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Indonesia: Macroeconomic Update and Progress on Structural Reforms

October 25, 2007

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Outline •Recent Economic Development

•Progress on Structural Reform

•Efforts to Accelerate Infrastructure Development

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Indonesia’s economic recovery continues and persistent

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Persistent Improvement over Time: GDP Growth 1998-2007

Percent p.a

-13.8%

GDP has grown by 6% over last 4 quarters,While non oil GDP has reached 7% in Q2-07

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Supported by recoveries in private consumption and strong external demand

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30,456 80,578 100.0 20.7 37,218 100.0 22.2

I. Agriculture 3,902 10,201 12.7 30.6 4,334 11.6 11.1

Timber 177 490 0.6 21.4 244 0.7 38.3

Rubber 1,644 4,281 5.3 73.4 1,878 5.0 14.2

Animal & Husb Products 837 2,056 2.6 1.4 889 2.4 6.2

II. Mineral 6,407 18,435 22.9 39.2 9,391 25.2 46.6

Copper 2,104 6,569 8.2 34.0 3,445 9.3 63.7

Nickel 429 1,836 2.3 55.7 1,454 3.9 238.7

Coal 2,417 6,208 7.7 42.5 2,896 7.8 19.8

III. Manufactured 19,723 51,117 63.4 13.8 23,083 62.0 17.0

Textile & Textile Products 3,753 9,620 11.9 12.1 4,119 11.1 9.7

Palm Oils 1,921 5,100 6.3 37.1 2,288 6.1 19.1

Chemical Products 1,941 5,330 6.6 19.4 2,509 6.7 29.3

Electrical Appliances 3,423 9,210 11.4 -6.1 3,698 9.9 8.0

Machinery & Mechanic 2,022 5,140 6.4 48.7 2,920 7.8 44.4

2006

Total

CommoditiesShare

%Share

%Growth % (y.o.y)

Value (USD Mill)

Jan-May*

2007

Jan-May

Jan-Des

Growth % (y.t.d)

Value (USD Mill)

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Private Investment show a significant improvement

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Indonesia: Investment Approval and IUT Definition (Rp Tr)

Foreign Domestic Total Foreign Domestic TotalApproval 78.3 96.74 175.04 281.97 146.04 428.01IUT Definition 35.37 11.8 47.17 73.17 32.14 105.31

Approval 260% 51% 145%IUT Definition 107% 172% 123%Notes: Exchange Rate Rp 9000/US$

2006 2007

% change

Poverty and Open Unemployment is declining

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Macroeconomic Risks continue to decline

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Structural Reform • Inpres 6/2007 consists of policy actions for

▫ Improving investment climate▫ Accelerating infrastructure providing in Indonesia through improving policy environment

which include de-monopolize SOEs, providing legal basis and incentive for PPP.▫ Encouraging SME development and▫ Reforming financial sector and SOEs

• Partial and Gradual Administration Reform.• Revitalization Agriculture Sector• Energy Sector Reform• Poverty Reduction National Program (Including rural infrastructure program)

▫ PNPM : coverage and size of allocation per sub district expanded significantly. All sub district will be covered and allocation per district is risen up Rp 3 billion

▫ Conditional Cash Transfer : Pilot Project in 6 Provinces in 2007 and 2008

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Structural Reform: • Inpres No 6/2007; Some Highlights

▫ Investment Climate : Implementation Regulations of Investment Law

PP No : to provide clarity of authority and responsibility between central and local government and better mechanism for evaluation local regulations

Efforts to reduce days of setting up business near complete PEPI is operational

Major improvement in VAT refund mechanism Modernization in Custom and Tax Administration

▫ Infrastructure Reform▫ Financial Sector Reform

Financial Sector Stability Forum is operational BEJ and BES merger Draft of Fiscal Incentives for Public Companies is completed

▫ SME Sector Reform Framework for SME Credit Guarantee System is completed Business Plan for two SOEs : Askrindo and PT SPU completed and capital injected for those SOEs are

approved by the Parliament▫ Bureaucratic and Institutional Reform (Ministry of Finance and some regional governments)

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Progress on Investment Climate

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Monitoring surveys show a real improvement in investment climates andpartly reflected in current investment recovery.

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Efforts to accelerate infrastructure development

• Multiple tracks strategy▫ Increase budget allocation for infrastructure including

matching grant for region to encourage higher allocation for infrastructure from local government budget

▫PPP through partial guarantee: toll road▫Crash program for electricity sector▫ Institutional Reform to allow private sector participation.

• Partly implemented this year but majority in 2008

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Model Projects:•0f 10 model projects, 4 projects are under way▫Tangerang Water Project: tender was completed and

now on the bidder evaluation stage.▫Toll Solo Kertosono: Tender was completed but no

interest; new scheme is prepared.▫Central Java Power Plant: tender preparation with IFC

assistance.▫Telecom : Palapa Ring : the bid winner awarded

through private consortium scheme.