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The Republic of Indonesia Recent Economic Update July 2008.

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Presentation on theme: "The Republic of Indonesia Recent Economic Update July 2008."— Presentation transcript:

1 The Republic of Indonesia Recent Economic Update July 2008

2 Outline Fundamental Economic Strengths Fiscal Sustainability Impact of Oil Prices and Food Staples on the Economy and 2008 Budget Financing Strategy Fiscal Realization and Outlook Challenges for 2008 1 2 3 4 5 6

3 Fundamental Economic Strengths

4 Macroeconomic Stability IDR / USD Exchange RateBI Rate and Fed Fund Rate Indonesia is maintaining macroeconomic stability substantiated by a stable exchange rate and increasing foreign reserves Foreign ReservesInflation 0% 2% 4% 6% 8% 10% JFMAMJJASONDJFMAMJ Spread BI Rate – Fed RateBI RateFed Rate 59.45 0 10 20 30 40 50 60 70 Jan Feb Mar Apr May Jun Jul Aug Sept Oct Nov Dec Jan Feb Mar Apr May Jun (US$bn) 20062007 Spread Jun 08 = 650 bps 20072008 Export, FDI & Portfolio 80 85 90 95 100 105 110 115 Jan-08Feb-08Mar-08Apr-08May-08Jun-08Jul-08 SGD CurncyPHP Curncy THB CurncyIDR Curncy 11.03 11.70 6.00 6.60 0 4 8 12 16 20 'Jan-06 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 'Jan-07 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 'Jan-08 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Des (% y-o-y) 20062007 2007: 6% 1% 2008: 11.7 %   2007: 6% 1% 2008: 11.7 %   2008

5 Sustained Economic Growth Real GDP Growth Indonesia has been growing at a rate above 6% since 4Q06 supported by private consumption and investment Source: Ministry of Finance

6 Strengthening Private Consumption Consumption Credit Growth Source: Bank Indonesia, CEIC Consumption credit growth is strong. Car and motorcycle sales, as a proxy of demand, have recently experienced significant growth Indonesia Car and Motorcycle Sales (60%) (40%) (20%) 0% 20% 40% 60% 80% 1Q051Q061Q071Q08 Car SalesMotorcycle Sales Y-o-Y Growth 29.2% 0% 10% 20% 30% 40% 50% MarJunSepDecMarJunSepDecMarJunSepDecMar Consumption Credit 2008 7 5 6 Y-o-Y Growth

7 Improving Investment Climate Imported Capital Goods vs. Investments Source: BKPM, CEIC 1.Subject to limits for foreign participation in certain sectors of the economy. New Investment Law passed in April 2007 aims to facilitate foreign investment. Continuous taxation reform expected to spur further investment Significant Improvements in Investment Climate  Equal treatment for domestic and foreign investment (1)  Extends the validity of land titles  Rights to appoint foreign management  Unrestricted repatriation of profits and capital  Accelerated reform in tax administration  Simplified VAT audits and improved taxpayer services quality  5% reduction in corporate income tax rate for listed companies which meet certain conditions  Reduction in the tax rate on dividend payments to non-residents from 20% to 10%  Significant increase in budget allocation for capital expenditure  Provides better clarity in business activities that are conditionally open to foreign investors

8 Fiscal Sustainability

9 Budget Deficit and Debt Ratios Budget Deficit (% of GDP) Debt to GDP Ratio Source: Ministry of Finance 67% 61% 56% 47% 39% 36% 33% 36% 32% 28% 24% 21% 31% 29% 28% 23% 18% 15% 12% 0% 20% 40% 60% 80% 2002200320042005200620072008 Total Debt to GDPForeign Debt to GDPDomestic Debt to GDP -1.2% -2.5% -1.3% -1.7% -1.0% -0.5% -1.0% -1.3% -2.1% -3% -2% -1% 0% 20002001200220032004200520062007 Revised 08 Budget CONSOLIDATION STIMULUS Avg.–1.54% Avg.–0.88%

10 2008 Revised State Budget Key Assumptions Source: Ministry of Finance Maintaining fiscal stability in the face of external economic shocks Official State Budget 2008  Greater need for energy and food subsidies given persistently high crude oil and commodity price environment  Deficit could increase to 3% of GDP if no action was taken on subsidy allocation  Funding of the revised deficit is within a reasonable range given the consistent decline in the debt-to- GDP ratio over the past five years from 67% in 2002 to 35% in 2007  Fiscal policy measures to mitigate the impact of heightened food and oil prices have been and are currently being implemented

11 Tax and Non-tax Revenue  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% Tax RevenueNon-Tax Revenue (IDR Trillion)  Non-tax revenue increased due to: –Higher oil prices –Higher natural resources / mining revenues –Larger Pertamina and other SOE profits IDR tn Source: Ministry of Finance

12 Actively Managing Expenditures and Subsidies Government Expenditure (IDR Trillion)Subsidies (IDR Billion)  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  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

13 Impact of Oil Prices and Food Staples on the Economy and 2008 Budget

14 Soaring Oil Prices Cause Fuel Subsidies to Escalate International Oil Price Source: Bloomberg The ICP rose by 64% since the beginning of the year to average US$109.5/Bbl as of June

15 Successfully Raised Fuel Prices to Manage Deficit The government raised fuel prices by an average of 28.7% on May 24, 2008 and has implemented cash and food assistance programs to mitigate impact on the poor Schedule of Fuel Price Adjustment Source: Ministry of Finance Type of FuelInitial Price (Rp / KL)% IncreaseAdjusted Price (Rp / KL) Gasoline4,50033.3%6,000 Diesel4,30027.9%5,500 Kerosene2,00025.0%2,500 Reduction in subsidy payments and contingency fund provision will be allocated to the following: Direct Cash Distribution Program Food Assistance Educational and Social Assistance Ensuring Fiscal Sustainability

