Indonesia Economic Outlook and Policy Challenges

Indonesia Economic Outlook and Policy Challenges Daniel A. Citrin Asia and Pacific Department, IMF April 3, 28

Global Financial Stability Map: risks have risen; conditions have deteriorated October 27 GFSR April 28 GFSR Macroeconomic risks Closer to center signifies less risk or tighter conditions Emerging market risks Risks Credit risks Market and liquidity risks Monetary and financial Conditions Risk appetite 1

Subprime crisis triggered severe dislocations, but emerging markets largely unscathed so far Emerging markets Corporate credit Prime RMBS Commercial MBS Money markets Financial institutions Mortgage-related ABS Heat Map: Developments in Systemic Asset Classes Jan-7 Apr-7 Jul-7 Oct-7 Jan-8 2

European banks are likely to shoulder a sizable share of non-prime losses Expected Nonprime-Related Bank Losses (In billions of U.S. dollars as of March 28) 16 14 12 1 8 6 4 2 Conduits / SIVs ABS CDOs ABS Nonprime loans Europe United States A sia Note: Losses aggregated over a two year period. ABS = asset-backed securities; CDOs = collateralized debt obligations; SIVs = structured investment vehicles. 6

Credit deterioration, a weaker U.S., and financial deleveraging have boosted potential losses. Estimates of Potential Write-downs to Holders of U.S.-Issued Securitized and Unsecuritized Debt Leveraged loans Corporate credit 4% Consumer credit 8% 2% 56% 25% 4% Non-prime residential real estate Prime residential real estate Commercial real estate $945 billion 3

Emerging Asian stock markets were hit relatively hard in late 27 and early 28, but have rebounded slightly recently Equity Market Performance (Januay 1, 27=1) 17 16 15 14 13 12 11 1 9 8 Emerging Asia EMEA Latin America S&P 5 1/1/27 1/22/27 2/12/27 3/5/27 3/26/27 4/16/27 5/7/27 5/28/27 6/18/27 7/9/27 7/3/27 8/2/27 9/1/27 1/1/27 1/22/27 11/12/27 12/3/27 12/24/27 1/14/28 2/4/28 2/25/28 3/17/28 4/7/28 4/28/28 Source: Bloomberg LP. PDF Created with deskpdf PDF Writer - Trial :: http://www.docudesk.com

Asian bank CDS spreads widened early in 28 but have come down Credit Risk: Bank Credit Default Swap Spreads 1 3 25 2 India Japan Korea Singapore Australia 15 1 5 2-Jul-7 17-Jul-7 1-Aug-7 16-Aug-7 31-Aug-7 15-Sep-7 3-Sep-7 15-Oct-7 3-Oct-7 14-Nov-7 29-Nov-7 14-Dec-7 29-Dec-7 13-Jan-8 28-Jan-8 12-Feb-8 27-Feb-8 13-Mar-8 28-Mar-8 12-Apr-8 Sources: Bloomberg; and IMF staff calculations. 1 Country spreads are weighted averages based on relative assets PDF Created with deskpdf PDF Writer - Trial :: http://www.docudesk.com

16 14 12 1 8 6 4 2 Possible Financial Contagion Channel to Emerging Market Corporate Bond Issuance Private Sector Gross Ext. Issuance (in billions of U.S. dollars) Emerging Asia Middle East West ern Hemisphere Africa Emerging Europe 5-Q1 6-Q1 7-Q1 8-Q1 Sources: IMF, Bonds Equities Loans database and Bloomberg, L.P. Sovereign and Corporate Spreads (in basis points) 8 Corporate Sovereign 5 6 7 8 7 6 5 4 3 2 1 3/18

As a result of the financial turmoil, the outlook has weakened Spring 8 WEO 9% Confidence interval 7% Confidence interval 5% Confidence interval Fall 7 WEO 1. 24 25 26 27 28 29 6. 5.5 5. 4.5 4. 3.5 3. 2.5 2. 1.5 9

GDP Growth and Inflation IMF WEO global baseline Real GDP Growth CPI Inflation (Y/Y percent change) (Y/Y percent change) Proj. Proj. 27 28 29 27 28 29 World 4.9 3.7 3.8 4. 4.7 3.7 Advanced economies 2.7 1.3 1.3 2.1 2.6 2. United States 2.2.5.6 2.9 3. 2. Euro area 2.6 1.3 1.1 2.1 2.7 1.9 Japan 2.1 1.4 1.5..6 1.3 Emerging and developing economies Sources: IMF, WEO database; and staff estimates. 7.9 6.7 6.6 6.3 7.4 5.6

