Republic of Indonesia Minister of Finance and Bank Indonesia Governor

1. Republic of IndonesiaMinister of Finance and Bank Indonesia Governor Recent Economic Update 2006 Luncheon Investor Forum New York, 24 April 2006

2. OUTLINE:1. The Economy2. Monetary Policy3. Financial Sector4. Fiscal Policy5. Investment Climate6. Outlook

3. The Economy

4. Resilient economic performance and sustained growth despite difficult environment Key highlights • Despite the difficult global economic environment, GDP growth accelerated to 5.6% in 2005. • The pattern of growth improved from one dominated by consumption to one where investment and exports played a larger role • Early indication Q1 2006, growth around 4.5-5%, slower growth but better than expected • Household consumption remain stable and government spending drive the economy • Investment and export pickup in 2nd semester.

5. Exchange rate and inflation trends are favorable for long term growth Inflation y-o-y and 1-month SBI (%) Recent IDR exchange rate, inflation rate, and BI rate trends % Source: BPS, Bank Indonesia IDR exchange rate Source: Bloomberg, Bank Indonesia, BPS Source: Bank Indonesia

6. Healthy external position reflected in current account surplus and growth of reserves Rise in FX reserves (USD Bn) Current account surplus (USD bn) Months Source: Bank Indonesia * Very preliminary assesment Source: Bank Indonesia

7. Robust import and export growth: Signs of solid economic expansion Imports of capital goods, raw materials and auxiliary goods Trade balance and export/import growth USD bn % USD bn Note: Export figures are on FOB basis; Import figures are on C&F basis Source: Bank Indonesia Source: Bank Indonesia

8. Short Term Capital Inflow Yield Spread & Exchange Rate Capital inflow and Rupiah yield • High Capital Inflow due to: • High yield of Rupiah • Lower risk: tighter swap premi and yield spread Global Bond 2014. Swap Premi - Various Tenor

9. Banking sector performance remains resilient Key highlights Banking sector fundamentals remain strong % % • Consolidation • Number of banks decreased from 239 in 1996 to 131 as of Feb 2006 • Bank sector consolidation has relied on market mechanisms and prudential regulations to strengthen structure of national banking system • Banking performance • LDR1 steadily increased from 61.8% in Dec 2004 to 63.6% in Feb 2006 • Monthly NIM2 relatively stable from 0.6% in Dec 2004 to 0.4% in Feb 2006 1Loan calculations include channeling loans 2 Calculated as NII for the particular month divided by earning assets for the corresponding period Source: Bank Indonesia

10. Key in Fiscal Policy 2006

11. Fiscal Consolidation Remains on Track Budget deficit continues to decline and remains well below “BB” median level Budget Deficit Continues to Decline Fiscal Performance Highly Favorable vs Comps General Government Financial Balance/GDP Primary balance (as % of GDP) 2000 2001 2002 2003 2004 2005 2006** 2.4% 2.8% 3.4% 1.5% 1.6% 1.8% 1.8% Source: Moody’s Statistical Handbook, Country Credit, May 2005 Notes: ** Based on 2006 State Budget

12. The 2006 State Budget In IDR trillion % of GDP In IDR trillion % of GDP Total Revenues & Grants 625.2 20.6 Tax Revenues 416.3 13.7 Non-Tax Revenues 205.3 6.8 Grant 3.6 0.1 Expenditures 647.7 21.3 Central Government 427.6 14.1 - Fuel subsidy 54.3 1.8 - Electricity Subsidy 17.0 0.4 Transfer To Region 220.1 7.2 Primary Balance 54.2 1.8 Overall Balance (Deficit) (22.4) (0.7) Government Bank Account 23.0 0.8 Privatization Proceeds 1.0 0.0 Assets Disposal 2.4 0.1 Government Bonds, net 24.9 0.8 Government Investment (0.4) (0.0) Official External Debt, net (28.5) (0.9)- Gross Drawing 35.1 1.2- Amortizations (63.6) (2.1) Total Financing 22.4 0.7

13. Highlight of 2006 Budget • Higher deficit due to carry over spending and more spending for infrastructure • Fiscal Risks: Global Interest Rate, Oil Price, SOEs. • Delay on Electricity Tariff Increase • Capital markets (international and domestic) as source of financing; maintain arround 1% of net gov. bond issuance • Strong Measures to target deficit around 1-1.5% of GDP

