About Investor Relations Unit (IRU)

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2 About Investor Relations Unit (IRU) ABOUT THE REPUBLIC OF INDONESIA INVESTOR RELATIONS UNIT The Republic of Indonesia Investor Relations Unit (IRU) has been established as the joint effort between the Coordinating Ministry of Economic Affairs, Ministry of Finance and Bank Indonesia since The main objective of IRU is to actively communicate Indonesian economic policy and address concerns of investors, especially financial market investors. IRU is expected to serve as a single point of contact for the financial market participants. As an important part of its communication measures, IRU maintains a website under Bank Indonesia website which is being administrated by the International Department of Bank Indonesia. However, investor relations activities involve a coordinated efforts which are supported by all relevant government agencies, i.e. Bank Indonesia, the Ministry of Finance, the Coordinating Ministry for Economic Affairs, Investment Coordinating Board, Ministry of Trade, Ministry of Industry, State Ministry of State Owned Enterprises, State Asset Management Company, and the Central Bureau of Statistics. IRU also holds an investor conference call on a quarterly basis, answers questions through , telephone and may arrange direct visit of banks/financial institutions to Bank Indonesia and other relevant government offices. Published by Investor Relations Unit Republic of Indonesia Contact: Wiwit Widyastuti K. (International Department - Bank Indonesia, Phone: ) Dalyono (Fiscal Policy Office Ministry of Finance) Subhan Noor (Debt Management Office - Ministry of Finance, Phone: ) contactiru-dl@bi.go.id 1

3 Table of Content Executive Summary Improved International Perception and Rising Investment Preserved Macroeconomic Stability Prudent Fiscal Management Government Debt Performance Wide Range of Policy Reforms to Boost Economic Growth 2

4 Executive Summary 3

5 Executive Summary Economic growth accelerated in the third quarter of 2015, with the trend projected to continue into the fourth quarter. Third quarter growth was recorded at 4.73% (yoy), surpassing that posted last period at 4.67% (yoy). This was mainly due to stronger government consumption and investment, in line with significant progress in terms of government infrastructure projects. Sound non-oil and gas trade balance preserved the current account gains during the reporting period. The current account deficit in the Indonesia Balance of Payments (BOP) stood at USD4.0 billion (1.86% of GDP) in Q3/2015, improving from USD7.0 billion (3.02% of GDP) in Q3/2014 and USD4.2 billion (1.95% of GDP) in Q2/2015. Rupiah rebounded after intense depreciatory pressures were felt in the third quarter. In Q3/2015, Rupiah depreciated on average by 5.35% (qtq) to a level of Rp13,873 per USD due to external factors, namely concerns over the normalisation policy of the Federal Reserve as well as Yuan devaluation in China. Nonetheless, the Rupiah strengthened in October 2015 on positive sentiment for EM due to a dovish announcement relayed at the FOMC, coupled with optimism regarding the economic outlook of Indonesia after the Government released a series of policy packages and Bank Indonesia intervened on the foreign exchange market to stabilise the Rupiah. The Consumer Price Index (CPI) remains under control, experienced deflation in October Deflation was recorded at 0.08% (mtm) or 6.25% (yoy) in line with volatile food deflation after foodstuff prices were corrected due to increased supply. Consequently, inflation from January to October 2015 stood at 2.16% (ytd) or 6.25% (yoy). Financial system stability remained solid, underpinned by a resilient banking system and relatively stable financial markets. Banking industry resilience endured, with credit, liquidity and market risks well mitigated. In September 2015, the Capital Adequacy Ratio (CAR) remained significantly above the 8% minimum threshold at 20.4%, while non-performing loans (NPL) were low and stable at 2.7% (gross) or 1.3% (net). The BI Board of Governors agreed on 17th November 2015 to hold the BI Rate at 7.50%, while maintaining the Deposit Facility rate at 5.50% and the Lending facility rate at 8.00%. The Board of Governors also decided to lower the primary reserve requirement in Rupiah from 8.0% to 7.50%, effective on 1st December Bank Indonesia considered that the macroeconomic stability has continued to improve, making room to maintain a loose monetary policy stance. Bank Indonesia believes that the 2015 inflation will be maintained at the lower end of the 4±1% inflation target, with the current account deficit is projected at 2% of GDP. With the lingering uncertainty in the global financial market, stemming mainly from the expected Federal Funds Rate (FFR) hike as well as the diversity of monetary policies from ECB, BoJ, and PBoC, Bank Indonesia will remain vigilant in loosening its monetary policy. On the fiscal front, Indonesia will continue its prudent fiscal management in 2015 with strong commitment to fiscal consolidation. Recent policy reforms represent an essential step and integral part of structural reforms to strengthen economic fundamentals in Indonesia. The budget deficit for 2015 is projected at a safe level of 2.2% of GDP. 4

6 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1* Q2* Q3* Q4* Q1* Q2** Executive Summary GDP Growth Inflation * Q Source: Bank Indonesia Q Q Source: BPS, Bank Indonesia Balance of Payments Fiscal Balance Current Account Capital & Financial Account Overall Balance Reserve Assets Source: Bank Indonesia * Preliminary Figures - (0.5) -0.7% 1.1% (1.0) (1.5) 1.8% (2.0) 2.2% 2.2% (2.5) (3.0) Fiscal Surplus / (Deficit) (% of GDP) Source: BPS 5

7 Executive Summary Central Government Debt to GDP Ratio (% of GDP) Debt Composition Table of Debt to GDP Ratio Note: Using GDP at Current Market Prices [2010 Version] *) Preliminary Figures Source: Ministry of Finance 6

8 2015 Policy Summary Government s coordinated policy tools to promote growth through macroeconomic management Quality of Spending Fuel subsidy savings of IDR trillion. Reallocation of savings towards basic infrastructure (food security, connectivity and maritime) and social welfare. Infrastructure expenditure is higher than energy subsidy. Food security spending larger than energy subsidy. Additional allocation for village funds. Cashless smart cards system for better targeted subsidy. Capital injection to SOEs. Monetary Policy Mix Bold and pre-emptive policy through BI Policy Rate, responsively adjusting to current macroeconomic condition. Exchange rate flexibility to facilitate external adjustments. Financial market deepening and capital flows management. Accommodative measures of macroprudential policy. Policy coordination with the government and financial stability forum. Central bank cooperations, including second line of defences. State Revenues Optimization Strategies: Improving compliance rate. Closing tax leakage (especially VAT Refund). Expanding tax base (Mapping Tax Payer). Manageable Fiscal Deficit Fiscal deficit to be lowered from 2.2% of GDP to 1.9% of GDP. Spacious fiscal room for maneuver to anticipate global uncertainty. Financing and Debt Management Policy Capital injection to state-owned companies, as agents of development in supporting national priorities. Optimizes Governments securities issuance from domestic sources to fulfill Budget need and uses foreign debts as complimentary. Determines debt instrument by taken into account of market need in regard to market development and portfolio management. Issues Retail Bond for instrument diversification and financial inclusion. Optimizes foreign and domestic loan instrument to fulfill Budget need on capital expenditure. Conducts active portfolio management of Government securities in order to promote market liquidity and stability. Strengthens the function of Investor Relations Unit. 7

9 Improved International Perception and Rising Investment 8

10 Fitch S&P Moody s Improving International Perception: Acknowledged by Rating Agencies Investment grade Baa3 / Stable Jan 2012 (affirmed Dec 2013) Indonesia's rating is based on the country's resilient growth, low debt burden, favorable maturity profile, and high debt affordability. Indonesia has demonstrated resilience to large external shocks [with] sustainably high trend growth over the medium term. Prudent fiscal management has contained budget deficits and steadily reduced the government's debt burden over the past decade. Investment grade BB+ / Positive May 2015 S&P outlook revision reflects S&P s view of Indonesia's improved policy credibility stemming from initiatives to bolster monetary and financial sector management as well as economic performance. S&P expects these actions to improve Indonesia's growth prospects and external resilience. The ratings on Indonesia balance the country's low per capita income and developing policy and institutional settings against the improved credibility of its monetary policy, buoyant economic growth, and sound public finances. Investment grade BBB- / Stable Positive Watch Positive Outlook Negative Outlook Stable Outlook Dec 2011 (affirmed Nov 2015) The recent wave of reform initiatives by the government is likely to improve the business sentiment. The series of packages contain a number of measures with the potential in the longer run to significantly change the business environment, which can currently be characterised as difficult. The reform agenda may signal a structural change from a more nationalistic approach to economic policy of the recent past. Fitch expects annual real GDP growth to pick up to 5.3% in 2016 and 5.5% in 2017 from 4.8% in Source: Moody s, S&P, Fitch 9

