The Republic of Indonesia

1. The Republic of Indonesia February 2009

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3. Impact of the Global Credit Crisis on Indonesia’s Economy Effective Policy Responses in 2008 and Proactive Measures for 2009 Fiscal Stimulus and Budget Financing Conclusion 1 2 3 4 PRESENTATION OUTLINE

4. 1 Impact of the Global Credit Crisison Indonesia’s Economy

5. Impact of the Global Credit Crisis on Asian Economies Depreciation of Stock Indices & Exchange Rates Negative Impact on Trade Balance 2008 Performance 10.8* Downward Revision in Global Growth Outlook (%) Source: Bloomberg, CEIC, National Statistics of peer countries, World Economic Outlook (“WEO”), IMF * 3Q08 data is used as 2008 forecast is unavailable

6. Indonesia’s Macroeconomic Environment Headline Inflation Trending Down from Peak Bank Indonesia Still Has Room to Lower The Policy Rate Equity and Currency Markets Have Stabilized at New Levels Sufficient Foreign Reserves Despite Global Challenges Dec Source: Ministry of Finance, Bank Indonesia, Bloomberg

7. Credit Growth Stays Strong Despite the Global Crisis Rapid Bank Credit Growth Despite Global Liquidity Crunch Loan-to-Deposit Ratio Rising to Post Crisis Record Nov Non-Performing Loans Ratio is Trending Down Nov Nov Source: Bank Indonesia

8. Credit Contraction Resulting in Increased Financing Cost Bond yields have increased considerably amidst heightened risk aversion in the capital markets Source: Bloomberg * As at Issue Date

9. Slowdown in Real Sector Growth has been Gradual Despite the Decline in Raw Material and Commodity Prices… …Exports Remain Stable Source: Central Bureau of Statistics, Bloomberg

10. Slower Economic Growth Forecasted for 2009 Breakdown of GDP Growth Consumption/Exports/Investment Quarterly GDP Growth Source: Ministry of Finance, Central Bureau of Statistics * Preliminary estimates. 2009 GDP forecast is 4.5-5.5%, this chart uses an average of 5%

11. Resilience Acknowledged by All Three Ratings Agencies Moody’s (Ba3 Stable) S&P(BB- Stable) Fitch(BB Stable) BB- BB 2008 Ba3 BB- 2007 B1 Ba3 BB- BB- B2 B1 B+ BB- BB- 2006 2005 B2 B+ B+ BB- B2 B B+ B+ 2004 2003 B3 B2 B- B B B+ Moody’s – 7 Jan 2009 “The rating outlook is stable and reflects Moody's view that reasonable policy management and gradual structural reforms will offset the challenges that the Indonesian authorities may face over the next 12 to 18 months… Moody’s assessment of Indonesia’s ‘medium’ economic resiliency is supported by a relatively large and well-diversified economic base…” S&P – 7 Nov 2008 "The stable outlook reflects Standard & Poor's view that debt reduction in recent years and an improved policy environment, particularly the flexible exchange rate regime, will enable the government to sustain an adequate external liquidity cushion in the face of ongoing negative external shocks...“ Fitch – 23 Jan 2009 • “Fitch Ratings does not expect the country’s sovereign credit fundamentals to change materially in the forecast period, warranting a Stable Outlook...Structural improvements in public finance management and thorough ongoing surveillance of fiscal risks are Indonesia’s fundamental rating strengths… Fitch expects Indonesia’s liquidity ratio and external financing needs to stay manageable…” Source: Moody’s, S&P, Fitch

12. 2 Effective Policy Responses in 2008 and Proactive Measures for 2009

13. Crisis Control in the Financial Markets Supporting the Banking and Capital Market Systems • Place government funds with state-owned banks to increase liquidity in the banking system • Increase the amount of deposits guaranteed by the government in the banking system • Strengthen the government’s supervisory and enforcement capacity over capital markets • Prepare crisis protocol (implementation of the Financial System Stability Committee) • Manage state-owned enterprises’ foreign exchange transactions to reduce speculation Ensuring Foreign Exchange Stability • Maintain a sufficient level of foreign exchange reserves through trade financing facilities and prevention of illegal imports • Requiring greater disclosure on large-sized purchases of foreign currency against IDR to curb speculative pressure on IDR

14. Stimulating Real Sector Growth • Recognize the importance of monetary policy support, as deemed appropriate for domestic conditions • Bank Indonesia lowered the policy rate to 8.75% in Jan-09 when inflation pressure eased • Indonesian banks have started cutting their lending rates in response to the central banks’ rate cut to accelerate real sector growth • Accelerate the disbursement of projects for government and state-owned enterprise • Implement fiscal stimulus and provide additional fiscal stimulus for business and infrastructure projects • Support for real sector and export promotion such as government guarantees for trade financing • Reduce fuel prices, apply an automatic premium gasoline price adjustment and provide diesel price incentives to reduce manufacturing operational costs

