The Republic of Indonesia

1. The Republic of Indonesia Fiscal Policy Update November 2008

2. Table of Content • Impact of the Global Financial Crisis • Action Taken & Fiscal Policy Response • Conclusion

3. 1. Impact of the Global Financial Crisis

4. Further Depreciation of Rupiah Depreciation of Stock Indices & Exchange Rates (Jan-Nov 2008) IDR and JCI Performances • Capital outflows from Bank Indonesia certificates, domestic government bonds and the international capital Markets to safe-haven • Decreasing of USD liquidity in the international capital markets and depreciation of rupiah Foreign Reserves

5. Competition to Seize Capital in the Capital Markets Leads to an Increase in Interest rates and Cost of Capital • Higher Yield Curve of Government Bond (UST yields increased by 500 Bps and Indonesian government bond yields increased by 300 bps) • Refinancing of government bonds and the private sector will become more expensive and difficult

6. Exports tend to decline and imports will be slower while the real sector will be slowly impacted CPO & Rubber Price Sharply Decline...... 6

7. Forecast of 2008 Economic Growth will be Slower 7

8. 2. Actions Taken and Fiscal Policy Responds

9. Policy Response • Place government funds at state-owned banks to increase liquidity in the banking system • Increase the amount of deposits guaranteed by the government in the banking system • Adjust the financial sector with prudential regulations (banking and the capital market) according to the needs • Recognize the importance of monetary policy support as deemed appropriate to domestic conditions • Manage SoE foreign exchange transactions to reduce speculation • Maintain the sufficiency of foreign exchange reserves through trade financing facilities, control of consumption goods imports and illegal imports • Accelerate the disbursement of program loans for government and SOE projects • Prepare Crisis Protocol (Implementation Committee of Financial Sector Stability) • Reduce government bond issuance in 2008 and 2009 • Redefine emergency funding in State Budget Law 2009 based on emergency conditions for anticipating of global crisis impact • Design standby financing for counter-cyclical or stimulus in 20009 Budget

10. 2008 Budget Outlook Maintain fiscal stability in the face of external economic shocks Official State Budget Key Assumptions • 2008 budget outlook deficit is 1.1%, down from original target of 2.1% of GDP • Oil price decline helps to reduce energy subsidies and budget deficit • No bond issuance since October 2008 due to volatile market conditions Source: Ministry of Finance

11. 2009 Budget The 2009 budget gives the government enough room to adjust to the impact of the global financial turmoil Official State Budget Key Assumptions • 2009 budget deficit is expected to be 1.0% of GDP as compared to 2.1% of GDP of the revised budget 2008 and 1.1% of GDP of 2008 outlook • Safety nets and crisis prevention mechanisms are built into the 2009 state budget Source: Ministry of Finance

12. Macroeconomic assumptions used are still optimistic despite of inclusion for downside risks Moderate tax revenue growth of 20% for 2009 Implementation of the new Income Tax Law that provide lower rate, increase treshhold, incentives for certain sectors and regions. Currently implementing the Income Tax Law, which lowers tariffs and increases minimum thresholds, and provides tax incentives to certain sectors (food, energy, textile and footwear and export-oriented small and medium enterprises) and regions, in order to reduce costs for businesses Improve transparency for the calculation of cost recovery and revenue from the oil and gas sector Use all fiscal, trade and industry instruments to support the real sector, boost investment climate and increase competitiveness of Indonesia’s economy Summary of 2009 Budget 12

13. Increase fiscal reserveto fund budget deficit Priority is given to poverty alleviation and education (BLT, PKH, PMPH and BOS), health care and infrastructure (road, bridge, airport and electricity) programs Shift financing sources from marketable securities to standby financing facilities from bilateral and multilateral institutions Design standby financing for countercyclical/stimulus in Budget 2009 Preparing Crisis Protocol (Implementation Committee of Financial Sector Stability) Summary of 2009 Budget 13

