Republic of Indonesia

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1 Republic of Indonesia 2018 Investor Update Stability at the Forefront with Unwavering Reforms Commitment June 2018

2 Disclaimer This presentation has been prepared by the Republic of Indonesia (the Republic ). This presentation is being presented solely for your information and is subject to change without notice. By accessing this presentation, you are agreeing to be bound by the restrictions set out below. Any failure to comply with these restrictions may constitute a violation of applicable securities laws. This presentation contains forward-looking statements that involve risks and uncertainties. All statements other than statements of historical facts are forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Republic to be materially different from those expressed or implied by the forward-looking statements. The Republic has filed a registration statement (including the prospectus) with the U.S. Securities and Exchange Commission (the SEC ). You should read the prospectus in that registration statement (file no ), any prospectus supplement and other documents that the Republic has filed with the SEC for more complete information about the Republic. A copy of the prospectus can be obtained for free by visiting EDGAR on the SEC web site at from Deutsche Bank Securities Inc. at 60 Wall Street, New York, NY 10005, USA, Attention: Prospectus Group, by calling , or by ing prospectus.cpdg@db.com. A prospectus of the Republic, dated March 16, 2018, is available from the SEC website at This presentation may not be reproduced, disseminated or quoted without the prior written consent of the Republic. 2

3 Outline 1 Executive Summary 2 Recent Macroeconomic Development 3 Financial Market Condition State Budget Realization Performance 5 Fiscal Incentive to Support Investment and Export 6 Medium Term Fiscal Objectives & 2019 Macro-Fiscal Framework 7 Monetary Policy and Banking Sector 8 Debt Management and Budget Financing 3

4 01 Widi Island in North Maluku, Indonesia Executive Summary

5 Executive Summary Indonesia in Snapshot Strong GDP Growth Supported by robust domestic activity and increasing role of investment Infrastructure Development Acceleration Strategic national projects supported by budget and non-budget financing (private sector) Credit Rating Improvement One of the Best GDP Growth Performer. with more potential to come Continuous Reform. Fiscal, monetary and Real sector International recognition from global rating agencies Prudent Debt Management Maintain productive use of public debt Reform on the Move Credible Policy Framework.followed by International Recognitions 1. Taxation 2. Investment Regulation 3. Bureaucratic Preserved Fiscal Prudence.improving creditworthiness 5

6 India China Turkey Indonesia Korea Mexico Australia Saudi Arabia United Kingdom United States Canada Germany South Africa Japan France Argentina Italy Russia Brazil Indonesia s GDP Growth Has Been Robust Consumption and investment remain as the main engines of growth GDP breakdown by expenditure (%, YoY) Q1 Q2 Q3 Q4 Y Q1 Q2 Q3 Q4 Y Q1 Household Consumption Government Consumption (2.95) (4.03) (0.14) 2.69 (1.92) Gross Fixed Capital Formation Export (3.10) (1.50) (5.75) 4.15 (1.57) Import (5.04) (3.47) (4.13) 2.72 (2.45) GDP Domestic and foreign direct investment have been picking up thanks to the acceleration of infrastructure spending. International trade is rebounding and supporting growth, partly attributed to the increase of commodity prices, but also signals that global demand improves. Indonesia s growth is still stable and higher than most of its G20 peers Medium term growth is well maintained through improving investment climate and fiscal incentive GDP Growth Comparison Amongst G-20 Countries Indonesia GDP Projection Institutions 2018 GDP Growth Projection Government of Indonesia (2018 Budget) 5.4% IMF (WEO Apr 2018) 5.3% World Bank (IEQ June 2018) 5.2% ADB (ADO Apr 2018) 5.3% (0.5) S&P (May 2018) 5.3% Fitch (Dec 2017) 5.4% Avg. GDP Growth 5 Years Std. Dev. GDP Growth 5 Years 6

7 Regional Growth Most of regions recorded positive growth in the first quarter : : : 4.37% SUMATERA: 21.5% of GDP 2017: : 4.97 KALIMANTAN: 8.2% of GDP 2018: 3.25% 2017: : 6.93 SULAWESI: 6.0% of GDP 2018: 6.83% 2017: : : 18.42% Government effort aimed to improve connectivity among the islands and bring down the logistics cost. The prices of basic goods in the outlying islands are becoming more affordable as the result. This will translate to improved efficiencies, thriving regional economies, and lowering the development disparity among the regions Regional GDP Growth 2017 Q1 Regional GDP Growth 2018 Q1 Regional GDP Growth 2017: : : 5.78% JAVA: 58.7% of GDP 2017: : : 3.74% BALI & NUSRA: 3.0% of GDP PAPUA: 2.5% of GDP 2017 National GDP Growth 5.06% Infrastructure and connectivity projects to create more sustainable and equitable economic growth in all regions. Intergovernmental transfer, including Village Fund, has also promoted equality in the region. As the industrial center, Java still holds the biggest economic activity accounting for percent of GDP Maluku and Papua recorded high growth of percent, underpinned by the increase of commodity price and mining activity 7