16 Fuel Price Hike Lowers Price Gap and Consumption Rise in fuel prices have reduced the price disparity and is expected to curtail over- consumption Source: Ministry of Finance Subsidized Gasoline Consumption & Price Gap Trend Domestic vs. International Price Disparity

17 Fiscal Policy Response to Soaring Oil Prices The Government has implemented a number of measures to ensure fiscal sustainability in the face of soaring oil prices Use of Contingency Fund Reduction in Government Spending Optimizing Taxation in Nat Res & Commodities Optimizing Oil & Gas Production Fuel Price Hike & Compensation Packages for the Poor Energy Savings Initiatives Diversified Financing Alternatives Fiscal Policy Measures With these fiscal policy measures, deficit is expected to fall from 2.1% to 1.8%

18 Impact of Fiscal Policy Adjustments on Budget Impact of Revised ICP Assumption on 2008 Revised Budget Outlook Source: Ministry of Finance

19 Financing Strategy

20 Disciplined Approach to Debt Management Portfolio Management Prudent Rules Domestic Bond Market Development External Loan Financing  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) To minimise cost of debt within manageable risk Objective Effective Coordination amongst Fiscal, Monetary and Capital Market Authorities

21 Impact of Fiscal Policy Adjustments on Financing Impact of Revised ICP Assumption on 2008 Revised Budget Outlook Source: Ministry of Finance

22 2008 Funding Strategy on Track The Government’s funding plans are well on-track with realized net financing at 69% of net financing required in the Revised 2008 Budget as of June 2008  Issuance in the domestic market will be prioritized  Issuance of a variety of domestic government securities –Fixed-rate –Variable rate –T-Bills –Zero coupon –Retail bonds –Syariah securities – Sukuk (3)  International bonds 2008 Issuance ProgramUS$ bn Original 2008 Budget Government Securities Net Financing:10.1 Revised 2008 Budget Government Securities Net Financing:12.9 Redemption + Buyback (1) (4.4) Net Realization (May 30, 2008)8.9 Issuance:10.5 Coupon GDS (2) 3.1 Retail bonds1.5 Zero coupon GDS (2) 1.6 International bonds4.3 Redemption + Buyback(1.6) Target up to end FY 2008, net6.8 Net Issuance Realization as at June 26, 2008 Source: Ministry of Finance 1.Redemption and buyback amount subject to change 2.GDS stands for Government Debt Securities (SUN) 3.New Syariah instruments expected to be launched in 2008 in the form of Sukuk

23 Composition of Debt Composition of Central Government Debt By Maturity and Interest Rate, Dec 2007 Balanced debt profile with a majority of debt being either Rp denominated or medium to long-dated Source: Ministry of Finance Note: Exchange rate of Rp.9,034 per US$ used for period end 2007 By Currency, Dec 2007

24 Holders of Tradable Government Securities Holders of Tradable Domestic Gov’t Securities There is an increasing proportion of foreign and non-bank holders of Indonesian Government securities Source: Ministry of Finance 1.New Syariah instruments expected to be launched in 2008 in the form of Sukuk Foreign Holdings by Maturity, May 30, 2008 Developments in Domestic Market  Yearly issuance schedule publicly available  Established primary dealership infrastructure  Benchmark series  Active communication with market participants  Variety of domestic securities available –T-Bills, fixed rate, floating rate, variable rate, zero coupon, retail bonds and Sukuk (1)

25 Fiscal Realization and Outlook

26 Macroeconomic Assumption 2008 & Outlook

27 Realization of Revised Budget 2007 & 2008

28 Tax Revenue up to June 30, 2008 reached Rp307,5 T (50,5% of R-Budget) Tax Revenue 112% from monthly R-Budget Target Customs & Excise Revenue 122% from monthly R-Budget Target 2008 1 st Semester Revenue and Grant Realization Tax Revenue Total RevenueCustoms & Excise Revenue

29 2008 1 st Semester Expenditure Realization Realization of 2008 exp. Budget was similar to 2007 Compare to 2007, realization of 2008 central gov. exp showed a rising trend Transfer to regions was bit lower than 2007 because of Block Grant (50%, last year 58%)

30 Central Government Expenditure

31 Energy Subsidies Up to 30 June, realization of subsidy was dominated by fuel subsidy BBM : Rp60,5 T, electricity subsidy: Rp26,4 T Realization of fuel consumption Jan - June 2008 reached 19,3 million KL, 2008 projection = 39 - 40 million KL Subsidy Realization, 2006- 2008 (trillion Rp) Realization of Fuel Consumption (mm KL) Projection & Realization of (as of 30 June 2008)

32 Challenges for 2008

33  Downward revision of GDP growth target from 6.4% to a range of 6.0% to 6.4% due to lower U.S. and global economic growth and economic effects of fuel subsidy reduction and cash transfer and food assistance programs  Inflationary pressures from persistent high commodity prices (oil and food)  With 28.7% domestic fuel price increase, the 2008 and 2009 state budget is sustainable even if oil prices remain high  Savings from the reduction in subsidy payments will be allocated to provide direct cash transfers and other direct subsidies to the poor households  Maintain a sound banking sector and effective intermediary function  Monetary policy will be consistently aimed at addressing external inflationary pressures through preserving exchange rate stability and optimizing open market operation of the central bank  Continuous improvement in investment climate to sustain robust economic growth


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