0

September 2014

The Current Outline of

Indonesian Economy

Rizal A. Djaafara

Chief Representative

Bank Indonesia - London

Vaasa, 25 September 2014

0

2

4

6

8

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12

14

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2

2010 2011 2012 2013 2014

Brazil Rusia India China Indonesia

Economic Growth and Fundamentals Compare Favorably to Peers

Source: OECD Source: Bloomberg

(% yoy)

Indonesia continues to perform admirably versus its closest peers

G-20 Group of Countries, First Quarter 2014 Real GDP Growth

Comparison with BRICs Countries (GDP Growth) Indonesian GDP growth continued to remain robust with a quarterly yoy growth above 5.0% for the fourth consecutive year – the most stable growth amongst its BRIC peers

Indonesia is decoupling from the “Fragile Five” economies as the Current Account deficit continues to narrow to a more sustainable level

Indonesia’s robust macroeconomic fundamentals have resulted in it out-performing its peers as it becomes the third fastest growing G-20 economy in Q2 2014

The economy continues to diversify from the oil & gas sector

* Refers to Q1-2014

Source: Ministry of Finance, Bank Indonesia, BPS, Moody’s Peers include Brazil, Colombia, India, Peru, Philippines, South Africa, Turkey, and Vietnam

Real GDP (yoy Growth)

4,8% 5,0% 5,7% 5,5%

6,3% 6,0%

4,6%

6,2% 6,5%

6,2% 5,8% 5,2% 5,1%

4,6% 5,0% 5,7% 5,5% 5,3%

3,6%

(1.1)%

4.8% 4.1% 3.7%

3,6%

(2,0%)

0,0%

2,0%

4,0%

6,0%

8,0%

200

3

200

4

200

5

200

6

200

7

200

8

200

9

201

0

201

1

201

2

201

3

Q1

201

4

Q2

201

4

Indonesia Peers (Baa1 - Baa3)

3,6% 4,5% 4,8% 5,0%

5,7% 5,5% 6,3% 6,0%

4,6%

6,2% 6,5% 6,3% 5,8%

4,9% 5,2% 5,7% 6,0%

6,6% 6,1%

6,9% 6,5%

5,0%

6,6% 7,0% 6,9% 6,3%

(5,3%)

(1,3%)

(2,9%) (3,5%) (3,1%)

(1,3%) (0,8%)

0,2% (0,5%)

0,8%

(1,0%)

(3,4%) (2,8%)

(6,0%)

(4,0%)

(2,0%)

0,0%

2,0%

4,0%

6,0%

8,0%

200

1

200

2

200

3

200

4

200

5

200

6

200

7

200

8

200

9

201

0

201

1

201

2

201

3

Annual Growth in GDP Annual Growth in Non-Oil & Gas GDPAnnual Growth in Oil & Gas GDP

Strong and Consistent Real GDP Growth Share of GDP from Oil & Gas is Decreasing

Source: Ministry of Finance

1

2

• Weak Global growth • Uncertainty over US Monetary Policy • Slow Down in Chinese Economy and other

Emerging Economies

Indonesia: - Challenging time

2013 Coordinated Policy Response

Providing additional budget for social protection: Conditional and Unconditional Cash Transfer, Poor Students Aid, and Additional allocation of rice for the poor.

Providing tax breaks for specific industries (labor intensive & export oriented industries) to prevent layoff

Imposing additional tax for luxurious and branded products.

Relaxing import tax for import goods to be used for exports

Continuing reform on energy subsidy: Fuel price adjustment, Electricity tariff increase and mandatory use of Biodiesel

Enacting land acquisition bill

Improving imports system from tariff to quota system

Introducing more integrated infrastructure development (MP3EI)

Streamlining permit process and improving single window service for investment

Debottlenecking problems in strategic investment projects such as power plant, oil, gas, mineral mining, and infrastructure projects

Simplifying regulations for small and medium enterprise

Requiring minimum wage to be based on a combination of Minimum living cost, Productivity and Economic condition

Pre-emptive Monetary Policy Mix

Fiscal Policy

Structural Reforms

Boldly increasing the policy rate

Allowing more flexibility on the movement of rupiah exchange rate in line with its fundamentals

Launching macro-prudential measures

Deepening the financial market

Actively communicating the policies with the stakeholders

Strengthening co-operation in regional financial safety net

3

A Pivotal Year in Politics

• Jokowi's was voted World's Third Best City Mayor in 2012.

