REFORMS IN THE MAKING

Transcription

1 REPUBLIC OF INDONESIA REFORMS IN THE MAKING JUNE 2016 REPUBLIC OF INDONESIA REFORMS IN THE MAKING APRIL

2 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) Farid Arif Wibowo (Directorate General of Budget Financing and Risk Management- Ministry of Finance) contactiru-dl@bi.go.id 1

3 Overview Institutional And Governance Effectiveness: Unwavering Commitment on Reforms Agenda 1 Fiscal Performance and Flexibility: More Fiscal Stimulus with Prudent Fiscal Management 4 Economic Factor: Healthy Growth Prospects Remain Intact 2 Monetary Factor: Monetary Policy Anchors Price Stability 5 External Factor: Improved External Resiliency 3 Wide Range of Policy Reforms to Boost Economic Growth 6 2

4 Section 1 Institutional And Governance Effectiveness: Unwavering Commitment on Reforms Agenda

5 Improving Global Perception WEF Global Competitiveness World Governance Indicators Higher rank is better Higher rank is better Indonesia India Brazil Phillipines Vietnam Voice and Accountability Government Effectiveness Rule of Law Political Stability/Absence of Violence Regulatory Quality Control of Corruption Ease of Doing Business Corruption Perception Index Higher rank is better Higher score is better Indonesia India Brazil South Africa Indonesia Thailand Malaysia Source: World Economic Forum; World Bank; Transparency International 4

6 2015E Total Investment / GDP (%) Indonesia Remains the Investment Destination of Choice Rising Direct Investments 1 Indonesia Enjoys Large Investments Relative to Peers within the Region 2 IDR tn FDI DDI Total ,0 30,7 34,0 26,5 20,7 24, Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q Brazil India Indonesia Malaysia Philippines Thailand The Economist: Indonesia among the top 3 destination for attracting investors in Asia (January 2016) 3 India China Indonesia Philippines Malaysia Myanmar Vietnam Thailand Japan Australia Singapore South Korea Hong Kong Taiwan 69,3 58,2 48,0 37,2 32,7 32,2 30,1 29,0 28,3 27,1 24,8 23,6 22,9 18,9 % of surveyed who plan to increase investment in each country 0,0 10,0 20,0 30,0 40,0 50,0 60,0 70,0 80,0 JBIC: Amongst ASEAN countries, Indonesia is the most preferred place for business investment (December 2015) 4 India Indonesia China Thailand Vietnam Mexico USA Philippines Brazil Myanmar Malaysia Russia Singapore Korea Turkey 7,9 6,2 5,5 4,6 3,9 3,9 11,5 11,1 16,6 23,6 27,5 30,7 40,4 38,8 38,8 % of surveyed who consider each country has promising prospects Source: Indonesia Investment Coordinating Board (BKPM); 2. Source: IMF World Economic Outlook, Database October 2015; 3. The Economist Asia Business Outlook Survey 2016; 4. Source: JBIC Outlook for Japanese Foreign Direct Investment (27th Annual Survey); 5

7 National Strategic Development Plan (Nawa Cita) The 3 Dimensions on Economic Development Human Development Priority Sector Development Equitable Development Education Health Housing Character Food Security Energy & Electrical Security Maritime & Marine Tourism & Industry Water Security, Basic Infrastructure & Connectivity Inter- Income Group Inter-Region: (1) Rural Area, (2) Periphery, (3) Outside Java, (4) Eastern Area. Necessary Condition Legal Certainty & Law Enforcement Security & Order Politic & Democracy Governance 6

8 Improving Investment Climate: Introduce 3-hour investment licensing service to complement One Stop Service (OSS) Priority Investment Service 3-hour Service Available for investors with minimum investment of IDR 100 billion (USD 8 million) and/or employing 1,000 local workers. No requirements for investment in infrastructure sector. Certainty to start a business Investment license Certificate of incorporation NPWP / Tax registration TDP / Company registration Certainty to work RPTKA / Employment plan IMTA / Working permit 9 documents obtained Certainty to import capital goods APIP / Import identification NIK / Customs registration Accurate land Information Letter of land availability BKPM Arrive at One-stop Integrated Service at BKPM directly from the airport. Consult with Director of Investment Service. Submit the required documents & data. Wait at the lounge while documents are processed by BKPM, in-house notary, ministries, & other government institutions. Obtain eight documents & letter of land availability within three hours to start your business. Until April 2016, there were 43 companies obtained 3 hours services Source: Investment Coordinating Board (BKPM) 7

9 Improving Investment Climate: Introduce 3-hour investment licensing service to complement One Stop Service (OSS) Priority Investment Service Direct Construction (KLIK) Investors can directly start their project construction before obtaining construction permits. This service is supported by both Central and Regional Governments. KLIK also as the first step to synergize between central and local licensing. No Requirements No minimum investments or workers is required. Available for selected industrial parks. Construction permits can be obtained in parallel with construction process. Obtain investment licence at One-stop Integrated Service (PTSP) at national or regional level. Survey a land within selected industrial parks. Acquire the land for your industry. Start the construction of your project. No other permits are required. Apply for building construction permit & environmental permit, in parallel with construction process. Source: Investment Coordinating Board (BKPM) 8

10 Improving Investment Realization (Q1-2016) Rp124.6 T Rp146.5 T 315, ,170 * 17.6% 3.8% Q Q * person Q Q Rp82.1 T Rp96.1 T Rp42.5 T Rp50.4 T 17.1% 18.6% Q Q Q Q Source: Investment Coordinating Board (BKPM), compared to Q period 9

11 FDI Realization by Sectors (Q1-2016) Other Services US$219.1 mn 50.8% Rubber and Plastic Industry US$199.6 mn 27.6% Metal, Machinery and Electronic Industry US$696.9 mn 8.9% etc Source: Investment Coordinating Board (BKPM), compared to Q period Leather Goods and Footwear Industry US$26.7 mn Mining 55.4% US$ mn 83.3% Chemical and Pharmaceutical Industry US$ mn 54% 96.3% Real Estates, Industrial Estate and Business Activities US$6.392 Mn US$ mn 61% 13.0% Transport Equip and Other Transport Industry US$ mn 42.4% 10

12 Section 2 Economic Factor: Healthy Growth Prospects Remain Intact

13 Conducive Environment Underpinning Strong Growth Fundamentals Largest Economy in South East Asia 4th Most Populous country in the World; 64% in productive age Budget reform as a part of larger economic reform initiative Tax base to be broadened from one reduce dependency on commodities Manageable Inflation Rate Growing Middle Income Class From commodity-based to industrializednatural resources-based economy via infrastructure development From consumption-led to investment-led growth via a stronger manufacturing sector and more investment initiatives Policies to maintain purchasing power to stimulate domestic economy in the midst of weakening macroeconomic conditions Large and Stable Economy New Economic Structure Consistent Budget Reform New Reform- Oriented Administration High Infrastructure Investments Fuel subsidies significantly reduced and spending redirected to more productive allocation Prudent debt management Three main sources of financing for IDR 5 tn investment needs: State and regional budget, State Owned Enterprises and PPP Continuing from 2015 policy, infrastructure will be higher than fuel subsidy Infrastructure spending focused on basic infrastructure projects Fiscal and non-fiscal incentives to attract infrastructure investment and promote PPP 12

14 Indonesia s Strong GDP Strong GDP Growth % 7,0 5,0 3,0 5,14 4,96 4,97 5,04 3,83 3,29 4,73 4,66 4,74 3,75 3,36 5,04 4,92 Q GDP growth still showed that our economy remains on a stable growth path 1,0-1,0-3,0 0,06 QoQ YoY -0,23-0,34-2,11-1,83 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q Indonesia recorded solid GDP growth supported by our strong household consumption, investment, as well as government expenditure Main challenges arose from external sectors GDP Growth Based on Expenditures By expenditure Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Household consumption Non profit household consumption (0.5) (8.1) (8.0) Government consumption 6.1 (1.8) Investment Exports (4.6) (0.6) 0.0 (0.6) (6.4) (3.9) Imports (2.2) (7.0) (5.9) (8.1) (4.2) GDP Growth Prospect Institutions 2016 GDP growth (%YoY) 2016 National Budget 5.3 Bank Indonesia IMF 4.9 World Bank 5.1 ADB 5.2 Consensus Forecast (May 2016) 5.0 Indonesia s strong GDP growth remains favorable compared to peers, supported by demographic bonus and strong domestic demand 13

15 Strong and Stable GDP Performance Spatial GDP Growth Spatial GDP Growth Contribution Sumatera GDP Growth Q1 2016: 4.2% Kalimantan GDP Growth Q1 2016:1.1% Sulawesi GDP Growth Q1 2016:7.5% Bali & Nusa Tenggara GDP Growth Q1 2016: 7.1% Maluku & Papua GDP Growth Q1 2016: 1.2% Sulawesi: 5.9% Kalimantan: 7.7% Bali & Nusa Tenggara: 3.1% Maluku & Papua: 2.3% Sumatera: 22.2% Java GDP Growth Q1 2016: 5.3% Java: 58.9% Contributors to GDP Growth by Sector Shifting from Commodity-based Economy to Manufacturing and Service Sectors GDP growth by sectors (YoY) (%) Agriculture, forestry, and fishery Q1 Q2 Q3 Q4 Yearly Q1 Q2 Q3 Q4 Yearly Q Mining (1.0) (1.3) (5.2) (5.7) (7.9) (5.1) (0.7) Industrial processing Construction Big traders, wholesale, retail Ransportation and warehousing Information and communication Financial service and insurance Other GDP % 9,0 6,4 5,7 6,0 4,6 4,0 4,0 3,0 1,8 0,0 (0,7) (1,3) -3,0 Manufacturing Services Agriculture Mining Q Q Source: BPS Majority of growth was driven from Java Drop in commodity prices affected commodity-based regions such as Sumatra, Kalimantan, Papua Sulawesi, Bali Nusa Tenggara & Java continue to grow above the national average Government policies continue to encourage regional growth 14

