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Danamon Economic & Market Research 1 Table of Contents Indonesia Economic Outlook 2011 Another Good Year? 28 January 2011 PT Bank Danamon Indonesia, tbk. Economic and Market Research

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Page 1: Indonesia Economic Outlook 201 1 · Danamon Economic & Market Research 1

Danamon Economic & Market Research 1

Table of Contents

Indonesia Economic Outlook 2011 Another Good Year?

28 January 2011

PT Bank Danamon Indonesia, tbk. Economic and Market Research

Page 2: Indonesia Economic Outlook 201 1 · Danamon Economic & Market Research 1

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Table of Contents Table of Contents................................................................................................................................................................. 2 Highlights for 2011 ............................................................................................................................................................... 3 Global Economic Outlook: Go East...................................................................................................................................... 4 Indonesia In the Face of Capital Inflows .............................................................................................................................. 5 The Real Economy: Another Good Year?............................................................................................................................ 6

Box 1: Gauging Household Purchasing Power............................................................................................................ 8 Inflation and Monetary Policy: Interest Rates Becoming a Last Resort?.............................................................................. 9

Box 2: Fuel Subsidy Cuts: Will Inflation Blow Sky High?........................................................................................... 10 Fiscal Policy: An Improvement in Spending? ..................................................................................................................... 11 Banking System and Liquidity Outlook: Will Returns on Liquidity Remain Suppressed? ................................................... 12 Balance of Payments: Expecting a Growing Portion of FDI ............................................................................................... 13

Box 3: Recent Trends in Foreign Trade - Exports ..................................................................................................... 15 Box 4: Recent Trends in Foreign Trade - Imports ..................................................................................................... 16

Fiscal Financing and Bond Market: A Higher Volatility Premium........................................................................................ 16 Additional Risks: Inflation, Asset Price Vulnerability and Political Stalemate ..................................................................... 18

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Highlights for 2011 • Despite recent turbulence in the financial markets, Indonesia enters 2011

with optimism intact. Although some sectors may see softer growth rates compared to the extraordinary rebound year of 2010, we still expect stronger economic growth overall in 2011 (6.4% vs. 6.0% in 2010), supported primarily by domestic demand.

• Headline inflation is expected to rise further towards 7.2%, with some risk

to the upside. Food and administered energy prices will be at the forefront in driving up the CPI; however we may gradually start to see a pass-through into core inflation. And eventually this will require a (stronger) degree of monetary tightening.

• Yet in spite of this, we don’t expect any policy rate increase to be very

strong. We see BI increasing its policy rate by only 50bps to 7.00% in total this year, which will mainly be done for signaling purposes and dampening the rise in inflation expectations.

• Furthermore given apparent concerns over monetary policy costs, we

wouldn’t be surprised if any rate hike is accompanied by more liquidity absorption measures, such as further hikes in reserve requirements later in the year.

• Meanwhile despite prospects of gradual Yuan appreciation, the global

environment is still shaky so risk appetite could go on and off leading to abrupt episodes of broad dollar strengthening. This situation is paired with a domestic background of shallow financial markets and rising inflation. Therefore in the IDR bond market, investors may start demanding a higher volatility premium, and bond-related capital inflows may tend to be more moderate compared to 2010.

• But in spite of that, portfolio inflows will remain a swing factor for Indonesia’s

balance of payments (despite expected improvements in FDI inflows), especially as the current account surplus would likely narrow further this year to around 0.2% of GDP.

• And since a volatile exchange rate would not be helpful for easing inflation

worries, we expect BI to continue its regular interventions in the FX market and allow more swings in foreign reserves instead. We foresee the spot exchange rate ending the year at a slightly weaker position of Rp9,150/US$.

Key economic forecasts 1Q11 2Q11 3Q11 4Q11

IDR/USD 9,050 9,350 9,150 9,150

BI policy rate (% p.a.) 6.50 7.00 7.00 7.00

CPI (% chg y-o-y) 7.3 7.4 7.0 7.2

10-yr bond yield 9.00 9.25 8.50 8.50

Anton Gunawan Chief Economist

[email protected]

Helmi Arman Economist/ Bond Strategist [email protected]

Anton Hendranata Economist/Econometrician

[email protected]

Please see the important disclaimer and information on

the back of this report.

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Global Economic Outlook: Go East Following the 2008 global financial crisis, the recovery of advanced economies is underway but continues to face headwinds. After a brief rebound supported by fiscal and monetary stimuli in the mid of 2009, concern over rising debt levels and its sustainability will be an issue which could rock the boat at anytime. While there have been recent signs of strength in the US economy and some countries in Europe, industrial production levels are still far below pre-crisis highs. In Japan, industrial production has been tapering off. However the picture in Asia ex-Japan is far less bleak, although not without its share of concerns. With domestic demand expected to strengthen, the real GDP growth outlook remains robust, although year on year growth rates have started to tail-off from the post crisis rebounds in China, Korea, as well as in major ASEAN economies such as Malaysia, Thailand and Philippines. Real GDP growth in India remains particularly robust, supported by domestic consumption. Demand pull inflation won’t be a big issue in the developed countries given rampant spare capacity. However rising consumer prices has and will continue to spark concern in Asia. Although a number of tightening measures have been put in place, inflation in China has exceeded 5% y-o-y on food and residential housing prices. Food price inflation has also been driving up inflation in Korea, while energy prices have lately pushed up inflation in India. Generally this discrepancy in the growth and inflation outlook may continue to widen the interest rate differential between developed countries and emerging markets. While we expect neither the Fed Funds rate nor the ECB policy rate to be hiked until 2012, policy rates in a number of Asian countries may be increased. Accordingly the latter may continue to be on the receiving end of capital inflows from the former, and we may continue to see regulationist tendencies among policymakers in the Asia when dealing with this issue. Meanwhile with inflation and overheating concerns on the rise in China, we expect the PBOC to continue with its gradual reform on the Yuan, letting it appreciate in a gradual manner against the dollar. This will allow many Asian currencies to somewhat strengthen as well. However with debt woes in the Eurozone still lingering, we may see sporadic episodes risk aversion leading to episodes of substantial dollar strengthening across the board.

Chart 1. Industrial Production Indexes of Major Countries Chart 2. Policy Rates in Developed Countries

Nov-02 Nov-04 Nov-06 Nov-08 Nov-10

40

30

20

10

0

-10

-20

-30

-40

% y-o-y

Industrial Production Indexes

IN

US

EU

JP

May-01 Sep-02 Feb-04 Jun-05 Nov-06 Mar-08 Aug-09 Dec-10

7

6

5

4

3

2

1

0

US: Federal Funds Rate Target UK: Bank of England

ECB Policy Rate JP: BOJ Policy Rate

% p.a.