• Jokowi's successful track record as governor of the capital Jakarta and as mayor of Surakarta in central Java has shown his willingness to see through real improvements on the ground.

• He is expected to replicate his local government's achievements at the national level.

• Jokowi is the first Indonesian leader who has roots in neither the military nor an established family.

• Jokowi offered the people to vote on the 34 new cabinet candidates through social media, with the proposal dubbed “People’s Choice for an Alternative Candidates”.

• Prabowo’s refusal to accept defeat and his legal challenge on Jokowi caused a month of uncertainty for voters and investors.

• Nevertheless, the legal process was held sound & safe, and did not spur unnecessary jittery.

• Ensuring a smooth transfer of power when the current president steps down will be a test for a country that held its first direct election for president just a decade ago.

• Jokowi faces challenges both at home and abroad by assuring investors that the nation’s most divisive presidential election won’t erode democratic and economic progress.

After holding 2 periods of direct elections, Indonesia extended its successful election for the national parliament and local assemblies, as well as the nation’s next president, without negative impacts on the economy and violent upheavals.

4

Red & White Coalition

0

5

10

15

20

25

Golkar Gerindra Demokrat PAN PKS PPP PDI-P PKB Nasdem Hanura PBB PKPI

(Mill ion Votes)72 Million Votes (58%)

Vote Count Vote Count

Provinces Provinces

Vote Differences

Favorable Market Reaction

• Jokowi’s victory has sparked new optimism to the people and was also hailed as a big boost to Indonesia’s democracy.

• The euphoria following the election result were also reflected in market performances. Optimism about the prospects of Widodo’ selection success triggered a favorable reaction in the Indonesian markets: • Following the announcement, Jakarta Composite Index rose

by 35 points to 5.118 at the opening day, reached its highest at 5.139 and closed at 5.093.

• Stocks increased by one percent a day after the conclusion of the election – the biggest advance since the beginning of July

• Rupiah climbed by one percent to a two-month high, trading at 11,555 per U.S. dollar on July 23, 2014.

5

Conducive Environment Underpinning Growth Fundamentals

Source: KPMG, Ernst and Young, Jefferies Economist Intelligence Unit, Ministry of Finance, BPS and CIA World Factbook (1) Working age defined as being between 15-54 years old

The largest economy in South-East Asia

A large, culturally diverse, young and vibrant workforce

Large consumer base with fast growing spending power

Increase in infrastructure investment to improve overall efficiency

According to McKinsey, Indonesia is projected to be the 7th largest economy in the world by 2030

5.9% average real GDP growth over the period 2008-2013

Exports are 23.7% of GDP for the year of 2013, one of the lowest in Asia, creating low volatility in GDP

Foreign direct investment grew at an average rate of 21.1% from 2010-2013

4th most populous country in the world

66.6% of the population is of working age(1) and 68.5% were 39 years and younger as of 2012

Working population projected to grow at 0.7% compared to 0.5% CAGR for total population from 2012-2017

A high literacy rate of more than 90%

~7mn people are expected to join the middle class each year

Consumer expenditure has grown at a 12.3% CAGR from 2007-2012 and is expected to continue at a 9.1% rate from 2012-2017

Disposable incomes are projected to grow at 12.1% from 2012-2017

According to McKinsey, 135-170mn people will join the consuming class

by 2030

Announced an expansion of fiscal spending on infrastructure by 19.2% CAGR from 2012 to 2014

Infrastructure investments are spread over Indonesia’s 6 economic corridors

Encompass various sectors such as seaports, roads, railways, airports, energy and many others

Government continues to align regional and national regulations to attract further private sector investors

The fundamental long term growth drivers for Indonesia haven’t changed – equipped with abundant natural resources, a young and technically trained workforce and a large consumer base with a fast growing spending power