16 Section 3 External Factor: Improved External Resiliency

17 Jan Feb Mar Apr Mei Jun Jul Ags Sep Okt Nov Des Jan Feb Mar Apr Mei Jun Jul Ags Sep Okt Nov Des Jan Feb Mar Apr Mei 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 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1* Q2* Q3* Q4* Q1** A Narrower, Structurally-Stronger Current Account Deficit Strong Balance of Payments Improving Current Account Deficit US$bn FX reserve as of May 2016 is US$103.6bn (Equivalent to 7.6 months of imports and servicing of government debt) * 2016** US$bn (0.3) (5.0) 50 0 US$bn : CA Surplus US$1.7 Bn 2012: CA Deficit (US$24.4 Bn) 2013: CA Deficit (US$29.1 Bn) 2014: CA Deficit (US$27.5 Bn) 2015: CA Deficit (US$17.8 Bn) 2016**: CA Deficit (US$4.7 Bn) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1* Q2* Q3* Q4* Q1** * 2016** (4.7) (7.6) (1.1) Current Account Capital & Financial Account Overall Balance Reserve Assets (RHS) Source: Bank Indonesia Goods Services Income Secondary Inc. Current Acc. Source: Bank Indonesia Trade Balance Surplus Continues US$bn 2,50 2,00 1,50 1,00 0,50 0,00-0,50-1,00-1,50-2,00-2, Deficit US$1.89bn 2015: Surplus US$7.52bn Jan-May 2016: Surplus US$2,7 Bn Non-OG OG Total Rising Foreign Reserves Amid Global Uncertainties US$bn FX Reserves as of May 2016: US$103.6 Bn (Equiv. to 7.6 months of imports + servicing of government debt) FX Reserves (LHS) Month of Import & Debt Service (RHS) Month Source: BPS Source: Bank Indonesia Source: Bank Indonesia 16

18 Exchange Rate In Line with Fundamentals Stable Movement of Rupiah IDR/US$ IDR/USD Monthly Average Quarterly Average * data as of 31 May 2016 Source: Bank Indonesia Rupiah Exchange Rate Relatively Well Compared to Peers On average, the Rupiah depreciated 1.95% (mtm) to a level of Rp13,434 per USD in May Depreciatory pressures, which were also felt in other countries, were triggered by global risks associated with the proposed FFR hike. The Rupiah rebounded at the beginning of June 2016, however, as foreign capital flowed back into Indonesia after weaker-than-expected labour data was announced in the United States. The Federal Reserve s decision to postpone the FFR hike at the FOMC on 15th June 2016 should help stabilise the Rupiah. Looking forward, Bank Indonesia will continue to maintain exchange rate stability in line with the rupiah s fundamental value YTD 2016* vs 2015 BRL 9,67 MYR 4,01 EUR 2,17 THB 0,95 IDR 0,92 PHP 0,27 TRY -0,92 ZAR -1,15 KRW -1,42 INR -1,64 * data as of 31 May 2016 % -4,00-2,00 0,00 2,00 4,00 6,00 8,00 10,00 Source: Bank Indonesia ZAR MYR TRY BRL KRW IDR EUR THB CNY INR PHP -10,02 Average Source: Bank Indonesia * data as of 31 May 2016 May 2016 vs Apr 2016 Point to Point -5,07-3,65-5,43-5,36-4,87-4,41-3,46-2,39-1,95-0,39-1,06-0,93-1,63-0,76-1,38-0,86-2,68-2,24-1,66-12,00-10,00-8,00-6,00-4,00-2,00 0,00 2,00 0,40 0,29 % 17

19 Lines of Defense Against External Shocks First Line of Defence FX Reserve Ample of level of FX reserves to buffer against external shock FX Reserves as of May 2016: US$103.6 billion Second Line of Defence Japan US$ billion swap line with the Bank of Japan currently in place The quantum of the swap line was increased from US$12 billion in December 2013 Chiang Mai Initiative Multilateralization (CMIM) Agreement Entitled to a maximum swap amount of US$ billion under the ASEAN+3 (Japan, China, and Korea) FX reserves pool created under the agreement Came into effect in 2010 with a pool of US$120 billion Doubled to US$ 240 billion effective July 2014 BI s Existing Bilateral Currency Swap Arrangement (BCSA) China Agreed to renew currency swap agreement with PBOC and increase volume of funds to RMB130 billion up from RMB100 billion Agreement was signed in 2009 and was previously extended for a period of 3 years in 2013 South Korea Established a 3 year KRW/IDR swap arrangement with the size of up to 10.7 trillion KRW / IDR 115 trillion in March 2014 Australia Exchange of local currencies between the two central banks of up to A$10 billion or IDR 100 trillion Effective as of December 15, The effective period will be three years, and could be extended by mutual consent of both sides * In addition to the above facilities, Indonesia is entitled to access IMF facilities for crisis prevention to address potential (actual) BOP problem as part of IMF s Global Financial Safety Net (GSFN) initiative. Such facilities include Flexible Credit Line (FCL) and Precautionary and Liquidity Line (PLL) Source: Bank Indonesia 18

20 Comprehensive Stabilization Framework Ensures Proactive Risk Management of Financial System Implementing Crisis Management Protocol Implementing Bond Stabilization Framework Enhancing coordination between government institutions and continuous dialogue with market participants Crisis Management Protocol The FKSSK, Consists of Minister of Finance, BI Governor, Head of Indonesian FSA and Head of Indonesian Deposit Insurance Corporation, manages the Nationwide Crisis Management Protocol (CMP) Framework as guidance and procedures for national crisis prevention and mitigation measures. The nationwide CMP incorporates the Exchange Rate, Banking, Non-Bank Financial Institution, Capital Market, Government Bonds Market (SBN), and Fiscal CMPs. Coordination Meeting is conducted regularly to discuss and assess the current level of Financial System Stability and current issues related to the financial system In 2013, FKSSK has conducted two crisis simulations: Full Dress Simulation (ministerial level) and activation of pre-emptive instrument (CMIM) at technical In March 2016, the Parliament has approved Financial System Crisis Prevention and Mitigation Law (UU PPKSK) which contains some key features, ie: Clear division of tasks and responsibilities between the Ministry of Finance, BI, OJK and LPS; Clarity of Systemically Important Banks (SIBs) definition based on international criteria; Application of the bail-in principle according to international best practices; and Resolution mechanism in which Lender of Last Resort (LoLR) still provided by central banks to address short-term liquidity difficulties. 4 Specific policies in place in the 2014 budget law to address crisis Bond Stabilization Framework DMO Budget Buyback Funds Buyback of government bonds by the DMO from the state budget 5 Swap facility arrangements based on international cooperation SOE Budget Related SOEs (min. Alert level) KUN (State s General Cash) (min. Alert level) Potential purchase of government bonds by State Owned Enterprises in primary market (min. Aware Level) and in secondary market (min. Alert Level) Potential purchase of government bonds by the Treasury Office using the State s General Cash (KUN) 6 Chiang Mai Initiative Multilateralization Other Gov t Budget PIP Investment Funds (min. Alert Level) Potential purchase of government bonds by the Indonesia Investment Agency SAL (min. Crisis Level) Purchase of government bonds using the accumulated cash surplus (SAL). Parliament approval is required 1 2 Fiscal buffers to prevent crises and mitigate risks Deferred drawdown option facilities up to US$5bn Specific articles in the 2014 State Budget Law that provide flexibility for Government to take quick mitigation action if necessary, with Parliament approval that has to be given within 24 hours 19 19

21 Strengthened Private External Debt Risk Management (US$bn) Despite Increasing Trend of External Debt Source: External Debt Statistics of Indonesia, June 2016 Total FCY Debt: US$319 Bn Private Sector FCY Debt: US$165 Bn * 2015* Jan Feb Mar Apr 2016* 2016* 2016* 2016** Public (Govt. & BI) Private Total (RHS) Debt Burden Indicator (External Debt / GDP) Remains Comparable to Peers External Debt / GDP (%) Turkey 50,4 47,3 Thailand 34,6 33,8 Indonesia 29,2 33,1 Philippines 27,3 28,9 Brazil 22,0 27,0 India 23,2 23,8 (%) 0,0 10,0 20,0 30,0 40,0 50,0 60,0 Source: Moody s Statistical Handbook, November 2015 Prudent External Debt Management Oct 2014, introduced prudential principles in managing external debt for the nonbank corporation to mitigate risk emerging from external debt activity. Corporations holding external debt required to fulfil: Minimum hedging ratio in order to mitigate currency risk Minimum forex liquidity ratio to mitigate liquidity risk Minimum credit rating to mitigate overleverage risk Regulation update in Dec 2014 including among others: broadening the coverage of components of FX Assets and Liabilities, extension of credit rating s status validity period Regulation Key Points Object of Regulation Hedging Ratio Phase 1 Jan 1,2015 Dec 31,2015 Phase 2 Jan 1,2016 Dec 31,2016 Governs all Foreign Currency Debt < 3 months 20% * 25%** > 3 6 months 20%* 25%** Liquidity Ratio ( < 3 months) 50% 70% Phase 3 Jan 1, 2017 and beyond Credit Rating Not applicable Minimum rating of BB- Hedging transaction to meet hedge ratio not necessarily be done with a bank in Indonesia Sanction As of Q IV-2015 Applied Must be done with a bank in Indonesia 20

22 Manageable External Debt Profile... short term non-bank corporate debt represents only 17.5% of total private external debt External Debt Position US$153.8 Bn or 48.2% of Total Ext. Debt US$117.0 Bn or 70.8% of Private Ext. Debt US$19.3 Bn or 11.7% of Private Ext. Debt Affiliation US$11.0 Bn or 6.7% of Private Ext. Debt US$319.0bn US$165.2bn or 51.8% of total Ext. Debt US$48.2bn or 29.2% of Private Ext. Debt US$28.9bn or 17.5% of Private Ext. Debt External Debt Position as of April Based on remaining maturity Private Short-Term 1 Private Non-Bank US$17.9 Bn or 10.8% of Private Ext. Debt Source: External Debt Statistics of Indonesia, June 2016 Non Affiliation 21

23 Section 4 Fiscal Performance and Flexibility: More Fiscal Stimulus with Prudent Fiscal Policy

24 Consistent Domestic Reform is Fundamental to Accelerate Growth Structural Challenges Global Volatility Long Term Strategy to Create Sustainable and Equitable Economic Growth Budget Reforms Revenue Optimization Quality Spending Sustainable Financing Investment to contribute larger part in achieving sustainable and equitable economic growth 8,0 7,5 7,0 7,6 Short Term Strategy to Navigate Global Uncertainties and Financial Turmoil 6,5 6,0 5,5 5,3 6,8 Structural Reforms 5,0 4,5 4, Improve People Purchasing Power Improve Quality of Investment Climate 23

25 Pillar I Revenue Optimization Pillar II Quality of Spending Pillar III Sustainable Financing Budget Reform as a Part of Larger Economic Reform Initiative to support sustainable and equitable economic growth Objective: Creating a Sustainable and Equitable Economic Growth for Indonesia I. Shift from commodity-based revenues I. Higher spending productivity I. Secure budget financing II. Broaden tax coverage III. Improve tax compliance and prevent leakages IV. Strengthen taxation institution II. Better targeted subsidy scheme III. Empowerment of local governments II. Effective utilization of domestic and international funding sources III. Financing schemes to support infrastructure development program Implemented: Reinventing policy e-invoice Compliance risk management Adjustment of non-taxable income threshold ICT improvement in Tax Office Initiatives: Tax Amnesty Tax Administrative Reform Regulatory Reform (tax provisions & procedures (UU KUP), non tax revenue (UU PNBP) Development of Semi-Autonomous Tax Office Initiatives: Improve government procurement regulation Continue targeted subsidy reform (electricity, seed, fertilizer, interest (KUR)) Larger budgetary allocations for: Infrastructure projects Social welfare Cashless smart cards Rural transfer 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 Challenges Slow and low disbursement performance Miss targeted subsidy Revenue Shortfall (tax, low oil and commodity prices) Narrow tax base Dependency on foreign financing Source: Ministry of Finance 24

