INDONESIA

November 2010 EDC ECONOMICS

Economy • Real GDP slowed to 5.8% y/y in Q3 from 6.2% in Q2, as heavy rain limited agricultural output, while other goods
sectors continued to perform well. On the expenditure side, personal consumption continues to drive growth, albeit at
a lesser pace than previous quarters, supported by a healthy labour market and record low interest rates, while
Nominal GDP (2009) government stimulus is withdrawn.
539 bil USD
• Greater capital inflows, easy monetary policy and the strong domestic economy are pushing up inflation (up 6.1%
Population (2009) y/y in Q3) and the rupiah (up 6% since Jan). Nonetheless, inflation remains below historical trend and the Central
232 million Bank has made policy adjustment to address strong capital inflows and drain excess liquidity.
Total Trade/GDP (2009)
45 % • EDC Economics maintains its growth outlook for 2010 at 6.1% but revised 2011 down to 5.8% on weaker external
factors, most notably a weaker outlook in China and the G3. Growth is set to move to a higher path as positive
Currency
developments and strong policy decisions since the crisis have improved foreign investors' perception.
Indonesian rupiah
Exchange regime Economic Activity External Trade
Independant float 12 Real GDP, q/q % chg, SAAR (L) 4 40,000 Trade Balance, SA, USD Mn. (R) 14,000
Merchandise imports Manufacturing production, q/q % chg, SA (R) 3 35,000 Exports, SA, USD Mn. (L)
10 12,000
Imports, SA, USD Mn. (L)
from Canada (2009) 2 30,000
8 10,000
CAD 954 million 1 25,000
6 8,000
Main sources of for. 0 20,000
exchange (excl. FDI) 4
-1
6,000
15,000
Mineral Fuels, Oils 2 4,000
-2 10,000
0 2,000
-3 5,000
Largest merchandise
-2 Q2-00 Q2-02 Q2-04 Q2-06 Q2-08 Q2-10
-4
export market (2009) 0 0
-4 -5 Q2-00 Q2-02 Q2-04 Q2-06 Q2-08 Q2-10
Japan (16 %)
Main imports (2009) Financial Indicators Monetary Policy Indicators
Mineral Fuels (20%) 4,000 Jakarta Composite Index (L) 50 20
13,000
Industrial M&E (15%) IDR per USD (R)
40
18
3,500 12,000
E&E equipment (11%) 16
3,000
11,000 30 14
2,500
INSovereign Ratings 10,000 20
12
2,000
MLT external debt 9,000 10
1,500 10
# Fitch BB+ 8,000
8
1,000
# S&P BB
7,000
0 6
500
# Moody's Ba2 -10
10
Sep-00 Sep-02 Sep-04 Sep-06 Sep-08 Sep-10 4
0 6 000
6,000 Commercial bank credit, y/y % chg. (L) 2
Risks to the outlook Inflation, y/y % chg. (R)
Sep-00 Sep-02 Sep-04 Sep-06 Sep-08 Sep-10 -20 0
BI target rate, % (R)
Infrastructure
investment
Fiscal Performance External Sector Performance
0.0 50 7 100
accelerates
-0.5 45 90
6
-1.0 40 80
Strong capital inflows 35 5 70
-1.5
results in renewed 30 4 60
-2.0
inflation and asset 25 50
-2.5 3
price bubbles 20 40
-3.0
15 2 30
Budget Balance/GDP, % (L)
-3.5 FX reserves, mth of import cover (L)
November/10 Public Debt/GDP, % (R)
10
1
20
-4.0 5 10
Jérôme Bourque External debt, % of GDP (R)
-4.5 0 0 0
jbourque@edc.ca
2000 2002 2004 2006 2008 Q2-00 Q2-02 Q2-04 Q2-06 Q2-08 Q2-10

Economic Indicators Canadian exports and CDIA

05-09 avg. 2009 2010 2011 4,500 1,600
CDIA, CAD Mn. (L)
GDP (% growth, real) 5.6 4.5 6.1 5.8 4,000 1,400
Inflation (% chg, pa avg.) 8.9 4.8 5.2 6.0 3,500 1,200
Fiscal Balance (% of GDP) -0.8 -1.6 -2.5 -1.3 3,000
1,000
Exports (%, comp. annual growth) 11.1 -15.0 24.3 11.1 2,500
800
Imports (%, comp. annual growth) 20.0 -25.1 33.4 13.6 2,000
600
Current Account (% of GDP) 1,500
1.5 2.0 1.3 0.8
1,000 400
Reserves (months of curr. debits) 5.5 7.1 7.1 7.2
500 200
External Debt (% of GDP) 35.8 29.0 22.5 20.0
0 0
Debt Service Ratio (due) 16.3 16.4 13.2 11.8
2000 2002 2004 2006 2008
Exchange Rate (to USD; eoy) 9724 9400 8900 8700
Sources: EIU, EDC Economics Sources: Haver Analytics, Statistics Canada, EIU, Bloomberg
 INDONESIA
November 2010 ECONOMICS