15. Fiscal Stimulus and Budget Financing 3

16. Measures Are Taken to Ensure Sustainability of the 2009 Budget Indonesia is moving from a defensive to offensive stance while maintaining fiscal sustainability Defensive Measures Offensive (Counter-Cyclical) Measures • Earmark expenditure on lower priority projects and imports • Flexible allocation of provincial government expenditure • Lower tax revenue growth target • Redefine “emergency funding” in State Budget Law 2009 based on emergency conditions, government debt security funding costs and banking systemic risk • Increase fiscal contingency fund to counteract deviations from current macroeconomic assumptions • Shift financing sources from marketable securities to standby facilities • Prepare crisis protocol through the implementation of the “Financial System Stability Committee” • Additional expenditure on infrastructure projects which have greater impact on employment creation and poverty reduction • Reduce costs of business through the implementation of the Income Tax Law • 2-7% reduction in income tax • Introduce tax incentives for selected sectors and regions • Relax tax tariffs for selected sectors e.g. crude palm oil • Provide more direct subsidy for medium and low income households • Lower energy prices or provide a certain discount on electricity bill for industries • Upsize financing from bilateral and multilateral organizations

17. Fiscal Stimulus in Place for 2009 Support from infrastructure and national programs, such as: Additional peoples empowerment (PNPM) program to alleviate poverty Expansion of credit program (KUR) to accelerate the development of the primary sectors Additional infrastructure projects for job creation 1 2 3 Accelerate job creation and foster growth of small scale businesses Boosting the society’s purchasing power • Subsidies on medicine, and cooking oil • Direct subsidies (cash transfer and conditional cash transfer) for low-income households • Provide more direct and indirect subsidies to education and health sector Stimulate trade and promote entrepreneurship • Import duty facility on selected capital goods and materials • Export financing and guarantee • Tax rate reduction on corporate income and individual income, and increase minimum threshold for employee tax • Discount on electricity peak-hour charge for industries and reduction of diesel fuel price

18. Indonesia's Stimulus Package is Comparable to Other Economies The fiscal stimulus package that Indonesia has put in place is in line with rest of the world Source: CEIC, Bloomberg

19. 2009 Outlook Budget with Safety Net and Crisis Prevention Mechanism The 2009 budget is designed to give the Government enough room to adjust to any potential impact of the global credit crisis 2009 Budget (in USD) Assumption 1 USD = IDR 9,400 for Original Budget, 1 USD = IDR 11,000 for Outlook Budget Source: Ministry of Finance

20. Rationale Supporting the 2009 Budget Outlook • Adjust macroeconomic assumptions: • Economic growth: from 6.0% to 4.5-5.5% • IDR/USD: from 9,400 to 11,000 • World oil price: from 80 to 45 US$/b • Revenue projected to be 26% lower than original budget • Accelerate expenditure disbursement from the central and regional government • Automatic price adjustment with maximum cap applied to gasoline price • Original capital and social spending through line ministries remain unchanged • Incorporate fiscal stimulus (1.4% of GDP) to stabilize the economy • Budget deficit: 1%  2.5% of GDP • Increase in budget deficit to be financed by 2008 budget surplus of US$4.7bn (1% GDP) and additional debt of US$3.4bn (0.8% GDP) • Arrange standby financing from multilateral and bilateral countries in anticipation of any worsening of the credit crisis

21. 2009 Funding Plan Budget Deficit Financing (in USD) • Notes: • Estimates based on new set of assumptions plus additional fiscal stimulus measures • 2008 financing surplus • Additional debt from standby facilities Assumption 1 USD = IDR 9,691 for 2008, 1 USD = IDR 9,400 for 2009 Original Budget, 1 USD = 11,000 for 2009 Budget Outlook Source: Ministry of Finance. Detailed breakdown for 2009 Budget Outlook is currently available

22. 1 2 3 4 2009 Debt Management Budget Deficit Financing (in USD) 2009 budget deficit: US$12bn (2.5% GDP) - upsized from US$5.5bn (1.0% GDP) under the original budget Additional debt required: US$3.4bn Standby facilities in place should market conditions be unfavorable for debt issuance: 1. World Bank 2. ADB 3. Bilateral: Japan, Australia and others* Maintain total issuance amount (net of redemption) of government securities: US$4.9bn In response to volatile market conditions, Indonesia has embarked on the following steps for 2009: • Maintain dialogue on alternative financing and standby facilities from bilateral and multilateral organizations and other institutional investors • Enhance debt issuance strategy: • Explore new fundraising methodology including establishing a Global Medium Term Note Program and issuance via private placements and syndicated offerings • Shortening portfolio duration • Instrument diversification Source: Ministry of Finance * Still in discussion

23. 4 Conclusion

24. Conclusion Indonesia’s policy responses seek to safeguard the country’s fundamentals against the global credit crisis Counter-cyclical measures to offset external shocks Provide monetary policy support to real sector growth Flexible state budget factoring in potential downside risks Effective government measures Fiscal stability in face of Maintain healthy financial systems through regulations and crisis protocols supporting Indonesia’s economic stability external economic shocks Fuel price automatic adjustment with maximum cap Proactive and prudent debt management Rebalancing of debt maturities Enhance debt issuance strategy Diversified financing alternatives in place