26 Long Term Strategies to Achieve Sustainable Growth stimuli to maintain purchasing power The Virtuous Cycle of Purchasing Power Stimuli Consumption is still the largest contributor to Indonesia s GDP Private consumption has been a key factor driving Indonesia s economic growth in recent years Ease of land certification and licensing for street vendors Increase non-taxable income limit Fuel price and electricity adjustment The government has designed stimulus program to maintain and enhance purchasing power for households The government has increased non-taxable income level and adjusted wage policy to ensure that the lowest income bracket has the greatest support Rural transfer for productive spending Maintaining Purchasing u Power 2 months addition of rice subsidy program Funds are targeted at not only to improve basic village infrastructure but also to create jobs through labor intensive projects as well as other job creation programs Stabilized price for meat products Predictable labour wages Boosting housing development Elimination of luxury goods tax for consumer goods 25

27 Long Term Strategies to Achieve Sustainable Growth stimuli to promote investments Licensing Incentives Tax Incentives Business and Infrastructure Incentives Other Incentives Permit & licensing simplfication Income tax relief for labor intensive industries Incentives for footwear and apparel industries Simplification of import licensing for drugs and raw food Accelerating infrastructure development Water management and regulation One map policy Relaxation of entry visa policies Tax incentives for REITS Dwelling time optimization Oil refinery development Aviation sector incentives Downstream industries Debt To equity ratio Expansion of coverage and interest subsidy for MSME Special economic zones Tax incentives on property Integrated logistics zones CPO fund Support for export-oriented industries Village-city logistics improvement Acceleration of power infrastructure Relaxation of negative foreign investment list 26

28 The Big Bang Policy on Relaxation of Foreign Investment promoting competition and growth from investments Introduction of New Foreign Ownership Regulation for Strategic Sectors Cold storage Sports Center, Restaurants, Bars Pharmaceutical Raw Materials Film Processing Lab, Crumb Rubber Manufacturing Before After Before After Before After Before After 49% 100% 49% 100% 51% 100% 85% 100% Key Reforms in Negative Foreign Investment List Toll Road Operator, Telecommunication Testing Company Distribution, Warehousing Private Museum, Catering, apparel Manufacturing, Exhibitions & Conventions Before After Before After Before After Revision of "Partnership" category to refer to partnership with Micro, Small and Medium Enterprises (MSMEs) 95% 100% 33% 67% 51% 67% Grandfather Law: If a particular sector is tightened in future, existing foreign investor does not need to comply with tighter stake Professional Training, Golf Course Management, Air Transport Support Services, Travel Bureau Consultancy for Construction 1 Telecommunication Provider with Integrated Services Before After Before After Before After Strengthen implementation of negative investment law through active roles from ministries, agencies and regional governments 51% 67% 55% 67% 65% 67% 1 For total project value of IDR10bn and above 27

29 2015 Budget Realization Indicators 2015 Revised Budget Realization 1 Economic growth (%, YoY) Inflation rate (%, YoY) month-SPN (Treasury bills, %) Exchange rate (US$/IDR,Average) 12,500 13,392 Indonesia crude price (US$/bbl) Oil lifting (thousand bbl/day) Gas lifting (thousand bbl/day oil equivalent) 1,221 1, Description Realization Δ (IDRtn) % to Budget Per 31 Dec (IDRtn) A. Revenue 1, % (46) I. Domestic revenue 1, % (51) 1. Tax revenue 1, % Non tax revenue % (145) II. Grant % 5 B. Government spending 1, % 19 I. Central government 1, % (30) 1. Personnel, operational & capital spending % Subsidies, interest payment & others % (178) II. Inter-governmental transfers % Transfer to regional & local governments % Rural transfer % 21 C. Primary balance (136) 203.8% (43) D. Surplus/deficit (292) 131.3% (65) % deficit to GDP (2.5%) (0.3%) E. Financing % 69 I. Domestic financing % 47 II. Foreign financing (net) 10 (51.9%) 23 Surplus/(deficit) financing 26 4 Pressures on macroeconomic indicators in 2015 due to: Global economic slowdown Drop in commodities prices Non-oil & gas tax revenue went up by 12.6% Slow down in manufacturing and mining sector led to lower tax revenue collected in these sectors The improved budget structure has created a base for acceleration of economic development in the midst of global uncertainty Capital expenditure in 2015 reached IDR209tn (41.8% increase from 2014 realization) Rural transfer initiatives, started in 2015, amounted to IDR20.8tn as of December 2015, have been entirely distributed Source: Ministry of Finance 1 As of Dec 31st

30 Comprehensive Budget for focus on productive spending, broadening tax base, improved subsidy schemes and fiscal decentralization Indicators 2016 Budget Economic growth (%, YoY) 5.3 Inflation rate (%, YoY) month-SPN (Treasury bills, %) 5.5 Exchange rate (US$/IDR, average) 13,900 Indonesia crude price (USD/bbl) 50 Oil lifting (thousand bbl/day) 830 Gas lifting (thousand bbl/day oil equivalent) 1, Description (In IDRtn) Budget Δ (IDRtn) A. Revenue 1, I. Domestic revenue 1, Tax revenue 1, Non tax revenue II. Grant 2 (1) B. Government Spending 2, I. Central government 1, Personnel, operational & capital spending 784 (11) 2. Subsidies, interest payment & others II. Inter-governmental transfers Transfer to local & regional governments Rural transfer C. Primary Balance (88) (21) D. Surplus / Deficit (273) (51) % deficit to GDP (2.15%) E. Financing I. Domestic financing II. Foreign financing Source: Ministry of Finance Fiscal Risks Have Shifted from Spending to Revenue Revenue Expenditure Financing Setting pragmatic revenue using 2015 revenue outlook Broaden tax base and improving compliance, tax administration as well as IT system Improve fiscal incentives for strategic purposes Optimizing non-tax revenue from government institutions Key Strategic Policies Broadening tax base for businesses 20% budget allocation for education 5% budget allocation for health 1 Million-House Program Develop priority infrastructure projects Efficient spending Targeted subsidy scheme Fulfill mandatory spending Stimulating regional economies to reach optimum growth Prudent and targeted budget expansion (2.15% of GDP) Reducing bureaucracy Strengthening fiscal decentralization Maintaining budget deficit under constitutional threshold (3% of GDP) Diversified budget financing Combining financing sources with competitive terms and conditions Continuously increasing infrastructure project Improved subsidy scheme (objects, subjects, delivery methods) Sustainable national social security system 29

31 Optimizing Tax Revenue Strategy...improving tax ratio and buoyancy remains a challenge Global Growth (yoy) Showings Signs of Recovery in 2016 Breakdown (in IDR bn) Budget-R Budget 1. Tax revenue 1,489, ,546,664.6 a. Domestic tax revenue 1,439, ,506, ) Income tax 679, , Non-oil & gas income tax 629, , Oil & gas income tax 49, , ) VAT 576, , ) Land and building tax 26, , ) Duties 145, , ) Other Tax 11, ,766.8 b. Tax from international trade 49, , ) Import duty 37, , ) Export duty 12, ,883.2 Share of Tax-based Revenue to be Increased Going Forward Boosting Tax Buoyancy Becomes a Key Priority Year Total taxation Tax and oil & gas income tax Non oil and gas income tax Value added tax General policies to achieve taxation target includes: 1. Maintain conducive investment climate 2. Maintain national economic stability and protect purchasing power 3. Improve national competitiveness and industry value-add 4. Tighten monitoring on excisable goods consumption There are 44.8 mm Potential Taxpayers Based on Demographics Data 90% 75% 60% 45% 30% Tax Revenue Non Tax Revenue Grant 84,5% 84,9% 72,3% 73,3% 74,9% 74,0% 37,8% 35,9% 32,9% 34,8% 18,1% 17,7% >15 yr old MM Registered tax payer MM Total population MM Potential tax payer MM 15% 0% 1,5% 1,6% 1,9% 1,3% 1,2% 0,7% Paying tax MM Tax report MM 1 Source : Ditjen Dukcapil, June Source : Tax Office, April

32 Incentives Incentives Pioneer Industry/Projects High Priority Industry/Projects Reform in the Budget (Revenue, Spending, Financing) as part of a larger structural reform Tax Allowance Tax Holiday Tax Allowance Facility Up to 30% of invested capital is deductible for tax purposes Tax Holiday Facility Income Tax Relief or Reduction High economic integration Contributes high value addition and externalities Introduces new technology Has strategic role on the national economy Support economic diversification Strengthen national industry structure Competitive in the international market High absorptions of workers and supporting technology transfer Located outside Java, Bali, and Batam Islands (Remote Areas & KTI) Taxable Income reduction amounting up to 30% of the invested capital Corporate income-tax relief for a minimum period of 5-15 years. Can be extended to 20 years Accelerated depreciation and amortization Eligible industries: Reduction of Income Tax on dividend from 20% to 10% Extended loss carried forward (from 5 years) to max of 10 years Eligible Industry: 66 sector industries and 77 sector industries in specified region Basic metal industry Oil refinery Petrochemical industry Machinery Agricultural, forestry and fisheries Telecommunication, information and communication Marine transportation Major manufacturing in Special Economic Zone Infrastructure, ex. PPP projects 31

33 Targeted Tax Incentives to Attract Investment supportive fiscal (tax allowance and tax holiday) to further improve business climate Improve regulation; Tax amnesty, Amendment of Income tax law (UU PPh), VAT law (UU PPN), General tax provisions and procedures (UU KUP), and non tax revenue (PNBP). Reinventing policy, E-Invoice, Compliance risk management. Adjustment of non-taxable income threshold. Broaden tax base, improve compliance, improve tax administration and improve the Tax Office Information and Communication Technology (ICT). Improve fiscal incentives for strategic purposes. Optimize non-tax revenue from government institution. Keep budget deficit under constitutional threshold (3% of GDP). Mix budget financing instruments and currencies. Combine financing sources with competitive terms and conditions (Bilateral loan, DDO, etc). Increase capital injection to SOEs to include SOEs in infrastructure development. Revenue Financing Expenditure Develop priority infrastructure projects as committed. More efficient spending. Better targeted subsidy scheme. Fulfill mandatory spending. Improve Government procurement regulation. Continue targeted subsidy reform (Electricity, seed, Fertilizer, Interest (KUR)). Stimulate regional economies to reach optimum growth by introducing transfer to rural regions (dana desa). Larger Budgetary allocations for: Infrastructure projects Social welfare Cashless smart cards Rural transfers 32