Turning to Asia, 27 was a good year, but growth should decline in 28 Asia: Real GDP Growth (Year-on-year percent change) 26 27 27 28 28 29 REOOct '7 Latest Proj. Industrial Asia 2.4 2.3 2.3 2. 1.7 1.7 Japan 2.4 2.1 2. 1.7 1.4 1.5 Australia 2.6 4.1 4.4 3.8 3.2 3.1 New Zealand 1.5 3.1 2.8 2.3 2. 2.1 Emerging Asia 9. 9.2 9. 8.2 7.6 7.9 NIEs 5.6 5.6 5. 4.5 4. 4.4 Hong Kong SAR 7. 6.3 5.7 4.7 4.3 4.8 Korea 5.1 5. 4.8 4.6 4.2 4.4 Singapore 8.2 7.7 7.5 5.8 4. 4.5 Taiwan POC 4.9 5.7 4.1 3.8 3.4 4.1 China 11.1 11.4 11.5 1. 9.3 9.5 India 9.8 9.2 8.9 8.4 7.9 8. ASEAN-5 5.7 6.3 5.9 5.8 5.8 6. Indonesia 5.5 6.3 6.2 6.1 6.1 6.3 Malaysia 5.9 6.3 5.8 5.6 5. 5.2 Philippines 5.4 7.3 6.3 5.8 5.8 5.8 Thailand 5.1 4.8 4. 4.5 5.3 5.6 Vietnam 8.2 8.5 8.3 8.2 7.3 7.3 Emerging Asia excl. China 7.2 7.2 6.8 6.4 6.1 6.3 Emerging Asia excl. China & India 5.6 5.9 5.4 5.1 4.9 5.2 Asia 7.2 7.4 7.3 6.6 6.2 6.4 Sources: CEIC Data Company Ltd; and IMF, WEOdatabase.

3 2 1-1 -2 Jan-6 Mar-6 May-6 Outside of ASEAN-5, consumption and investment indicators have eased Selected Asia: Industrial Production (3-month percent change of 3-mma, SAAR) Jul-6 Sep-6 Nov-6 Jan-7 NIEs excl. HKG Japan Mar-7 Sources: CEIC Data Company Ltd; and IMF staff calculations. May-7 Jul-7 ASEAN-5 India Sep-7 Nov-7 Jan-8 Emerging Asia: Retail Sales Volume (3-month percent change of 3-mma, SAAR) 4 3 2 1-1 -2 Jan-6 Mar-6 May-6 Jul-6 NIEs ASEAN-5 excl. VNM 1/ China Sep-6 Nov-6 Sources: CEIC Data Company Ltd; and IMF staff calculations. 1 Proxies used for Malaysia (manufacturing sales), Philippines (car sales), and Thailand (composite consumption). Jan-7 Mar-7 May-7 Jul-7 Sep-7 Nov-7 Jan-8

But trade growth remains buoyant PDF Created with deskpdf PDF Writer - Trial :: http://www.docudesk.com Japan, China and India: Exports of Non-oil Goods (3-month percent change of 3-mma, SAAR) 6 5 4 3 2 1-1 -2 Jan-6 Japan China India Mar-6 May-6 Jul-6 Sep-6 Nov-6 Jan-7 Mar-7 May-7 Sources: CEIC Data Company Ltd; and IMF staff calculations. Jul-7 Japan, China and India: Imports of Non-oil Goods (3-month percent change of 3-mma, SAAR) 5 Japan 4 China India (right scale) 3 2 1-1 Jan-6 Mar-6 May-6 Jul-6 Sep-6 Nov-6 Jan-7 Mar-7 May-7 Sources: CEIC Data Company Ltd; and IMF staff calculations. Jul-7 Sep-7 Sep-7 Nov-7 Nov-7 Jan-8 Jan-8 Mar-8 Mar-8 2 16 12 8 4-4 Emerging Asia: Exports of Goods (3-month percent change of 3-mma, SAAR) 6 5 4 3 2 1-1 -1 Jan-6 Mar-6 NIEs: total NIEs: non-oil ASEAN-5: total ASEAN-5: non-oil May-6 Jul-6 Sep-6 Nov-6 Jan-7 Mar-7 May-7 Sources: CEIC Data Company Ltd; and IMF staff calculations. Emerging Asia: Imports of Goods (3-month percent change of 3-mma, SAAR) 6 5 4 3 2 1 Jan-6 Mar-6 May-6 Jul-6 Sep-6 Nov-6 NIEs: total NIEs: non-oil ASEAN-5: total ASEAN-5: non-oil Jan-7 Mar-7 May-7 Sources: CEIC Data Company Ltd; and IMF staff calculations. Jul-7 Jul-7 Sep-7 Sep-7 Nov-7 Nov-7 Jan-8 Jan-8 Mar-8 Mar-8