11 International institutions outlook shows some optimism though there is still downside risk for Indonesia in IMF Article IV Indonesia (March 2015) World Bank IEQ (Oct 2015) Asian Development Outlook (Sept 2015) OECD Economic Forecast (June 2015) Indonesia s prospects should improve as the domestic reform momentum gathers pace Real GDP growth is projected to tick up to 5.2 percent in 2015, with the output gap effectively closed based on staff s latest estimates of potential growth. Headline inflation is expected to decline in 2015, with reductions in retail gasoline and diesel prices under the new fuel price regime. The current account deficit is projected to narrow slightly in 2015, mainly due to a reduction in net oil imports. Risk Downside risks emanate mainly from external sources, but they could exacerbate strains in the banking system and corporate sector. Among the most significant risks, a sharp slowdown in trading partner growth could dampen external demand and commodity prices. Indonesia s growth moderation has continued and an uncertain external environment has turned the government focus to structural and fiscal reforms to raise investor confidence Growth is grew at the moderate pace of 4,7% (yoy) in Q2, the same rate as Q1. Widened current account deficit to 2,1% in Q2 caused by weaker services and income account is considered as typical in the Q2 every year. The government starts housing program as the result of better public spending. Risk The main risks to the outlook is the possibility of larger than expected real sector spillovers from volatile financial markets. Low oil prices not only would bring a benefit for Indonesia as a net oil importer, but also would put a significant strain on oil and gas-related fiscal revenue Stronger public investment is now seen to pull economy out of a slowdown that persisted in the first half of 2015 GDP growth is forecast to recover to 4.9% this year and 5.4% in 2016 Inflation is projected to subside to average 6.7% in 2015 and 5.1 % in Exports are expected to improve in 2016 on better prospects for major industrial economies. To accommodate funding for infrastructure the government widen its budget deficit to 2.2% of GDP from 1.9% budget maintains an expansionary fiscal stance and includes a more realistic revenue target and 2,1% fiscal deficit of GDP. Risk Downside domestic risks centers on further delays in infrastructure investment which would damage growth and slowing progress on structural reform. External risks would be posed by global financial market turbulence as Indonesia need to finance fiscal and external deficits. activity is projected to pick up later in 2015 and strengthen further in 2016 as public spending gathers pace, confidence recovers and the expansionary impact of the depreciation of the rupiah takes hold. Inflation is now moderating, in large part because of the fall in energy prices. ` Official interest rates are assumed to remain unchanged through 2015 and then fall slightly in The abolition of fuel subsidies has provided the necessary fiscal space for increased public infrastructure investment. Risk The exchange rate may remain fragile as the external imbalance persists 10

12 Preserved Macroeconomic Stability 11

13 Economic Growth Picked Up in the Third Quarter of 2015 Economic Growth Economic growth picked up in the third quarter of 2015 and was projected to continue improving through the fourth quarter. The economy posted growth of 4.73% (yoy) in Q3/2015, outpacing the 4.67% (yoy) achieved in the previous period, in line with various indicators monitored by Bank Indonesia over the past few months. Such conditions pave the way for stronger economic momentum moving forward. The Government was inclined to consume and invest more, which propelled growth during the reporting quarter as significant progress was made in terms of government-led infrastructure projects despite the wait-and-see attitude of private investors. Households, however, continued to consume tenaciously. From an external perspective, persistently low international commodity prices, coupled with sluggish growth in trading partner countries, such as United States, China and Singapore, precipitated a deeper export contraction. On the other hand, import growth was maintained on the back of stronger domestic demand. Bank Indonesia is satisfied that the current economic momentum will gain further traction in the fourth quarter as the government continues to expedite infrastructure projects that will attract more investment. Private investment was also predicted to increase in line with the policy packages released by the government, including deregulation to bolster the investment climate. Meanwhile, consumption was expected to surge as a result of local elections to be held nationwide in December In addition, a looser macroprudential policy stance will also begin to catalyse economic activity in the final quarter of this year. Economic Growth - Expenditure Side S e c t o r I II III IV I II III Household Consumption NPI Serving Household Consumption Expenditure (-0.2) 12.4 (-8.3) (-7.9) 6.4 Gross Fixed Capital Formation Government Consumption (-1.5) Exports of Goods and Services (-4.5) 1.0 (-1.0) (-0.1) (-0.7) Imports of Goods and Services (-2.4) (-7.0) (-6.1) GDP Economic Growth - Supply Side S e c t o r I II III IV I II III Agriculture, Forestry, and Fisheries Mining and Quarrying 1.7 (-2.0) (-1.5) (-6.2) (-5.6) Manufacturing Electricity and Gas Water Supply, Waste Management and Recycling Construction Wholesale and Retail Trade; Automotives Transportation and Warehousing Provision of Accommodation and Food & Beverage Information and Communication Financial Services and Insurance Real Estate Business Services Administration, Defence, and Social Security (-2.5) Education Services Health Services and Social Activities Other Services GDP Source: BPS, Bank Indonesia 12

14 Signs of Growth Pick-Up: Fiscal Spending Boosting Investment and Retail Sales Rebound Cement sales increase significantly Rising Government s investment on infrastructure construction Rp Trillion Total Construction, RHS Source: BCI Asia (Aug 31 st ) * Q3: 50% of all stages assumed private and 70% of all stages public Retail sales index has shown signs of improvement Indication of an improvement is reflected in the increase of motorcycle and car sales 13

15 Significant Growth in Fiscal Spending Up to 31 Aug 15, realization of budget absorption is 32.3% (18.4% increase from June and 11.9% increase since July). Strategic infrastructure on the pipeline: Raknamo, Keureuto, Logung and Lolak Dams; Trans Sumatra, Kertosono-Solo and Manado-Bitung Toll Road. Ministry of Public Works Budget Absorption Progress up to Aug 2015 Stronger Disbursement Rate of Fiscal Spending Budget Year 2015 as of 31 Aug 2015 Target 30.21% Realization 32.30% Source: Monev website, accessed on 1 Sept

16 Strong and Stable GDP Performance Spatial GDP Growth Spatial GDP Growth Contribution Sumatera GDP Growth 2014: 4.7% 2015Q1: 3.5% 2015Q2: 2.9% 2015Q3: 3.0% Kalimantan GDP Growth 2014: 3.2% 2015Q1: 1.1% 2015Q2: 1.5% 2015Q3: -0.41% Sulawesi GDP Growth 2014: 6.9% 2015Q1: 7.3% 2015Q2: 8.6% 2015Q3: 8.2% Bali & Nusa Tenggara GDP Growth 2014: 5.9% 2015Q1: 8.9% 2015Q2: 8.9% 2015Q3: 11.8% Maluku & Papua GDP Growth 2014: 4.3% 2015Q1: 3.7% 2015Q2: 10.2% 2015Q3: 2.28% Kalimantan: 8.0% 2015Q3 GDP Growth: 4.73% Sulawesi: 6.1% Maluku & Papua: 2.2% Sumatera: 22.4% Java GDP Growth 2014: 5.6% 2015Q1: 5.2% 2015Q2: 5.1% 2015Q3: 5.2% Bali & Nusa Tenggara: 3.1% Source: BPS Source: BPS Java: 58.3% Main Contributors to GDP Growth (%) (%) (-5.0) 4.6 (-10.0) I II III IV I II III IV I II III GDP (LHS) Household Consumption (RHS) Govt Consumption (RHS) Investment Export (RHS) Import (RHS) Source: Bank Indonesia Shifting from Commodity-based economy In 3 rd Quarter 2015, Indonesia booked 4.73% GDP growth (yoy), slight increase from 4.67% in 2 nd Quarter Majority of the growth was driven from Java island, contributed 58.3% of Indonesia s GDP growth and at 5.2% (yoy). Growth in Java is higher than resource-rich regions such as Sumatra and Kalimantan, given its high industrialization and larger consumption base Indonesia continues to drive growth in resource-based industrialization to shift from commodity-based economy 15

