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The Republic of Indonesia. Economic, Financial and Sukuk Developments June 2008. Contents. Macroeconomic Overview Fiscal Policy Overview Budget Financing Strategy Monetary & Banking Policy Islamic Finance Market Conclusion. Macroeconomic Overview.

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The republic of indonesia

The Republic of Indonesia

Economic, Financial and Sukuk DevelopmentsJune 2008



Macroeconomic OverviewFiscal Policy OverviewBudget Financing Strategy Monetary & Banking Policy Islamic Finance MarketConclusion

The republic of indonesia country overview
The Republic of Indonesia – Country Overview

  • World's fourth most populous country (and the most populous Muslim-majority country)

  • Population of approx. 225 million spread across an archipelago of 17,500 islands

  • Largest economy in Southeast Asia, with an estimated GDP of approx. USD 433 billion in 2007

  • Key sectors are manufacturing, trade/hotel/restaurant, and agriculture/livestock/forestry/fisheries

  • Unitary republic with a presidential system – next general and presidential elections in mid-2009

Composition of GDP by Sector

The Republic of Indonesia

Source: Ministry of Finance


Resilient economic growth
Resilient Economic Growth

Strong Growth in Recent Quarters

  • Resilient growth over the last 5 years, despite increases in domestic fuel prices

  • 2008 growth expected to remain strong, at around 6.4%, but could have a downside bias

  • 6.28% GDP growth in Q1 2008 driven by consumption (5.3%), investment (13.3%) and exports (15%)






Source: Ministry of Finance


Record high exports driven by commodities
Record High Exports Driven by Commodities

Strong Export Growth (USD Billion)

Export Price Index (Rebased to 100)

USD bn






Source: Bank Indonesia

  • Both oil & gas and non-oil & gas exports have gained significantly since 2002

  • Total exports rose 14.0% to USD 118.01 billion in 2007 – volumes and prices of major commodities such as crude palm oil, nickel, paper and chemicals spiked

  • Dependency on the US market has declined – share of exports to U.S has steadily fallen from 13.3% in 2002 to 9.8% for 2007

  • China is becoming an increasingly important export market – exports share to China has increased from 3.6% in 2002 to 8.6% in 2007

Source: Ministry of Finance, Bank Indonesia


Robust foreign investment
Robust Foreign Investment

Foreign Portfolio Investment (USD Million)

Net Foreign Direct Investment (USD Million)

USD mn

USD mn

Source: Bank Indonesia

  • Significant foreign portfolio inflows demonstrate resilience against the sub-prime mortgage crisis

  • 41% growth in net FDI inflow in 2007 supported by:

    • Increase in reinvested earnings

    • Establishment of the Batam, Bintan and Karimun SEZs

    • Creation of tax incentives

Source: Ministry of Finance, Bank Indonesia


Resilient financial markets through sub prime
Resilient Financial Markets through ‘Sub-Prime’

Government Bond Yield Curve

Jakarta Composite Equity Index

Net Foreign Buying of Government Bonds (IDR bn)

Net Foreign Buying of Equities (IDR bn)

IDR bn

IDR bn





Source: Ministry of Finance, Bank Indonesia


Strong external position
Strong External Position

Balance of Payments (USD Million)

International Reserves (USD Billion)

IDR bn

IDR bn

  • Record high current account surplus buoyed by expansion in non-oil & gas exports, due to strong global demand and rising commodity prices

  • Official reserves increased significantly to a record USD 56.9 billion at the end of 2007, compared to USD 42.6 billion at the end of 2006, translating to 5.7 months of imports and official debt repayments

  • This has helped mitigate the impact of external shock on the exchange rate, which has further been supported by the decreasing external debt burden

Source: Ministry of Finance, Bank Indonesia


Budget deficit and debt ratios
Budget Deficit and Debt Ratios

Budget Deficit (% of GDP)

Avg. –0.88%

Avg. –1.54%



Debt to GDP Ratio

Source: Ministry of Finance


Actively managing expenditures and subsidies
Actively Managing Expenditures and Subsidies

Government Expenditure (IDR Trillion)

Subsidies (IDR Billion)

IDR tn

IDR tn

IDR tn

  • 10% cut in ministries’ spending

  • Capital spending on infrastructure and poverty programs remains a priority

  • Providing for fiscal risk:

    • Oil price increase

    • Overrunning oil consumption

    • Macroeconomic volatility

Total (RHS)

  • Fuel subsidy capped at 3% of GDP:

    • Consumption limit

    • Fuel price adjustment

    • Further budget adjustment

  • Food subsidies for price stabilisation:

    • Rice for the poor

    • Cooking oil for the poor

    • Soybean and flour for SMEs

Source: Ministry of Finance


Tax and non tax revenue
Tax and Non-tax Revenue

Tax Revenue

Non-Tax Revenue (IDR Trillion)

IDR tn

IDR tn

  • Tax revenue increasing because of ICP assumption and improved administration

  • Tax incentives:

    • Food prices (rice, cooking oil, soy bean, flour)

    • Reduced tax rate for publicly listed companies

    • Priority sectors include oil and geothermal

  • Actual non-oil tax revenue collection as of March 2008 increased 48.1%

  • Non-tax revenue increased due to:

    • Higher oil prices

    • Higher natural resources / mining revenues

    • Larger Pertamina and other SOE profits

Source: Ministry of Finance


Summary of recent fiscal policy measures
Summary of Recent Fiscal Policy Measures

Key Fiscal Policy Measures

  • Government department expenditure cut by 10%

  • Optimisation of non-oil tax revenue

  • Government bond issuance: gross USD 17.1 bn. YTD Apr 08 USD 5.5 bn with yield 2.5-3.5% higher

  • Program loans (ADB, World Bank, and bilateral)

  • Oil lifting production upgrade : 927 thousand barrel per day

  • Energy savings program

    • Conversion Kerosene to LPG : 1 million Kl - 2 million Kl equivalent

    • 10,000 MW coal based electricity project to replace fuel based generators

    • Efficiency in Pertamina and PLN

    • Energy savings in Government Buildings, Private Offices, mall, hotel, shopping center

  • Recent action to reduce fuel subsidy by increasing fuel price around 30%

  • Use cut off subsidy to compensate the poor

    • Direct cash transfer IDR 14.1 trillion (approx. USD 1.5 billion)

    • Discounted rice and food price around IDR 4.2 trillion (approx. USD 450 million)

    • Credit for people effort (KUR) around IDR 1 trillion (approx. USD 110 million)

  • Fiscal risk fund of around IDR 3 trillion


Disciplined approach to debt management
Disciplined Approach to Debt Management


To minimise cost of debt within manageable risk

Prudent Rules

Domestic Bond Market Development

External Loan Financing

Portfolio Management

  • Prioritise debt securities issuance in domestic market for deficit financing & debt refinancing

  • Diversify debt instruments to widen investor base

  • Develop market infrastructure to support efficient price discovery mechanism

  • Meet Millennium Development Goals (MDGs), (E.g. poverty reduction)

  • Finance cost recovery projects

  • Enhance project readiness criteria

  • Issue benchmark bonds on regular basis (E.g. 5, 7, 10, 15 and 20 years)

  • Aggressively conduct debt switching to extend duration

  • Buyback bonds to reduce outstanding debt and stabilize market

  • Diversify funding sources (e.g., Sukuk)

Effective Coordination amongst Fiscal, Monetary and Capital Market Authorities


Debt composition and budget financing trends
Debt Composition and Budget Financing Trends

Current Composition of Debt

Prioritising Domestic Market Issuance

  • Prioritising issuance from domestic market

  • Developing new instruments – IDR & USD Sukuk

  • Short-term instruments e.g. T-Bills, Variable Rate Bonds, and Zero Coupon Bonds

  • Accessing international market appropriately to avoid “crowding out” the domestic market

Source: Ministry of Finance


Recent adjustments to budget financing plan
Recent Adjustments to Budget Financing Plan

  • Debt Securities will be the main source for deficit financing and debt refinancing

  • External loan financing (net) has been kept negative

  • Program loans mainly from World Bank, ADB, and JBIC

Source: Ministry of Finance


Roi us dollar bond performance
RoI US Dollar Bond Performance

10-year Benchmark Spreads vs. UST (bps)

10-year Benchmark Yields (%)

  • RoI USD benchmark bonds have performed strongly since recent issuance in January 2008

  • Well-established credit curve in both the 10 and 30-year maturities (total of USD9bn outstanding)

  • RoI USD bonds have substantial secondary market liquidity

Source: Bloomberg


International credit ratings overview

2008 YTD







B1  Ba3

B2  B1



B3  B2



B+  BB-


B  B+

CCC+  B-  B+

International Credit Ratings Overview

Moody’s (Ba3)

S&P (BB-)

Fitch (BB)

BB-  BB



B+  BB-


B  B+

Selected Recent Rating Agency Comments

“The reasons behind the upgrade are the declining government debt ratio, sufficient foreign exchange reserves, ongoing inflows from modest current account surpluses and FDI, declining fiscal vulnerability to sudden domestic price or rate shocks, and also political stability and the government’s ongoing commitment to fight corruption and enhance transparency.”