14. Measures are Taken to Maintain State Budget 2009 Sustainability High awareness and proactive management of the impact of the global financial crisis on Indonesia Defensive Offensive (Counter-Cyclical) • Reduce expenditure for lower priority projects and imports • Reallocate central and provincial government expenditure if needed • Redefine emergency funding in State Budget (APBN) Law 2009 based on emergency conditions (GDP and other macroeconomic assumptions), SBN funding costs and banking systemic risk • Increase fiscal reserve to mitigate against any increase in fiscal risk due to deviation from current macroeconomic assumptions • Lower revenue growth target for tax collection • Reduce deficit target to 1% of GDP with less reliance on financing from the capital markets • Reduce income tax rate for both individuals and corporates by 2% and a further 5% for listed companies • Provide tax incentives for certain sectors and regions and relax tax tariffs for several sectors such as crude palm oil • Allocate non-energy tax subsidies of IDR 10 trillion as a counter-cyclical fiscal measure • Increase or focus expenditure on large industrial sectors which have greater impact on employment creation and poverty reduction • Upsize financing from bilateral and multilateral organizations • Obtain additional funding from foreign loans through private placement with sovereign wealth funds, international financial institutions and ASEAN+3

15. Debt Financing Strategy 2009 Demand for government bonds will be impacted A decline in investor interest from the U.S. and Europe, which are the largest buyers (65%) of Indonesian global bonds Foreign investors will also reduce the purchase of rupiah bonds Banks, the primary buyer of government bonds, need to maintain sufficient liquidity Obtain alternative financing from bilateral and multilateral organizations and institutional investors The availability of loan programs to finance the deficit The demand for the issuance of Sukuk remains strong Private placement with bilateral agencies, international Financial Institutions and sovereign wealth funds Standby financing facilities amounting to USD5.5 billion are arranged with bilateral and multilateral organizations 15

16. Indonesian Government Financing Table

17. Indonesia 2009 Monthly Sovereign Debt Amortization Schedule 17

18. In the Article 23 of Law in the Government Budget 2009 and the explanation were given a protection law to anticipate the state of emergency as the impact of the global economic crisis following : In an emergency, if the following matters: The decrease of economic growth under the assumption that the deviation and other macro-economic assumptions that lead to the decrease in income countries, and / or increasing state spending significantly; Increase the cost of debt, particularly yield securities countries, significantly, and / or Systemic crisis in the banking and financial system, the national need additional funds and the banks underwriting Non-Bank Financial Institutions (LKBB), Emergency Condition (Article 23 UU APBN 2009 and Explanation)

19. Government with the approval of the Board of Representatives can make steps: expenditures that are not yet available budgets and / or expenditures exceed Limit defined in the Revised Fiscal Year 2009; shift spending between programs, between activities, and / or the type of shopping in one of the state ministries / agencies and / or inter-state ministries / agencies; expenditure savings in order to increase the country's efficiency, while maintaining the target programs and activities that priority should be achieved; withdrawal of standby loans from bilateral and multilateral creditors; publication of the State Securities exceeds the Limit, which is set in the Budget that year. Government steps to convey the policies referred to in paragraph (1) report in the Budget Implementation Semester I and / or the Financial Report of the Central Government. Emergency Condition (Article 23 UU APBN 2009 and Explanation) (cont’d)

20. G20 Declaration In case where severe market disruptions have limited access to the necessary financing for counter-cyclical fiscal policies, multilateral development banks must ensure management are in place to support, as needed, those countries with a good track record and sound policies

21. 3. Conclusion

22. Conclusion Indonesia’s fiscal position remains strong and solid despite the impact from the global financial crisis Close monitoring of macroeconomic targets with prudent and proactive fiscal and debt management Flexible state budget to account for potential downside risk with conservative assumptions Sufficient cash on hand to meet all immediate debt obligations Stronger coordination between different ministries and BI to ensure economic stability Diversified financing alternatives have been arranged Fuel price automatic adjustment with maximum cap Reduce reliance on financing from the international capital markets Focus on counter-cyclical measures to reduce the impact of the global financial crisis on Indonesia

23. THANK YOU 23

24. Emergency occurs when: Prognosis of the lowest economic growth of 1% (one percent) under the assumption; prognosis, while other macro economic indicators have the lowest deviation of 10% (ten percent) from assumption. Prognosis is calculated based on the realization of the macro-economic indicators in 2008. Nominal position of third party funds in the national banking system to decline drastically. Increase in yield (yield) of the State Securities cause additional cost of publishing SBN significantly reflected in: the lack of yield in the bidding, which won in the government benchmark in the 2 (two) times in auction and / or the trend of increased yield at least as much as 300 basis points (bps) in one (1) month; The Emergency is causing the decline of government revenue prognosis that come from tax revenues and Nontax, and the estimated additional burden of the obligations that derive from the state payment of principal and interest debt, fuel and electricity, and other expenditure. Referred to the House of Representatives approval of the decision is in the conclusion of Work Meeting House Budget Committee, the Government of the Republic of Indonesia within twenty-four hours after receiving the proposals from the Government.