14. Key 1: Tax Reform

15. Tax Reforms Lead to Revenue Enhancement Tax Ratio on Upward Trend Administrative Reforms TAXES • Implement database and on-line system • Improve current Large Taxpayer’s Office • Expansion of Modern Offices • Establish medium and small tax offices • E-filing, e-registration, modernize office and Single Identification Number initiative CUSTOMS • Extend green and priority lane facility • Improve customs valuation procedures • Introduce Tariff Harmonization • Fighting against illegal products and smuggling Proposed Tax/Customs Law • Provide incentive and pro-business regulation • Revising tax procedure and administration • Provide more legal certainty • Balance between tax payer and official Source: Ministry of Finance Notes: * Based on 2005 State Budget 2nd revision

16. Key 2: Debt Management

17. Factors contributing to the decline in debt/GDP ratio: Decline in Total Government Debt/GDP Ratio Debt/GDP Ratio • Decline in budget deficit • Continued fiscal consolidation • Increase in primary balance surplus leading to improved solvency • Robust Economic growth and lower inflation • Lower costs of Borrowing • Improve Maturity Profiles Source: Ministry of Finance

18. Public external debt structure • Lower cost of borrowing, exchange rate swaps, debt swaps, debt sustainability to MDG, fixed rate borrowing • Quality disbursement, lower proportion of Export Credit, review un-disbursed loan Government External Debt Outstanding Global Bonds • US$31 bn, of which: • - Japan: US$ 20.5 bn • France: US$ 1.6 bn • USA: US$ 1.6 bn • Germany: US$1.3bn 6% 36% Mostly export credits 22% • US$ 28 bn, of which: • - IMF: US$ 7.8 bn • IBRD: US$ 8.8 bn • ADB: US$ 8.4 bn 35% Source: MoF/Bank Indonesia

19. Domestic Debt: Maturity Profile of Tradeable Domestic Government Bonds (FR+VR) end of 2001-2005 “Maturity profile has been improving over time towards a more balanced structure.” Source: Ministry of Finance

20. Near term volatility has abated, stability has been restored and growth is on track IDR and JSX Composite Index ROI IDR bonds’ yields (%) IDR average since Jan 1, 2005 = 9,671 Source: Bloomberg Source: Bloomberg

21. Foreign investor confidence also evident in rising demand for Indonesian bonds ROI USD Government bonds’ spread against UST (bps) Foreign ownership in IDR Government bonds (%)1 1 As % of total outstanding tradable IDR Government bonds, excluding non-tradable bonds issued to Bank Indonesia Source: Ministry of Finance

22. Ownership of IDR Tradeable Government Bonds 2003-2005 (in %) Source: Ministry of Finance “The trend of government bonds ownership shows a more diversified investors base, where ownership by ‘long-term holders’ (insurance, pension funds, and foreign holders) is becoming larger.”

23. Key 3: Investment Climate

24. Improving Investment Climate Improving Investment Climate • we intend to push reforms in the areas of business start-up, taxes and customs, trade restrictions and Decentralization in the year ahead. 1. Sectoral Policies 2. Tax/Customs 3. Decentralization • reduce the time to register • removes restrictions movement of goods, • streamlines trade licenses • Improve financial sector • Improve investment Climate • Labor Law • speeding up refunds, simplifying tax admin • reduce time to clear customs, • increase the number of compliant importers • Fiscal balance between Central-Local Gov. • establishes positive list for local taxes/charges

25. Closing: 2006 Outlook

26. Challenges and Outlook 2006 • Global Risk: • Oil Price • Global Interest Rate • Source of Growth: • Fiscal Front Loading • Private Sector (investment and exports) • Improve Macro Stability: • Fiscal-Monetary Policy Coordination • Maintain Inflation pressures

27. Policy Agenda 2006 • Investment • Infrastructure • Investment Package • Financial Sector Reform • Policy Agenda • Maintain Inflation Pressures • Speed-up and Improve Quality Fiscal Spending • High Priority: Tax and Customs Reforms • Financial Sector Reform: Banking, Capital Market, Debt Market, NBFI, and SOE reform