1. Economic and Social Update November 2007 William E. Wallace, Lead Economist World Bank, Indonesia November 2007

2. The International Economic Environment

3. Recovery in growth and investment continues The post-adjustment recovery continues, with economic growth firmly above 6 percentThe post-adjustment recovery continues, with economic growth firmly above 6 percent The recovery in investment also continues, with investment above 7 percent since late 2006The recovery in investment also continues, with investment above 7 percent since late 2006

4. The broadening source of growth (1) et exports retune to support growth in first half on faster export growthet exports retune to support growth in first half on faster export growth However, growth is gaining a broader domestically-focused base with firming consumption growth added to rising investmentHowever, growth is gaining a broader domestically-focused base with firming consumption growth added to rising investment

5. The broadening source of growth (2) (year-ended growth rates) Growth firming for most non-tradable, service sectorsGrowth firming for most non-tradable, service sectors This complements strong growth in some mining and manufacturing industries, but weaker outcomes in othersThis complements strong growth in some mining and manufacturing industries, but weaker outcomes in others Overall tradeables grew 4.3% y-o-y to June, while non-tradeables grew 7.4% on averageOverall tradeables grew 4.3% y-o-y to June, while non-tradeables grew 7.4% on average Transport & communications pace growth at 11.9 percentTransport & communications pace growth at 11.9 percent

6. Strong International Trade

7. Inflation Inflation remains a little above 6½ percent, firming slightly in recent monthsInflation remains a little above 6½ percent, firming slightly in recent months 2007 inflation rate forecast to be 6.5 percent.2007 inflation rate forecast to be 6.5 percent.

8. Credit and Monetary Policy Credit Growth Rate (YoY, %) Credit started to pick up in mid-2006Credit started to pick up in mid-2006 Investment credit grows faster than consumptionInvestment credit grows faster than consumption Interest Rates (%) SBI 1 month fell from 12.8% to 8.3%SBI 1 month fell from 12.8% to 8.3% Lending rates fall less than SBI 1 monthLending rates fall less than SBI 1 month

9. Fiscal policy Government Debt (percent of GDP) Source: Central government budget State Budget Balance (percent of GDP) Source: Central government budget

10. Structural Change in Labor Markets (percentage change)

11. Macroeconomic Projection 2007-2009 2005 (act) 2006 (act) 2007 (Pro) 2008 (Pro) GDP Growth Rates (percent)5.75.56.36.4 o/w investment growth rates10.82.97.710.6 Investment (% of GDP)23.624.024.325.2 Current account balance (% of GDP) 0.12.72.51.8 Central government balance (% of GDP) -0.5-0.9-1.5-1.8 Government debt (% of GDP)4639.134.531.9 Inflation rate (%, annual average)10.513.16.56.0

12. Risks to these projections

13. Risks 1: Impact of financial market turbulence has been short-term…so far An initial, sharp response, but the exchange rate, stock market index and bond yield curves all quickly recovered An initial, sharp response, but the exchange rate, stock market index and bond yield curves all quickly recovered

14. Risks 2: Rising commodity prices have been supporting Indonesia’s economy Rising oil prices are associated with higher commodity prices in general Rising oil prices are associated with higher commodity prices in general These are supporting the value of exports and profitability These are supporting the value of exports and profitability Even if prices stabilize, may see ongoing volume effects Even if prices stabilize, may see ongoing volume effects

15. Risks 3: The connection between US growth and Indonesia’s may not be that strong Event analysis gives a response to US growth of 0.48 across East Asia Event analysis gives a response to US growth of 0.48 across East Asia Potentially high-end estimate Potentially high-end estimate Other estimates range from 0.1 to 0.5 Other estimates range from 0.1 to 0.5 Implies US 2%  0% lowers Indonesian growth 6½%  5½% Implies US 2%  0% lowers Indonesian growth 6½%  5½%

16. Summary Overall story -- in our view Indonesia’s prospects for next year are positive, with growth rising from 6.3% to 6.4% Overall story -- in our view Indonesia’s prospects for next year are positive, with growth rising from 6.3% to 6.4% This projections assumes some further slowing in US growth, that international financial market instability is largely at an end, and that relatively high international oil & commodity prices continue (US$ 72 a barrel for oil) – roughly the same as this year’s average This projections assumes some further slowing in US growth, that international financial market instability is largely at an end, and that relatively high international oil & commodity prices continue (US$ 72 a barrel for oil) – roughly the same as this year’s average However, uncertainty around global growth risks persist which could translate into more downside risk, i.e. a US recession. However, uncertainty around global growth risks persist which could translate into more downside risk, i.e. a US recession. But there are also upside risks especially to inflation, which could create challenges for Indonesia given emerging constraints (infrastructure) But there are also upside risks especially to inflation, which could create challenges for Indonesia given emerging constraints (infrastructure)

17. Thank You!