17 Conducive Environment Underpinning Growth Fundamentals 16 The fundamental long term growth drivers for Indonesia remain strong equipped with abundant natural resources, a young and technically trained workforce and a large consumer base with a fast growing spending power 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 7 th largest economy in the world by % average real GDP growth over the period 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 th 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 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 and is expected to continue at a 9.1% rate from Disposable incomes are projected to grow at 12.1% from According to McKinsey, mn 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 Nominal GDP Strong Growth to (USD tn) Continue Demographic Dividend Young Population Male Female ( 000) Middle Class Households 21,980 39,340 60,740 Annual Budgeted Capital Spending (IDR tn) E E Realized 2014 Realized 2015 Budget 16

18 Globally Competitive and a Top Investment Destination Indonesia s stage of development is categorized as efficiency-driven with a strong and well balanced performance across all 12 pillars of competitiveness Indonesia is in the Top 40 of the Global Competitiveness Index ( GCI ) 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 No. (1) Country 2008 (2) 2015 (3) Score Score Score Score Score Score Score Score Score Score Score Score 1 Spain Thailand Indonesia Turkey Italy South Africa Mexico Brazil Philippines Source: Global Competitiveness Index , WEF (1) Countries with sovereign ratings in the Baa1-Baa3 category and population larger than 40 million (2) Rank among 134 countries (3) Rank among 140 countries JBIC: Amongst ASEAN countries, Indonesia is the most preferred place for business investment The Economist: Indonesia has taken over India in #2 Investment Destination in Asia since 2014 Source: Japan Bank for International Cooperation ( JBIC ) FY2014 Survey Report on Overseas Business Operations by Japanese Manufacturing Companies (1) Total number of companies that responded was 499 Source: The Economist Asia Economic Outlook Survey 2015, January

19 Trillion Rp Strong Investment Underpinned by Competitiveness and Stability Investment Realization in Quarter III 2015 is Rp140.3 T, increases around 3.8% from Quarter II 2015 (Rp T) or increases around 17.0% from Quarter III 2014 (Rp T). The value of investment is based on investment realization report from DDI and FDI companies (Oil and Gas, Banking, Non-Bank Financial Institution, Insurance, Leasing and Home Industry are excluded). Investment realization in January September 2015 is Rp400.0 T, increases around 16.7% from that in January September 2014 (Rp T). Foreign Direct Investment realization in Quarter III 2015 based on sectors (five leading sectors) are: Electricity, Gas, and Water Supply (US$ million); Mining (US$ million); Real Estates, Industrial Estates, and Office Building (US$ million); Metal, Machinery, and Electronic Industry (US$ million); and Chemical and Pharmaceutical Industry (US$ million). Investment Realization Progress Q FDI by Sectors (Millions USD) QI QII QIII Jan- Sep 2014 QI QII QIII Source: BKPM *) 2015 Investment Target, BKPM s Strategic Planning **) Achievements January-September 2015 towards 2015 target Jan- Sep 2015 Target 2015* Achiev ement ** DDI % FDI % TOTAL % 8,000 7, ,070 1, ,436 1,154 1, , , ,065 5, , , , , ,000 1,646 1,094 1, ,136 1, Q Q Q Q Q Q Q Mining Other Primary Sector Food Industry Paper and Printing Industry Chemical and Pharmaceutical Industry Metal, Machinery, and Electronic Industry Transport Equip. and Other Transport Industry Other Secondary Sector Electricity, Gas, and Water Supply Trade and Reparation Transportation, Warehouse, and Telecommunication Other Tertiary Sector Source: BKPM 18

20 Rp Billion USD Million Java is Still the Main Investment Destination Based on Economic Corridor, in January September 2015 period the highest realization of DDI and FDI is located in Java Corridor. The further ranks of realization of the DDI is in Sumatera, Kalimantan, Sulawesi, Bali and Nusa Tenggara, also Maluku and Papua Corridor. The further ranks of realization of the FDI is also in Kalimantan, Sumatera, Sulawesi, Bali and Nusa Tenggara, as well as Maluku and Papua Corridor. DDI and FDI by Economic Corridor Q (Million USD) 14,000 12,000 10,000 8,000 6,000 4,000 2,000 Realized Foreign Direct Investment (Jan Sep 2015) 11,441 3,898 2,825 1, ,184 0 Sumatera Java Bali & Nusa Tenggara Kalimantan Sulawesi Maluku & Papua Source: BKPM Realized Domestic Direct Investment (Jan Sep 2015) 90,000 80,000 76,344 70,000 60,000 50,000 40,000 30,000 30,555 Source: BKPM 20,000 10, ,492 Sumatera Java Bali & Nusa Tenggara 16,235 7,559 1,104 Kalimantan Sulawesi Maluku & Papua Source: BKPM 19

21 Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Inflation Remains Under Control The Consumer Price Index (CPI) recorded deflation of 0.08% (mtm) in October 2015, bucking the historical trend of inflation at this time of year. Actual CPI recorded inflation, however, was on track with BI projections. Deflation stemmed from volatile foods, which continued to experience price corrections of various meats and chilli varieties. Consequently, headline inflation on an annualised basis from October 2014 October 2015 was recorded at 6.25% (yoy), while year to date, inflation from January October 2015 stood at 2.16% (ytd). Volatile food deflation was recorded at 1.22% (mtm), the highest level of deflation recorded in October for the past five years. Annually, however, volatile food inflation was 6.95% (yoy). Deflation in October stemmed from persistent deflation of chicken meat, beef and various chilli varieties. Furthermore, core inflation and administered prices were both lower this month than historical trends. Core inflation hit 0.23% (mtm) or 5.02% (yoy) in line with modest rupiah appreciation, domestic economic moderation and anchored inflation expectations. Inflation of administered prices was recorded at 0.03% (mtm) or 9.83% (yoy) as a result of lower diesel prices and the lingering impact of a reduction in the price of 12kg canisters of LPG last September. Based on inflation through to October 2015, Bank Indonesia is satisfied that inflation in 2015 will come in at below 4%, supported by policy coordination to control inflation nationally and locally. In addition, inflation through to October 2015 is also indicative of resilient price stability. Disaggregation of Inflation Consensus Forecast on Inflation (%) CPI (%, yoy) (RHS) Core (%, yoy) Volatile Food (%, yoy) Administered (%, yoy) CPI Oct-2015 mtm : -0.08% yoy : 6.25% ytd : 2.16% (%) CF Jun 2015 CF Sep Source: BPS, Bank Indonesia 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q Source: Consensus Forecast 20

22 Balance of Payments in Q Balance of Payments Indonesia s overall balance of payments (BOP) in Q3/2015 recorded a deficit. Although the current account (CA) deficit has lessen compared to the previous quarter, the smaller surplus of capital and financial account (CFA) was unable to fully offset the CA deficit. Consequently, the official reserve asset positions at the end of September 2015 dropped moderately to US$101.7 billion, equivalent to 6.8 months of imports and servicing public external debt, which is still well above international adequacy standards of three months. Current Account Current Account deficit performance continued to improve, supported by the non-oil and gas trade balance. The CA deficit stood at USD4.0 billion (1.86% of GDP) in Q3/2015, improving from USD4.2 billion (1.95% of GDP) in the previous quarter. Improvement in the CA stemmed primarily from the non-oil and gas trade balance. Smaller services account deficit due to decline in transportation services (freight) in line with fewer imports of goods and growing travel account surplus due to an increase in international visitors to Indonesia also buoyed the CA performance. Capital & Financial Account The capital and financial account maintained a US$1.2 billion surplus in third quarter despite growing uncertainty on global financial markets. The surplus shrinking from US$2.2 billion in Q2/2015. A portfolio investment deficit and smaller direct investment surplus were cited for the decline of the surplus 21