Emerging Asia: Consumer Prices (3-month percent change of 3-mma, SAAR) 16 Inflation pressures are on the rise Inflation pressures are on the rise Emerging Asia: Core CPI (3-month percent change of 3-mma, SAAR) 1 NIEs ASEAN-5 China India: WPI 14 12 1 8 NIEs ASEAN-5 China India: WPI 8 6 4 6 4 2 2-2 Jul-7 Sep-7 Nov-7 Jan-8 Jul-7 Sep-7 Nov-7 Jan-8 Jan-6 Mar-6 May-6 Jul-6 Sep-6 Nov-6 Jan-7 Mar-7 May-7 Sources: CEIC Data Company Ltd; and IMF staff calculations. Emerging Asia: Core CPI (12-month percentage change) 8 7 6 5 NIEs ASEAN-5 China India: WPI 4 3 2 1 Jul-7 Sep-7 Nov-7 Jan-8 Jan-6 Mar-6 May-6 Jul-6 Sep-6 Nov-6 Jan-7 Mar-7 May-7 Jul-7 Sep-7 Nov-7 Jan-8 Jan-6 Mar-6 May-6 Jul-6 Sep-6 Nov-6 Jan-7 Mar-7 May-7 Jan-6 Mar-6 May-6 Jul-6 Sep-6 Nov-6 Jan-7 Mar-7 May-7 Sources: CEIC Data Company Ltd; and IMF staff calculations. Emerging Asia: Consumer Prices (12-month percentage change) 12 1 8 NIEs ASEAN-5 China India: WPI 6 4 2 Sources: CEIC Data Company Ltd; and IMF staff calculations. Sources: CEIC Data Company Ltd; and IMF staff calculations. PDF Created with deskpdf PDF Writer - Trial :: http://www.docudesk.com

Outlook and challenges for Indonesia Indonesia remains reasonably well positioned to withstand moderate US and global slowdown Strong domestic demand Reduced vulnerabilities Limited direct exposure Key external risks Deeper global slowdown / commodity price decline Financial contagion Domestic macro policy challenges Rising Inflation Energy subsidies

12 8 4 GDP growth remained strong through 27 with rebalancing towards domestic demand Indonesia: GDP Growth (In percent, y/y) Domestic demand contribution GDP growth 4Q1 4Q3 5Q1 5Q3 6Q1 6Q3 7Q1 7Q3 28 Sources: CEIC database; and Fund staff calculations.

12 8 4-4 -8 6 4 2-2 Most short-term term indicators picked up in Q1 28, despite the drop in consumer confidence Jan- 6 Jan- 6 Motor Vehicle Sales (growth y/y) Apr- 6 Jul- 6 Oct- 6 Jan- 7 Cement Consumption (growth y/y) Apr- 6 Jul- 6 Oct- 6 Jan- 7 Apr- 7 Apr- 7 Jul- 7 Jul- 7 Oct- 7 Oct- 7 Jan- 8 Jan- 8 8 6 4 2-2 -4 1 9 8 7 6 Jan- 6 Jan- 6 Motorcycle Sales (growth y/y) Apr- 6 Consumer Confidence Index Apr- 6 Jul- 6 Jul- 6 Oct- 6 Oct- 6 Jan- 7 Jan- 7 Apr- 7 Apr- 7 Jul- 7 Jul- 7 Oct- 7 Oct- 7 Jan- 8 Jan- 8

Exports remained buoyant, supported by high commodity prices, while imports increased due to strong domestic demand 5 4 3 2 1-1 Trade and Current Account (In percent) Import growth y/y Export growth y/y Current account/gdp (RHS) 6Q1 6Q3 7Q1 7Q3 28 5 4 3 2 1-1