(USD tn)

Nominal GDP – Strong Growth to Continue Middle Class Households Annual Budgeted Capital Spending

(IDR tn)

145,1 172,4

185,8

2012 2013Realized

2014 Budget

21,980

39,340

60,740

2007 2012 2017E

(‘000)

Demographic Dividend – Young Population

0,43

0,88

1,14

2007 2012 2017E

Male Female

6

Strong Investment Underpinned by Competitiveness and Stability

Investment Realization Progress as of Q2-2014

Investment Realization from Jan-June 2014 reached Rp222.8 trillion, an increase around 15.6% from that in the same period of 2013.

The value of investment is based on investment realization report by the DDI and FDI companies (Oil and Gas, Banking, Non-Bank

Financial Institution, Insurance, Leasing and SMEs are excluded).

Source: BKPM Source: BKPM *)Revised Investment Target 2014 Strategic Planning BKPM 2010 –2014 **) Against target 2014

FDI by Sectors (Millions USD)

Foreign Direct Investment in leading sectors are: Mining (US$ 2.7 billion); Food Industry (US$ 2.1 billion); Transportation Warehouse and

Telecommunication (US$ 1.7 billion); Food Crops & Plantation (US$ 1.1 billion); and Transport Equipment and Other Transport Industry

(US$ 1.0 billion).

7

BUILDING BLOCKS: SEIZING INDONESIA’S POTENTIAL

Rank

Country / Region No. of Companies(1)

Percentage Share

(%) 2012 2013

3 1 Indonesia 219 44.9

2 2 India 213 43.6

4 3 Thailand 188 38.5

1 4 China 183 37.5

5 5 Vietnam 148 30.3

6 6 Brazil 114 23.4

7 7 Mexico 84 17.2

10 8 Myanmar 64 13.1

8 9 Russia 60 12.3

9 10 USA 54 11.1

Rank(1)

Country 2008(2)

2013(2)

Institutions Infrastructure

Macro-economic

Environtment

Health and primary

education

Higher education

and training

Goods market

efficiency

Labor market

efficiency

Financial market

development Technological

readiness Market

size Business

sophistication Innovation

Score Score Score Score Score Score Score Score Score Score Score Score

1 Spain 29 35 4.1 6.0 4.0 6.2 5.2 4.3 3.9 3.7 5.3 5.4 4.5 3.8

2 Thailand 34 37 3.8 4.5 5.6 5.5 4.3 4.7 4.3 4.6 3.6 5.1 4.4 3.2

3 Indonesia 55 38 4.0 4.2 5.8 5.7 4.3 4.4 4.0 4.2 3.7 5.3 4.4 3.8

4 Turkey 63 44 4.1 4.5 4.6 5.9 4.3 4.5 3.7 4.4 4.1 5.3 4.4 3.5

5 Italy 49 49 3.5 5.4 4.3 6.3 4.8 4.2 3.5 3.3 4.7 5.6 4.7 3.7

6 South Africa 45 53 4.5 4.1 4.4 3.9 3.9 4.8 3.9 5.8 3.9 4.9 4.5 3.6

7 Mexico 60 55 3.6 4.1 5.1 5.7 4.0 4.2 3.9 4.2 3.7 5.6 4.2 3.3

8 Brazil 64 56 3.7 4.0 4.6 5.4 4.2 3.8 4.1 4.4 4.1 5.7 4.4 3.4

9 Philippines 71 59 3.8 3.4 5.3 5.3 4.3 4.2 4.1 4.4 3.6 4.7 4.3 3.2

9 Globally Competitive and a Top Investment Destination

Source: Global Competitiveness Index 2013-2014, WEF (1) Countries with sovereign ratings in the Eaa1-Baa1 category and population larger than 40 million (2) Rank among 148 countries

Indonesia’s stage of development is categorized as efficiency-driven with a strong and well balanced performance across all 12 pillars of competitiveness