8 Sovereign Rating Credit Upgrade and Improving Global Perception International acknowledgement from various agencies and improving global perception The 2018 World Bank Ease of Doing Business Ranking 1 31 May 2018 BBB- BBB- The sovereign ratings on Indonesia are supported by the government s relatively low debt levels and its moderate fiscal performance and external indebtedness 20 Dec 2017 BBB- BBB The focus on macro stability is also evident in credible budget assumptions in the previous few years 12 Feb 2018 BBB- BBB infrastructure development has been gaining momentum under strong initiative of President Joko Widodo for determination of National Strategic Projects (PSN) JUMPED 19 ranks 2018 : #72 out of 190 countries 7 Mar 2018 BBB- BBB 13 Apr 2018 Baa3 Baa2 Score: 66,5 ( 5.0) Indonesia's economy continues its strong performance, with inflation remaining low and stable. Fiscal deficits have been reined in, and government debt is low The upgrade to Baa2 is increasingly underpinned by a credible and effective policy framework conducive to macroeconomic stability China Vietnam Indonesia Philippines Brazil India 2017: # : # : #120 1 Source: World Bank: Doing Business 2018: Reforming to Create Jobs 8

9 Inflation has been More Benign Create Substantial Foundation for Robust Consumption Inflation Rate (YTD, %) Inflation Rate & Components (%) 11.1% 8.4% 8.4% 7.0% 3.8% 4.3% 2.8% 3.4%3.0% 3.6% 1.3% May-18 Source: BPS Consumer Confidence Index 12.0% 10.0% 8.0% 6.0% 4.0% 5.9% 3.1% 3.0% 8.7% 3 3.0% 4.3% 3.6% 3.2% Inflation is more benign supported by more stable food inflation as supply side improves. The administered price inflation is the biggest source of pressure in 2017, but pressure is easing as tariffs are adjusted at the end of the first semester of Indonesian Consumer Confidence is showing a vibrant economic activity and good expectation on economy % 2.8% Future Policies J M M J S N J M M J S N J M M Source: Bank Indonesia 0.7% 0.0% 0.2% (2.0)% J F M A M J J A S O N D J F M A M J J A S O N D J F M A M Inflation (CPI) Core Inflation Administered Price Volatile Food Source: BPS Improving logistic and distribution and stronger coordination between institutions are some key factor in inflation management The monitoring of prices and improvements to the trading of some food commodities can anticipate price game practices. 9

10 Direct Investment Grew by 11.8 Percent in Q Underpinned by improving investment climate Nominal (Rp Tn) Direct Investment Realization FY-2016 FY-2017 Q Growth (% YoY) Nominal (Rp Tn) Growth (% YoY) Nominal (Rp Tn) Growth (% YoY) Domestic Foreign Total FDI Share by Country Origins Q FDI Share by Country Origins Singapore Japan S Korea China Hong Kong Other 8.3% 6.3% 11.6% 16.7% 24.5% 32.6% Singapore Japan US S Korea Netherland Malaysia China Hong Kong BVI Other 5.5% 5.4% 4.7% 4.6% 3.9% 3.5% 3.4% 12.2% 23.8% 32.9% Direct Investment Share by Sectors Q Others 45% Transportation, Warehouse, & Telecommunication 8% Source: NSWi BKPM Metal, Machinery, & Electronic Industry Housing, 12% Estate & Building 15% Crops & Plantation 10% Electricity, Gas, & Water Supply 10% Positive FDI flow shows a high interest in Indonesia. Nevertheless, Java island is still the main destination for direct investment, roughly 55% of total FDI. Government Efforts To Improve Investment Climate : (1) Easing Import and Export Restrictions (2) Reducing Dwelling Time (3) Revising and Perfecting Tax Incentive (Tax Allowance and Tax Holiday) Overall structural reform efforts are expected to boost investment and exports to support Indonesia's economic growth in the medium term. 10

11 Import Growth Upholds Increasing Domestic Economic Activities Until April 2018, Trade Balance is Recording a Deficit of USD1.31 billion M J J A S O N D 2017-J F M A M J J A S O N D 2018-J F M A M M J J A S O N D 2017-J F M A M J J A S O N D 2018-J F M A J S N 2017-J M M J S N 2018-J M Trade Balance (USD Billion) Cumulative Growth of Export Commodity (1.0) (2.0) Surplus FY 2016: USD9.5 billion Surplus FY 2017: USD11.8 billion Deficit Jan-Apr 2018: USD1.31 billion 60.0% 40.0% 20.0% 0.0% (20.0)% (40.0)% (60.0)% 33.4% 5.3% 4.0% (5.1)% Non O&G O&G Total Agriculture Manufacturing Mining O&G Trade balance is recording deficit cumulatively in April 2018, due to high import growth that supports growing domestic production Import grew by 23.65% (YTD) supported by higher demand for festive seasons of Ramadhan and Idul Fitri; capital good increase to support infrastructure development and military equipment; and raw material increase that highlights improving domestic productivity and economic activity Top 4 Export/Import (Non-O&G) by Country April 2018 (USD Billion) Export (Non O&G) 1 China United States Japan 1.4 Import (Non O&G) 1 China Japan United States % 30.0% 10.0% (10.0)% (30.0)% Cumulative Growth of Import Goods 31.0% 26.1% 21.9% Contribution to Total Import Capital Goods 16.3% Consumption Goods 9.1% Export grew by 8.77% (YTD), underpinned by mining commodity growth of 33.4% and manufacturing of 5.3% 4 India Thailand 0.9 Consumption goods Raw materials Capital goods Raw Materials 74.6% Source: BPS 11

12 Macroeconomic Indicators Remain Strong Indicators Revised Budget (APBN-P) Realized 31 May APBN Realized 31 May Budget (APBN) Realized 31 May Submitted to Parliament Economic growth (%, yoy) Inflation (%, yoy) Month Treasury Bill (SPN) (%) Exchange Rate (Average, IDR/USD) ,500 13,435 13,400 13,336 13,400 13,714 13,700 14,000 ICP (USD/barrel) Oil Production (thousands of barrel/day) Indonesia has been able to maintain robust economic performance which expected to continue in 2018 and Inflation is benign supported by improving logistic and infrastructure acceleration Interest rate and exchange rate are stable, benefiting from strong fundamental and positive investor perception in the midst of uncertain global condition. Increasing commodity price helped in boosting external position and revenue. Indonesia's economy is currently in the process of transitioning. However, Indonesia economy cannot be separated from external conditions (technology, trade, and geopolitics) as well as domestic challenges. Gas Production (millions of barrels/day) Q1 figures. 2 As of April. 12