23 Balance of Payments Q3-2015: Current Account Trade Balance: Non-Oil & Gas Non-oil and gas trade balance surplus increased as imports declined sharply by 18.2% (yoy) in line with dwindling domestic demand. On the other hand, exports of nonoil and gas experienced a less pronounced decrease (11.0%, yoy) due to sliding commodity prices, despite real growth of 4.5% (yoy). The movement pattern of non-oil and gas exports and imports contributed to raise the trade surplus amounted to 2.8% compared to Q2/2015. Trade Balance: Oil & Gas The oil and gas trade deficit remained relatively stable from the previous quarter as a decline in the gas trade surplus was offset by a decrease in the oil trade deficit. Current Account - Services, Primary Income, and Secondary Income Services account deficit was US$2,0 billion, lower than deficit of US$2.7 billion in Q2/2015. The smaller deficit due to a decline in transportation services (freight) in line with fewer imports of goods as well as growing travel account surplus due to an increase in international visitors also buoyed current account performance. Primary income in Q3/2015 recorded a deficit of US$7.4 billion, higher than deficit of US$7.1 billion in Q2/2015. The higher deficit of primary income account was inline with the increase in direct investment income payments and portfolio investment income payments in public sector due to seasonal pattern. Secondary income in Q3/2015 recorded a surplus of US$1.2 billion, mainly supported by the net surplus of the personal transfer.

24 Balance of Payments Q3-2015: Capital & Financial Account Financial Account: Assets On the assets side, Indonesia s financial account charted a net outflows (deficit) of US$3.9 billion, similar to net outflows in Q3/2014 and lower than net outflows of US$8,1 billion in Q2/2015. The decreases in net outflow was mainly due to lower placement of private sectors deposits abroad. Financial Account Liabilities: Direct Investment Net inflows (surplus) of direct investment (liabilities side) in Q3/2015 stood at US$4.1 billion, 36.5% lower than net inflows in Q2/2015 of US$6,5 billion due to slower economic growth. The lower surplus was mainly driven by higher external debt payments by affiliates companies as well as a decrease in inflows of direct investment equity. On directional basis, Foreign Direct Investment (FDI) in Q3/2015 increased from US$4.3 billion in Q2/2015 to US$5.0 billion. By sector, Manufacturing, Agriculture, Fishery & Forestry, and Other Sector (incl. Services, Properties) were the main sectors attracting FDI inflows during Q3/2015 (73.0% of total FDI). While on the country of origin basis, the inflows of FDI were dominated by countries in the ASEAN region amounted to US$2.7 billion (53.5% of total FDI), followed by Japan and Emerging Markets of Asia (incl. China). 23

25 Balance of Payments Q3-2015: Capital & Financial Account Financial Account Liabilities: Portfolio Investment In the midst of global economic slowdown and the market speculation of increasing Federal Funds Rate (FFR) and global financial markets risk, foreign portfolio investment in Q3/2015 experienced an outflows of US$1.5 billion, in contrast to foreign portfolio investment in Q2/2015 recorded net inflow of US$6.3 billion. This development was primarily due to the payments of bankers acceptance by some domestic banks and net selling of domestic equity and government securities. Financial Account Liabilities: Foreign Other Investment Other investment liabilities in Q3/2015 recorded a surplus of US$2.4 billion, in contrast to the deficit of US$2.2 billion in Q2/2015. The surplus was affected by increasing of net drawing of trade credit in private sector and increasing of net drawing of external debt in public sector. 24

26 Continued Pressure on Emerging Markets Currencies Movement of Rupiah The Rupiah rebounded at the beginning of October after intense depreciatory pressures were felt in September Rupiah appreciation stemmed from positive sentiment regarding the possible delay of FFR hike and optimism concerning the domestic economic outlook after the government released a series of policy packages and Bank Indonesia intervened in the market to stabilise the exchange rate. The policy packages have spurred an influx of foreign capital to financial markets in Indonesia, which subsequently propped up the Rupiah by 9,3% (ptp, 13 October compared to the end of September). Previously, in September 2015, Rupiah depreciated point-to-point (ptp) by 4.1% and closed at Rp14,650 per US Dollar. Rupiah depreciation was lower compared to Brazilian Real, Malaysian Ringgit, Turkish Lira, and South African Rand. IDR/USD IDR/USD Monthly Avg Quarterly Avg Data as of 30 October 2015 Source: Bank Indonesia Source: Bank Indonesia International Reserves Indonesia s official reserve assets position as of end October 2015 stood at US$100.7 billion, lower than the end of September 2015 level registered at US$100.7 billion. This development was attributable to the use of foreign exchange for Government foreign debt payments and to stabilise Rupiah exchange. It is in line with Bank Indonesia s commitment which has and will be in the market in order to stabilize the Rupiah rate in accordance with the fundamental to support macroeconomic and financial system stability. With these developments, official reserve assets at the end of October 2015 can adequately cover 7.1 months of imports or 6.6 months of imports and servicing of Government external debt repayment, well above the international standards of reserves adequacy at 3 months of imports. Bank Indonesia considers the position of official reserve assets has positive impact on efforts to strengthen the resilience of the external sector and maintain the sustainability of Indonesian economic growth. Billion USD Source: Bank Indonesia 25

27 Monetary Policy Stance The BI Board of Governors agreed on 17th November 2015 to hold the BI Rate at 7.50%, while maintaining the Deposit Facility rate at 5.50% and the Lending facility rate at 8.00%. The Board of Governors also decided to lower the primary reserve requirement in Rupiah from 8.0% to 7.50%, effective on 1st December Bank Indonesia considered that the macroeconomic stability has continued to improve, making room to maintain a loose monetary policy stance. Bank Indonesia believes that the 2015 inflation will be maintained at the lower end of the 4±1% inflation target, with the current account deficit is projected at 2% of GDP. With the lingering uncertainty in the global financial market, stemming mainly from the expected Federal Funds Rate (FFR) hike as well as the diversity of monetary policies from ECB, BoJ, and PBoC, Bank Indonesia will remain vigilant in loosening its monetary policy. In this respect, lowering the primary reserve requirement is expected to boost bank financing capacity to support escalating economic activity during the third quarter and beyond. Moving forward, Bank Indonesia will consistently maintain coordination with the Government in order to reinforce the structure of the economy, thereby facilitating stronger economic growth and preserving macroeconomic and financial system stability. BI Rate (%) Source: Bank Indonesia 26

28 Solid Financial System Stability Financial system stability remained solid, underpinned by a resilient banking system and relatively stable financial markets. Banking industry resilience endured, with credit, liquidity and market risks well mitigated. In September 2015, the Capital Adequacy Ratio (CAR) remained significantly above the 8% minimum threshold at 20.4%, while nonperforming loans (NPL) were low and stable at 2.7% (gross) or 1.3% (net). In terms of the intermediation function, credit growth was recorded at 11.1% (yoy), higher than that of the previous month, while deposit growth on September 2015 was recorded at 11.7% (yoy). Looking forward, credit growth is predicted to continue accelerating in line with an increase in economic activity and the looser macroprudential policy stance adopted by Bank Indonesia, along with the lower primary reserve requirement. (YoY) Source: Bank Indonesia Slowdown in Loan Growth Source: Bank Indonesia CAR Comfortably High, NPL Favorably Low (%) Capital Adequacy Ratio (CAR) (RHS) Gross Non-Performing Loan (NPL) (%) Loan-to-Deposit Ratio Well Maintained Within the Target Range Source: Bank Indonesia 27

29 Prudent Fiscal Management 28

30 New Challenges Coordinated Short Run and Long Run Policies Long Run Policies Revenue Optimization Structural Challenges Budget Reforms Quality of Spending Sustainable and Equitable Economic Growth Sustainable Financing Short Run Policies Budget Optimization Global Volatility Fiscal Stimulus Maintain Purchasing Power Fiscal Incentives for Business Sector Support Navigation Through Global Uncertainties Other Policies 29 29