Source: CEIC, Danamon estimates Source: CEIC

The recovery boat remains

on unfriendly waters

Exchange rates prone to

sudden adjustments

The weather will remain

sunnier in the East

Inflation will be an issue in

developing countries

Discrepancies in interest

rates and growth outlook

will still direct capital to

emerging markets

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Meanwhile in recent months, the prices of soft and hard commodities have rallied due to a variety of factors. Precious metals such as gold, which have store of value properties, rose in price in the midst pump-priming and rising debt levels in developed economies. However for commodities such as vegetable oil, crude oil and coal prices have been driven up by extreme weather conditions. According to the International Energy Agency (IEA), oil demand from OECD countries surged in 3Q10, linked in part to a post-recession rebound and abnormal weather conditions. Chinese oil demand also soared in October 2010 amid increased usage of small-scale gas oil generators, following the Chinese government’s policy to close down inefficient coal-fired power plants by 2010.

Going forward, the ingredients for a further rally in gold prices will still be intact. However we are not yet convinced that a rerun of a 2008-style rally in oil prices is underway. In the longer run we should expect to see a continued decline of fossil-fuel dependence in the OECD. Furthermore the supply side seems to be still able to absorb increases in demand. Oil inventories in the OECD are still above the five year average and OPEC spare capacity still stands at around 5.6mb/d—which is far higher compared to the low 1.5mb/d levels seen in mid-2008. From an expected average oil price of $80/bl in 2010, we expect oil prices to average a moderately higher $90/bl in 2011.

Chart 3. Trading partner inflation Chart 4. Oil and Soft Commodity Prices

Nov-04 Nov-06 Nov-08 Nov-10

5

4

3

2

1

0

-1

-2

ID: Trading Partner

Inflation

% y-o-y

Jun-06 Mar-07 Dec-07 Sep-08 Jul-09 Apr-10 Jan-11

160

140

120

100

80

60

40

20

350

300

250

200

150

100

Crude oil: WTI

Soft Commodity

Price Index

US$/bl 2000=100

Source: CEIC, Danamon estimates Source: CEIC, Danamon estimates

Indonesia In the Face of Capital Inflows For Indonesia, capital inflows are still likely to remain a warm issue in 2011. We expect total capital inflows (portfolio and foreign direct investment) to remain quite strong, though lower compared to 2010. This has been and may continue influencing various dimensions of the economy such as the GDP growth, monetary and fiscal policy outlook. We may see a continued rebound in foreign direct investment inflows given Indonesia’s sanguine long term growth prospects, which are supported by a relatively stable political and macroeconomic environment as well as conditionally favorable demographics. But on the flip side, we should mind that portfolio inflows will still tend to dominate the balance of payments. And given the relatively small size of Indonesia’s financial markets, capital flows can bring

On capital inflows, there is

good news and bad news

Will rising commodity

prices be a grave concern?

2008-style oil price rally

seems unlikely, in our view

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about unusually high levels of volatility, not to mention an increased likeliness of asset price bubbles. The capital inflows also act to increase the money supply and raise the costs of sterilized intervention. As of mid-January, outstanding open market instruments issued by BI summed up close to a staggering Rp500tn (7% of GDP), which translates to an annual interest payment of around Rp33tn assuming an average interest rate of 6.5%. Over the past six months, BI has quite effectively dampened the potential for inflows into SBIs; e.g. by replacing SBIs with term deposits and levying a minimum 1M holding period. But the government still needs foreign investors to finance the budget, so bond market capital inflows are still expected to continue. Accordingly excess onshore liquidity and exorbitant interest payments on monetary instruments may still be a key issue for monetary policymakers this year, which could mean that BI will be rather restrained in raising interest rates. One way out of this predicament is for BI and the government to jump-start the long-stalled plan to use government bills (instead of BI-issued instruments) in their monetary operations. There should be renewed momentum on this as cooperation would benefit both parties. The government is also looking for ways to fine-tune its debt management strategy, which is marred every year by wasteful excess financing.

The Real Economy: Another Good Year? In 2010, we saw economic growth become broader-based across consumption, investment and exports. This was contrary to the previous year when growth was supported mainly by an election-related consumption binge. Going forward we still expect domestic demand growth to continue strengthening, but inflation will be a key risk to monitor. Inflation will undoubtedly hit the real incomes of the very poor. The middle class (which is around 50 percent of the population), however, still has some chance of sustaining the blow—as long as core inflation doesn’t rise dramatically and export soft-commodity prices remain favorable. As for the upper income (affluent) segments of society, the experience of 2008 has shown that their expenditures are not so sensitive to inflation and appears to correspond more with the general state of the economy.

Chart 5. Foreign ownership in the bond market Chart 6. Net foreign purchases of stocks

Dec-06 Dec-07 Dec-08 Dec-09 Dec-10

200000

180000

160000

140000

120000

100000

80000

60000

40000

20000

35

30

25

20

15

10

5

Rpbn

Portion to total

outstanding (RHS)

%

Dec-06 Dec-07 Dec-08 Dec-09 Dec-10

8000

6000

4000

2000

0

-2000

-4000

JCI: Net foreign buying (Rpbn)

Source: MOF, CEIC Source: IDX, CEIC

Monetary policy costs will

probably be kept in mind

Excessive liquidity will also

be a problem

Will monetary operations

see any change?

Consumption growth is

threatened by inflation,

but we shouldn’t be too

pessimistic

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Fixed capital investment is also expected to continue growing. Construction activities might be constrained to some extent by the wet weather. However under an environment of relatively low interest rates and easy access to financing, we expect machinery investment to still grow robustly. Government infrastructure projects will also see some progress, though still at a slow pace. Meanwhile given the softer growth outlook on the global economy, export growth will probably be lower than 2010; however we still expect it to be positive. Indonesia will continue to diversify its exports towards emerging markets, although this may mean a greater portion of natural resources to total exports. On the supply side, growth among manufacturing industries has been relatively narrow-based; but we are encouraged about the nascent signs of revitalization within a number of industries. Investments in new machinery has been on the rise, and from digging through the trade data, we can see significant increases in machinery going towards manufacturing sub-sectors such as paper & printing, rubber and plastics, food and beverages. Meanwhile for labor intensive industries such as textile, there has also been an increase in machinery imports vs. 2009, but the figures are generally still below 2008 figures except for some sub-sectors such as leather and footwear. Yet it is important to keep our expectations generally in check, as unfortunately some sunset industries have yet to see light at the end of the tunnel: Machinery imports for metal rolling mills continue to decline year on year. Overall the revitalization of the manufacturing sector won’t come overnight, as many infrastructure bottlenecks are still prevalent, which will take time to address. Speaking of which, we note there has been progress in terms of infrastructure development; but a vast amount of effort is still needed. In the latest Global Competitiveness Report (2010 – 2011), Indonesia moved up in rank to 44, from 54 in the previous year (out of 139 countries). However this was mainly driven by better perceptions about the macroeconomic environment. Indonesia’s ranking on infrastructure is still far behind and only moved up two notches from 84 to 82. Specifically, roads were ranked 84

th, ports 96

th and electricity supply

97th.