13 Performance of State Budget Fiscal Sustainability is Well Preserved as Fiscal Deficit Narrowed and Primary Balance Recorded a Substantial Surplus R-Budget May Realization % Real to Budget Budget May Realization % Real to Budget % of Growth (YoY) A. Revenue & Grant 1, , I. Domestic Revenue 1, , Taxation Revenue 1, , Non Tax Revenue II. Grants B. Expenditure 2, , I. Central Government Expenditure 1, , Ministerial Spending Non Ministerial Spending II. Transfer to Region and Village Fund (4.0) 1. Transfer to Region (1.9) 2. Village Fund (26.7) C. Primary Balance (178.0) (29.9) 16.8 (87.3) 18.1 (20.7) (160.5) D. Surplus/(Deficit) (397.2) (128.7) 32.4 (325.9) (94.4) 29.0 (26.6) % of GDP (2.92) (0.94) (2.19) (0.64) E. Financing (13.1) % of GDP I. Debt (12.8) II. Investment (59.7) (65.7) III. SLA (3.7) 1.6 (43.6) (6.7) 0.8 (11.9) (50.1) IV. Guarantee (1.0) (1.1) V. Other (35.6) Surplus/(Deficit) Financing The robust tax growth and positive performance in export and import duty good in the first quarter of 2018 is a positive support. Central Government Expenditure grows robustly Deficit realization of 0.64% of GDP is much lower compared to May 2017 Primary balance surplus is significantly higher than last year, highlighting improving fiscal performance and sustainability that well preserved 13

14 12,170 10,445 12,385 11,876 13,785 13,392 13,473 13,305 13,568 13,385 13,895 14,043 Stable Monetary Environment Conducive Monetary Environment Supporting the Economy US broad based appreciation has triggered regional depreciation, including the Rupiah. Compared to other countries, the Rupiah exchange rate depreciation is more limited underpinned by Indonesia s sound economic fundamentals and Bank Indonesia s foreign exchange stabilization policies in the form of dual intervention and policy response in the May Board meeting. Inflation Remained Under Control Rupiah Depreciated Due To USD Broad Based Appreciation YoY % Managed inflation is observed throughout Indonesia, well within the target range of 3.5±1% in the majority of the regions May-18 Limited Depreciation Compared to Other Countries May-18 EOP Average Measures To Stabilize Rupiah Exchange Rate As of May 2018 May vs April 2018 TRY (10.15) (8.43) BRL (5.84) (6.26) EUR (3.57) (3.90) ZAR (1.12) (3.48) (1.11) INR (2.75) THB (1.46) (2.08) (1.41) MYR (1.91) SGD (1.02) (1.76) IDR 0.13 (1.67) CNY (1.22) (1.19) KRW (0.85) (0.85) PHP (1.50) (0.33) (12.00) (10.00) (8.00) (6.00) (4.00) (2.00) A pre-emptive, front-loading and aheadof-the-curve policy response Dual intervention in the foreign exchange market and government securities (Surat Berharga Negara SBN) market in a measured way Strengthening the monetary operations in the foreign exchange and money markets Intensive communication, especially to market players, banks, businesses, and economists To stabilise the rupiah exchange rate, while consistently controlling inflation within the target range of 3.5±1% To stabilise the rupiah exchange rate, adjust fair prices in the financial markets and maintain adequate liquidity in the money market To maintain adequate liquidity in the rupiah money market and interbank swap market To form rational expectations, thus helping to mitigate the rupiah overshooting its fundamental level. Point to Point Average Source: BPS, Bank Indonesia 14

15 External Sector Remains Resilient Healthy Current Account Deficit and Balance of Payment (USD bn) (10.0) (20.0) (30.0) (40.0) (50.0) (USD bn) Current Account Deficit is Improving, Significantly Lower than (2.0) (1.8) (1.7) (27.1) (28.4) (28.4) (29.6) (33.0) (29.1) (27.5) (17.5) (17.0) (17.5) (12.1) (10.0) (8.7) (7.1) (7.8) (3.2) (3.1) * Primary Income Secondary Income Goods Services Current Account Current Account (% GDP)-rhs Ample Foreign Reserves to Buffer Against External Shocks (Month) % (1.0) (1.5) (2.0) (2.5) (3.0) (3.5) Components (USD bn) Q Current Account (29.1) (27.5) (17.5) (17.0) (17.5) (5.5) A. Goods Export, fob Import, fob (176.3) (168.3) (135.1) (129.2) (150.1) (42.1) B. Services, Primary & Secondary Income Balance of Payment ( ) (34.9) (34.5) (31.6) (32.3) (36.3) (7.9) Capital & Financial Account Direct Investment Portfolio Investment (1.2) Source: Bank Indonesia 1 Provisional figures. 2 Very provisional figures May May-18 International Reserves 7.2 Months of Imports & Servicing of Government Debt (rhs) Financial Derivatives (0.3) (0.2) (0.1) Other Investment (0.8) 4.3 (10.1) (5.8) (10.2) (0.2) Overall Balance (7.3) 15.2 (1.1) (3.9) Memorandum: Reserve Assets Position In months of imports & official debt repayment Current Account (% GDP) (3.2) (3.1) (2.0) (1.8) (1.7) (2.2) 15

