Economic and Social UpdateEconomic and Social UpdateApril 2008April 2008

William E. Wallace, Lead EconomistWilliam E. Wallace, Lead EconomistWorld Bank, IndonesiaWorld Bank, Indonesia

April 1, 2008April 1, 2008

Indonesia had sustained GDP growth in Indonesia had sustained GDP growth in 20072007

-2

0

2

4

6

2001 2002 2003 2004 2005 2006 2007

-2

0

2

4

6

%

Sources: BPS; World Bank seasonal adjustment

Year-on-year

Quarterly(seasonally adjusted)

%

Largely on domestic driversLargely on domestic drivers

4.0%

4.5%

5.0%

5.5%

6.0%

6.5%

7.0%

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

2005 2006* 2007*

-24%

-12%

0%

12%

24%

36%

48%

Total GDP(LHS)

Net Exports RHS

Investment RHS

ConsumptionRHS

With capital goods and construction up & With capital goods and construction up & consumption rebounding on falling interest consumption rebounding on falling interest

ratesrates

-10%

0%

10%

20%

30%

40%

50%

2004 2005 2006 2007

-3%

0%

3%

6%

9%

12%

15%

SBI 1 month rate (RHS)

Total nominal consumptiongrowth (y-o-y, LHS)

Consumption credit growth (y-o-y, LHS)

Total real consumption growth(quarterly, seasonally adjusted; RHS)

Investment(percentage change)

-40%

-20%

0%

20%

40%

60%

80%

2003 2004 2005 2006 2007

Imported capital goods

Domestic

Construction

Investment(quarterly, SA)

Consumption(percentage change)

Which, in turn, supported a turn around in Which, in turn, supported a turn around in

employment growthemployment growth (and reduced unemployment)

3%

6%

9%

12%

15%

2000 2001 2002 2003 2004 2005 2006 2007

-10%

-5%

0%

5%

10%

Unemployment(LHS)

Source: BPS

Employment growth(RHS)

Trends continuedTrends continuedand services & Utilities continued strong and services & Utilities continued strong

while tradables were mixedwhile tradables were mixed

-2

0

2

4

6

8

10

Q105

Q205

Q305

Q405

Q106

Q206

Q306

Q406

Q107

Q207

Q307

Q407

Agriculture Transport Construct'nManu Trade, restaur. FinanceMining Utilities Services

Tradables Non-tradables

TradablesNon-

tradables

%

Total GDP

Domestic economy is drawing in imports;Domestic economy is drawing in imports;while higher commodity prices supported exportswhile higher commodity prices supported exports

13.4

10.7

7.6

5.4

8.57.7

18.8 19.2

15.3

0

5

10

15

20

25

2005 2006 2007

Volume growth Price growth Growth of value of non-oil exports

Growth (%)Year-on-year percentage change

-10

0

10

20

30

40

Mar-05 Sep-05 Mar-06 Sep-06 Mar-07 Sep-07

Non-oil Exports

**PreliminarySource: BPS Trade Statistik

Non-oil Imports

**

**

But Indonesian exports are becoming less But Indonesian exports are becoming less dependent on the US dependent on the US

(and more on China and India)(and more on China and India)

Market Share in Non-Oil/Gas Exports

1

3

5

7

9

11

13

15

17

19

2000 2001 2002 2003 2004 2005 2006 2007

%

China India Japan

Malaysia Singapore United States

Contribution to Growth of Non-Oil Exports

0

2

4

6

8

10

12

14

16

18

20

China India Japan Malaysia Singapore UnitedStates

%

2004 2005 2006 2007

And commodities drove Indonesia’s stock And commodities drove Indonesia’s stock market to one of the best performances in market to one of the best performances in

the worldthe world

80.00

100.00

120.00

140.00

160.00

180.00

200.00

220.00

240.00

260.00

Jan-06 May-06 Sep-06 Jan-07 May-07 Sep-07 Jan-08

Jakarta Stock Exchange (JSE)

MSCI Emerging Market

MSCI Developed Market

Equity Price Indices1/2/2006=100

But challenges are mounting as oil But challenges are mounting as oil pricesprices

put pressure on fiscal policyput pressure on fiscal policy

Central government balancePercent of GDP

10%

13%

16%

19%

22%

2000 2001 2002 2003 2004 2005 2006 2007*2008**

-6%

-3%

0%

3%

Realized(RHS)

Proposed(RHS)

Expenditure(LHS)

Revenue(LHS)

Balance(RHS)

Central government debtPercent of GDP

0%

20%

40%

60%

80%

100%

2000 2001 2002 2003 2004 2005 2006 2007

S.O.E.sCommericalExport creditMultilateralBilateralDomestic

And energy subsides risk crowdingAnd energy subsides risk crowding out other spending out other spending

(and distorting incentives)(and distorting incentives)

0%

10%

20%

30%

40%

50%

1 2 3 4 5 6 7 8 9 10 Poor Household consumption decile Rich

0

60

120

180

Subsidies Capital investment Social assistance

Electicity

Fuel

Source: Ministry of Finance, 2008 RAPBN-P. Assumes oil at US$95.