Chart 7. Real GDP and domestic demand components Chart 8. Real GDP Growth by Main Sectors

Sep-06 Sep-07 Sep-08 Sep-09 Sep-10

7.0

6.5

6.0

5.5

5.0

4.5

4.0

3.5

3.0

2.5

30

25

20

15

10

5

0

-5

-10

% y-o-y GDP growth

Private Consumption

Investments

(RHS)

% y-o-y

Govt Consumption

Dec-02 Dec-04 Dec-06 Dec-08 Dec-10

10

8

6

4

2

0

-2

% y-o-y

Manufacturing

Data uses 2000p base year from Mar-04

Services

Primary

Commodities

Source: BPS, CEIC Source: BPS , CEIC

Real sector investments

will still accelerate

Softer export growth will

be a challenge

Supply side has been

problematic, but there is

reason to be optimistic

Infrastructure

development progressing,

but slowly

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Box 1: Gauging Household Purchasing Power Over the past decade, Indonesian households have been experiencing a significant increase in purchasing power. Based on the government’s social economic survey (SUSENAS), we calculate that the (inflation-adjusted) median expenditure per capita of Indonesians has been growing steadily despite a number of cyclical disruptions during the economic downturns of 2006 and 2009. We also can see from the data that the number of people in the lower income bracket (proxied by expenditure) has been steadily declining, while the number of middle income individuals has been rising significantly (see chart B1). This is true for both urban and rural households, but the trend has been more noticeable in the latter. Over the 10-yrs preceding 2009, the portion of middle income individuals rose from around 30% to nearly 50%. As for 2010, we expect there to have been further increases in the portion of middle class households, judging from the robust growth in sales of non-discretionary products such as motorcycle, car and clothing. And as far as the labor market data is concerned, the unemployment rate continued declining to 7.1% as of Aug-10, from 7.9% a year earlier, although this was accompanied by an increase in underemployment and a still dominant informal sector (67% of the labor force). The weak point is that the middle class in the rural areas are still mostly lower middle class, which could easily slip back into poverty in the event of an economic downturn. And we learn from the high inflation episode of 2008 that the income segments most prone to inflation, especially food inflation, are the poor. They saw real expenditures slashed by around 4%. However for the middle class, the median expenditure per capita was only marginally affected; while for the affluent (upper and upper-middle income) segment, expenditure sill managed to grow. This year rising inflation will undoubtedly hit the poor, which have a high portion of food expenditure. For the middle class (which is around 50% of the population), non-food spending is on average already higher than non-foods, so their purchasing power will be affected as well by core inflation. Much will also depend on the price of export soft-commodities, which affect the incomes in the agricultural sector and lower middle class.

Chart B1: Indonesia household expenditure segments (share of total)

34.9 34.5

51.7 53.849.3

28.8

0

10

20

30

40

50

60

70

80

90

1999 2002 2006 2007 2008 2009

0.00

0.04

0.08

0.12

0.16

0.20

0.24

0.28

0.32

0.36Lower segment

Middle segment

Upper segment (rhs)

% %

Source: BPS (Susenas), Danamon calculations

Table B1: Average real expenditure per day y-o-y change Real Expenditure / Capita / Day

(IDR) 2008 2009

< 6000 (eq. $1.25 PPP) -4.4% 6.3%

6000 - < 10000 ($1.25 - <2 PPP) 2.5% -2.2%

10000 - < 20000 ($2 – <4 PPP) -0.7% -0.7%

20000 - < 30000 ($4 – <6 PPP) -0.4% 0.0%

30000 - < 50000 ($6 – <8 PPP) -0.5% -0.1%

50000 - < 100000 ($8 - <10 PPP) 0.4% -1.8%

>= 100000 (>$10 PPP) 7.6% -7.0%

All -1.7% -6.1% Source: BPS (Susenas), Danamon calculations. Red : Lower segment ; Orange : Middle segment ; Yellow : Upper segment. PPP: 2009 Purchasing Power Parity dollars

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On electricity there has also been rather slow progress. A number of electricity development targets for 2010 were not met. Reportedly only around 52% of the targeted 1150MW additional capacity aimed for in 2010 was achieved. Meanwhile the development of new transmission lines were only partly met (30%) amid complications in land acquisition. Separately the draft law on land acquisition, which was originally planned to be made into a law in 2010, remains stuck on the drawing board.

Inflation and Monetary Policy: Interest Rates Becoming a Last Resort? In 2010 we saw headline inflation creep up from an all-time low of 2.8% to nearly 7% by year-end. Most of the increase was driven by volatile food prices. However the rise in core inflation has been less pronounced (from 3.6% to 4.3%) and this has been a justification for BI to maintain its policy rate at the historical low of 6.50%. Raw food prices are volatile, so the norm has been not to pay too much attention to its occasional ups & downs. But in our view, the wet weather & food price increases have been persistent, and official (BMKG) predictions suggest the La Nina phenomenon can last until May-2011. In this sense it is unwise to simply ignore the headline inflation readings, as they contain information on where core inflation is heading to going forward. Core inflation looks set to rise towards 5.0% - 5.5%, not only due to food price pass-through, but also due to rising money supply growth. The M1 money supply (as a proxy for transactions money) has been growing at a rate of 15% y-o-y, up from around 7% a year earlier. Rising M1 growth is usually followed by rising core inflation. See Chart 10. Furthermore in recent months we already saw higher raw food prices creeping into processed foods. Furthermore fuel subsidies will be rationed in April, potentially adding +/-0.7pps against a no-rationing scenario (see Box 2). Hence from a forward looking perspective, there are reasons to be cautious. We are raising our 2011 inflation forecast to 7.2%, from previously 6.5%.

Chart 9. CPI inflation breakdown Chart 10. M1 growth and inflation

Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10

50

40

30

20

10

0

-10

Food Processed Food Housing

Clothing Health Education, Recr.

Transport, Comm.