34 Optimization of Government Revenue the focus of government to broaden tax base, increase compliance, and improve the quality of tax administration Grand Strategy to Achieve Taxation Target Control the consumption of goods subject to customs Improve competitiveness and added value to the national industry Maintain national economic stability and people's purchasing power Optimization of tax revenue to maintain investment climate Policy Direction Shifting the sources of income derived from commodities Widening the scope of revenue base Increasing the level of tax compliance Prevent tax leakage, especially VAT refunds Control the consumption of goods subject to customs Tax Policies Improvement of tax administration Tax Amnesty Compliance Risk Management Reinventing policy; e-invoice Extensification and Intensification of Taxpayers Data matching, optimization of IT, e-tax invoice, improved regulation Optimization of inspection The focus of the leading sectors of each regional office, transfer pricing, and fraud; Implementation of 2016 as the year of Law Enforcement Adjustments to Non-Taxable Income Threshold Revision on Taxation Regulation (Amendments 33 Tax Procedures Law, Income Tax Law, and VAT Law) 33

35 Tax Amnesty Scheme as a Policy Breakthrough short and long term impact is expected to be very positive on economic growth Objectives Assets and Properties of Indonesian Citizen Deposited Overseas Accelerating Economic Growth through Asset Repatriation Increase domestic liquidity Improve the stability of IDR currency Create lower interest rate Support investment growth + Expanding Tax Base through Reliable, Integrated and Comprehensive Database Rp Rp Rp Increasing More Sustainable Tax Collection Providing Tax Relief for Taxpayers Who Revise Their Unreported Assets Paying for certain amount of compensation Lowering tax rate for repatriation than declaration Lowering tax rate for early reporting By the implementation of Automatic Exchange of Information (AEOI) globally in 2018, taxpayers could not hide the information of their asset to avoid taxation 34

36 Transfer to Local Government and Rural Also Being Revisited Policy Reform for 2016 Transfer to Region IDR tn 1. Transfer to region to be closer or even higher than line ministries 2. Increasing the amount and improving the formula of General Allocation Fund (DAU) as an equalization grant 3. Strengthening Specific Allocation Fund (DAK) as an instrument to improve the quality of public infrastructure as well as a tool to support national priority 4. Strengthening and improving incentive mechanism through reform on Regional Incentive Fund (DID) policy 5. Strengthening village fund Revised Budget Budget 2016 Central Government Spending Regional & Rural Transfer Objectives of non-cash scheme on regional transfer, are: 1. To encourage a more healthy, efficient, and effective regional budget management 2. To push a more optimum and timely regional budget disbursement 3. To lesser regional government unusual cash and/or bank deposits Non-cash scheme can be delivered by government sharia/obligation scheme Time period of the sharia/obligation is 3 months, with yield 50% of interest rate of government deposit in Bank Indonesia (65% from BI rate) 35

37 Future Growth Policies Geared Towards Investments Share of Growth Geared Towards Investment % of GDP Source: BPS Increased 32,1 32,6 32,8 share of investments 39,0 2,2 1,2 1,1 in GDP 1,0 56,2 56,1 56,3 54, Target Policy to Accelerate Infrastructure Development Incentive for Business Sector expected to create stable trade sector Policy to Maintain Purchasing Power Household Consumption Non Profit Private Consumption Investment Strategies & Policies to Boost Investments Stable Dependency Ratio Showing Sustainable Support for Investment Activities Source: Euromonitor Indonesia will continue to have young and vibrant population as evidenced by stable dependency ratio outlook China India Russia Brazil Indonesia Japan 1. Maintain economic stability to promote strong business and investment climate 2. Simplify licensing and investment procedures 3. Harmonize investment regulations between central government and local governments 4. Consistently improve the involvement of state owned enterprise (SOE) in infrastructure development 5. Increase the role of banking institutions in lending rate development, especially for working capital and investment credits 6. Expand the role of non-bank financial institutions in the development of infrastructure financing alternative The Government will encourage the development of infrastructure projects to boost investment opportunities and create greater competitiveness for Indonesian economy 36

38 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Improvement in Budget Implementation Supports Sustainable Economic Growth Government Spending grew 11% CAGR from with Regional and Rural Transfer Allocation Outgrowing Central Government Budget (IDR tn) Central Government Spending Regional & Rural Transfer Revised Budget Budget Ministries with Highest Budget Allocation Budget (IDR tn) Min. of Public Works and Housing Min. of Defence 99.5 National Police 73.0 Min. of Health 63.5 Min. of Religious Affairs 57.1 Min. of Basic Education 49.2 Min. of Transportation 48.5 Min. of Higher Education and Research 40.6 Min. of Finance 39.3 Min. of Agriculture 31.5 Reallocation of Energy Subsidies to Productive Areas: Education, Healthcare and Infrastructure The Result of Online Procurement: Acceleration of Capital and Goods Spending in 2015 (IDR tn) Revised Budget 2015 Budget 2016 Education Healthcare Energy Subsidy Infrastructure EDUCATION 28.3% HEALTH 75.4% ENERGY SUBSIDY 60.7% INFRASTRUCTURE 103.5% Comparison between average allocation in and Revised Budget Capital Spending Profile (IDR tn) (IDR tn) Revised Budget Goods Spending Profile

39 Spending Profile Indicates Further Improvement in Q increasing productive spending in both central and regional segments Capital Spending Realization Regional Transfer Realization Regional Government Banking Deposit % IDRtn IDRtn IDRtn 6,0% 5,0% Regional Transfer Village Fund ,7 4,0% 3,0% , ,5 2,0% ,0% 0,0% Jan Feb Mar Q realization (RHS) Q realization (RHS) 2015 % of realization to budget (LHS) 2016 % of realization to budget (LHS) ,8 723,2 7, IDR tn, % Jan Feb Mar Q realization ,4 190,3 180 % of real. to budget 0.0% 0.1% 1.5% Q realization % of real. to budget 0.7% 2.7% 5.1% 0 R Budget Q1 Real. Budget Q1 Real. Q Q Q Q Capital spending increased significantly by almost 3x vs Q The increasing regional transfer realization is expected to push infrastructure spending in rural areas Regional government banking deposits in Q1 decreased compared to the same period last year. However, the amount remains substantial and can be used for further infrastructure spending in regional areas Source: Ministry of Finance 38

40 Public Private Partnership And Private Sector Budget State Owned Enterprises Alternative Source of Infrastructure Financing Infrastructure Plan New Roads 2,650 km Highway 1,000 km Road Maintainance 46,770 km Bus Corridors 2 New Sea Ports 24 Sea Port Development 59 Pioneer Cargo Ships New Airports 15 Airport Infrastructure Development Airplanes 20 Rail lines 2,159 km Intra City Rail Lines 1,099 km Infrastructure Financing Needs Scenario 1 (Full Scenario) Scenario 2 (Partial Scenario) Baseline (Baseline) Roads 1, Rail System Urban Transportation Sea Transportation Ferry and Other Waster Transportation Air Transportation Electricity 1, Other Energy dan Gas Waer Resources 1, Water and Sanitation Public Housing Information and Communication Technology Total 6,541 4,781 3,561 SOEs and PPP Become Alternative Source of Funding as Government Budget Could Only Support ~20% of Our Infrastructure Needs Central & Regional Budget (Special Allocation Fund & Rural Transfer) Mainly to support basic infrastructure projects: Food Security: Irrigation, dams etc. Maritime: Seaports, shipyards etc. Connectivity: Village roads, public transportation etc. Government to inject capital to SOEs with leveraging process a multiplier effect, more infrastructure projects can be developed Key focus areas: For commercial and/or complex projects Medium term infrastructure developments focus: electricity and power plants, toll road Government support for PPP : Land Fund: Modification and simplification of land acquisition process Project Development Facility (PDF) through PT Sarana Multi Infrastructure Indonesia Infrastructure Guarantee Fund (IIGF) Viability Gap Fund (VGF) Projects Ready for Auction under PPP Scheme: Toll roads projects such as Balikpapan-Samarinda, Manado- Bitung Railway projects such as Halim-Soetta Airport Express Railway Water supply such as West Semarang water supply project Infrastructure Fund & Availability Payment (AP) 39

41 Budget Financing Breakdown in 2016 Breakdown of Budget Financing IDR tn US$ bn Redemption IDR297.7tn Government Debt (net) Government Securities (net) Issuance Redemption & Cash Management (225.49) (16.98) Debt (Gross) IDR628.6tn Debt Portfolio Management (3.00) (0.23) Domestic Loans (net) Withdrawal Non-Debt Financing IDR57.7tn Budget Financing IDR273.2tn Redemption (0.45) (0.03) Foreign Loans (net) Withdrawal Redemption (68.78) (5.18) Source: Ministry of Finance. USD/IDR: 13,200 40

42 Government Securities Financing Plan for 2016 Instruments Indicative Target (IDR bn) Preliminary Budget Indicative Target (US$ mm) Government Securities (Net) 327,224 24,648 Redemption 196,999 14,839 Cash Management 28,500 2,147 Buyback 3, Government Securities (Gross) 555,723 41,859 Composition Domestic 76% Auction 66% Non-Auction 10% International Bond 24% Government Issuance Targets Sukuk 24% International Bonds Issuance of international bonds as a complement to diversify investor base in domestic market and to avoid crowding out the domestic market Weekly Auction: Conventional securities Islamic securities Domestic Bonds ATM for Government Securities (SBN) by auction Non-Auction: 9-11 years Retail bonds Private Placement 23 x 23 x Sukuk Retail (Q1), SBR 1 (Q2), Sukuk Tabungan 2 (Q3), and ORI 3 (Q4) Based on request Front Loading Issuance For Budget Financing Pre-funding to optimize cost ahead of potential Fed rate hikes Anticipate developments in global environment Our target is to front load 68%-73% of the annual budget in 1H16 Debt Securities 76% Provides benchmark for Indonesia corporate issuances, consisting of USD, JPY and EUR denominated bonds Target maximum 30% of issuance via international bonds Government Debt Outstanding (as of Apr 2015) IDR tn US$ bn Total government debt outstanding 3, ,4 Loan Securities 2, US$/IDR: 13,204 1 SBR: Savings Bond Ritel or Retail Savings Bond 2 Sukuk Tabungan means Sukuk Savings Bond 3 ORI: Obligasi Negara Ritel or Indonesian Retail Bond Source: Ministry of Finance 41