31 Pillar I Revenue Optimization Pillar II Quality of Spending Pillar III Sustainable Financing Three Key Pillars to a Sustainable and Equitable Growth Objective: Creating a sustainable and equitable economic growth for Indonesia I. Shift from commoditybased revenues II. Broaden tax coverage III. Improve tax compliance and prevent leakages IV. Strengthen Taxation institution I. Higher spending productivity II. Enhanced subsidy scheme III. Empowerment of local governments I. Secure budget financing II. Effective utilization of domestic and international funding sources III. Financing schemes to support infrastructure development program Initiatives: Reinventing Policy e-invoice Compliance Risk Management Tax Amnesty Tax Administrative Reform Regulatory Reform Adjustment of non-taxable income threshold Development of Semi- Autonomous Tax Office Initiatives: Improve Government procurement regulation. Continue Fuel Subsidy Reform (re-allocate energy subsidy to productive spending) and maintain targeted subsidy scheme. Budgetary allocations for: Infrastructure Projects Social Welfare, and Cashless smart cards Village fund Initiatives: Maintain manageable budget deficit; Improve bilateral and multilateral financing sources, including BSA and DDOs Increase financing instruments. Increase capital injection to SOEs to include SOEs in infrastructure development Source: Ministry of Finance 30 30

32 Reduction of Poverty Through Conditional Cash Transfers Current administration has a renewed focus on reducing poverty this will be achieved via conditional cash transfers Program Indonesia Sehat Program Indonesia Pintar Program Keluarga Sejahtera (Healthy Indonesia Program) Free health insurance and medical benefits Organizers Social Security Agency : (BPJS) Service Coverage Up to village level health : units ( Posyandu ) Beneficiaries : Disadvantaged communities who have had BPJS PBI card plus groups with social welfare issues (PMKS) Benefits : Treatment and prevention (Indonesian Smart Program) Education subsidies for the poor and families near the poverty threshold Beneficiaries : Less capable students, PMKS school-age children, street children, child labor in Indonesia Distribution of Funds Benefits : Savings / savings in a post office or a designated bank may be withdrawn or to be kept : SD / MI amounting to IDR225,000 / student / semester SMP / MTs of IDR / student / semester SMA / SMK IDR500,000 / student / semester (Family Welfare Program) Bi-monthly credits for eligible families to offset increasing costs of living Beneficiaries Distribution of Funds Benefits : Underprivileged families throughout Indonesia. Extended to include orphanage, nursing homes, and other social institutions : Savings / savings in a post office or a designated bank may be withdrawn or be kept : IDR200,000 / family / month The government will distribute Family Welfare Card, Indonesia Smart Card and Indonesia Health Card to 15.5 million poor families which are 25% of the population with the lowest socio-economic status For the first stage, Family Welfare Card and non-cash assistance through the Financial Services Digital, Indonesia Smart Card and Indonesia Healthy Card will be distributed to 1 million of the 15.5 million families living in 19 districts / cities in 10 provinces across Indonesia 28

33 Budget Re-Allocation to Sustainable Economic Growth Allocation of Energy Subsidy Spending to Education, Infrastructure and Regional Development for Sustainable Economic Growth IDR Tn Budget Energy Subsidy Spending: IDR Tn Infrastructure Spending: IDR Tn 2016 Proposed Budget Energy Subsidy Spending: IDR Tn Infrastructure Spending: IDR Tn P Education Infrastructure Regional Energy 2016 Budget Key Policies Central Government Expenditure: Continue budget efficiency framework Subsidy Policies Fuel Subsidy Policy: Continue Fixed Subsidy scheme to Diesel and Price Subsidy for Kerosene and 3 kg LPG Electricity Subsidy Policy: Switch to direct subsidy scheme given to small households (450 VA and part of 900 VA) Food Subsidy: Rice for targeted household (15.5 million households) Subsidy for Fertilizer: Production price close to economic price targeted volume of 9.55 million ton, with retail price to be adjusted to close price gap Interest Subsidy for SME credit: For selected sectors such as agriculture, fishery, manufacturing and trade and including for migrant worker 2016 Budget Allocation Plan Compared to 2015 Revised Budget Regional Transfer Policy Formulate Transfer Fund nomenclature Enhance Special Transfer Fund (DTK) Energy -12% Education +4% Infrastructure +8% Transfer to Regional +17.5% Optimize the implementation of reward and punishment to regional Government Village Fund Policy Significantly Increase allocation compared to 2015 Source: Ministry of Finance To support growth equality and empowerment in village area 32 32

34 Key Macroeconomic Assumptions Assumptions: Period Realized Revised Budget Latest Realization Proposed Budget Growth (%) Inflation (%) YoY YTD Exchange Rate (USD/IDR, Average) 11,878 12,500 EOP 13, ,900 YTD 13, month-SPN (Treasury Bills) Indonesia Crude Price (ICP) (USD / bbl) Oil Lifting (thousand bbl / day) Gas Lifting (thousand bbl / day oil equivalent) 1,224 1,221 1, , Budget Key Focus 2016 Budget Key Focus Quality of Spending Fuel subsidy savings of IDR Tn Re-allocation of savings to basic infrastructure (food security, connectivity and maritime) and social welfare Additional allocation for village funds Capital injection to SOEs Revenue Optimization Improving tax compliance rate, closing tax leakage and expanding tax base Financing Policy Lower fiscal deficit from 2.2% to 1.9% General Revenue and Expenditure Policies Continue Tax Extensification and Intensification program and improve tax compliance Drive priority program to improve growth quality such as the 20% allocation for education, maintain 5% health allocation and increase regional and village fund allocation Subsidy Policies More Targeted Program Targeted subsidy scheme and direct subsidy to small households Food & fertilizers subsidy and expand financing program for SMEs Continue to drive key development projects: Develop infrastructure for Food Security and Connectivity Improve the service and sustainability of national health, labor insurance program and sustainable social protection program Financing Policies: Fiscal deficit at 2.1% and Debt/GDP at 26% Notes: 1. As of 2 nd Quarter 2015, 2. As of September 2015, 3. Up to 16 October 2015, 4. Average Dec 2014 Aug 2015 Source: Ministry of Finance, Bappenas 33

35 Projection of Revised Budget 2015 Realization and 2016 s Budget Items (IDR tn) Budget deficit expected to remain within safe and manageable threshold Revised Budget st Semester Realization % of Revised Budget Revised Budget 1st Semester Projection % of Revised Budget 2nd Semester Prognosis % of Revised Budget Outlook Proposed Budget A. State revenue and grants % 1, % % I. Domestic revenue % 1, % % Tax revenue % 1, % % Non tax revenue % % % II. Grants % % % B. State expenditure % 1, % % I. Central gov. expenditure % 1, % % Ministries/Agencies Spending % % % Non-Ministries/Agencies Spending % % % II. Transfer to region % % % C. Primary balance (1) % % % D. Overall balance (A - B) % % % % deficit to GDP E. Financing % % % I. Domestic financing % % % II. Foreign financing % % % Excess/Shortage Financing % The realization of income, expenditure, and financing in Semester II is expected to increase, an improvement from semester I; The financing gap will be covered with sources of financing that is considered safe, has low risk, and low cost 34 34

36 Government Has Various Measures in Place to Manage Budget Risks...government is still committed to maintain fiscal prudence Standby Loan (DDO) of USD 5 Billion Program Loan from Multilateral and Bilateral Natural Rate of Budget Disbursement FISCAL BUFFER AND BUDGET RISK MITIGATION Accumulated Cash Surplus (SAL) Bond Stabilization Framework, such as: SOEs, Funds from Hajj Fund and BPJS New Issuance of Government Bond