% y-o-y

May-04 May-06 May-08 May-10 May-12

30

25

20

15

10

5

0

11

10

9

8

7

6

5

4

3

Core Inflation, RHS

M1 growth (lead 18M)% y-o-y %

Source: BPS, CEIC Source: BPS, CEIC, Danamon estimates

Inflation is on the rise

Should we be worried

against higher food prices?

This time, yes.

Land acquisition remains a

key impediment

Rising core inflation is just

a matter of time

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Box 2: Fuel Subsidy Cuts: Will Inflation Blow Sky High? As part of its long-term subsidy reform program, the government plans in March to limit the sale of subsidized RON 88 petrol a.k.a. Premium. Subsidized petrol will eventually be left available only to public transport vehicles, two & three-wheelers, as well as fishing boats. And the uneligible private cars may have to buy the more expensive Pertamax (RON 92 & 95), if not a market-price version of Premium (RON 90). The policy can impact inflation because in effect the public will have to spend more on fuel. From a statistical standpoint, the weights on fuel in the CPI will be adjusted upward, impacting the inflation rate in a similar way to a fuel price hike. Still though, the shock should be less than that of a traditional fuel price hike because there should not be any strong second-round impact, which is usually in the form of official increases in public transport tariffs. As we expected in our 30-Nov report, entitled “Subsidized fuel rationing: An initial assessment,” the plan will be implemented gradually. Starting from greater Jakarta, the whole of Java and Bali in 2011, followed by the other islands nationwide in 2012. Automotive diesel will also be rationed starting in June (substituted with non-subsidized diesel), but this requires a high degree of preparation thus risks being not implemented on time. The minister of finance has put a ball-park figure of 0.34 percentage points incremental inflation impact due to the rationing of premium and diesel. However this is an indicative figure, which depends also on the discrepancy between the subsidized and non-subsidized prices. At a benchmark oil price assumption of $90/bl, we calculate the direct impact to be around 0.5pps. The second round impact is a bit difficult to quantify. Some increase in public transport tariffs due to potential fuel distribution problems is possible; however we don’t expect a big pass-through effect to food prices, because road transport services are a relatively small component of cost in the production of crop foods (i.e. +/- 3% on average). Overall we estimate the total second round impact to be close to 0.2pps, meaning a total 0.7pps total inflation impact vs. a no rationing scenario.

Consumption of fuel by the transportation sector, share (%) against total

Avtur Premium Pertamax Pertamax+ Diesel Fuel Oil Others Total

(Aviation) (RON 88) (RON 92) (RON 95) (Automotive) (Marine)

2002 6.4 53.7 0.0 0.0 39.4 0.3 0.2 100

2005 7.9 56.5 0.8 0.3 34.2 0.1 0.1 100

2008 8.3 59.0 0.9 0.4 28.2 0.1 3.2 100 Source: ESDM, Danamon calculations

In 2010 we saw a slight shift in the central bank’s policy focus away from the policy rate, coupled with an increasing reliance on liquidity management and macro-prudential measures. Several apparent issues were behind this trend: BI has been trying to keep a lid on monetary policy (sterilized FX intervention) costs, including the interest payments paid on its monetary policy instruments. It was also worried that raising interest rates might encourage more capital inflows into short-term money market instruments (especially SBIs). Furthermore BI, under the leadership of Governor Darmin Nasution, looks determined to push banks to extend more credit. Yet when taken together with developments in the money market, BI’s actual monetary policy stance is less conclusive. Although the BI rate has not been changed, onshore interbank rates have been allowed to drop to a low point of 90bps increments below the BI rate, which is not consistent with monetary tightening. Furthermore BI’s policy to penalize banks that have a Loan to

A shift in paradigm at the

central bank

But interest rate

developments and LDR

linked required reserves

policies are consistent with

monetary easing

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Deposit Ratio (LDR) of less than 78% starting March 2011, further gives a confusing signal on its true monetary policy stance. So the markets have started to price in the risk of BI being behind the curve on inflation, which has caused yields to move upward by 100 – 200 bps since the start of the year. Given the abrupt rise in yields seen over the past weeks, we acknowledge a chance that BI could move sooner than our baseline scenario in April. Policymakers may start to realize that if worries over inflation remain unaddressed; the government’s cost of financing this year’s budget deficit could become more expensive. In the event BI does move, we expect it will be by 25bps increments, as the purpose of any rate hike would be for signaling only (rate hikes actually could do little to address the recent food price surges).

Fiscal Policy: An Improvement in Spending? Indonesia’s relatively low fiscal deficit and declining debt to GDP ratio has long been applauded; and there should be no further need to overstress this. What should be the focus going forward regarding fiscal policy concerns matters above the line; e.g. how well fiscal policy contributes to the structural improvements necessary to facilitate higher rates of economic growth. The contribution of government consumption to GDP growth in the first 3 quarters of 2010 was negative. This is unsurprising, as government expenditure (particularly capital expenditure) was below the budget and tax revenues hit the mark. The actual budget deficit was only 0.6% of GDP from an initial target of 2.1% of GDP. However there are signs of hope. In August 2010, the government issued a new regulation (PP 54/2010) to expedite the procedure for acquiring goods and services. The regulation streamlines the approvals needed for certain types of expenditures, and encourages e-procurement which is supposedly more efficient. It also allows direct purchases (without auction) for certain types of spending; e.g. vehicle purchases, hotel bookings, etc. With this new regulation, the strong seasonality in spending patterns (in which the bulk of spending is usually done in the last quarter of every year) could be reduced. Therefore we expect the gap between the budget and realized fiscal deficits this year would narrow. We expect the fiscal deficit this year to be 1.2% of GDP, vs. the government’s projection of 1.7% of GDP.

