INDONESIA REBOUNDS

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Indonesia’s performance is very much comparable in the region

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INDONESIA REBOUNDS

  1. 1. INDONESIA REBOUNDS GINANDJAR KARTASASMITA The Japan Institute of International Affairs Tokyo, 21 F b Tk February 2007
  2. 2. Macroeconomic Update JIIA_Tokyo_07 www.ginandjar.com 2
  3. 3. Macroeconomic Development Outlook 2007 Policy Reform Initiatives JIIA_Tokyo_07 www.ginandjar.com 3
  4. 4. Positive Growth Trajectory Sustained economic growth despite difficult environment Economy is on a steady E i td upward trend. Indonesia’s > 7% 6-7% performance is very much 5-6% comparable in the region 5.25 % Over the medium term, this acceleration process should 4% continue assuming that all reform programs are implemented. il td 2007 - 2009 2010 - 2006 2001-2003 2004-2005 beyond Source: CBS . JIIA_Tokyo_07 www.ginandjar.com 4
  5. 5. Macroeconomic Update p Growth steadily recover Indonesia: Economic Growth 1998-2006 2006: reached 5.5%; government 006 a d 5 5%; go consumption and expert driven; 6.5 6.5 6 5.7 5.6 5.6 5.2 4.9 5.1 5.1 4.9 4.9 4.4 investment remains weak. 5 3.8 0.9 1.2 Medium Term 0 Percen p.a 1998 1999 2000 2001 2002 2003 2004 2005 2006 – 2007 2009 : 6-7 % p.a 2007-2009 6 7 pa nt -5 – After 2010 : 7+% % p.a Confidence has been restored after -10 fuel price adjustment. - 13 8 14.1 13.8 -15 15 - Stock prices are historic high GDP Non Oil and Gass Exchange rates are stable M a rk e t c o n fid e n c e s tre n g th e n Reserves stronger and still increasing 83=100 R p /U S $ 11000 1800 Ratings upgraded. s to c k in d e x (R H S ) 1700 10500 1600 Macroeconomic Stability has been 1500 10000 achieved 1400 9500 1300 Y o y i fl ti inflation d down f from 17% l t last 1200 year to 6.6% or less this year 9000 1100 Over Medium Term: 3-4% is the 1000 8500 E x c h a n g e ra te s (L H S ) target 900 8000 800 J a n -0 5 M a y-0 5 S e p -0 5 J a n -0 6 M a y-0 6 S e p -0 6 JIIA_Tokyo_07 www.ginandjar.com 5
  6. 6. Manufacturing sector shows signs of recovery Non Oil/Gas Industrial Growth 2005-2006 20.0% 15.0% 10.0% 5.0% 5 0% 0.0% Q1 Q2 Q3 Q4 Q1 Q2 Q3 2005 2006 -5.0% Non Oil/Gas Industries Food Textile Fertilizer Cement JIIA_Tokyo_07 www.ginandjar.com 6
  7. 7. Other Macroeconomic Development Fiscal sustainability has been reestablished. D e c lin in g B u d g e t D e fic its (% o f G D P ) Budget deficits has been contained 0% around 1% of GDP -1 % -2 % public debt ratio down to about 40% at -3 % the end of 2006 and will continue falling R e vis e d b u d g e t -4 % to below 30% of GDP in 2011. R e a liz a tio n -5 % B udget -6 % -7 % -8 % FY98 FY99 FY00 FY 01 FY02 FY03 FY04 FY05 FY06 FY07 On spending side (9 m ) Public spending now back to the pre crisis level around 7-8% of GDP but with Public Investment different composition. (% of GDP) 8% Sub-national gov’t control more than District Central gov't 7% 50% of total 6% Province Education spending on the rise and now 5% comparable to the peer countries around 4-5% of GDP 4% Spending on health and infrastructure a 3% also increasing. 2% Commitment for PPP development. 1% 0% 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 (E) (P) (P) JIIA_Tokyo_07 www.ginandjar.com 7