37,7

38,6

43,0

53,5

54,1

73,8

32,8

33,9

38,5

27,1

32,0

20,6

3,3

2,4

2,2

0,8

0,7

26,2

25,2

16,3

18,6

13,9

5,0

Vietnam

Thailand

Malaysia

Indonesia

India

China

Increase their level of investmentStill in the market, but will not invest more

Source: The Economist – Asia Economic Outlook Survey 2013

Indonesia is in the Top 40 of the Global Competitiveness Index (“GCI”)

JBIC: Indonesia is the #1 Promising Country/Region for Business Development Over the Medium Term (Next 3 Years)

The Economist: Indonesia is the #3 Investment Destination in Asia in 2013

Source: Japan Bank for International Cooperation (“JBIC”) FY2013 Survey Report on Overseas Business Operations of Japanese Manufacturing Companies

(1) Total number of companies that responded was 488

10

Domestic Economic Adjustment Continues

• Economic growth in Q2-2014 keeps moderating to 5.12% (yoy), lower than 5.22% (yoy) from previous quarter, mainly as a result of weaker export performance of natural resource based commodities.

• In domestic demand, the economic slowdown is primarily attributable to a contraction in government spending due to the postponement of social assistance disbursements, coupled with sluggish non-construction investment activity. Notwithstanding, dogged household consumption in Q2-2014 bolstered economic growth due to activities associated with the presidential election as well as maintained public purchasing power in line with lower inflation.

• The domestic economy is expected to expand in line with the previous BI projection of 5.1-5.5% in 2014, with a bias towards the lower end of the range.

I II III IV I II

Private Consumption 5.3 5.2 5.1 5.5 5.3 5.3 5.6 5.6

Government Consumption 1.3 0.4 2.2 8.9 6.4 4.9 3.6 (-0.7)

Gross Fixed Capital Formation 9.7 5.5 4.5 4.5 4.4 4.7 5.1 4.5

Exports of Goods and Services 2.0 3.6 4.8 5.2 7.4 5.3 (-0.4) (-1.0)

Imports of Goods and Services 6.7 0.0 0.7 5.1 (-0.6) 1.2 (-0.7) (-5.0)

GDP 6.3 6.0 5.8 5.6 5.7 5.8 5.2 5.1

I II III IV I II

Agriculture 4.2 3.7 3.3 3.3 3.8 3.5 3.2 3.4

Mining and Quarrying 1.6 0.1 (-0.6) 2.0 3.9 1.3 (-0.3) (-0.2)

Manufacturing 5.7 6.0 6.0 5.0 5.3 5.6 5.1 5.0

Electricity, Gas, and Water Supply 6.2 7.9 4.0 3.8 6.6 5.6 6.3 5.8

Construction 7.4 6.8 6.6 6.2 6.7 6.6 6.5 6.6

Trade, Hotels, and Restaurant 8.1 6.5 6.4 6.1 4.8 5.9 4.8 4.5

Transportation and Communication 10.0 9.6 10.9 9.9 10.3 10.2 10.2 9.5

Financial, Real Estate, and Business 7.1 8.2 7.7 7.6 6.8 7.6 6.2 6.2

Services 5.2 6.5 4.5 5.6 5.3 5.5 5.7 5.7

GDP 6.3 6.0 5.8 5.6 5.7 5.8 5.2 5.1

Economic Growth - Demand Side

Economic Growth - Supply Side

S e c t o r 20122013

2013

S e c t o r 20122013

20132014

2014

Source: Bank Indonesia Source: Bank Indonesia

(9 000)

(6 000)

(3 000)

0

3 000

6 000

9 000

12 000

15 000

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1

Direct Investment (Net FDI) Net Portfolio Investment

Net Other Investment Financial Account

(3)

(2)

(1)

0

1

2

3

4

Jan

Ap

r

Jul

Oct

Jan

Ap

r

Jul

Oct

Jan

Ap

r

Jul

Oct

Jan

Ap

r

Jul

Oct

Jan

Ap

r

Jul

11 Current Account Deficit Moving to Sustainable Level

(12 000)

(10 000)

(8 000)

(6 000)

(4 000)

(2 000)

0

2 000

4 000

(15 000)

(10 000)