16 Balanced Debt Maturity Profile - Resilient Against External Shocks Marked by stable maturity profile and declining risks against interest rate and FX volatilities More Prudent Risk Management Manageable External Debt Service Requirements 86.3% 87.9% 89.3% 89.6% USD billions % 42.6% 40.4% 41.8% % 22.7% 25.4% 23.0% Apr-18 FCY debt-to-total Debt Fixed Interest-to-debt Maturing debt within 3 Years P² 2019P 2020P Principal Repayment Interest Repayment Well-Balanced Debt Maturity Profile¹ Average Time to Maturity of 8.7 years USD billions IDR Denominated Source: Ministry of Finance 1 Debt Maturity Profile as of April 30, Based on outstanding debt as of 31-May Other Currencies 16

17 2018 Progress of Issuance Creating Prudent and Sustainable Fiscal Management Instruments Weekly Auction: Domestic Government Securities Conventional securities 24-25x Islamic securities 24-25x Non-Auction Retail Bonds and Retail Sukuk (ORI, SBR, Sukuk Ritel) Private Placement Target avg. tenor maturity for Government Securities Issuance Source: Ministry of Finance 1 Original amount was Rp tn, shifting to loan in amount of Rp 7.3 tn. Indicative Budget Target Rp tn USD bn Budget Deficit (2.19% of GDP) Financing Government Securities (Net) Government Securities (Gross) Composition Domestic Government Securities 80-83% International Government Securities 17-20% USD Sukuk USD EUR JPY Government Securities to Meet State Budget Financing International Government Securities Based on request 7-8 years Avoid crowding out in domestic market Provide benchmarks for corporate bonds Investor base diversification Auction Issuance Targets for Government Securities Government Sukuk 25%-30% Alternative of Issuance Private Placement Government Debt Securities 70%-75% Government Securities Financing Realization Book Building Realization % Budget 2018 (as of May 2018) Realization Rp tn USD bn Rp tn USD bn to Budget 2018 Government securities (net) % Government securities (gross) % Government debt securities (GDS) % Domestic GDS International bonds Government Sukuk % Domestic Government sukuk Global Sukuk

18 Indonesia s Infrastructure Projects and Financing Schemes Promotion of Infrastructure Development to Accelerate Economic Growth Infrastructure Development is a Key Priority Infrastructure Development in order to: 1. Accelerate growth particularly in rural areas 2. Support industrial development and tourism 3. Reduce unemployment and poverty Infrastructure fundraising needs: USD bn (or equivalent to Rp 4,796.2 tn) 245 National Strategy Projects under National Medium Term Plan for with an estimated total cost of Rp 4,197 tn (USD 313 bn) 37 priority infrastructure projects with an estimated cost of Rp 2,490tn (USD 180 bn) Majority of 37 priority projects are expected to commence commercial operation by Broad Objective Core Mandates Additional Mandates Establishment of PPP Unit Champion project preparation and acceleration of the PPP agenda in Indonesia Improve quality of project selection under KPPIP OBC criteria Support project preparation through Project Development Facility support and highly qualified transaction advisors Act on behalf the Minister of Finance in providing government support and approvals for projects Coordinate all public finance instruments Provide input for PPP Policy Development and Regulations Implement capacity building program for GCAs One stop shop for PPP promotion & Information Budget Public Private Partnership SOE & Private Sector Central & regional budget (special allocation fund & rural transfer) Primarily to support basic infrastructure projects: Food security: Irrigation, dams etc. Maritime: Seaports, shipyards etc. Connectivity: Village roads, public transportation etc. Certain infrastructure projects to be funded and operated through a partnership between the Indonesian government and the private sector Projects ready for auction under the PPP Scheme: Toll roads projects such as Balikpapan-Samarinda and Manado-Bitung Railway projects such as an express line into Soekarno-Hatta International Airport Water supply projects such as the West Semarang Project Various government support for PPP: Project Development Facility (PDF): Helps Government Contracting Agencies (GCAs) in project preparation and transaction VGF: improves financial viability of PPP projects Government Guarantees: Supports PPP projects bankability by providing sovereign guarantees Infrastructure Financing Fund: Provided through PT SMI and IIGF Availability Payment (AP): GCA pays private partner based of availability of infrastructure services Government to inject capital into SOEs: Intended multiplier effect to develop more infrastructure projects Key focus areas: Infrastructure and maritime development Transportation and connectivity Food security Medium term infrastructure developments to focus on: Water Supply Airports Seaports Electricity and power plants Housing Mining Source: Ministry of Finance; Bappenas; KPPIP: Komite Kebijakan Percepatan Penyediaan Infrastruktur or National Committee for the Acceleration of Infrastructure Provision; OBC: Outline Business Case; PDF: Project Development Facility; GCA: Government Contracting Activity 18