Chart 11. Government budget deficit Chart 12. Government excess financing

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

2.5

2.0

1.5

1.0

0.5

0.0

ID: Central government deficit

% GDP

F

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

80000

60000

40000

20000

0

-20000

-40000

-60000

-80000

-100000

Rptn

Excess Financing

Budget Deficit

Source: MOF, CEIC Source: MOF, CEIC

Perceptions may emerge

of policymakers being

behind the curve

New regulation is expected

to expedite the spending

process, hopefully

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Banking System and Liquidity Outlook: Will Returns on Liquidity Remain Suppressed? In 2010, overall onshore liquidity was flush. Indonesia’s hefty balance of payments surplus helped propel money growth so that the money supply (M2) still grew by around 14% y-o-y in Nov-10 despite a contraction in net claims to the government. The amount of bank liquid assets (SBIs and call money) placed at BI increased to 12% of total assets in Oct-10 vs. 10% a year earlier, before primary reserve requirements (IDR) was raised from 5% to 8% in Nov-10. In the money market however, although the BI policy rate officially remains at 6.50%, the interbank and other money market rates have come down much to the result of BI’s policies. In 2010, BI re-widened the band between the BI rate and the FasBI and later on their fine tune operations (which usually involved opening multi-day deposit facilities at close to the BI rate) were stopped—effectively engineering a rate cut without explicitly doing so. Going forward, perhaps we can expect that any policy rate hike would be accompanied by a flattening of the money market yield curve, as BI may try to hold down the interest rate on SBIs and Term Deposits. And perhaps reserve requirements could be hiked again to further absorb liquidity. Excess liquidity will likely remain on BI’s sight. Domestic liquidity may still be abundant although bank lending may grow by another 21% this year (vs. 22.8% last year). Net foreign assets may continue growing amid an expected balance of payments surplus. And with the implementation of PP 54/2010, which is expected to expedite government spending and reduce its cyclicality, the impact of liquidity from government operations should also be more positive. In spite of all this, however, it is important not to be too focused on the aggregate numbers, and be mindful of the imbalances of liquidity position between banks. If we take out the top 4 banks in the country, competition for gathering funding among mid-sized banks have been quite strong and will probably persist in 2011. This can result in further increasing deposit rates.

Chart 13. Onshore daily liquidity balance Chart 14. IDR Inter-Bank Transaction Volumes

7-Jul-09 24-Nov-09 13-Apr-10 31-Aug-10 18-Jan-11

160000

140000

120000

100000

80000

60000

40000

20000

0

IDR Daily LiquidityRpbn

Yellow line:

2W Moving Average

Nov-07 May-08 Nov-08 May-09 Nov-09 May-10 Nov-10

280000

260000

240000

220000

200000

180000

160000

140000

120000

100000

80000

IDR Interbank transaction

volumes (monthly)

Rpbn

Source: Bank Indonesia , CEIC, Danamon calculations Source: Bank Indonesia

Domestic liquidity still

abundant

Money market rates have

come down significantly

despite stable BI rate

BI may want to suppress any

increase in interest payments

resulting from a BI rate hike

Mid-sized banks may continue

to see strong competition in

gathering third party funds

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Danamon Economic & Market Research 13

Chart 15. Selected money market rates Chart 16. Commercial bank LDR

24-Nov-09 13-Apr-10 31-Aug-10 18-Jan-11

6.8

6.6

6.4

6.2

6.0

5.8

5.6

6M SBI/TD

%

O/N Interbank

BI rate

Nov-05 Nov-06 Nov-07 Nov-08 Nov-09 Nov-10

85

80

75

70

65

60

55

%Commercial Banks:

Rupiah LDR

Source: Bank Indonesia , CEIC Source: Bank Indonesia, CEIC

Balance of Payments: Expecting a Growing Portion of FDI In 2010 we saw the current account surplus narrowing; however the capital account was in a hefty surplus resulting in a record high balance of payments surplus. Several developments in particular regarding the BOP are worth highlighting. What’s interesting from the current account deterioration is that it was not due to a shrinking of the merchandise trade balance, but rather a fast rise in freight costs and income repatriation. The trade balance has remained fairly robust, which we believe has a lot to do with the changing structure of exports towards natural resources. As the portion of natural resource exports grow, the positive correlation between imports and exports is reduced. This is because natural resource exports has lower import content compared to the higher value added manufacturing product. However there is also a negative side to this, just like a “double-edged sword”; the trade balance becomes more sensitive to global commodity prices. Going forward, the services and income deficits will continue to widen. But we also expect export volume growth to soften this year amid a slower global economic growth outlook, while import growth may stay relatively strong given the relatively robust domestic demand. For example if one expects an increase in FDI inflows, then this is usually accompanied by a rise in capital goods imports. Overall we expect the current account surplus to continue narrowing in 2011 towards 0.2% of GDP (from an expected 1% in 2010). On the capital account, we expect capital inflows to be also strong, though probably not as robust as in 2010. What’s important to watch is the size of foreign direct investment (FDI) inflows, and its comparison against portfolio inflows (which gives us a proxy of the ratio of long term to short term capital inflows). The ratio of FDI to portfolios inflows probably increased to around 45% in 2010 from 23% in 2009. Our baseline is for this ratio to increase further in 2011. The higher the ratio the better, especially as the current account may eventually

Capital account still expected

to be in surplus…

Current account surplus to

narrow towards 0.2% of GDP

Merchandise trade surplus

remains intact.

Strong growth in exports of

natural resources, which has

low import content

But ratio of FDI to portfolio

inflows needs to improve

further

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Danamon Economic & Market Research 14

turn into deficit in 2012. Overall, we expect BI’s foreign exchange reserve position to increase further towards $116bn by end 2011. Speaking of which, sharper foreign reserve fluctuations will also be a key feature for this year. BI may continue conducting two-way interventions in the foreign exchange markets. As for the de facto FX intervention band, there’s a chance of BI eventually widening it (as a too tight one encourages carry trade by eliminating exchange rate risk); however we expect policymakers to generally have low tolerance towards excessive foreign exchange market volatility, as it could further complicate the inflation problem. Meanwhile judging from the available trade data, we haven’t seen any dramatic problem in terms of export competitiveness. The real effective exchange rate is also only mildly stronger (around 3%) than its pre-crisis high. However going forward, as long as portfolio inflows dominate the balance of payments, BI may continue to build up their reserves; and this will limit the potential for IDR appreciation. Overall we expect the exchange rate to slightly weaken by the end of the year towards $9,150/US$.

Chart 17. Indonesia Trade Weighted Exchange Rates Chart 18. M2/Foreign Reserves

90

95

100

105

110

115

120

125

130

135

05060708091011120102030405060708091011120102030405060708091011120102030405060708091011

2007 2008 2008 2009 2010

-8

-4

0

4

8

12

16

20

24

28

App(-)/Dep(+) in IDRUSD (rhs)

Trade-Weighted Exch. Rate

Trade-Weighted Exch. Rate(Infl. Adjusted)

IDRUSD Index

Dec-02 Dec-04 Dec-06 Dec-08 Dec-10

13000

12000

11000

10000

9000

8000

40000

38000

36000

34000

32000

30000

28000

26000

24000

Nominal Exchange

Rate (LHS)

IDR/USD IDR/USDM2 / Foreign Reserves

(Adj. RHS)