(5 000)

0

5 000

10 000

15 000

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2

2011 2012 2013 2014

Goods Services Income

Current Transfers Current Account

Source: Bank Indonesia

(US$mm)

2011

…And Rebound in Financial Account Capital Flows

Long Run Overall Healthy BoP

Trade Balance Gradual Recovery of the Current Account …

(Billion US$)

Source: BPS

2011 2012 2013 2010

2012 2013

2014

2014

The Republic believes current pressure on the trade balance is temporary and expects it to rebound in the future

The trend of improvement in the Current Account continued in Q2 2014. Although posting a higher deficit compared to the previous quarter, the Q2/2014 current account performed better than that in the same period last year

Likewise, portfolio investment continues to trend positively, underscored by improvements in economic fundamentals that attracted foreign investors. The capital and financial account charted a US$14.5 billion surplus in Q2/2014.

Strong Capital Inflows Accompanied Solid Market Performance

Slightly Weakening Government Bond Yield •Capital inflows continued to domestic financial assets, supported by well-maintained investor perception. Stock market strengthened in the midst of a slightly weakening bond market .

•The rupiah depreciated in August 2014, but volatility remained well maintained. The depreciation is influenced by external factors stemmed from geopolitical dynamics and domestic factors related to the wait-and-see attitude of investors concerning government future policies

•Relatively stable exchange rate, accompanied by strong inflows, reflected in the increasing trend of FX reserves. (US$111.2 Billion or equal to 6.3 of imports and official debt repayment)

Rising JCI & Net Foreign Buy/Sell

Less Volatile Rupiah Exchange Rate Comfortable International Reserves

12

(1,3%)

(0,1%)

(1,6%)

(0,7%)

(1,1%)

(1,9%) (2.3%)

(2,4%)

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

Rev

.B

ud

get

Positive Track Record of Debt Reduction in a Moderately Leveraged Economy

Source: Moody’s Statistical Handbook (1) 2012 domestic credit as a % of GDP. 2013 data not available for Vietnam

Source: Ministry of Finance

Source: Ministry of Finance, Moody’s

31,3 45,4

51,9 56,1

73,9 76,5 79,0

104,9

40,1

0

20

40

60

80

100

120

Pe

ru

Ind

on

esia

Co

lom

bia

Ph

ilip

pin

es B

razi

l

Ind

ia

Sou

thA

fric

a

Turk

ey

Vie

tnam

2013 Domestic Credit (% GDP)

(1)

95

,1%

80

,2%

67

,8%

60

,5%

55

,8%

46

,3%

39

,0%

35

,1%

33

,0%

28

,3%

26

,1%

24

,3%

24

,0%

26

,1%

25

,9%

25

,6%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

200

0

200

1

200

2

200

3

200

4

200

5

200

6

200

7

200

8

200

9

201

0

201

1

201

2

201

3

1Q

201

4

2Q

201

4

Govt Debt to GDP

(% GDP)

Consistent fiscal conservatism is a hallmark of Indonesia’s macroeconomic management

A combination of moderate leverage and consistent debt reduction provides more fiscal headroom to respond to economic shocks

As a result, Indonesia has been able to maintain a lower fiscal deficit versus similar and higher rated peers

‘07 – ‘13 Avg: (1.3%)

Indonesia has Maintained a Sustainable Fiscal Deficit ...

… And a Consistent Path of Govt. Debt Reduction

A Strong and Moderately Leveraged Economy

13

(10)%

(5)%

0%

5%

10%

15%

20%

Jan

May

Sep

Jan

May

Sep

Jan

May

Sep

Jan

May

Sep

Jan

May

Sep

Jan

May

CPI (%, yoy) Core (%, yoy) Volatile Food (%, yoy) Administered (%, yoy)

2010 2011 2012 2013 2014

Inflation remained fundamentally under control as reflected in core inflation which has been fairly stable in the last 3 years and remained at approximately below 5%. Headline inflation in August 2014 was 0.47% (mtm) or 3.99% (yoy) vs. 0.93% (mtm) or 4.53% (yoy) July 2014.