And Indonesia’s Fuel Prices are Very Low(even adjusted for income)

UnitedKingdomKoreaRep

Japan

Singapore

UnitedStatesMalaysia

UnitedArabEmiratesIndonesia SaudiArabiaYemen

IranVenezuela0

25

50

75

100

125

150

100 1,000 10,000 100,000

GDP per capita (log scale)

Gasoline price (US cents/liter)

China

While other commodity pricesWhile other commodity pricesfeed into domestic food costsfeed into domestic food costs

(with rice an exception)(with rice an exception)

1,000

2,000

3,000

4,000

5,000

2000 2001 2002 2003 2004 2005 2006 2007 2008

International prices

(Vietnamese, 25% broken, cif)

IDR

Domestic wholesale price

Importban

0

5

10

15

2004 2005 2006 2007 2008

Core

Food

Headline

%

CPI inflationYear-on-year percentage change

Wholesale & international rice prices

And borrowing spreads are rising, but And borrowing spreads are rising, but remain low in historical perspectiveremain low in historical perspective

Source: Bloomberg

20

30

40

50

60

70

80

90

100

110

120

Jan-03 Jun-03 Nov-03 Apr-04 Sep-04 Feb-05 Jul-05 Dec-05 May-06 Oct-06 Mar-07 Aug-07 Jan-08

JP Morgan US High Yield Spreads

EMBI Global

Indonesia Bond Spread over US

Emerging Market Spreads, January 2003=100

And International conditions continue to And International conditions continue to deterioratedeteriorate

-6

-3

0

3

6

9

2000M1 2002M1 2004M1 2006M1 2008M1

Industrial production growth, year on year (%)

OECD leading indicator

OECD IP

Source: World Bank, DECPG.

The global outlook for 2008The global outlook for 2008Prelim. Projected

2005 2006 2007 2008

Real GDP growth (annual % change):

World 3.4 3.9 3.6 2.7

OECD 2.4 2.8 2.5 1.5

United States 3.1 2.9 2.2 0.4-1.4

Japan 1.9 2.2 2.1 1.5

Euro Area 1.5 2.8 2.7 1.6

Developing East Asia Pacific 9.1 9.7 10.2 8.8

World trade (% change in volume)

7.8 10.1 9.2 4.5

CPI inflation G7 (% change) 2.0 2.0 1.7 1.7

Oil Price (USD per barrel)* 53.4 64.3 71.2 86.8

Non-oil commodity prices (% change)

13.4 24.5 -0.7 13.4

* Simple average of spot prices of U.K. Brent, Dubai, and West Texas Intermediate crude oil.Source: World Bank Development Economics Prospects Group (preliminary, March 2008)

But developing and high-income country But developing and high-income country growth growth

has been diverginghas been diverging

-1

0

1

2

3

4

5

6

7

8

9

1962 1967 1972 1977 1982 1987 1992 1997 2002 2007

Developing countries

High-income countries

Source: World Bank, DECPG.

With developing countries providing With developing countries providing more momentum especially to trade more momentum especially to trade

growthgrowth

-5

0

5

10

1991M1 1993M1 1995M1 1997M1 1999M1 2001M1 2003M1 2005M1 2007M1

United States

Developing countries

Source: World Bank, DECPG.

Contribution to global nominal import growth in US$, year on year (%-points)

But Indonesian growth to slow But Indonesian growth to slow moderatelymoderately

The outlook for the Indonesia economy

2006 2007 2008 2009

GDP growth 5.5 6.3 6.0 6.4

NIA real export growth 9.4 8.0 7.0 8.6

Fixed investment growth 2.5 9.2 10.5 10.0

BOP Current account (% of GDP) 2.7 2.5 1.7 0.9

BOP Capital account (% of GDP) 0.7 1.4 1.3 1.6

Foreign reserves (Bill.$) 42.6 52.9 71.8 87.0

Central government bal. (% of GDP) -0.9 -1.3 -2.2 -2.1

Government debt (% of GDP) 39.6 34.4 31.9 30.3

CPI Inflation (%) 13.1 6.6 6.5 5.5

Key policy interest rate (1 m SBI) 12.0 8.0 7.5 7.25

Overview Indonesia

• 2007 was a good year– Solid output growth– Accelerating investment and– Better employment outcomes.

• And there are strengths going forward– Domestic momentum from credit expansion and growing infrastructure

investment.– Relatively smaller trade shares (i.e. more focus on the domestic

economy) with trade concentrated in commodities where prices are expected to continue relatively strong

– Reduced government debt exposure (<35% of GDP)– Little exposure in the Banking system to the sub-prime debt

• But weaknesses as well– Higher food prices feeding through into higher inflation and social

insecurity– A high subsidy burden on the budget from controlled domestic fuel

prices– High government borrowing needs

Thank You!Thank You!

While growth and investment have fed into higher imports and commodity prices supported

exports

Description January - December

in billion USD yoy (%) share to total growth (%)

2005 2006 2007 2006 2007 2006 2007

Total Export 85.7 100.8 114.0 17.7 13.1 100 100

Non-oil and Gas 66.4 79.6 91.9 19.8 15.5 86.93 93.41

Oil and Gas 19.2 21.2 22.1 10.3 4.1 13.07 6.59

Total Import 57.7 61.1 74.4 5.8 21.9 100 100

Non-oil and Gas 40.2 42.1 52.5 4.6 24.8 55.26 78.02

Oil and Gas 17.5 19.0 21.9 8.6 15.5 44.74 21.98