Source: CEIC, Danamon estimates Source: Bank Indonesia, CEIC, Danamon estimates

Chart 19. Indonesia Trade Balance Chart 20. FDI and portfolio inflows

May-08 Nov-08 May-09 Nov-09 May-10 Nov-10

16000

14000

12000

10000

8000

6000

4000

4000

3000

2000

1000

0

-1000

Exports

Imports

Trade balance (RHS)

US$mn US$mn

Sep-04 Sep-05 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10

8000

6000

4000

2000

0

-2000

-4000

-6000

US$mn

Portfolio Inv

FDI

Source: BPS , CEIC Source: Bank Indonesia, CEIC

BI may still be intolerant of

excessive exchange rate

volatility

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Box 3: Recent Trends in Foreign Trade - Exports Exports to developed markets not fully recovered. Over the two years since the 2008 global crisis, Indonesia has seen a strong rebound in exports to Emerging Market Asian countries, most notably China, India and Korea. Meanwhile the value of exports to developed markets e.g. the US, despite increasing 30% from 2009, has not yet exceeded the pre-crisis levels by much. Exports to Singapore are even still below 2008 levels, mainly due to declines in export values of e.g. tin and copper which are raw materials for electronics. The same goes for Europe-bound exports such as to the Netherlands (due to lower export of vegetable oils). Stronger growth of exports to EM Asia. China in particular has been gaining strong importance as Indonesia’s trading partner, by both exports and imports. It became Indonesia’s third largest destination for of non-oil and gas exports in 2009, and the country’s share of exports thereto increased further to around 10% of total exports in 2010 (from around 9% in 2009). The commodities which experienced notable growth in demand from China were coal (248% y-o-y), iron ores (91% y-o-y), organic chemicals (124%) and rubber (41% y-o-y). Coal and iron ore trade also contributed significantly to the rebound in exports to Korea and India from their pre-crisis levels. Commodity exports led the way. In the beginning of the 2010, the growth discrepancy between resource based and higher value-added imports was very wide. Among the top 10 export commodities, the value natural resource exports grew nearly 78% y-o-y in 1Q10 while manufactured goods exports grew by a sluggish 28%. As per August, the gap has narrowed to become 48% vs. 28% as China demand for coal slowed down. But manufacturing exports are not dead. In spite of this gap, though, export volumes of some manufactured commodities have modestly surpassed pre-crisis levels. For example textile exports (apparel & clothing) still managed to grow modestly in 2010 (14% y-o-y) and are already 6% above pre-crisis levels. While shipments to the 15 largest EU countries stagnated, they still grew to the USA, mirroring the relatively better retail sales numbers there. And despite the rapid appreciation of the rupiah since 2009, Indonesia’s apparel market share in the US still stood at around 6%, suggesting that Indonesian textile exports can still compete. Furthermore export volumes of wood & wood articles has also exceeded the pre-crisis level by 20%, as weak demand from Japan, USA and Europe were counterbalanced by rising shipments to China and India. In terms of value, however, wood exports were flat suggesting the shipments to China and India may be of lower price or value added.

Table B3. Indonesia: Commodity share of non oil and gas exports to selected trading partners

JP US CN KR EU-15

'08 '09 '10 '08 '09 '10 '08 '09 '10 '08 '09 '10 '08 '09 '10

Animal or vegt. fats and oils 0.1 0.2 0.2 3.0 1.0 0.3 27.9 24.7 14.0 2.0 0.6 0.7 18.4 15.0 14.4

Mineral fuels 14.1 19.3 17.4 1.1 1.4 1.0 8.3 15.3 33.9 27.6 38.8 41.1 5.9 6.8 5.0

Elect. machinery, rec., TV 9.0 8.1 7.4 6.2 11.0 9.2 3.5 3.0 3.3 4.4 5.1 5.1 5.4 9.0 8.2

Rubber and articles thereof 9.9 6.0 7.3 16.4 8.2 15.6 12.4 11.4 10.3 6.5 3.5 4.3 6.9 4.1 7.5

Mech. appliances, boilers, etc. 4.5 4.6 3.0 3.5 4.2 3.6 3.2 3.1 1.1 0.9 1.4 1.2 3.8 4.2 3.1

Ores, slag and ash 12.2 17.5 18.1 0.0 0.0 0.0 9.1 7.6 9.3 13.1 16.6 14.3 5.1 7.1 7.6

Paper and paperboard 2.6 3.6 2.9 2.2 2.3 1.8 2.6 1.8 1.5 1.4 1.3 1.6 1.5 2.0 1.2

Apparel & Clothing 0.9 1.4 1.1 28.2 32.9 30.1 0.3 0.3 0.2 0.4 0.8 0.7 10.2 11.9 9.5

Vehicles other than railwa 3.2 2.3 2.3 0.6 0.6 0.5 0.4 0.1 0.3 0.0 0.0 0.0 1.2 0.8 1.7

Wood and articles of wood 4.9 5.4 4.6 2.2 1.8 2.0 2.1 1.5 2.0 3.9 3.3 2.3 4.6 3.8 3.7

Others 38.6 31.7 35.8 36.6 36.8 36.0 30.3 31.2 24.1 39.9 28.5 28.6 37.1 35.4 38.2

All 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 Source: BPS trade statistics (Jan – Aug), Danamon calculations. Note: JP = Japan, US = USA, CN = China, KR = Korea, EU-15= Austria, Belgium, Denmark, Finland, France, Gernmany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal, Spain, Sweden, UK.

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Box 4: Recent Trends in Foreign Trade - Imports Imports: a healthy recovery. Non-oil and gas imports have also surpassed the 2008 numbers. Contrary to exports (where natural resources are becoming a bigger piece of the pie), there hasn’t been any dramatic change in the structure of imports. Overall imports show capital goods imports on the rise, mostly in the form of machinery and electrical appliances. From the breakdown we can see that imports have exceeded pre-crisis levels for data processing machines / computers and heavy equipment. China ties stronger. In terms of trading partner, China has also gained importance. From 2010 the country surpassed Singapore and Japan as Indonesia’s largest supplier of imports. Strong growth was particularly seen in imports of electrical machinery and mechanical appliances. A significant portion of these are in the form of data processing machines / computers, telecom apparatus / telephones and radio / TVs. Chinese machinery destined for the printing industry has also been on the rise, suggesting renewed capacity in some sub-sectors of manufacturing. Textile-related products and steel imports from China also rose—following the implementation of the ASEAN-China Free Trade Agreement last year. Yet in spite of this, steel imports from China are still far below those from Japan. A good portion of Japanese steel imports goes to the fast-growing local auto industry, which has rather demanding standards on quality. Meanwhile as imports of machinery and appliances from China grow, imports of such items from the USA and Singapore has been gradually declining in portion. But non-oil and gas imports from the US have been holding up, supported by aircraft purchases of by Indonesian airliners.

