Cablegate: Indonesia - Economic and Financial Highlights June
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TAGS: EFIN EINV ECON PGOV ID
SUBJECT: INDONESIA - ECONOMIC AND FINANCIAL HIGHLIGHTS JUNE
2006
1. Summary. The Central Bureau of Statistics (BPS)
announced on July 3 a slight decrease in year-on-year (YoY)
inflation in June 2006 to 15.5 percent. Citing improving
macroeconomic trends, Bank Indonesia (BI) cut interest rates
by 25 basis points to 12.25 percent on July 6. At their
June 14 meeting, Consultative Group on Indonesia (CGI)
members pledged USD 5.4 billion of loans and grants to the
Government of Indonesia (GOI), more than covering the
country's USD 4.3 - 4.6 billion financing gap for 2006. 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. On June 22, the
GOI announced it would repay half of its outstanding standby
reserves loan to the International Monetary Fund (IMF),
about USD 3.7 billion, and BI transferred the funds to the
IMF the next week. Largely as a result, June foreign
exchange reserves at BI fell to USD 40.1 billion. On June
2, the Minister of Finance issued a decree on infrastructure
risk sharing guidelines for public-private partnership
projects, and the President signed a revised decree on land
procurement on June 5. Both measures are designed to help
facilitate infrastructure investment. A June 2006 Ministry
of Finance report shows that government spending has been
slow, with only 31 percent of 2006 funds distributed as of
June 7. On June 14 Bank Mandiri, Indonesia's largest state-
owned bank, disclosed the names of debtors with non-
performing loans (NPLs) exceeding Rp 1 trillion (USD 107.5
million) which account for 60 percent of the bank's total
NPLs. The mutual fund industry is recovering from last
year's steep sell-off by offering a new class of lower risk
products. End Summary.
Inflation Remains High, BI Cuts Interest Rate
---------------------------------------------
2. On July 3, the Central Bureau of Statistics (BPS)
announced a slight decrease in YoY inflation in June 2006 to
15.5 percent. Month-on-month (MoM) inflation rose slightly
to 0.5 percent from 0.4 percent in May, mainly due to a rise
in food prices. Core inflation also increased slightly to
9.6 percent YoY from 9.5 percent in May. Citing improving
macroeconomic trends, including declining inflation rates,
BI cut short-term interest rates by 25 basis points (bps) to
12.25 percent 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 percent by the end of the year, if inflation
falls into the single digits.
---------------------------------------------
Table 1: Inflation Components - June 2006
---------------------------------------------
Component MoM YoY
---------------------------------------------
Foodstuffs 1.1 17.0
Prepared food, beverages,
tobacco 0.3 11.7
Housing, water, electric, fuel 0.3 12.8
Clothing -0.1 9.8
Health 0.3 7.3
Education, recreation/sports 0.2 8.0
Transportation, communication
and financial services 0.1 30.8
---------------------------------------------
Total 0.5 15.5
---------------------------------------------
Source: Central Bureau of Statistics (BPS)
CGI Pledges USD 5.4 Billion for Indonesia,
------------------------------------------
3. 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
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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
-----------------------------------
4. 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
2 outlines revised FY 2006 and preliminary FY 2007 budget
assumptions.
--------------------------------------------- ------
Table 2: 2006 Revised and 2007 Preliminary
Budget Assumptions
--------------------------------------------- ------
2006 2006 2007
Original Revised Preliminary
--------------------------------------------- ------
Budget deficit (1) 0.7 1.3-1.5 0.7-0.9
Oil Price (USD/Barrel) 57 62 57-65
BI Interest Rate (pct) 9.5 12 8.5-9.5
Exchange Rate (Rp/USD) 9,900 9,300 9,000-9,500
Inflation (pct) 8.0 8.0 6.0-8.0
GDP Growth (pct) 6.2 5.9 6.0-6.5
(1) Percent of GDP.
Source: Ministry of Finance
GOI Repays Half of IMF Standby Reserves Loan
--------------------------------------------
5. 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
--------------------------------------------- ----
6. 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
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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
-----------------------------
7. 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.
8. 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.
9. 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 3 outlines
changes in the types of projects that the GOI may categorize
as meeting a "public purpose."
--------------------------------------------- ---
Table 3: Decree No. 36/2005: Types of Infrastructure
Projects that may be defined as meeting a
"Public Purpose"
--------------------------------------------- ---
Type Revised Decree
--------------------------------------------- ---
Railway Retained
Public Safety Retained
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Airport Retained
Highway/Toll Road Retained
Seaport Retained
Telecommunication
Facilities Removed
Public Building Removed
Hospitals Removed
Schools Removed
Source: Media reports
GOI Spending Slow in First Half of 2006
---------------------------------------
10. 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 percent of the targeted amount. The central government
spent Rp 113.6 trillion (USD 12.2 billion) or 25.6 percent
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 percent 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.
11. Up to June 7, GOI revenues reached Rp 209.1 trillion
(USD 22.5 billion), or 33.4 percent 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 percent of
the targeted Rp 416.3 trillion (USD 44.8 billion). Non-tax
revenue reached Rp 47 trillion (USD 5 billion) or 22.9
percent 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
--------------
12. 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 percent,
while the new bonds offer yields of 13.2 percent 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"
---------------------------------------------
13. 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"
----------------------------
14. On June 14, Indonesia's largest state-owned Bank Mandiri
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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 percent of
Mandiri's NPLs, which reached Rp 27 trillion (USD 2.9
billion) as of December 2005, or 26.2 percent of its total
loans. The surge in NPLs contributed to an 88-percent 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?
---------------------
15. 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 percent. 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 percent 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.
--------------------------------------------- --
Table 4: Mutual Fund Growth (Dec 05 - May 06)
(in Rp trillion)
--------------------------------------------- --
Type 2005 2006
Dec Jan Feb Mar Apr May
--------------------------------------------- --
Fixed income 13.9 14.4 14.2 14.5 14.6 14.6
Money market 2.1 2.0 2.0 2.3 2.4 2.3
Mixed 5.5 4.8 4.7 4.6 4.8 4.7
Equity 4.9 4.3 4.2 3.9 4.2 4.4
"Protected" 3.0 3.1 2.0 3.7 3.8 6.3
TOTAL 29.4 28.6 27.1 29.0 29.8 32.3
Source: Capital Markets Supervisory Agency (BAPEPAM)
--------------------------------------------- ------
Table 5: Selected Economic, Financial, and Trade
Statistics, March - June 2006
--------------------------------------------- ------
Mar Apr May Jun
CPI inflation (YoY) 15.74 15.4 15.60 15.53
CPI inflation (MoM) 0.03 0.05 0.37 0.45
Rp/USD Exch. rate(1) 9,075 8,775 9,220 9,300
30-day SBI rate (1) 12.73 12.75 12.50 12.50
Foreign Res. (USD bn)(1) 40.1 42.8 44.2 40.1
JSX Composite Index(1) 1,323 1,464 1,330 1,310
Exports (USD billion) 7.45 7.6 8.3
Percent change (YoY) 2.76 11.9 13.4
Imports (USD billion) 4.35 4.8 5.1
Percent change (YoY) -12.65 -3.7 -2.1
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Trade Balance 3.10 2.8 3.2
Source: Bank Indonesia, BPS, JSX
(1) End of period
PASCOE