  8. 8. 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 % level support declining inflation thus 3-4 % providing room for policy rates to decline. CPI inflation : 6.6% 2006 2007 2007-2009 Inflation easing toward targeted level 2005 12000 20 18 10000 16 Risks for destabilizing inflation still 8000 14 high: rice price has been increasing 12 6000 10 since last December. 4000 8 6 2000 4 0 2 2001 2002 2003 2004 2005 Q106 Q206 Q306 Oct 06 Source: Bloomberg & BI IDR/USD Inflation rate yoy SBI 1 month - BI Rate SBI 1 month - BI Rate JIIA_Tokyo_07 www.ginandjar.com 8
  9. 9. External position remains promising Current account position has Rise in FX reserves turned around Months USDbn USDbn FX reserves (LHS) ( ) 50 9.0 3 50% Months of import and official debt repayment (RHS) 45 8.0 7.1 2 40 30% % 6.6 66 7.0 70 35 5.5 6.0 1 5.0 5.9 30 10% 4.5 5.0 0 25 4.0 2001 2002 2003 2004 2005 2006 -10% 20 36 36 35 43 -1 3.0 32 15 28 2.0 20 -30% 30% 10 -2 1.0 5 Current Account (LHS) Export (RHS) Import (RHS) -3 -50% 0 0.0 Source: Bank Indonesia 06* 001 002 003 004 005 200 20 20 20 20 20 JIIA_Tokyo_07 www.ginandjar.com 9
  10. 10. Continued improvement in external debt position External Debt Key highlights 45.0 90.0 Debt to GDP ratio decline from 80.7 40.0 80.0 81% in 2001 to 47% in 2005, and 65.7 35.0 70.0 4 2 .1 expected to reach 39% in 2006. 3 8 .6 56.8 54.2 54 2 30 0 30.0 60.0 60 0 3 7 .3 46.0 There was a significant drop of 25.0 50.0 3 3 .9 3 1 .9 38.6 2 8 .4 2 2 .8 41.4 33.1 2 2 .2 20.0 40.0 DSR in 2005 since there was 2 6 .6 1 9 .5 2 1 .3 15.0 25.8 30.0 Paris Club moratorium due to 32.2 32 2 10.0 20.0 tsunami disaster in Aceh. 27.1 1 4 .6 22.1 5.0 10.0 - 0.0 2001 2002 2003 2004 2005 2006 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 JIIA_Tokyo_07 www.ginandjar.com 10
  11. 11. Improving Ratio of Short Term Debt to Reserve tR 35000 120.00% 112.6% 30000 100.00% 25000 80.00% 73.9% 62.0% 57.4% 20000 59.3% 60.00% 15000 45.9% 40.00% 40 00% 20.74% 20 74% 23.89% 10000 18.72% 6.42% 11.29% 20.00% 5000 4.70% 0 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 JIIA_Tokyo_07 www.ginandjar.com 11
  12. 12. Exchange rate modest appreciation - low volatility Average Exchange Rate Highlights • R i h stabilized and average exchange Rupiah t bili d d g hg K Rp/USD Kurs, R /USD V l tilit % Volatilitas, rate during Q3 2006 was Rp. 9,125. 11,000 8.0 Relatively unchanged from Rp. 9,115 in Kurs Harian 7.0 Volatilitas 10,500 the preceeding quarter p gq Rata-rata V l tilit R t t Volatilitas 6.0 60 10,000 • Average exchange rate in October 5.0 depreciate 0.26% to Rp. 9174 from Rp 9,500 4.0 9153 3.0 9,000 • Volatility stable at 0.5% 2.0 8,500 1.0 0.51 8,000 - M a y -0 6 A u g -0 5 N o v -0 5 M a r-0 6 A p r-0 6 A u g -0 6 J u l-0 5 S e p -0 5 O c t- 0 5 D e c -0 5 J a n -0 6 F e b -0 6 J u n -0 6 J u l-0 6 S e p -0 6 O c t- 0 6 Daily exchange rate JIIA_Tokyo_07 www.ginandjar.com 12 Volatility Average volatility
  13. 13. Fiscal Consolidation Outcomes Sovereign Debt to GDP Ratio 100% Compare to Other Emerging Countries 90% Domestic 80% 70.0 63.1 70% 59.0 60 0 60.0 54.4 60% 50.0 47.3 46.5 46.5 45.3 45.4 45.1 42.4 40.9 % dari PDB 50% 2005 External 40.0 37.5 2006 40% d 30.0 30 0 2007 30% 20.0 20% 10.0 10% 0.0 Indonesia Malaysia Philippines Thailand 0% 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Source: IMF, World Economic Outlook, Sept 2006 JIIA_Tokyo_07 www.ginandjar.com 13