The downward trend was a result of correction in food prices, especially rice and miscellaneous horticultural commodities in line with abundant domestic supply linked to the harvest season and continuous efforts from the Government to manage food distribution.

With easing pressure from subsidized fuel price adjustment, inflationary pressure are coming from expenditure side due to holiday season.

14 Downward Trend on Inflation Continued

Source: Bank Indonesia Monetary Policy Review Source: BI Quarterly Consensus Forecast, Dec 2013 and September 2014

Stable core inflation was also supported by moderating domestic demand and well-anchored inflation expectation

Strong coordination between Bank Indonesia and the Government through monetary and fiscal policies as well as real sector policies resulted in continued downward inflation trend

2009

July

Administered Price 5.49% Volatile Food 1.06% Core 4.47%

Aug ‘14 CPI 3.99%

Downward trend on inflation

Y-o-Y

15

A Sound Financial Sector

79 79 80

81 82 83 83

84 83 84 84 84 83 84 85 85 86

87

89 89 89 89 90 90 90 90

91 91 90 91

92

78

80

82

84

86

88

90

92

94

tam

mi.1

2h

elm

i.12

maa

lis.1

2h

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2to

uko

.12

kesä

.12

he

inä.

12

elo

.12

syys

.12

loka

.12

mar

ras.

12

jou

lu.1

2ta

mm

i.13

he

lmi.1

3m

aalis

.13

hu

hti

.13

tou

ko.1

3ke

sä.1

3h

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inä.

14

Loan-to-Deposit Ratio (%)

Source: Bank Indonesia – Banking Statistics Source: Bank Indonesia – Banking Statistics

2,0

1,0 0,9 0,8 0,8 0,7 0,7

0,9

0,0

0,5

1,0

1,5

2,0

2,5

Sou

th A

fric

a

Ind

on

esia

Ind

ia

Per

u

Ph

ilip

pin

es

Co

lom

bia

Turk

ey

Bra

zil

Average nominal 2009-2013 GDP growth / M2 Growth (2009-2013)

Source: Moody’s Statistical Handbook, May 2014 Source: Bank Indonesia – Banking Statistics

Post the Asian financial crisis in 1997, Indonesia has built a stronger banking system

Improved banking regulations and supervision are the direct result of lessons learned

Consequently, financial sector vulnerabilities that were exposed in past financial crises have been addressed

Today, the financial sector is characterized by a healthy funding base and low credit risk, ensuring that the sector is less susceptible to external shocks

The rapid loan growth has decelerated to a more stable and sustainable level

Resilient Banking Sector

GDP Growth Not Driven By Excess Liquidity Healthy LDR Balancing Growth And Liquidity

Masterplan for Acceleration and Expansion of Indonesia Economic Development (MP3EI)

MP3EI initiatives strategic : Encourage a large scale investment realization in 22 main

economic activities Synchronization of national action plan to revitalize the real

sector performance The development of center of excellence in 6 (six) economic

corridors

Sumatera Corridor

Kalimantan Corridor

Java Corridor

Sulawesi Corridor

Papua – Maluku Corridor

“Supporting the National Service and

Industry" '‘Gate of Tourism and Supporting Provider of National Food and

Agriculture''

'‘Central of Production and Manufacture of National Agriculture, Plantation,

Fishery, and Nickel Mining'' “Central of

Production and Manufacture of

National Natural and Energy Resources" “Central of

Production and Manufacture of

National Mining and Energy Resources"

“Central of Development of

National Food, Fishery, Energy, and Mining”

Bali - Nusa Tenggara Corridor

Source: Coordinating Ministry for Economic Affairs, 2011

Main strategy of MP3EI:

Economic potential development through economic corridor

Strengthening the national connectivity

Strengthening national human resources capability and science and technology

16

MACROECONOMIC AND MONETARY POLICY DIRECTION

Global Risks 18

Challenges

Global Growth Spill-Over and

Spill-Back

Global downside scenario (covering uneven pace of AE economic growth recovery, Slower economic growth in EMs, & financial turmoil) exposed Indonesia to the risk of a slower economic growth >3,75% against WEO IMF baseline.