37 Investment is Still Showing a Positive Development Direct investment needs to be further improved to help finance the current account deficit Investment Climate Improvement: Revision of Investment negative list Land acquisition bill and revision of government regulation on procurement Special Economic Zone Fiscal Incentive One Stop Services (OSS) center as an integrated services to provide quick, simple, transparent, integrated license services Special Economic Zone Fiscal Incentive Companies entitled for tax holiday or tax allowance Exemption for import duties, VAT and excise Land Acquisition Bill Provide certainty in Land Procuring for Public Infrastructure Project. The law sets a finite deadline to resolve all legal issues in the event of objections to any land acquisition for infrastructure projects. Revision of investment negative list In the effort to increase investment in Indonesia and to execute the ASEAN Economic Community (AEC), the Government of Indonesia had done amendments to the provision list of business fields closed and open with certain requirements in the field of investment (Investment Negative List /DNI) One Stop Service (OSS) by BKPM Conducted by electronically integrated system on investment information and licensing. Implementation of OSS in BKPM comes with online tracking system. National Single Window for Investment (NSWi) or the Electronic Investment Licensing Service System (SPIPISE) was created to facilitate further OSS services. NSWi as an electronic basis for investment so that investors can obtain a variety of online licensing and non-licensing service. 30

38 General Strategy for Debt Financing Optimizes Governments securities (SBN) issuance from domestic sources to fulfill Budget need and uses foreign debts as complimentary; 2. Determines debt instrument by taken into account of market need in regard to market development and portfolio management; 3. Issues Retail Bond for instrument diversification and financial inclusion; 4. Optimizes foreign and domestic loan instrument to fulfill Budget need on capital expenditure; 5. Conducts active portfolio management of Government securities through, among others, debt buyback and debt switch, in order to promote market liquidity and stability; 6. Strengthens the function of Investor Relations Unit, among others, through the proactive dissemination of information, rapid and effective responses, and effective communication with investors and other stakeholders. 37

39 Government Budget FY 2015 In billion IDR Financing sources Revised Budget 2015 come from debt financing (85.78% from Government Securities, 9.62% from Loan) and the rest 4.61% from non debt financing. Stand-by loans are in place to anticipate adverse situations. 38

40 Government Securities Financing (Gross) 2015 Budget Deficit 1.90% 2.23% Nominal 222, , Additional Financing 37, Cash Financing 459, ,205 Government Securities (gross) 452, ,747 Domestic 339, ,756 Government Debt Securities 261, ,901 Sukuk 77,982 84,855 Global Bond 112, ,991 Government Debt Securities 86,495 86,569 Sukuk 26,422 26,422 External Loan 7,500 35,458 Domestic: Auction: Conventional securities: 23 x Islamic securities: 22 x Non-Auction: Retail bonds: ORI + Sukuk Retail. International Bonds: Issuance of International Bonds as complement to avoid crowding out in domestic market and provide benchmark for corporate issuance, consist of USD, YEN or EURO global bonds Maximum issuance international bond 30% from target gross Issuance targets for GDS, Sukuk and ATM target: GDS (SUN): 75.9% Sukuk: 24.1% ATM for GS (SBN): 8.4 yr Benchmark Series for 2014 & 2015 FR 69 5 Y FR Y FR Y FR Y 39

41 Improved Government Debt Position 40

42 Secondary Market Performance of Central Government Bonds Yield of Benchmark Series As of Oct 30, 2015 [In Percentage] Global Financial Crisis Eurozone sovereign debt crisis 41

43 Government Securities Realization *Adjusted by changes in Cash Management & Debt Switch 39

44 Outstanding of Total Central Government Debt [USD billion] Source: Ministry of Finance 43

45 Total Debt Maturity Profile as of End of October, 2015 Maturity Profile of Central Government by Instruments (in trillion IDR) Maturity Profile of Central Government by Currencies (in trillion IDR) Source: Ministry of Finance 44

46 Holders of Tradable Central Government Securities More Balance Ownership In Terms Of Holders And Tenors Holders of Tradable Gov t Domestic Debt Securities Foreign Ownership of Gov t Domestic Debt Securities by Tenor Source: Ministry of Finance 45

47 Profile of Central Government Debt Securities Source: Ministry of Finance 46

48 Debt Switch & Cash Buyback Program Debt Switch Program [in billion IDR] Buyback Program Source: Ministry of Finance 47

49 Maturity Profile of Tradable Central Government Securities as of the end of October, 2015 [IDR Trillion] Source: Ministry of Finance 48

50 Daily Transaction & Offshore Ownership as of the end of October, 2015 Average Daily transaction Govt Bonds Net Buyer (Seller) Non Resident Average daily trading (IDR Trilion) [Trillion IDR] Source: Ministry of Finance 49

51 Ownership of IDR Tradable Central Government Securities (in trillion Rp) Source: Ministry of Finance 50

52 Wide Range of Policy Reforms to Boost Economic Growth 51

53 Economic Policy Package To propel the real sector in order to provide the foundation for economic growth ECONOMIC POLICY PACKAGE 9 SEPTEMBER 2015 Encourage the competitiveness of national industry through deregulation and debureaucratization as well as law enforcement and business certainty Accelerate the national strategic projects through simplification of permits, land provision, accelerate the flow of goods and services, as well as break down barriers Boost investment in the property sector encourage housing projects, particularly for low-income earners Amended 89 out of 134 regulations Drafting 2 Presidential Decree, 2 Presidential Instruction, 63 Minister Regulation and 5 other regulations 52

54 Short Run Policy Package I, II, and III to navigate uncertain global environment and to stimulate domestic economic growth Stimulus Package I: 9 Sep 2015 Cut Red Tapes Rewriting 89 out of 154 regulations Deregulation policies such as relaxing visa requirements, gas price adjustment for certain industries and enhancing cooperative function Simplification to obtain business licenses and implementation of e-services Accelerate Strategic National Projects Simplifying spatial license & land accommodation Accelerating goods & service procurement for the government Discretion in legal issue barriers Strengthen the role of regional heads to accelerate national strategic project completion Boost Low Income Housing Promoting housing construction for low income citizens Expanding opportunity for investments in property sector Stimulus Package II: 29 Sep 2015 Simpler Permit Requirements Ease bureaucracy for investments via 3-hour permit issuance program Faster process for tax allowance and holiday for qualified investments to 25 days and 45 days, respectively Streamline permit requirements in forestry sector from 14 to 9 Tax Incentives Elimination of VAT for transport industries (train, shipping and air transport inc. spare parts) Reducing tax rate on deposits from export proceeds. 1-month deposit tax 10%, 3- month 7.5%, 6-month 2.5% and more than 6- month 0% Integrated Logistics Facilities Facility incentive on integrated logistic center Two facilities slated to be operational by end of 2015; Cikarang (Manufacturing) and Merak (Fuels) Stimulus Package III: 7 Oct 2015 Lower Fuel and Electricity Prices Lower retail fuel costs (jet fuel, LPG and retail fuel) Decrease gas price for factories and qualified industries Lower industrial electricity prices Land Permit Simplification for Investment Activities 3-hour turnaround for land availability Faster approval time for building, leasehold, use right and land permits Broadening of Small Business Credit Recipients Expanding criteria for allowed recipients to include salaried workers Source: Ministry of Finance 53 53

55 Short Run Policy Package IV, V, and VI to navigate uncertain global environment and to stimulate domestic economic growth Stimulus Package IV: 15 Oct 2015 Fair, Simplified and Projectable Wage System Setting Provincial Minimum Wage regulation Formula for setting minimum wage to ensure simplified, stable and projectable yearly wage adjustments Ease and Affordability of Small Business Credit Government provides subsidy on small business credit to stimulate credit growth in banking sector and affordability to applicants Expanding criteria for small business credit to include: Micro, Small and Medium enterprises in productive sectors (farming, fishery, manufacturing, creative business, trading and services) Overseas Indonesian workers with occupation in formal sectors Family members of salaried workers Ex-Overseas Indonesian workers Overseas Indonesian workers with terminated contract Source: Ministry of Finance Stimulus Package V: 23 Oct 2015 Lower Asset Revaluation Tax Revaluation tax originally set at 10% Under new incentive, tax rates are cut according to periods, detailed below: Revaluation period until 31 Dec 2015: tax rate at 3% Revaluation period until 30 Jun 2016: tax rate at 4% Revaluation period until 31 Dec 2016: tax rate at 6% Eliminating Double Taxation for REITs Eliminating double taxation system for Real Estate Investment Trusts (REITs) Encourage Indonesian property and infrastructure companies to issue REITs in Indonesia Stimulus Package VI: 5 Nov 2015 Propel Rural Economies through Development in Special Economic Zones (SEZs) Tax holiday (reduce income tax) and tax allowance (reduce net income and accelerate depreciation. No charges on value-added tax and luxury goods tax Import duty tariff require Certificate of Origin Foreigners allowed to have property Reduce tax on development and amusement in tourist areas Establish wage boards and specialized tripartite agencies Grant 30 days visitor visa which are extendable for 5 times SEZ administrator able to provide land services SEZ administrator able to issue principles and business permits Accelerating licensing process a max. of 3 hours Sustainable and Equitable Water Supply to the Community Drafting government regulations (RPP) on water resources utilization Drafting RPP on water supply systems (SPAM) Ensure that private entities do not dominate the whole SPAM subsystem Private water supplier to meet their needs on its own. Simplifying Import Licensing for Pharmaceutical Raw Materials Simplifying the licensing process to only 5.7 hours Target 100% paperless 54 54