  14. 14. Banking indicators: Banks maintaining reasonable performance Main Banking Indicators Highlights NPL ratios decline during the course of Average CAR Gross NPL Net NPL 14.0 23 2006 % % 22.4 22.5 Banks B k well capitalized with CAR at around ll it li d ith t d 12.0 21% as of August 2006, far above the 22 12.1 21.7 required level of 8% 21.5 10.0 21.0 9.4 8.3 LDR1 relatively stable during 2006 at 8.7 87 21 8.1 8.2 8.5 around 64-65 %. In September 2006 LDR 8.0 20.5 20.5 recorded at 65%. 19.9 5.8 20 19.5 6.0 Net interest income (NII)2 in September 19.4 19.4 9 19 5 19.5 51 5.1 2006 was Rp 6.2 trillion, similar to 4.9 5.6 4.8 December 2005 figure, despite slowing 4.0 19 credit expansion 3.6 18.5 3.0 2.0 RoA stable at around 2.6% with significant 2 6% 18 2.1 1.7 rise in total assets. 17.5 0.0 2001 2002 2003 2004 2005 'S 06 Qi'06 Q2'06 Loan calculations include channeling loans 1 Sep Calculated as NII for the particular month divided by earning p y g 2 Q assets for the corresponding period JIIA_Tokyo_07 www.ginandjar.com 14 Source: Bank Indonesia
  15. 15. No More IMF and CGI In 2006 Indonesia settled the remaining debt to IMF amounting $ 7 billion, 4 y g , years ahead. In January 2007, GOI announced the 2007 dissolution of CGI. JIIA_Tokyo_07 www.ginandjar.com 15
  16. 16. THE PROBLEMS Macroeconomic d M i development h not b l t has t been followed by improvements in the microeconomic (real) sectors; major constraint for economic development. Lagging investment investment. Social Impact : increase of poverty from 16 % to 17.75 17 75 % (equivalent to 19 1 million poor 19.1 households in 2006) and 10.85 million unemployed. unemployed Tax Policy. JIIA_Tokyo_07 www.ginandjar.com 16
  17. 17. THE PROBLEMS Manpower: labor l M l b law, llow i income, euphoria of hi f freedom of expression (demonstrations and strikes). Infrastructure: inadequate infrastructure constitute a major constraint to economy as well j y as social life. Unstable and high oil prices in international markets had given impact to socioeconomic life of the people. Political and security instability impact on economic development, particularly to investment. JIIA_Tokyo_07 www.ginandjar.com 17
  18. 18. Outlook 2007 Tabel • Global economy Projected Economic Growth 2004 2005 2006 2007 World Output 5.3 4.9 5.1 4.9 slowing down Developed Countries 3.2 2.6 3.1 2.7 US 3.9 3.2 3.4 2.9 Jepang 2.3 2.6 2.7 2.1 • Domestic demand Euro Area 2.1 1.3 2.4 2 Asia 8.8 9 8.7 10 China 8 8.5 8.3 7.3 should be the driver India 5.8 5.1 5 5.6 Asean-4 5.5 5.7 5.8 5.4 for economic growth World Trade Volume 10.6 7.4 8.9 7.6 Impor Developed Countries 9.1 6 7.5 6 – Public investment and Expor Developed Countries 88 8.8 55 5.5 8 6 private investment Inflation Developed Countries 2 2.3 2.6 2.3 – Private consumption Emerging and Developing Countries 5.6 5.3 5.2 5 LIBOR on USD 1.8 3.9 5.4 5.5 on Yen 0.1 0.1 0.5 1.1 on Euro Deposit 2.1 2.2 3.1 3.7 Source: IMF JIIA_Tokyo_07 www.ginandjar.com 18
  19. 19. Outlook 2007 Economic Growth: 6 – 6,5% (Budget: 6.3%; Consensus around 6 %) ; ) Inflation: 6-7% P li R t 8 9 5% (B d t 8 5% i Policy Rate: 8-9,5% (Budget: 8,5% in current pace; policy rate to go down to becomes 7,5% at the end of 2007); a stimulus for reducing bank’s lending rate. bank s JIIA_Tokyo_07 www.ginandjar.com 19
  20. 20. Outlook 2007 The Th problem of purchasing power can b bl f hi be compensated in 2007 by: increase of civil servant’s salary, minimum wage, consumption credits, good control of inflation and lending rate by Bank Indonesia. The goal of economic development for 2007: reducing unemployment to 9.9 % and number of poor people to 16,4 %. JIIA_Tokyo_07 www.ginandjar.com 20
