RECENT ECONOMIC REPORTS

INDONESIA: ECONOMIC AND FINANCIAL  HIGHLIGHTS 
JUNE 2006

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Inflation Remains High, BI Cuts Interest Rate

On July 3, the Central Bureau of Statistics (BPS) announced a slight decrease in YoY inflation in June 2006 
to 15.5%.  Month-on-month (MoM) inflation rose slightly to 0.5% from 0.4% in May, mainly due to a rise 
in food prices.  Core inflation also increased slightly to 9.6% YoY from 9.5% in May.  Citing improving 
macroeconomic trends, including declining inflation rates, BI cut short-term interest rates by 25 basis points 
(bps) to 12.25% on June 6, a move widely expected by analysts.  BI Governor Burhanuddin Abdullah said 
there remains room for further interest rate cuts.  “We will cut more aggressively in future when there is less 
pressure from inflation.”  Abdullah said he hopes BI can lower benchmark interest rate to 11 or 10% by the 
end of the year, if inflation falls into the single digits.

CPI Components

Source: Central Bureau of Statistics (BPS)

CGI Pledges USD 5.4 Billion for Indonesia,

During their June 14 meeting, CGI members pledged USD 5.4 billion in loans and grants to Indonesia, a sum 
that will more than cover Indonesia’s USD 4.3 – 4.6 billion financing gap for 2006.  The commitment consists 
of USD 3.9 billion in on-budget loans and USD 1.5 billion off-budget loans and grants.  Donors also pledged 
to help Indonesia rebuild after the magnitude 6.3 earthquake that struck the Yogyakarta area on May 27 and 
caused an estimated Rp 29 trillion (USD 3.1 billion) in damages and loss.  Coordinating Minister for Economic 
Affairs Boediono said the GOI understands that the CGI's 29 donor organizations would have to consult with 
capitals and parliaments before finalizing grant commitments for the quake-hit areas.  The GOI is planning to 
provide USD 1.2 billion in earthquake relief and reconstruction from its budget and is requesting USD 300 
million from donors. 

GOI Revises 2006 Budget Assumptions

On June 22, Parliament’s Special Budget Committee and Minister of Finance Sri Mulyani Indrawati agreed on 
a revised set of macroeconomic budget assumptions for 2006.  The budget assumptions influence the projected 
levels of various revenue and expenditure items in the budget.  Parliament and the GOI have also agreed on a set 
of budget assumptions for the draft 2007 budget that President Yudhoyono will present to Parliament in August 
2006.  Table below outlines revised FY 2006 and preliminary FY 2007 budget assumptions.

2006 Revised and 2007 Preliminary Budget Assumptions

Source: Ministry of Finance

GOI Repays Half of IMF Standby Reserves Loan

On June 22, the GOI informed the International Monetary Fund (IMF) of its decision to advance repayment 
of approximately half of its standby reserves loan under Indonesia’s Extended Fund Facility, or USD 3.7 billion.  
BI made the USD 3.7 billion transfer to the IMF the following week, accounting for most of the USD 4.6 billion 
decline in Indonesia’s gross FX reserves in June.  At the end of the month, reserves stood at USD 40.1 billion, 
down from USD 44.7 billion at the end of May.  On June 15, Japan Bank for International Cooperation (JBIC) 
agreed to waive its condition that a USD 78 million loan from JBIC, due in 2010, be linked to simultaneous 
repayment of the IMF.   

Bank Indonesia Launches Credit Information Bureau

On June 29, BI officially launched its new credit information bureau to assist banks in lending and risk management.  
The bureau collects information on borrowers that financial institutions can access electronically, including borrowers’ 
names, ID numbers, amount borrowed, collateral, and other details.  The bureau is operating under BI’s directorate 
for licensing and information.  To date, BI has stated that more than 2,600 financial institutions have submitted 
information on 16.3 million borrowers.  BI expects this number to increase significantly in the wake of its June 29 
directive requiring all domestic banks (including small rural banks), finance companies and credit card issuers to submit
borrower information to the credit information bureau.  Participation by international banks and non-bank financial 
institutions is voluntary.  The lack of accurate borrower information has held back lending for many Indonesian banks.  
Except through informal negative lists, they were largely unable review a customer’s complete credit 
profile to make informed lending decisions. 

Infrastructure Decrees Issued

On June 2, Finance Minister Sri Mulyani issued a new ministerial decree (PMK 38/2006) on an “Infrastructure Risk 
Allocation Framework”.  The decree covers risk sharing for Public Private Partnership (PPP) infrastructure projects 
in the energy, transportation, telecommunications, water resources, and housing sectors.  The decree covers the 
following types of risk:

     §     Political risk: policies, actions, or decisions by government or state entities that directly and significantly impose 
         financial losses on a business enterprise through expropriation, legal or regulatory change, currency convertability 
         restrictions or funds repatriation prohibitions.

§   Project Performance Risk: Risk associated with project implementation, which includes location risk and 
operational risk.

      §     Demand Risk: When demand for goods or services produced are lower than agreed. 

Mulyani also said that the government would propose an approximately Rp 2.6 trillion (USD 279.6 million) budget line 
item in the revised 2006 budget to finance a three-pronged GOI risk-sharing package potentially including the following 
items:

§         An infrastructure insurance provision, under which the GOI would provide Rp 1 – 2 trillion (USD 107.5 – 215.1 
million) to cover the potential liabilities from GOI project risk sharing.

§         A possible revolving land acquisition fund.  Because of delays in finalizing this fund, the GOI has reallocated to 
other needs Rp 600 billion (USD 64.5 million) that had been intended for this program.

      §         A possible government-financed “infrastructure investment fund” still under internal debate.  The GOI has said 
            this fund should be finalized soon. 