Spill over from advance market to emerging market may occur at least through 4 path, as follow: trade, commodity prices, global financial system, and neighborhood effect.

China’s Slower

Economic Growth

Growth in China’s property sector is still weak, potentially affecting efforts to rebalance the economy. Risks stemming from the property sector may affect the financial system (shadow banking) in addition to growth (investment).

Other risks may also arise from economic growth disparity among region in China.

Uncertainty of Fed’s Policy

Normalization

Although structural problems remain as highlighted by Yellen in 16 July 2014, there is a possibility FFR will increase earlier if the recovery in the employment sector occured sooner than expected.

This is reinforced by Yellen statement in FOMC 30-31 July which is “slightly hawkish”, and the indication of the end of tapering in Oct 2014 according to FOMC minutes in June (released 9 July)

Emerging Markets

Vulnerability

Indonesian economic condition improves supported by lower inflationary pressure, improving international reserves, and worsening condition of other EMs. Nonetheless, the potential of an economic growth slow down in other EM countries may increase Indonesian’s vulnerability to global risk aversion.

Higher Inflationary

Pressure

Up side risk in the 2nd half-2014 potentially arise from an increase in the upper tariff for air transportation. In addition, risk may also arise from food price related to the possibility of lack of supply of raskin at the end of the year and the increase of El Nino intensity to strong level.

The continued reduction in the supply of subsidized fuel to the gas station to keep the quota in 2014.

Medium Term Challenges and Fiscal Policies

Challenges Main Issues Future Policy

Productivity & Competitiveness

Infrastructure development

Industry revitalization

Human capital, Technology and Innovation Improvement

Domestic economy as a part of global value chain

Inequality and Welfare Improvement

Inclusive growth

Social Security

Sustainability

Food and energy sustainability

Exchange Rate

Fiscal Sustainability

Global Growth Uncertainties

Global Liquidity

Volatility in Commodity Prices

ASEAN Economic Community

Price Stabilization

Food &Energy Sustainability

Financial Market Stability

External Balance

Growth Acceleration

Poverty and Inequality

Fiscal Sustainability

Growth acceleration through Productivity, Capacity and Business Competitiveness improvements

Manage economic stability and sustainability

Improve people welfare and reduce inequality

Economic Growth of 5.5% - 6.0%

Unemployment Rate 5.5%-5.7%

Poverty Rate 9%-10%

Provide sustainable Fiscal (Budget) Condition

Glo

bal

D

om

esti

c

The Government of Indonesia is well aware of the global and domestic challenges, these concerns are addressed in the future policy

19

20

Monetary Policy Stance

•On Sept 11, 2014, BI decided to hold the BI Rate at 7.50%, with Lending Facility rate and Deposit Facility rate each kept at 7.50% and 5.75%, respectively.

• The policy is consistent with ongoing efforts to guide inflation back towards its target corridor of 4.5±1% in 2014 and 4.0±1% in 2015, as well as reduce the current account deficit to a more sustainable level.

•Bank Indonesia will continue to strengthen the monetary and macroprudential policy mix as well as implement structural policies to boost domestic economy while also managing the external debt, in particular corporate external debt.

•BI will also increase coordination efforts with the Government in terms of inflation control and the current account deficit order to shore up the economic rebalancing process.

Although global economy is still projected to have down side risks, Indonesia economic stability in 2014 would be maintained, supported by moderate economic growth, well anchored inflation within its target, as well as a healthier current account deficit.

Macroeconomic Projections: More Balanced Growth Prospect in 2014-2015 21

2014 2015

World GDP 3.1 3.4 3.8

Advanced Countries 1.4 2.0 2.4

United States 2.2 2.1 3.0

Euro Zone -0.4 1.1 1.5

Japan 1.5 1.6 1.1

Emerging and Developing Economies 4.7 4.6 5.0

China 7.7 7.4 7.1

India 4.6 5.4 6.4

Other Emerging Market Countries 3.1 3.1 3.6

2013Projection

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BUILDING ON STRONGER FOUNDATIONS | September 2014

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