56 Ministry of Finance Policy Package comprehensive approach across sectors Stimulus to Enhance Household Purchasing Power Increase non-taxable income threshold to IDR 36.0 million (~USD 2,570) from IDR 24.3 million (~USD 1,671) Increase distribution of rice for low income household by two months, to 14 months Faster turnaround for drawdown and realization of village fund budget Provision of official guidance on realization of village fund on labor intensive sectors and projects Slated to provide IDR 4-5 Tn (~USD million) in additional income and provides additional 800 thousand 1 million workforce across Indonesia Stimulus to Increase Incentive for Businesses Implemented Revision of Tax Allowance and Tax Holiday policies Levy of luxury tax (for houses, vehicles, airplanes and firearms) to provide competitive advantage on domestic industries Support small business through interest rate subsidies in small business credit (KUR). lowered to 12%, less than general SMEs credit rate Implementation of 4:1 Debt-Equity ratio for tax purposes to encourage capital inflow and improvements in capital structure Construction of integrated logistic centers, in Cikarang (Manufacturing) and Merak (Fuels) Higher threshold for property luxury tax to IDR 10 billion (~USD 714 thousand) for apartments and IDR 20 billion (~USD 1.4 million) for landed houses Support export financing for domestic industries through Indonesia Exim Bank via government capital allocation and National Interest Account Lower tax on asset revaluation. 3% tax before Dec 31st Remove double taxation for Real estate investment trusts (REITs) Lower tax on dollar deposit interest, especially for exporters Elimination of VAT levy on certain transportation industries (trains, river shipping and airplanes, including spare parts) On Pipeline Taxation Administrative and Regulatory Reform, including amendment of Income Tax Law, VAT Law, General Tax Administration Law and regulation regarding Tax Amnesty Develop more Special Industrial Zones outside Java with special incentives (tax allowance, tax holiday and elimination of customs fee) Support economic activities in Special Economic Zones via longer tax holiday up to 25 years Revision on Ease of Import for Export Destination (KITE) regulations by providing free import fee facilities and more efficient administration process Source: Ministry of Finance 55 55

57 Monetary Policy Package: September I 9 th September Strengthening inflation control and stimulating the real sector from the supply side. 02 Maintaining rupiah exchange rate stabilisation. 03 Strengthening liquidity management Rupiah, through Open Market Operations (OMO), in order to divert the daily liquidity to longer tenors Strengthening coordination amongst the National and Regional Inflation Control Teams to accelerate implementation of the national and regional inflation control roadmap. There are currently more than 430 regional inflation control teams throughout Indonesia, each having a regional inflation roadmap. Preserving foreign exchange market confidence by controlling currency volatility Changing the auction mechanism of Reverse Repo (RR) SBN from variable rate tender into fixed rate tender, adjust the pricing of RR SBN, and extend the tenor by issuing RR SBN 3 months Changing the auction mechanism of Certificates of Deposit of Bank Indonesia (SDBI) from variable rate tender into fixed rate tender, adjust the pricing of SDBI, and issue SDBI with 6 months tenor Strengthening Regional Economic and Financial cooperation between Bank Indonesia and the Government. Maintaining market confidence in tradeable government securities (SBN) through purchases on the secondary market, while monitoring its impact on SBN availability in terms of inflow and money market liquidity. Reissue Bank Indonesia Certificates (SBI) tenor of 9 months and 12 months with a fixed rate tender auction mechanism as well as pricing adjustment 56

58 Monetary Policy Package: September I (continued) 9 th September Strengthening foreign exchange supply and demand management 05 Deepening the money market Adjust the frequency of the auctions of Foreign Exchange (FX) swap from 2 times/week to 1 time/week Change the Foreign Currency Term Deposit (TD) auction mechanism from variable rate tender into fixed rate tender, pricing adjustment, and extend the tenor of up to 3 months; Lower the purchase limit of foreign currency by verifying the underlying documents from US$ 100,000 to US$ 25,000 per customer per month and requires the use of Tax Identification Number (NPWP) Providing swap hedging facilities to shore up investment infrastructure and simultaneously strengthen foreign exchange reserve assets. Refining money market regulations covering all components of market development, including the instruments, players and infrastructure. Expediting the bank foreign debt approval process while adhering to prudential principles 57

59 Monetary Policy Package: September II 30 th September 2015 Maintaining Rupiah Exchange Rate Stability The presence of Bank Indonesia in the domestic foreign exchange market to stabilise the rupiah exchange rate was strengthened through intervention in the forward market. In addition to intervention in the spot market, Bank Indonesia also intervenes in the forward market to help balance supply and demand. Maintaining balance in the forward market is important to alleviate pressures in the spot market. Strengthening Rupiah Liquidity Management Bank Indonesia reinforced rupiah liquidity management by releasing three-month Bank Indonesia Certificates of Deposit (SDBI) along with two-week reverse repo tradable government securities (SBN). The release of such open market operation instruments will absorb liquidity, prompting a shift towards longer tenor instruments, which should reduce the risk of excessive use of rupiah liquidity that could intensify pressures on the rupiah exchange rate. Strengthening Foreign Exchange Supply and Demand Management Policy to manage supply and demand on the forward market was strengthened. The policy aims to encourage forward selling transactions of foreign currencies/rupiah and clarify underlying forward buys of foreign currencies/rupiah by raising the forward selling threshold that requires an underlying document from US$1 million to US$5 million per transaction per customer and broaden the scope of underlying assets for forward sells to include domestic and offshore foreign currency term deposits. Foreign currency Bank Indonesia securities (SBBI) were also issued to back financial market deepening efforts, especially on the foreign exchange market. The holding period of Bank Indonesia Certificates (SBI) was reduced from 1 month to 1 week in order to attract foreign capital inflows. Incentive was provided in the form of a reduction in the interest tax paid on term deposits for exporters depositing their FX earnings at banks in Indonesia or converting the proceeds into rupiah as requested by the government. The policy is expected to keep FX earnings in the country for longer. BI ensured greater transparency and information availability when using FX by strengthening the FX flow report (LLD). In this case, LLD participants are obliged to report their use of FX through supplementary supporting documentation for transactions of a certain value. The regulation is pursuant to Act No. 24 of 1999 concerning the Flow FX and the Exchange Rate System, where Bank Indonesia is authorised to request information and data regarding the flow of FX from residents. 58

60 Financial Sector Policy Packages to Boost Growth As part of national efforts to reverse the recent economic slowdown, OJK has issued a series of financial sector policies. Such measures are directed to, among others, to maintain the level of household/private consumption and to support the Government s infrastructure development. July 2015 September 2015 October 2015 Banking sector: measure are focused on increasing bank loans to MSMEs and housing financing Adjustment of risk weighting for certain types of loans Relaxation of requirements for debt restructuring Capital market sector: Measures are focused on supporting financing for housing and infrastructure, as well as developing SMEs through financing from the capital market Development & expansion of investment products Development of municipal bonds Unlocking opportunities for SMEs to go public NBFI sector: Measures are focused on fostering the growth of multifinance companies and microfinance institutions Relaxation of regulations on NPF in multifinance companies Development of microfinance institutions Establishment of a rating agency for MSMEs Source: Financial Service Authority (OJK) Encourage individual foreign currency account opening for foreign residents Opening an account up to $50,000 only need to present a passport Opening an account with over than $50,000 will be subject to simple customer due diligence process - passport and other supporting documents Relaxation of regulations on business trust Preparation of agricultural insurance scheme Revitalization of venture capital, especially to finance start-up businesses Establishment of financing industry consortium, especially to provide financing for creative industry, exportoriented businesses, and MSMEs Empowerment of the Indonesia Export Financing Agency (LPEI) Implementation of one-project concept in assessing quality of loans 59 59