Table B4. Indonesia: Commodity share of non oil and gas imports to selected trading partners

CN JP SG US TH

'08 '09 '10 '08 '09 '10 '08 '09 '10 '08 '09 '10 '08 '09 '10

Mech. Appliances, boilers, etc. 22.7 25.4 24.3 28.7 28.3 30.6 22.4 21.7 18.0 17.5 16.6 13.1 19.0 19.7 18.6

Elect. machinery, rec., TV 22.0 23.3 25.3 13.2 12.9 11.0 26 21.3 25.3 5.6 4.7 3.8 5.3 6.1 5.7

Iron and steel 6.9 2.7 3.7 10.3 9.6 9.2 4.77 3.71 3.8 3.2 1.6 1.7 2.4 1.6 1.5

Vehicles other than railway 2.1 1.7 1.8 13.3 8.5 10.8 2.92 2.06 2.2 3.3 1.8 1.6 30.5 22.4 25.8

Organic chemicals 3.4 3.6 3.5 2.5 3.2 2.6 8.7 6.79 9.2 2.5 2.5 2.4 4.0 4.6 3.7

Plastics and articles thereof 2.2 2.2 2.5 3.3 4.3 3.6 7.42 6.4 8.3 2.9 2.7 2.7 6.2 6.6 6.1

Articles of iron and steel 5.8 5.4 4.6 4.7 5.8 5.7 5.02 5.36 5.3 1.9 1.3 1.6 2.0 2.5 1.9

Fertilizers 2.2 0.8 0.8 0.1 0.0 0.1 0.13 0.1 0.1 0.1 0.2 0.0 0.3 0.3 0.2

Cereals 0.5 0.1 0.0 0.0 0.0 0.0 0 0.01 0.0 6.6 2.6 1.6 1.7 2.8 1.2

Aircraft, spacecraft and parts 0.0 0.1 0.0 0.0 0.0 0.0 0.77 0.46 0.8 10.3 25.6 32.5 0.0 0.0 0.1

Others 32.2 34.6 33.6 23.9 27.4 26.6 21.9 32.1 27.0 46.2 40.5 39.1 28.6 33.3 35.1

All 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 Source: BPS trade statistics; Danamon calculations; Data for 2008 and 2009 are full year; 2010 data are for Jan – Aug; Note: CN = China, JP = Japan, SG=Singapore; US = USA, TH = Thailand

Fiscal Financing and Bond Market: A Higher Volatility Premium Based on the 2011 budget, the bond issuance target for this year amounts to around Rp126.7tn (net) or Rp210.6tn on a gross basis. As usual, the MOF is targeting to front-load Rp38.5tn of t-bills, fixed rate bonds and IDR sukuk in 1Q10, which sums up to around 35% of our estimated full year forecast for conventional IDR bond issuances. However given the massive overfinancing in

Government ready to

frontload on bond issuances

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Danamon Economic & Market Research 17

2010, as well as the cumulative financing surplus in excess of Rp95tn, the government probably still has slack if market conditions become significantly unfavorable. The government budget balance in January is usually in surplus, and in April tax revenues come in. In regard to bond yields, Indonesia’s favorable fundamental story of low debt levels, potential credit rating upgrades and relatively high interest rate differentials will still be intact. However it will have to be balanced against the backdrop of rising inflation, and a central bank that is constrained in its use of interest rates as a policy tool. We have been highlighting the narrow-based bond demand as a key source of vulnerability for the bond market. The heavy correction seen in the first weeks of January has underlined the fact that a bond rally without local participation is unsustainable. Therefore going forward, we expect bond yields to become more realigned with the inflation fundamentals. As the market becomes more demanding on the volatility premium, investors will likely be more selective and bond-related capital inflows may tend to be more moderate. As for the IDR bond market, recent data suggests that onshore demand for bonds have been emerging after the correction. However we posit that it is still limited to certain parts of the curve. Demand from local buy-hold investors are probably concentrated on long-end issues (15-yr and above) which have yields close to or in double-digit territory. Meanwhile domestic banks are probably watching the front end of the curve (5yr and below). We should mind that given the market’s heavy foreign penetration and relatively narrow investor base, there is still risk of further turbulence in case the inflation outlook deteriorates further; therefore we prefer to stay low on duration. Considering the long term average spread between the 5-year yield and core inflation of around 400bps, we think that a yield of around 8.50% for the 5-yr appears sufficient to price in core inflation rising to 5.0%, along with a slightly lower long-term risk premium going forward.

Chart 21. Indicative spread: 5-yr vs. 10-yr IDR bond Chart 22. IDR Sovereign Yield Curve

Source: Bloomberg Source: Bloomberg

Fundamental story still intact,

but near term risks on the

horizon

Demand has become very

narrow-based, which is

unsustainable

As yields realign with the

inflation outlook, local

demand emerges

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Danamon Economic & Market Research 18

Additional Risks: Inflation, Asset Price Vulnerability and Political Stalemate On inflation, many things can happen that could cause the headline to deviate from our forecast. If weather anomalies last longer than expected (into 2H10), food prices can be pushed up further. Further rising oil prices (>$100/bl) will also affect the gap between subsidized and non-subsidized fuel, which could lead to arbitraging, scarcity and full-fledged increase in transportation tariffs. The relatively high penetration of foreign investors in the financial markets (especially bond market) is also a risk, which increases vulnerability of asset prices in the event of a sudden reversal. The government is coordinating efforts to use idle funds in State-Owned Enterprises (SOEs) for supporting the bond market in case there is a sudden reversal. However the effectiveness and credibility of this scheme remains to be seen, as there is no clear amount on the potential size of any intervention. Meanwhile Indonesia’s political situation has been relatively cool on the surface, but the effectiveness of President Yudhoyono’s coalition remains under question. In this regard, there is a risk that Indonesia may continue to be handicapped in delivering long-needed reforms and regulations. For example, the bill on the Financial Services Authority (OJK) has stalled; and the country still has no law governing crisis protocols—after the bill on the financial safety net was torpedoed in 2008. We can expect the window for cooperation between President Yudhoyono and many of his half-hearted political allies will become smaller going forward, as preparations start for the 2014 election year.