General Political Environment: Susilo Bambang Yudhoyono (SBY), Indonesia’s first president to be elected through direct
Political presidential elections in 2004 was re-elected with 60% of the vote in July 2009, thus continuing Indonesia’s process of
democratic transition. The ruling Democratic Party (DP), led by SBY, also increased its position in Indonesia’s parliament
Political Structure during the April 2009 legislative elections. These electoral successes were primarily due to the high expectations Indonesians
Presidential government with placed on SBY to deliver on wide ranging economic reforms and anti-corruption programs he championed during his first
a multi-party cabinet. term.
President At the same time, expectations that SBY and the DP, who control both the executive and legislature, would be able to govern
Susilo Bambang Yudhoyono unhindered, and thereby push through structural reforms appear to have been somewhat premature. DP governs in a six party
Vice President coalition and Golkar, one of its coalition allies has figured as prominently in SBY’s second term as during his first. For
Boediono example, it is widely believed that Sri Mulyani Indrawati - the highly regarded reformist Finance Minister-who resigned over
a scandal related to the bailout of a bank was a casualty of coalition politics and vested interest groups opposed to reforms.
National Legislative Bodies
The People’s Consultative Even though SBY appears to be largely popular, anti-government protests on the first anniversary (October 2010) of his
Assembly (MPR): second term highlight frustration among some Indonesians over the government’s performance and slower than expected
pace of reforms.
 Lower House: House of
People’s Representatives Investment Environment: Indonesia’s investment environment has witnessed relative improvements in recent years and the
(DPR). government appears keen to facilitate growth in key sectors by boosting foreign investments. Foreign businesses however
 Upper House: Regional are still likely to face challenges due to wide-spread corruption, regulatory uncertainty and bureaucracy.
Representatives Corruption in various forms including graft and bribery exists at all levels including within state agencies; however, SBY’s
Conference (DPD).
anti-corruption campaign has made gradual progress on this front, and it is expected that more progress will be made during
Major Parties his second term in office. That said, the main corruption fighting entity within Indonesia, the Anti-Corruption Commission
 Democratic Party (DP); (KPK), is in the midst of a political battle due in part to the political enemies it created through its success in tackling graft.
 Golkar; Indonesia has introduced several pieces of investment-related legislation in recent years including the 2007 Investment Law
 Indonesian Democratic that sets out general investment principles, as well as the latest version of the Negative Investment List, revised in 2010. This
Party of Struggle (PDI-P);
Negative list outlines sectors where foreign investment is restricted, highlighting the power of vested interest groups to use
 National Awakening Party
nationalist sentiment to continue to shape Indonesia’s investment environment. This seemingly incongruous policy attitude
(PKB);
is not uncommon in Indonesia given the overlapping jurisdictions and opaque regulations within which investment occurs.
 United Development Party
(PPP) The decentralization of power and regulatory authority to the regions underway in Indonesia since 2001 has resulted in an
overlapping and inconsistent regulatory environment. Specifically, these difficulties are most pronounced in sectors that cut
Last Elections
across central and regional/provincial jurisdictions. The new mining legislation passed in December 2008 devolves certain
 Legislative: April 2009
 Presidential: July 2009 administrative authorities to the provinces and left investors uncertain about operational impacts. Subsequent amendments
made to the law in February 2010 appear to have somewhat alleviated investor concerns. Investors also appears to be
Next Elections looking to see how additional elements in the new mining law such as the new permitting system and requirements for
 Legislative: 2014 foreign firms to divest after a number of years are clarified.
 Presidential: 2014
Realizing poor infrastructure is a bottleneck to growth, the government had laid out ambitious infrastructure development
Press Freedom Survey: plans, which to date, have been hamstrung by bureaucracy and unclear regulations. The government recently introduced
 2010 Score: 52 (Partly measures to streamline the project approval process by naming the Investment Coordination Board (BKPM) as the sole
Free) agency authorized to administer Public-Private Partnerships in Infrastructure.
freedomhouse.org
Political Violence: Even though the security environment has improved over the past decade Islamic terrorist groups
Control of Corruption Index: including Jemaah Islamiyah (JI) continue to pose a threat despite significant (and successful) steps taken by the government
 2009 Score: -0.71 to strengthen its anti-terrorism activities. The July 2009 Jakarta hotel suicide bombings, believed to be launched by JI
(-2.5: Worst; +2.5: Best) marked the first major terror attack in Indonesia since 2005 and highlight the persistent threat posed by these radical groups.
worldbank.org
Most of the separatist’s armed conflicts that engulfed Indonesia during the previous decade have now ended. At the same
time, bouts of ethnic/separatist violence continue to affect Papua, an area of considerable extractive sector activity including
the Grasberg (Freeport McMoRan) mine. Attacks, most often target government assets but commercial operations have also
been targeted. The Freeport mine remains a very contentious project among segments of the local population and ambushes
near the mine in July 2009 killed an Australian mine worker and several security staff.
Joy Rankothge
jrankothge@edc.ca Political Outlook
President Yudhoyono and the ruling party’s election victories in 2009 will provide a degree of continuity in
Indonesia’s political and investment environments. Continued efforts on the government’s economic reform
and anti-corruption agendas can be expected; however, such reform will be gradual. While the DP-led
government has demonstrated an interest in strengthening Indonesia’s investment environment, foreign
companies continue to face challenges ranging from a somewhat opaque regulatory environment to sectoral-
based restrictions. Operating conditions vary greatly by province. Despite the success of the government’s
counter-terrorism strategy, the Jakarta hotel bombings of July 2009 highlight the continued, albeit lessened,
threat posed by JI and similar groups.