with a good track record and sound policies

3. Conclusion

22

Conclusion

Indonesia’s fiscal position remains strong and solid despite the impact from the global financial crisis

Stronger coordination between different ministries and BI to ensure economic

stability

Sufficient cash on hand to meet all immediate debt obligations

Flexible state budget to account for potential downside risk with conservative assumptions

Diversified financing alternatives have been arranged

Fuel price automatic adjustment with maximum cap

Reduce reliance on financing from the international capital markets

Close monitoring of macroeconomic targets with prudent and proactive fiscal and debt management

Focus on counter-cyclical measures to reduce the impact of the global financial crisis on Indonesia

THANK YOU

23

Emergency occurs when:

Prognosis of the lowest economic growth of 1% (one percent) under the assumption; prognosis, while other macro economic indicators have the lowest deviation of 10% (ten percent) from assumption. Prognosis is calculated based on the realization of the macro-economic indicators in 2008.

Nominal position of third party funds in the national banking system to decline drastically.

Increase in yield (yield) of the State Securities cause additional cost of publishing SBN significantly reflected in: the lack of yield in the bidding, which won in the government benchmark in the 2 (two) times in

auction and / or the trend of increased yield at least as much as 300 basis points (bps) in one (1) month;

The Emergency is causing the decline of government revenue prognosis that come from tax revenues and Nontax, and the estimated additional burden of the obligations that derive from the state payment of principal and interest debt, fuel and electricity, and other expenditure.

Referred to the House of Representatives approval of the decision is in the conclusion of Work Meeting House Budget Committee, the Government of the Republic of Indonesia within twenty-four hours after receiving the proposals from the Government.