19 Solid Policy Coordination In Managing Financial Markets Volatility The enactment of Law No. 9/2016 regarding Prevention and Mitigation of Financial System Crises as a legal foundation for the government to serves at the time of financial crisis in the form of Financial System Stability Committee (KSSK) Most important provisions stipulated in the Law: KSSK members: the Ministry of Finance, Bank Indonesia, the Financial Services Authority, and the Deposit Insurance Corporation Financial system stability monitoring and maintenance by KSSK members based on crisis management protocol of each member; Prevention of financial system crisis, including the mitigation of systemically important bank s liquidity and solvency problems; Recovery Plan for Systemically Important Banks; Bank Restructuring Program Gov t Securities CMP Level Gov t Securities Crisis Management Protocol (CMP) Indicators: Yield of benchmark series; Exchange rate; Jakarta Composite Index; Foreign ownership in government securities Policies to address the crisis at every level : Repurchase the government securities at secondary market Postpone or stop the issuance State s Budget State Owned Enterprises (BUMN) s Budget Social Security Organizing Agency (BPJS) s Budget Bond Stabilization Framework First Line of Defense Buyback fund at DG of Budget Financing and Risk Management Investment fund at Public Service Agency (BLU) (min. level Aware) Related SOEs (min. level Aware) BPJS (min. level Aware) Second Line of Defense NORMAL AWARE ALERT CRISIS State s Budget State General Treasury Account (Rekening KUN) (min. level Alert) Accumulated cash surplus (SAL) (min. Level Crisis) 19

20 02 Ampera Bridge in South Sumatera, Indonesia Recent Macroeconomic Development

21 India China Turkey Indonesia Korea Mexico Australia Saudi Arabia United Kingdom United States Canada Germany South Africa Japan France Argentina Italy Russia Brazil Indonesia s GDP Growth Has Been Robust Consumption and investment remain as the main engines of growth GDP breakdown by expenditure (%, YoY) Q1 Q2 Q3 Q4 Y Q1 Q2 Q3 Q4 Y Q1 Household Consumption Government Consumption (2.95) (4.03) (0.14) 2.69 (1.92) Gross Fixed Capital Formation Export (3.10) (1.50) (5.75) 4.15 (1.57) Import (5.04) (3.47) (4.13) 2.72 (2.45) GDP Domestic and foreign direct investment have been picking up thanks to the acceleration of infrastructure spending. International trade is rebounding and supporting growth, partly attributed to the increase of commodity prices, but also signals that global demand improves. Indonesia s growth is still stable and higher than most of its G20 peers Medium term growth is well maintained through improving investment climate and fiscal incentive GDP Growth Comparison Amongst G-20 Countries Indonesia GDP Projection Institutions 2018 GDP Growth Projection Government of Indonesia (2018 Budget) 5.4% IMF (WEO Apr 2018) 5.3% World Bank (IEQ June 2018) 5.2% ADB (ADO Apr 2018) 5.3% (0.5) S&P (May 2018) 5.3% Fitch (Dec 2017) 5.4% Avg. GDP Growth 5 Years Std. Dev. GDP Growth 5 Years 21

22 Secondary GDP by Production Side Manufacturing improves while service sector generally keeps on recording high growth Agriculture (%, YoY) Mining (%, YoY) Primary sector grew marginally: Tertiary Primary Q Manufacturing (%, YoY) Q Trade (%,YoY) Transportation (%, YoY) Q Construction (%, YoY) Q Comm & Info (%, YoY) Financial Service (%, YoY) Agriculture slowed due to production decrease in food crops Mining growth increased supported by increasing metal ores production, but the decline in energy commodity production weighed on overall growth Secondary sector on an improving trend: Manufacturing sector growth increased particularly supported by F&B, textile, and metal industries Construction recorded high growth driven by infrastructure acceleration program Tertiary sector continues to show strong growth: Trade accelerated in line with increasing export-import as well as vehicle sales Transportation, communication, and information sectors consistently posted high growth supported by improving logistic and digital economy Q Q Q Q1-18 Financial service sector grew moderately as credit growth remains soft 22

23 Regional Growth Most of regions recorded positive growth in the first quarter : : : 4.37% SUMATERA: 21.5% of GDP 2017: : 4.97 KALIMANTAN: 8.2% of GDP 2018: 3.25% 2017: : 6.93 SULAWESI: 6.0% of GDP 2018: 6.83% 2017: : : 18.42% Government effort aimed to improve connectivity among the islands and bring down the logistics cost. The prices of basic goods in the outlying islands are becoming more affordable as the result. This will translate to improved efficiencies, thriving regional economies, and lowering the development disparity among the regions Regional GDP Growth 2017 Q1 Regional GDP Growth 2018 Q1 Regional GDP Growth 2017: : : 5.78% JAVA: 58.7% of GDP 2017: : : 3.74% BALI & NUSRA: 3.0% of GDP PAPUA: 2.5% of GDP 2017 National GDP Growth 5.06% Infrastructure and connectivity projects to create more sustainable and equitable economic growth in all regions. Intergovernmental transfer, including Village Fund, has also promoted equality in the region. As the industrial center, Java still holds the biggest economic activity accounting for percent of GDP Maluku and Papua recorded high growth of percent, underpinned by the increase of commodity price and mining activity 23

24 Direct Investment Grew by 11.8 Percent in Q Underpinned by improving investment climate Nominal (Rp Tn) Direct Investment Realization FY-2016 FY-2017 Q Growth (% YoY) Nominal (Rp Tn) Growth (% YoY) Nominal (Rp Tn) Growth (% YoY) Domestic Foreign Total FDI Share by Country Origins Q FDI Share by Country Origins Singapore Japan S Korea China Hong Kong Other 8.3% 6.3% 11.6% 16.7% 24.5% 32.6% Singapore Japan US S Korea Netherland Malaysia China Hong Kong BVI Other 5.5% 5.4% 4.7% 4.6% 3.9% 3.5% 3.4% 12.2% 23.8% 32.9% Direct Investment Share by Sectors Q Others 45% Transportation, Warehouse, & Telecommunication 8% Source: NSWi BKPM Metal, Machinery, & Electronic Industry Housing, 12% Estate & Building 15% Crops & Plantation 10% Electricity, Gas, & Water Supply 10% Positive FDI flow shows a high interest in Indonesia. Nevertheless, Java island is still the main destination for direct investment, roughly 55% of total FDI. Government Efforts To Improve Investment Climate : (1) Easing Import and Export Restrictions (2) Reducing Dwelling Time (3) Revising and Perfecting Tax Incentive (Tax Allowance and Tax Holiday) Overall structural reform efforts are expected to boost investment and exports to support Indonesia's economic growth in the medium term. 24