On June 5, President Susilo Bambang Yudhoyono signed Presidential Decree No. 65/2006 on Land Procurement for 
Public Development Purposes.  This decree, which revises Presidential Decree No. 36/2005 on the same topic, reduces 
the GOI’s authority to confiscate private property if the owner disagrees with the GOI’s compensation offer.  The revision 
also narrows the scope of infrastructure projects that may be categorized as meeting a “public purpose.”  Decree 36/2005 
was criticized for allegedly allowing several instances of forced evictions, intimidation and even physical threats to small 
property owners.  Table below outlines changes in the types of projects that the GOI may categorize as meeting a “public 
purpose.” 

Decree No. 36/2005: Types of Infrastructure Projects that may be defined as meeting a “Public Purpose” 

Source: Media reports

GOI Spending Slow in First Half of 2006

On June 28, Ministry of Finance (MOF) issued a budget realization report showing that actual GOI 
spending up to June 7, 2006 was Rp 203.1 trillion (USD 21.8 billion), or 31.4% of the targeted amount.  
The central government spent Rp 113.6 trillion (USD 12.2 billion) or 25.6% of the targeted Rp 427.6 
trillion (USD 46 billion).  Local government spending reached Rp 89.6 trillion (USD 9.6 billion) or 40.1% 
of the targeted Rp 220.1 trillion (USD 23.7 billion).  MOF Director General for the Treasury Mulia Nasution 
said spending would significantly increase by the third quarter as central and local government spending units 
tender and contract projects.  Nasution also noted that limited project planning capacity in many local 
governments is holding back spending. 

Up to June 7, GOI revenues reached Rp 209.1 trillion (USD 22.5 billion), or 33.4% of the full year target.  
Tax revenues make up the largest component of total revenues at Rp 161.5 trillion (USD 17.4 billion) or 
38.8% of the targeted Rp 416.3 trillion (USD 44.8 billion).  Non-tax revenue reached Rp 47 trillion 
(USD 5 billion) or 22.9% of the targeted Rp 205.3 trillion (USD 22.1 billion).  Budget surplus reached 
Rp 5.9 trillion (USD 634.4 million).   

GOI Swaps Debt

On June 27, the MOF swapped Rp 3.1 trillion (USD 333.3 million) of bonds maturing in 2007–09 
for bonds maturing in 2012.  The old bonds had yields of 12.1 – 12.6%, while the new bonds offer 
yields of 13.2% yield.  The debt swap is the latest in a series of MOF operations designed to reduce 
the very amortizations in 2007-09.

Bank Indonesia Delays “Single Presence Policy”

On June 5, BI Governor Burhanuddin Abdullah announced that BI had decided to postpone the 
implementation of a “single presence policy” from 2006 to 2008 or later.  The policy would prevent 
a person or a company from owning shares in more than one Indonesian bank.  Once BI implements 
the policy, foreign investors in Indonesian banks, including companies such as Singapore's Temasek 
Holdings, United Overseas Bank (UOB), Oversea-Chinese Banking Corporation (OCBC), Malaysia's 
Khazanah, and the United Kingdom’s Standard Chartered, would likely have to merge, restructure, 
or divest their banks.  Abdullah reportedly stated that BI is considering other options in consultation 
with affected banks before creating a stricter regulation requiring divestment.

Bank Mandiri “Name and Shame”

On June 14, Indonesia’s largest state-owned Bank Mandiri publicized the names of 30 corporate borrowers 
with non-performing loans exceeding Rp 1 trillion (USD 107.5 million).  The bad debtors account for 60%
 of Mandiri’s NPLs, which reached Rp 27 trillion (USD 2.9 billion) as of December 2005, or 26.2% of its 
total loans.  The surge in NPLs contributed to an 88-% drop in the bank's net profit in 2005.  Among the 
bad debtors is the Bosowa Group, controlled by Aksa Mahmud, a brother-in-law of Vice President M.
 Jusuf Kalla.  Mandiri President Director Agus Martowardojo said the bank would provide assistance, such 
as softer repayment terms, for debtors demonstrating goodwill to repay.  "For those who do not, the bank 
plans to take action," Martowardojo said. 

Mutual Funds Recover?

Funds invested in Indonesia’s mostly fixed-income mutual funds industry dropped from a peak of Rp 110.8 
trillion (USD 11.8 billion) in February 2005 to only Rp 29 trillion (USD 3.1 billion) in December 2005, 
a decrease of 73%.  However, Capital Markets Supervisory Agency (BAPEPAM) data show that investment 
in low-risk, “protected” mutual funds has increased significantly in 2006, driving a recovery in the sector.  
From March-May 2006, investments in new “protected” mutual funds increased by 110% to Rp 6.3 trillion 
(USD 677 million) from Rp 3 trillion (USD 323 million) in January 2006.  In the “protected” funds, investment 
managers protect the face or nominal value of investors’ funds by investing them in a zero-coupon bond 
equivalent product (i.e. a low risk government bond) priced at a discount.  The managers then invest leftover 
funds in higher-risk assets, and return any profits to the investors.  The “protected” funds appeal to many 
investors who seek lower risk products after suffering losses in the 2005 mutual fund sell-off.    

Mutual Fund Growth (Dec 05 – May 06) (in Rp trillion)

Source: Capital Markets Supervisory Agency (BAPEPAM)

Selected Economic, Monetary  & Financial Statistics

 Source: Bank Indonesia, BPS

(1)   Rp/USD, end of period

(2)   End of period

(3)   USD billions, end of period

(4)   Jakarta Stock Exchange average daily transaction volume, in billions of shares

(5)   USD billions

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