Indonesias Macroeconomic

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Indonesias Macroeconomic and Fiscal Update
Dr. Sri Mulyani Indrawati Minister of
Finance December 18, 2006
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Outline

• Macroeconomic Update
• Fiscal Policy
• MOF Reform

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Economic growth
Key Highlights
Economic Growth

• Indonesian economy grew by 4.8 , 5.1 and 5.5
  in the first, second and third quarter of 2006
  respectively. Q4 2006, economic growth predicted
  6.4-6.6. Overall 2006 predicted 5.4-5.5.
• Growth was mainly driven by substantial rise in
  exports and increased government expenditure.
• There is a renewed optimism for improvement in
  the economic conditions as reflected by stronger
  purchasing power and consumer confidence in
  relation to income expectations.
• The recent positive trend on import of capital
  goods in Q3 and Q4 are expected to accelerate
  investment in 2007.

change in GDP
Preliminary Source BPS
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GDP Growth

• In the third quarter of 2006, the growth rate
  declined.
• The rate is expected to increase in the fourth
  quarter
• Key factors increase of Government consumption,
  net export, investment due to continuing
  macroeconomic stability

The growth rate of most industrial sectors have
shown a positive trend, except agriculture,
mining and quarrying, and financial sectors which
decelerated.
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Inflation and SBI rate
Strengthening and stabilizing rupiah supports
declining inflation thus providing room for
policy rates to decline

• Inflation easing toward targeted level key
  factors stabilized exchange rate, lower
  domestic demand, improved inflation expectations
  minimum impact from administered prices
• Key considerations improved macroeconomic
  stability, greater confidence for achieving 2006
  and 2007 inflation targets and renewed market
  confidence.
• Outlook for 2006 Inflation around 6

Source Bloomberg BI
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Inflation
Rice was the dominant factor in the November
2006s inflation item. December Inflation
Carefully on Rice and Kerosene.
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Increasing regional trend as caused
by(1) Declining oil price(2) Stabilizing or
pausing the Fed rate (3) The impact of ICBC
which is the biggest IPO in the world
ever(4) Increasing global commodity price.
Stock Market
Stabilizing rupiah and declining BI rate attract
investors in Jakarta stock market and follow the
regional trends
JSX
The JSX performance in the period of January to
November 2006. Net buying foreign investor of
Rp. 15 trilyun 2nd Best among Asia Pacific
region after China
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Government Bond Development January 11
December 2006
Best Performing Bond in Asia
The lower financing risk has reduced the yield.
Total net buying of foreign investor Rp.20
trilyun.
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Outline

• Macroeconomic Stability
• Fiscal Policy
• MOF Reform

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Fiscal Consolidation on track
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
  guarantee
• Consolidation of fiscal decentralization
• Improved fiscal balance
• Regional borrowing and municipal bonds, subject
  to Minister of Finance approval
• Regional financial information system to support
  decentralization based on transparency and
  accountability

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Possible Outturn of 2006 budget
The realization 2006 budget remains on track in
spite of internal external challenges

• Indicative Budget Deficit below targetted of 1.3
  GDP, around 0.9-1.1 of GDP
• Slow down economic growth, lower imports and
  speed-up VAT refund impacts lower Non-Oil Tax
  Revenue (98 of APBN-P)
• Lower world oil price and strengthen rupiah
  reduce expenditure, particularly subsidy and
  interest payment of external debt
• Combined lower spending and Improve efficiency of
  government expenditure
• Financing of deficit very much on track and no
  additional net government debt needed

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CentralGovernment ExpenditureJanuari Desember
()
Capital
Material
Disbursment on Capital Spending 2006 around 70,
rupiah 90, external debt 50.
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2007 Budget
Key assumptions

• Fiscal consolidation and sustainability
• Target deficit at 1.1 of GDP
• Lower total debt/GDP ratio at 37
• Budget financing to rely more on domestic
  sources, primarly government debt
• Increase expenditures for the regions

State budget 20071
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Source Ministry of Finance
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Outline

• Macroeconomic Stability
• Fiscal Policy
• MOF Reform

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Tax and Custom Reform

• Modernize Headquarter
• Extend Major Tax Offices to improve services
• Speedup of VAT refund to promoteexport
  activities
• Improve audit
• Improve data base and link to customs