25 Inflation has been More Benign Create Substantial Foundation for Robust Consumption Inflation Rate (YTD, %) Inflation Rate & Components (%) 11.1% 8.4% 8.4% 7.0% 3.8% 4.3% 2.8% 3.4%3.0% 3.6% 1.3% May-18 Source: BPS Consumer Confidence Index 12.0% 10.0% 8.0% 6.0% 4.0% 5.9% 3.1% 3.0% 8.7% 3 3.0% 4.3% 3.6% 3.2% Inflation is more benign supported by more stable food inflation as supply side improves. The administered price inflation is the biggest source of pressure in 2017, but pressure is easing as tariffs are adjusted at the end of the first semester of Indonesian Consumer Confidence is showing a vibrant economic activity and good expectation on economy % 2.8% Future Policies J M M J S N J M M J S N J M M Source: Bank Indonesia 0.7% 0.0% 0.2% (2.0)% J F M A M J J A S O N D J F M A M J J A S O N D J F M A M Inflation (CPI) Core Inflation Administered Price Volatile Food Source: BPS Improving logistic and distribution and stronger coordination between institutions are some key factor in inflation management The monitoring of prices and improvements to the trading of some food commodities can anticipate price game practices. 25

26 Import Growth Upholds Increasing Domestic Economic Activities Until April 2018, Trade Balance is Recording a Deficit of USD1.31 billion M J J A S O N D 2017-J F M A M J J A S O N D 2018-J F M A M M J J A S O N D 2017-J F M A M J J A S O N D 2018-J F M A J S N 2017-J M M J S N 2018-J M Trade Balance (USD Billion) Cumulative Growth of Export Commodity (1.0) (2.0) Surplus FY 2016: USD9.5 billion Surplus FY 2017: USD11.8 billion Deficit Jan-Apr 2018: USD1.31 billion 60.0% 40.0% 20.0% 0.0% (20.0)% (40.0)% (60.0)% 33.4% 5.3% 4.0% (5.1)% Non O&G O&G Total Agriculture Manufacturing Mining O&G Trade balance is recording deficit cumulatively in April 2018, due to high import growth that supports growing domestic production Import grew by 23.65% (YTD) supported by higher demand for festive seasons of Ramadhan and Idul Fitri; capital good increase to support infrastructure development and military equipment; and raw material increase that highlights improving domestic productivity and economic activity Top 4 Export/Import (Non-O&G) by Country April 2018 (USD Billion) Export (Non O&G) 1 China United States Japan 1.4 Import (Non O&G) 1 China Japan United States % 30.0% 10.0% (10.0)% (30.0)% Cumulative Growth of Import Goods 31.0% 26.1% 21.9% Contribution to Total Import Capital Goods 16.3% Consumption Goods 9.1% Export grew by 8.77% (YTD), underpinned by mining commodity growth of 33.4% and manufacturing of 5.3% 4 India Thailand 0.9 Consumption goods Raw materials Capital goods Raw Materials 74.6% Source: BPS 26

27 2018 Growth Outlook Economy is projected to further accelerate in the midst of robust domestic demand and improving international trade GDP Growth Projection (%, YoY) Opportunities: Stable consumption supported by benign inflation Rising investment driven by infrastructure development and improving business climate APBN 2019 (Submitted to Parliament)¹ Increasing export as external demand recovering and commodity prices increasing Additional contribution from various special occasions such as Asian Games, regional election, general election preparation, and IMF-WB annual meeting 2018 Growth Projection from Various Institutions IMF (WEO Apr 2018) 5.3% World Bank (IEQ June 2018) 5.2% ADB (ADO Apr 2018) 5.3% Challenges: Consumption growth needs to be boosted more Competitiveness needs to be enhanced particularly to fulfill growing domestic demand S&P (May 2018) 5.3% Fitch (Dec 2017) 5.4% Credit growth needs to be accelerated more External uncertainties: US monetary normalization, trade wars and protectionism, and geopolitical tension 1 Mid-point of 5.4% and 5.8% economic growth assumption, submitted to parliament. 27

28 03 Financial Market Condition Lake Toba in North Sumatera, Indonesia

29 Jan-11 Jun-11 Nov-11 Apr-12 Sep-12 Feb-13 Jul-13 Dec-13 May-14 Oct-14 Mar-15 Aug-15 Jan-16 Jun-16 Nov-16 Apr-17 Sep-17 Feb-18 Global New Normal is Coming Stabilization policy may influence in reaching Indonesia desired growth target US Policy Rates & 10Y Yield Potential Risk For Indonesia in People preference to saving, rather than consumption, not followed by productive (intermediate) financial market Monetary policy normalization and US recent taxation policy could influence capital flow to emerging markets 1 0 Wait and See profile of investor due to General Election process Inward looking policies in Indonesia s key trade partner with potential trade war between US and China. Fed Fund Rate upper bound 10Y US Gov't Bonds Strategic Policy Prepared The Government will continue to monitor global condition because it can translates to domestic economy Policy coordination amongst authorities will be continued (Government, Central Bank, FSA, Deposit insurance Corporation) Coordinated policy to create Stability in Exchange rate, Manageable inflation rate, Healthy fiscal deficit, and Supportive current account profile Fiscal Policies to support investment, competitiveness and export performance. This include: Fiscal incentives for investment Expansionary budget policy, supporting productive sectors and assuring infrastructure development. Private involvement in infrastructure development Well-targeted and well-timed social spending Central and Regional Policy coordination Real Sector Policies Law and Regulation certainty Improving business climate Maintaining prudent inflation management Strengthening export performance, include those from non-commodity (high value added) related activities and taping prospective new markets 29