43 Disciplined and Sophisticated Debt Portfolio Management Stable Debt to GDP Ratio Over the Years US$ bn Government Debt / GDP (%) % % 23.0% 24.9% 24.7% * May-16 Securities (LHS) Loans (LHS) Govt Debt / GDP (%) (RHS) Source: Ministry of Finance Weighted Average Debt Maturity of ~9.3 Years (As of Apr 2016)** Years 10,0 9,8 9,70 9,73 9,60 9,5 9,32 9,28 9,30 9,3 9, * Apr-16** Source: Ministry of Finance Remarkable Debt Reduction Initiative Over the Past 10 Years Change in Debt to GDP Ratio (2005 to 2015, point to point; in %) Turkey Philippines Indonesia India Germany Brazil Poland Colombia Italy Japan Malaysia South Africa United States United Kingdom Chile Australia Source: IMF World Economic Outlook Database, April 2016 Well Diversified Across Different Currencies % of Yearly Issuance 3% 3% 3% 2% 2% 2% 100% 3% 3% 3% 3% 3% 3% 17% 14% 12% 9% 8% 8% 80% 22% 24% 29% 29% 31% 30% 60% 40% 20% 0% -80,0-30,0 20,0 70,0 120,0 170,0 220,0 270,0-38,1-37,2-36,1-16,9 55% 56% 53% 57% 56% 57% Apr-16 Source: Ministry of Finance 6,0 7,5 9,9 29,0 30,1 33,1 38,8 50,7 63,1 115,2 143,8 IDR USD JPY EUR Others*** 238,1 (1) * Preliminary figures in 2015, ** Using GDP at Current Market Prices [2010 Version],*** SDR, AUD, and other 42

44 Well Balanced Maturity Profile With Strong Resilience Against External Shocks Declining Interest Rate Risks Declining Exchange Rate Risks % ,8 25,9 Variable Rate Ratio¹ 22,5 23,2 16,2 16,0 Refixing Rate² 21,0 21,1 14,8 14,0 12,7 19,2 % FX Debt to GDP Ratio 45,1 44,4 46,7 FX Debt to Total Debt Ratio 43,4 43,9 42, ,4 10,2 11,7 10,7 11,8 11, * Apr-2016** * Apr-2016** Debt Maturity Profile Upcoming Maturities (Next 5 Years) IDR tn IDR-Denominated Other Currencies % 40,0 34,6 In < 1 year In < 3 year In < 5 year 32,4 33,4 33,9 35,3 33, ,0 20,0 22,7 21,5 21,8 20,1 21,8 23, ,0 8,2 7,2 8,6 7,7 8,5 7, Source: Ministry of Finance 0, * Apr-2016** 1 Variable Rate Ratio is defined as ratio between debt instruments with variable rate divided by total debt instruments (variable + fixed rates) 2 Refixing Rate ratio is defined as ratio between debt instruments with variable rate + debt instruments with fixed rate maturing in 1 year divided by total debt instruments (variable + fixed rates) * Preliminary figures for 2015; ** Using GDP assumption in 2016 budget 43

45 Financing Policy Description (IDR tn) R-Budget Budget I. Domestic Financing 242,5 272,8 1. Domestic Banking 4,8 5,5 2. Domestic Non-Banking 237,7 267,3 II. Foreign Banking -20,0 0,4 1. Foreign Outstanding Loan (Gross) 48,6 75,1 a. Program Loan 7,5 36,8 Debt Financing Manageable Debt-to-GDP ratio Financial inclusion & market deepening Debt issuance for productive activity Selective external loan (infrastructure and energy sector) Loan as an alternative instrument for financing Active debt management and Asset Liabilities Management (ALM) b. Project-Based Loan 41,1 38,3 2. Standby Loan Agreement (SLA) 4,5-5,9 3. Foreign Debt Principal Repayment 64,2-68,8 TOTAL 222,5 273,2 IDR tn 0 (50) (100) (150) (200) (250) (0,73) (1,14) Deficit % to PDB (1,86) (2,33) (2,25) 2015 R-Budget (1,90) 2016 Budget (2,15) % 0,0 (1,0) (2,0) Non Debt Financing Sharpen PMN recipients and purposes Provide government guarantee for infrastructure project Support accessibility for education and housing for low income class (300) (3,0) 44

46 Profile of Total Central Government Debt Government Debt Outstanding Increasing Foreign Ownership of Government Securities at Longer Tenors USD bn (%) % ,16 72,84 76,5 76,39 83,66 83,52 83,87 84,27 83,87 84, ,8 32,98 32,54 38,13 38,21 38,94 38,98 38,59 38,85 38, Jun-15 Dec-15 Jan-16 Mar-16 Apr-16 May-16 Loan Government Securities Foreign Holders of Government IDR Bonds Composition May ,97 19,32 18,29 18,96 13,1 13,44 13,10 12,45 12,60 12,66 11,87 7,84 5,2 4,65 3,23 3,04 3,04 3,28 3,54 2,94 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May >1-5 >5 Foreign Ownership to Total (RHS) ,63 36,53 33,7 31,04 23,95 29,81 30,53 38,48 28,7 27,63 (%) ,58 30,49 33,76 30,83 37,85 31,25 30,48 32,89 32,44 34, ,8 32,98 32,54 38,13 38,12 38,94 38,98 38,48 38,85 38,28 0 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Foreign Holder Domestic Non Banks Domestic Banks 45

47 Ownership of IDR Tradable Central Government Securities Description Dec-12 Dec-13 Dec-14 Dec-15 Jan-16 Apr-16 (IDR tn) May-16 Banks* % % % % % % % Govt Institutions (Bank Indonesia**) % % % % % % % ` Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Jan-16 Bank Indonesia (gross) % % % Banks* 265,03 36,63% 299,66 36,73% 335,43 33,70% 375,55 31,04% 350,07 23,95% 442,76 29,81% GS use for Monetary Operation % % % Govt Institutions (Bank Indonesia**) 7,84 1,08% - 0,00% 44,44 4,47% 41,63 3,44% 148,91 10,19% 56,41 3,80% Non-Banks % % % % % % % Bank Indonesia (gross) 150,18 10,11% Mutual Funds % % % % % % % GS use for Monetary Operation 93,77 6,31% Insurance Company % % % % % % % Non-Banks 450,75 62,29% 517,53 63,21% 615,38 61,83% 792,78 65,52% 962,86 65,87% 985,99 66,39% Mutual Funds 47,22 6,53% 43,19 5,28% 42,50 4,27% 45,79 3,78% 61,60 4,21% 61,48 4,14% Foreign Holders % % % % % % % Insurance Company 93,09 12,86% 83,42 10,21% 129,55 13,02% 150,60 12,45% 171,62 11,74% 173,26 11,67% Foreign Govt's&Central Banks % % % % % % % Foreign Holders 222,86 30,80% 270,52 32,98% 323,83 32,54% 461,35 38,13% 558,52 38,21% 578,32 38,94% Pension Fund % % % % % % % Foreign Govt's&Central Banks 50,06 6,13% 78,39 7,88% 103,42 8,55% 110,32 7,55% 110,98 7,47% Pension Individual Fund 34,39 4,75% , % 6,91% 39, ,97% 2.51% 43, ,58% 2.91% 49, ,41% 2.79% 52, ,52% 3.05% % Individual Others 32,48 3,26% 30,41 2,51% 42,53 2,91% 41,42 2,79% % % % % % % % Others 53,05 7,33% 63,64 7,79% 46,68 4,69% 60,51 5,00% 78,50 5,37% 78,99 5,32% Total % % 1, % 1, % 1, % 1, % 1, % Total 723,61 100% 817,19 100% 995,25 100% 1.209,96 100% 1.461,85 100% 1.485,16 100% 1) Non Resident are consisted of Private Bank, Fund/Asset Manager, Securities Company, Insurance Company, and Pension Fund. 2) Others such as Securities Company, Corporation, and Foundation. *) Including the gov't securities used in monetary operation with Bank Indonesia. **) net, excluding gov't securities used in monetary operation with Banks. Source: Ministry of Finance 46

48 Government Securities Realization Budget 2016 Realization (a.o. May 31, 2016) (IDR mn) *(Million IDR) % Realization to Budget 2016 Government Securities Net 327,224, ,103, % Government Securities Maturing in 2016 and Buyback 228,499, ,900, % Issuance Need for ,723, ,003, % Government Debt Securities (GDS) 216,356,137 Domestic GDS 167,713,137 -Coupon GDS 118,750,000 -Conventional T-Bills 27,890,000 -Private Placement 17,154,132 -Retail Bonds 3,919,005 International Bonds 48,643,000 -USD GMTN 48,643,000 -Euro GMTN - -Samurai Bonds - -Domestic GDS - Government Islamic Debt Securities 128,647,500 Domestic Government Islamic Debt Securities 95,240,000 - IFR/PBS/T-Bills Sukuk (Islamic Fixed Rated Bond/Project Based Sukuk) 61,240,000 - Retail Sukuk 31,500,000 - Private Placement 2,500,000 Global Sukuk 33,407,500 Note: - Issuance Government Securities Conversion - Issuance Government Securities Conversion ,814 Based 360,814 on projection of deficit 2,15% - Matured Government Securities Conversion Adjusted by changes in Cash Management & Debt Switch - Matured Government Securities Conversion ,814 Source: Ministry of Finance Nett Issuance Government Securities Conversion Nett Issuance Government Securities Conversion ,814 47

49 Section 5 Monetary Factor: Monetary Policy Anchors Price Stability

50 Bank Indonesia Policy Mix: June 2015 Loosens Macroprudential Policy Increase the Loan-to-Value (LTV) ratio Reduce downpayments for automotive loans 17 November 2015 Lowering IDR Primary RR by 50bps from 8.0% to 7.5%. Effective since 1 Dec February 2016 Cut BI Rate 25 bps to 7% Cut DF & LF Rate at 5% & 7.5% resp. BI lower the rupiah denominated primary reserve requirement by 1%, from 7.5% to 6.5%, effective from 16th March April 2016 Hold BI Rate at 6.75%, and maintain DF & LF Rate at 4.75% & 7.25% respectively. Reformulate policy rate from BI Rate into the 7 day (Reverse) Repo Rate to improve the effectiveness of monetary policy transmission. The change will be effective on August 19th June 2015 Reserve Requirement Policy: RR-LDR RR-LFR Accomodate banks SMEs loan in RR calculation 14 January 2016 Cut BI Rate 25 bps to 7.25% Cut DF & LF Rate at 5.25% & 7.75% resp. BI lower its monetary operation rates even further, ranging from 25bps to 45bps (O/N to 1Y) 18 March 2016 Cut BI Rate 25 bps to 6.75% Cut DF & LF Rate at 4.75% & 7.25% resp. 16 June 2016 Cut BI Rate 25 bps to 6.5% Cut DF & LF Rate at 4.5% & 7.0% resp Relaxing the loan-to-value ratio (LTV) and financing-to-value ratio (FTV) on housing loans/financing* Relaxing partially prepaid loans/financing* Raise the floor on the Reserve Requirement - Loan to Funding Ratio (RR-LFR) from 78% to 80%, with the ceiling maintained at 92%. The change will be effective in August * The regulation is only applicable to banks with a gross NPL ratio on housing loans below 5% and total gross non-performing loans (NPL) below 5%. 49