Tax

• Presidential Decree of New DGT structure has been
  issued
• Draft Tax Law submitted to Parliament and
  discussed
• Administration improvement underrway (VAT refund,
  audit)
• Sufficient support from Parliament

• Streamlined processing time
• Implementation of EDI system toimprove
  efficiency
• Extend Priority dan Green Lane
• Improve Compliance
• Establish Major Customs Office (KPU)

• Custom law has been approved by the Parliament on
  October 18, 2006
• Two regulations issued on streamlining of customs
  processing, revision of remaining regulations
  ongoing

Customs
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Budget Policy and Implementation Reform

• Establishment of FPO
• More Focus on integrated Organization Structure
  of MOF FPO, Budget, Debt, Asset, Regional and
  Treasury
• Leading to performance based budget
• Improve Governance (reward and punishment)

MOF

• Implementation of new organization structure of
  MoF
• Appoint Echelon I and other
• MTEF, Hold harmless, Performance Based in 2008
  budget
• Blue Print beuracratic reform finalized

• Better Fiscal Policy and Coordination
  Fiscal-Moneter, Fiscal-Financial Sector,
  Fiscal-Trade and Fiscal Decentralization
• Balance Fiscal Incentives and Fiscal
  Sustainability
• Incentives to Investment (PP 148)
• VAT Incentives on Primary Products
• EPA and FTA
• Lower cost of Financing Sources

• Develop an early indicators and anticipate
  downward trend
• Improve Policy Coordination
• Use fiscal policy tools to support investment and
  growth
• Exercise Medium Term Fiscal Outlook

Policy
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Managing Government Debt

• Establishing DG Debt Management
• Lower cost of borrowing
• Maintain macro stability
• Fixed Rate, rupiah and long term maturity
• Reduce financial risk improve maturity profile,
  debt switch
• Debt instrument debt swaps, retail, sukuk, tenor
• Improve rating
• Bundling Project and Program Loan
• Deepen capital market and reform NBFI (Pension,
  Insurance, Financing)
• Managing Risk and Debt Exposure
• Establish dedicated IRU

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Government Debt
Continued improvement in Government debt position

• External debt burden and debt service ratio has
  been declining
• Debt to GDP ratio has been achieving around 47
  in 2005, slightly lower from safety level at 48,
  along with increasing of GDP and declining of
  external debt

of GDP
of GDP
Debt to GDP (LHS) Debt Service Ratio (RHS)
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Public external debt structure

• Lower cost of borrowing, exchange rate swaps,
  debt swaps, debt sustainability to MDG, fixed
  rate borrowing
• Quality disbursment, lower proportion of Export
  Credit, review undisburst loan

GOVERNMENT EXTERNAL DEBT OUTSTANDING
Global Bonds

• US 34.6 bn, of which
• - Japan US 24.9 bn
• France US 2.6 bn
• USA US 3.2 bn
• Germany US 3.9 bn

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42
Mostly export credits
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• US 17 bn, of which
• - IMF US -- bn
• IBRD US 8.2 bn
• ADB US 8.8 bn

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Source MoF/Bank Indonesia
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Domestic Debt Profile and Secondary Trading
Improve Debt Profile
Liquid and Active Secondary Market
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Fiscal Policy to Support Investment

• TAX POLICY and ADMINISTRATION
• Amandmend of Tax Law
• Establishment of FPO
• Modernize DGT
• Tax Incentives
• TARIFF and CUSTOMS
• Improve Tariff Setting
• Modernize Customs Office, priority Tg
  Priok/Batam
• Implement EPA and FTAs

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Fiscal Policy to Support Investment

• INFRASTRUCTURE (PPP)
• Establishment and Empower RMU
• Infrastructure Fund and Land Fund
• Deal with Non-Compliant Project and high profile
  projects
• Support Model Project

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Conclussion

• Economic Outlook 2006 very encouraging as
  fundamental basis for 2007
• Budget Outturn 2006 is on track to reach deficit
  around 0.9 to 1.1 of GDP
• Implement Budget 2007 on time and improve budget
  allocation and disbursment
• Prepare 2008 budget
• RKAP 2008, Macroeconomic/Fiscal Policy and Budget
  Docs 2008
• MTB, MTEF, Performance Based and Holdharmless
  Local Financing
• Continued Reform Civil Service Reform, Capital
  Market,NBFI, Treasury and Debt Strategy
• Design a prudent Fiscal Policy to Support
  Investment and Infrastructure Development (PPP)