61 Market s Positive Signal to Policy Package Market participants began to welcome the Indonesian economic recovery efforts in addition to dynamic external conditions Rupiah Curr (Rp/1US$) Composite Index BEI Package III Package II Source: Bloomberg Package I Yuan devaluation Source: Bloomberg 60 60

62 Initiatives to accelerate infrastructure development through reforms (1/2) INSTITUTIONAL REFORMS To ensure sound implementation, some institutional reforms and new institutions have been established. National Land Agency (BPN) Reforms Reform of National Land Agency (BPN), including establishment of special deputy for land acquisition acceleration and dedicated team for priority infrastructure projects, development of SOPs for every BPN activities etc. Increased Fiscal Contribution by GoI through PT SMI, PT IIF, and IIGF Establishment of PT SMI (Sarana Multi Infrastruktur), PT IIF (Indonesia Infrastructure Finance) to provide long-term financing The government is also in the process of establishing more institutions to further accelerate infrastructure delivery Establishment of KPPIP KPPIP (The Committee for Accelerated Infrastructure Delivery) is a central government body that will coordinate the delivery of the government s priority infrastructure projects, which consists of key government ministries related to infrastructure delivery, such as the CMEA, MoF, BAPPENAS and the BPN. KPPIP has established 22 priority projects for 2015 to be implemented. Establishment of PPP unit under MOF PPP Unit under Ministry of Finance will facilitate project development of PPP projects, by providing facilities such as Project Development Facilities (PDF), technical assistance, arrangement of guarantee with IIGF, and infrastructure funding with PT SMI and PT IIF. PPP Unit will also help capacity development for PPP and promotion of PPP projects Minister has approved the establishment of PPP unit, and the funding arrangement with donor and regulatory framework are under progress. 61

63 New Law no 2 / 2012 Initiatives to accelerate infrastructure development through reforms (2/2) REGULATORY REFORMS Law No. 2 /2012 regarding Land Acquisition for Public Interest Presidential Regulation (PR) no 38/2015 regarding PPP Presidential Regulation (PR) no 39/2014 regarding the New Negative List of Investment Minister of Energy & Mineral Resources Reg. No. 3/2015 regarding Procedure for Power Purchase The new law will ease land acquisition bottlenecks and disputes for infrastructure projects such as road, railway, station, port, airport, etc. The law regulates procedures of land acquisition, funding for land acquisition land appraisal, amount and types of compensations, objections and dispute settlements. The new President Reg. No. 30/2015 stipulates the role of private investors in contributing to land acquisition process. Government has revised the original regulation on PPP (Presidential Regulation no 67/2005) three times to accommodate more concerns regarding PPP development in Indonesia. For example, the revision accommodates foreign companies/investors in procurement of PPP projects, criteria and compensation for unsolicited project proposal, the need for fiscal support from Ministry of Finance. Government has revised the previous Negative list of investment to encourage more foreign businesses to take part in infrastructure development. For example, in transport sector, foreign ownership of seaport facility increased from 49% to 95% during PPP concession period. The government also allows 100% foreign ownership of power plant >10MW during PPP concession period (previously 95%). This regulation allows for power purchase from mine mouth coal power plant, coal power plants, gas/micro gas power plants, and hydro power plants can be done with direct selection and direct appointment with the purpose to accelerate procurement process. One of the major reforms is the New Land Law No.2/2012: BPN as central agency in implementation of land acquisition More detailed regulation on implementation of land acquisition Neutral decision making regarding community rejection Successful case of the implementation of the New Law The best example of a successful implementation of the law is the city of Bojonegoro, where the civil society was socialized early to the law and where the land appraisal and compensation amount were attractive. Better Land Appraisal Team Appointment Less bureaucratic land right revocation process Outcome: the overall land acquisition process for the Java North Line Double Track Rail project took less than 2 years. 62

64 22 Priority Projects Within the Pipeline 1. New oil refinery (Rp T) 2. Jakarta Sewerage System Zona 1 (Rp 7T) 3. Airport Revitalization (brownfield) 4. Kuala Tanjung Int. Hub. Seaport (Rp 30T) 5. Bitung Int. Hub. Seaport (Rp 34T) 6. Panimbang Serang Toll Road 7. Upgrading existing refineries (Cilacap, Dumai, Plaju, Balongan, Balikpapan) Ready for PPP Tender 12. HVDC (Rp 20T) 13. Indramayu Power Plant (Rp 20T) 14. Sumatera Transmission (Rp 35T) 15. MRT Jakarta South - North (Rp 25T) 16. Sumsel 9, 10 Power Plants 17. Central and West Java 500 kv Transmission Line Financial Close* sections of Trans Sumatera toll road (Rp 30T) 20.Makassar Pare Pare Railway (Rp 6,4T) 21.Water to Energy Development of Hydro Power Plants Karangkates IV&V, Kesamben, and Lodoyo 22.NCICD Phase A (Rp 20T) OBC Develop ment 8. SHIA Express Railway (Rp 24T) 9. West Semarang Water Supply (Rp 765 M) 10.Balikpapan Samarinda Toll Road (Rp 11,4T) 11. Manado Bitung Toll Road (Rp 4,3T) Permit and Land Acquisition 18. Sumsel 8 (One package with Sumsel 8, 9, 10 with total investment value of Rp 54T) 19. Batang Power Plant/Central Java Power Plant (Rp 40T), Target: October 2015 Construc tion** 63

65 Mining Sector: Progress of Processing and Refinery Facility (1/3) 1. Processing & refinery facility plan based on progress 2. Processing & refinery facility plan based on commodities No. PROGRESS (%) Progress Status Environmental Impact Analysis (AMDAL) Ground Breaking and Initial Construction Plant Mid-Plant Construction Phase Final Phase of Construction Total Mining Permit (July 2015) Total No. of Smelter No. Commodities Total Mining Permit Total No. of Facilities 1. Nickel Bauxite Iron Mangan Zircon Lead and Zinc On Commissioning / Production Phase Kaolin and Zeolite 4 4 Total Total Note: Total Mining Permit cooperating with smelter companies may change 64

66 Mining Sector: Progress of Processing and Refinery Facility (2/3) Nickel Smelter (Operational) Iron Smelter (Operational) Company Name: Indoferro (Cilegon-Banten) Steel Smelter (Operational) Company Name : Delta Prima Steel (Tanah Laut-South Kalimantan) Mangan Smelter (Operational) Company Name : Krakatau Posco (Cilegon- Banten) Company Name : Indotama Ferro Alloy (Purwakarta-West Java) 65

67 Mining Sector: Progress of Processing and Refinery Facility (3/3) Nickel Refining Facility (NPI) Still On Progress Company Name: Bintang Delapan Group (Morowali-Central Sulawesi) 66

68 Energy Sector: 35,000 MW Program has been launched Average economic growth of 6.7 requires 7,000 MW / year or 35,000 MW / 5 years (Kepmen ESDM No. 0074/2015 on RUPTL ) Cabinet Meeting Progress of 35,000 MW 17 Dec 14 Jan 15 4 May 15 Jan Mar 15 Cabinet Meeting There s electricity crisis in Indonesia, requires construction of large capacity plant " Debottlenecking through regulation: 1. Regulation No.1/2015 concerning electricity supply cooperation and joint utilization of the electrical network among license holders. 2. Regulation No.3/2015, concerning Procedures of Purchasing Electrical Power and benchmark prices for Electrical Power through the Direct Selection and Appointment. Launching MW by the President in Goa Beach Sanden DIY. 67