51 Bank Indonesia Policy Mix: June 2016 The BI Board of Governors agreed on 16th June 2016 to lower the BI Rate at 6.5%, as well as the Deposit Facility and Lending Facility rates at 4.5% and 7.0%, respectively Lower the BI Rate to 6.5% Bank Indonesia s term structure of monetary operations remains as follows: Raise the floor on the Reserve Requirement - Loan to Funding Ratio (RR-LFR) from 78% to 80%, with the ceiling maintained at 92%. The change will be effective in August Relaxing the loan-tovalue ratio (LTV) and financing-to-value ratio (FTV) on housing loans/financing as well as partially prepaid loans/financing* Remain vigilant towards global developments, specifically the expected adjustment of the Fed Fund Rate (FFR), the possibility of Brexit, China s economy recovery, and the rising of international commodity prices Maintain exchange rate stability in line with the currency s fundamental value Strengthen coordination with the Government to to control inflationary pressures during Ramadan this year 7-day 2 Weeks 1 Month 3 Months 6 Months 9 Months 12 Months 5.25% 5.45% 5.70% 6.10% 6.30% 6.40% 6.50% * The regulation is only applicable to banks with a gross NPL ratio on housing loans below 5% and total gross non-performing loans (NPL) below 5%. 50

52 Enhancement of Monetary Operations Framework BI rate as reference rate BI rate BI 7-day repo rate BI RATE BI Rate reflects monetary policy stance as a tool to anchor economic agent inflation expectations BI Rate is used as a benchmark interest rate for transactions in financial markets and eventually to influence general interest rate BI Rate effectively affect banking interest rate 12 months (equivalent) OMO term structure Character 7 day CHALLENGES Challenges: Transmission of monetary policy is less effective Excess liquidity due to massive capital inflows post 2008 global financial crisis draw down overnight interbank rates around DF Rate. Meanwhile, the BI rate is currently around 9-12 months OM instrument. The shallow financial markets also inhibit the transmission of monetary policy. Non-Transactional Not optimally reflected in money market interest rates Transmission Transactional (Central Bank) Stronger relationship to the money market interest rates ENHANCEMENT Enhancement of monetary operations framework Bank Indonesia will enhance the monetary operations framework that is supported by the deepening of the financial markets in order to strengthen the transmission of monetary policy. Cost of being illiquid is too high, does not support financial deepening Financial Deepening Cost of being illiquid is lower, support financial deepening 51

53 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 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 Nov Jan Mar May Stable Monetary Environment Despite Challenges Pre-emptive and Bold Monetary Policy Managed Core Inflation Over The Past Few Months % 8,00 7,75 19 CPI (%, yoy) Core (%, yoy) Volatile Food (%, yoy) Administered (%, yoy) 7,50 7,00 6,50 6,50 6,75 6,50 7,25 7,00 6,50 7,50 7,25 7,00 6,75 6, ,00 5,50 6,00 5,75 6, , Supported by Substantial FX Reserves to Mitigate External Challenges US$bn FX Reserves as of May 2016: US$ Bn (Equiv. to 7.6 months of imports + servicing of government debt) FX Reserves (LHS) Month of Import & Debt Service (RHS) Month Rupiah Exchange Rate Remains Comparable to Peers YTD vs BRL MYR EUR THB IDR PHP TRY ZAR KRW INR -0,92-1,15-1,42-1,64 0,95 0,92 0,27 2,17 *data as of 31 May ,00-2,00 0,00 2,00 4,00 6,00 8,00 10,00 4,01 9,67 % Source: Bank Indonesia 52

54 Banking Sector Continues to Show Resilience...strong supervision, robust capitalization, stable liquidity and sustainable credit growth Robust Banking Sector with High CAR & Low NPL Ratios Credit Growth Supported by Macroprudential Policy % % YoY % Capital Adequacy Ratio (CAR) (RHS) Gross Non-Performing Loan (NPL) 5 25 Total Growth Working Capital loans Investment Loans Consumption Loans % % 30% % % % 12.2% 10% 10.4% % 5% 5.3% 0 0 0% LDR Remains at Comfortable Level Loan-to-Deposit Ratio (%) Source: Bank Indonesia ,5% Act of Financial System Crisis Prevention and Resolution (PPKSK) Strengthening the role, function, and coordination among the 4 financial authorities in the crisis prevention and resolution. Financial crisis prevention by strengthening the regulatory and supervisory functions of banking especially against SIBs. Strengthening the resolution of systemic bank issues by prioritizing bail-in principle. BI provides Short-Term Liquidity Loans (PLJP) to banks which are solvent and has sufficient collateral. Implementation of the action plan (recovery plan) by OJK and early intervention by LPS in the event of a systemic bank experiencing solvency issues. In financial distress, the president has full authority to take decisions for crisis handling. Immunity and Legal Protection for KSSK members (MoF, BI, OJK, LPS). 53

55 A Comprehensive Financial Deepening Program...strategy to tackle challenges in deepening Indonesia s financial markets Financial Market Deepening Program First Priority: Continuous Basis Monitoring, match making, and solution: Repo Hedging Market Development Money Market Bank Indonesia Regulation (PBI) on Money Market Encourage well-functioning money market (deep and efficient, risk mitigation, and market integrity), Bank Indonesia Regulation (PBI) on Negotiable Certificate of Deposit (NCD) Enriching money market instruments, encourage banks to raise long term funding, and acts as an alternative investment for investors Bank Indonesia Regulation (PBI) on Commercial Paper Alternative sources of financing for non-bank corporations, as well as an investment outlet for investors FX Market Swap Link Deposit a combination of foreign currency deposits with FX Swap against the rupiah. Dual Currency Deposit a combination of assets (deposits) and derivatives (FX Options). Supporting Regulations Coordination Corporate Bonds Government Bonds Other instruments Strengthening JIBOR Extension of window time Increase in IDR nominal Lengthening tenor of up to 3 months Market Code of Conduct More comprehensive code of conduct The use of technology and public security Inter-agency Cooperation Signing of MoU on April 8 th, 2016, between MoF, BI, and OJK on Coordination in the Context of Financial Markets Development and Deepening to Support National Development Financing Certification of Dealer Obligation on certification for dealers Dealers training for certification The Signing of this MoU is driven by the need for: Sufficient development financing, Financial markets deepening, and Good coordination among related institutions Source: Bank Indonesia 54

56 Stronger Fundamentals Facing the Headwinds Inflation Rate IDR Depreciation BI Rate Inflation controlled under the revised Budget target Depreciation rate lower than 1998 & 2009 BI Rate is lower than , , , , ,0 9,5 7,5 6.5 May Sep ,8 (yoy) May Sep ,5 (ytd) Jun Okt Non-Performing Loan (NPL) Government Debt/GDP Foreign Reserves Continue to decline and allocated to Significantly higher than 1998 & 2008, ample to cover NPL level is below the maximum threshold of 5% productive sectors 7.3 months of import and external debt repayment , , , % % % ,2 Apr Agu ,8 Q May Sep ,6 External Debt (Public & Private) to FX Reserve Ratio Significantly lower than 1998 crisis More Liquid Market Overnight interbank money market rate is relatively lower 62 External Debt/GDP Slightly higher than 2008, but significantly lower than x x x Q , , Jul-15 May % % % Q

57 Outlook of Domestic Economy Improves...domestic economic growth is predicted to be higher in Economic Outlook Economic growth expected to increase, supported by fiscal stimulus linked specifically to accelerated infrastructure project development. Private investment is expected to increase as a result of government policy packages and measurable monetary easing. Inflation projected at the midpoint of the 4±1% inflation target, with the current account deficit is projected below 3% of GDP Credit is projected to grow 12-14% on the back of improving purchasing power and fiscal stimulus. Economic Growth Inflation CAD (% GDP) Credit Growth % 3.35% 2.06% 10.45% % 4.0%±1% < 3.0% 11% - 13% 56

58 Financial Stability Indicators Remain Robust Amidst the prolonged uncertainties in the global economy, the stability of the domestic banking sector remains intact. Capital adequacy ratio (CAR) of the banking sector increased compared to the pre-global crisis period. The high level of CAR provides room for the banking sector to further extend its loan. Credit risks in the banking sector are quite low, indicated by a low level of nonperforming loan (far below the 5% threshold). Net interest margin of the banking sector is relatively stable compared to previous few years. Capital Adequacy Ratio Nonperforming Loan - Gross Net Interest Margin 57

59 Financial Stability Indicators Remain Robust (Cont d) In the nonbank financial industry, the stability is also maintained. The fluctuating market risks have been effectively mitigated by nonbank financial institutions. Risk-based capital (RBC) of the insurance industry is maintained at a high level; sufficient enough to absorb the fluctuating market risks. Risk-Based Capital Credit risks in multi-finance companies are quite low, indicated by a low level of nonperforming financing (far below the 5% threshold). Nonperforming Financing The investment value of insurers and pension funds still demonstrates an increasing trend. Investment Value of Insurers & Pension Funds 58

60 Indonesian Financial Sector Master Plan OJK has also clearly set out three directions to develop the domestic financial sector in the medium-term, as stipulated in the Indonesian Financial Services Sector Master Plan Contributive In ongoing efforts to achieve a robust and sustainable economic growth, the domestic financial sector is directed to play a more vital role in terms of catalyzing national economic activities. Stable Inclusive To support the sustainability of economic development, financial stability plays an important role. To that end, financial sector must maintain its resilience to confront possible shocks that could emerge from the domestic or external environments. Financial sector has the opportunity to play an increasingly significant role in overcoming inequality that may arise. Initiatives undertaken by OJK include promoting financial inclusion and catalyzing local economy. 59

61 Indonesian Financial Sector Master Plan (Cont d) From each direction in the Master Plan, OJK has formulated initiatives and programs in order to enhance the role of the domestic financial sector in accelerating the domestic economic growth, strengthening financial stability, and enhancing financial inclusion. Contributive Stable Inclusive Funding of infrastructure & priority economic sectors Capacity building at financial institutions Financial sector product & service development Improving financial literacy Strengthening the role of Islamic financial sector Strengthening financial sector supervision, including through integrated & risk-based supervision Strengthening crisis management protocol and interagency coordination Strengthening financial sector regulations in accordance with international standards Enhancing the role of financial sector in developing local economic potentials Expanding financing access to micro, small, and medium enterprises Expanding financial inclusion to reach all social strata Enhancing consumer protection 60