  21. 21. Three Policy Packages 1 Investment Law & Procedure Investment 2 Tax & Custom Reform Climate 3 Labor I L b & Immigration i ti Improvement 4 Trade Licenses 5 Cross Sector Strategic Policy Reform 6 Sector Restructuring, Corporatisation and Policy Reform Infrastructure 7 Regulation on monopoly & investment protection Clear separation on the role of policy maker, regulator, 8 contracting agency and operator agency, 9 Coordination Monetary & Fiscal Authority Financial 10 Financial Institution (Banking & Non Banking) 11 JIIA_Tokyo_07 www.ginandjar.com 21 Capital Market and SOE Privatization
  22. 22. 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 (Kecamatan Development Program) and P2KP (Urban Poor) into PNPM (National Program on Community Empowerment) Focus 3: Shifting Cash Transfer to Conditional Cash Transfer 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. g y y JIIA_Tokyo_07 www.ginandjar.com 22
  23. 23. Investment Policies New Investment Law is being finalized in the Parliament. Streamlining investment procedures. Equal treatment of foreign and domestic investment. Less negative list list. More incentive to invest. JIIA_Tokyo_07 www.ginandjar.com 23
  24. 24. SOCIO POLITICAL DEVELOPMENT SOCIO-POLITICAL Indonesia is emerging from long period of authoritarian rule to consolidate its status as one of the world’s largest democratic country. JIIA_Tokyo_07 www.ginandjar.com 24
  25. 25. Regime Change in Indonesia Sukarno Suharto • August 1945 - March • March 1968 - May 1998 1968 • Elected by MPRS • Elected by the PPKI • Resigned under • Impeached by MPRS pressure Abdurrahman Wahid B.J. Habibie October 1999 – July • May 1998-October 1999 2001 • Accountability Speech Elected by MPR Rejected • Declined to run for Impeached by MPR President Megawati Susilo Bambang Yudhoyono • July 2001 – October 2004 • October 2004 – 2009 • Elected by MPR • Directly elected • Lost election to SBY JIIA_Tokyo_07 www.ginandjar.com 25
  26. 26. SOCIO POLITICAL DEVELOPMENT SOCIO-POLITICAL Indonesia’s political and economic d Id i’ liti l d i development l t after the REFORMASI (1998) seems to be on the right track. track Socio-political development: amendment of 1945 Constitution improvement of checks and Constitution, balances system, direct presidential and regional executives elections legal reform and elections, decentralization, human rights, freedom of the p press, bigger role of civil society. , gg y Peace in Aceh. JIIA_Tokyo_07 www.ginandjar.com 26
  27. 27. MAJOR PROBLEMS 1. Institutions: ambiguity between presidential and parliamentary systems; weak bicameral parliamentary system, establishment of quasi- government institutions, and confusion of role and 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. JIIA_Tokyo_07 www.ginandjar.com 27
  28. 28. 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 socio- economic domains. JIIA_Tokyo_07 www.ginandjar.com 28
  29. 29. MAJOR PROBLEMS 4. Ethno-nationalism: as negative impact of decentralization and political freedom (euphoria: from autonomy to special autonomy to independence?) JIIA_Tokyo_07 www.ginandjar.com 29
  30. 30. MAJOR PROBLEMS Political trust and social trust: problem in law enforcement (frequently constrained by issues of human rights and freedom of expression). Pluralism: negative impact of pluralism in the form of horizontal conflicts along religious, ethnics, socio-economic divide. Terrorism. JIIA_Tokyo_07 www.ginandjar.com 30
  31. 31. 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 JIIA_Tokyo_07 www.ginandjar.com 31