Chart 23. Fuel Price Disparity Chart 24. Indonesia Current Account Balance

Dec-00 Dec-02 Dec-04 Dec-06 Dec-08 Dec-10

100

80

60

40

20

0

-20

200

150

100

50

0

-50

Fuel price discrepancy:Unsubsidized vs. Subsidized

(RHS)Fuel price hike

(LHS)

% m-o-m %

2004 2005 2006 2007 2008 2009 2010 2011

3.0

2.5

2.0

1.5

1.0

0.5

0.0

% of GDP

F

F

Source: CEIC, Danamon estimates Source: Bank Indonesia, Danamon estimates

Inflation risk is skewed to the

upside

High foreign penetration in

the financial markets

Continued leadership deficit

on the political front

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Danamon Economic & Market Research 19

Government Revenues and Spending (Rptn) 2010 Rev. budget 2010 Realized Difference 2011

A) Total revenue and grants 992.4 1014.0 21.6 1104.9

1) Tax revenues 743.3 744.1 0.8 850.3

2) Non-tax revenues 249.1 267.5 18.4 250.9

B) Government Expenditures 1126.1 1053.5 -72.6 1229.6

I) Central Government Expenditure 781.5 708.7 -72.8 836.6

Debt Interest payment 105.7 88.3 -17.4 115.2

Energy subsidies 144.0 140.0 -4.0 136.6

II) Transfer to region 344.6 344.7 0.1 393.0

C) Surplus / Deficit -133.7 -39.5 94.2 124.7

as % of GDP 2.1 0.6 -1.5 -1.7

D) Financing 133.7 86.6 -47.1 124.7

- Government bonds (net) 107.5 91.2 n.a. 126.6

Excess Financing (shortfall) n.a. 47.1 n.a. n.a.

Source: MOF

Indonesia Selected Economic Indicators 2008 2009 2010E 2011E 2012E

National Accounts

Real GDP (% y-o-y) 6.1 4.6 6.0 6.4 6.7

Domestic demand ex. inventory (% y-o-y) 7.4 5.5 6.2 7.6 8.6

Real Consumption: Private (% y-o-y) 5.3 4.9 4.9 5.4 5.4

Real Gross Fixed Capital Formation (% y-o-y) 11.7 3.4 9.6 11.7 13.1

GDP (US$bn) — nominal 507 536 707 918 1090

GDP per capita (US$) — nominal 2,227 2,324 3,028 3,885 4,556

Open Unemployment Rate (%) 8.6 7.9 7.1 6.9 6.6

External Sector

Exports, fob (% y-o-y, US$ bn) 18.3 -14.4 24.7 13.0 17.3

Imports, fob (% y-o-y, US$ bn) 36.8 -27.7 33.3 16.7 22.1

Trade balance (US$ bn) 22.9 35.2 36.6 37.3 37.3

Current account (% of GDP) 0.1 2.0 1.0 0.2 0.0

Central government debt (% of GDP) 33 28 26 24 22

International Reserves –IRFCL (US$ bn) 51.6 66.1 96.2 116.1 127.0

Int (Imports and external debt) 4.0 6.5 7.2 6.5 6.8

Currency/US$ (Year-end) 10,950 9,403 8,977 9,150 9,300

Currency/US$ (Average) 9,767 10,356 9,074 9,115 9,275

Other

BI policy rate (% year end) 9.25 6.50 6.50 7.00 7.00

Consumer prices (% year end) 11.06 2.78 6.96 7.20 6.70

Fiscal balance (% of GDP; FY) -1.0 -1.6 -0.6 -1.2 -1.0

S&P's Rating - FCY BB- BB- BB BB+ BBB-

Source: CEIC, *Danamon Estimates

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Danamon Economic & Market Research 20

Quarterly Global Assumptions and Forecasts 27-Jan-11 1Q11 2Q11 3Q11 4Q11 1Q12

Policy Rates (end of period)

BI Rate 6.50 6.50 7.00 7.00 7.00 7.00

US Federal Funds 0.12 0.15 0.15 0.15 0.15 0.15

Euro Repo Rate 1.00 1.00 1.00 1.00 1.00 1.00

Yen Call Money 0.11 0.10 0.10 0.10 0.10 0.10

10-yr Bond Yields (period average)

IDR Government Bond 8.80 9.00 9.25 8.50 8.50 8.50

Treasuries 3.43 3.50 3.60 3.65 3.70 3.70

Bunds 3.17 3.10 3.25 3.40 3.50 3.50

JGB 1.23 1.20 1.20 1.30 1.30 1.30

Exchange Rates (end of period)

IDR/US$ 9,030 9,050 9,350 9,150 9,150 9,250

US$/Euro 1.36 1.30 1.30 1.35 1.40 1.35

¥/US$ 82.8 82 83 85 85 85

Source: Bloomberg, *Danamon Estimates

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Danamon Economic & Market Research 21

Economic and Market Research

Anton H. Gunawan Chief Economist +62 21 5799-1466 [email protected] Helmi Arman Economist/Bond Strategist +62 21 5799-1563 [email protected] Anton Hendranata Economist/Econometrician +62 21 5799-1563 [email protected]

PT Bank Danamon Indonesia, Tbk. Menara Bank Danamon

Jalan Prof. Dr. Satrio Kav. E IV #6 Mega Kuningan, Jakarta 12950

INDONESIA ***

Facs: +62 21 5799-1048

ANALYST CERTIFICATION We hereby certify that all of the views expressed in this research report accurately reflect our personal views about any and all of the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or views in this report.

DISCLAIMER The information contained in this report has been taken from sources which we deem reliable. However, none of P.T. Bank Danamon Indonesia Tbk. and/or its affiliated companies and/or their respective employees and/or agents makes any representation or warranty (express or implied) or accepts any responsibility or liability as to, or in relation to, the accuracy or completeness of the information and opinions contained in this report or as to any information contained in this report or any other such information or opinions remaining unchanged after the issue thereof. We expressly disclaim any responsibility or liability (express or implied) of P.T. Bank Danamon Indonesia Tbk., its affiliated companies and their respective employees and agents whatsoever and howsoever arising (including, without limitation for any claims, proceedings, action , suits, losses, expenses, damages or costs) which may be brought against or suffered by any person as a result of acting in reliance upon the whole or any part of the contents of this report and neither P.T. Bank Danamon Indonesia Tbk., its affiliated companies or their respective employees or agents accepts liability for any errors, omissions or mis-statements, negligent or otherwise, in the report and any liability in respect of the report or any inaccuracy therein or omission there from which might otherwise arise is hereby expressly disclaimed. The information contained in this report is not be taken as any recommendation made by P.T. Bank Danamon Indonesia Tbk. or any other person to enter into any agreement with regard to any investment mentioned in this document. This report is prepared for general circulation. It does not have regards to the specific person who may receive this report. In considering any investments you should make your own independent assessment and seek your own professional financial and legal advice.