30 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 May-17 Jul-17 Sep-17 Nov-17 Jan-18 Mar-18 May-18 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 May-17 Jul-17 Sep-17 Nov-17 Jan-18 Mar-18 May-18 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Uncertainties and Policy Dynamics Have Created Volatility in Global Financial Market Depreciation has been widely experienced by global currencies as US monetary normalization continues on VIX and MOVE Indices Global Currencies Index Against US Dollar (31 Dec 2017 = 100) Indonesia Jepang China India EU Canada UK AUS Yields & Rupiah Movement 14,200 14,000 13,800 13,600 13,400 13,200 13,000 12,800 12,600 Spread T Bond 10 Y SUN 10 Y IDR (RHS) US policy normalization and global dynamic have led to volatilities in the financial markets Rupiah, along with global currencies experiences depreciation against US Dollar BI has increased 7 Days Reverse Repo Rate in May 2018 by 25 bps to 4.75% to maintain economic stability in the midst of global financial sector volatilities Deposit insurance rate has increased by 25 bps to 6.00% for commercial bank (IDR), 50 bps to 1.25% for commercial bank (foreign currency) and by 25 bps for rural bank in June

31 Indexed Prices Yield (%) Uncertainties and Policy Dynamics Have Created Volatility in Global Financial Market (Cont d) There has been volatilities in the stock market and local bond market. However, financial services sectors have remained resilient Price Performance of Stock Market Indices of Emerging Market Peers (2018 YTD) 10-Year Local Government Yield of Emerging Market Peers (2018 YTD) Commentary 130% 12% 11.3% There has been volatility in Indonesia s financial markets and yield of local government 10-year bond in 2018, in line with other emerging markets. 120% 110% 100% 90% 80% Jan Feb JCI (Indonesia) SET (Thailand) PSEI (Philippines) BOVESPA (Brazil) Mar Apr May Jun % 1.1% 0.9% (1.9)% (2.3)% (5.9)% (6.5)% (10.8)% KLCI (Malaysia) Hochiminh (Vietnam) CSI 300 (China) SENSEX 30 (India) 10% 8% 6% 4% 2% 0% Jan Feb Mar Apr May Jun Indonesia Malaysia Thailand Vietnam Philippines China Brazil India 7.8% 7.1% 6.1% 4.7% 4.2% 3.6% 2.9% However, Indonesia s financial services sector stability and liquidity has remained solid throughout As of April 2018, Financial services institutions have maintained adequate capital and liquidity, with the Capital Adequacy Ratio (CAR) in the banking industry recorded at 22.38% RBC of the general insurance and life insurance industries recorded at 310% and 454%, respectively Excess reserve in the banking industry was Rp 618 trillion Credit and market risk remain credible gross NPL ratio of 2.79% in the banking industry and NPF ratio 3.01% as reported by finance companies Deposit guarantee coverage of the Deposit Insurance Corporation (LPS) has reached 99.9% of customers and 52.15% in terms of value, demonstrating public confidence and trust in the national banking system Source: Data Stream as of 1-Jun-2018 Source: Data Stream as of 1-Jun

32 Solid Policy Coordination In Managing Financial Markets Volatility The enactment of Law No. 9/2016 regarding Prevention and Mitigation of Financial System Crises as a legal foundation for the government to serves at the time of financial crisis in the form of Financial System Stability Committee (KSSK) Most important provisions stipulated in the Law: KSSK members: the Ministry of Finance, Bank Indonesia, the Financial Services Authority, and the Deposit Insurance Corporation Financial system stability monitoring and maintenance by KSSK members based on crisis management protocol of each member; Prevention of financial system crisis, including the mitigation of systemically important bank s liquidity and solvency problems; Recovery Plan for Systemically Important Banks; Bank Restructuring Program Gov t Securities CMP Level Gov t Securities Crisis Management Protocol (CMP) Indicators: Yield of benchmark series; Exchange rate; Jakarta Composite Index; Foreign ownership in government securities Policies to address the crisis at every level : Repurchase the government securities at secondary market Postpone or stop the issuance State s Budget State Owned Enterprises (BUMN) s Budget Social Security Organizing Agency (BPJS) s Budget Bond Stabilization Framework First Line of Defense Buyback fund at DG of Budget Financing and Risk Management Investment fund at Public Service Agency (BLU) (min. level Aware) Related SOEs (min. level Aware) BPJS (min. level Aware) Second Line of Defense NORMAL AWARE ALERT CRISIS State s Budget State General Treasury Account (Rekening KUN) (min. level Alert) Accumulated cash surplus (SAL) (min. Level Crisis) 32