  32. 32. Japan-Indonesia Relationship Japan- Japan is a traditional and natural economic partner and political ally of Indonesia Good relation and mutual Indonesia. interest between the two countries have to be maintained. Generally Japanese people and the Japanese Business Community are “losing interests” in Indonesia, g g y g giving more attention to China and India. JIIA_Tokyo_07 www.ginandjar.com 32
  33. 33. The Current State of Economic Cooperation Trade Year Indonesia’s Indonesia’s Import Surplus Export to Japan from Japan 2005 US$ 20.8 billion US$ 9.2 billion US$ 11.6 billion 2006 US$ 23.9 billion US$ 7.3 billion US$ 16.6 billion (Jan-Dec) JIIA_Tokyo_07 www.ginandjar.com 33
  34. 34. The Current State of Economic Cooperation . . . ODA Almost 40% of I d Al t f Indonesia’s ODA comes f i’ from Japan: Economic Sectors Social Institutional Capacity Building Technology JIIA_Tokyo_07 www.ginandjar.com 34
  35. 35. The Current State of Economic Cooperation . . . Investment Japan is still th bi J i till the biggest i t investor i I d t in Indonesia i among 103 countries with US$ 39 billion in 1.715 1 715 projects (13% of th t t l FDI) up t jt f the total to June 2006. JIIA_Tokyo_07 www.ginandjar.com 35
  36. 36. Changes for Promising Countries/Regions over the Medium-term Medium- Note: “Medium-term” means the next 3 years or so. Source: JBEC Institute, Dec 2006 JIIA_Tokyo_07 www.ginandjar.com 36
  37. 37. Milestones for Enhanced Cooperation p Indonesia- Indonesia-Japan Strategic Investment Action Plan (SIAP) At the meeting between Prime Minister Junichiro Koizumi and President Susilo Bambang Yudhoyono on 2 June 2005, the two leaders announced th J ld d the Japan-Indonesia St t i Investment Action Id i Strategic I t t A ti Plan (SIAP). This was an initiative to promote foreign investment in Indonesia p g based on the shared recognition that a substantial increase in foreign investment is essential for poverty reduction and employment generation, 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 it i df ti items i 5 sectors, namely, t in t l tax, customs, labor, infrastructures, industrial competitiveness/small and medium enterprises. JIIA_Tokyo_07 www.ginandjar.com 37
  38. 38. Milestones for Enhanced Cooperation . . . p The significance of the November 2006 visit of President Susilo Bambang Yudhoyono to Japan: Signing of the Strategic Partnership for Peaceful and Prosperous Future Future. Signing of the Principles of Economic Partnership Agreement (EPA). JIIA_Tokyo_07 www.ginandjar.com 38
  39. 39. Indonesia-Japan Economic Partnership Indonesia- Agreement (IJ-EPA) A t (IJ- a. a Trade in Goods (Tariff and Non-Tariff Measures Non Tariff Measures, Rules of Origin, Trade Remedies). b. Trade in Services. c. C t Customs Procedures. P d d. Investment. e. e Movement of Natural Persons Persons. f. Energy and Mineral Resources. g g. IPR. h. Government Procurement. i. Competition Policy. j. Improvement of Business Environment and jI t fB i Ei td Promotion of Business Confidence. k. Cooperation p JIIA_Tokyo_07 www.ginandjar.com 39
  40. 40. Political Cooperation Bilateral. Regional. Multilateral. JIIA_Tokyo_07 www.ginandjar.com 40
  41. 41. Momentum of the 50th Anniversary of Indonesia- Indonesia-Japan Diplomatic Relations 2008 Broadening and deepening exchanges and cross generational mutual understanding. ti l t l d t di Milestone for a more advanced and mature bilateral l ti bil t l relations. Contribution to peace, stability and economic growth on th E t Asia region. th the East A i i JIIA_Tokyo_07 www.ginandjar.com 41
  42. 42. JIIA_Tokyo_07 www.ginandjar.com 42
  43. 43. JIIA_Tokyo_07 www.ginandjar.com 43

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