Vulnerability indicators continued to improve PDF Created with deskpdf PDF Writer - Trial :: http://www.docudesk.com 1 9 8 7 6 5 4 3 2 1 Fiscal Balance and Public Debt (In percent of GDP) Total public debt Overall balance (RHS) 21 22 23 24 25 26 27 28 7 6 5 4 3 2 1 Debt to Asset Ratio: Non-Financial Corporate Sector -1-2 -3-4 6 5 4 3 2 1 asset-weighted avg unweighted avg Reserves in USD (left axis) Reserves in percent of short-term external debt External debt/gdp 2 21 22 23 24 25 26 27 18 16 14 12 1 8 6 4 2 2 21 22 23 24 25 26

4 3 2 1 Credit growth recovered strongly from the slump in 26 Increasing, but still relatively low loan-to to-deposit ratio CAR fell somewhat as a result of higher credit share, but still remains high NPLs continued to improve High liquidity in the banking system Loan to Deposit Ratio and Credit Growth (In percent) Credit growth y/y LDR (RHS) Jan-5 Jun-5 Nov-5Apr-6 Sep-6Feb-7 Jul-7 Dec-7 7 65 6 55 5 1 8 6 4 2 Banking Indicators (In percent) NPL ROA CAR (RHS) Jan-5 Jun-5 Nov-5 Apr-6 Sep-6Feb-7 Jul-7 Dec-7 3 25 2 15 1 5

So far, financial spillover have been contained but recent underperformance and local bond market weakness 3 25 2 15 1 5 Stock Market Index (National currency, Jan. 2, 26 = 1) MSCI Asia Pacific excl. Japan Jakarta Composite Index Jan-6 May-6 Sep-6 Jan-7 May-7 Sep-7 Jan-8 4 35 3 25 2 15 EMBI Global (Stripped spreads, bps) Indonesia Philippines Composite 11 1 9 8 Exchange Rates (National currency/us$, Jan.2, 26 = 1) Indonesia Philippines Thailand 7 Jan-6 May-6 Sep-6 Jan-7 May-7 Sep-7 Jan-8 16 14 12 1 8 6 4 Government Bonds Yield (In percent, 1-Year Bonds) Indonesia Philippines Thailand 1 Jan-6 May-6 Sep-6 Jan-7 May-7 Sep-7 Jan-8 2 Jan-6 May-6 Sep-6 Jan-7 May-7 Sep-7 Jan-8

Inflationary pressures increased since mid-27 Headline and core inflation significantly above the target range Policy rate unchanged since unexpected cut in December 27 Real rates slightly negative 2 16 12 8 4 CPI Inflation (In percent) Headline, y/y Core, y/y Policy rate (1-mo SBI) Real interest rate (Core) Inflation target Jan-3 Jan-4 Jan-5 Jan-6 Jan-7 Jan-8 Sources: CEIC database; and Fund staff calculations.

Which likely contributed to the underperformance of the rupiah ASEAN-5: Nominal Effective Exchange Rates (January 1, 27=1) 12 115 11 Indonesia Malaysia Philippines Thailand Vietnam 15 1 95 9 85 1/1/27 1/22/27 2/12/27 3/5/27 3/26/27 4/16/27 5/7/27 5/28/27 6/18/27 7/9/27 7/3/27 8/2/27 9/1/27 1/1/27 1/22/27 11/12/27 12/3/27 12/24/27 1/14/28 2/4/28 2/25/28 3/17/28 4/7/28 Source: IMF, Information Notice System; and APD staff calculations. PDF Created with deskpdf PDF Writer - Trial :: http://www.docudesk.com

28 fiscal stance is broadly appropriate, but fuel subsidies are increasingly crowding out priority spending Deficit consistent with further decline in debt ratio No fuel price adjustment since 25 world oil price +95% Large spending needs in health, education, and infrastructure are being squeezed out Energy subsidies in 28: ¼ of total spending and ½ of discretionary spending Higher if oil remains at current level Risk of potential financing issues Percent of GDP 4 35 3 25 2 15 1 5 Percent of GDP 27 28 29 21 211 212 213 6. 5. 4. 3. 2. 1. Medium-term fiscal projections Central government debt Central government balance primary balance Energy subsidy (LHS) WEO oil price (RHS) 1. 9. 8. 7. 6. 5. 4. 3. 2. 2. 1.. -1. -2. -3. -4. -5. US$/Barrel Percent. 22 23 24 25 26 27 28 1.

Conclusions Near term prospects are generally favorable, but risks are tilted to the downside Key priorities include bringing inflation down and reducing oil subsidies in the budget Policy actions: Gradual adjustment of subsidized domestic fuel prices, accompanied by compensation to protect vulnerable Interest rate increases to prevent second round effects Slow the pace of reserve accumulation and allow the exchange rate to appreciate

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