“The ratings on Indonesia are underpinned by continued improvements in its debt and external liquidity positions. Although the sovereign faces some short-term uncertainties brought about by higher commodity prices, which are leading to growing inflationary and fiscal pressures, the central government's response to these challenges has so far been encouraging.”

“ …positive economic growth, improvement in its balance of payments and strengthening of its international reserve base in 2007 have enabled Indonesia to manage its economy during a period of tightened global credit conditions… implementation of a structural reform agenda … which specifically aimed at addressing foreign investor concerns are successfully implemented .”

Moody’s, 18 Oct 2007

S&P, 26 May 2008

Fitch, 14 Feb 2008


Monetary policy overview
Monetary Policy Overview

New Framework

  • In July 2005, Bank Indonesia implemented enhanced monetary policy measures within the Inflation Targeting Framework (ITF), including:

    • Use of the BI rate as an operational target

    • Enhanced decision making process

    • More transparent communications strategy

    • Strengthened policy coordination with the Government

Key Objectives

  • Strengthen effectiveness and provide good policy governance

  • Achieve price stability for sustainable growth and social welfare

Policy Stance

  • BI Rate and control of exchange rate volatility used as the signal of Bank Indonesia's stance on monetary policy

  • Bank Indonesia is resolutely committed to controlling inflation through more effective, simultaneous use of monetary instruments including:

    • Increasing BI Rate by 25 bps to 8.25% in May 2008

    • Absorption of excess liquidity

    • Strengthening monetary policy instruments

    • Reducing exchange rate volatility

Recent Developments


Combating inflationary pressures
Combating Inflationary Pressures

Components of Inflation




  • Apr 08 inflation was 0.57% MoM or 8.96% YoY, markedly higher than the annual rate in Mar 08 (8.17%)

  • To combat inflationary pressures, BI has identified and targeted 5 sources:

  • Output gap: upward consumption trend has contributed pressure in core inflation

  • Imported inflation: driven by strong commodity prices – mitigated by minimising exchange rate fluctuation

  • Inflation expectations: fuelled by escalating commodity prices and expectations of fuel price increase

  • Volatile food: driven by strong international food prices and speculation in domestic market

  • Administered prices: increased due to kerosene supply/distribution bottlenecks to some regions

Source: Bank Indonesia


Monetary policy stance
Monetary Policy Stance

IDR Exchange Rate and Volatility

BI Rate







  • IDR exchange rate trend relatively stable amid global financial turmoil and high oil prices

  • On average, the Rupiah fell slightly vs. USD in 2007 (0.37%) from IDR 9,174 to IDR 9,209.00

  • Fluctuation was kept to a minimum, with volatility reduced from 0.6% to 0.2%

  • Recent policy directed to mitigating inflationary pressure, esp. inflation expectations

  • As such, in May 2008, Bank Indonesia increased the BI Rate by 25 bps to 8.25%

  • Bond market reacted positively, with yields declining after the cut

Source: Bank Indonesia


Positive banking sector performance
Positive Banking Sector Performance

Key Banking Indicators

Commercial Bank Earning Assets (USD bn)

  • Well capitalised banking system, with average CAR of 18.6% as of end Q1 2008

  • Solid solvency and liquidity, and steady profitability, adding to stability amidst global uncertainty

  • Flourishing intermediary function – LDR reached 69.2% in December 2007 and 70.1% in early 2008

  • Improving credit risk – gross NPLs eased to 4.6% (Dec 07),

  • Steadily increasing profitability – ROA increased to 2.8% (Dec 07) on credit expansion

  • Bank Indonesia focused on developing a roadmap to implement Basel II over the next 5 years

Source: Bank Indonesia


Banking policy direction basel ii implementation
Banking Policy Direction & Basel II Implementation

  • Bank Indonesia’s three key policy directives for the next 5 years are:

    • Continuation of national banking industry consolidation

    • Development of the rural bank (BPR) considering the potential of local economies

    • Shariah (Islamic) banking acceleration

  • On 15 April 2008, Bank Indonesia announced the April 2008 Banking Regulation Package, which is expected to stimulate economic growth while maintaining financial system stability:

    • Resolve problems faced by small businesses in accessing bank financing

    • Promote financial market deepening and capital market growth

    • Improve and strengthen institutional structures

    • Improve risk management by implementing Basel II

  • Implementation of Basel II is a key element of the 5-year programme:

    • Understanding of the 25 Basel Core Principles for Effective Banking Supervision (BCP)

    • Implementation of Basel II by first using the standardised method


Islamic banking in indonesia
Islamic Banking in Indonesia

The Islamic banking industry in Indonesia was pioneered by the establishment of the first Islamic commercial bank in 1991

Currently there are 3 Islamic commercial banks, 28 Islamic banking units (windows within conventional banks), and 117 Islamic rural banks

A new Islamic Banking Law is expected to be ratified by the Parliament in the near future, and will provide a more favorable environment for Islamic banking development

Islamic banking in Indonesia has seen rapid growth over the last several years

Banking assets of around USD 4.2 bn, growing on average by 42% per annum over the past 4 years

26 Shariah mutual funds currently, with NAV growth of 139% p.a. over the past 4 years

Jakarta Islamic Index (JII) launched in 2000, consisting of 30 shariah-compliant Indonesian stocks

First local currency corporate Sukuk issued in 2002 – 22 Sukuk and 3 MTN issuances to date

However, the market still forms a small percentage of the broader financial system, and provides significant growth opportunities

Fast-growing Market with Huge Potential

Source: Ministry of Finance and Bank Indonesia


Strong potential for growth across products
Strong Potential for Growth Across Products

Rapid Growth in Islamic Banking Assets

Shariah Mutual Funds NAV Picking Up in 2007

IDR tn

IDR bn

Strong Growth in Takaful over the Past 5 Years

Corporate Sukuk issuance still in early stage

IDR bn

IDR bn

Source: Indonesian Capital Market Supervisory Agency


The republic of indonesia

Spearheading Efforts to Grow the Industry

More Supportive Regulatory Framework and Availability of Sovereign Sukuk shall drive growth

  • Indonesia has the world’s largest Muslim population of roughly 190 million people

    • The Islamic finance industry (banking, Takaful, mutual funds, and capital markets) is in an early stage of development and has huge potential for growth

  • The Ministry of Finance and Bank Indonesia play a major role in developing the Indonesian Islamic finance industry

  • Regulations are currently being developed to accommodate Islamic financing products & structures, e.g., tax laws, Shariah banking law etc.

  • GOI is considering eliminating additional taxation that may potentially apply to Islamic finance products and transactions

    • These changes will be accommodated in the ongoing Tax Law amendment process

  • GOI realises that availability of Sukuk instruments issued by the government would provide a major boost to the Indonesian Islamic finance industry by

    • Providing a much needed investment alternative for Shariah financial institutions

    • Serving as a benchmark for corporate Sukuk issuance


The sovereign sukuk law
The Sovereign Sukuk Law

Establishment of the Sovereign Sukuk Law a Key Milestone

  • Starting mid-2006 the GOI commenced drafting a new legal framework to accommodate sovereign Sukuk issuances and resolve legal constraints associated with Shariah-based securities

  • The Indonesian People’s Consultative Assembly (Parliament) has recently ratified the Sovereign Sukuk Law, which now enables the Indonesian government to issue Islamic securities

  • The law provides a legal basis for GOI to issue Sukuk domestically and internationally and enables the utilisation of state-owned assets by GOI as Sukuk Assets

    • GOI has identified approximately USD 2 billion of State-owned Assets (consisting of land and building) which can be used as underlying assets for the initial stage of Sovereign Sukuk issuance

  • Key features of a sovereign Sukuk would be as follows:

    • Ijarah, Mudarabah, Musyarakah, Istishna and other shariah-compliant structures/akad recognised

    • Issued either directly or via sovereign-owned Sukuk issuance company

    • Issued for financing of the state budget, including financing of infrastructure projects


Summary and key themes going forward
Summary and Key Themes Going Forward

  • Broad-based and well-diversified economy with continued strong growth – resilient to external shocks from the credit crises and escalating oil prices

  • Strong external and current account position, continually reducing debt ratios and record high foreign reserves

  • Government focussed on prudent management of fiscal policy and subsidies, including recent measures with respect to domestic fuel subsidies

  • Monetary policy aimed at addressing inflationary pressures via maintaining exchange rate stability and effectively using the BI rate

  • Banking sector remains healthy, with policy focussed on consolidation, implementation of Basel II, and acceleration of Islamic banking