33 Additional Measures to Strengthen Stability and Growth of Financial Markets The Government, Bank Indonesia (BI), The Financial Services Authority (OJK) and The Indonesian Deposit Insurance Corporation are strengthening coordination and implementing an optimal policy mix to maintain economic stability and ongoing development efforts Stronger coordination prioritizes short-term stability of economy and financial markets while nurturing medium-term growth In the Near Term, Bank Indonesia Will Prioritize Monetary Policy Oriented Towards Rupiah Exchange Rate Stability 4 1 Pre-emptive policy response 2 First, a pre-emptive, front-loading and ahead-of-the-curve policy response will be pursued to stabilize the rupiah exchange rate, while consistently maintaining low and controlled inflation within the target corridor of 3.5±1% Second, dual intervention in the foreign exchange market and SBN market will constantly be optimized to stabilize the Rupiah exchange rate along with fair price adjustments in the financial markets, while maintaining adequate liquidity in the money market Intensive Communication with key market, industry, business stakeholders 3 Strengthening of monetary operations in FX and money markets Dual intervention in FX/ SBN markets Third, the monetary operations strategy will be oriented towards maintaining adequate liquidity, particularly in the Rupiah money market and interbank swap market Fourth, intensive communication with market players, the banking industry, business community and economists will be used to form rational expectations, thus helping to mitigate the rupiah overshooting the currency s fundamental value In addition, to maintain and build the current pace of domestic economic growth momentum, Bank Indonesia is preparing follow-up measures to ease macroprudential policy, while also coordinating with the Coordinating Ministry for Economic Affairs, Ministry of Finance and the Financial Services Authority (OJK) to accelerate financial market deepening, particularly for private sector infrastructure financing 33

34 Additional Measures to Strengthen Stability and Growth of Financial Markets (Cont d) Financial Sector Supervision Conducted by the Financial Services Authority (OJK) is Focused on Maintaining a Healthy Financial Sector OJK continues to back the financial market deepening program in terms of supply and demand, while strengthening market infrastructure and facilitating municipal bond issuances and asset securitization OJK maintains financial services sector stability through industry resilience, strengthening issuer fundamentals and implementing appropriate policy measures when the financial markets experience pressures LPS is Open to Make Any Necessary Adjustments to the Guarantee Rate The Deposit Insurance Corporation (LPS) will intensify the monitoring and evaluation of deposit guarantee schemes along with the Magnitude and Guarantee Rate LPS is open to make any necessary adjustments to the Guarantee Rate at the first opportunity in accordance with the latest data available and assessments of financial system stability LPS will intensify monitoring and evaluation in order to maintain public confidence in the national banking system of Indonesia OJK nurtures credit growth and financial sector financing by prioritizing financing that targets export commodities In addition, OJK will continue to advocate financial inclusion to stimulate quality economic growth through the development of People s Business Loan (KUR) clusters, waqf-based microfinance and FinTech 34

35 04 Komodo National Park in East Nusa Tenggara, Indonesia 2018 State Budget Realization Performance

36 Macroeconomic Indicators Remain Strong Indicators Revised Budget (APBN-P) Realized 31 May APBN Realized 31 May Budget (APBN) Realized 31 May Submitted to Parliament Economic growth (%, yoy) Inflation (%, yoy) Month Treasury Bill (SPN) (%) Exchange Rate (Average, IDR/USD) ,500 13,435 13,400 13,336 13,400 13,714 13,700 14,000 ICP (USD/barrel) Oil Production (thousands of barrel/day) Indonesia has been able to maintain robust economic performance which expected to continue in 2018 and Inflation is benign supported by improving logistic and infrastructure acceleration Interest rate and exchange rate are stable, benefiting from strong fundamental and positive investor perception in the midst of uncertain global condition. Increasing commodity price helped in boosting external position and revenue. Indonesia's economy is currently in the process of transitioning. However, Indonesia economy cannot be separated from external conditions (technology, trade, and geopolitics) as well as domestic challenges. Gas Production (millions of barrels/day) Q1 figures. 2 As of April. 36

37 Performance of State Budget Fiscal Sustainability is Well Preserved as Fiscal Deficit Narrowed and Primary Balance Recorded a Substantial Surplus R-Budget May Realization % Real to Budget Budget May Realization % Real to Budget % of Growth (YoY) A. Revenue & Grant 1, , I. Domestic Revenue 1, , Taxation Revenue 1, , Non Tax Revenue II. Grants B. Expenditure 2, , I. Central Government Expenditure 1, , Ministerial Spending Non Ministerial Spending II. Transfer to Region and Village Fund (4.0) 1. Transfer to Region (1.9) 2. Village Fund (26.7) C. Primary Balance (178.0) (29.9) 16.8 (87.3) 18.1 (20.7) (160.5) D. Surplus/(Deficit) (397.2) (128.7) 32.4 (325.9) (94.4) 29.0 (26.6) % of GDP (2.92) (0.94) (2.19) (0.64) E. Financing (13.1) % of GDP I. Debt (12.8) II. Investment (59.7) (65.7) III. SLA (3.7) 1.6 (43.6) (6.7) 0.8 (11.9) (50.1) IV. Guarantee (1.0) (1.1) V. Other (35.6) Surplus/(Deficit) Financing The robust tax growth and positive performance in export and import duty good in the first quarter of 2018 is a positive support. Central Government Expenditure grows robustly Deficit realization of 0.64% of GDP is much lower compared to May 2017 Primary balance surplus is significantly higher than last year, highlighting improving fiscal performance and sustainability that well preserved 37

38 Fiscal Deficit and Primary Balance on an Improving Trend May Realization (RP Tn) (6.0) Primary surplus Higher than previous period, indicating that fiscal sustainability improves Surplus of financing realization in 30 May 2018 in-line with previous year 18.0 T 62.2 T (29.9) (71.1) (94.5) (189.1) (110.3) (128.7) Fiscal deficit realization (94.5) T Deficit Surplus of Financing Primary Balance 38