62 Section 6 Wide Range of Policy Reforms to Boost Economic Growth

63 Short Run Policy Package I, II, and III to navigate through uncertain global environment and to stimulate domestic economic growth, Indonesia has launched a series of economic policy package Stimulus Package I: 9 Sep 2015 Stimulus Package II: 29 Sep 2015 Stimulus Package III: 7 Oct 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 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 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 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 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) 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 62

64 Short Run Policy Package IV, V, and VI to navigate through uncertain global environment and to stimulate domestic economic growth, Indonesia has launched a series of economic policy package 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 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% 00 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 63

65 Short Run Policy Package VII, VIII, and IX to navigate through uncertain global environment and to stimulate domestic economic growth, Indonesia has launched a series of economic policy package Stimulus Package VII: 4 Dec 2015 Stimulus Package VIII: 21 Dec 2015 Stimulus Package IX: 27 Jan 2016 Acceleration of Land Certification Process Increasing numbers of certified surveyor, especially from non-civil servant. Speed up the time needed to land registration announcement, from days to 14 days Shifting land registration process to electronic system Giving communal rights for indigeneous peoples and people who lives in plantation/forest area Tax Incentive for Labor Intensive Industry Releasing Government Regulation (PP) which facilitate income tax (PPh) for the labor works in labor intensive industry for 2 years Giving tax facilities for various footwear industries throughout provinces in Indonesia One Map Policy All government office will use only thematic map in 1: in order to accelerate the settlement of land using problem and to solve the country s borderline problem Refinery Construction 0 New refinery will be constructed in Tuban and Bontang, to support the existing refinery in Cilacap, Balikpapan, Balongan and Dumai. Incentive for Aircraft Maintenance Companies 0% of import duty will be applied for 21 tariff post regarding aircraft sparepart and maintenance components Accelerated Construction of Electricity Infrastructure The Government will support State Electricity Company (PLN) in its various actions by guaranteeing the supply of primary energy; Giving facilities for development of renewable energy sources; Streamlining of licensing through the onestop-shop; Resolution of conflicting spatial planning, provision of land and resolution of legal issues Stabilisation of Meat Prices Expanding the cattle population; Development of logistics and distribution; Improvements to the cattle and beef regulated trading schemes; Institutional strengthening involving Smallholder Livestock Centres (SPRs). Deregulation on Logistics Sector Development of commercial postal services Electronic single billing for port services SoE s synergy in development od export aggregators for SME s products, geographical indications and the creative economy Electronic port integrated services system 64

66 Short Run Policy Package X, XI, and XII to navigate through uncertain global environment and to stimulate domestic economic growth, Indonesia has launched a series of economic policy package Stimulus Package X: 11 Feb 2016 Stimulus Package XI: 29 Mar 2016 Stimulus Package XII: 28 April 2016 Easing of Investment Restrictions The government has added 19 business categories to those reserved for micro, small and medium enterprises and cooperative (MSMECs) in a revision to Presidential Decree Number 39 of 2014 concerning the List of Business Closed and Conditionally Open to Investment, more commonly known as the Negative Investment List (NIL). 35 business categories, including crumb rubber production; cold storage; tourism (restaurants, bars, cafés, recreational, art and entertainment businesses, sports facilities); the film-making industry; operation of marketplace electronic transactions above Rp 100 billion; establishment of telecommunication devices testing institutions; toll road concessions; non-hazardous waste management and disposal; and the pharmaceutical raw material industry have been taken off the NIL. The revisions to the NIL also opens 20 business categories to foreigners permitted to hold shares up to particular levels, compared to the previously required 100% domestic investment, including health support services (max. 67% foreign capital), land passenger transportation (max. 49%), the film-making industry including film distribution (up to 100%) and high/extra high voltage power utility installations. Export-Oriented People s Business Credit (KURBE) Provide complete and integrated export finance facilities for the working capital and investment needs of micro, small and medium enterprises. Real Estate Investment Trust (REITs) Issue REITs at relatively low cost in order to bolster efficiency in provision of long-term investment funds in support of accelerated construction of infrastructure and housing under the National Medium-Term Plan for Risk Management for Expediting Flows of Goods in Ports (Indonesia Single Risk Management/ISRM) Expedite services for import/export activities that can offer business certainty, efficiency in times and costs of licensing, and savings in dwelling time through more effective supervision through integration of risk management among the relevant line ministries/government agencies. Further Development of the Pharmaceutical and Medical Equipment Industries Guarantee the availability of pharmaceutical preparations (i.e. drugs, drug raw materials, traditional medicines and cosmetics) and medical equipment in an effort to improve health services under the National Health Insurance (JKN) and promote affordable prices for drugs in Indonesia. Simplification of Licensing, Procedures, Duration, and Cost of Starting Business in Indonesia Starting Business Cutting procedures and minimum requirements in the establishment of Limited Company (Ltd.) Dealing with Construction Permit Simplification of 17 procedures / 210 days to 14 procedures / 52 days Registering Property Simplification of 5 procedures / 25 days to 3 procedures / 7 days Paying Taxes Introduce online taxation system to simplify procedure from 54- time to 10-time payments. Getting Credit Access to credit will be conducted through PT PEFINDO and PT Indonesia Jaya Credit Bureau. Enforcing Contract Contract enforcement by regulating simple lawsuit settlement Getting Electricity Simplification of electricity connection process from 5 procedures / 80 days to 4 procedures / 25 days Trading Across Borders Cut export time from 4.5 days to 3 days and export fees from USD424 to USD83. Resolving Insolvency Compensation to curator will be calculated based on the debt value, not based on debtor s asset value. Protecting Minority Investors Minority investors will be protected by the existing regulations. 65

67 Indonesian Policy Packages update on regulation issuance (implementation) Issued Regulation in 1 st Package Issued Regulation in 2 nd Package Logistic and Bounded Zone facilities President Decree No. 85/2015 Deposit interest for Export Proceed President Decree No. 123/2015 MoF Decree No. 26/PMK.010/2016 Facilities on VAT in Port Service President Decree No.75/2015 VAT Exemption for Transportation President Decree No. 39/2015 MoF Decree No. 192/2015; No. 193/2015 VAT incentive President Decree No. 69/2015; No. 81/2015; No. PP 106/2015 MoF Decree No. 267/2015, No. 268/2015 Fiscal Incentive in Logistic Area MoF Decree 272/PMK.010/2015 (Cikarang &Merak) Incentive for Industrialized Zone President Decree No. 142/2015 Luxury tax incentive Import duty exemption for Industry MoF Decree No. 206/PMK.010/2015 MoF Decree No. 188/PMK.010/2015 Issued Regulation in 4 th Package Issued Regulation in 6 th Facilities for Investment in Special Economic Zone 0% duty for airline related goods and 8 th Package President Decree No. 96/2015 MoF Decree No. 35/2015 Regulation in Pipeline (Mostly 70% in Issuing) Tax incentive for Asset Revaluation MoF Decree No. 191/PMK.010/2015 MoF Decree No. 233/PMK.003/2015 Tax and Custom Exemption Facility in Industrial Area Import Duty Exemption for Export Oriented Product Elimination of Double taxation in REITS MoF Decree No. 200/PMK.003/2015 Physical Check Easing by DG Custom and Excise Shorten Tax Allowance and Tax Holiday Process Income Tax Relief for Labor Intensive Industry Expanding Industry Eligibility for Tax Allowance Tax Cut for REITS Issuance 66

68 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 (~US$ 2,570) from IDR 24.3 million (~US$ 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 (~US$ 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 (~US$ 714 thousand) for apartments and IDR 20 billion (~US$ 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 67

69 Bank Indonesia Backs the Government s September Policy Package (9 th Sept. 2015) In line with the government s effort to promote economic growth, Bank Indonesia introduced the September Policy Package to support macroeconomic and financial system stability Strengthening inflation control and stimulating the real sector from the supply side 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. Strengthening Regional Economic and Financial cooperation between Bank Indonesia and the Government Maintaining rupiah exchange rate stabilization Preserving foreign exchange market confidence by controlling currency volatility Maintaining market confidence in tradable government securities (SBN) through purchases on the secondary market, while monitoring its impact on SBN availability in terms of inflow and money market liquidity. Strengthening liquidity management Rupiah, through Open Market Operations (OMO), in order to divert the daily liquidity to longer tenors 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 Reissue Bank Indonesia Certificates (SBI) tenor of 9 months and 12 months with a fixed rate tender auction mechanism as well as pricing adjustment Strengthening foreign exchange supply and demand management 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) Expediting the bank foreign debt approval process while adhering to prudential principles Deepening the money market 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. 68

70 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 inthe 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. 69

71 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 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 70

72 Efforts to Accelerate Infrastructure Provision Improvement on PPP Regulation By taking into account the growth of PPP project potential, the Government of Indonesia has revised the Presidential Regulation No. 67 of 2005 on PPP and its amendments by issuing the new Presidential Regulation No. 38 of 2015 on PPP on 20 March This new Presidential Regulation addresses the constraints which contributes to delays in PPP implementation, such as: PPP for the social infrastructure; a low quality of pre-feasibility studies; gaps of quality in assets that were partly constructed by the Government; unattractive investment return scheme; and weak Ministries/Institutions commitment for PPP projects. The Ministry of National Development Planning has issued the Ministerial Regulation No. 4 of 2015 on the implementation Procedures for a Public-Private Partnership in Infrastructure Provision. This Ministerial Regulation is a derivative regulation to supplement the Presidential Regulation No. 38 of 2015 on PPP. Source: Committee for Acceleration of Priority Infrastructure Delivery (KPPIP) 71

73 Efforts to Accelerate Infrastructure Provision (continued) Regulation improvement to accelerate land procurement process The Government of Indonesia issued Law No. 2 of 2012 on Land Acquisition for Public Interest, with a purpose to provide certainty about the land acquisition duration for the Government Contracting Agencies and the Investors. The Law sets an estimated 583 days maximum time to complete the land acquisition process. For its implementation, the Law No. 2 of 2012 was supported by the Presidential Regulation No. 71 of 2012 on Land Acquisition Implementation for Developing Public Facilities, which has been revised into the Presidential Regulation No. 30 of The Amendment to the Regulation allows a Business Entity to allocate funding for a land acquisition which can be reimbursed by the Government following the completion of land acquisition process. With this Regulation, the land acquisition process is expected not to be delayed by the unallocated budget or the delay on the budget disbursement. Land Procurement Process as Stipulated in Law No. 2 of 2012 Source: Committee for Acceleration of Priority Infrastructure Delivery (KPPIP) 72

74 Indonesia Infrastructure Projects and Financing Schemes Financing Breakdown ( ) Establishment of PPP Unit Total Financing Needs: ~ US$345.1 Bn Govt & Local Budget (41.3%) Financing Gap ~ US$142.4 Bn SOE (22.2%) PPP (36.5%) ~ US$76.7 Bn ~ US$126.0 Bn Alternative Financing Scheme Broad Objective Core Mandates Additional Mandates Champion project preparation and acceleration of the PPP agenda in Indonesia Improve quality of project selection under KKPPI OBC criteria Support project preparation through PDF support and use a high quality Transaction Advisor Act on behalf the Minister of Finance in providing government support approvals for projects Coordinate all public finance instruments Provide input for PPP Policy Development and Regulations Implement capacity building program to GCA One stop shop for PPP promotion & Information Sea Port New Sea Ports 24 Budget Public Private Partnership State Owned Enterprise & Private Sector Roads Railways Airport Sea port developments 59 New Roads 2,650 km Highway 1,000 km Road maintenance 46,770 km Bus Corridors 2 Railway Lines 2,159 km Intra City Rail Lines 1,099 km New Airports 15 Airplanes for new routes 20 Central & Regional Budget (Special Allocation Fund & Rural Transfer) Mainly 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 private sector companies Projects Ready for Auction under 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 such as West Semarang water supply project Government to support the PPP via initiatives: Land Fund: Modification and simplification of land acquisition process Project Development Facility (PDF) through PT Sarana Multi Infrastructure Indonesia Infrastructure Guarantee Fund (IIGF): A mutual government guarantee scheme for infrastructure risks Viability Gap Fund (VGF) for PPP projects with near-term financial constraints Infrastructure Fund: To offer long term financing for infrastructure projects Availability Payment (AP): To allow availability of infrastructure services provided by PPP companies Government to inject capital into SOEs intention is that through a multiplier effect, more infrastructure projects can be developed Key focus areas: Infrastructure and maritime development Transportation and connectivity Food security Medium term infrastructure developments in focus: Water Supply Airports Seaports Electricity and power plants Housing Mining 73

75 Government Guarantee for Basic Infrastructure Development Budget Allocation for Claims on Government Guarantee (1) Guarantee Program based on Guarantee Classification (US$ mm) 79,5 Program Guaranteed Party No. of Letters Currency Value (bn) Outstanding as of 2015 (bn) 75,8 3,8 68,5 67,3 1,1 53,4 48,0 4,5 0,8 2,7 47,2 46,3 73,0 3,7 69,2 0,2 63,9 3,8 60,0 0,1 69,6 24,5 45,0 0.1 A Credit Guarantee 47 Acceleration of coalfired power plant project (10,000 MW) stage 1 Acceleration of drinking water supply project PLN B Investment Guarantee 10 Acceleration of coalfired power plant project (10,000 MW) stage 2 US$ IDR 36, , US$ IDR 35, ,975.7 PDAM 11 IDR US$ 8.2 IDR IPP 9 US$ Revised Budget (IDR bn equivalent) 1, Electricity Development Clean Water Program PPP & Electricity Dev. Project Government partnership with Enterprise Infrastructure Guarantee Agency Total 57 Private 1 US$ 3.2 US$ IDR 36, ,138.9 In 2016, Government will add credit guarantee program (i) infrastructure financing through direct loans from international financial institutions (ii) acceleration of toll road construction in Sumatera Source: Ministry of Finance 1 USDIDR exchange rate of 13,200 74

76 30 Priority Projects Within the Pipeline 1. Jakarta Sewerage System (Rp70 T, Zona 1 Rp7 T) 2. Existing Refinery Upgrading Project (Cilacap, Balongan, Plaju, Dumai, dan Balikpapan) (~Rp210T) 3. New Port in Northern West Java (TBA) 4. Inland Waterways/ Cikarang Bekasi Laut (CBL) (Rp35T) 1. High Voltage Direct Voltage Transmission (Rp20 T) MW Indramayu Power Plant (Rp20 T) 3. Central-West Java 500 kv Transmission Line (Rp7,64T) 4. National Capital Integrated Coastal Development (NCICD) Tahap A (Rp 20 T) 5. Karangkates Power Plant (2x50MW) 6. Kesamben Power Plant (37MW) 7. Lodoyo Power Plant (10MW) 8. Bitung Port Development (Rp34 T) 9. Kalimantan Timur Railways (Rp72 T) 1. Trans-Sumatera Toll Road (>Rp 31T) 2. Makasar-Parepare Railway (Rp 6,4 T) 3. SHIA Express Railway (Rp2,7 T) 4. MRT Jakarta (Rp 25 T) 5. LRT Jabodetabek (Rp 11,9 T) 6. LRT Palembang (Rp11,5 T) 7. Kuala Tanjung Int l Hub Port (Rp 30 T) 8. Manado-Bitung Toll Road (Rp 4,3 T) 9. Balikpapan-Samarinda Toll Road (Rp13,1 T) 10.Batang MW Power Plant (Rp40 T) OBC Development Ready for PPP Tender Permit and Land Acquisition Financial Close Construction 1. SPAM Semarang Barat (Rp845 M) 2. Bontang Refinery (Rp140 T) 3. Tuban Refinery (Rp165 T) 4. Sumatera 500 kv Transmission (Rp6,71 T) 5. Panimbang-Serang Toll Road (Rp12 T) 6. Sumsel 9, 10 Power Plant (Rp 44 T) 1. Sumsel 8 Power Plant (Rp 25 T) 2. Palapa Ring Broadband (Rp 6 T) Preparation Stage Implementation Stage 75

77 Significant Progress on Key Infrastructure Projects Roads Dams Housing Trans-Sumatra Highway Cikampek-Palimanan Highway (Operational) Jatigede Dam (Operational) Raja Ampat Housing Project, Papua Transportation Jakarta MRT Project 1 Terminal 3 Ultimate Soekarno-Hatta1 New Tanjung Priok Port Project 1 Komodo Airport, NTT Matahora Airport, Southeast Sulawesi Tual Airport, Maluku Juwata Airport, Tarakan 1 Not funded from National Budget 76

78 Progress of Infrastructure Initiatives under SOEs Description Length (km)* Investment (Rp trillions)* Solo-Ngawi-Kertosono 177,1 10 Waskita Karya, Jasa Marga In Progress Concession By** Status** Remarks** Solo-Ngawi: Construction 80% completed (by end-2015) Ngawi-Kertosono: Construction 40% completed (will finish by end of 2017) Completion Target** Soreang-Pasir Koja 10,57 1,2 Wijaya Karya, PT. Jasa Sarana In Progress Land Clearing: 96% completed June 2016 Tb. Tinggi-Kuala Tj-Sei Mangkei 57 5,5 n/a In Progress n/a n/a Manado-Bitung 39 3,2 n/a Land Clearing: 64% completed (Section I) In Progress Construction: 4% 2018 Balikpapan-Samarinda 99 8,5 PT. Jaya Karya, PT. Samacita, Waskita Karya, In Progress Land Clearing: 80% completed 2019 Hutama Karya, Adhi Karya Cinere-Serpong 10,14 1,8 Jasa Marga, Waskita In Progress Land Clearing: 1% completed 2019 Medan-Binjai 16,72 1,5 Jasa Marga, Hutama Land Clearing: 70% (11,7 km) completed In Progress Karya, Waskita Karya Construction: 8% completed 2016 Bakauheni-Terbanggi Besar ,2 Hutama Karya, PP, Land Clearing: 18% (25,2 km) completed Waskita Karya, Wijaya In Progress Construction: 5% completed Karya, Adhi Karya 2018 Palembang-Indralaya 22 3,3 Hutama Karya Land Clearing: 49,1% (10,8 km) completed In Progress Construction: 10,4% completed 2018 Pekanbaru-Dumai ,9 Hutama Karya Land Clearing: 19,5% completed In Progress Construction starts in Bekasi-Cawang-Kampung Groundbreaking: October ,04 7,2 Waskita Karya In Progress Melayu Land Clearing: Section 1-70% completed, Section 2-30% completed 2017 Pejagan-Pemalang 57,5 5,5 Waskita Karya Land Clearing: 99% completed In Progress Construction: Section I & II 92% completed 2017 Pemalang-Batang 39,2 4,1 Jasa Marga, Waskita Karya In Progress Land Clearing: 4.25% completed 2018 Batang-Semarang 75 7,2 Waskita Karya In Progress Land Clearing: 3% completed 2018 Ciawi-Sukabumi 7,78 7,7 PT. MNC Tol Investama Groundbreaking: Februari 2015 In Progress Land Clearing: 70% completed 2016 Krian-Legundi-Bunder 30 4,6 Waskita Karya In Progress Land Clearing: uncompleted, followed by concession tender (June 2016) 2018 Medan-Kualanamu-Tb. Tinggi 61,7 4,1 Jasa Marga, Waskita, Land Clearing: 85.98% completed In Progress Hutama Karya Construction: 6% completed 2017 Total 994,75 101,5 * Source: Ministry of State Owned Enterprises * Source: Ministry of State Owned Enterprises ** Source: Anecdotal information from various media e.g. Kompas, Media Indonesia, Liputan6, Republika, Tribunnews, Merdeka, etc ** Source: anecdotal information from various media e.g. Kompas, Media Indonesia, Liputan6, Republika, Tribunnews, Merdeka, etc

79 Energy Sector: 35,000 MW Program has been Launched Debottlenecking through regulation: Average economic growth of 6.7% requires 7,000 MW / year or 35,000 MW / 5 years (Kepmen ESDM No. 0074/2015 on RUPTL ) 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. Cabinet Meeting Progress of 35,000 MW Launching MW by the President in Goa Beach Sanden DIY 17 Dec 14 Jan 15 Jan Mar 15 4 May 15 Cabinet Meeting There s electricity crisis in Indonesia, requires construction of large capacity plant " 35,000 MW Program Distribution The progress so far: Apr 16 Sumatera PLN: 1,100 MW Private: 8,990 MW Transmission: 18,729 ckt.km Substation: 35,521 MVA Kalimantan PLN: 900 MW Private: 1,735 MW Transmission: 5,604 ckt.km Substation: 3,500 MVA Jawa & Bali PLN: 5,000 MW Private: 13,697 MW Transmission: 9,185 ckt.km Substation: 66,265 MVA Sulawesi PLN: 2,000 MW Private: 1,470 MW Transmission: 5,275 ckt.km Substation: 4,390 MVA Nusa Tenggara PLN: 670 MW Private: 0 MW Transmission: 2,347 ckt.km Substation: 1,410 MVA Papua PLN : 220 MW Private: 0 MW Transmission: 364 ckt.km Substation: 460 MVA Maluku PLN: 260 MW Private: 12 MW Transmission: 653 ckt.km Substation: 620 MVA Source: PLN No Phase MW % 1 Planning ,80 34,4 2 Procurement 8.377,70 23,6 3 Power-purchase Agreement ,00 30,8 4 Construction 3.862,45 10,9 5 Commercial Operation Date 123,00 0,3 Total ,95 100,0 Source: Ministry of Energy and Mineral Resources 78